<PAGE>
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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, 2000
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)
3300 Fernbrook Lane N., Suite 200 55447
Plymouth, Minnesota (Zip Code)
(Address of principal
executive offices)
(952) 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 6, 2000, there were 6,811,841 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, 2000
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999.....3
Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999...................................4
Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999...................................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 6. Exhibits and Reports on Form 8-K.................................12
SIGNATURES....................................................................13
INDEX TO EXHIBITS.............................................................14
2
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PART I. FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
VITAL IMAGES, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,386,917 $ 5,332,885
Accounts receivable, net of allowance for doubtful accounts
of $130,000 and $93,000 as of September 30, 2000 and
December 31, 1999, respectively 3,261,016 2,005,114
Prepaid expenses and other current assets 507,549 463,309
------------ ------------
Total current assets 6,155,482 7,801,308
Property and equipment, net 1,548,564 864,479
------------ ------------
TOTAL ASSETS $ 7,704,046 $ 8,665,787
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,017,265 $ 831,741
Accrued payroll 832,574 539,977
Deferred revenue 1,042,135 758,110
Other current liabilities 316,723 262,183
------------ ------------
Total current liabilities 3,208,697 2,392,011
Deferred revenue 151,744 175,360
------------ ------------
Total liabilities 3,360,441 2,567,371
Shareholders' equity:
Preferred stock: $.01 par value; 5,000,000 shares authorized;
none issued or outstanding as of September 30, 2000 and
December 31, 1999 -- --
Common stock: $.01 par value; 20,000,000 shares authorized;
6,791,807 and 6,695,867 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively 67,918 66,959
Additional paid-in capital 23,496,952 23,260,227
Accumulated deficit (19,221,265) (17,228,770)
------------ ------------
Total shareholders' equity 4,343,605 6,098,416
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,704,046 $ 8,665,787
============ ============
</TABLE>
(The accompanying notes are an integral part of the
interim financial statements.)
3
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VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
License fees $ 1,967,894 $ 1,106,020 $ 5,220,585 $ 2,819,606
Maintenance and services 343,561 215,656 991,222 634,157
Hardware 517,244 396,846 1,400,458 1,124,704
----------- ----------- ----------- -----------
Total revenue 2,828,699 1,718,522 7,612,265 4,578,467
Cost of revenue:
License fees 67,467 23,158 172,697 77,669
Maintenance and services 93,371 41,338 268,910 146,499
Hardware 477,366 272,826 1,251,460 830,649
----------- ----------- ----------- -----------
Total cost of revenue 638,204 337,322 1,693,067 1,054,817
Gross margin 2,190,495 1,381,200 5,919,198 3,523,650
Operating expenses:
Sales and marketing 1,454,116 829,984 3,962,728 2,692,294
Research and development 809,074 611,210 2,305,734 1,864,925
General and administrative 484,499 405,508 1,767,789 1,561,595
----------- ----------- ----------- -----------
Total operating expenses 2,747,689 1,846,702 8,036,251 6,118,814
Operating loss (557,194) (465,502) (2,117,053) (2,595,164)
Other income, net 35,098 19,816 133,558 79,429
----------- ----------- ----------- -----------
Loss before income taxes (522,096) (445,686) (1,983,495) (2,515,735)
Income taxes 3,000 1,500 9,000 4,500
----------- ----------- ----------- -----------
Net loss $ (525,096) $ (447,186) $(1,992,495) $(2,520,235)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.08) $ (0.09) $ (0.30) $ (0.51)
=========== =========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 6,770,991 5,022,563 6,744,139 4,946,714
=========== =========== =========== ===========
</TABLE>
(The accompanying notes are an integral part of the
interim financial statements.)
4
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VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
--------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,992,495) $(2,520,235)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 534,092 416,613
Stock-based compensation -- 10,781
Provision for uncollectible accounts receivable 37,000 15,000
Changes in operating assets and liabilities:
Accounts receivable (1,292,902) (458,931)
Prepaid expenses and other current assets (44,240) (137,397)
Accounts payable 185,524 61,837
Deferred revenue 260,409 273,734
Accrued payroll and other liabilities 347,137 41,106
----------- -----------
Net cash used in operating activities (1,965,475) (2,297,492)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,218,177) (418,735)
Investments in marketable securities -- (1,014,444)
Maturities of marketable securities -- 3,000,000
----------- -----------
Net cash (used in) provided by investing activities (1,218,177) 1,566,821
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock under stock option plans 237,684 386,559
----------- -----------
Net cash provided by financing activities 237,684 386,559
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,945,968) (344,112)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,332,885 1,751,615
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,386,917 $ 1,407,503
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the interim
financial statements.)
5
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VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(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, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. 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, 1999.
(2) MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
The following customer accounted for more than 10% of the Company's total
revenue for the periods indicated:
Significant Percentage of
Customer Revenue Total Revenue
-------- ------- -------------
Nine months ended Toshiba America Medical
September 30, 2000 Systems, Inc. $ 2,311,000 30%
Nine months ended Toshiba America Medical $ 1,261,000 28%
September 30, 1999 Systems, Inc.
The Company's accounts receivable are generally concentrated with a small base
of customers. As of September 30, 2000, one customer accounted for 23% of
accounts receivable, while as of December 31, 1999, two customers, each
accounting for more than 10% of accounts receivable, accounted for 28% of
accounts receivable.
Export revenue amounted to 6% and 9% of total revenue for the nine months ended
September 30, 2000 and 1999, 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,
----------------------
2000 1999
---- ----
Europe............................................... $ 256,000 $ 277,000
Asia and Pacific Region.............................. 99,000 83,000
Canada, Mexico and others............................ 108,000 62,000
--------- ---------
Totals............................................... $ 463,000 $ 422,000
========= =========
6
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(3) NET LOSS PER SHARE:
For the three and nine months ended September 30, 2000 and 1999, 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
3,896,095 and 1,604,154 shares of the Company's common stock were outstanding as
of September 30, 2000 and 1999, respectively, and could potentially dilute net
income per share in future periods if the Company generates net income.
(4) COMPREHENSIVE INCOME:
There was no accumulated other comprehensive income or loss for the three and
nine months ended September 30, 2000 and 1999, respectively.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which postponed the adoption of
SFAS No. 133 until fiscal years beginning after June 15, 2000. SFAS No. 133, as
amended by SFAS No. 137, is effective for the Company beginning January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB No. 133,"
which amends certain aspects of SFAS No. 133. The Company does not expect SFAS
No. 133, as amended, to materially affect its financial position or results of
operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements," in December 1999. SAB
101, as amended, provides further interpretive guidance for publicly traded
companies in applying generally accepted accounting principles to revenue
recognition in financial statements and will be effective for the Company's
fourth fiscal quarter of 2000. Although it is still evaluating the new
pronouncement, the Company does not expect the adoption of SAB No. 101 to
materially affect its financial position or results of operations.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Vital Images develops, markets and supports medical visualization and analysis
software for use primarily in clinical diagnosis, surgical planning and medical
screening. The Company's software applies proprietary computer graphics and
image processing technologies to a wide variety of data supplied by computed
tomography ("CT") scanners, magnetic resonance ("MR") imaging devices and
ultrasound scanning equipment. Vital Images' products allow clinicians to create
both two- and three-dimensional views of human anatomy and to non-invasively
navigate within these images to better visualize and understand internal
structures and pathologies. The Company believes that its high-speed
visualization technology and customized protocols cost-effectively bring 3D
visualization and analysis into the routine, day-to-day practice of medicine.
The Company, which operates in a single business segment, markets its products
to healthcare providers and to manufacturers of diagnostic imaging systems
through a direct sales force in the United States and independent distributors
in international markets.
Revenue
Revenue was $2,829,000 for the three months ended September 30, 2000 compared
with $1,719,000 for the three months ended September 30, 1999, a 65% increase.
For the nine months ended September 30, 1999, revenue was $7,612,000 compared
with $4,578,000 in the comparable nine-month period of the prior year, a 66%
increase. These increases were primarily the result of volume and pricing
increases in sales of Vitrea(R), the Company's flagship medical visualization
and analysis software. Software and hardware revenue from the Vitrea platform
totaled $2,341,000, or 83% of total revenue, and $6,327,000, or 83% of total
revenue, for the three and nine months ended September 30, 2000, respectively,
compared with $1,335,000, or 78% of total revenue, and $3,453,000, or 75% of
total revenue, for the three and nine months ended September 30, 1999,
respectively. There was also an increase in maintenance and services revenue
related to Vitrea sales for the three and nine months ended September 30, 2000,
as compared with the comparable periods last year. The increase principally
reflects the Company's increasing number of customers contracting for
maintenance.
Gross Margin
The gross margin percentage decreased from 80% for the three months ended
September 30, 1999, to 77% for the three months ended September 30, 2000. The
decrease was due to lower margins on hardware revenues. The gross margin
percentage increased slightly from 77% for the nine months ended September 30,
1999 to 78% for the nine months ended September 30, 2000. The Vitrea system,
consisting of Vitrea software and third-party hardware and peripherals, is
designed to offer end users an integrated visualization and analysis system. The
Company receives only a nominal discount in purchasing the third-party hardware
and peripheral components of the Vitrea system, and the Company's gross margin
on the resale of these system components approximates its discount. The Company
anticipates that as hardware revenue related to the sale of Vitrea software
continues to account for a significant proportion of the Company's total
revenue, the overall gross margin percentage in future periods will approximate
the results of this quarter.
Sales and Marketing
Sales and marketing expenses increased to $1,454,000, or 51% of total revenue,
for the three months ended September 30, 2000 from $830,000, or 48% of total
revenue, for the three months ended September 30, 1999, a 75% increase. For the
nine months ended September 30, 2000, sales and marketing expenses increased
47%,
8
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to $3,963,000, or 52% of total revenue, from $2,692,000, or 59% of total
revenue, for the nine months ended September 30, 1999. The increases were
primarily due to increased compensation costs as a result of additional
personnel and increased sales commissions as result of increased revenue. There
were also increases in expenses related to selling and promoting the Vitrea
product. 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
Research and development expenses increased 32% to $809,000, or 29% of total
revenue, for the three months ended September 30, 2000, compared with $611,000,
or 36% of total revenue, for the same period last year. For the nine month
period ended September 30, 2000, research and development expenses increased 24%
to $2,306,000, or 30% of total revenue, from $1,865,000, or 41% of total
revenue, for the comparable period in the prior year. The increases were
primarily due to increased compensation costs resulting from additional
personnel for both the three and nine months ended September 30, 2000, compared
with the three and nine months ended September 30, 1999. The Company anticipates
that research and development costs will increase in future periods as future
releases of Vitrea software are developed.
General and Administrative
General and administrative expenses increased to $484,000, or 17% of total
revenue, for the three months ended September 30, 2000, from $406,000, or 24% of
total revenue, for the three months ended September 30, 1999, a 19% increase.
For the nine months ended September 30, 2000, general and administrative
expenses increased 13%, to $1,768,000, or 23% of total revenue, from $1,562,000,
or 34% of total revenue, for the nine months ended September 30, 1999. General
and administrative expenses increased primarily due to compensation costs
increasing, primarily as a result of staffing additions for both the three and
nine month periods. There was also an increase in shareholder communications
expense and professional fees for the nine-month period. These increases for the
nine-month period were partially offset by a decrease in recruiting costs. The
Company believes that general and administrative expenses will increase in
future periods due to increased infrastructure costs as the business grows.
Results of Operations
The increasing revenues from Vitrea shipments, net of the increased expenses
primarily attributable to the development of the Company's infrastructure and
the development and promotion of the Vitrea product, resulted in operating
losses of $557,000 and $2,117,000 for the three and nine months ended September
30, 2000, respectively, compared with operating losses of $466,000 and
$2,595,000 for the three and nine months ended September 30, 1999, respectively.
Other Income
Other income, net consists primarily of interest income. The increase in
interest income was due to a higher balance of cash and cash equivalents as a
result of the private placement of the Company's common stock completed in
December 1999.
Income Taxes
The income tax provisions for the three and nine months ended September 30, 2000
and 1999 consist solely of certain state minimum fees. A valuation allowance has
been established to completely reserve for the deferred tax assets of the
Company due to the Company's history of generating net operating losses.
9
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Liquidity and Capital Resources
As of September 30, 2000, the Company had $2,387,000 in cash and cash
equivalents, the Company's working capital was $2,947,000 and the Company had no
material borrowings. The Company has entered into a collateralized line of
credit agreement with a bank for $1,000,000. Borrowings under the agreement are
limited to the lower of $1,000,000 or the Company's borrowing base, which
consists of a specified percentage of certain accounts receivable. The Company
is also required to maintain a cash and cash equivalents balance of at least
$1,000,000 at the lending bank. As of September 30, 2000, the Company's
available borrowings under the agreement were $1,000,000.
Cash flows used in operations decreased to $1,965,000 in the first nine months
of 2000 from $2,297,000 in the first nine months of 1999. In both nine-month
periods, cash flows were used primarily to fund operating losses, which were
partially offset by non-cash expenses for depreciation and amortization.
Increases in accounts receivable, resulting from increased sales, were the
primary use of cash in operations for the nine months ended September 30, 2000
and 1999. These uses of cash were partially offset by increases in current
liabilities, primarily due to an increase in accrued payroll and an increase in
deferred revenue due to an increase in the Company's maintenance customers in
the nine months ended September 30, 2000 and 1999.
The increase in accounts receivable and deferred revenue for the nine months
ended September 30, 2000 was primarily due to volume increases in Vitrea sales.
The increase in accrued payroll and other liabilities for the same period was
primarily due to an increase in the number of employees for the Company, which
resulted in increased accruals for both bonuses and vacations.
Net investing activities used $1,218,000 of cash in the nine months ended
September 30, 2000 for property and equipment additions, primarily furniture for
the Company's new facility, and provided $1,567,000 of cash in the nine months
ended September 30, 1999, primarily due to the conversion of marketable
securities into cash. The Company also used cash to acquire property and
equipment of $419,000 in the nine months ended September 1999, primarily for
computer equipment to accommodate the increases in the number of employees.
Cash provided by financing activities totaled $238,000 and $387,000 for the nine
months ended September 30, 2000 and 1999, respectively, as a result of proceeds
from the exercise of stock options previously granted under stock option plans.
The Company has never paid or declared any cash dividend and does not intend to
pay dividends in the near future. The Company has no current commitments for
material capital expenditures. The Company expects to use cash in the near term
as it continues to develop the infrastructure to support its business and
develop the market for its products.
If the Company's operations progress as anticipated, of which there can be no
assurance, management believes that its cash and cash equivalents and borrowings
available under the credit agreement should be sufficient to satisfy its cash
requirements for at least the next twelve months. 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 and analysis software in clinical diagnosis, surgical planning,
patient screening and other diagnosis and treatment protocols; the ability of
the Company to successfully market its products; the ability of the Company to
differentiate its volume rendering software from competing products employing
surface rendering or other technologies; the ability of the Company to build and
maintain an effective sales and distribution channel; the impact of competition
in the medical visualization business; the ability of the Company to receive any
necessary regulatory approvals; and the ability of the Company to
10
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enhance existing products and develop new products on a timely basis. To the
extent that the Company's operations do not progress as anticipated, additional
capital may 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 capital would have a material adverse effect on the
Company's business.
Foreign Currency Transactions
Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.
Certain Important Factors
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, 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 dependence
on growth of the industry in which the Company operates, the extent to which the
Company's products gain market acceptance, the need for and availability of
additional capital, regulatory approvals, the potential for litigation regarding
patent and other intellectual property rights, the introduction of competitive
products by others, dependence on major customers, fluctuations in quarterly
results, 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, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
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PART II. OTHER INFORMATION
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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
None
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 14.
(b) Form 8-K. The Company filed no reports on Form 8-K during the three
months ended September 30, 2000.
12
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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 14, 2000 /s/ Gregory S. Furness
------------------------------------
Gregory S. Furness
Chief Financial Officer and
Senior Vice President-Finance
(Chief Accounting Officer)
13
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VITAL IMAGES, INC.
INDEX TO EXHIBITS
-----------------
10.27 Vital Images, Inc. and Toshiba America Medical Systems, Inc. Reseller
Agreement (filed herewith electronically) (Confidential treatment has
been requested for portions of this exhibit).
27.1 Financial Data Schedule for the Nine Months Ended September 30, 2000
(filed herewith electronically).
14
