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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 0-22743
VISTA MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3184035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CA 92008
(Address of principal executive offices)
(760) 603-9120
(Registrant's phone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:
(1) YES [X] NO [ ]
(2) YES [X] NO [ ]
As of May 12, 1999 there were 13,694,434 shares of $.01 par value common
stock outstanding.
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VISTA MEDICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ..................................3
Consolidated Statements of Operations.........................4
Consolidated Statements of Cash Flows ........................5
Notes to Consolidated Financial Statements ...................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................26
SIGNATURES.............................................................27
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Vista Medical Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,495,519 $ 7,625,804
Short-term investments & securities available for sale........ 516,564 1,176,800
Accounts receivable........................................... 997,942 752,233
Inventories................................................... 4,695,263 4,354,338
Other current assets.......................................... 148,205 157,443
------------ ------------
Total current assets.............................................. 11,853,493 14,066,618
Property and equipment, net....................................... 1,917,153 2,056,535
Patents and other assets.......................................... 410,875 481,594
------------ ------------
TOTAL ASSETS...................................................... $ 14,181,521 $ 16,604,747
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 684,649 $ 552,441
Accrued compensation.......................................... 344,511 300,807
Accrued liabilities........................................... 966,301 1,085,009
------------ ------------
Total current liabilities......................................... 1,995,461 1,938,257
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - no shares outstanding
on December 31, 1998 or March 31, 1999................ -- --
Common stock, $.01 par value:
Authorized shares - 35,000,000
Issued and outstanding shares - 13,572,101 on
December 31, 1998 and 13,694,434 on March 31, 1999.... 136,944 135,721
Additional paid-in capital................................ 62,919,318 62,856,201
Notes receivable from stockholders........................ (78,375) (78,375)
Deferred compensation..................................... (904,081) (1,030,420)
Unrealized gain/(loss) on investments..................... (567) 1,211
Accumulated deficit....................................... (49,887,179) (47,217,848)
------------ ------------
Total stockholders' equity........................................ 12,186,060 14,666,490
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 14,181,521 $ 16,604,747
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales.................................................................. $ 862,042 $ 2,433,082
Cost and expenses:
Cost of sales...................................................... 1,066,344 1,789,608
Research and development........................................... 976,909 1,555,698
Sales and marketing................................................ 1,036,742 1,878,921
General and administrative......................................... 594,658 1,704,254
------------ ------------
Total cost and expenses................................................ 3,674,653 6,928,481
------------ ------------
Loss from operations................................................... (2,812,611) (4,495,399)
Interest income........................................................ 92,655 328,193
Other gains/(losses)................................................... 50,625 0
------------ ------------
Net loss............................................................... $ (2,669,331) $ (4,167,206)
------------ ------------
------------ ------------
Basic and diluted loss per share....................................... $ (0.20) $ (0.31)
------------ ------------
------------ ------------
Shares used in computing basic and
diluted loss per share............................................. 13,485,430 13,248,379
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................................ $ (2,669,331) $ (4,167,206)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ................................... 259,540 631,896
Amortization of premium on short term investments ............... (301) 59,618
Amortization of deferred compensation ........................... 126,339 194,290
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable ..................................... (245,710) (1,256,733)
Inventories ............................................. (340,925) (640,950)
Other current assets .................................... 70,148 159,578
Accounts payable ........................................ 132,209 585,187
Accrued compensation .................................... 43,704 (118,541)
Accrued liabilities ..................................... (118,708) 943,954
------------ ------------
Net cash flows used for operating activities ............................ (2,743,035) (3,608,907)
INVESTING ACTIVITIES
Purchases of short-term investments ..................................... (341,241) (80,640)
Maturities of short-term investments .................................... 1,000,000 2,450,000
Purchase of property and equipment ...................................... (110,348) (263,585)
------------ ------------
Net cash flows provided by (used for) investing activities .............. 548,411 2,105,775
FINANCING ACTIVITIES
Issuance of common stock ................................................ 64,339 172,913
------------ ------------
Net cash flows provided by financing activities ......................... 64,339 172,913
Net (decrease) increase in cash and cash equivalents .................... (2,130,285) (1,330,219)
Cash and cash equivalents at beginning of period ........................ 7,625,804 7,328,502
------------ ------------
Cash and cash equivalents at end of period .............................. $ 5,495,519 $ 5,998,284
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................. $ 0 $ 0
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The Audited Financial Statements of Vista Medical Technologies, Inc.
(the "Company") and the notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission, contain additional information about the
Company, its operations, and its financial statements and accounting
practices, and should be read in conjunction with this quarterly report on
Form 10-Q. These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and with
the instructions on Form 10-Q except that certain information and footnote
disclosures normally contained in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The accompanying unaudited consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for all periods presented. The
interim financial information contained herein is not necessarily indicative
of results for any future interim periods or for the full fiscal year ending
December 31, 1999.
<TABLE>
<CAPTION>
2. Inventories
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Parts and materials ............... $ 3,047,972 $ 3,913,529
Work in process ................... 1,287,926 334,812
Finished goods .................... 1,258,833 1,039,997
------------ ------------
5,594,731 5,288,338
Less: reserves .................... (899,468) (934,000)
------------ ------------
$ 4,695,263 $ 4,354,338
------------ ------------
------------ ------------
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS OUTLOOK
REPRESENTS OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCH
RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASE
PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE OF THIS QUARTERLY REPORT.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY
REPORT ON FORM 10-Q AND OUR 1998 ANNUAL REPORT ON FORM 10-K, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW OF OUR BUSINESS
We develop, manufacture and market proprietary 3-D visualization and
information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. We also market endoscopic cameras and have generated minimal
revenues from the sales of these products since our formation in July 1993. We
expect to continue to incur substantial losses for at least the next 12 - 15
months. As of March 31, 1999, our accumulated deficit was approximately
$49,887,000. There can be no assurance that our development efforts will result
in commercially available products, that we will be successful in introducing
the products under development, or that required regulatory approval of products
will continue to be obtained in a timely manner, if at all.
OUR RESULTS OF OPERATIONS
Sales. We had revenue from product sales of $862,000 for the three-months
ended March 31, 1999, compared to revenues from product sales and distribution
fees of $2,433,000 for the same period in 1998. The decrease in revenues was due
to a reduction in sales of StereoSite systems and associated distribution fees
paid by Sofamor Danek, our distributor for the HNS market and a reduction in
sales of our Series 8000 Advanced Visualization and Information System ("Series
8000") for minimally invasive cardiac surgery during the first quarter of 1999
compared to the corresponding period of 1998. These were partially offset by
initial product sales to OEC Medical for the medical imaging market during the
first quarter of 1999 under a purchasing agreement signed during the quarter.
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Cost of Sales. Our cost of sales were $1,066,000 and $1,790,000 for the
three- months ended March 31, 1999 and 1998, respectively, a decrease of
$724,000. The decrease was primarily due to lower product sales levels during
the 1999 period and no costs related to the launch of the StereoSite product in
1999 as compared to 1998.
Research and Development Expenses. Our research and development expenses
decreased to $977,000 for the three-months ended March 31, 1999, from $1,556,000
for the corresponding period in 1998. The decrease in research and development
expenses was primarily attributable to decreases in staffing and related supply
and occupancy costs and a decrease in contract services related to development
efforts. We believe that a significant level of investment for product
development and evaluation is necessary to maintain our technological advantage
and, accordingly, anticipate that we will continue spending in research and
development at or near current levels for the next several quarters.
Sales and Marketing Expenses. Sales and marketing expenses were $1,037,000
and $1,879,000 for the three-months ended March 31, 1999 and 1998, respectively.
The decrease in sales and marketing expense reflects the transition of all of
sales, marketing and distribution efforts associated with our Series 8000 for
minimally invasive cardiac surgery in the United States to Medtronic following
an agreement announced at the end of June 1998. We expect our sales and
marketing expenses to remain at or near current levels for the next several
quarters.
General and Administrative Expenses. Our general and administrative
expenses decreased to $595,000 for the three-months ended March 31, 1999, from
$1,704,000 for the corresponding period in 1998. This decrease was primarily due
to a reduction in staffing and related expenses following a restructuring at the
end of the second quarter of 1998, a reduction in deferred compensation expense
and lower professional, legal and consulting service fees. We expect our general
and administrative expenses to remain at or near current levels for the next
several quarters.
Interest Income. Our net interest income was $93,000 for the three-month
period ended March 31, 1999 compared to $328,000 for the corresponding period in
1998. This decrease was due primarily to decreasing average investment balances
of our excess cash.
Other Gains. We had other gains of $51,000 for the three-month period ended
March 31, 1999 and had no such gains for the corresponding period in 1998. The
gains for the 1999 period relate to sale of securities we received in connection
with an earlier license agreement signed in 1996 with Imagyn Medical
Technologies, Inc. (formerly Urohealth Systems, Inc.).
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that our existing cash, cash equivalents and short-term
investments, and product revenues, will be sufficient to fund our operations
through August 1999. Substantial additional capital resources will be required
to fund continuing expenditures related to our research, development,
manufacturing and commercialization of new products beyond that point, and we
estimate $4,000,000 in additional financing will be required to fund operations
through
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December 31, 1999. There can be no assurance that the requisite fundings will
be consummated in the necessary time frame or on terms acceptable to us.
Should we be unable to raise sufficient funds, we may be required to curtail
our operating plans and possibly relinquish rights to portions of our
technology or products.
Net cash used in operating activities for the three-months ended March 31,
1999 was $2,743,000 compared to net cash used of $3,609,000 for the
corresponding three-month period in 1998. The decrease in net cash used in
operating activities was primarily attributable to decreasing net losses and
lower accounts receivable balances and inventory purchases during the 1999
period partially offset by lower non-cash expense for depreciation and
amortization and no customer advance payments in 1999 compared to 1998.
Net cash provided by investing activities was $548,000 for the three-months
ended March 31, 1999 compared to $2,106,000 of net cash provided in the same
period in 1998. The decrease in net cash provided by investing activities in
1999 was primarily attributable to declining balances of short term investments
reaching maturity partially offset by decreasing purchases of property and
equipment.
Net cash provided by financing activities was $64,000 for the three months
ended March 31, 1999 compared to $173,000 for the same period in 1998. The
decrease in net cash provided by financing activities during the 1999 period was
primarily attributable to a reduction in purchases of stock by employees through
our employee stock purchase plan and a lower level of stock option exercises.
YEAR 2000
We recognize the need to ensure our operations will not be adversely
impacted by the inability of our 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. We are currently addressing the risk, with respect to the
availability and integrity of our financial systems and the reliability of our
operating systems, and are in the process of communicating with suppliers,
customers, financial institutions and others with whom we conduct business
transactions to assess whether they are Year 2000 compliant.
We established a Year 2000 Compliance Team in 1998 made up of members of
all of our company's functional organizations and our implementation of a full
Year 2000 Compliance Program is ongoing. Our Chief Financial Officer is the
officer responsible for the Year 2000 Compliance Program and the individual who
leads the Year 2000 Compliance Team reports directly to the Chief Financial
Officer.
Central to our Year 2000 Compliance Program is a matrix we have developed
of all of our operations and business activities. This matrix which is
constantly updated provides the status of all of our Year 2000 Compliance
efforts in terms of level of assessment, conversion, testing, and completion and
identifies responsibility for each item. In this way, we are able to
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prioritize our efforts and provide visibility of the Compliance Program to all
Compliance Team members and management.
Thus far we have completed the assessment phase of all of our operations
and business activities. We have determined that our products are Year 2000
compliant, we have already converted some of our non compliant business systems
to be fully compliant such as telephone systems, and are in process of
converting our business enterprise software at this time. During the first
quarter of 1999 we installed a year 2000 compliant version of our business
enterprise software and completed the majority of the testing required of the
system. There were no significant problems encountered during this testing and
we anticipate we will be fully converted and operating on this system by the end
of the second quarter of 1999.
Furthermore, as a result of our assessment of other, less critical systems,
we believe we have identified adequate remedies for those which have been
identified as currently non-Year 2000 compliant. Specific examples of non
compliant systems would include certain desktop personal computers and
applications software where compliant versions are readily available from the
current suppliers as well as others. We currently have no contingency plans in
place. We expect to develop contingency plans during the second and third
quarters of 1999 and have those plans in place by the end of the third quarter
of 1999.
We currently estimate that the cost of the Year 2000 initiative will not
exceed $150,000, a portion of which, such as the business enterprise software,
was scheduled for upgrade irrespective of the Year 2000 issue and approximately
$45,000 of which was expended in 1998. An additional $25,000 was expended in the
first quarter of 1999. We do not, therefore, expect the Year 2000 initiative to
be material to our results of operations or financial position.
RISKS AND UNCERTAINTIES
You should consider the following factors carefully in evaluating an
investment in Vista Medical in addition to the other information in this report.
You are cautioned that the statements in this quarterly report that are not
descriptions of historical facts may be forward-looking statements that are
subject to risks and uncertainties. Our actual results could differ materially
from those currently anticipated due to a number of factors, including those
identified in this section and elsewhere in this annual report. We undertake no
obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date of this quarterly report. The following discussion should be read in
conjunction with our consolidated financial statements and notes thereto.
WE ARE A DEVELOPMENT STAGE COMPANY AND MAY HAVE SUBSTANTIAL FUTURE LOSSES
AND FUTURE CAPITAL REQUIREMENTS
Since our formation in July 1993, we have been engaged in the development
of visualization and information systems that enable minimally invasive
microsurgery ("MIM") solutions for applications in cardiothoracic and other
selected microsurgical procedures. In
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addition we have been engaged in manufacturing and marketing limited quantities
of camera systems to customers as an OEM. As of March 31, 1999, we had incurred
cumulative net losses of $49.9 million since our formation. We expect to incur
substantial losses for at least the next 12-15 months. There can be no assurance
that we will achieve or sustain profitability in the future. Failure to achieve
significant commercial revenues or profitability would have a material adverse
effect on our business, financial condition and results of operations.
Our future liquidity and capital requirements will depend upon numerous
factors, including the following: the extent to which our 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 our ongoing research and
development programs; the costs of training physicians to become proficient in
the use of our products and procedures; and the costs of developing marketing
and distribution capabilities.
We anticipate that our existing cash, cash equivalents and short-term
investments, and product revenues, will be sufficient to fund our operations
through August 1999. Substantial additional capital resources will be required
to fund continuing expenditures related to our research, development,
manufacturing and commercialization of new products beyond that point, and we
estimate $4,000,000 in additional financing will be required to fund operations
through December 31, 1999. There can be no assurance that the requisite fundings
will be consummated in the necessary time frame or on terms acceptable to us.
Should we be unable to raise sufficient funds, we may be required to curtail our
operating plans and possibly relinquish rights to portions of our technology or
products.
WE ARE DEPENDENT UPON THE SUCCESSFUL COMMERCIALIZATION OF OUR SERIES 8000
AND STEREOSITE
The Series 8000 for minimally invasive cardiac surgery and StereoSite
systems for head, neck and spine microsurgery are expected to account for the
majority of our revenues over the next several years. We are uncertain as to
whether the demand for the Series 8000 and StereoSite will be sufficient to
allow us to achieve profitable operations.
Development of certain additional components of the Series 8000 has not yet
been completed and additional versions of StereoSite have yet to be finally
developed. There can be no assurance that our development efforts for these
products will be successful, or that the products under development will be
shown to be safe or effective, capable of being manufactured in commercial
quantities at acceptable costs, acquire appropriate regulatory clearances or be
successfully marketed.
Evaluations of the Series 8000 and StereoSite 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 systems. 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 and StereoSite will prove suitable for use by a
substantial number of surgeons. If the Series 8000 and StereoSite prove
unsuitable for a
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large number of surgeons to use, the potential markets and applications for our
products would be significantly limited. Widespread use of the Series 8000 and
StereoSite 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 near term market acceptance of our Series 8000 and StereoSite.
Our failure to successfully commercialize the Series 8000 and StereoSite would
jeopardize our ability to achieve or sustain profitability.
WE ARE UNCERTAIN AS TO WHETHER PHYSICIANS WILL ADOPT MINIMALLY INVASIVE
MICROSURGICAL PROCEDURES
Our near-term products are being developed in order to enable
cardiothoracic, HNS and other surgeons to perform MIM surgical procedures using
their existing skills coupled with training and complementary equipment being
developed by other companies. Accordingly, our 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. We are 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 safe and effective 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 safety and effectiveness 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 our ability to
facilitate training of surgeons to perform MIM surgery and the willingness of
such surgeons to perform such procedures. Physicians may 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. We believe 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 the near future, if at all. Patient
acceptance of the procedure will depend upon 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.
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There can be no assurance that MIM procedures will gain clinical adoption.
Failure of these procedures to achieve significant clinical adoption will
jeopardize our ability to achieve or sustain profitability.
WE ARE DEPENDENT ON MEDTRONIC AND SOFAMOR DANEK
We have organized our sales and marketing efforts through our
CardioThoracic Surgery and HNS Microsurgery divisions. Pursuant to a recently
announced sales agreement, the products of our Cardiothoracic Surgery division
will be sold by Medtronic's sales force in most of the world's significant
markets, including the United States. The products of our HNS Microsurgery
division will be sold worldwide via Sofamor Danek's sales force.
We are directly dependent on our agreements with Medtronic and Sofamor
Danek for sales of the majority of our products. The termination of these
relationships would have a negative impact on our business.
Medtronic is the world's leading medical technology company specializing in
implantable and interventional therapies. Medtronic manufactures products in the
United States, Europe and Asia and sells its products to hospitals and surgeons
worldwide. Pursuant to a June 29, 1998 sales agreement between Medtronic and our
company, we appointed Medtronic as our exclusive distributor for current and
future visualization and information systems for cardiothoracic surgery in the
United States, Europe, Japan and several other significant geographical regions.
There can be no assurance that Medtronic will commit significant resources to
market our Series 8000 System or that its marketing efforts will be effective.
If they are not effective, it will jeopardize or ability to achieve or sustain
profitability.
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 our company, we appointed Sofamor Danek as our exclusive worldwide
distributor for our current and future visualization and information systems for
neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems"). There can be no assurance that
Sofamor Danek will commit significant resources to market StereoSite Systems or
that its marketing activities will be effective. If they are not effective, it
will jeopardize or ability to achieve or sustain profitability.
We 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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In January 1999, Sofamor Danek was acquired by Medtronic, Vista Medical's
other principal strategic distribution partner. We do not anticipate that this
acquisition will have any negative effects on our distribution agreement with
either company.
WE LACK COMMERCIAL MANUFACTURING EXPERIENCE AND THERE ARE SIGNIFICANT RISKS
ASSOCIATED WITH OUR SCALE-UP OF MANUFACTURING
We lack long term experience in manufacturing our products, including the
Series 8000 and StereoSite systems, in the quantities that would be necessary
for us to achieve significant commercial sales. The manufacture of our products
primarily involves the assembly of a number of sub-assemblies and components.
Companies such as ours 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 we can establish or maintain
reliable, high-volume manufacturing at commercially reasonable costs. We 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 our business, financial
condition and results of operation.
We have 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. Our
manufacturing yields or costs may increase as a result of the transition to
in-house production or to new production processes when such efforts are
undertaken. In addition, costs in complying with FDA Good Manufacturing
Practices ("GMP") or changes in such practices may exceed our expectations.
WE MAY FACE COMPONENT SHORTAGES AND ARE DEPENDENT IN SOME INSTANCES ON
SINGLE SOURCES OF SUPPLY
We use and rely on certain components and services used in our systems for
which we have only a single source of supply. The manufacture of our 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 our products.
We expect to manufacture our products based on forecasted product orders
and intend to purchase subassemblies and components prior to receipt of purchase
orders from customers. Lead times for ordered materials and components 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 our products have long lead times. As a
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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 negatively impact our ability to manufacture our products.
WE ARE SUBJECT TO SIGNIFICANT DOMESTIC AND INTERNATIONAL REGULATION AND MAY
NOT BE ABLE TO OBTAIN NECESSARY REGULATORY CLEARANCES
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
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and approval of a PMA application. If a medical device manufacturer or
distributor can establish that a device is "substantially equivalent" to a
legally marketed Class I or Class II device, or to a Class III device for which
the FDA has not called for a PMA, the manufacturer or distributor may market the
device upon receipt of an FDA order determining such a device substantially
equivalent to a predicate device. The 510(k) notification may need to be
supported by appropriate performance, clinical or testing data establishing the
claim of substantial equivalence. The FDA requires a rigorous demonstration of
substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an FDA
substantial equivalence order permitting the marketing of a device is received
by the person who submitted the 510(k) notification. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA letter may declare that the device is substantially equivalent to a
legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information will delay market
introduction of the product that is the subject of the 510(k) notification.
All clinical investigations involving the use of an unapproved or uncleared
device on humans to determine the safety or effectiveness of the device must be
conducted in accordance 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 which we manufacture or distribute 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.
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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. Our failure to comply with
regulatory requirements would jeopardize our ability to market our products.
The current regulatory environment in Europe for medical devices differs
significantly from that in the United States. Since 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.
WE EXPECT TO ENCOUNTER RAPID TECHNOLOGICAL CHANGE AND SIGNIFICANT
COMPETITION
The medical device market in which we compete is characterized by
intensive development efforts and rapidly advancing technology. Our future
success will depend, in large part, upon our ability to anticipate and keep
pace with advancing technology and competing innovations. We may not be
successful in identifying, developing and marketing new products or enhancing
our existing products.
We believe that a number of large companies, with significantly greater
financial, manufacturing, marketing, distribution and technical resources and
experience than ours, are focusing on the development of visualization products
for minimally invasive microsurgery. Several companies are currently developing
and marketing visualization products for minimally invasive microsurgery which
could be applied to cardiac surgery or to HNS microsurgery. There can be no
assurance that we 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 minimally invasive microsurgery
procedures and could render minimally invasive microsurgery obsolete.
There can be no assurance that physicians will use minimally invasive
microsurgery procedures to replace or supplement established treatments, or
that cardiac surgery minimally invasive microsurgery or HNS minimally
invasive microsurgery will be competitive with current or future
technologies. There can be no assurance that we will be able to compete
successfully against current and future competitors.
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WE ARE EXTREMELY RELIANT ON CERTAIN STRATEGIC RELATIONSHIPS
We intend to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval and marketing of certain of our products. Our future success may
depend, in part, on our relationships with such partners, including, for
example, our relationship with Medtronic and Sofamor Danek. We will have
limited or no control over the resources that any partner may devote to our
products, or over our partners' development and marketing efforts. We cannot
guarantee that our present or future collaborative partners will perform
their obligations as expected or will devote sufficient resources to the
development or marketing of our potential products. Any of the following
actions by a partner could damage our business: parallel development of
alternate technologies; preclusion from entering into competitive
arrangements; failure to obtain timely regulatory approvals; premature
termination of a collaborative agreement or failure to devote sufficient
resources to the development and commercialization of our products. We
anticipate that our partners may have the unilateral right to terminate our
relationships without significant penalty. We may not be successful in
establishing or maintaining any strategic relationships in the future.
WE EXPECT FLUCTUATIONS IN OUR OPERATING RESULTS
Our results of operations of 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 our pricing policies or those of our competitors;
changes in third-party payment guidelines; the number, timing and
significance of product enhancements and new product announcements by us or
our competitors; our ability to develop, introduce and market new and
enhanced versions of our products on a timely basis; customer order deferrals
in anticipation of enhancements or of new product introductions by us or our
competitors; product quality problems; personnel changes; and the level of
international sales.
WE ARE EXPERIENCING UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS
We expect that sales volumes and prices of our products will be directly
influenced by the profitability to, or cost-effectiveness for, hospitals of
the procedures in which our 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. We expect that our products typically will be used by hospitals and
surgical centers, which bill various third-party payors, such as governmental
programs and private insurance plans, for the health care services provided
to their patients. Third-party payors carefully review and increasingly
challenge the prices charged for medical products and services or negotiate a
flat rate fee in advance. Payment rates from private companies also vary
depending on the procedure performed, the third-party payor, the insurance
plan and other factors. Medicare compensates hospitals at a pre determined
fixed amount for the costs associated with an in-patient hospitalization
based on the patient's discharge diagnosis and compensates physicians at a pre
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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. We are unable
to predict what changes will be made in the reimbursement methods utilized by
third-party health care payors. We 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 our
products are intended to be used.
If we obtain the necessary foreign regulatory registrations or
approvals, market acceptance of our 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 the use of our
technology.
We believe 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 and 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 which we offer. 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 our products or our ability to sell our products on a
profitable basis, particularly if our systems are more expensive than
competing surgical procedures. The unavailability or inadequacy of
third-party payor coverage or reimbursement would have a negative impact on
our business.
THERE ARE SIGNIFICANT RISKS RELATING TO OUR INTERNATIONAL OPERATIONS
We plan to market our products in international markets, either on our
own or with our strategic partners. We have limited experience in marketing
our products overseas. Changes in overseas economic conditions, currency
exchange rates, foreign tax laws or tariffs or other trade regulations could
negatively impact our business. The anticipated international nature of our
business is also expected to subject our representatives, agents and
distributors to laws and regulations of the foreign jurisdictions in which
they operate or in which our products are sold. The regulation of medical
devices in a number of such jurisdictions, particularly in the European
Union, continues to develop and new laws or regulations may negatively impact
our business. In addition, the laws of certain foreign countries do not
protect our intellectual property rights to the same extent as do the laws of
the United States.
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WE MAY BE SUBJECT TO PRODUCTS LIABILITY CLAIMS AND HAVE LIMITED INSURANCE
COVERAGE
We face an inherent and significant business risk of exposure to product
liability claims in the event that the use of our products results in
personal injury or death. Also, in the event that any of our products proves
to be defective, we may be required to recall or redesign such products. Our
current product liability insurance coverage limit is $10.0 million per
occurrence and in the aggregate. Our coverage limits may not be adequate to
protect us from any liabilities we might incur in connection with the
development, manufacture and sale of our products. In addition, increased
product liability coverage may be required 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 us on
acceptable terms, if at all. A successful product liability claim or series
of claims brought against us in excess of our insurance coverage or a product
recall would negatively impact our business.
THERE IS SIGNIFICANT UNCERTAINTY REGARDING OUR PATENTS AND PROTECTION OF
OUR PROPRIETARY TECHNOLOGY
We rely on a combination of technical leadership, patent, trade secret,
copyright and trademark protection and nondisclosure agreements to protect
our proprietary rights. As of March 31, 1999, we had exclusive ownership
rights to 15 issued United States patents, 12 pending United States patent
applications and 28 pending foreign applications covering various aspects of
our devices and systems. Furthermore, as of the same date, we had exclusive
rights in the medical field to five issued United States patents, one pending
United States patent application, 11 issued foreign patents and 10 pending
foreign applications covering various aspects of our devices and systems. In
1998 we additionally obtained from Carl Zeiss Inc. non-exclusive rights to
three issued United States patents and four pending foreign applications. We
intend to file additional patent applications in the future. The failure of
such patents to issue could damage our ability to protect our proprietary
information.
Our future success will depend, in part, on our ability to continue to
develop patentable products, enforce our patents and obtain patent protection
for our products both in the United States and in other countries. The patent
positions of medical device companies, 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 us or
that, if patents do issue, the claims allowed will be sufficiently broad to
protect our technology. In addition, there can be no assurance that any
issued patents owned by or licensed to us will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide us with
competitive advantages.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights.
Litigation, which would result in substantial expense may be necessary to
enforce any patents issued or licensed to us and/or to determine the scope
and validity of proprietary rights of third parties or whether our products,
processes or procedures infringe any such third-party proprietary rights. We
may also have to participate in
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interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial expense, to determine the priority
of inventions covered by our issued United States patents or pending patent
applications. Furthermore, we may have to participate at substantial cost in
International Trade Commission proceedings to enjoin importation of products
which would compete unfairly with our products. Any adverse outcome of any
patent litigation (including interference proceedings) could subject us to
significant liabilities to third parties, require disputed rights to be
licensed from or to third parties or require us 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 our competitors to
ascertain the areas of research or development in which we are engaged prior
to our 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 is
intensely competitive. Patents issued and patent applications filed relating
to medical devices are numerous and current and potential competitors and
other third parties may have filed or in the future may 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 us. There can also be no assurance that third
parties will not assert infringement claims against us in the future or that
any such assertions will not result in costly litigation or require us to
obtain a license to intellectual property rights of such parties. Any such
licenses may not be available on acceptable terms, if at all. Furthermore,
parties making such claims may be able to obtain injunctive or other
equitable relief that could effectively block our ability to make, use, sell
or otherwise practice our intellectual property (whether or not patented or
described in pending patent applications), or to further develop or
commercialize our 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 damage our business.
We rely on unpatented trade secrets to protect our 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 our proprietary technology or
disclose such technology or that we can ultimately protect our rights to such
unpatented proprietary technology. Third parties may obtain patent rights to
such unpatented trade secrets, which patent rights could be used to assert
infringement claims against us. We also rely on confidentiality agreements
with our collaborators, employees, advisors, vendors and consultants to
protect our proprietary technology. These agreements may be breached, we may
not have adequate remedies for any breach and our trade secrets may otherwise
become known or be independently developed by competitors. In addition, our
agreements with employees and consultants require disclosure of ideas,
developments, discoveries or inventions conceived during
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employment or consulting, as the case may be, and assignment to us of
proprietary rights to such matters related to our business and technology.
The extent to which efforts by others will result in patents and the effect
on us of the issuance of such patents is unknown. Failure to obtain or
maintain patent and trade secret protection, for any reason, could negatively
impact our business.
We have licensed certain aspects of our technology from third parties.
In September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to us 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, we are 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 we fail to
pay any royalties. In addition, we have 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 us a non-exclusive license to certain
optical zoom technology for use in endoscopes. We are obligated to pay
royalties on net sales of products in the United States which incorporate
Fuji's technology. Fuji may terminate the agreement if we do not cure any
violation of the agreement within a limited period of time. Our failure to
retain rights to these technologies could negatively impact our business.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND ADVISORS
Our future business and operating results depend in significant part
upon the continued contributions of our key technical and senior management
personnel, many of whom would be difficult to replace and certain of whom
perform important functions beyond those suggested by their respective job
titles or descriptions. Our business and future operating results also depend
in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, marketing and sales and support
personnel for our operations. We have not entered into any employment
contracts or arrangements with any of our employees. Competition for such
personnel is intense, and we may not 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 our inability to attract and
retain skilled employees, as needed, could negatively impact our business.
We have 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.
We have also 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 us exclusively in the field of visualization, but are free to
consult with other
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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 our
business. Although we have 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, the consulting and
confidentiality agreements between us and each of the members of the Clinical
Advisory Boards may be terminated or breached. In addition, such agreements
may not be renewed upon termination.
WE NEED TO EFFECTIVELY MANAGE OUR CHANGING BUSINESS
In order to compete effectively against current and future competitors,
prepare additional products for potential commercialization and develop
future products, we believe that we must continue to expand our operations,
particularly in the areas of development. If we 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 our management, operating and financial systems and resources. To
accommodate such growth and compete effectively, we must continue to
implement and improve information systems, procedures and controls, and to
expand, train, motivate and manage our work force. Our future success will
depend to a significant extent on the ability of our current and future
management personnel to operate effectively, both independently and as a
group. Our personnel, systems, procedures and controls may not be adequate to
support our future operations. Any failure to implement and improve our
operational, financial and management systems or to expand, train, motivate
or manage employees could negatively impact our business.
WE ARE FACING YEAR 2000 ISSUES
We recognize the need to ensure our operations will not be adversely
impacted by the inability of our 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. We are currently addressing the risk, with respect to the
availability and integrity of our financial systems and the reliability of
our operating systems, and are in the process of communicating with
suppliers, customers, financial institutions and others with whom we conduct
business transactions to assess whether they are Year 2000 compliant.
We established a Year 2000 Compliance Team in 1998 made up of members of
all of our company's functional organizations and our implementation of a
full Year 2000 Compliance Program is ongoing. Our Chief Financial Officer is
the officer responsible for the Year 2000 Compliance Program and the
individual who leads the Year 2000 Compliance Team reports directly to the
Chief Financial Officer.
Central to our Year 2000 Compliance Program is a matrix we have
developed of all of our operations and business activities. This matrix which
is constantly updated provides the status of all of our Year 2000 Compliance
efforts in terms of level of assessment, conversion, testing, and completion
and identifies responsibility for each item. In this way, we are able to
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prioritize our efforts and provide visibility of the Compliance Program to
all Compliance Team members and management.
Thus far we have completed the assessment phase of all of our operations
and business activities. We have determined that our products are Year 2000
compliant, we have already converted some of our non compliant business
systems to be fully compliant such as telephone systems, and are in process
of converting our business enterprise software at this time. During the first
quarter of 1999 we installed a year 2000 compliant version of our business
enterprise software and completed the majority of the testing required of the
system. There were no significant problems encountered during this testing
and we anticipate we will be fully converted and operating on this system by
the end of the second quarter of 1999.
Furthermore, as a result of our assessment of other, less critical
systems, we believe we have identified adequate remedies for those which have
been identified as currently non-Year 2000 compliant. Specific examples of
non compliant systems would include certain desktop personal computers and
applications software where compliant versions are readily available from the
current suppliers as well as others. We currently have no contingency plans
in place. We expect to develop contingency plans during the second and third
quarters of 1999 and have those plans in place by the end of the third
quarter of 1999.
We currently estimate that the cost of the Year 2000 initiative will not
exceed $150,000, a portion of which, such as the business enterprise
software, was scheduled for upgrade irrespective of the Year 2000 issue and
approximately $45,000 of which was expended in 1998. An additional $25,000
was expended in the first quarter of 1999. We do not, therefore, expect the
Year 2000 initiative to be material to our results of operations or financial
position.
POTENTIAL VOLATILITY OF OUR STOCK PRICE
The market prices and trading volumes for securities of emerging
companies, like ours, 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 our common stock is
likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in our operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by us or our competitors,
regulatory announcements, developments with respect to patents or proprietary
rights, conditions and trends in the medical device and other technology
industries, adoption of new accounting standards affecting the medical device
industry, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for shares of
early stage companies. These broad market fluctuations may adversely affect
the market price of our 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 us, could result in substantial
costs and a diversion of management's attention and resources.
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WE MAY BE REQUIRED TO USE HAZARDOUS MATERIALS
Our research and development activities may involve the controlled use
of hazardous materials and chemicals. Although we believe that our 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, we could be held liable for any resultant
damages, and any such liability could exceed our resources. We may incur
substantial cost to comply with environmental regulations.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS
We currently intend to retain any future earnings for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future.
WE HAVE ADOPTED CERTAIN MEASURES THAT MY DISCOURAGE A CHANGE OF CONTROL
THAT MAY NEGATIVELY IMPACT HOLDERS OF OUR COMMON STOCK
Our 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 our stockholders. The
rights of the holders of our 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
our outstanding voting stock.
In addition, our Second Restated Certificate of Incorporation provides
for a classified Board of Directors such that approximately one-third of the
members of the our Board of Directors are elected at each annual meeting of
stockholders. Such classification of our Board of Directors may have the
effect of delaying, deferring or discouraging changes in control. Making it
more difficult or discouraging a change in control may adversely affect the
market price of our common stock.
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PART II. OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISTA MEDICAL TECHNOLOGIES, INC.
Date: MAY 14, 1999 /s/ JOHN R. LYON
----------------------- --------------------------------------
John R. Lyon
President, Chief Executive Officer and
Director
Date: MAY 14, 1999 /s/ ROBERT J. DE VAERE
----------------------- ---------------------------------------
Robert J. De Vaere
Vice President of
Finance & Administration
& Chief Financial Officer
(Principal financial and
accounting officer)
27
<PAGE>
EXHIBIT 11.1
VISTA MEDICAL TECHNOLOGIES, INC.
Statement Regarding Computation of Per Share Data
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss) ..................................... $ (2,669,331) $ (4,167,206)
Weighted average common shares outstanding ............ 13,485,430 13,248,379
------------ ------------
Shares used in basic and diluted loss per share ....... 13,485,430 13,248,379
------------ ------------
------------ ------------
Basic and diluted loss per share ...................... $ (0.20) $ (0.31)
------------ ------------
------------ ------------
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998 AND AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,495,519
<SECURITIES> 516,564
<RECEIVABLES> 997,942
<ALLOWANCES> 0
<INVENTORY> 4,695,263
<CURRENT-ASSETS> 11,853,493
<PP&E> 6,015,985
<DEPRECIATION> 4,098,832
<TOTAL-ASSETS> 14,181,521
<CURRENT-LIABILITIES> 1,995,461
<BONDS> 0
0
0
<COMMON> 136,944
<OTHER-SE> 12,049,116
<TOTAL-LIABILITY-AND-EQUITY> 14,181,521
<SALES> 862,042
<TOTAL-REVENUES> 1,005,322
<CGS> 1,066,344
<TOTAL-COSTS> 1,066,344
<OTHER-EXPENSES> 2,608,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,669,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,669,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,669,331)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
