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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 0-22229
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VITAL IMAGES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 42-1321776
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 WEST LAKE STREET, SUITE 100 55416
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal
executive offices)
(612) 915-8000
(Registrant's telephone 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. Yes [X] No [ ]
---------------------------
On November 12, 1998, there were 4,865,226 shares of the registrant's common
stock, par value $.01 per share, outstanding.
1
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VITAL IMAGES, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 and December 31, 1997....3
Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 ...................................4
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 ...................................5
Notes to Financial Statements ...................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................8
PART II. OTHER INFORMATION
Item 5. Other Information ..............................................14
Item 6. Exhibits and Reports on Form 8-K ...............................14
SIGNATURES .................................................................15
INDEX TO EXHIBITS ..........................................................16
2
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
VITAL IMAGES, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
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<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 544,194 $ 448,377
Marketable securities 3,732,474 5,963,464
Accounts receivable, net of allowance for doubtful accounts
of $64,000 and $40,000 as of September 30, 1998 and
December 31, 1997, respectively 716,197 581,130
Prepaid expenses and other current assets 253,000 264,826
------------ -------------
Total current assets 5,245,865 7,257,797
Property and equipment, net 893,651 997,947
Patent costs 46,044 40,267
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TOTAL ASSETS $ 6,185,560 $ 8,296,011
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 303,062 $ 203,579
Accrued payroll 397,873 322,572
Deferred revenue 316,972 212,556
Other current liabilities 162,898 104,003
------------ -------------
Total current liabilities 1,180,805 842,710
Deferred revenue 145,257 200,107
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Total liabilities 1,326,062 1,042,817
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding as of September 30, 1998 and
December 31, 1997 -- --
Common stock: authorized 20,000,000 shares of $.01 par
value; issued and outstanding, 4,865,226 shares as of
September 30, 1998 and 4,806,561 shares as of December 31, 1997 48,652 48,066
Additional paid-in capital 18,089,900 18,006,824
Accumulated deficit (13,279,054) (10,801,696)
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Total shareholders' equity 4,859,498 7,253,194
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,185,560 $ 8,296,011
============ =============
</TABLE>
(The accompanying notes are an integral part of the financial statements.)
3
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VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
License fees $ 736,239 $ 188,265 $ 1,792,714 $ 319,391
Maintenance and services 135,884 63,949 339,781 209,322
Hardware 377,812 -- 868,946 --
----------- ----------- ----------- -----------
Total revenue 1,249,935 252,214 3,001,441 528,713
Cost of revenue:
License fees 37,135 25,455 116,610 76,771
Maintenance and services 33,807 -- 88,915 --
Hardware 271,382 -- 641,827 17,500
----------- ----------- ----------- -----------
Total cost of revenue 342,324 25,455 847,352 94,271
Gross margin 907,611 226,759 2,154,089 434,442
Operating expenses:
Sales and marketing 692,446 478,763 2,032,187 1,425,229
Research and development 456,368 593,727 1,354,207 1,644,864
General and administrative 357,915 354,578 1,433,128 971,836
----------- ----------- ----------- -----------
Total operating expenses 1,506,729 1,427,068 4,819,522 4,041,929
Operating loss (599,118) (1,200,309) (2,665,433) (3,607,487)
Interest income 57,881 114,068 207,113 346,474
----------- ----------- ----------- -----------
Loss before income taxes (541,237) (1,086,241) (2,458,320) (3,261,013)
Income taxes 5,920 500 19,038 1,500
----------- ----------- ----------- -----------
Net loss $ (547,157) $(1,086,741) $(2,477,358) $(3,262,513)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (.11) $ (.23) $ (.51) $ (.68)
=========== =========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 4,860,448 4,772,509 4,832,567 4,764,526
=========== =========== =========== ===========
</TABLE>
(The accompanying notes are an integral part of the financial statements.)
4
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VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,477,358) $(3,262,513)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 362,959 225,133
Stock-based compensation -- 87,957
Provision for uncollectible accounts receivable 38,313 (2,698)
Changes in operating assets and liabilities:
Accounts receivable (173,380) (15,006)
Prepaid expenses and other current assets 11,826 (186,191)
Accounts payable 99,483 184,591
Deferred revenue 49,566 (160,317)
Accrued payroll and other liabilities 134,196 223,434
----------- -----------
Net cash used in operating activities (1,954,395) (2,905,610)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (258,663) (648,764)
Additions to patent costs (5,777) (3,165)
Investments in marketable securities (7,519,010) (5,373,299)
Maturities of marketable securities 9,750,000 3,903,044
----------- -----------
Net cash provided by (used in) investing activities 1,966,550 (2,122,184)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net investment by Bio-Vascular -- 1,797,814
Purchases of common stock under Employee Stock Purchase Plan and
stock option plans 83,662 11,479
----------- -----------
Net cash provided by financing activities 83,662 1,809,293
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95,817 (3,218,501)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448,377 6,481,067
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 544,194 $ 3,262,566
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the financial statements.)
5
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VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
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(1) BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Vital Images, Inc. ("Vital
Images" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary, including items of a normal
recurring nature, for a fair presentation have been included. Operating results
for the three and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. These financial statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) SPIN-OFF OF VITAL IMAGES:
On May 12, 1997, Bio-Vascular, Inc. ("Bio-Vascular"), the former parent company
of Vital Images, distributed all of the shares of Vital Images to the
shareholders of Bio-Vascular (the "Distribution"), and on that date Vital Images
began operating as an independent public company. All Bio-Vascular shareholders
of record as of May 5, 1997 received one share of Vital Images common stock for
each two shares of Bio-Vascular stock held on that date, and cash in lieu of
fractional shares.
(3) REVENUE RECOGNITION:
Effective January 1, 1998 the Company adopted Statement of Position 97-2,
SOFTWARE REVENUE RECOGNITION ("SOP 97-2"), which provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions and supersedes Statement of Position 91-1, SOFTWARE REVENUE
RECOGNITION. The adoption of SOP 97-2 did not materially impact the Company's
revenue recognition practices, financial position or results of operations for
the three and nine months ended September 30, 1998 and would not have materially
impacted the revenue recognition practices, financial position or results of
operations for the three and nine months ended September 30, 1997.
6
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VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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(4) MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Percentage of
Significant Accounts
Customer Revenue Receivable
----------- ------- -------------
Nine months ended Toshiba America Medical $ 803,000 15%
September 30, 1998 Systems
Paradigm Geophysical $ 551,000 -
Corporation
Nine months ended Paradigm Geophysical $ 142,000 -
September 30, 1997 Corporation
The Company's accounts receivable are generally concentrated with a small base
of customers. As of September 30, 1998, two customers accounted for 16% and 15%,
respectively, of accounts receivable, while as of December 31, 1997, six
customers accounted for 73% of accounts receivable.
Export revenue amounted to 3% and 22% of total revenue for the nine months ended
September 30, 1998 and 1997, respectively. Substantially all of the Company's
export revenue is negotiated, invoiced and paid in U.S. dollars. Gross export
revenue by geographic area is summarized as follows:
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
Europe and Middle East...................... $ 36,000 $ 50,000
Asia and Pacific Region..................... 52,000 42,000
Canada, Mexico and others................... 8,000 26,000
(5) NET LOSS PER SHARE:
For the three and nine months ended September 30, 1998 and the three months
ended September 30, 1997, net loss per share is computed using the weighted
average common shares outstanding during the period. Common share equivalents
are not included in the net loss per share calculations, since they are
anti-dilutive. Warrants and options to purchase common stock, 1,469,333
outstanding as of September 30, 1998, could potentially dilute basic earnings
per share in future periods if the Company generates net income.
For the nine months ended September 30, 1997, for periods prior to the
Distribution, the weighted average common shares outstanding used in the net
loss per share calculation is one-half of the weighted average of Bio-Vascular
common shares outstanding based on the distribution of one share of the
Company's common stock for each two shares of Bio-Vascular's common stock
pursuant to the Distribution and is computed using the weighted average common
shares outstanding during the period. For periods after the Distribution, net
loss per share is computed using the weighted average common shares outstanding
during the period. Common share equivalents are not included in the net loss per
share calculation, since they are anti-dilutive.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On May 12, 1997 (the "Distribution Date"), Bio-Vascular, the former parent
company of Vital Images, distributed all of the shares of Vital Images to the
shareholders of Bio-Vascular (the "Distribution"), and on that date Vital Images
began operating as an independent public company. All Bio-Vascular shareholders
of record as of May 5, 1997 received one share of Vital Images common stock for
each two shares of Bio-Vascular stock held on that date, and cash in lieu of
fractional shares.
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. On the Distribution Date, Bio-Vascular contributed to Vital
Images an additional $1,845,000 in cash equivalents in order to restore Vital
Images' cash, cash equivalents and marketable securities balance to $10,000,000.
On July 17, 1997, the Board of Directors of the Company adopted a resolution
changing the Company's fiscal year end from October 31 to December 31 of each
year. This quarterly report on Form 10-Q contains unaudited financial statements
for the three and nine months ended September 30, 1998 and the comparable
periods of the prior calendar year.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
Revenue was $1,250,000 compared with $252,000, a 396% increase. This increase
was primarily the result of software and hardware revenue of $931,000 related to
shipments of Vitrea, the Company's flagship medical visualization software
released in October of 1997. An increase in royalties received from the
Company's license agreement with Paradigm Geophysical Corporation also
contributed to the increase in revenue. It is expected that revenue will
continue to increase in future quarters due to increased sales of Vitrea
software and related hardware. However, actual results could vary materially
from the foregoing forward-looking statement on a quarter to quarter basis and
as a result of lower than expected demand for the Vitrea product or the timing
of future releases of Vitrea software.
The Company's largest customer, Toshiba of America Medical Systems ("Toshiba"),
has recently begun marketing a new high speed CT scanner, the Aquilion(TM).
Toshiba does not expect to begin delivery of the Aquilion until the first
quarter of 1999. As a result of the future availability of this scanner, many of
Toshiba's customers are changing their current scanner purchases to upgrade to
this new scanner. Since the Aquilion will not be delivered until 1999, this may
have the effect of delaying shipments of Vitrea software and hardware purchased
in conjunction with a Toshiba scanner. Accordingly, some of the revenue the
Company expects to realize in 1998 may be delayed until 1999. The Company
anticipates that a delay in revenue, if it occurs, may result in quarter to
quarter revenue fluctuations, but will not have a material adverse effect on the
Company's long-term financial position or results of operations.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
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The gross margin percentage decreased from 90% to 73%, primarily due to hardware
revenue related to the sales of Vitrea software increasing as a proportion of
the Company's total revenue. The Company receives only a nominal discount in
purchasing third party hardware and the Company's gross margin on the resale of
this hardware approximates its discount. The Company anticipates that as
hardware revenue related to the sale of Vitrea software continues as a
significant proportion of the Company's total revenue, the overall gross margin
percentage will approximate the results of this quarter. This forward-looking
statement will be influenced primarily by vendor discounts on the third party
hardware and on the Company's product mix.
Sales and marketing expenses increased to $692,000 from $479,000, a 45%
increase. The increase was due primarily to increased compensation costs as a
result of additional personnel, increases in travel expenses related to the
marketing and promotion of Vitrea software, and the cost of market research.
These increases were partially offset by a decrease in consulting expenses. The
Company expects sales and marketing costs to increase in future periods as a
result of the cost of additional sales and customer support personnel.
Research and development expenses decreased 23% to $456,000 from $594,000. The
decrease was primarily due to reimbursement of $57,000 of engineering costs
pursuant to the development contract with Advanced Technologies Laboratories,
Inc. ("ATL"), and decreases in compensation, travel and clinical research
expenses. The Company anticipates that research and development expenses will
increase in future periods as future releases of Vitrea software are developed
and the reimbursement of engineering costs by ATL decreases.
General and administrative expenses increased from $355,000 to $358,000, a 1%
increase. While overall general and administrative expenses remained consistent
with the comparable period of 1997, there were increases in compensation costs
as a result of increased staffing, and increases in both recruiting costs and
the cost of temporary workers offset by a decrease in travel expenses. The
Company believes that general and administrative costs will increase in future
periods primarily due to increased compensation expense for employees hired in
1997 that will be present for all of 1998 and additional new hires in 1998.
The increased revenue from sales of Vitrea software and hardware and the
reimbursement by ATL of certain engineering costs offset by increasing expenses
attributable to the continuing development of the Company's management team and
infrastructure and the development and promotion of Vitrea software, resulted in
an operating loss of $599,000 for the three months ended September 30, 1998,
compared with an operating loss of $1,200,000 for the three months ended
September 30, 1997.
Interest income was $58,000 for the three months ended September 30, 1998
compared with $114,000 for the comparable period in 1997. The decrease in
interest income during the three months ended September 30, 1998 was due to a
lower balance of cash, cash equivalents and marketable securities as a result of
the use of cash to fund the Company's operations.
The income tax provisions for the three months ended September 30, 1998 and 1997
consist solely of certain state minimum fees. A valuation allowance has been
established to completely reserve for the net deferred tax assets of the
Company.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenue was $3,001,000 compared with $529,000, a 468% increase. This increase
was primarily the result of software and hardware revenue of $2,023,000 related
to shipments of Vitrea, the Company's flagship medical visualization software
released in October of 1997. An increase in royalties received from the
Company's license agreement with Paradigm Geophysical Corporation also
contributed to the increase in revenue. It is expected that revenue will
continue to increase in future quarters due to increased sales of VITREA
software and related hardware. However, actual results could vary materially
from the foregoing forward-looking statement on a quarter to quarter basis and
as a result of lower than expected demand for the Vitrea product or the timing
of future releases of Vitrea software.
The Company's largest customer, Toshiba of America Medical Systems ("Toshiba"),
has recently begun marketing a new high speed CT scanner, the Aquilion. Toshiba
does not expect to begin delivery of the Aquilion until the first quarter of
1999. As a result of the future availability of this scanner, many of Toshiba's
customers are changing their current scanner purchases to upgrade to this new
scanner. Since the Aquilion will not be delivered until 1999, this may have the
effect of delaying shipments of Vitrea software and hardware purchased in
conjunction with a Toshiba scanner. Accordingly, some of the revenue the Company
expects to realize in 1998 may be delayed until 1999. The Company anticipates
that a delay in revenue, if it occurs, may result in quarter to quarter revenue
fluctuations, but will not have a material adverse effect on the Company's
long-term financial position or results of operations.
The gross margin percentage decreased from 82% to 72%, primarily as a result of
hardware revenue related to Vitrea software sales increasing as a proportion of
the Company's total revenue. The Company receives only a nominal discount in
purchasing third party hardware and the Company's gross margin on the resale of
this hardware approximates its discount. The Company anticipates that as
hardware revenue related to the sale of Vitrea software continues as a
significant proportion of the Company's total revenue, the overall gross margin
percentage will approximate the results of this period. This forward-looking
statement will be influenced primarily by vendor discounts on the third party
hardware and on the Company's product mix.
Sales and marketing expenses increased to $2,032,000 from $1,425,000, a 43%
increase. The increase was due primarily to increased compensation costs as a
result of additional personnel, and increased travel expenses related to the
marketing and promotion of Vitrea software. These increases were offset by a
decrease in expenses related to the printing of sales promotional material. The
Company expects sales and marketing costs to increase in future periods as a
result of the cost of additional sales and customer support personnel.
Research and development expenses decreased 18% to $1,354,000 from $1,645,000.
The decrease was due primarily to reimbursement of $214,000 of engineering costs
pursuant to the development contract with ATL, and decreases in travel and
clinical research expenses offset by an increase in rent expense. The Company
anticipates that research and development expenses will increase in future
periods as future releases of Vitrea software are developed and the
reimbursement of engineering costs by ATL decreases.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
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General and administrative expenses increased from $972,000 to $1,433,000, a 47%
increase. The increase was due primarily to a charge of $180,000 in connection
with the resignation of the Company's former Chief Executive Officer and the
incremental costs associated with being an independent public company, including
professional fees and shareholder reporting. In addition, compensation costs
increased as a result of increased staffing. The Company believes that general
and administrative costs will increase in future periods primarily due to
increased compensation expense for employees hired in 1997 that will be present
for all of 1998 and additional new hires in 1998.
The increased revenue from sales of Vitrea software and hardware and the
reimbursement by ATL of certain engineering costs offset by increasing expenses
attributable to the continuing development of the Company's management team and
infrastructure and the development and promotion of the Vitrea software,
resulted in an operating loss of $2,665,000 for the nine months ended September
30, 1998, compared with an operating loss of $3,607,000 for the nine months
ended September 30, 1997.
Interest income was $207,000 for the nine months ended September 30, 1998
compared with $346,000 for the comparable period in 1997. The decrease in
interest income during the nine months ended September 30, 1998 was due to a
lower balance of cash, cash equivalents and marketable securities as a result of
the use of cash to fund the Company's operations.
The income tax provisions for the nine months ended September 30, 1998 and 1997
consist solely of certain state minimum fees. A valuation allowance has been
established to completely reserve for the net deferred tax assets of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. On the Distribution Date, Bio-Vascular contributed to Vital
Images an additional $1,845,000 in cash equivalents in order to restore Vital
Images' cash, cash equivalents and marketable securities balance to $10,000,000.
If the Company's operations progress as anticipated, of which there can be no
assurance, management believes that its cash, cash equivalents and marketable
securities should be sufficient to satisfy its cash requirements at least
through 1999. The timing of the Company's future capital requirements, however,
will depend on a number of factors, including the ability and willingness of
physicians to use three-dimensional visualization software in clinical
diagnosis, surgical planning patient screening and other diagnosis and treatment
protocols; the ability of the Company to build an effective sales and
distribution channel; the impact of competition in the medical visualization
business; and the ability to enhance existing products and develop new products
on a timely basis. If the Company's operations do not progress as anticipated,
additional capital will be required sooner. There can be no assurance that any
required additional capital will be available on acceptable terms or at all, and
the failure to obtain any such required capital would have a material adverse
effect on the Company's business.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and 1997, cash used in operating
activities was $1,954,000 and $2,906,000, respectively. The Company invested
$259,000 and $649,000 in property and equipment during the nine months ended
September 30, 1998 and 1997, respectively, primarily for the acquisition of
computer equipment. The Company used $7,519,000 and $5,373,000 to purchase
marketable securities and had $9,750,000 and $3,903,000 of marketable securities
mature during the nine months ended September 30, 1998 and 1997, respectively.
The Company also received $84,000 and $11,000 from the purchase of the Company's
common stock under the Employee Stock Purchase Plan and stock option plans
during the nine months ended September 30, 1998 and 1997, respectively.
The Company has no material commitments at this time other than facility leases
and expected employment contracts, but will be using cash in the near term as it
continues to develop the market for its products and its channels of
distribution.
YEAR 2000 ISSUES
Many computer programs and embedded computer chips are unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. This is commonly known as the Year 2000 ("Y2K") issue.
The Company has identified its Y2K risks in the following four categories:
Company products, internal financial software, internal non-financial software
and embedded chip technology, and external noncompliance by suppliers and
customers.
Company Products. The Company has assessed its Vitrea software product and
determined it will be Year 2000 compliant with the release of Version 1.2, which
the Company expects to release in the first quarter of 1999. The Company is
currently assessing the Y2K readiness of its other products. It is expected that
this assessment will be completed by December 31, 1998. Management believes that
there would not be a material impact on the Company's results of operations or
financial condition if it is unable to achieve Y2K compliance on these other
products.
Internal Financial Software. During 1997, the Company purchased and installed a
new accounting software package. The Company has obtained a statement from the
vendor indicating that the software is Y2K compliant.
Internal Non-financial Software and Embedded Chip Technologies. The Company is
in the data gathering phase with regard to non-financial software and embedded
chip technology to assess the impact of the Y2K issue. It is expected that this
assessment will be completed by March 31, 1999. However, based on management's
current assessment, it does not believe that the cost of the Y2K issue will have
a material impact on the Company's results of operations or financial condition.
Since the Company is in the information-gathering phase, the Company does not
currently have a contingency plan in place for its internal non-financial
software and embedded chip technology.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
External Noncompliance by Suppliers and Customers. The Company is in the process
of identifying its critical suppliers and service providers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remedy their own Y2K issues. It is expected that this assessment will be
completed by March 31, 1999. To the extent that responses to the Y2K issue
are unsatisfactory, the Company intends to change suppliers or service
providers, but the Company cannot be assured that it will be successful in
finding such alternative suppliers or service providers. The Company currently
does not have any formal information concerning the Y2K compliance status of its
customers. If the customers experience significant Y2K problems, they may choose
to delay or cancel orders for the Company's products. In the event that any of
the Company's significant suppliers or customers do not achieve Y2K compliance
in a timely manner, and the Company is unable to replace them with alternate
suppliers or customers, the Company's operations could be materially adversely
affected.
NEW ACCOUNTING STANDARD
Effective January 1, 1998 the Company adopted Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), which provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions and supersedes Statement of Position 91-1, Software Revenue
Recognition. The adoption of SOP 97-2 did not materially impact the Company's
revenue recognition practices, financial position or results of operations for
the three and nine months ended September 30, 1998 and would not have materially
impacted the revenue recognition practices, financial position or results of
operations for the three and nine months ended September 30, 1997.
CERTAIN IMPORTANT FACTORS
This Form 10-Q contains certain forward-looking statements and information that
are based on management's beliefs, as well as on assumptions made by, and upon
information currently available to, management. When used in this Form 10-Q, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," and
"estimate" or similar expressions are intended to identify such forward-looking
statements. However, this Form 10-Q also contains other forward-looking
statements. Forward-looking statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions, including, but
not limited to, the following factors, which could cause the Company's future
results and shareholder values to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company: the early stage
of the industry and business in which the Company operates, the Company's
transition to an independent medical visualization business, the extent to which
the Company's products gain market acceptance, litigation regarding patent and
other intellectual property rights, the introduction of competitive products by
others, dependence on major customers, quarter-to-quarter sales fluctuations,
the progress of product development, the availability of third-party
reimbursement, and the receipt and timing of regulatory approvals and other
factors detailed from time to time in the Company's filings with the Securities
and Exchange Commission, including those set forth under the heading "Important
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
- -------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Any shareholder wishing to have a proposal considered for inclusion in
the registrant's proxy solicitation materials for the 1999 Annual
Meeting of Shareholders must set forth such proposal in writing and
file it with the secretary of the registrant no later than December 15,
1998. If the registrant does not receive notice of a shareholder
proposal prior to February 21, 1999, management proxies will use their
discretionary voting authority as to any such matter raised at the 1999
Annual Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
the exhibit index beginning on page 16.
(b) Form 8-K. The Company filed no reports on Form 8-K during the three months
ended September 30, 1998.
14
<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.
VITAL IMAGES, INC.
November 13, 1998 /s/ Gregory S. Furness
-----------------------------------
Gregory S. Furness
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
VITAL IMAGES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule for the Nine Months Ended September 30, 1998
(filed herewith electronically)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 544,194
<SECURITIES> 3,732,474
<RECEIVABLES> 780,197
<ALLOWANCES> 64,000
<INVENTORY> 30,244
<CURRENT-ASSETS> 5,245,865
<PP&E> 2,598,007
<DEPRECIATION> 1,704,356
<TOTAL-ASSETS> 6,185,560
<CURRENT-LIABILITIES> 1,180,805
<BONDS> 0
0
0
<COMMON> 48,652
<OTHER-SE> 4,810,846
<TOTAL-LIABILITY-AND-EQUITY> 6,185,560
<SALES> 2,661,660
<TOTAL-REVENUES> 3,001,441
<CGS> 758,437
<TOTAL-COSTS> 847,352
<OTHER-EXPENSES> 4,819,522
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,458,320)
<INCOME-TAX> 19,038
<INCOME-CONTINUING> (2,477,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,477,358)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
