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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
TO
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE
REQUIRED)
For fiscal year ended December 31, 1997
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (I.R.S. Employer
or incorporation or organization) Identification No.)
5451 Avenida Encinas, Suite A, Carlsbad, California 92008
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (760) 603-9120
Securities registered pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of January 31, 1998 was approximately $53,507,000. For
the purposes of this calculation, shares owned by officers, directors and 10%
stockholders known to the registrant have been deemed to be owned by
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock as
of January 31, 1998 was 13,422,875.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 9, 1998, to be filed on or about April
30, 1998 and referred to herein as the "Proxy Statement", are incorporated as
provided in Part III.
PART I
Item 1. BUSINESS
THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL REPORT
ON FORM 10-K MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION
OF FACTORS WHICH MAY AFFECT THE OUTCOME PROJECTED IN SUCH STATEMENTS, PLEASE SEE
"RISKS AND UNCERTAINTIES" AT PAGES 21 THROUGH 31 OF THIS REPORT.
OVERVIEW
Vista Medical Technologies, Inc. ("Vista Medical" or the "Company")
develops, manufactures and markets proprietary visualization and information
systems that enable minimally invasive surgical solutions in cardiothoracic,
head, neck and spine and other selected microsurgical procedures. The
Company also markets endoscopic cameras and related surgical instruments and
accessories. Vista Medical's visualization and information systems bring
together the head-mounted display technology originally developed for
applications in military aerospace by Kaiser Aerospace & Electronics
Corporation ("Kaiser Aerospace") and three-dimensional imaging capability
from its acquisition of Oktas, Inc. The Company was founded as a
wholly-owned subsidiary of Kaiser Aerospace in July 1993, and became an
independent entity in July 1995 with the addition of several venture capital
funds as investors, prior to its initial public offering of shares of Common
Stock in July 1997 ("Initial Public Offering").
BACKGROUND
MINIMALLY INVASIVE SURGERY
The development and subsequent widespread adoption of minimally
invasive surgical approaches have revolutionized many surgical fields,
including general surgery, orthopedics, gynecology and urology. Minimally
invasive surgical procedures are performed through strategically placed ports
or mini-incisions in a patient's body thereby avoiding the larger incisions
used in traditional open surgery. A minimally invasive approach is most
advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Notable examples of minimally
invasive surgical procedures include laparoscopic procedures in the field of
general surgery and arthroscopic procedures in the field of orthopedic
surgery, many of which have become the standard of care and have achieved
significant procedure volumes rapidly. For example, according to Medical
Data International, an independent research organization, the number of
laparoscopic surgical procedures performed annually in the United States
increased from approximately 84,000 in 1990 to more than an estimated 2.4
million in 1995. Minimally invasive procedures are designed to be as
efficacious as conventional surgery, but with substantially reduced trauma.
Minimally invasive procedures are designed to reduce pain and suffering,
speed recovery, shorten the length of hospital stays and decrease many of the
costs associated with patient care. This movement toward minimally invasive
surgery has been driven by advances in both device technology and surgical
technique, as well as patient demand.
MINIMALLY INVASIVE MICROSURGERY
Minimally invasive microsurgery ("MIM") is an extension of minimally
invasive surgery, characterized by greater complexity and precision. MIM
procedures have been made possible primarily by recent advances in medical
technology. MIM is usually performed in very confined areas of the body,
involves critical anatomical structures, and often requires dissection and
reconstruction as well as excision. As a result, the Company believes that
in order for MIM procedures to be extensively adopted, surgeons must have
access to enhanced visualization and other
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specialized instruments and technology. Examples of MIM are emerging
procedures in cardiothoracic surgery and head, neck and spine ("HNS")
surgery.
CARDIOTHORACIC SURGERY
CONVENTIONAL TREATMENTS. Cardiovascular disease, the leading cause
of death in the United States, is typically treated with drugs, various
surgical procedures or both. The two principal types of cardiovascular
disease are coronary artery disease and valvular heart disease. Methods of
accessing the heart for treatment include surgically opening the chest,
threading a balloon-tipped catheter through a major artery or, most recently,
gaining surgical access via a small incision in the chest. Conventional
cardiology procedures include angioplasty, atherectomy and inserting coronary
stents; conventional surgical procedures include coronary artery bypass graft
("CABG") and valve replacement or repair. Angioplasty, atherectomy and
inserting coronary stents involve the use of a balloon-tipped catheter which
is threaded into the heart through an artery in a patient's leg. Although
these procedures are less invasive than conventional CABG, a major drawback
is the high rate of restenosis or renarrowing of the blood vessel at the
treatment site. Traditional CABG and valve replacement or repair procedures
typically involve a sternotomy, whereby a surgeon makes a 12 to 18 inch
incision in the patient's chest, the sternum is cut in half with a bone saw,
and the rib cage is then spread open with a steel retractor to perform the
grafting procedures or to replace or repair the heart valves. According to
the results of a recent study, approximately one-third of all angioplasties
experience restenosis or renarrowing of the blood vessel at the treatment
site within seven months while the Company believes most traditional CABG
procedures remain effective for more than a decade.
According to recent data published by the American Heart Association,
there were approximately 628,000 open heart surgical procedures performed in
the United States in 1994. Of these, 501,000 were CABG procedures, 60,000
were valve procedures and 67,000 were other procedures including congenital
and pediatric repairs. The Company believes that worldwide there are
approximately 800,000 CABG procedures and approximately 100,000 valve
replacement or repair procedures performed each year.
CARDIOTHORACIC MIM. The application of minimally invasive techniques
to cardiothoracic surgery is commonly regarded as a revolutionary development
in modern surgery. Minimally invasive CABG and valve replacement or repair
procedures avoid the trauma caused by sternotomy and promise to significantly
decrease pain and trauma and shorten recovery times. The minimally invasive
approaches to surgical intervention are evolving and include methods
performed on either a beating or arrested heart. While there is still
professional debate on the ultimate form or standard of care and techniques
and practices are still under development, nearly all of those involved
believe that minimally invasive procedures will change the future practice of
cardiothoracic surgery, just as laparoscopy has revolutionized general
surgery. However, cardiothoracic MIM requires the surgeon to perform
technically challenging procedures, including working on tiny delicate
structures (such as a one millimeter heart vessel) with highly restricted
access through small incisions. The Company believes that a current
limitation to widespread adoption of cardiothoracic MIM is the restricted
visibility through the minimal incisions currently used. While new retractor
systems are being introduced to open the incision and therefore improve the
surgeon's access and ability to visualize the anatomy directly, restricted
visibility, particularly for more complex cases, remains an issue. In
addition, the objective of minimizing the incision size ("keyhole" access) to
reduce trauma can only be achieved effectively with visualization, as has
been demonstrated in other minimally invasive applications. As a result of
these factors, the development of cardiothoracic MIM will require enhanced
visualization, as well as specialized instruments and surgeon training in the
new techniques.
THE VISTA MEDICAL SOLUTION. The Company believes that an advanced
visualization technology which provides the surgeon with an intuitive and
ergonomic solution to the inherent vision restrictions of the MIM approach
will enable the use of the MIM technique with increased safety, efficacy and
precision. In the cardiothoracic MIM area, the Company's proprietary
technologies are equally applicable whether the surgeon elects to use either
a beating or arrested heart approach. In addition, the enhanced
visualization provided by the Company's products is expected to enable a
significant number of surgeons, who otherwise might be reluctant to perform
MIM, to adopt the procedures, thereby accelerating the rate of conversion
towards a standard of care. Finally, there is growing evidence of patient
interest and demand for cardiothoracic MIM procedures.
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HEAD, NECK AND SPINE (HNS) SURGERY
CONVENTIONAL HNS TREATMENTS. Conventional head, neck and spine
procedures are often invasive and involve a lengthy and painful recovery.
Neurosurgical procedures involving the brain and spinal cord have traditionally
been performed under microscopic visualization to facilitate the delicate
manipulations and extreme precision which are required. More recently, the
visualization system often includes neuroendoscopes in combination with
microscopes. The Company estimates there were approximately 315,000
neurosurgical and skull base procedures, 430,000 surgical sinus procedures and
650,000 spinal procedures performed in the United States in 1995.
HNS MIM. The Company believes that there are significant opportunities
to advance MIM techniques in HNS procedures which involve manipulation in close
proximity to critical anatomical structures. The visualization techniques
currently available for these procedures are limited. Existing fiberoptic
neuroendoscopes have inferior resolution, do not provide depth perception and
require a surgeon to view the procedure on a video monitor. The position
required for both the principal and assistant surgeon to utilize a surgical
microscope is both ergonomically awkward and physically demanding. In addition,
the assistant surgeon does not see the procedure in 3-D when using the teaching
attachment. Many of these procedures also require the simultaneous monitoring
of multiple information sources, including the images used in the emerging
technique of image guided surgery. Image guided surgery converts the output
from digital imaging modalities, such as magnetic resonance imaging (MRI) and
computerized tomography (CT), into highly precise computer models which help the
surgeon with pre-operative planning as well as choosing the least destructive
path when operating close to critical anatomy and locating and removing tissue
with the highest degree of safety and accuracy.
THE VISTA MEDICAL SOLUTION. In the HNS MIM area, the Company's products
incorporate 3-D visualization into a small diameter endoscope which provides the
surgeon with the critical element of depth perception missing from conventional
endoscopes. In addition, the endoscopic image in the head-mounted display worn
by an assistant surgeon who is operating directly across from the principal
surgeon can be electronically reversed in order to align the assistant's
movements with those of the principal surgeon. The Company can also retrofit
surgical microscopes, so that both the principal surgeon and assistants can view
the case simultaneously on their head-mounted displays in 3-D, with superior
comfort and ergonomic positioning. Multiple video images can be incorporated
into the display, operated by Vista Medical's Infomatix voice activated
software.
BUSINESS STRATEGY
The Company's business strategy is to become the leading developer and
marketer of advanced visualization and information systems for MIM applications
in cardiothoracic, HNS and other selected surgical specialties. Key elements of
the Company's strategy include:
ESTABLISH ADVANCED VISUALIZATION TECHNOLOGIES AS STANDARD PRACTICE IN
MINIMALLY INVASIVE CARDIAC SURGERY. The Company believes that it has the only
visualization system specifically designed for minimally invasive cardiac
surgery. The Company is currently working with its Cardiac Clinical Advisory
Board and other leading surgeons to develop operating protocols which
incorporate advanced visualization technologies as standard practice. The
Company then intends to provide training in these protocols, including the use
of the Company's visualization system, to other cardiac surgeons to accelerate
the general rate of conversion to MIM procedures, whether performed on a beating
or arrested heart.
PROMOTE VISTA MEDICAL'S VISUALIZATION SOLUTION FOR USE IN ALL TYPES OF
CARDIAC SURGERY. The Company believes that its technology is applicable to all
types of cardiac surgery, whether minimally invasive or conventional open heart,
especially where enhancement of the surgeon's view is particularly critical.
The Company believes that use of its advanced visualization product in open
heart surgeries will enhance visualization, improve the quality of procedures
and result in shorter operating times and reduced costs.
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DEVELOP MIM APPLICATIONS THROUGH SPECIALTY-FOCUSED BUSINESS UNITS BY
LEVERAGING THE COMPANY'S TECHNOLOGY PLATFORM. The Company approaches its target
markets via its focused business units, the CardioThoracic Surgery division and
the HNS Microsurgery division. The business units concentrate on the specific
requirements of their target markets, with dedicated clinical marketing
programs, clinical advisory boards, sales forces and customer support teams for
the introduction and support of the Company's products. The Company's strategy
is to optimize its fundamental technology platform for each of these medical
specialties and to develop appropriate partnership and distribution systems both
in the United States and international markets.
ACCELERATE ADOPTION OF THE SERIES 8000 ADVANCED VISUALIZATION AND
INFORMATION SYSTEM IN THE CARDIAC MARKET BY IMPLEMENTING A FEE-PER-PROCEDURE
PRICING STRATEGY. The Company believes that it can accelerate the adoption
of its Series 8000 advanced visualization and information system in the
United States by implementing a fee-per-procedure pricing strategy. This
strategy offers the Series 8000 on a rental basis and requires a payment to
the Company every time the Series 8000 is used in a procedure. The Company
commissioned market research in order to determine the viability of a
fee-per-procedure pricing strategy in the United States market. The results
of this market research support the Company's belief that an integrated
equipment and service package, including installation, in-service training,
on-going technical support and system upgrades for a single procedure-based
charge will maximize market penetration and assist in roll-out of the product
line.
INCREASE THE SURGEON'S REAL-TIME ACCESS TO CRITICAL DATA. The
surgeon's access to operative data, on demand, in real time and integrated
with the anatomical image, enhances procedure performance. The Company's
head-mounted display, incorporating picture-in-picture capability, is
designed to give the surgeon this real-time access to critical information
integrated with the anatomical images generated by the Company's camera
systems.
ENTER INTO STRATEGIC RELATIONSHIPS WHICH COMPLEMENT COMPANY
RESOURCES. The Company intends to leverage its position in both technology
and distribution by forming strategic alliances with partners. In November
1996, the Company and Medtronic, Inc. ("Medtronic"), a leading cardiac
company, entered into a strategic alliance providing for the distribution and
co-promotion of the Company's current and future visualization and
information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). Medtronic will co-promote the product line in the United
States and act as the Company's exclusive distributor in Europe, the Middle
East (excluding Afghanistan and Pakistan) ("Middle East") and Africa. In
February 1997, the Company entered into an agreement with Heartport, Inc.
("Heartport"), a leading company developing minimally invasive technology for
heart surgery. Vista Medical sold four Series 8000 systems to Heartport, for
use in the Heartport Research and Training Center in Salt Lake City, Utah.
In January 1998, the Company entered into a worldwide exclusive distribution
agreement with Sofamor Danek L.P. together with Sofamor Danek Group, Inc.
("Sofamor Danek") for the distribution of the Company's current and future
visualization and information systems for neurosurgery, spinal surgery,
radiation delivery, otolaryngology and maxillofacial surgery. Sofamor Danek
is a world leader in systems for spinal surgery. The Company has also
entered into a Cooperative Technology Agreement to collaborate with Sofamor
Danek on integrating Vista Medical's technology with Sofamor Danek's
StealthStation-TM- Treatment Guidance Platform for image guided surgery. The
Company has also formed strategic partnerships with Cogent Light Technologies
("Cogent Light") and GDE Systems, Inc. ("GDE") to incorporate light source
technology and information technologies, respectively, into its products.
The Company expects to pursue additional strategic relationships.
ADVANCED VISUALIZATION PRINCIPLES AND PRODUCT PLATFORM
Vista Medical's proprietary technology is based on the following
principles which the Company believes are both essential in advancing the
techniques of MIM and offer several key advantages over other visualization
approaches:
- 3-D VIEW. The surgeon's ability to view the principal
anatomical image in 3-D provides the accurate depth perception
necessary so that vital anatomical structures are accurately
identified and located, thereby improving safety, precision and
speed of the procedure.
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- HIGH RESOLUTION IMAGES. The availability of a high resolution
image which can be electronically managed under the surgeon's
control significantly enhances the surgeon's ability to
differentiate critical tissues in a confined setting and perform
intricate dissection and reconstruction as well as excision.
- ACCESS. The surgeon benefits from miniaturization technology
which allows for the direct insertion of a camera into the body
cavities or organs and provides high quality images from an
optimal anatomical orientation.
- ERGONOMICS. Due to the complex and time consuming nature of MIM
procedures, the surgeon requires an ergonomic display system
which allows comfortable operating posture and maximizes
hand-eye coordination without strain.
- INFORMATION INTEGRATION. The surgeon's access to operative
data, on demand, in real time and integrated with the
anatomical image within the surgeon's visual field, enhances
procedure performance.
The Company has applied its proprietary technology by incorporating the
above principles into its visualization product platform.
HEAD-MOUNTED DISPLAY
The head-mounted display ("HMD") was originally developed for mission
critical applications in military aerospace by Kaiser Aerospace, one of the
world's leading manufacturers of head-mounted displays for aviation
applications. The HMD was determined by the Company to be the optimal solution
to the display challenge of MIM. The fundamental technology and human factors
experience incorporated in the Company's HMD was originally developed by Kaiser
Aerospace and is the result of substantial investment in the technologies of
advanced aerospace display systems and incorporates extensive human factors
experience. This human factors knowledge, derived from many years of analysis
into the display characteristics which enable pilots performing critical
physical tasks to simultaneously absorb and react to crucial information, is a
key element in the Company's HMD design. Kaiser's original know-how and
technical knowledge have been transferred to the Company pursuant to the
development agreement with Kaiser Electro-Optics, Inc. ("Kaiser
Electro-Optics"), a subsidiary of Kaiser Aerospace. The Company has done
significant additional development work, and has proprietary rights, in the
surgical HMD design. The Vista Medical HMD, which the Company believes is the
first specifically designed for surgical use, provides 3-D visualization of an
endoscopic or microscopic image, has the capability of integrating relevant data
and presents the images to a surgeon in an optically correct, intuitive and
ergonomic way. Wearing the HMD, the microsurgeon can also perform surgery
"in-line" -- the natural way people perform micro-critical tasks -- eyes, hands,
instruments and subject in line. This is not the case when the surgeon is
observing the anatomy on a remotely-positioned video monitor.
The Company's HMD is a proprietary, lightweight, high resolution
display designed to allow the surgeon to view information on demand, whether
such information is generated from attached endoscopes, microscopes or
monitoring equipment in the operating room. It is presently contemplated
that further enhancements to the HMD will allow for voice-activated control
and information display from other diagnostic equipment in the hospital or
from remote locations via information networks. The video display in the HMD
is fixed in relation to the surgeon's eyes, but his or her head may move into
any position necessary for comfort. The HMD design allows the surgeon to
have a constant view of the surgical anatomy required for the procedure as
well as full awareness of the surroundings in the operating room. The HMD is
designed to provide a true 3-D image by replicating the way the human visual
system works -- left and right acquired images are delivered directly to left
and right liquid crystal displays. The HMD is also designed so that it can
be worn with conventional surgical loupes.
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THREE-DIMENSIONAL IMAGE ACQUISITION
Vista Medical believes that 3-D visualization capability is critical in
MIM procedures such as cardiothoracic and neurosurgical procedures. The
Company's technology for stereo visualization consists of the following
proprietary elements: the optical system, the stereo camera and the stereo
processor. The 3-D endoscopic optical system employed by Vista Medical was
originally developed and patented by a noted optical designer, Mr. H. McKinley,
and is licensed exclusively to the Company for medical applications. The system
is designed to replicate the exact view that the surgeon would have if the
procedures were being performed open and he or she had direct sight of the
anatomy. The Company believes that the McKinley optical system will provide it
with a significant and enduring competitive advantage because it provides
natural depth perception, and it can be packaged with twin cameras in a very
compact design. The twin cameras acquire the image in a manner analogous to a
human's two eyes.
Vista Medical's technology packages the twin cameras in two ways. In
the first method, a micro-camera is attached to the end of a flexible or rigid
guide which can then be inserted directly into the body cavity and organs. The
image is directly captured by the camera chips without being transmitted through
multiple rod lenses as in a conventional optical endoscope design. The
elimination of optical surfaces produces several important advantages, including
increased image quality, improved contrast, better reliability and improved
ability to sterilize by autoclaving. Alternatively, for applications where a
standard optical endoscope configuration remains preferable, a stereo
micro-camera can be mounted externally on a stereo endoscope. The image
acquired by either approach is then processed for display by control electronics
developed exclusively by the Company. The controller will also include image
management features which will contribute significantly to procedure
performance, such as zoom control, dual image presentation and
picture-in-picture.
INFORMATION MANAGEMENT
Medicine is an information rich discipline, but the provision of
relevant information in real-time to surgeons has not been developed to the
levels attained, for example, in military aviation. The HMD is designed to give
the surgeon real-time access on demand to critical information, integrated with
the anatomical images generated by the Company's camera systems. Therefore, the
surgeon will be able to command the diagnostic and monitoring information
relevant to the specific procedure while it is taking place. In addition to
real-time display, the information can be managed (stored or transmitted) within
the hospital or to remote locations for training, advisory or administrative
purposes. The applications software to control this flow of information is a
key element in Vista Medical's long-term product strategy, which positions
visualization within the context of a total information service to the surgeon.
The Company's data integration capability has been enhanced through a
perpetual, exclusive license from GDE which has added high speed image-based
information processing and networking software to the Company's technology
platform. The Company believes that its technology will demonstrate that
real-time access to relevant information, along with enhanced visualization,
is a critical requirement of performing MIM and other surgical procedures.
The Company anticipates incorporating appropriate elements of this software
package into future products.
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PRODUCT LINES
Vista Medical develops products based on the Company's core technology
and product platform described above, that are customized for the specific
cardiothoracic and HNS procedures to which they are directed. The Company's
product lines are as follows:
SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM
The Company has developed the Series 8000 for minimally invasive and
other procedures in cardiothoracic surgery. The components of the Series 8000
are individual modules, rack mounted in a custom console, and supplied as an
integrated, upgradeable system.
<TABLE>
<CAPTION>
COMPONENT DESCRIPTION
- ----------------- -----------------------------------------------------------
<S> <C>
CardioView (1) Head-mounted display (HMD) and information
processing computer which integrates 3-D
visualization of surgical anatomy and related
diagnostic and monitoring data (up to four HMDs
may be used simultaneously with each
Series 8000).
CardioCamera 2-D and 3-D miniature high resolution digital
cameras. Cameras can be delivered directly into
the surgical field or positioned externally by
attachment to retractor systems.
CardioController High resolution stereo image processor which
drives all the CardioCameras in the cardiac
operating room.
CardioLight High power xenon light source incorporating
micro-illuminated light delivery technology
developed by Cogent Light.
CardioConsole Console for rack mounting of all Series 8000
modules.
Cardio3DScope (2) Small diameter, angled, rotatable Stereo
endoscope.
CardioRecorder (2) 3-D disk image recorder.
</TABLE>
- ---------
(1) The Company expects to introduce a voice-activated control feature for
CardioView in future versions of the Series 8000.
(2) The Company expects to introduce the Cardio3DScope and the
CardioRecorder in future versions of the Series 8000. The
CardioRecorder developed by an OEM supplier is currently under
evaluation by the Company.
Of the components listed in the table above, CardioView, CardioCamera,
CardioController, CardioLight and CardioConsole are necessary for Series 8000
commercialization. 510(k) clearances to market the first four components have
been received, and 510(k) clearance to market is not necessary for the
CardioConsole component. The Cardio3DScope has also received 510(k) clearance
to market.
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STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY
The Company is developing two systems, designed specifically for
microscopic and endoscopic procedures in HNS Microsurgery, which will be
marketed under the brand name of StereoSite.
<TABLE>
<CAPTION>
COMPONENT DESCRIPTION
- ----------------- -----------------------------------------------------------
<S> <C>
HMD/Processor Head-mounted display and information processing
computer which provides 3-D visualization of
surgical anatomy and related diagnostic and
monitoring data (up to four HMDs may be used
simultaneously with each StereoSite system).
3-D Scope Small diameter, angled, rotatable 3-D endoscope.
MSVA Micro-stereo video adapter ("MSVA") which
retrofits to the surgical microscope to produce a
3-D video image to be displayed on the HMD. The
MSVA incorporates twin 3-chip cameras.
Light Source High power xenon light source incorporating
micro-illuminated light delivery technology
developed by Cogent Light.
</TABLE>
In the same manner as the Series 8000, the StereoSite systems
incorporate advanced visualization principles and the Company's platform
technology in application specific packages. The Company expects that its
StereoSite system targeted at microscopy will incorporate the HMD and MSVA
and expects that its StereoSite system targeted at microendoscopy will
incorporate the HMD, the 3-D Scope and the light source. The Company
currently has prototype StereoSite systems available and placed at evaluation
sites.
The Company received 510(k) clearance to market for the processor
component of the HMD for the StereoSite systems in December 1997. All other
required 510(k) clearances to market required for initial commercialization
had been previously received. The Company expects the StereoSite system for
microsurgery to be commercially available in second quarter 1998, with
initial shipments to its strategic partner, Sofamor Danek, at the end of
first quarter 1998.
OTHER PRODUCTS
RELATED CARDIOTHORACIC AND HNS PRODUCTS. The Company's
CardioThoracic Surgery division is the exclusive North American distributor
of instruments manufactured by Delacroix-Chevalier, a French corporation, and
sutures manufactured by Peters, a French corporation, which are particularly
appropriate for the minimally invasive approach.
ENDOSCOPIC CAMERA. Endoscopic cameras are the state-of-the-art in
two-dimensional endoscopic imaging. The Company currently manufactures
compact, high resolution endoscopic cameras under its own label and for OEM
customers and strategic partners. These products have historically accounted
for a significant portion of the Company's revenues.
ELECTRONIC ZOOM LAPAROSCOPE (EZL). The EZL represents a new
generation of laparoscopes in which the camera is placed on the distal end of
the endoscope and then inserted inside the body. The EZL incorporates Vista
Medical's unique proprietary zoom feature, which allows a surgeon to
manipulate the image by zooming in and out at the touch of a button, while
remaining in focus and without moving the scope. This capability is not
available in any other currently marketed endoscope and the Company is
currently seeking a strategic partner with distribution capability in
laparoscopy. The Company may also utilize the zoom technology in future
products for the CardioThoracic Surgery and HNS Microsurgery divisions.
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STRATEGIC ALLIANCES
The Company intends to leverage its position in both technology and
distribution by forming strategic alliances with corporations and research
institutions with respect to the development, regulatory approval and
marketing of certain of its products. The Company has entered into strategic
partnering arrangements as follows:
MEDTRONIC
In November 1996, Vista Medical and Medtronic, a leading cardiac
company, entered into a strategic alliance providing for the distribution and
co-promotion of the Company's current and future visualization and
information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). The parties entered into a co-promotion agreement for the
United States and Canada under which Medtronic will promote the Vista Systems
in conjunction with Medtronic's own proprietary products for minimally
invasive cardiac surgery. Vista Medical will be responsible for the sale and
distribution of the Vista Systems to customers in the United States and
Canada. The Company will be responsible for obtaining all regulatory
clearances in the United States and Canada, will provide training and
installation at its expense and will pay Medtronic a sales commission based
on net revenues generated by the installation and use of the Vista Systems in
the United States and Canada. During the term of the co-promotion agreement,
Medtronic has agreed not to market or sell in the United States and Canada
visualization products which are competitive with Vista Medical in
cardiothoracic surgical procedures. Medtronic's right to co-promote will
terminate in December 1999, subject to (i) earlier termination for
Medtronic's failure to meet certain objectives or breach of material
obligations by either party and (ii) automatic renewal if certain performance
criteria are met.
Medtronic will also act as Vista Medical's exclusive distributor for
the Vista Systems for use in cardiothoracic surgical procedures in Europe,
the Middle East and Africa. Medtronic will be responsible for obtaining all
regulatory clearances other than the CE mark and will provide training and
installation at its expense. Medtronic will purchase the Vista Systems for a
transfer price to be adjusted each year. Medtronic's exclusive
distributorship will terminate on the third anniversary of the initial
commercial release of the Vista Systems in Europe, subject to earlier
termination for Medtronic's failure to meet certain objectives or breach of
material obligations by either party.
The initial term of co-promotion and/or distributorship will be
automatically renewed for an additional two-year term provided certain
performance criteria are met. Vista Medical retains the worldwide right to
distribute products based upon the technology incorporated in the Vista
Systems for use in specialties other than cardiothoracic surgery. Vista
Medical also retains the right to make the Vista Systems available worldwide
(other than in Europe, the Middle East and Africa) for clinical and training
programs organized by any company. Medtronic has the right of first refusal
to obtain distribution rights for the Vista Systems in other areas of the
world.
In connection with entering into the co-promotion agreement,
Medtronic made a $10 million equity investment in the Company and received
2,000,000 shares of Series C Preferred Stock, which were automatically
converted into 1,500,000 shares of Common Stock in connection with the
Initial Public Offering.
HEARTPORT
In February 1997, the Company entered into a Supply and Services
Agreement with Heartport, a leading company developing minimally invasive
technology for heart surgery. Vista Medical sold four Series 8000 systems to
Heartport in September 1997, for use in the Heartport Research and Training
Center in Salt Lake City, Utah. Heartport has agreed to use the Series 8000
in its training centers, to promote that its training courses utilize the
Series 8000 and to endorse the Series 8000 as the preferred 3-D video
visualization and information solution for minimally invasive heart surgery.
Until December 31, 1999, the Company will maintain and support the four
systems at the Heartport Research and Training Center and will collaborate
with Heartport with the goal of ensuring that the Series 8000 is compatible
with technology used in the performance of Heartport's Port-Access
procedures. During the period ending December 31, 2003, the Company has also
agreed to provide the Vista Systems to
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hospitals, clinics or similar sites in North America whose surgeons have been
trained at the Heartport Research and Training Center, without discrimination
and on the best available terms and conditions the Company offers to any
other similarly situated customers of the Company. In connection with the
agreement, the Company issued to Heartport a warrant to purchase up to
100,000 shares of Common Stock, exercisable at any time prior to March 31,
2001, at a price of $6.67 per share.
SOFAMOR DANEK
In January 1998, Vista Medical and Sofamor Danek, a leading provider of
systems for spinal surgery, entered into an exclusive distribution agreement
appointing Sofamor Danek as Vista Medical's 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"). The Company will be
responsible for obtaining all regulatory clearances in the United States and all
necessary CE Mark clearances. Sofamor Danek shall be responsible for obtaining
all other regulatory clearances. Sofamor Danek will purchase StereoSite Systems
for a transfer price to be adjusted each year, and in 1998 and 1999 Sofamor
Danek will make guaranteed minimum purchases of StereoSite Systems as long as
certain conditions are fulfilled. Sofamor Danek's exclusive distributorship may
terminate, in whole or in part, if Sofamor Danek fails to meet certain
performance objectives. The term of the distributorship expires on December 31,
2002, provided, however, that the term will be automatically extended for
successive two-year periods provided certain performance criteria are met.
Sofamor Danek has a right of first refusal to obtain distribution rights for
StereoSite Systems for orthopedic surgery (other than arthroscopy).
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 SteroSite Systems with Sofamor Danek's image
guidance systems and certain other products, including systems and instruments
for spinal surgery. Vista has agreed to spend certain minimum amounts each year
during the term of the cooperative technology agreement on research and
development specifically focused on StereoSite Systems. The term of the
cooperative technology agreement will expire upon the termination of Sofamor
Danek's exclusive rights under the distribution agreement.
GDE SYSTEMS
In February 1997, GDE, a leading military electronics and information
management company, granted the Company an exclusive worldwide license to
software, documentation and trademarks of GDE for use in the medical field.
Since 1993, GDE's subsidiary, Healthcom, has been adapting the software licensed
to Vista Medical to provide high-speed, image-based information processing and
networking capabilities specifically for medical applications. In connection
with the license, Vista Medical issued to GDE Common Stock with a value (based
on the initial public offering price) of $250,000 and will pay GDE a royalty on
revenues derived from any products based upon or derived from the GDE software.
Vista Medical has also agreed to make a non-refundable payment of at least
$250,000 by December 31, 1998 as a combination of royalty payments earned
through such date and a royalty advance creditable against future royalties due
thereafter. Pursuant to the license agreement, Vista Medical has hired three of
GDE's software development engineers. GDE has a right of first refusal to
license Vista Medical improvements to the software for use in non-medical
markets, subject to the payment of a royalty to Vista Medical. The parties also
agreed to negotiate in good faith to enter into a services agreement which would
provide Vista Medical with access to GDE consultancy services on a
project-by-project basis, on terms to be mutually agreed upon.
COGENT LIGHT
The Company and Cogent Light formed a strategic alliance in March 1996,
pursuant to a memorandum of understanding, to cooperate in the development of
products for minimally invasive cardiac surgery which incorporate Cogent Light's
proprietary light fiber delivery technology. Pursuant to the memorandum of
understanding, Cogent Light is currently providing its single fiber and
MicroBundle technologies exclusively for incorporation into the Series 8000,
including CardioCamera, CardioLight and Cardio3DScope. The memorandum of
understanding
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stipulates that Vista Medical will incorporate only a Cogent Light
source in its cardiac surgical instrumentation, for example, CardioLight,
provided such light source meets all of Vista Medical's performance
requirements. The parties retain rights to their respective intellectual
property, with new developments under the alliance being jointly owned and
cross-licensed to each party.
KAISER AEROSPACE
In July 1995, the Company entered into a Manufacturing Supply Agreement
with Kaiser Electro-Optics, a subsidiary of Kaiser Aerospace. This agreement
was subsequently amended in December 1997. In December 1997, the Company
entered into a Technology Strategic Alliance: Memorandum of Understanding (the
"Technology Strategic Alliance") with Kaiser Aerospace, which superseded a
similar agreement entered into by the Company and Kaiser Electro-Optics in July
1995. The Technology Strategic Alliance provides that the Company and Kaiser
Aerospace, represented by its subsidiary Kaiser Electro-Optics, will cooperate
in joint development programs related to the HMD as appropriate to be negotiated
on an arms-length and project-by-project basis for a five-year term. The
Company contracts with Kaiser Electro-Optics for development and manufacturing
services related to the Company's HMD, including initial production quantities
for the HMD. The Manufacturing Supply Agreement provides that Kaiser
Electro-Optics will be the Company's preferred supplier for a five-year period
for not less than 75% of its requirements for the optical subassembly of the
Company's HMD, provided that pricing and other terms are competitive and
mutually agreed upon. Pursuant to the Technology Strategic Alliance, Kaiser
Aerospace granted the Company a right of first refusal to exclusively license
independently developed new technology or devices for medical applications.
Reciprocally, in December 1997, the Company entered into a License Agreement
with Kaiser Aerospace pursuant to which the Company exclusively licensed to
Kaiser Aerospace the right to manufacture and distribute industrial and
professional versions of its HMD in market segments other than medicine in
return for an upfront payment and royalties based on sales.
UROHEALTH (IMAGYN MEDICAL TECHNOLOGIES)
In December 1996, the Company and Urohealth Systems, Inc., which changed
its name to Imagyn Medical Technologies in 1997 ("Imagyn"), entered into a
license agreement under which the Company exclusively licensed visual instrument
technology developed principally for the field of gynecology (the "Newman
Technology") to Imagyn for use in gynecology, urology and general surgery on a
worldwide basis. Imagyn will pay to Vista Medical a sliding royalty based on
sales of products incorporating the Newman Technology, subject to certain
maximums and minimums. The agreement may be terminated in the event of an
uncured material breach or insolvency by either party. In connection with the
license agreement, the parties entered into a consulting agreement whereby Vista
Medical agreed to use its reasonable efforts to provide the services of Allen
Newman, the Company's Vice President and General Manager, HNS Microsurgery, as a
consultant to Imagyn on a limited basis. The Company exclusively licensed the
Newman Technology from Mr. Newman in September 1994. The Newman license
agreement was amended in December 1996 to permit the Company to sublicense the
Newman Technology to Imagyn, formerly Urohealth Systems, Inc. In connection
with the amendment of the Newman license agreement, including the termination of
royalty rights for camera systems, the Company paid Mr. Newman an additional sum
of money and agreed to pay Mr. Newman a percentage of the royalties received
from Imagyn for sales of disposable products manufactured under the sublicense.
MARKETING AND SALES
The Company has organized its sales and marketing efforts by
specialty-specific divisions: Vista CardioThoracic Surgery division ("VCS") and
Vista HNS Microsurgery division ("VHNS"). The Company believes that this
organizational structure provides the commitment and focus necessary to
introduce and support new advanced technology to these two distinct market
segments. Each division, however, will follow similar strategic principles in
developing its business.
TRAINING. The introduction of new technology requires training for both
surgeons and operating room personnel. VCS began training programs in the third
quarter of 1997 and expects to be able to train up to 250
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surgeons on an annual basis. VCS will also provide the visualization
equipment for training programs organized by Medtronic, Heartport and other
cardiac surgery companies. The VCS training format will involve one or two
day sessions at selected locations where surgeons will have the opportunity
to use the Series 8000 in a laboratory environment. Operating room personnel
will receive in-service training from company representatives when equipment
is installed. VHNS intends to utilize a similar format specifically designed
for HNS surgeons in conjunction with Sofamor Danek. See "--Strategic
Alliances." VHNS will distribute its products worldwide through Sofamor
Danek, its sales forces and independent distributors.
CLINICAL EVALUATION. VCS and VHNS product lines have been developed
with frequent input from the Clinical Advisory Boards of each division. This
evaluation phase will progress into a publication phase with the Company's
advisors publishing results of their experience in leading publications and
speaking at major clinical conferences. The Company supports such research,
although it has no control over the content or timing of any publication or
presentation, because impartial education of the general clinical audience is a
key component in establishing procedure and equipment acceptance. As part of
their strategy, VCS and VHNS also intend to continue to support seminars and
symposiums and participate in industry trade shows.
SALES FORCE. The VCS sales force consists of a combination of direct
and independent sales representatives. VCS currently markets and supports its
products through seven direct and 19 independent representatives and four
clinical specialists. In addition, Medtronic will co-promote the Series 8000 in
conjunction with Medtronic's own proprietary products for minimally invasive
cardiac surgery in the United States.
PATIENT EDUCATION. As the success of the Company's products is
dependent on the adoption of MIM procedures, it must support the purchasers of
its products in the introduction of these procedures to the local community.
The Company has therefore engaged a national firm, specializing in medical
communications, to provide public relations assistance to create patient
awareness of the minimally invasive surgical options. Initial emphasis will be
to support the launch of the Series 8000.
INTERNATIONAL SALES. The Company has entered into a strategic
relationship with Medtronic for the distribution of the Series 8000 in Europe,
the Middle East and Africa. See "--Strategic Alliances--Medtronic." The
StereoSite systems will be distributed internationally by Sofamor Danek. See
"Strategic Alliances--Sofamor Danek."
MANUFACTURING
The Company has established a manufacturing facility in Westborough,
Massachusetts, which it believes generally meets the Good Manufacturing Practice
("GMP") standards set by the FDA as well as the requirements of the European
Quality Systems standard ISO9001/EN46001. The Company believes this facility is
adequate for the Company's near-term manufacturing requirements which are
principally final assembly of sub-assemblies and components, including hardware
and software. The Company has been manufacturing OEM camera systems in limited
quantities for two years and has been developing the necessary procedures,
systems and controls and hiring supervisory staff throughout this period. The
Company believes that its current manufacturing facility will be adequate to
meet its forecasted requirements through 1998 and that additional space will be
available when required on reasonable commercial terms.
The Company lacks experience in manufacturing its products under
development, including the Series 8000, in the quantities that would be
necessary to achieve significant commercial sales. The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components either by the Company directly or by contract manufacturers.
Companies such as Vista Medical often encounter difficulties in scaling up
manufacturing of products, which could include problems involving quality
control and assurance, component and service availability, adequacy of control
policies and procedures, lack of qualified personnel, compliance with FDA
regulations and the need for further FDA review and possible approval of new
manufacturing processes and facilities or other production constraints. There
can be no assurance that reliable, high-volume manufacturing can be established
or maintained at commercially reasonable costs. The Company will also require
additional manufacturing facilities as production volumes increase; acquisition
of new manufacturing facilities will likely involve relocation.
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Any of these factors could have a material adverse effect on the Company's
business, financial condition and results of operation.
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. In addition, the substitution of replacement vendors may
entail re-engineering time and cost and could delay the supply of the Company's
products. Any significant supply interruption would have a material adverse
effect on the Company's ability to manufacture its products and, therefore, a
material adverse effect on its business, financial condition and results of
operations.
The Company has, and will continue to consider as appropriate, the
internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new design and production
processes which further reduce costs.
COMPETITION
The medical device market is characterized by intensive development
efforts and rapidly advancing technology. The future success of the Company
will depend, in large part, upon its ability to anticipate and keep pace with
advancing technology and competing innovations. There can be no assurance,
however, that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products.
Although several companies compete with aspects of the Company's
visualization product line, the Company believes there is no single company
which offers a complete and integrated advanced visualization and information
system specifically directed at minimally invasive microsurgical applications.
In addition, the Company believes that no other head-mounted display has been
cleared for marketing in surgical applications by the FDA. The Company believes
that a number of large companies, with significantly greater financial,
manufacturing, marketing, distribution and technical resources and experience
than that of the Company, are focusing on the development of visualization
products for MIM. Several companies are currently developing and marketing
visualization products for MIM which could be applied to cardiac surgery. There
can be no assurance that the Company will be successful in competing with any
such companies.
Technological advances in other therapies for heart disease such as
drugs, interventional cardiology procedures or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than MIM surgical procedures and could render MIM cardiac surgery
obsolete.
GOVERNMENT REGULATION
The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States primarily by the
FDA and, to a lesser extent, by certain state agencies. Generally, medical
devices require pre-market clearance or pre-market approval prior to
commercial distribution. In addition, certain material changes or
modifications to, and changes in intended use of, medical devices also are
subject to FDA review and clearance or approval. The FDA regulates the
research, testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, promotion and distribution of medical devices in the United
States and the export of unapproved medical devices from the United States to
other countries. 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.
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Class I devices are subject to general controls (e.g., establishment
registration and product listing, labeling, adulteration and misbranding
provisions and medical device reporting requirements and, unless exempt, to
pre-market notification and adherence to GMP standards). Class II devices
are subject to general controls and special controls (e.g., performance
standards, post-market surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those that must receive pre-market approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable or new devices which have not been found to
be substantially equivalent to legally marketed devices). Class III devices
ordinarily require clinical testing to ensure safety and effectiveness and
FDA approval prior to marketing and distribution. The FDA also has the
authority to require clinical testing of Class I and Class II devices. A
pre-market approval ("PMA") application must be filed if a proposed device is
not substantially equivalent to a legally marketed predicate device or if it
is a Class III device for which the FDA has called for such application. A
PMA typically takes several years to be approved by the FDA.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or submission and approval of a PMA application. If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to a Class III device for which the FDA has not called for a PMA, the
manufacturer or distributor may market the device upon receipt of an FDA order
determining such a device substantially equivalent to a predicate device. The
510(k) notification may need to be supported by appropriate performance,
clinical or testing data establishing the claim of substantial equivalence. The
FDA requires a rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an FDA
substantial equivalence order permitting the marketing of a device is received
by the person who submitted the 510(k) notification. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA letter may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k) notification.
The Company has received 510(k) clearance to market the following
product lines in the United States: (i) 3-D video endoscope (April 1997);
(ii) mini cameras (April 1997); (iii) illumination system (April 1997);
(iv) head mounted display (September 1996); (v) additional cardiothoracic
indications for the 3-D scope (July 1996); (vi) sinus telescopes (October 1995);
(vii) video endoscope with zoom (January 1995); (viii) stereo viewing system
(November 1994); (ix) dental camera (November 1994); (x) three-chip (endoscopic)
video camera (June 1994); and (xi) 3-D scope (December 1992). All 510(k)
clearances to market necessary for Series 8000 commercialization have been
received. In addition, in December 1997 the Company received clearance to
market the processor component of the HMD, incorporating enhanced software
capabilities required by the StereoSite systems. All other required 510(k)
clearances to market for the StereoSite systems have been received.
Internationally, all of the Company's current products have qualified for the CE
mark under the Electromagnetic Compatibility Directive for sale in Europe.
All clinical investigations involving the use of an unapproved or
uncleared device on humans to determine the safety or effectiveness of the
device must be conducted in accordance with the FDA's IDE regulations. If the
device presents a "significant risk," the manufacturer or distributor of the
device is required to file an IDE application with the FDA prior to commencing
human clinical trials. The IDE application must be supported by data, typically
the result of animal and bench testing. If the IDE application is approved by
the FDA, human clinical trials may begin at a specific number of investigational
sites with a maximum number of patients, as approved by the FDA. If the device
presents a "non-significant risk," approval by an Institutional Review Board
prior to commencing human clinical trials is required, as well as compliance
with labeling, record keeping, monitoring and other requirements. However, the
FDA can disagree with a non-significant risk device finding.
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Any products manufactured or distributed by the Company are subject
to continuing regulation by the FDA, which includes record keeping
requirements, reporting of adverse experience with the use of the device, GMP
requirements and post-market surveillance, and may include post-market
registry and other actions deemed necessary by the FDA. A new 510(k), PMA or
PMA supplement is also required when a medical device manufacturer makes a
change or modification to a legally marketed device that could significantly
affect the safety or effectiveness of the device, or where there is a major
change or modification in the intended use of the device or a new indication
for use of the device. When any change or modification is made to a device
or its intended use, the manufacturer is expected to make the initial
determination as to whether the change or modification is of a kind that
would necessitate the filing of a new 510(k), PMA or PMA supplement.
Sales of medical device products outside the United States are
subject to foreign regulatory requirements that vary from country to country.
The time required to obtain approvals required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ from FDA requirements. Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. The current
regulatory environment in Europe for medical devices differs significantly
from that in the United States. Europe is currently in the transitional
process of implementing the Medical Device Directive which was adopted on
January 1, 1995 with a transition period through June 1998. After June 1998,
all medical devices sold in the European Union must bear the CE mark.
Devices are now classified by manufacturers according to the risks they
represent with a classification system giving Class III as the highest risk
devices and Class I as the lowest. Once the device has been classified, the
manufacturer can follow one of a series of conformity assessment routes,
typically through a registered quality system, and demonstrate compliance to
a European Notified Body. After that, the CE mark may be applied to the
device. Maintenance of the system is ensured through annual on-site audits
by the Notified Body and a post-market surveillance system requiring the
manufacturer to submit serious complaints to the appropriate governmental
authority. With respect to the Series 8000 and StereoSite systems, the
Company is responsible for gaining, at its expense, the CE mark in Europe.
All components of the Series 8000 and StereoSite systems have qualified for
the CE mark under the Medical Device Directive.
PATENTS AND PROPRIETARY RIGHTS
Vista Medical relies on a combination of technical leadership,
patent, trade secret, copyright and trademark protection and nondisclosure
agreements to protect its proprietary rights. As of January 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 for such patents to issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has rights in the following trademarks: 3D
Scope-Registered Trademark-, Design of Cone and Vista Medical Technologies &
Design. In addition, the Company has applied to register the following
trademarks: MIM, StereoSite, CardioCamera, Infomatix, CardioView,
CardioController, CardioGuide, CardioConsole and CardioLight.
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain
patent protection for its products both in the United States and in other
countries. The patent positions of medical device companies, including the
Company, however, are generally uncertain and involve complex legal and
factual questions. There can be no assurance that patents will issue from
any patent applications owned by or licensed to the Company or that, if
patents do issue, the claims allowed will be sufficiently broad to protect
the Company's technology. In addition, there can be no assurance that any
issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will
provide competitive advantages to the Company.
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The Company has in-licensed certain aspects of its technology. In
September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to the Company a perpetual, exclusive, worldwide
license in the medical field to make, have made, modify, use, lease,
market, sell and otherwise distribute certain endoscopes and other
medical products incorporating a stereo objective lens and/or a relay lens
configuration. Under the terms of this license agreement, Vista Medical is
obligated to pay McKinley an annual maintenance royalty, additional royalties
upon the sale of certain numbers of systems incorporating the McKinley
technology and royalties on net sales of products incorporating the McKinley
technology. The exclusive license granted under this agreement becomes a
non-exclusive license (or, under certain circumstances, the license
terminates) in the event Vista Medical fails to pay any royalties following
receipt of notice of such failure to pay. In addition, Vista Medical has the
right to terminate the agreement with limited notice.
In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to
certain optical zoom technology for use in endoscopes. Vista Medical is
obligated to pay royalties on net sales of products in the United States which
incorporate Fuji's technology. Fuji may terminate the agreement if Vista
Medical does not cure any violation of the agreement within a limited period of
time. Failure of the Company to retain rights to these technologies could have
a material, adverse effect on the Company's business, financial condition and
results of operations.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights.
Litigation, which would result in substantial expense to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of proprietary rights of third parties or
whether the Company's products, processes or procedures infringe any such
third-party proprietary rights. The Company may also have to participate in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial expense to the Company, to determine
the priority of inventions covered by the Company's issued United States patents
or pending patent applications. Furthermore, the Company may have to
participate at substantial cost in International Trade Commission proceedings to
enjoin importation of products which would compete unfairly with products of the
Company. Any adverse outcome of any patent litigation (including interference
proceedings) could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from or to third parties or
require the Company to cease using the technology in dispute.
Patent applications in the United States are maintained in secrecy until
a patent issues, and patent applications in foreign countries are maintained in
secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign countries
are published. While publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications, such publication may enable the Company's competitors to
ascertain what areas of research or development the Company is engaged in prior
to the Company's receipt of patent protection in the United States or foreign
countries relating to such research or development.
In general, the development of visualization and information systems and
related surgical instruments and accessories is intensely competitive. Patents
issued and patent applications filed relating to medical devices are numerous
and there can be no assurance that current and potential competitors and other
third parties have not filed or in the future will not file applications for, or
have not received or in the future will not receive, patents or obtain
additional proprietary rights relating to products or processes used or proposed
to be used by the Company. There can also be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertions will not result in costly litigation or require the Company
to obtain a license to intellectual property rights of such parties. There can
be no assurance that any such licenses would be available on terms acceptable to
the Company, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent applications),
or to further develop or commercialize its products in the United States and
abroad and could result in the award of substantial damages. Defense of any
lawsuit or failure to obtain any such license could have a material adverse
affect on the Company.
The Company relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
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technologies or otherwise gain access to the Company's proprietary technology
or disclose such technology or that the Company can ultimately protect its
rights to such unpatented proprietary technology. No assurance can be given
that third parties will not obtain patent rights to such unpatented trade
secrets, which patent rights could be used to assert infringement claims
against the Company. The Company also relies on confidentiality agreements
with its collaborators, employees, advisors, vendors and consultants to
protect its proprietary technology. There can be no assurance that these
agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. In
addition, the Company's agreements with its employees and consultants require
disclosure to the Company of ideas, developments, discoveries or inventions
conceived during employment or consulting, as the case may be, and assignment
to the Company of proprietary rights to such matters related to the business
and technology of the Company. The extent to which efforts by others will
result in patents and the effect on the Company of the issuance of such
patents is unknown. Failure to obtain or maintain patent and trade secret
protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations.
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CLINICAL ADVISORY BOARDS
The Company has established three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS microsurgery and a third General Advisory Board focused on
several other 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. The
Clinical Advisory Boards are intended to act as a clinical reference for the
Company and to provide access to potential training sites for the Company's
visualization products. The Clinical Advisory Boards, Research Advisory Board
and their members are as follows:
<TABLE>
<CAPTION>
CLINICAL ADVISORY BOARD: CARDIOTHORACIC SURGERY
ADVISOR (1) INSTITUTION AND LOCATION
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<S> <C>
Delos M. Cosgrove III, M.D. . . The Cleveland Clinic Foundation, Cleveland, OH
Federico Benetti, M.D. . . . . Fundacon Benetti, Rosario, Argentina
Alain Carpentier, M.D. . . . . Hopital Broussais, Paris, France
O. Howard Frazier, M.D. . . . . Texas Heart Institute, Houston, TX
Laman A. Gray, M.D. . . . . . . University of Louisville, Louisville, KY
Renee S. Hartz, M.D. . . . . . Tulane University, New Orleans, LA
Urban Lonn, M.D. . . . . . . . University Hospital, Linkoping, Sweden
William F. Northrup, III, M.D. Minneapolis Heart, Minneapolis, MN
M. Clive Robinson, M.D. . . . . University of Kentucky, Lexington, KY
William I. Santamore, Ph.D. . . University of Louisville, Louisville, KY
Meredith L. Scott, M.D. . . . . Florida Hospital, Orlando, FL
Hani Shennib, M.D. . . . . . . Montreal General Hospital, Montreal, Canada
Albert Starr, M.D. . . . . . . St. Vincent Hospital, Portland, OR
Victor F. Trastek, M.D. . . . . Mayo Clinic Foundation, Rochester, MN
Gus J. Vlahakes, M.D. . . . . . Massachusetts General Hospital, Boston, MA
John C. Wain, M.D. . . . . . . Massachusetts General Hospital, Boston, MA
- ----------
(1) Each of the listed advisors specializes in cardiac surgery, with the
exceptions of Drs. John Wain and Victor Trastek, who specialize in
thoracic surgery, and Dr. William Santamore, who is a cardiovascular
researcher.
</TABLE>
<TABLE>
<CAPTION>
RESEARCH ADVISORY BOARD: CARDIOTHORACIC SURGERY
ADVISOR INSTITUTION AND LOCATION
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<S> <C>
Lawrence H. Cohn, M.D. . . . Brigham & Women's Hospital, Boston, MA
Jacob Bergsland, M.D. . . . . Buffalo General Hospital, Buffalo, NY
Robert J. March, M.D. . . . . Rush Presbyterian St. Lukes Medical Center,
Chicago, IL
Valavanur A. Subramanian, M.D. Lennox Hill Hospital, New York, NY
</TABLE>
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<TABLE>
<CAPTION>
CLINICAL ADVISORY BOARD: HNS MICROSURGERY
ADVISOR INSTITUTION AND LOCATION
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<S> <C>
Richard D. Bucholz, M.D. . . St. Louis University School of Medicine,
St. Louis, MO
Peter W. Carmel, M.D. . . . New Jersey School of Medicine, Newark, NJ
John Diaz Day, M.D. . . . . Lahey Clinic, Burlington, MA
Joseph F. Hahn, M.D. . . . . The Cleveland Clinic Foundation, Cleveland, OH
Michael L. Levy, M.D. . . . Children's Hospital, Los Angeles, CA
Raymond J. Linovitz, M.D. . Scripps Memorial Hospital, Encinitas, CA
Axel Perneczky, M.D. . . . . University of Mainz, Mainz, Germany
Michael Schulder, M.D. . . . New Jersey School of Medicine, Newark, NJ
</TABLE>
<TABLE>
<CAPTION>
CLINICAL ADVISORY BOARD: OTHER SPECIALTIES
ADVISOR ADVISORY FOCUS INSTITUTION AND LOCATION
------- -------------- ------------------------
<S> <C> <C>
G. David Adamson, M.D. Gynecology Fertility Physicians of Northern California, Palo
Alto, CA
Desmond H. Birkett, M.D. General Surgery Lahey Clinic, Woburn, MA
James T. Caillouette, M.D. Orthopedics Hoag Hospital, Newport Beach, CA
John A. Coller, M.D. Colo-rectal Surgery Lahey Clinic, Woburn, MA
Douglas Olsen, M.D. General Surgery Vanderbilt University School of Medicine,
Nashville, TN
John H. Payne, Jr., M.D. General Surgery Kaiser Permanente Hospital, Honolulu, HI
Stanley Shapshay, M.D. Otolaryngology New England Medical Center, Boston, MA
</TABLE>
HUMAN RESOURCES
As of January 31, 1998, the Company had 104 full-time employees, of
whom 12 hold advanced degrees. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. The Company believes its relations with its
employees are good.
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RISKS AND UNCERTAINTIES
IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS
ANNUAL REPORT THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER
OF FACTORS, INCLUDING THOSE IDENTIFIED UNDER "RISKS AND UNCERTAINTIES" AND
ELSEWHERE IN THIS ANNUAL REPORT.
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 December 31, 1997, the Company had
incurred cumulative net losses of $30.5 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 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
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of the Series 8000 will require training of a large number of
surgeons, and the time required to institute a training program and to train
such surgeons could adversely affect market acceptance. Failure to
successfully commercialize the Series 8000 would have a material adverse
effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES
The Company's near-term products are being developed in order to enable
cardiothoracic and HNS surgeons to perform MIM surgical procedures using their
existing skills coupled with training and complementary equipment being
developed by other companies. Accordingly, the Company's success is dependent
upon acceptance of these procedures by the medical community as a reliable, safe
and cost effective alternative to existing treatments. To date, MIM surgical
procedures have only been performed on a very limited basis by a small number of
highly skilled surgeons. The Company is unable to predict how quickly, if at
all, MIM surgical procedures will be adopted by the medical community or, if
they are adopted, the number of procedures that will be performed.
Most patients with cardiovascular disease first consult with a
cardiologist, who then may treat the patient with pharmaceuticals or
non-surgical interventions, such as angioplasty and intravascular stents, or
refer the patient to a cardiac surgeon for open-chest coronary artery bypass
graft ("CABG") surgery. Cardiologists may not recommend MIM procedures until
such time, if at all, as such procedures can successfully be demonstrated to
be as safe and cost-effective as other accepted treatments. In addition,
cardiac surgeons may choose not to recommend MIM procedures until such time,
if at all, as such procedures are proven to be as efficacious as
conventional, open-chest surgery methods, which have become widely adopted by
cardiac surgeons since the initial use of such surgery in the mid-1950s.
Even if the clinical efficacy of MIM procedures is established in
cardiac and other specialties, surgeons, specialists and other physicians may
choose not to recommend the procedures for any number of other reasons.
Clinical adoption will depend, for example, upon the Company's ability to
facilitate training of surgeons to perform MIM surgery and the willingness of
such surgeons to perform such procedures. Physicians may similarly elect not to
recommend the MIM procedure based on possible unavailability of acceptable
reimbursement from health care payors. Health care payor acceptance may require
evidence of the cost effectiveness of MIM procedures as compared to other
currently available treatments. The Company believes that physician
endorsements will be essential for clinical adoption of MIM procedures, and
there can be no assurance that any such endorsements will be obtained in a
timely manner, if at all. Patient 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 and StereoSite systems, 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.
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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;
DEPENDENCE ON SOFAMOR DANEK
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 seven
direct (Company employee) sales representatives and 19 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 Vista Medical's 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"). Sofamor Danek will purchase
StereoSite Systems for a transfer price to be adjusted each year, and in 1998
and 1999 Sofamor Danek will make guaranteed minimum purchases of StereoSite
Systems as long as certain conditions are fulfilled. Sofamor Danek's exclusive
distributorship may terminate, in whole or in part, if Sofamor Danek fails to
meet certain performance objectives. The term of the distributorship expires on
December 31, 2002, provided, however, that the term will be automatically
extended for successive two-year periods provided certain performance criteria
are met. Sofamor Danek has a right of first refusal to obtain distribution
rights for StereoSite Systems for orthopedic surgery (other than arthroscopy).
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.
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POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY
The Company uses or relies on certain components and services used in
its systems that are provided by sole source suppliers. The manufacture of the
Company's products in larger commercial quantities will require a substantial
increase in component supplies and will likely necessitate the replacement of
current suppliers or the addition of new suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. In addition, the substitution of replacement vendors may
entail re-engineering time and cost and could delay the supply of the Company's
products.
The Company expects to manufacture its products based on forecasted
product orders and intends to purchase subassemblies and components prior to
receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly and depend on factors such
as the business practices of the specific supplier, contract terms and general
demand for a component at a given time. Certain components used in the
Company's products have long lead times. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts.
Any significant supply interruption, or inventory shortage or overage,
would have a material adverse effect on the Company's ability to manufacture the
Company's products and, therefore, a material adverse effect on its business,
financial condition and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC
AND INTERNATIONAL REGULATION
The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States primarily by the FDA
and, to a lesser extent, by certain state agencies. Generally, medical devices
require pre-market clearance or pre-market approval prior to commercial
distribution. In addition, certain material changes or modifications to, and
changes in intended use of, medical devices also are subject to FDA review and
clearance or approval. The FDA regulates the research, testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, promotion and
distribution of medical devices in the United States and the export of
unapproved medical devices from the United States to other countries.
Noncompliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal or
suspension of approval, total or partial suspension of production, fines,
injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution.
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
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substantially equivalent to a predicate device. The 510(k) notification may
need to be supported by appropriate performance, clinical or testing data
establishing the claim of substantial equivalence. The FDA requires a
rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an FDA
substantial equivalence order permitting the marketing of a device is received
by the person who submitted the 510(k) notification. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA letter may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k) notification.
All clinical investigations involving the use of an unapproved or
uncleared device on humans to determine the safety or effectiveness of the
device must be conducted in accordance with the FDA's investigational device
exemption ("IDE") regulations. If the device presents a "significant risk," the
manufacturer or distributor of the device is required to file an IDE application
with the FDA prior to commencing human clinical trials. The IDE application
must be supported by data, typically the result of animal and bench testing. If
the IDE application is approved by the FDA, human clinical trials may begin at a
specific number of investigational sites with a maximum number of patients, as
approved by the FDA. If the device presents a "non-significant risk," approval
by an Institutional Review Board prior to commencing human clinical trials is
required, as well as compliance with labeling, record keeping, monitoring and
other requirements. However, the FDA can disagree with a non-significant risk
device finding.
Any products manufactured or distributed by the Company are subject to
continuing regulation by the FDA, which includes record keeping requirements,
reporting of adverse experience with the use of the device, GMP requirements and
post-market surveillance, and may include post-market registry and other actions
deemed necessary by the FDA. A new 510(k), PMA or PMA supplement is also
required when a medical device manufacturer makes a change or modification to a
legally marketed device that could significantly affect the safety or
effectiveness of the device, or where there is a major change or modification in
the intended use of the device or a new indication for use of the device. When
any change or modification is made to a device or its intended use, the
manufacturer is expected to make the initial determination as to whether the
change or modification is of a kind that would necessitate the filing of a new
510(k), PMA or PMA supplement.
Sales of medical device products outside the United States are
subject to foreign regulatory requirements that vary from country to country.
The time required to obtain approvals required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ from FDA requirements. Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. The current
regulatory environment in Europe for medical devices differs significantly
from that in the United States. After June 1998, all medical devices sold in
the European Union must bear the CE mark. Devices are now classified by
manufacturers according to the risks they represent with a classification
system giving Class III as the highest risk devices and Class I as the
lowest. Once the device has been classified, the manufacturer can follow one
of a series of conformity assessment routes, typically through a registered
quality system, and demonstrate compliance to a European Notified Body.
After that, the CE mark may be applied to the device. Maintenance of the
system is ensured through annual on-site audits by the Notified Body and a
post-market surveillance system requiring the manufacturer to submit serious
complaints to the appropriate governmental authority.
Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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
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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 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
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and surgical centers, which bill various third-party payors, such as
governmental programs and private insurance plans, for the health care
services provided to their patients. Third-party payors carefully review and
increasingly challenge the prices charged for medical products and services
or negotiate a flat rate fee in advance. Payment rates from private
companies also vary depending on the procedure performed, the third-party
payor, the insurance plan and other factors. Medicare compensates hospitals
at a prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis and
compensates physicians at a prospectively determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the
hospital or physician in furnishing the care and unrelated to the specific
devices or systems used in that procedure. Medicare and other third-party
payors are increasingly scrutinizing whether to cover new products and the
level of payment for new procedures. The flat fee reimbursement trend is
causing hospitals to control costs strictly in the context of a managed care
system in which health care providers contract to provide comprehensive
health care for a fixed cost per person. The Company is unable to predict
what changes will be made in the reimbursement methods utilized by
third-party health care payors. The Company could be adversely affected by
changes in payment policies of government or private health care payors,
particularly to the extent any such changes affect payment for the procedure
in which the Company's products are intended to be used.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international markets
would be dependent, in part, upon the acceptance by the prevailing health care
financing system in each country. Health care financing systems in
international markets vary significantly by country and include both government
sponsored health care programs and private insurance. There can be no assurance
that these financing systems will endorse use of the Company's technology.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost
of medical products and services has led to and will continue to lead to
increased pressures on the health care industry, both foreign and domestic, to
reduce the cost of products and services, including products offered by the
Company. There can be no assurance, as to either United States or foreign
markets, that funding will be available or adequate, or that future legislation,
regulation or reimbursement policies of third-party payors will not otherwise
adversely affect the demand for the Company's products or its ability to sell
its products on a profitable basis, particularly if the Company's systems are
more expensive than competing surgical procedures. The unavailability or
inadequacy of third-party payor coverage or reimbursement would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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
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<PAGE>
be no assurance that such coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the Company may require
increased product liability coverage if any products are used in clinical
evaluations or successfully commercialized. Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION
Vista Medical relies on a combination of technical leadership, patent,
trade secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of January 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 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
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<PAGE>
can also be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that
any such licenses would be available on terms acceptable to the Company, if
at all. Furthermore, parties making such claims may be able to obtain
injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent
applications), or to further develop or commercialize its products in the
United States and abroad and could result in the award of substantial
damages. Defense of any lawsuit or failure to obtain any such license could
have a material adverse effect on the Company.
The Company relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants to protect its proprietary
technology. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors. In addition, the Company's agreements with its
employees and consultants require disclosure to the Company of ideas,
developments, discoveries or inventions conceived during employment or
consulting, as the case may be, and assignment to the Company of proprietary
rights to such matters related to the business and technology of the Company.
The extent to which efforts by others will result in patents and the effect on
the Company of the issuance of such patents is unknown. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
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<PAGE>
The Company has established three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS 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 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
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<PAGE>
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 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.
Item 2. PROPERTIES
The Company's facilities consist of approximately 6,500 square feet
of office space located in Carlsbad, California, in which the Company's
executive offices and the HNS Microsurgery division are located, pursuant to
a lease which expires in November 1998. In addition, the Company maintains a
facility of approximately 37,100 square feet in Westborough, Massachusetts in
which the Company's development and manufacturing operations and the
CardioThoracic Surgery division are located, pursuant to several leases which
expire at various points in time beginning in May 1999 and ending in October
2001. The Company believes that suitable additional space will be available
to it, when needed, on commercially reasonable terms.
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<PAGE>
Item 3. LEGAL PROCEEDINGS
From time to time, Vista Medical may be involved in litigation
relating to claims arising out of its operations in the normal course of
business. As of the date of this Annual Report, the Company is not a party
to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of and Dividends on the Registrant's Common Equity.
The Company's Common Stock is traded on the over-the-counter market
and prices are quoted on the Nasdaq National Market under the symbol "VMTI."
The following table sets forth the high and low sale prices for the Common
Stock on the Nasdaq National market from its initial public offering on July
2, 1997 through December 31, 1997.
YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
3rd Quarter (July 2 through
September 30) . . . . . . . . . . . 18.50 8.88
4th Quarter . . . . . . . . . . . 15.50 8.88
</TABLE>
On March 27, 1998, the last reported sale price of the Common Stock
was $11.50. As of January 31, 1998, there were approximately 163 holders of
record of the Common Stock.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently does not intend to pay any cash
dividends in the foreseeable future and intends to retain its earnings, if
any, for the operation of its business.
(b) Recent Sales of Unregistered Securities.
Since January 1, 1997, the Company has sold and issued the following
unregistered securities (which numbers have been adjusted for the reverse
stock split effected in February 1997):
(1) From January 1, 1997 to February 18, 1997, the Company issued an
aggregate of 112,500 options to purchase shares of Common Stock with exercise
prices ranging from $0.80 to $4.00 per share under the 1995 Stock Option Plan
(the "Predecessor Plan") and an aggregate of 43,750 shares of Common Stock
were issued through the exercise of options granted under the Predecessor
Plan for an aggregate exercise price of $31,174.80.
(2) On February 22, 1997, the Company issued a warrant to purchase
100,000 shares of Common Stock at an exercise price per share equal to $6.67
to Heartport in consideration of Heartport entering into a certain Supply and
Services Agreement with the Company.
(3) On March 3, 1997, the Company issued an aggregate of 3,000 shares of
Common Stock to certain employees of the Company in consideration for past
services rendered to the Company.
(4) On July 3, 1997, the Company issued 27,777 shares of Common Stock to
GDE in consideration of GDE entering into a certain License Agreement with
the Company.
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<PAGE>
(5) On October 23, 1997, the Company issued a warrant to purchase 27,184
shares of Common Stock at an exercise price per share equal to $12.875 to
Silicon Valley Bank ("The Bank") in connection with the Bank entering into a
loan and security agreement with the Company.
The sales and issuances of securities in the above transactions were
deemed to be exempt under the Act by virtue of Section 4(2) thereof and/or
Regulation D and Rule 701 promulgated thereunder as transactions not
involving any public offering. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view
to the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. Similar representations of
investment intent were obtained and similar legends imposed in connection
with any subsequent transfers of any such securities. The Company believes
that all recipients had adequate access, through employment or other
relationships, to information about the Company to make an informed
investment decision.
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the
Company's consolidated statements of operations for each of the three years
in the period ended December 31, 1997, and with respect to the Company's
consolidated balance sheets at December 31, 1996 and 1997, are derived from
the financial statements of the Company that have been audited by Ernst &
Young LLP, independent auditors, which are included elsewhere herein and are
qualified by reference to such financial statements. The statement of
operations data for the period from July 19, 1993 (inception) to December 31,
1993 and the year ended December 31, 1994, and the balance sheet data at
December 31, 1993, 1994 and 1995 have been derived from financial statements
audited by Ernst & Young LLP, independent auditors, which are not included
herein. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993(1) 1994 1995 1996 1997
-------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . $ 73 $ 59 $ 1,719 $ 2,244 $ 4,141
Costs and expenses:
Cost of sales. . . . . . . . . . . . 50 43 1,272 2,253 4,559
Research and development . . . . . . 310 1,328 1,904 3,880 6,875
Sales and marketing. . . . . . . . . 48 291 834 2,057 5,011
General and administrative . . . . . 562 758 1,034 3,103 5,499
--------- --------- --------- --------- ----------
Total costs and expenses. . . . . . . 970 2,420 5,044 11,293 21,944
--------- --------- --------- --------- ----------
Loss from operations. . . . . . . . . (897) (2,361) (3,325) (9,049) (17,803)
Minority interest in net loss of
consolidated partnership. . . . . . 80 270 -- -- --
License income . . . . . . . . . . . -- -- -- 1,493 --
Interest income . . . . . . . . . . . -- -- 51 117 926
--------- --------- --------- --------- ----------
Net loss . . . . . . . . . . . . . . $(817) $(2,091) $(3,274) $(7,439) (16,877)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Basic and diluted net loss per
share(2) . . . . . . . . . . . . . . (1,089.33) (2,788.00) $ (88.49) $(37.01) $(2.51)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Shares used in computing basic
and diluted net loss per share(2). . 1,000 1,000 37,000 201,000 6,731,000
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments. . . . . . . . . . . . . $ 442 $ 9 $ 3,399 $10,285 $24,113
Working capital. . . . . . . . . . . . . 409 (76) 4,224 10,805 25,977
Total assets . . . . . . . . . . . . . . 855 475 5,208 14,316 32,130
Total debt . . . . . . . . . . . . . . . 1,293 3,243 -- -- --
Accumulated deficit. . . . . . . . . . . (817) (2,907) (6,181) (13,620) (30,498)
Total stockholders' equity (deficit) . . (816) (2,906) 4,707 12,961 29,866
- -----------
</TABLE>
(1) July 19, 1993 (inception) to December 31, 1993.
(2) See Notes 1 and 8 of Notes to Consolidated Financial Statements for
information concerning the computation of basic and diluted net loss per
share and shares used in computing basic and diluted net loss per share.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL 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.
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
December 31, 1997, the Company's accumulated deficit was approximately
$30,500,000. There can be no assurance that the Company's development efforts
will result in commercially available products, that the Company will be
successful in introducing its products under development, or that required
regulatory approval of products will continue to be obtained in a timely manner,
if at all.
The Company has increased its staffing each year to support its research
and development, manufacturing and sales and marketing activities. At
December 31, 1995, 1996, 1997, the Company had 21, 49 and 104 employees,
respectively. The Company expects to continue to increase staffing levels
significantly in future periods in support of its research and development,
manufacturing scale up, service and support, sales and marketing and general and
administrative activities related to new products. The Company expects that its
increased staffing needs will negatively impact operating income, which in turn
may impact the Company's ability to achieve profitability.
The Company recorded noncash deferred compensation in 1996 and 1997
totalling approximately $3,500,000 in connection with the grant of certain
stock options, of which approximately $1,100,000 was recognized as an expense
in 1997. The unamortized balance of the deferred compensation will be
expensed over the vesting periods of the options (typically four or five
years) and, therefore, will continue to impact the Company's operating
results through 2001.
In October 1997 the Company implemented a fee-per-procedure pricing
strategy for the Series 8000 in the United States market. This strategy,
designed to accelerate adoption of the Series 8000, earns a fee for the
Company every time the Series 8000 is used in a procedure. Therefore,
revenues are directly related to actual usage, subject to minimum payment
requirements. Customers receive an integrated equipment and service package,
including installation, in-service training, on-going technical support and
system upgrades, for a single charge which can be clearly related to a
specific procedure. The Company believes that such strategy, based upon a
service contract rather than an upfront capital payment, will allow more
rapid penetration of the available market. The Company intends to amortize
the cost of the Series 8000 over the term of the service contract and will
provide necessary reserves for
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<PAGE>
the required maintenance and upgrades of the machines. Under the
fee-per-procedure pricing strategy, the Company is required to allocate
adequate capital resources to fund such investment, as the customer does not
purchase the system with an upfront capital payment.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES
The Company had revenues from product sales of $2,244,000 and $4,141,000
for the years ended December 31, 1996 and 1997, respectively. The increase in
revenues from 1996 to 1997 was primarily due to sales of the Company's Series
8000 Advanced Visualization and Information ("Series 8000") product for
minimally invasive cardiac surgery launched in September 1997, 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 during
1997 compared to 1996. Sales to individual customers exceeding 10% or more of
revenues in the years ended December 31, were as follows: during 1995 one
customer accounted for 85% of revenues; during 1996 three customers accounted
for 30%, 27% and 25% of revenues; during 1997, three customers accounted for
25%, 19% and 10% of revenues, respectively.
COSTS AND EXPENSES
COST OF SALES. The Company's cost of sales were $2,253,000 and
$4,560,000 for the years ended December 31, 1996 and 1997, respectively. The
increase in cost of sales was primarily due to increased 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 continue to incur
expenses related to manufacturing scale-up associated with the Series 8000 and
its StereoSite systems for HNS markets in the first and second quarters of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and
development expenses were $3,880,000 and $6,875,000 for the years ended December
31, 1996 and 1997, respectively. The increase in research and development
expenses was attributable to continued development and expansion of the
Company's research and development organization focused on development,
prototyping and evaluation of new products and consisted of increases in
staffing and related supply and occupancy costs. Contracted research and
development effort also contributed to the increase. The Company believes that
a significant level of investment for product development and evaluation is
necessary to maintain its technological advantage and, accordingly, anticipates
that it will continue spending in research and development near current levels.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
from $2,057,000 in 1996 to $5,011,000 in 1997. 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 commissions and other expenses related to revenues
associated with a line of cardiac instruments and sutures for which the Company
acquired distribution rights in the second half of 1996. The Company expects
that such expenses will continue to increase as it expands its sales and
marketing efforts in connection with commercialization of new products.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses were $3,103,000 and $5,499,000 for the years ended
December 31, 1996 and 1997, respectively. The increase was primarily due to
increases in staffing and related expenses associated with the continued
development of the Company's administrative infrastructure, amortization of
deferred compensation in connection with the grant of certain stock options in
1996 and early 1997, expansion of the Company's information and communication
systems, increases in legal and professional fees associated with business
development efforts, and costs associated with being a public company. The
Company recorded noncash deferred compensation of approximately $3,500,000 in
connection with the grant of certain stock options during 1996 and 1997, of
which approximately $1,100,000 and $447,000 were recognized as an expense in
1997 and 1996, respectively. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001. The Company expects its general and
administrative expenses
-35-
<PAGE>
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.
OTHER INCOME
LICENSE INCOME. The Company had license income of $1,493,000 in 1996
and no income from licensing of technology in 1997. The license income in 1996
related to a perpetual license to certain of the Company's technology and
patents unrelated to its main products and markets. No other technology is
being developed with the purpose of being licensed and the Company does not
anticipate any future licensing arrangements of any of its core technology for
medical applications.
INTEREST INCOME. Interest income increased from $117,000 in 1996 to
$926,000 in 1997, due primarily to increasing average investment balances of the
Company following the Initial Public Offering.
TAXES.
At December 31, 1997, the Company had federal and state tax loss
carryforwards of approximately $22,500,000 and $3,100,000, respectively. The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized. At December 31, 1997, the Company
also had federal and state research tax credit carryforwards of approximately
$390,000 and $330,000 respectively, which will expire in 2010 unless previously
utilized. The Company has provided a full valuation allowance on the deferred
tax assets as realization of such assets is uncertain.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
SALES
SALES. The Company had revenues from product sales of $1,719,000 and
$2,244,000 for the years ended December 31, 1995 and 1996, respectively. The
increase in revenue from 1995 to 1996 was attributable to the increased sales of
the Company's endoscopic cameras and the sale of surgical instruments and
sutures for which the Company acquired distribution rights during 1996. Sales to
individual customers exceeding 10% or more of revenues for the years ended
December 31, 1995 and 1996 were as follows: during 1995, one customer accounted
for 85% of revenues; during 1996, three customers accounted for 30%, 27% and 25%
of revenues. For the years ended December 31, 1995 and 1996, the same customer
accounted for 85% and 25% of revenues, respectively.
COSTS AND EXPENSES
COST OF SALES. The Company's cost of sales were $1,272,000 and
$2,253,000 for the years ended December 31, 1995 and 1996, respectively. The
increase in cost of sales from 1995 to 1996 was attributable to the increase in
revenues from 1995 to 1996 as well as the investment the Company made in its
manufacturing infrastructure to accommodate the scale-up for new product
introductions.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and
development expenses were $1,904,000 and $3,880,000 for the years ended
December 31, 1995 and 1996, respectively. The increase in research and
development expenses from 1995 to 1996 was attributable to significant increases
in staffing, contract research and development expense, and consulting fees
related to development, prototyping and evaluation of future products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
from $834,000 in 1995 to approximately $2,057,000 in 1996. The increase from
1995 to 1996 was related to significant increases in staffing and related
expenses, commissions and professional and consulting fees as the Company
continued to build its sales operations and expand its marketing activities in
relation to future products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $1,034,000 and $3,103,000 for the years ended December 31, 1995
and 1996, respectively. The increase from 1995 to 1996 was
-36-
<PAGE>
primarily attributable to the continued development of corporate management
and related support functions, the addition of new facilities and expansion
of current facilities, expansion of the Company's information systems and the
amortization of deferred compensation in the amount of $447,000.
OTHER INCOME
LICENSE INCOME. License income of $1,493,000 in 1996 represents the net
amount received by the Company from a perpetual license to certain of its
technology and patents unrelated to the Company's main products and markets. The
license to Imagyn, formerly Urohealth Systems, Inc., was a unique, non-recurring
transaction that involved a license of only that component of the Company's
technology that it did not want to pursue. For this reason, the license fees
were treated as non-operating income. Prior to 1996, the Company had no license
income. No other technology is being developed with the purpose of being
licensed and the Company does not anticipate any future licensing arrangements
of any of its core technology for medical applications.
INTEREST INCOME. Interest income represents the net amount of interest
earned by the Company on its cash and short-term investments and interest
expense on debt. Interest income increased from approximately $51,000 for the
year ended December 31, 1995 to approximately $117,000 for the year ended
December 31, 1996 due primarily to increasing average investment balances. The
Company had immaterial amounts of interest income prior to 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its Initial Public Offering in July 1997, raising
approximately $32,700,000 net of offering costs. Prior to the Initial Public
Offering, 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.
In October 1997, the Company completed a $10,000,000 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 December 31, 1997 there were no outstanding balances
under the Agreement. If the Company were to borrow funds pursuant to the Loan
Agreement, it could borrow up to $10,000,000 at one time with an interest
rate of prime plus one and one half percent.
Net cash used in operating activities was approximately $3,567,000,
$6,937,000 and $15,494,000 in 1995, 1996 and 1997. The increase in net cash
used in operating activities was primarily attributable to increasing net losses
during the such periods and investment in inventories associated with expansion
of the Company's product line.
Net cash used in investing activities was approximately $298,000,
$1,239,000 and $20,025,000 in 1995, 1996 and 1997, respectively. The increase
was 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.
Cash flows from financing activities were $7,090,000, $15,061,000 and
$32,728,000 in 1995, 1996 and 1997, respectively. The cash flows from
financing activities in 1995 and 1996 were primarily attributable to the
private sale of preferred stock while cash flows from financing activities in
1997 were primarily attributable to proceeds from the Company's Initial
Public Offering.
The Company intends to undertake approximately $1,500,000 in capital
expenditures in 1998 and has future lease payments relating to its facilities
and certain equipment under operating leases of $1,624,000, of which $387,000
is payable in 1998.
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 a $10,000,000 Loan Agreement, existing cash, cash
equivalents and short-term investments, and product revenues, will be sufficient
to fund its operations through 1998.
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.
-37-
<PAGE>
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 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Company required by this item are set forth at the pages indicated in 14(a)(1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption
"Proposal 1 - Election of Directors," appearing in the Proxy Statement, is
incorporated herein by reference.
(b) Identification of Executive Officers. The information under
the headings "Executive Officers and Key Employees," appearing in the Proxy
Statement, is incorporated herein by reference.
(c) Compliance with Section 16(a) of the Exchange Act. The
information under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," appearing in the Proxy Statement, is incorporated herein
by reference.
Item 11. EXECUTIVE COMPENSATION
The information under the headings "Executive Compensation and Other
Information," appearing in the Proxy Statement, is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the headings "Ownership of Securities," appearing
in the Proxy Statement, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Relationships and Related
Transactions," appearing in the Proxy Statement, is incorporated herein by
reference.
-38-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements required by this item are submitted in
a separate section beginning on Page F-1 of this report.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors . . . . . . . F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1996
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1995, 1996 and 1997. . . . . . . . F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . F-8
</TABLE>
(2) Financial Statement Schedules
All schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have
been omitted.
(b) No reports on Form 8-K have been filed during the last quarter
of the period covered by this report.
(c) Exhibits
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION
- ---------- -----------
<S> <C>
(1) 3.1 Second Restated Certificate of Incorporation of
the Company (Exhibit 3.2).
(1) 3.2 Restated Bylaws of the Company (Exhibit 3.4).
(1) 10.1 Asset Purchase Agreement between the Company and
AST, dated September 15, 1995.
(1) 10.2 Asset Purchase Agreement between the Company,
ProMedica Distribution, Inc. (ProMedica) and
certain stockholders of ProMedica, dated July 26,
1996.
(1) 10.3 Series A-1 Preferred Stock Purchase Agreement
among the Company and the purchasers listed on
Schedule A thereto, dated July 27, 1995.
(1) 10.4 Series B Preferred Stock Purchase Agreement among
the Company and the investors listed on
Schedule A thereto, dated July 12, 1996.
(1) 10.5 Series C Preferred Stock Purchase Agreement
between the Company and Medtronic Asset
Management, Inc., dated November 27, 1996.
(1) 10.6 Common Stock Purchase Warrant between the Company
and Heartport, Inc. (Heartport), dated
February 22, 1997.
(1) 10.7 International Distribution Agreement between AST
and AMCO, Inc., dated September 20, 1994 (with
certain confidential portions omitted).
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION
- ---------- -----------
<S> <C>
(1) 10.8 Manufacturing Supply Agreement between the
Company and Kaiser Electro-Optics, Inc. ("KEO"),
dated July 19, 1995 (with certain confidential
portions omitted).
(1) 10.9 U.S.A. and Canada Distribution Agreement between
the Company and Delacroix-Chevalier Inc., dated
July 11, 1996 (with certain confidential portions
omitted).
(1) 10.10 Distributor Agreement between the Company and
Peters, dated July 15, 1996 (with certain
confidential portions omitted).
(1) 10.11 Sales Agreement between the Company and
Medtronic, Inc., dated November 27, 1996 (with
certain confidential portions omitted).
(1) 10.12 Supply and Services Agreement between the Company
and Heartport, dated February 22, 1997 (with
certain confidential portions omitted).
(1) 10.13 Supplemental Rights Agreement between the Company
and Medtronic, Inc., dated November 27, 1996
(with certain confidential portions omitted).
(1) 10.14 Amended and Restated Investors' Rights Agreement
between the Company and the stockholders listed
on Schedule A thereto, dated November 27, 1996.
(1) 10.15 Amendment to the Amended and Restated Investors'
Rights Agreement between the Company, Heartport
and the stockholders listed on Exhibit A thereto,
dated February 22, 1997.
(1) 10.16 Letter Agreement regarding Investment
Representations and Registration Rights between
the Company and Imagyn, formerly Urohealth
Systems, Inc. (Imagyn), dated December 13, 1996.
(1) 10.17 Consulting Agreement between the Company and
Harry R. McKinley, dated September 15, 1995, as
amended (with certain confidential portions
omitted).
(1) 10.18 Consulting Agreement between the Company and
Imagyn, dated December 13, 1996 (with certain
confidential portions omitted).
(1) 10.19 Form of Professional Services Agreement.
(1) 10.20 Form of Non-Disclosure Agreement for Proprietary
or Business Confidential Information.
(1) 10.21 Non-Competition, Non-Disclosure and Patent and
Inventions Assignment Agreement among Harry R.
McKinley, McKinley Optics, Inc. and AST, dated
December 18, 1991.
(1) 10.22 License and Development Agreement among Harry R.
McKinley, McKinley Optics, Inc. ("MOI") and AST,
dated December 18, 1991, as amended on June 28,
1994 (with certain confidential portions
omitted).
(1) 10.23 License Agreement between the Company and Allen
Newman, dated September 2, 1994, as amended
December 13, 1996 (with certain confidential
portions omitted).
(1) 10.24 Agreement to Amend License and Development
Agreement between Harry R. McKinley, MOI and the
Company, dated September 15, 1995 (with certain
confidential portions omitted).
(1) 10.25 License Agreement between the Company and Kaiser
Aerospace, dated July 19, 1995 (with certain
confidential portions omitted).
(1) 10.26 Technology Strategic Alliance: Memorandum of
Understanding between the Company and Kaiser
Electro Optics, Inc., dated July 19, 1995 (with
certain confidential portions omitted).
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION
- ---------- -----------
<S> <C>
(1) 10.27 Non-Exclusive License Agreement between the
Company, Fuji Photo Film Co., Ltd. and Fuji Photo
Film Optical Co., Ltd., dated June 25, 1996 (with
certain confidential portions omitted).
(1) 10.28 Memorandum of Understanding between the Company
and Cogent Light Technologies, dated March 27,
1996.
(1) 10.29 License Agreement between the Company and Imagyn,
dated December 13, 1996 (with certain
confidential portions omitted).
(1) 10.30 License Agreement between the Company,
HealthCom, Inc. and GDE Systems, Inc., dated
February 28, 1997 (with certain confidential
portions omitted).
(1) 10.31 Lease dated April 14, 1994, as amended by a
certain First Amendment to Lease dated March 29,
1996 and a certain Second Amendment to Lease
dated October 22, 1996 between the Company and
Robert F. Tambone, as Trustee of MAT Realty
Trust, u/d/t dated June 4, 1986.
(1) 10.32 Standard Sublease between the Company and
Quintiles Pacific, Inc., dated January 23, 1996.
(1) 10.33 Standby Letter of Credit from Silicon Valley
Bank, dated August 9, 1996.
(1)+ 10.34 1995 Stock Option Plan.
(1)+ 10.35 1995 Stock Option Plan Form of Notice of Grant.
(1)+ 10.36 1995 Stock Option Plan Form of Stock Option
Agreement.
(1)+ 10.37 1995 Stock Option Plan Form of Stock Purchase
Agreement.
(1)+ 10.38 1997 Stock Option/Stock Issuance Plan, as
amended.
(1)+ 10.39 1997 Stock Option/Stock Issuance Plan Form of
Notice of Grant.
(1)+ 10.40 1997 Stock Option/Stock Issuance Plan Form of
Stock Option Agreement.
(1)+ 10.41 1997 Stock Option/Stock Issuance Plan Form of
Stock Purchase Agreement.
(1)+ 10.42 1997 Employee Stock Purchase Plan.
(1) 10.43 Form of Indemnification Agreement between the
Company and each of its directors.
(1) 10.44 Form of Indemnification Agreement between the
Company and each of its officers.
(1) 10.45 Form of Waiver of Registration Rights, dated
February 28, 1997.
(1)+ 10.46 1997 Stock Option/Stock Issuance Plan Form of
Stock Issuance Agreement.
(1)+ 10.47 Issuance Agreement dated March 3, 1997 between
the Company and those purchasers set forth in
Schedule A.
(2) 10.48 Vista Medical Technologies, Inc. Third Amendment
to Lease, dated September 1, 1997.
* 10.49 Loan and Security Agreement between the Company
and Silicon Valley Bank, dated October 22, 1997.
(3) 10.50 Common Stock Purchase Warrant between the Company
and Silicon Valley Bank, dated October 23, 1997.
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION
- ---------- -----------
<S> <C>
(3) 10.51 Second Amendment to the Amended and Restated
Investor's Rights Agreement between the Company,
Silicon Valley Bank, and the Stockholders listed
on Exhibit A thereto, dated October 22, 1997.
(3) 10.52 Fourth Amendment to Lease, dated October 30,
1997.
(3) 10.53 Technology Strategic Alliance: Memorandum of
Understanding between the Company and KEO, dated
December 9, 1997.
(3) 10.54 Amendment to Manufacturing Supply Agreement
between the Company and KEO, dated December 9,
1997.
(3) 10.55 Amendment to License Agreement between the
Company and Kaiser Aerospace, dated December 9,
1997.
(3)* 10.56 License Agreement between the Company and Kaiser
Aerospace, dated December 9, 1997.
(3)* 10.57 Exclusive Distribution Agreement between the
Company and Sofamor Danek L.P., dated January 7,
1998.
(3)* 10.58 Cooperative Technology Agreement between the
Company and Sofamor Danek Group, Inc., dated
January 7, 1998.
11.1 Statement re: Computation of Per Share Data.
23.1 Consent of Ernst & Young LLP, Independent
Auditors.
24.1 Power of Attorney. (See page 43)
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
</TABLE>
- ----------------
+ Management contract or compensatory plan.
* Certain confidential portions of this Exhibit
were omitted by means of redacting a portion
of the text (the "Mark"). This Exhibit has
been filed separately with the Secretary of
the Commission without the Mark pursuant to
the Company's Application Requesting
Confidential Treatment under Rule 406 under
the Securities Act.
(1) Incorporated by reference to the same-numbered
exhibit (except as otherwise indicated) to the
Company's Registration Statement on Form S-1
(No. 333-22985), filed on March 7, 1997, as
amended.
(2) Incorporated by reference to the Company's
Form 10-Q, filed on November 13, 1997.
(3) Incorporated by reference to the same-numbered exhibit to the
Company's Form 10-K, filed on March 30, 1998.
SUPPLEMENTAL INFORMATION
Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 9, 1998 and copies of the form of proxy to be used
for such Annual Meeting were furnished to the Commission prior to the time they
were distributed to the Stockholders.
-42-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VISTA MEDICAL TECHNOLOGIES, INC.
Date: September 9, 1998 By: /s/ John R. Lyon
-------------------------------------
John R. Lyon
President and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints John R. Lyon or Robert J. De Vaere, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John R. Lyon President, Chief Executive September 9, 1998
- -------------------------- Officer and Director (Principal
(John R. Lyon) Executive Officer)
/s/ Robert J. De Vaere Vice President of Finance and September 9, 1998
- -------------------------- Administration and Chief
(Robert J. De Vaere) Financial Officer (Principal
Financial and Accounting Officer)
* Chairman of the Board and Director September 9, 1998
- --------------------------
(James C. Blair)
* Director September 9, 1998
- --------------------------
(Olav B. Bergheim)
* Director September 9, 1998
- --------------------------
(Nicholas B. Binkley)
* Director September 9, 1998
- --------------------------
(Daniel J. Holland)
* Director September 9, 1998
- --------------------------
(Larry M. Osterink)
</TABLE>
*By: /s/ Robert J. De Vaere
---------------------------------------
Robert J. De Vaere, Attorney-in-fact
-43-
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors...........................F-2
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1996 and 1997....................F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997..........................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997..........................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997..........................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Vista Medical Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Vista Medical
Technologies, Inc. as of December 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vista Medical Technologies, Inc. at December 31, 1996 and 1997 and the
results of its consolidated operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
- ----------------------------
San Diego, California
January 16, 1998
F-2
<PAGE>
Vista Medical Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,119,529 $ 7,328,502
Short-term investments 165,000 16,784,345
Accounts receivable, net 526,119 521,616
Inventories, net 1,212,825 3,344,967
Other current assets 136,400 261,864
------------------------------------
Total current assets 12,159,873 28,241,294
Property and equipment, net 1,082,103 3,327,283
Patents and other assets, net 1,073,741 561,873
------------------------------------
Total assets $14,315,717 $32,130,450
------------------------------------
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 607,639 $ 1,217,110
Accrued compensation 226,543 516,743
Accrued liabilities 520,584 665,285
------------------------------------
Total current liabilities 1,354,766 2,399,138
Commitments
Stockholders' equity :
Convertible preferred stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 11,574,252 in 1996, no shares
in 1997 115,742 -
Common stock, $.01 par value:
Authorized shares - 35,000,000
Issued and outstanding shares - 538,224 in 1996 and
13,407,038 in 1997 5,382 134,071
Additional paid-in capital 28,615,223 62,531,513
Notes receivable from stockholders (93,375) (78,375)
Deferred compensation (2,061,549) (1,942,074)
Unrealized gain/loss on investments - (416,313)
Accumulated deficit (13,620,472) (30,497,510)
------------------------------------
Total stockholders' equity 12,960,951 29,731,312
------------------------------------
Total liabilities and stockholders' equity $14,315,717 $32,130,450
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Vista Medical Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
Sales $ 1,719,223 $ 2,243,756 $ 4,141,082
Costs and expenses:
Cost of sales 1,272,010 2,252,509 4,559,521
Research and development 1,903,618 3,880,069 6,875,069
Sales and marketing 834,518 2,056,767 5,010,953
General and administrative 1,034,434 3,103,256 5,498,820
------------------------------------------------------
Total cost and expenses 5,044,580 11,292,601 21,944,363
------------------------------------------------------
Loss from operations (3,325,357) (9,048,845) (17,803,281)
License income - 1,493,000 -
Interest income 51,407 116,706 926,243
------------------------------------------------------
Net loss $(3,273,950) $(7,439,139) $(16,877,038)
------------------------------------------------------
------------------------------------------------------
Basic and diluted loss per share $ (88.49) $ (37.01) $ (2.51)
------------------------------------------------------
------------------------------------------------------
Shares used in basic and diluted loss per share
computations 37,000 201,000 6,731,000
------------------------------------------------------
------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-4
<PAGE>
Vista Medical Technologies, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994 - $ - 750 $ 8 $ 992
Issuance of Series A
convertible
preferred stock for
cash 6,037,736 60,377 - - 7,897,585
Issuance of Series A
convertible
preferred stock to
retire debt 1,792,453 17,925 - - 2,357,075
Issuance of Series A
convertible
preferred stock for
the assets 154,581 1,546 - - 203,274
Issuance of Series A
convertible
preferred stock for
minority partnership
interest 264,151 2,642 - - 347,358
Exercise of stock
options
Net loss - - 148,125 1,481 28,144
Balance at December 31, - - - - -
1995 --------------------- ------------------------------------
Issuance of Series B 8,248,921 82,490 148,875 1,489 10,834,428
convertible
preferred stock for
cash 1,279,331 12,792 - - 5,065,848
Issuance of Series B
convertible
preferred stock for
assets 46,000 460 - - 183,540
Issuance of Series C
convertible
preferred stock for
cash 2,000,000 20,000 - - 9,948,619
Exercise of stock
options
Deferred compensation - - 389,349 3,893 73,977
Amortization of
deferred - - - - 2,508,811
compensation
Net loss - - - - -
Balance at December 31, - - - - -
1996 --------------------- ------------------------------------
11,574,252 $ 115,742 538,224 $ 5,382 $ 28,615,223
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM DEFERRED UNREALIZED ACCUMULATED
STOCKHOLDERS COMPENSATION GAIN (LOSS) DEFICIT TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, $ - $ - $ - $ (2,907,383) $(2,906,383)
1994
Issuance of Series A
convertible
preferred stock for
cash - - - - 7,957,962
Issuance of Series A
convertible
preferred stock to
retire debt - - - - 2,375,000
Issuance of Series A
convertible
preferred stock for
the assets - - - - 204,820
Issuance of Series A
convertible
preferred stock for
minority partnership
interest - - - - 350,000
Exercise of stock
option (29,625) - - - -
Net loss - - - (3,273,950) (3,273,950)
Balance at December 31, ---------------------------------------------------------------------------
1995 (29,625) - - (6,181,333) 4,707,449
Issuance of Series B
convertible
preferred stock for
cash - - - - 5,078,640
Issuance of Series B
convertible
preferred stock for
assets - - - - 184,000
Issuance of Series C
convertible
preferred stock for
cash - - - - 9,968,619
Exercise of stock
options (63,750) - - - 14,120
Deferred compensation
Amortization of - (2,508,811) - - -
deferred
compensation - 447,262 - 447,262
Net loss - - - (7,439,139) (7,439,139)
Balance at December 31, ---------------------------------------------------------------------------
1996 (93,375) $ (2,061,549) $ - $ (13,620,472) $12,960,951
</TABLE>
F-5
<PAGE>
Vista Medical Technologies, Inc.
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Exercise of stock - $ - 150,273 $ 1,503 $ 61,901
options for cash
Issuance of common
stock for services - - 3,000 30 19,980
Payments on notes
receivable from
stockholders - - - - -
Issuance of common
stock in conjunction
with the initial
public offering at
$9.00 per share - - 4,000,000 40,000 32,554,990
Conversion of
convertible
preferred stock in
conjunction with the
initial public
offering (11,574,252) (115,742) 8,680,679 86,807 28,935
Issuance of stock
under employee stock
purchase plan 7,085 71 54,129
Issuance of common
stock for technology
license 27,777 278 249,715
Deferred compensation - - - - 946,640
Amortization of
deferred compensation - - - - -
Unrealized gain(loss)
on investments - - - - -
Net loss - - - - -
-------------------------------------------------------------------
Balance at December 31,
1997 - $ - 13,407,038 $ 134,071 $62,531,513
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM DEFERRED UNREALIZED ACCUMULATED
STOCKHOLDERS COMPENSATION GAIN (LOSS) DEFICIT TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Exercise of stock $ - $ - $ - $ - $ 63,404
options for cash
Issuance of common
stock for services - - - - 20,010
Payments on notes
receivable from
stockholders 15,000 - - - 15,000
Issuance of common
stock in conjunction
with the initial
public offering at
$9.00 per share - - - - 32,594,990
Conversion of
convertible
preferred stock in
conjunction with the
initial public
offering - - - - -
Issuance of stock
under employee stock
purchase plan - - - - 54,200
Issuance of common
stock for technology
license - - - - 249,993
Deferred compensation - (946,640) - - -
Amortization of
deferred compensation - 1,066,115 - - 1,066,115
Unrealized gain(loss)
on investments - - (416,313) - (416,313)
Net loss - - - (16,877,038) (16,877,038)
----------------------------------------------------------------------------
Balance at December 31,
1997 $(78,375) $(1,942,074) $ (416,313) $(30,497,510) $ 29,731,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Vista Medical Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,273,950) $(7,439,139) $(16,877,038)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 36,138 351,256 1,260,707
Amortization of premium on short-term - - 129,631
investments
Stock issued for services rendered - - 20,010
Amortization of deferred compensation - 447,262 1,066,115
Acquired in-process research and development 350,000 - -
Write-off of non recoverable patent costs 28,733 - -
Common stock received/issued in exchange for
license agreement - (693,000) 249,993
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (568,264) 126,752 4,503
Inventories (472,579) (405,706) (2,132,142)
Other current assets (30,846) (64,105) (125,464)
Accounts payable 255,192 171,714 609,471
Accrued compensation 108,750 79,133 290,200
Accrued liabilities (424) 488,591 9,868
------------------------------------------------------
Net cash flows used for operating activities (3,567,250) (6,937,242) (15,494,146)
INVESTING ACTIVITIES
Purchases of short-term investments (165,000) - (23,689,018)
Maturities of short-term investments - - 7,080,000
Increase in patent and other assets (51,975) (17,895) -
Purchase of property and equipment (80,954) (1,220,888) (3,415,457)
------------------------------------------------------
Net cash flows used for investing activities (297,929) (1,238,783) (20,024,475)
FINANCING ACTIVITIES
Payments on shareholder notes receivable - - 15,000
Advances from a related party 2,136,000 - -
Repayment of advances to a related party (3,004,000) - -
Issuance of common stock, net - 14,120 32,712,594
Issuance of convertible preferred stock, net 7,957,962 15,047,259 -
------------------------------------------------------
Net cash flows provided by financing activities 7,089,962 15,061,379 32,727,594
Net increase (decrease) in cash and cash equivalents 3,224,783 6,885,354 (2,791,027)
Cash and cash equivalents at beginning of year 9,392 3,234,175 10,119,529
------------------------------------------------------
Cash and cash equivalents at end of year $3,234,175 $10,119,529 $ 7,328,502
------------------------------------------------------
------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,711 $ 183 $ -
------------------------------------------------------
------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Debt obligation to related party converted to
Series A convertible preferred stock $2,375,000 $ - $ -
------------------------------------------------------
------------------------------------------------------
Exercise of stock options for stockholder notes
receivable $ 29,625 $ 63,750 $ -
------------------------------------------------------
------------------------------------------------------
Issuance of convertible preferred stock in
conjunction with acquisitions $ 554,820 $ 184,000 $ -
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Vista Medical Technologies, Inc. ("the Company") was founded in July 1993 and
develops and manufactures proprietary visualization and information systems
that enable minimally invasive surgical solutions in cardiothoracic, head,
neck and spine and other selected microsurgical procedures. Vista Medical's
visualization and information systems bring together head-mounted display
technology originally developed for applications in military aerospace by
Kaiser Aerospace and Electronics Corporation and three-dimensional imaging
capability from its acquisition of Oktas, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Oktas, Inc. Significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to the consolidated financial statements.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from product sales are recognized when products are shipped.
In 1997, the Company instituted a fee-per-procedure program in the United
States whereby the Company's cardiothoracic surgery product, the Series 8000,
is placed in a hospital for a specific term. The Company retains ownership of
the asset, which is classified on the balance sheet as investment in leased
assets and depreciated over the term of agreement. Revenue is recognized on a
monthly basis based on actual number of procedures performed by the hospital,
subject to a minimum monthly usage requirement. The Company accrues the
warranty and upgrade costs for this program on a monthly basis over the life
of the agreement.
F-8
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments consist of money market funds,
certificates of deposit and commercial paper. The Company considers all
highly liquid investments with maturities when purchased of three months or
less to be cash equivalents. The Company evaluates the financial strength of
institutions at which significant investments are made and believes the
related credit risk is limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards No. 115,
"ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES", and has
classified its cash equivalents and short-term investments as
available-for-sale in accordance with that standard. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported in a separate component of stockholders' equity. At December
31, 1997, the cost of cash equivalents and short-term investments compared to
estimated fair value resulted in unrealized losses of $416,313.
As of December 31, 1996 and 1997, the Company's cash, cash equivalents and
short-term investments were classified as available-for-sale and consisted of:
<TABLE>
<CAPTION>
1996 1997
------------------------------------
<S> <C> <C>
Cash $ 105,500 $ 573,223
Money market funds 10,014,029 3,789,419
Corporate bonds - 16,588,437
Commercial paper - 2,996,768
Certificates of deposit 165,000 165,000
------------------------------------
$10,284,529 $ 24,112,847
------------------------------------
------------------------------------
</TABLE>
All of the Company's debt securities mature in 1998, except one security with
a fair market value of approximately $1,000,000 that matures in 1999.
CONCENTRATION OF CREDIT RISK
The Company provides credit, in the normal course of business, to commercial
entities that meet specified credit requirements. The Company's principal
customers consist of original equipment manufacturers, distribution partners,
and hospitals in the U.S. and Europe. The Company provides for losses from
uncollectible accounts and such losses
F-9
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
have historically not exceeded management's expectations. As of December 31,
1997, one customer comprised $268,950 or 50% of the outstanding trade
receivables.
F-10
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at lower of cost (determined on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company provides for
depreciation on property and equipment using the straight-line method over
the estimated useful lives of the assets, generally five to seven years.
Marketing demonstration equipment is amortized over a one-year useful life,
and assets leased under the fee-per-procedure program are depreciated over
the term of the agreement.
PATENTS
Capitalized patent costs are amortized over five years commencing on the date
the patent is issued. The Company reviews its patents for impairment on an
annual basis or whenever events or changes in circumstances indicate that the
carrying value of the asset would not be recoverable.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. There have not been any impairments of long-lived assets to date.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standard (SFAS) No. 123,
the Company has elected to follow Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related Interpretations ("APB
25") in accounting for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the fair value
of the underlying stock on the date of grant, no compensation expense is
recognized.
F-11
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
NEW ACCOUNTING STANDARDS
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
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. The 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.
F-12
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. BALANCE SHEET COMPONENTS
Inventories consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
Parts and materials $ 567,707 $ 1,977,878
Work in process 286,099 662,237
Finished goods 359,019 704,852
-----------------------------------
$ 1,212,825 $ 3,344,967
-----------------------------------
-----------------------------------
</TABLE>
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
Machinery and equipment $ 271,747 $ 1,400,892
Office computers, furniture and equipment 352,911 839,533
Marketing demonstration equipment 776,420 2,199,736
Investment in leased assets - 206,011
Leasehold improvements 68,704 239,067
-----------------------------------
1,469,782 4,885,239
Less: accumulated depreciation (387,679) (1,557,956)
-----------------------------------
$ 1,082,103 3,327,283
-----------------------------------
-----------------------------------
</TABLE>
Patents and other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
Investment in common stock $ 693,000 $ 271,562
Patents and other intangible assets, net 323,241 232,811
Prepaid royalties 57,500 57,500
-----------------------------------
$1,073,741 $ 561,873
-----------------------------------
-----------------------------------
</TABLE>
3. MAJOR CUSTOMERS
Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31, were as follows: during 1995 Linvatec Corporation
accounted for 85% of revenues; during 1996 Pilling Weck, Amco, Inc. and
Linvatec Corporation accounted for 30%, 27% and 25% of revenues,
respectively; during 1997, Linvatec Corporation, Medtronic, Inc. and Aesculap
AG accounted for 25%, 19% and 10% of revenues, respectively.
F-13
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
4. COMMITMENTS
The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2001. Annual future
minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 $ 387,000
1999 399,000
2000 412,000
2001 426,000
2002 -
------------------
$1,624,000
------------------
------------------
</TABLE>
Rent expense was approximately $75,000, $183,000 and $342,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
5. LICENSE INCOME AND INVESTMENT IN COMMON STOCK
In December 1996, the Company granted a perpetual license to certain of its
technology and patents to Imagyn Medical Technologies, Inc. ("Imagyn"),
formerly Urohealth Systems, Inc. In exchange for the license the Company
received $1,000,000 in cash and 110,000 shares of common stock valued at
$693,000. The common stock received is restricted stock of a publicly traded
company with restrictions on the sale of the stock for two years from the
date of the agreement in accordance with the provisions of Rule 144 under the
Securities Act of 1933 as amended. The licensed technology and patent rights
were obtained by the Company through a perpetual license and royalty
agreement with an officer of the Company. In connection with the license
agreement with Imagyn, the Company amended an existing license agreement with
the officer to make its terms consistent with the licensing agreement with
Imagyn in exchange for $200,000.
In 1997, the fair value of the common stock declined to $271,562 at December
31, 1997. In accordance with SFAS 115, the Company has recorded this
unrealized loss of $421,438 as an adjustment to stockholders' equity.
6. LINE OF CREDIT
In October 1997, the Company signed a loan and security agreement with a
bank, subject to maximum advances of $10 million, at an annual interest rate
of 1.5% above the bank's prime rate (the prime rate was 8.5% at December 31,
1997). The line of credit expires in October 2002, and there were no amounts
outstanding under the line of credit at
F-14
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. LINE OF CREDIT (CONTINUED)
December 31, 1997. In conjunction with the line of credit agreement, the
Company issued a warrant expiring in October 2002, to purchase 27,184 shares
of common stock at $12.875 per share. The value of the warrant of
approximately $135,000 will be charged to interest expense over the life of
the agreement.
7. STOCKHOLDERS' EQUITY
CHANGE IN CAPITALIZATION
In February 1997, the Board of Directors approved an amendment to the
Articles of Incorporation increasing the number of authorized shares of
common stock to 35,000,000 shares with a $.01 par value per share and
5,000,000 shares of preferred stock at $.01 par value per share.
In February 1997, the Company's stockholders approved a 3 for 4 reverse stock
split of the Company's common stock. All share, per share and stock option
amounts have been restated to reflect retroactively the reverse stock split.
INITIAL PUBLIC OFFERING
During 1997, the Company issued 4,000,000 shares of common stock at $9.00 per
share in connection with its initial public offering. In conjunction with
this offering, all outstanding shares of preferred stock were converted to
common stock at a 4 for 3 conversion ratio. There are no shares of preferred
stock outstanding at December 31, 1997.
1995 STOCK OPTION PLAN
The Company reserved 2,015,610 shares of common stock under the 1995 Stock
Option Plan ("the 1995 Plan") for issuance to eligible employees, officers,
directors, advisors and consultants. The 1995 Plan provides for the grant of
incentive and nonstatutory stock options. Terms of the stock option
agreements, including vesting requirements, are determined by the Board of
Directors, subject to the provisions of the 1995 Plan. Options granted by the
Company generally vest over four to five years and are exercisable from the
date of grant for a period of ten years. The exercise price of the incentive
stock options must equal at least the fair market value of the stock on the
date of grant. The exercise price of nonstatutory stock options must equal at
least 85% of the fair market value of the stock on the date of grant. The
Company has the option, in the event of termination of employment to
repurchase unvested shares issued under the 1995 Plan at the original issue
price.
F-15
<PAGE>
Vista Medical Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The Company recorded $947,000 of deferred compensation for options granted
during the year ended December 31, 1997, representing the difference between
the option exercise price and the deemed value for financial statement
presentation purposes for stock options granted to employees in 1997. The
Company is amortizing the deferred compensation recorded in 1996 and 1997
over the vesting period of the options and the Company recorded $1,066,000 of
compensation expense during the year ended December 31, 1997.
1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN
In February 1997, the Company adopted the 1997 Stock Option Plan/Stock
Issuance Plan (the "1997 Plan") and reserved 2,820,000 shares for issuance
thereunder. The 1997 Plan incorporates the outstanding options under the 1995
Plan and no further options will be granted under the 1995 Plan.
At December 31, 1997, 1,227,824 options were available for future grant.
The following tables summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 - $ - $ -
Granted 655,322 $.20 $ .20
Exercised (148,125) $.20 $ .20
Canceled - - $ -
------------------------------------------------------
Balance at December 31, 1995 507,197 $.20 $ .20
Granted 1,173,888 $.20 - $.80 $ .33
Exercised (389,349) $.20 $ .20
Canceled (45,935) $.20 $ .20
------------------------------------------------------
Balance at December 31, 1996 1,245,801 $.20 - $.80 $ .32
Granted 447,500 $.80 -$14.38 $ 8.94
Exercised (150,273) $.20 - $.80 $ .42
Canceled (25,500) $.60 $ .60
------------------------------------------------------
Balance at December 31, 1997 1,517,528 $.20 -$14.38 $ 2.85
------------------------------------------------------
------------------------------------------------------
</TABLE>
F-16
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
EXERCISABLE STOCK
OUTSTANDING STOCK OPTIONS OPTIONS
------------------------------------------------------ ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.20 - $.80 1,107,528 101 $ .32 336,352 $ .29
$4.00 75,000 109 $ 4.00 12,500 $ 4.00
$9.88 170,000 116 $ 9.88 16,103 $ 9.88
$11.31 - 14.38 165,000 119 $ 12.07 667 $ 13.61
</TABLE>
The weighted average fair value of stock options granted during 1996 and 1997
was $0.09 and $4.66, respectively. The weighted average remaining life of the
options at December 31, 1996 and 1997 was 111 and 102 months, respectively.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 200,000 shares for issuance, thereunder.
The Purchase Plan permits eligible employees of the Company to purchase
shares of Common Stock, at semi-annual intervals, through periodic payroll
deductions. Payroll deductions may not exceed 10% of the participant's base
salary, and the purchase price per share will not be less than 85% of the
lower of the fair market value of the common stock at either the beginning or
the end of the semi-annual intervals.
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the minimum value
method for option pricing for options granted prior to the initial public
offering and the "Black-Scholes" method for option pricing for options
granted subsequent to the initial public offering with the following
weighted-average assumptions: risk-free interest rate range of 5.5% to 6.0%;
dividend yield of 0%; volatility of 55% and a weighted average expected life
of the option of 2.5 to 5 years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
Adjusted pro forma net loss $3,279,659 $7,451,220 $17,047,180
------------------------------------------------------
------------------------------------------------------
<S> <C> <C> <C>
Adjusted pro forma net loss per share $ (88.64) $ (37.07) $ (2.53)
------------------------------------------------------
------------------------------------------------------
</TABLE>
F-17
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements (continued)
8. LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $(3,273,950) $(7,439,139) $(16,877,038)
Denominator:
Weighted-average common shares 37,000 201,000 6,731,000
-------------------------------------------------------
Denominator for basic and diluted loss per share 37,000 201,000 6,731,000
-------------------------------------------------------
-------------------------------------------------------
Basic and diluted loss per share $ (88.49) $ (37.01) $ (2.51)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
All other potential common shares have been excluded from the diluted EPS
computation as they are antidilutive. The Company has not issued any common
shares or potential common shares that are considered nominal issuances under
the requirements of Staff Accounting Bulletin No. 98.
The Company believes that the preferred stock, which is excluded from the FAS
128 basic and diluted computation as an antidilutive security, is an
important component of the capital structure. Including the preferred stock
as weighted average shares outstanding would result in the following pro
forma net loss per share: ($1.22) in 1995, ($1.06) in 1996, and ($1.52) in
1997.
F-18
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements (continued)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets as of December 31, 1996 and
1997 are shown below. A valuation allowance has been recognized to offset the
deferred tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ (51,000) $ -
Deferred tax assets:
Net operating loss carryforwards 3,197,000 8,840,000
Research and development credits 229,000 600,000
Depreciation - 280,000
Other, net 32,000 950,000
-----------------------------------
Total deferred tax assets 3,458,000 10,670,000
Valuation allowance for deferred tax assets (3,407,000) (10,670,000)
-----------------------------------
Net deferred tax assets 51,000 -
-----------------------------------
Net deferred taxes $ - $ -
-----------------------------------
-----------------------------------
</TABLE>
As the Company was part of a consolidated group prior to the change in
ownership in July 1995, all tax loss and tax credit carryforwards up to the
date of change in ownership have been reported by the previous consolidated
group. All tax loss and tax credit carryforwards reflected in the
accompanying financial statements reflect activity only for the period
beginning July 1995 and ending December 31, 1996.
At December 31, 1997, the Company has federal and state tax net loss
carryforwards of approximately $22,500,000 and $3,100,000, respectively. The
federal and state tax loss carryforwards will begin to expire in 2010 and
2000, respectively, unless previously utilized. The Company also has federal
and state research tax credit carryforwards of approximately $390,000 and
$330,000, respectively, which will expire in 2010 unless previously utilized.
The difference between the federal and state tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and fifty percent limitation on
California loss carryforwards.
F-19
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
In accordance with Sections 382 and 383 of the Internal Revenue Code, a
change in ownership of greater than 50 percent of a corporation within a
three-year period will place an annual limitation on the Company's ability to
utilize its existing tax loss and tax credit carryforwards.
10. TRANSACTIONS WITH RELATED PARTIES
The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace subsidiary for the development and
manufacturing of certain of the Company's proprietary products. Under the
terms of the agreements, which were amended in December 1997, and which
expire in December 2002, Kaiser Aerospace will provide development and
consulting services and a minimum of 75% of certain of the Company's product
requirements provided certain competitive criteria are met. Payments made to
Kaiser under these arrangements totaled approximately $292,000, $1,205,000
and $2,878,000 for the years ending December 31, 1995, 1996 and 1997,
respectively. At December 31, 1997, the Company had approximately $2,820,000
in purchase commitments with Kaiser under these agreements.
In December 1997, the Company entered into a license agreement with a
subsidiary of Kaiser Aerospace whereby Kaiser acquired a license and will pay
royalties for sale of head mounted displays, derived from Vista's
developments, in non-medical market segments. In connection with the
agreement, the Company received $250,000 in license fees.
11. COLLABORATIVE AGREEMENTS
MEDTRONIC
In November 1996, Vista Medical and Medtronic, a leading cardiac company,
entered into a strategic alliance providing for the exclusive distribution in
Europe, the Middle East and Africa and co-promotion in the United States and
Canada, of the Company's current and future visualization and information
systems for cardiac surgery. Medtronic's right to distribute will terminate
on the third anniversary of the initial commercial release in Europe and
rights to co-promote will terminate in December 1999, subject to (i) earlier
termination for Medtronic's failure to meet certain objectives or breach of
contract by either party and (ii) automatic renewal if certain performance
criteria are met.
In connection with entering into the distribution and co-promotion agreement,
Medtronic made a $10 million equity investment in the Company which converted
into 1,500,000 shares of common stock in connection with the Initial Public
Offering.
F-20
<PAGE>
Vista Medical Technologies, Inc.
Index to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENT
In January 1998, the Company concluded a definitive agreement with Sofamor
Danek Group, Inc. which will provide world wide distribution of Vista's
second major product line, the SteroSite visualization and information system
for head, neck and spine microsurgery. The five year renewable alliance also
calls for collaboration on integration of Vista and Sofamor Danek technology
on future products. The agreement calls for guaranteed minimum purchases by
Sofamor Danek in 1998 and 1999 if certain conditions are fulfilled. The term
of the distributorship expires on December 31, 2002, provided, however, that
the term will be automatically extended for successive two-year periods if
certain performance criteria are met. In connection with the agreement, the
Company received payment from Sofamor Danek for exclusive distribution rights
and advance, non-refundable royalties. The Company will also receive
royalties on future sales.
F-21
<PAGE>
EXHIBIT 10.49
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of October 22, 1997 by
and between SILICON VALLEY BLINK ("Bank") and VISTA MEDICAL TECHNOLOGIES,
INC., a Delaware corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and either security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the
Committed Line.
"Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, partners and, for
any Person that is a limited liability company, such Persons, managers and
members.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents, (including fees
1
<PAGE>
and expenses of appeal or review, or those incurred in any Insolvency
Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets
or liabilities, the Collateral, business operations or financial condition;
and all computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" shall have the meaning set forth in Section
2.1.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A
attached hereto.
"Committed Line" means a credit extension of up to Ten
Million Dollars ($10,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee
or other support arrangement.
"Cost Evidence" shall have the meaning set forth in Section
2.1.1 (a) hereof.
"Credit Extension" means each Advance and each other
extension of credit by Bank for the benefit of Borrower hereunder.
2
<PAGE>
"Current Assets" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its
Subsidiaries, as at such date, plus, to the extent not already included
therein, all outstanding Credit Extensions made under this Agreement,
including all Indebtedness that is payable upon demand or within one year
from the date of determination thereof unless such Indebtedness is renewable
or extendable at the option of Borrower or any Subsidiary to a date more than
one year from the date of determination, but excluding Subordinated Debt.
"Debt Service Ratio" means as of any quarter end period, with
respect to the Borrower on a consolidated basis, the ratio of (a) Borrower's
earnings after taxes plus depreciation and other non-cash amortization
expenses and other non-cash expenses of Borrower for such quarter, to (b)
Borrower's obligations relating to the payment of interest and the current
principal amounts due on Borrower's outstanding long term Indebtedness, in
each case determined in accordance with generally accepted accounting
principles, consistently applied.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrowers
representations and warranties to Bank set forth in Section 5.4. Unless
otherwise agreed to by Bank in writing, Eligible Accounts shall not include
the following:
(a) Accounts that the account debtor has failed to pay
within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty
percent (50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five percent
(25%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;
(d) Accounts with respect to which the account debtor
does not have its principal place of business in the United States;
(e) Accounts with respect to which the account debtor is
a federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(f) Accounts with respect to which Borrower its liable to
the account debtor, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g. accounts
payable, customer deposits, credit accounts etc.);
3
<PAGE>
(g) Accounts generated by demonstration or promotional
equipment, or with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other
terms by reason of which the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is
an Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(j) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Usage Agreement" means a Usage Agreement submitted
by Borrower to Bank requesting that the Related Equipment covered by such
Usage Agreement be the basis for an Advance hereunder and which Agreement is
acceptable to the Bank.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts
and attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act
of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d)
all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials,
4
<PAGE>
work in process and finished products intended for sale or lease or to be
furnished under a contract of service, of every kind and description now or
at any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of
its custody or possession or in transit and including any returns upon any
accounts or other proceeds, including insurance proceeds, resulting from the
sale or disposition of any of the foregoing and any documents of title
representing any of the above.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Availability End Date" shall have the meaning set forth
in Section 2.1(a) hereof.
"Loan Documents" means, collectively, this Agreement, any
note or notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to
repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means the date that is thirty (30) months
from the date hereof.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Payment Date" means the first calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Maturity Date.
5
<PAGE>
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank;
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in
the ordinary course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule;
(b) (i) marketable direct obligations issued
or unconditionally guaranteed by the United States of America or any
agency or any State thereof. (ii) corporate securities including
commercial paper and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investor's
Service. Inc., (iii) certificates of deposit and bankers'
acceptances; (iv) repurchase agreements with member banks of the
Federal Reserve System and primary dealers limited to securities of
the United States federal government; and (v) money market funds
consistent with Investments set forth in (i) through (iv) hereof and
which provide for daily purchase and redemption together with a
constant share price.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the
other Loan Documents:
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being
contested in good faith by appropriate proceedings and as to which
adequate reserves are maintained on Borrower's Books in accordance
with GAAP, PROVIDED the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any Equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase
price of such Equipment or indebtedness incurred solely for the
purpose of financing the acquisition of such Equipment provided that
the amount indebtedness relating thereto shall not exceed $4,000,000
at any one time. or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is
6
<PAGE>
confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment;
(d) Liens on Equipment licensed for use by
Borrower or any Subsidiary to a third party and on the related Usage
Agreement (including proceeds thereof and accessions thereto)
incurred solely For the purpose of financing the usage agreement
relating to such Equipment:
(e) Licenses relating to Borrower's present and
future patents, patent applications, copyrights, processes,
proprietary information, license rights and related intellectual
property items granted to other parties in the ordinary course of
business in connection with Borrower's research, development,
manufacturing and distribution collaborative efforts with such other
parties; and
(f) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by
Liens of the type described in clauses (a) through (e) above,
PROVIDED that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
unrestricted consolidated cash, cash equivalents, Eligible Accounts and
investments with maturities of fewer than one year of Borrower determined in
accordance with GAAP.
"Related Equipment" means, as to any Advance, the Equipment
that is financed by that Advance, and any Equipment substituted therefor with
Bank's consent.
"Related Usage Agreement" means, as to any Advance, a Usage
Agreement of the Related Equipment, and any Usage Agreement subsequently
substituted therefor with the consent of the Bank.
"Responsible Officer" means each of the Chief Executive
Officer, the President the Chief Financial Officer and the Controller of
Borrower.
"Schedule" means the schedule of exceptions attached hereto,
if any.
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
7
<PAGE>
"Subordinated Debt" means any debt incurred by Borrower that
is subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity
of which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or
one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date the
consolidated total assets of Borrower and its Subsidiaries MINUS, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted
from assets, AND (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date, any date
as of which the amount thereof shall he determined, all obligations that
should, in accordance with GAAP be classified as liabilities on the
consolidated balance sheet of Borrower, including in any event all
Indebtedness, but specifically excluding Subordinated Debt.
"Usage Agreement" means any usage agreement (including any
and all schedules, supplements and amendments thereto and modifications
thereof) entered into by Borrower as the licenser of the usage with respect
to the Related Equipment, provided that if a usage agreement is a "master
usage agreement," such agreement shall be considered as a "Usage Agreement"
only insofar as it relates to Related Equipment and the equipment schedule
thereto covering Related Equipment.
1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and
all calculations and determinations made hereunder shall be made in
accordance with GASP. When used herein, the term "financial statements"
shall include the notes and schedules thereto. The terms "including"/
"includes" shall always be read as meaning "including (or includes) without
limitation", when used herein or in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower hereunder.
Borrower shall also pay interest on the unpaid principal amount of all Credit
Extensions at rates in accordance with the terms hereof.
8
<PAGE>
2.1.1 Advances.
(a) Subject to the terns and conditions of this
Agreement, Bank agrees at any time from the date hereof through the date that
is twelve (12) months from the date hereof (the "Loan Availability End
Date"), to make Advances to Borrower in an initial principal amount not to
exceed the lesser of the Committed Line or the Borrowing Base. For purposes
of this Agreement, "Borrowing Base" shall mean an amount equal to 100% of the
manufacturing cost to the Borrower of the Related Equipment covered by
Eligible Usage Agreements; upon request by the Bank, Borrower shall supply
evidence to the Bank, that is satisfactory to the Bank in its reasonable
discretion of such cost (the "Cost Evidence"). Each Advance shall be in
amount equal to at least *** ($ *** ).
(b) Whenever Borrower desires an Advance prior to the
Loan Availability End Date, Borrower will notify Bank by facsimile
transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of
a Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages
or loss suffered by Bank as a result of such reliance. Bank will credit the
amount of Advances made under this Section 2.1 to Borrower's deposit account.
(c) Any Advances that are outstanding on the Loan
Availability End Date will be payable in eighteen (18) equal monthly
installments of principal, plus all accrued interest, with the first of such
payments due on November 1, 1998, and continuing with each succeeding payment
due and payable on the first day of each month thereafter for the following
seventeen (17) consecutive months, and with all Advances and all Obligations
relating thereto to be fully due and payable in a final payment no later than
April 1. 2000. Advances, once repaid may not be reborrowed.
2.2 OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrower to Bank pursuant to Section 2 of this
Agreement is greater than the lesser of (i) the Committed Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount
of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section
2.3(b), any Advances shall bear interest, on the average daily balance
thereof, at a per annum rate equal to One and one-half (1.50) percentage
points above the Prime Rate.
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
9
<PAGE>
(b) DEFAULT RATE. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to five
(5) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and
payable on each Payment Date. Borrower hereby authorizes Bank to debit any
accounts with Bank, including, without limitation, Account Number
*** for payments of principal and interest due on the Obligations
and any other amounts owing by Borrower to Bank. Bank will notify Borrower
of all debits which Bank has made against Borrower's accounts. Any such
debits against Borrower's accounts in no way shall be deemed a set-off. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall
be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After
the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment, whether directed to
Borrower's deposit account with Bank or to the Obligations or otherwise,
shall be immediately applied to conditionally reduce Obligations, but shall
not be considered a payment in respect of the Obligations unless such payment
is of immediately available federal funds or unless and until such check or
other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment
received by Bank after 12:00 noon Pacific time shall be deemed to have been
received by Bank as of the opening of business on the immediately followings
Business Day. Whenever any payment to Bank under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable
for the period of such extension.
2.5 MANDATORY PREPAYMENTS. In the event that with respect to any
Advance:
(a) any Related Equipment shall be lost, wholly destroyed
or damaged in any manner whatsoever beyond economically feasible repair;
(b) any rental payments under a Related Usage Agreement
shall be past due beyond ninety (90) days;
(c) any bankruptcy with respect to a licensee on a
Related Usage Agreement shall occur;
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
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(d) any event of default (other than delinquent rent
payments) shall occur with respect to a Related Usage Agreement, or
(e) any Related Equipment is sold or otherwise disposed
of, (each of the foregoing being a "Prepayment Event"),
then Borrower shall, within ten (10) days after any such
occurrence, prepay that portion of such Advance attributable to the Related
Usage Agreement or Related Equipment.
2.6 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to $ *** , which
fee shall be due on the Closing Date and shall be fully earned and
non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of the
Collateral, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) BANK EXPENSES. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through
the date hereof, including reasonable attorneys' fees and expenses, and,
after the date hereof, all Bank Expenses, including reasonable attorneys'
fees and expenses, as and when they become due.
(d) WARRANTS. Borrower shall, concurrently herewith,
provide Lender with warrants to purchase 27,184 shares of Common Stock of the
Borrower, at $ 12.875 per share, on the terms and conditions in the Warrant
to Purchase Stock and related documents being executed concurrently with this
Agreement.
2.7 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by Bank; or
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
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(c) imposes upon Bank any other condition with respect to
its performance under this Agreement, and the result of any of the foregoing
is to increase the cost to Bank, reduce the income receivable by Bank or
impose any expense upon Bank with respect to any loans, Bank shall notify
Borrower thereof. Borrower agrees to pay to Bank the amount of such increase
in cost, reduction in income or additional expense as and when such cost,
reduction or expense is incurred or determined, upon presentation by Bank of
a statement of the amount and setting forth Bank's calculation thereof, all
in reasonable detail, which statement shall be deemed true and correct absent
manifest error.
2.8 TERM. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7,
shall continue in full force and effect for a term ending on the Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate
its obligation to make Credit Extensions under this Agreement immediately and
without notice upon clue occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) certified copy of Commercial Finance Lender's License
of Borrower;
(d) Evidence that the Borrower has received at least
$20,000,000 in net proceeds from the initial public offering of its common
stock;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(h) Certificate of Foreign Qualification (if applicable);
and
(i) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
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3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The
obligation of Bank to make each Credit Extension, including the initial
Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of:
(i) the Payment/Advance Form as provided in
Section 2.1;
(ii) a supplement, form acceptable to the Bank,
describing the Related Equipment and the Related Usage Agreements;
(iii) all executed original counterparts in the
Borrower's possession of the Related Usage Agreements and original guarantees
of the Related Usage Agreement, if any, except that if the Usage Agreement
consists of a schedule to a master usage agreement, Bank shall receive the
originals of such schedule and a copy of the master usage agreement certified
by Borrower to be a true and correct copy;
(iv) a copy of the notice provided from Borrower
to licensee under the Related Usage Agreement that such Agreement will be
assigned to the Bank;
(v) evidence satisfactory to Bank (including
corporate resolutions) that the licensee under the Related Usage Agreement is
authorized to enter into such Agreement;
(vi) evidence satisfactory to Bank that each item
of Related Equipment has been delivered and installed and accepted by
licensee of the usage thereof;
(vii) the Cost Evidence, if required by the Bank;
(viii) copy of the credit report on the licensee of
the usage of the Related Equipment and the guarantor of the such party's
obligations to the Borrower, if any, along with Borrower's request for such a
report;
(ix) copies of such licensee's and guarantor's
most recent fiscal year end and interim financial statements;
(x) evidence satisfactory to Bank that adequate
casualty insurance on the Related Equipment exists with Borrower named as
additional loss payee, provided that Bank may designate, in its sole
discretion, certain licensees that may be self-insured.
(xi) financing statements executed by Borrower,
wherein Borrower is named as debtor and Bank as secured party and describing
the Related Equipment and the Related Usage Agreements, for filing in each
public office (including, without limitation, filing offices in the state or
states where the Related Equipment is located) where such filing is necessary
or appropriate to perfect the Bank's security interest; and
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(xii) evidence satisfactory to Bank that Borrower
has filed a financing statement or statements in the appropriate public
office against the licensee on such Usage Agreement, and a financing
statement assignment or assignments (UCC-2) assigning such financing
statements to Bank.
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance
as though made at and as of each such date, and no Event of Default shall
have occurred and be continuing, or would result from such Advance. The
making of each Advance shall be deemed to be a representation and warranty by
the Borrower on the date of such Advance as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants, and duties under the Loan Documents. Except as set forth in
the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit
Account pledged as Collateral to secure the Obligations. Notwithstanding
termination of this Agreement, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank,
all Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order
to fully consummate all of the transactions contemplated under the Loan
Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice,
from time to time during Borrower's usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws
of its state of incorporation and qualified and licensed to do business in,
and is in good standing in, any state in which the
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conduct of its business or its ownership of property requires that it be so
qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the lean Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound.
Borrower is not in default under any agreement to which it is a party or by
which it is bound, which default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE USAGE AGREEMENTS. With respect to each Advance,
(i) each Related Usage Agreement will be the legal, valid, bindings and
unenforceable obligation of the licensee named therein, (ii) as to each
Related Usage Agreement, there shall be no setoffs, counterclaims or defenses
on the part of the licensee of the usage thereunder with respect to the
obligation of such licensee to make usage payments, and (iii) the Related
Equipment shall have been delivered to and accepted by the licensee thereof
at such party's address set forth in the supplement delivered in connection
with such Advance.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as
disclosed in the Schedule, Borrower has not done business and will not
without at least thirty (30) days prior written notice to Bank do business
under any name other than that specified on the signature page hereof. The
chief executive office of Borrower is located at the address indicated in
Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency
in which an adverse decision could have a Material Adverse Effect or a
material adverse effect on Borrower's interest or Bank's security interest in
the Collateral.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof
and Borrower's consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Bank on or about the Closing Date.
<PAGE>
5.9 SOLVENCY. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; the Borrower is not left with unreasonably small capital after
the transactions contemplated by this Agreement; and Borrower is able to pay
its debts (including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary have met
the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock within the meaning of Regulations G, T and U of the
Board of Governors of the Federal Reserve System). Borrower has complied with
all the provisions of the Federal Fair Labor Standards Act. Borrower has not
violated any statutes, laws, ordinances or rules applicable to it, violation
of which could have a Material Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release,
or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release or other disposition of hazardous waste
or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid,
or has made adequate provision for the payment of, all taxes reflected
therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENT. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
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5.15 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished
to Bank contains any untrue statement of a material fact or omits to state a
malarial fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty
(30) days after the end of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated
operations during such period, in a form and certified by an officer of
Borrower reasonably acceptable to Bank; (b) as soon as available, but in any
event within ninety (90) days after the end of Borrower's fiscal year,
audited consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days of filing, copies of
all statements, reports and notices sent or made available generally by
Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of Five
Hundred Thousand Dollars ($500,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within twenty (20) days after the last day of each month, Borrower
shall deliver to Bank aged listings of accounts receivable and accounts
payable.
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Within thirty (30) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of
EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit
Borrowers Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default
has occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on
the same basis and in accordance with the usual customary practices of
Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than *** ($ *** ).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state,
and local taxes, assessments, or contributions required of it by law and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments
and withholding taxes required of it by applicable laws, including, but not
limited to, those laws concerning F.I.C.A. F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is (I)
contested in good faith by appropriate proceedings, (ii) is reserved against
(to the extent required by GAAP) by Borrower and (iii) no lien other than a
Permitted Lien results.
6.6 INSURANCE.
6.6.1 Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and
all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations
where Borrower's business is conducted on the date hereof. Borrower shall
also maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar
to Borrower's.
6.6.2 All such policies of insurance shall be in such form,
with such companies, and in such amounts as are reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy for
any reason. At Bank request, Borrower shall
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
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deliver to Bank certified copies of such policies of insurance and evidence
of the Payments of all premiums therefor. All proceeds payable under any
such policy shall, at the option of Bank, be payable to Bank to be applied on
account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. Borrower shall maintain, as of the last day of
each calendar month, a ratio of Quick Assets to Current Liabilities of at
least *** to *** .
6.9 DEBT-NET WORTH RATIO. Borrower shall maintain, as of the
last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more
than *** to *** .
6.10 TANGIBLE NET WORTH. Borrower shall maintain, as of the last
day of each fiscal quarter, a Tangible Net Worth of not less than $ *** PLUS
*** % of the net proceeds that the Borrower receives from equity financing
transactions consummated after June 30, 1997 plus the amount of positive
income for such quarter, provided that if Borrower incurs a loss for such
quarter then MINUS such loss up to the permitted maximum loss amount relating
to such quarter as set forth in Section 6.11 hereof.
6.11 PROFITABILITY. Borrower shall not incur losses (after taxes)
in amounts greater than the following for each indicated period: $ *** for
the fiscal quarter ending September 30, 1997; $ *** for the fiscal quarter
ending December 31, 1997; $ *** for the fiscal quarter ending March 31,
1998; and $ *** for the fiscal quarter ending June 30, 1998.
6.12 LIQUIDITY COVENANT. Subject to compliance with the
provisions of Section 6.13 hereof, Borrower shall maintain, as of the last
calendar day of each month, a ratio of (I) unrestricted Quick Assets of
Borrower to (II) the amount of Obligations hereunder, of at least *** to
*** .
6.13 DEBT SERVICE RATIO. Subject to the following sentence,
Borrower, on a consolidated basis, shall maintain, as of the last day of each
monthly, a Debt Service Ratio of at least *** to *** . This covenant
shall become effective at such time that the Borrower is able to comply
herewith; at such time Borrower shall no longer be required to comply with
the Liquidity Covenant set forth in Section 6.12.
6.14 LOCKBOX ARRANGEMENT. Borrower shall assist Bank in the
establishment of a lockbox arrangement in favor of Bank for the payments
that the Borrower receives with respect to the Usage Agreements. Such
arrangement and the provisions relating thereto, including, without
limitation, the application of the proceeds collected by the Bank under such
arrangement, shall be established within _____ days hereof and shall be
satisfactory to the Bank in its reasonable discretion.
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
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6.15 FURTHER ASSURANCES. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes
of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any
Advances, without the prior written consent of the Bank, Borrower will not do
any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Transfers:
(i) of inventory in the ordinary course of business, (ii) of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or
its Subsidiaries in the ordinary course of business, (iii) that constitute
payment of normal and usual operating expenses in the ordinary course of
business; or (iv) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS OR OWNERSHIP, BUSINESS LOCATIONS. Engage
in any business, or permit any of its Subsidiaries to engage in any business,
other than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto), or suffer a
change in Borrower's ownership of greater than *** %. Borrower will not,
without a least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person,
unless the Borrower is the surviving corporation in the merger and the
aggregate value of the assets acquired in the merger do not exceed *** % of
Borrower's Tangible Net Worth as of the end of the month prior to the
effective date of the merger, and the assets of the corporation or entity
acquired in the merger are not subject to any liens or encumbrances, except
Permitted Liens, provided that at the time of entering into such a
transaction no Default or Event of Default is then occurring or would
otherwise arise upon the consummation of such transaction.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other
than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
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7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock.
7.7 INVESTMENTS, LOANS; GUARANTEES. Directly or indirectly
acquire or own, or make any Investment in or to any Person, or permit any of
its Subsidiaries so to do, other than Permitted Investments, or make any
loans of any money or any other assets to any Person, or guarantee or
otherwise become liable with respect to the obligations of any other Person,
other than respect to loans by the Borrower to employees of the Borrower in
an aggregate amount not to exceed $ *** outstanding at any one time,
provided that at the time of the making of any such loan no Default or Event
of Default is then occurring or would otherwise arise upon the making of such
loan.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehousman,
or similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section
10 hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose; fail to meet the minimum funding requirements of ERISA; permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
fail to comply with the Federal Fair Labor Standards Act or violate any other
law or regulations, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral; or permit any of its Subsidiaries to do any of the foregoing.
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
21
<PAGE>
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of
the Obligations.
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under
Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 or 6.15 or
violates any of the covenants contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or
observe any other material terms, provision, condition, covenant, or
agreement contained in this Agreement, in any of the Loan Documents, or in
any other present or future agreement between Borrower and Bank and as to any
default under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure such default within ten (10) days after
the occurrence thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such
default is likely to be cured within a reasonable time, then Borrower shall
have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an
Event of Default (provided that no Advances will be required to be made
during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or
levy has not been removed, discharged or rescinded within ten (10) days, or
if Borrower is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs,
or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within ten (10) days after Borrower receives notice thereof,
provided that none of the foregoing shall constitute an Event of Default
where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Credit Extensions
will be required to be made during such
22
<PAGE>
cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency
Proceeding is commenced against Borrower and is not dismissed or stayed
within 30 days (provided that no Advances will be made prior to the dismissal
of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect:
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty
Thousand Dollars ($50,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentations or
material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate or writing delivered to
Bank by Borrower or any Person acting on Borrower's behalf pursuant to this
Agreement or to induce Bank to enter into this Agreement or any other Loan
Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice
of its election and without demand, do any one or more of the following, all
of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Exercise any rights of Borrower as lessor under the
Related Usage Agreements, commence direct collections of amounts due under
the Related Usage Agreements, settle or adjust disputes and claims directly
with licensees of usage thereunder for amounts, upon
23
<PAGE>
terms and in whatever order that Bank reasonably considers advisable;
(d) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank my designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrances, charge or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's premises, Borrower
hereby grants Bank a license to enter such premises and to occupy the same,
without charge in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a non-exclusive,
royalty-free license or other right, solely pursuant to the provisions of
this Section 9.1, to use, without charge, Borrower's labels, patents,
copyrights, mask words, rights of use of any name, trade secrets, trade
names, trademarks, service marks, and advertising matter, or any property of
a similar nature, as it pertains to the Collateral in completing production
of, advertising for sale, and selling any Collateral and, in connection with
Bank's exercise of its rights under this Section 9.1, Borrower's rights under
all licenses and all franchise agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or
on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable, and apply the proceeds thereof
to the Obligations in whatever manner or order it deems appropriate;
(i) Bank may credit bid and purchase at any public sale,
or at any private sale as permitted by law; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
24
<PAGE>
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts,
and notices to account debtors; (d) make, settle, and adjust all claims under
an decisions with respect to Borrower's policies of insurance; and (e) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;
provided Bank may exercise such power of attorney to sign the name of
Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as
Borrower's attorney in fact, and each and every one of the Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of
such Account. Borrower shall collect all amounts owing to Borrower for Bank,
receive in trust all payments as Bank's trustee, and if requested or required
by Bank, immediately deliver such payments to Bank in their original form as
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of
the following: (a) make payment of the same or any part thereof; (b) set up
such reserves under the Committed Line as Bank deems necessary to protect
Bank from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement,
and take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by Collateral. Any payments
made by Bank shall not constitute an agreement by Bank to make similar
payments in the future or a waiver by Bank of any Event of Default under this
Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be
liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall
be borne by the Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan
25
<PAGE>
Documents and all other agreements shall be cumulative. Bank shall have all
other rights and remedies not expressly set forth herein as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy
shall be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower may
in any way be liable.
10. REPOSSESSION AND REMARKETING
10.1 REQUEST TO REPOSSESS; REMARKETING.
(a) Upon Bank's determination that a default exists under
a Related Usage Agreement, and that such default remains uncured with the
time, if any, for curing the same permitted by the Related Usage Agreement,
Bank, as secured party under this Agreement, may request Borrower to act as
its agent, and upon such request Borrower will, as such agent, use diligent
efforts to repossess the Equipment subject to such Related Usage Agreement as
promptly and efficiently as is legally permissible. Thereafter Borrower will
refurbish and update, as needed, and, for a period of one hundred twenty
(120) days or such other period as Borrower and Bank may agree upon in
writing from the date the Equipment is repossessed (the "Remarketing
Period"), attempt to sell or release such Equipment on such terms and
conditions as reflect fair market value for similar equipment and are
acceptable to Bank, in its sole discretion. Borrower shall give no less
priority to remarketing Equipment pursuant to this Section 10.1 than they
would similar equipment owned, leased or managed by Borrower. The obligations
of Borrower to remarket such Equipment for sale or lease shall include, but
not be limited to, efforts to lease such Equipment to new or established
lessees, efforts to sell such Equipment, preparation and supervision of the
documentation of each transaction and an accounting of the activities
referred to in this Section 10.1, including information relative to the
status of negotiations for offers made in respect of such Equipment.
(b) If Borrower has not remarketed any Equipment at the
conclusion of the Remarketing Period, upon notice from Bank, Borrower's
exclusive right to remarket shall terminate and Bank shall have the right to
remarket such Equipment on terms and conditions satisfactory to it. If Bank
remarkets the equipment, it shall retain proceeds in an amount equal to all
amounts due with respect to the Advance financing the Usage Agreement to
which such Equipment was subject and shall remit the excess proceeds to
Borrower.
(c) Nothing contained in this Section 10.1 shall be deemed
to constitute a
26
<PAGE>
release by Bank of its security interest in any of the Collateral. Bank
shall release its security interest in Equipment that has been sold pursuant
to this Section 10.1.
10.2 REMARKETING EXPENSES. Remarketing expenses shall be for the
account of the party incurring such expenses and shall be recoverable from
proceeds realized by the party remarketing the Equipment.
11. NOTICES
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into
in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by firstclass
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return
receipt requested, or by telefacsimile to Borrower or to Bank, as the case
may be, at its addresses set forth below:
<TABLE>
<S> <C>
If to Borrower Vista Medical Technologies, Inc.
5451 Avenida Encinas, Suite A
Carlsbad, California 92008
Attn: Robert De Vaere
FAX: 760-603-9170
If to Bank Silicon Valley Bank
5414 Oberlin Drive, Suite 230
San Diego, CA 92121
Attn: Manager
FAX: 619-535-1611
</TABLE>
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
12. CHOICE OF LAW AND VENUE; JURY WAIVER
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the stare and Federal courts located in the
County of San Diego, State of California. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES
AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT
TO ENTER INTO THIS AGREEMENT. EACH PARTY
27
<PAGE>
REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY, AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
13. GENERAL PROVISIONS
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the respective successors and permitted assigns of each of
the parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank
shall have the right without the consent of or notice to Borrower to sell,
transfer, negotiate, or grant participation in all or any part of, or any
interest in, Bank's obligations, rights and benefits hereunder.
13.2 INDEMNIFICATION. Borrower shall, indemnify, defend, protect
and hold harmless Bank and its officers, employees, and agents against: (a)
all obligations. demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by the Loan
Documents, and (b) all losses or Bank Expenses in any way suffered, incurred,
or paid by Bank as a result of or in any way arising out of, following, or
consequential to transactions between Bank and Borrower whether under the
Loan Documents, or otherwise (including without limitation reasonable
attorneys fees and expenses), except for losses caused by Bank's gross
negligence or willful misconduct.
13.3 TIME OF ESSENCE. Time is of the essence for the performance
of all obligations set forth in this Agreement.
13.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
13.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All
prior agreements, understandings, representations, warranties, and
negotiations between the parties hereto with respect to the subject matter of
this Agreement, if any, are merged into this Agreement and the Loan Documents.
13.6 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
13.7 SURVIVAL. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify
Bank; with respect to the expenses. damages, losses, costs
28
<PAGE>
and liabilities described in Section 13.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Bank have run.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VISTA MEDICAL TECHNOLOGIES, INC.
By: /s/John Lyon
----------------------------------
Title: President/CEO
--------------------------------
By: /s/ Robert DeVaere
----------------------------------
Title: CFO
--------------------------------
SILICON VALLEY BANK
By: /s/ Susan Batchen
----------------------------------
Title: Vice President
--------------------------------
30
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in
and to the following.
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements' franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights.
royalties. license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper now owned or hereafter acquired and Borrower's Books relating to the
foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
31
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
--------------------
FAX#: TIME:
---------------------------------- -----------------------
FROM:
------------------------------------------------------------------
BORROWER'S NAME
FROM:
------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
- -----------------------------------------------------------------------
AUTHORIZED SIGNATURE
PHONE:
-----------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
----------------- -------------------
- -----------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
--------------------
PRINCIPAL PAYMENT (ONLY) $
--------------------
INTEREST PAYMENT (ONLY) $
--------------------
PRINCIPAL AND INTEREST (PAYMENT) $
--------------------
OTHER INSTRUCTIONS:
--------------------------------------------------
- -----------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as
of the date of the telephone request for and Advance confirmed by this
Advance Request; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in
all material respects as of such date.
32
<PAGE>
EXHIBIT C
[RESERVED]
33
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM:
The undersigned authorized officer of _______________________________ hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending with all acquired covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of
the date hereof. Attached herewith are the required documents supporting the
above certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of
determination that Borrower is not in compliance with any of the terms of the
Agreement, and that such compliance is determined not just at the date this
certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial Monthly within 30 Yes No
statements days
Annual (CPA Audited) FYE within 90 days Yes No
[10Q and 10K Within 5 days after filing Yes No
with the SEC]
A/R & A/P Agings Monthly within 20 Yes No
days
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Yes No
Basis:
Minimum Quick Ratio *** ____:1.0 Yes No
Maximum Debt/Tangible Net *** ____:1.0 Yes No
Worth
Tangible Net Worth (qtrly) *** $_______ Yes No
Equity + - Income
Profitability: 9/30/97 $ *** $_______ Yes No
12/31/97 $ *** $_______ Yes No
3/31/98 $ *** $_______ Yes No
6/30/98 $ *** $_______ Yes No
Minimum Debt Service *** ____:1.0 Yes No
(qtrly)
OR
Liquidity Ratio *** ____:1.0 Yes No
</TABLE>
*** Portions of this page have been omitted pursuant to request for
Confidential Treatment and filed separately with the Commission.
34
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: VISTA MEDICAL TECHNOLOGIES, INC. BANK: SILICON VALLEY BANK
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF VISTA MEDICAL
TECHNOLOGIES, INC. (the "Borrower"), HEREBY CERTIFY that Borrower is a
corporation duly organized and existing under and by virtue of the laws of
the State of Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or
by other duly authorized corporate action in lieu of a meeting), duly called
and held, at which a quorum was present and voting, the following resolutions
were adopted.
BE IT RESOLVED, that any one (l) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
John R. Lyon President & CEO /s/ John R. Lyon
-----------------
Robert J. De Vaere V.P. Finance & /s/ Robert DeVaere
Admin., CFO & -----------------
Secretary
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are authorized and empowered:
BORROW MONEY. To borrow frown time to time frown Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should
be borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan
documents of Borrower, on Bank's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so
borrowed or any indebtedness of Borrower to Bank, and also to execute
and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the
loan documents, or any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of
Borrower's assets, which security interest shall secure all of
Borrower's obligations to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to Borrower or in which Borrower may have an
interest, and either to receive cash for the same or to
35
<PAGE>
cause such proceeds to be credited to the account of Borrower with Bank
or to cause such other disposition of the proceeds derived therefrom as
they may deem advisable.
36
<PAGE>
CORPORATE BORROWING RESOLUTION
Page 2
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as,
in the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock
for such class, series and number, and on such terms, as an officer of
Borrower shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, including agreements waiving the
right to a trial by jury, as they may in their discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these Resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of
the Corporation and occupy the positions set opposite their respective natives;
that the foregoing Resolutions now stand of record on the books of the
Corporation; and that they are in full force and effect and have not been
modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on 10/23/97 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ ROBERT DEVAERE
----------------------------------
*Secretary or Assistant Secretary
X
----------------------------------
37
<PAGE>
EXHIBIT 11.1
VISTA MEDICAL TECHNOLOGIES, INC.
STATEMENT RE-COMPUTATION OF PER SHARE DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDING DECEMBER 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ (3,274) $ (7,439) $ (16,877)
---------- ---------- ----------
---------- ---------- ----------
Average common shares outstanding 37 201 6,731
---------- ---------- ----------
Shares used in Basic per share
computations 37 201 6,731
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share - Basic $ (88.49) $ (37.01) $ (2.51)
---------- ---------- ----------
---------- ---------- ----------
Net effect of dilutive common share
equivalents based on the treasury
stock method -- -- --
Shares used in Diluted per share
computations 37 201 6,731
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per
share - Diluted $ (88.49) $ (37.01) $ (2.51)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) of Vista Medical Technologies, Inc. of our report dated January
16, 1998, with respect to the consolidated financial statements of Vista
Medical Technologies, Inc. included in its Annual Report (Form 10-K/A) for the
year ended December 31, 1997, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
September 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,328,502
<SECURITIES> 16,784,345
<RECEIVABLES> 521,616
<ALLOWANCES> 0
<INVENTORY> 3,344,967
<CURRENT-ASSETS> 28,241,294
<PP&E> 4,885,239
<DEPRECIATION> 1,557,956
<TOTAL-ASSETS> 32,130,450
<CURRENT-LIABILITIES> 2,264,305
<BONDS> 0
0
0
<COMMON> 134,071
<OTHER-SE> 29,732,074
<TOTAL-LIABILITY-AND-EQUITY> 32,130,450
<SALES> 3,891,082
<TOTAL-REVENUES> 5,067,324
<CGS> 4,559,521
<TOTAL-COSTS> 4,559,521
<OTHER-EXPENSES> 17,384,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,877,039)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,877,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,877,039)
<EPS-PRIMARY> (2.51)
<EPS-DILUTED> (2.51)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997, JUNE 30,
1997, SEPTEMBER 30, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 10,284,529 5,844,477 1,524,045 6,690,458
<SECURITIES> 0 0 0 22,040,577
<RECEIVABLES> 526,119 770,344 259,991 1,114,718
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,212,825 1,729,892 2,335,479 3,832,790
<CURRENT-ASSETS> 12,159,873 8,824,476 4,983,498 34,008,587
<PP&E> 1,469,782 1,822,933 3,217,639 3,771,967
<DEPRECIATION> 387,679 481,797 619,320 1,002,334
<TOTAL-ASSETS> 14,315,717 11,225,724 8,625,906 37,777,555
<CURRENT-LIABILITIES> 1,354,766 1,270,925 2,314,201 3,121,309
<BONDS> 0 0 0 0
0 0 0 0
115,742 115,742 115,742 0
<COMMON> 5,382 6,168 6,236 133,396
<OTHER-SE> 12,839,827 9,832,889 6,189,727 34,522,850
<TOTAL-LIABILITY-AND-EQUITY> 14,315,717 11,225,724 8,625,906 37,777,555
<SALES> 2,243,756 829,218 1,334,662 2,563,328
<TOTAL-REVENUES> 3,853,462 930,706 1,478,421 3,123,703
<CGS> 2,252,509 826,027 1,590,927 3,138,103
<TOTAL-COSTS> 2,252,509 826,027 1,590,927 3,138,103
<OTHER-EXPENSES> 9,040,092 3,422,750 7,114,322 11,978,400
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (7,439,139) (3,318,071) (7,226,828) (11,992,800)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (7,439,139) (3,318,071) (7,226,828) (11,992,800)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (7,439,139) (3,318,071) (7,226,828) (11,992,800)
<EPS-PRIMARY> (1.06) (9.88) (21.61) (2.63)
<EPS-DILUTED> (1.06) (9.88) (21.61) (2.63)
</TABLE>
