**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2002**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For the  transitionperiod from                  to                   .**

 

**COMMISSION FILE NUMBER 000-22743**

 

**VISTA MEDICALTECHNOLOGIES, INC.**

(Exact name of Registrantas Specified in Its Charter)

 

| **DELAWARE**                                                     |   | **94-3184035**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **5451 AVENIDA ENCINAS, SUITE A  CARLSBAD, CA  92008**      |
| (Address of principal  executive offices, including zip code)    |
|                                                             |
| **(760) 603-9120**                                               |
| (Registrant’s telephone  number, including area code)       |

 

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days:**

 

**(1)      Yes****ý       No****o**

**(2)      Yes****ý       No****o**

 

As of October 31, 2002, there were 5,001,749 shares of $.01 par valuecommon stock outstanding.

 

 

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**VISTA MEDICAL TECHNOLOGIES, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| PART 1.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |   |
| Item 1.                             | Financial Statements  (unaudited) |
|                                |   |
|                                | Consolidated Balance Sheets  as of September 30, 2002 and December 31, 2001 |
|                                | Consolidated  Statements of Operations for the three months ended September 30, 2002 and  2001, and the nine months ended September 30, 2002 and 2001 |
|                                | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2002 and  2001 |
|                                | Notes to  Consolidated Financial Statements |
|                                |   |
| Item  2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                |   |
| Item  3.                            | Quantitative  and Qualitative Disclosures About Market Risk |
|                                |   |
| Risks  and Uncertainties            |
|                                |   |
| Item 4.                             | Controls and  Procedures |
|                                |   |
| PART II.  OTHER INFORMATION    |
|                                |   |
| Item 1.                             | Legal  Proceedings |
|                                |   |
| Item  2.                            | Changes  in Securities and Use of Proceeds |
|                                |   |
| Item 3.                             | Defaults Upon  Senior Securities |
|                                |   |
| Item  4.                            | Submission  of Matters to a Vote of Security Holders |
|                                |   |
| Item 5.                             | Other  Information |
|                                |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K |
|                                |   |
| SIGNATURES                          |
|                                |   |
| CERTIFICATIONS                      |

 

2

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PART 1.             FINANCIALINFORMATION

 

Item 1.                FinancialStatements

 

Vista MedicalTechnologies, Inc.

Consolidated Balance Sheets

 
|                                                                                                 |   | **September 30, 2002** |      | **December 31, 2001** |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|-----------------------|--------|
|                                                                                                 |   | **(Unaudited)**        |      |                  |   |
| ASSETS                                                                                               |   |                   |      |                  |   |
| Current assets:                                                                                      |   |                   |      |                  |   |
| Cash and cash equivalents                                                                            |   | $                      | 704,615   |                  | $      | 800,547 |   |
| Marketable securities                                                                                |   | 372,842                |      | 516,855               |   |
| Accounts receivable, net                                                                             |   | 1,359,475              |      | 1,862,028             |   |
| Inventories, net                                                                                     |   | 1,431,247              |      | 1,094,574             |   |
| Other current assets                                                                                 |   | 143,140                |      | 154,827               |   |
| Total current assets                                                                                 |   | 4,011,319              |      | 4,428,831             |   |
| Property and  equipment, net                                                                    |   | 143,035                |      | 357,646               |   |
| Patents and other assets, net                                                                   |   | 10,950                 |      | 37,013                |   |
| TOTAL ASSETS                                                                                         |   | $                      | 4,165,304 |                  | $      | 4,823,490 |   |
|                                                                                                 |   |                   |      |                  |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                            |   |                   |      |                  |   |
| Current liabilities:                                                                                 |   |                   |      |                  |   |
| Accounts payable                                                                                     |   | $                      | 812,506   |                  | $      | 741,003 |   |
| Accrued compensation                                                                                 |   | 270,605                |      | 203,413               |   |
| Deferred revenue                                                                                |   | 254,167                |      | 416,667               |   |
| Accrued liabilities                                                                                  |   | 645,302                |      | 371,319               |   |
| Total current liabilities                                                                            |   | $                      | 1,982,580 |                  | $      | 1,732,402 |   |
|                                                                                                 |   |                   |      |                  |   |
| Commitments and Contingencies                                                                        |   |                   |      |                  |   |
| Stockholders’ equity:                                                                           |   |                   |      |                  |   |
| Preferred stock, $.01 par value:                                                                     |   |                   |      |                  |   |
| Authorized shares - 5,000,000                                                                        |   |                   |      |                  |   |
| Issued and outstanding shares - none                                                                 |   | —                 |      | —                |   |
| Common stock, $.01 par value:                                                                        |   |                   |      |                  |   |
| Authorized shares - 35,000,000                                                                       |   |                   |      |                  |   |
| Issued and outstanding shares - 4,913,031 on December 31, 2001 and  5,001,749 on September 30, 2002. |   | 50,017                 |      | 49,130                |   |
| Additional paid-in capital                                                                           |   | 68,079,862             |      | 67,974,087            |   |
| Notes receivable from stockholders                                                                   |   | (78,375                | )         | (78,375               | )      |
| Deferred compensation                                                                                |   | (57,353                | )         | (76,305               | )      |
| Accumulated deficit                                                                                  |   | (65,811,427            | )         | (64,777,449           | )      |
| Total stockholders’ equity                                                                      |   | 2,182,724              |      | 3,091,088             |   |
|                                                                                                 |   |                   |      |                  |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                      |   | $                      | 4,165,304 |                  | $      | 4,823,490 |   |

 

Note: The balance sheetat December 31, 2001 has been derived from the audited financial statements atthat date but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements.

 

See accompanyingnotes.

 

3

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Vista MedicalTechnologies, Inc.

Consolidated Statements of Operation

(Unaudited)

 
|                                                      |   | **Three Months Ended September 30,** |      | **Nine Months Ended September 30,** |   |
|-----------------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                                      |   | **2002**                             |      | **2001**                            |   | **2002** |   | **2001** |   |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Revenues                                                  |   | $                                    | 2,868,365 |                                | $      | 2,281,486 |   | $ | 8,350,853 |   | $ | 6,286,087 |   |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Cost of revenues                                          |   | 1,631,155                            |      | 1,353,226                           |   | 4,502,184 |   | 4,616,816 |   |
| Research and development                                  |   | 407,579                              |      | 713,484                             |   | 1,305,649 |   | 1,582,917 |   |
| Sales and marketing                                       |   | 670,201                              |      | 629,965                             |   | 2,129,471 |   | 1,713,337 |   |
| General and administrative                                |   | 447,094                              |      | 467,556                             |   | 1,462,045 |   | 1,518,285 |   |
| Total cost and expenses                                   |   | 3,156,029                            |      | 3,164,231                           |   | 9,399,349 |   | 9,431,355 |   |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Loss from operations                                      |   | (287,664                             | )         | (882,745                            | )      | (1,048,496 | ) | (3,145,268 | ) |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Interest income                                           |   | 4,292                                |      | 11,990                              |   | 14,517 |   | 62,604 |   |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Net loss                                                  |   | $                                    | (283,372  | )                                   | $      | (870,755 | ) | $ | (1,033,979 | ) | $ | (3,082,664 | ) |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Basic and diluted loss per share                          |   | $                                    | (0.06     | )                                   | $      | (0.18 | ) | $ | (0.21 | ) | $ | (0.63 | ) |
|                                                      |   |                                 |      |                                |   |   |   |   |   |
| Shares used in computing basic and diluted loss per share |   | 4,988,797                            |      | 4,908,503                           |   | 4,957,280 |   | 4,903,878 |   |

 

See accompanying notes.

 

4

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Vista MedicalTechnologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 
|                                                                          |   | **Nine Months  Ended September 30,** |       |
|-------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                          |   | **2002**                             |       | **2001** |   |
| OPERATING ACTIVITIES                                                          |   |                                 |       |   |   |
| Net loss                                                                      |   | $                                    | (1,033,979 | ) | $ | (3,082,664 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |   |                                 |       |   |   |
| Depreciation and amortization                                                 |   | 356,615                              |       | 610,391 |   |
| Amortization of deferred compensation                                         |   | 54,952                               |       | 216,556 |   |
| Changes in operating assets and liabilities:                                  |   |                                 |       |   |   |
| Accounts receivable                                                           |   | 502,553                              |       | 60,203 |   |
| Inventories                                                                   |   | (336,673                             | )          | 378,513 |   |
| Other current assets                                                          |   | 11,687                               |       | (83,048 | ) |
| Accounts payable                                                              |   | 71,504                               |       | 69,334 |   |
| Accrued compensation                                                          |   | 67,192                               |       | 33,404 |   |
| Deferred revenue                                                              |   | (162,500                             | )          | 166,667 |   |
| Accrued liabilities                                                           |   | 273,983                              |       | 36,946 |   |
| Net cash flows used for operating activities                                  |   | (194,666                             | )          | (1,593,698 | ) |
|                                                                          |   |                                 |       |   |   |
| INVESTING ACTIVITIES                                                          |   |                                 |       |   |   |
| Purchases (Sales) of short-term investments                                   |   | 144,013                              |       | (26,010 | ) |
| Purchases of property and equipment                                           |   | (115,941                             | )          | (33,566 | ) |
| Net cash flows provided by(used in) investing activities                      |   | 28,072                               |       | (59,576 | ) |
|                                                                          |   |                                 |       |   |   |
| FINANCING ACTIVITIES                                                          |   |                                 |       |   |   |
| Exercise of stock options                                                     |   | 70,662                               |       | 24,891 |   |
| Net cash flows provided by financing activities                               |   | 70,662                               |       | 24,891 |   |
| Net decrease in cash and cash equivalents                                     |   | (95,932                              | )          | (1,628,383 | ) |
| Cash and cash equivalents at beginning of period                              |   | 800,547                              |       | 2,589,006 |   |
| Cash and cash equivalents at end of period                                    |   | $                                    | 704,615    |   | $ | 960,623 |   |

 

See accompanying notes

 

5

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VISTA MEDICALTECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

1.   Basis of Presentation

 

The auditedfinancial statements of Vista Medical Technologies, Inc. (the “Company”) andthe notes thereto for the year ended December 31, 2001 included in theCompany’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission, contain additional information about the Company, its operations,and its financial statements and accounting practices, and should be read in conjunction with this quarterly reporton Form 10-Q.  These unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles and with the instructions on Form 10-Qexcept that certain information and footnote disclosures normally contained infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted.

 

The accompanyingunaudited consolidated financial statements of the Company reflect alladjustments of a normal recurring nature which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position,results of operations and cash flows for all periods presented.  The interim financial information containedherein is not necessarily indicative of results for any future interim periodsor for the full fiscal year ending December 31, 2002.

 

2.   Inventories

 
|                |   | **September 30, 2002** |      | **December 31, 2001** |   |
|---------------------|--------|------------------------|-----------|-----------------------|--------|
|                |   | **(Unaudited)**        |      |                  |   |
|                |   |                   |      |                  |   |
| Parts and materials |   | $                      | 1,513,620 |                  | $      | 1,587,253 |   |
| Work in process     |   | 216,123                |      | 170,815               |   |
| Finished goods      |   | 679,335                |      | 858,202               |   |
|                |   | 2,409,078              |      | 2,616,270             |   |
| Less: reserves      |   | (977,831               | )         | (1,521,696            | )      |
| Inventories, net    |   | $                      | 1,431,247 |                  | $      | 1,094,574 |   |

 

6

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3.   Loss Per Share

 
|                                             |   | **Three  Months Ended September 30,** |     | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------|--------|---------------------------------------|----------|--------------------------------------|--------|
|                                             |   | **2002**                              |     | **2001**                             |   | **2002** |   | **2001** |   |
|                                             |   |                                  |     |                                 |   |   |   |   |   |
| Net (loss)                                       |   | $                                     | (283,372 | )                                    | $      | (870,755 | ) | $ | (1,033,979 | ) | $ | (3,082,664 | ) |
| Weighted average  common shares outstanding      |   | 4,988,797                             |     | 4,908,503                            |   | 4,957,280 |   | 4,903,878 |   |
| Shares used in  basic and diluted loss per share |   | 4,988,797                             |     | 4,908,503                            |   | 4,957,280 |   | 4,903,878 |   |
| Basic and  diluted loss per share                |   | $                                     | (0.06    | )                                    | $      | (0.18 | ) | $ | (0.21 | ) | $ | (0.63 | ) |

 

The companycomputes loss per share in accordance with SFAS No. 128, Earnings PerShare.  Loss per share is computed bydividing the net loss for the period by the weighted average number of commonshares outstanding for the period. Common stock equivalents such as stock options are excluded from thecalculation of diluted weighted average shares outstanding because their effectwould be anti-dilutive due to losses incurred in all periods presented.

 

4.   Other Comprehensive Income

 

For each of theperiods presented, other comprehensive income (loss) equals the net lossreported as there were no material components of other comprehensive income(loss) other than the net loss.

 

5.   New Accounting Standards

 

In June 2001, theFASB issued SFAS No. 141, “BUSINESS COMBINATIONS,” and No. 142, “GOODWILL ANDOTHER INTANGIBLE ASSETS,” effective for fiscal years beginning after December15, 2001.  Under the new rules, goodwill,along with intangible assets deemed to have indefinite lives, will no longer beamortized but will be subject to annual impairment tests in accordance with theStatements.  Also, business combinationsinitiated after June 30, 2001 must be accounted for using the purchase methodof accounting.  Adoption of SFAS 141 and142 did not have a material impact on the Company’s financial statements.

 

In August 2001,the FASB issued SFAS No. 144, “ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OFLONG LIVED ASSETS,” effective for fiscal years beginning after December 15,2001.  Adoption of SFAS 144 did not havea material impact on the Company’s financial statements.

 

7

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

THIS QUARTERLYREPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTSTHAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSEDBELOW AT “RISKS AND UNCERTAINTIES.” WHILE THE OUTLOOK CONTAINED IN THIS QUARTERLY REPORT REPRESENTS OURCURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCH RISKS ANDUNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTUREPERFORMANCE SUGGESTED BELOW.  WE UNDERTAKENO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESEFORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THEDATE OF THIS QUARTERLY REPORT.  THEFOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATEDFINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLYREPORT ON FORM 10-Q AND OUR 2001 ANNUAL REPORT ON FORM 10-K, FILED WITH THESECURITIES AND EXCHANGE COMMISSION.

 

# **Overview of ourbusiness**

 

We develop, manufacture and market products thatprovide information to doctors performing minimally invasive general surgical,cardiac surgical and other selected microsurgical procedures.  We also develop and manage training andpatient awareness programs which enhance the adoption of proceduresincorporating use of our visualization technology, including the LaparoscopicBariatric Surgery (LBS) Preceptorship, whereby we are working to establish anational network of centers performing minimally invasive gastric bypasssurgery, to assist weight reduction in morbidly obese patients.  We also offer management consulting servicesand other products to the obesity surgery market.  Our visualization technology products combine a head mounteddisplay with video cameras to provide surgeons with critical visual informationduring these microsurgical procedures, combined with the ability to viewadditional information in a voice-controlled, picture-in-picture format, tofacilitate real-time decision making during surgery.  In addition, we manufacture compact, high-resolution endoscopiccameras for original equipment manufacturer customers and strategicpartners.  In general terms, endoscopicsurgery involves a telescopic viewing device which is inserted into a smallincision in the body and  therebyprovides the surgeon with an adequate view of the internal part of the bodybeing repaired.

 

**Critical Accounting Policies**

 

The preparation of financialstatements and related disclosures in conformity with accounting principlesgenerally accepted in the United States of America requires management to

 

8

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make judgments, assumptions and estimatesthat affect the amounts reported in Palm’s consolidated financial statementsand the accompanying notes.  The amountsof assets and liabilities reported in our balance sheets and the amounts ofrevenues and expenses reported for each of our fiscal periods are affected byestimates and assumptions which are used for, but not limited to, accountingfor product returns**,**allowance for doubtful accounts, warrantyand****technicalservice costs, goodwill and intangible asset impairments, restructuring,inventory and income taxes.  Actualresults could differ from these estimates. The following critical accounting policies are significantly affected byjudgments, assumptions and estimates used in the preparation of theconsolidated financial statements.

 

Revenue Recognition

 

Revenue generatedfrom Laparoscopic Bariatric Surgical (LBS) Preceptorship program sales is recognized(i) with regard to equipment sales, upon shipment of equipment and marketingmaterials and (ii) with regard to training services, upon completion of therelated training component, provided that a purchase order has been received,there are no uncertainties regarding customer acceptance, the sales price isfixed or determinable and collectibility is deemed probable.  Sales of all other products are similarlyrecognized upon shipment provided that a purchase order has been received,there are no uncertainties regarding customer acceptance, the sales price isfixed or determinable and collectibility is deemed probable.

 

The Companyreceives semiannual payments as a result of fulfilling certain obligationsrelated to its strategic alliance agreement with Ethicon Endo-Surgery, Inc.(EES).  These payments are recognized asrevenue on a straight-line basis over the related contract term, provided thatthe Company has complied with all contractual obligations.

 

Inventory

 

Inventory isaccounted for on a first-in first-out basis and is valued at the lower of costor market. The Company regularly evaluates inventory for obsolescence andreserves for 100% of inventory considered to be obsolete.  At September 30, 2002 such inventoryreserves approximated $978,000.  TheCompany believes it is adequately reserved for obsolescence of currentinventory.  However, future productintroductions and related inventories may require additional reserves basedupon changes in market demand or introduction of competing technologies.

 

**Our results of operations forthree-months and nine-months ended September 30, 2002 versus three-months andnine-months ended September 30, 2001**

 

Revenues.  We had revenue from product sales andcontract revenue of $2,868,000 and $8,351,000 for the three-and nine monthsended September 30, 2002, respectively, compared to revenues from product salesand contract revenue of $2,281,000 and $6,286,000 for the three- andnine-months ended September 30, 2001, respectively.  The increase in revenue for both the three-and nine-month periodswas due primarily to increased unit sales from our LBS Preceeptorships coupledwith contract revenue recognition of $750,000 for the nine-month

 

9

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period ending September 30, 2002 from our Supply and PromotionAgreement with Ethicon Endo-Surgery, Inc.

 

Cost ofRevenues.  Our cost of revenues were$1,631,000 and $4,502,000 for the three- and nine-months ended September 30,2002, respectively, and $1,353,000 and $4,617,000 for the three-and nine-monthsended September 30, 2001, respectively. Our gross margins were 43% and 46% for the three- and nine-months endedJune 30, 2002, respectively, and 41% and 26% for the three-and nine-months endedSeptember 30, 2001, respectively.  Theincrease in gross margin was primarily due to increased unit sales of ourhigher margin LBS Preceptorships.

 

Research andDevelopment Expenses.  Our research anddevelopment expenses were $408,000 and $1,306,000 for the three-and nine-monthsended September 30, 2002, respectively, and $713,000 and $1,583,000 for thethree-and nine-months ended September 30, 2001, respectively.  The decrease in research and developmentexpenses was primarily attributable to a reduction in next generation productdevelopment.  We expect our research anddevelopment expenses to remain at or near current levels in the next severalquarters as we finalize our next generation of products for the general surgerymarket.

 

Sales andMarketing Expenses.  Sales and marketingexpenses were $670,000 and $2,129,000 for the three-and nine-months endedSeptember 30, 2002, respectively, and $630,000 and $1,713,000 for the three-andnine-months ended September 30, 2001, respectively. The increase in sales andmarketing expense reflects an increase of field activities for the obesitysurgery market.  We expect our sales andmarketing expenses to increase proportionately during the next several quartersas we continue to increase our field activities for the obesity surgery market.

 

General andAdministrative Expenses.  General andadministrative expenses were $447,000 and $1,462,000 for the three-andnine-months ended September 30, 2002, respectively, and $468,000 and $1,518,000for the three-and nine-months ended September 30, 2001, respectively.  We expect our general and administrativeexpenses to remain at or near current levels for the next several quarters.

 

InterestIncome.  Our net interest income was$4,000 and $15,000 for the three-and nine-months ended September 30, 2002,respectively, and $12,000 and $63,000 for the three-and nine-months endedSeptember 30, 2001, respectively.  Thedecrease in net interest income during the 2002 period was due primarily todecreasing cash balances.

 

**Liquidity and capital resources**

 

Net cash used foroperating activities for the nine-months ended September 30, 2002 was $195,000compared to net cash used of $1,594,000 for the corresponding nine-month periodin 2001.  The decrease in net cash usedin operating activities during the 2002 period was primarily attributable to adecreased net loss partially offset by higher inventory purchases.

 

10

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Net cash providedby investing activities was $28,000 for the nine-months ended September 30,2002 compared to $60,000 of net cash used in the same period in 2001.  The increase in net cash provided byinvesting activities during the 2002 period was primarily attributable toincreasing balances of short term investments reaching maturity offset byincreasing purchases of property and equipment.

 

Net cash providedby financing activities was $71,000 for the nine-months ended September 30,2002, compared to $25,000 for the same period in 2001.  The increase in net cash provided byfinancing activities during the 2002 period was primarily attributable to ahigher level of stock option exercises

 

During fiscal 2000 and 2001, the Company incurredsignificant operating losses. However, in June 2001, the Company entered into aSupply and Promotion Agreement with Ethicon Endo-Surgery, Inc. (EES) which  provided a significant source of revenue infiscal 2002. We are also working on initiatives to extend our business, mostimmediately in the surgical obesity market, by adding new products and serviceswhich could provide new sources of revenue in fiscal 2002.  In October 2001, we also obtained anadditional financing source through a $2,000,000 bank line of credit facilityfor one year with automatic yearly renewals. At September 30, 2002 $2,000,000 was available under this creditfacility.

 

We believe that our existing cash resources, line ofcredit facility and cash from operations will meet working capital and researchand development requirements over the next twelve months.

 

Unanticipated decreases in operating revenues, increasesin expenses or delays in product development may adversely impact the Company’scash position and require further cost reductions. No assurance can be giventhat the Company will be able to achieve profitability or operate profitably ona consistent basis in the future.  As ofSeptember 30, 2002, our accumulated deficit was approximately $65,811,000.

 

We have a $2,000,000 credit facility with a financialinstitution.  Interest on this facilitywas prime plus 2% at September 30, 2002. At September 30, 2002, we had no advances  outstanding under this credit facility.  If we were to draw under this facility, changes in interest rateswould affect the interest expense we would pay and could impact our cash flowsand results of operations.

 

Item 3.   Quantitativeand Qualitative Disclosures About Market Risk

 

At September 30, 2002, our investment portfolioincluded fixed-income securities of $0.5 million.  These securities are subject to interest rate risk and willdecline in value if interest rates increase. These investments are not held for trading or other speculativepurposes. Due to the short duration of our investment portfolio, an immediate10 percent increase in interest rates would have no material impact on ourfinancial condition or results of operations.

 

11

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We generally conduct business, including sales toforeign customers, in U.S. dollars and as a result have limited foreigncurrency exchange rate risk.  The effectof an immediate 10 percent change in foreign exchange rates would not have amaterial impact on our financial condition or results of operations.

 

RISKS AND UNCERTAINTIES

 

You shouldconsider the following factors carefully in evaluating an investment in ourcompany in addition to the other information in this report.  You are cautioned that the statements inthis annual report that are not descriptions of historical facts may beforward-looking statements that are subject to risks and uncertainties.  Our actual results could differ materiallyfrom those currently anticipated due to a number of factors, including thoseidentified in this section and elsewhere in this annual report.  We undertake no obligation to releasepublicly the results of any revisions to these forward-looking statements toreflect events or circumstances arising after the date of this annualreport.  The following discussion shouldbe read in conjunction with our consolidated financial statements and notesthereto.

 

**We may need additional funds tosupport our currently proposed operations. If we are unable to obtain them, we may have to significantly scale backour operations or forgo opportunities in new market segments.**

 

We are working on initiatives to extend our business,most immediately in the surgical obesity****market, by****adding new products andservices. As a result, we may be required to raise additional funds to supportour operations.  In addition, if we areunable to sustain our cash flow under our current business plan, we will berequired to raise additional funds.  Ifwe are unable to raise sufficient funds from an offering of securities orotherwise, we may be unable to continue operations at their current level andmay be unable to pursue this new objective. Moreover, our liquidity and capital requirements will depend upon othernumerous factors, including the following:

 

•                                          Theextent to which our products gain market acceptance;

 

•                                          Theprogress and scope of product evaluations;

 

•                                          Thetiming and costs of filing future regulatory submissions;

 

•                                          Thetiming and costs required to receive both domestic and internationalgovernmental approvals;

 

•                                          Thetiming and costs of product introductions;

 

•                                          Theextent of our ongoing research and development programs;

 

•                                          Thecosts of sponsorship training of the physicians to become proficient in the useof our products and procedures; and

 

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•                                          Thecosts of developing marketing and distribution capabilities.

 

Even if we aresuccessful in raising additional funds, circumstances, such as a slow rate ofmarket acceptance of our products or our inability to scale up manufacturing,could accelerate our use of proceeds from any offering of securities we mightdo and require us to seek additional funds to support our operatingrequirements.

** **

**Ourcommon stock may be delisted from The Nasdaq SmallCap Market.**

 

On June 29, 2001, the SEC approved certain changes toThe Nasdaq SmallCap Market continued listing quantitative standards. EffectiveNovember 1, 2002, the previous tangible assets requirement is phased out and acompany must now have at least $2,500,000 in stockholders’ equity for continuedlisting on The Nasdaq SmallCap Market (or satisfy alternative quantitativerequirements).  Failure to maintain therequired $2,500,000 in stockholders’ equity subjects a company to possibledelisting from The Nasdaq SmallCap Market. As of June 30, 2002, our stockholders’ equity was $2,432,050, and weexpect our stockholders’ equity to be approximately $2,183,000 as of November15, 2002.  We also do not comply withthe alternative quantitative standards. This may subject us to delisting fromThe Nasdaq SmallCap Market if we are unable to come into compliance.  On November 7, 2002, we received a letterfrom Nasdaq informing us that we are not in compliance with the quantitativelisting requirements of the Nasdaq SmallCap Market and requesting that weprovide, on or before November 21, 2002, a specific plan to achieve and sustaincompliance with all The Nasdaq SmallCap Market listing requirements.  We are in the process of preparing this planand intend to provide Nasdaq with relevant information on or before November21, 2002.   We cannot assure you thatthese steps will be successful.  Thedelisting of our common stock from The Nasdaq SmallCap Market may materiallyimpair our stockholders’ ability to buy and sell shares of our common stock andcould have an adverse effect on the market price of, and the efficiency of thetrading market for, our common stock. In addition, the delisting of our common stock could significantlyimpair our ability to raise capital should we desire to do so in thefuture.  The continued listing of ourcommon stock on The Nasdaq SmallCap Market is very important to us and we intendto take measures to regain compliance.

 

**We have a history of losses and maynot become profitable.**

 

Since our formation in July 1993, and as of September30, 2002, we have incurred cumulative net losses of $65.8 million.  We expect to incur losses for at least thenext 6 months.  We may never achieve orsustain profitability in the future. Even if we achieve profitability, we may not be able to sustain it on anongoing basis.

 

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**We are, to a significant extent,dependent on distribution partners to sell our products.**

 

We only have a small direct sales force and, in thepast, we were primarily dependent on agreements with third parties for sales ofthe majority of products derived from our core three-dimensionaltechnology.  Two of our primarydistribution agreements were terminated in 2000.  We entered into an arrangement with Jomed N.V. in May, 2000 totransition to Jomed N. V. the distribution of our cardiac surgery products andto continue supporting our cardiac customer base.  However, the success of this transition depends upon theconcurrent development of new technology by Jomed N.V. and may not be achievedin a reasonable timeframe, or at all. If we are unable to make this transition, we may be unsuccessful indistributing our cardiac surgery products and may lose revenues.

 

In addition, during 2000, we changed our strategicemphasis for our core three-dimensional technology to focus on applications ingeneral surgery, gynecology and urology. We cannot assure you that we will be successful in these areas ofsales.  Even if we are successful, wecannot assure you that the revenue achieved in these areas of emphasis will besufficient to compensate for any loss of sales revenue from the termination ofour previous distribution agreements for cardiac products.  Either of these results could have anadverse affect on our financial condition and results of operations.

 

**Our profitability is primarilydependent upon the successful development and commercialization of our productsbased on our core three-dimensional technology.**

 

Products, such as the ORPC for general surgery and theSeries 8000 for minimally invasive cardiac surgery, or their successors, whichare derived from our core three-dimensional technology, are expected to accountfor the majority of our revenues over the next several years.  The demand for these products may not besufficient to allow us to achieve profitable operations.

 

Our development efforts for improvements to theseproducts may not be successful.  Inaddition, other products under development may not be shown to be safe oreffective, capable of being manufactured in commercial quantities at acceptablecosts, acquire appropriate regulatory clearances or be successfully marketed.

 

**Our success is dependent uponacceptance of a minimally invasive approach to complex procedures as areliable, safe and cost effective alternative to existing treatments.**

 

Complex minimally invasive procedures are onlyperformed on a very limited basis by a relatively small number of highly skilledsurgeons.  We are unable to predict howquickly, if at all, complex minimally invasive procedures will be adopted bythe medical community or, if they are adopted, the number of procedures thatwill be performed.

 

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Even if the clinical safety and effectiveness ofcomplex minimally invasive procedures is established in general surgery,cardiac, urology and other specialties, surgeons and other physicians maychoose not to recommend the procedures for any number of other reasons.  Adoption of these procedures by doctors willdepend, for example, upon our ability to facilitate and sponsor training ofsurgeons to perform complex minimally invasive procedures and the willingnessof these surgeons to perform such procedures. Doctors may also elect not to recommend the minimally invasiveprocedures based on possible unavailability of acceptable reimbursement fromhealth care payors.  Health care payoracceptance may require evidence of the cost effectiveness of minimally invasiveprocedures as compared to other currently available treatments.  We believe that physician endorsements willbe essential for clinical adoption of minimally invasive procedures and theseendorsements may not be obtained. Patient acceptance of new procedures will depend upon doctorrecommendations, as well as other factors, including the effectiveness of, andthe rate and severity of complications associated with, the procedure ascompared to other treatments.

 

**Widespread use of our products willrequire sponsoring the training of a large number of surgeons, and the timerequired to institute a training program and to train such surgeons couldadversely affect near term market acceptance.**

 

Evaluations of visualization technology, such as ours,which have been conducted to date, have shown that there is a learning processinvolved for surgeons and other members of the surgery team to becomeproficient with the use of the systems. Based on the clinical and laboratory procedures performed to date, wecannot assure you that visualization and information system enhancementsincorporated, or to be incorporated, in our products will prove suitable foruse by a substantial number of surgeons. If they prove unsuitable for use by a large number of surgeons, thepotential markets and applications for our products would be significantlylimited.

 

**There are significant risksassociated with any scale-up of manufacturing which may be required to meetmarket demand and become profitable.**

 

We have never established high-volume manufacturingoperations and if we are required to do so to meet market demand or to becomeprofitable, we may not be able to establish or maintain reliable operations atcommercially reasonable costs.  We mayalso require additional manufacturing facilities if production volumesincrease.  Acquisition of newmanufacturing facilities would also likely involve relocation.  Difficulties in scaling up manufacturing ofproducts could result from problems involving:

 

•                                          qualitycontrol and assurance;

 

•                                          componentand service availability;

 

•                                          adequacyof control policies and procedures;

 

•                                          lackof qualified personnel;

 

•                                          compliancewith FDA regulations and the need for further FDA approval of new manufacturingprocesses and facilities; and

 

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•                                          otherproduction constraints.

 

We have considered and will continue to consider asappropriate, the internal manufacture of sub-assemblies currently provided bythird-party subcontractors, as well as the implementation of new productionprocesses.  Our manufacturing yields orcosts may increase as a result of the transition to in-house production or tonew production processes when such efforts are undertaken.  In addition, costs to comply with FDA goodmanufacturing practices or changes in such practices may exceed ourexpectations.

** **

**We may face component shortages andare dependent in some instances on single sources of supply.**

 

Any significantsupply interruption, or inventory shortage or overage, would negatively impactour ability to manufacture our products. We use and rely on specific components and services used in our systemsfor which we have only a single source of supply.  The manufacture of our products in larger commercial quantitieswill require a substantial increase in component supplies and will likelynecessitate the replacement of current suppliers or the addition of newsuppliers.  The qualification ofadditional or replacement vendors for specified components or services is alengthy process.  In addition, thesubstitution of replacement vendors may entail re-engineering time and cost andcould delay the supply of our products.

 

We expect tomanufacture our products based on forecasted product orders and intend topurchase subassemblies and components prior to receipt of purchase orders fromcustomers.  Lead times for orderedmaterials and components vary significantly and depend on factors such as thebusiness practices of the specific supplier, contract terms and general demandfor a component at a given time.  Somecomponents used in our products have long lead times.  As a result, there is a risk of excess or inadequate inventory iforders do not match forecasts.

 

**We are subject to significantdomestic and international regulation and may not be able to obtain necessaryregulatory clearances to sell our products.**

 

The manufactureand sale of medical devices intended for commercial distribution are subject toextensive governmental regulation.  Ourfailure to comply with regulatory requirements would jeopardize our ability tomarket our products.  Noncompliance withapplicable requirements can result in failure of the regulatory agency to grantpre-market clearance or approval for devices, withdrawal or suspension ofapproval, total or partial suspension of production, fines, injunctions, civilpenalties, refunds, recall or seizure of products and criminal prosecution.

 

Medical devicesare regulated in the United States primarily by the FDA and, to a lesserextent, by state agencies.  Sales ofmedical device products outside the United States are subject to foreignregulatory requirements that vary from country to country.  Generally, medical devices requirepre-market clearance or pre-market approval prior to commercial distribution.  A determination that information available onthe medical device is not sufficient to grant the needed clearance or approvalwill delay market introduction of the product. In addition, material

 

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changes or modifications to, and changes in intended use of, medicaldevices 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 theexport of unapproved medical devices from the United States to othercountries.  The time required to obtainapprovals required by foreign countries may be longer or shorter than thatrequired for FDA clearance, and requirements for licensing may differ from FDArequirements.  The current regulatoryenvironment in Europe for medical devices differs significantly from that inthe United States.

 

**We expect to encounter rapidtechnological change and significant competition.**

 

The medical devicemarket in which we compete is characterized by intensive development effortsand rapidly advancing technology.  Ourfuture success will depend, in large part, upon our ability to anticipate andkeep 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 anumber of large companies, with significantly greater financial, manufacturing,marketing, distribution and technical resources and experience than ours, arefocusing on the development of visualization products for minimally invasivemicrosurgery.  Several companies arecurrently developing and marketing visualization products for minimallyinvasive microsurgery which could be applied to general surgery or heartsurgery.

 

Technologicaladvances with other therapies such as drugs, interventional procedures orfuture innovations in surgical techniques could make such other therapies moreeffective or lower in cost than minimally invasive microsurgery procedures andcould diminish growth prospects for minimally invasive microsurgery.

 

**We expect fluctuations in ouroperating results.**

 

Our results ofoperations may vary significantly from quarter to quarter depending uponnumerous factors, including the following:

 

•                                          timingand results of product evaluations;

 

•                                          delaysassociated with the FDA and other regulatory approval processes;

 

•                                          demandfor and utilization of our products;

 

•                                          changesin our pricing policies or those of our competitors;

 

•                                          changesin third-party payment guidelines;

 

•                                          thenumber, timing and significance of product enhancements and new productannouncements by us or our competitors;

 

•                                          ourability to develop, introduce and market new and enhanced versions of ourproducts on a timely basis;

 

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•                                          customerorder deferrals in anticipation of enhancements or new product introductions byus or our competitors;

 

•                                          productquality problems;

 

•                                          personnelchanges; and

 

•                                          thelevel of international sales.

 

**Our profitability is directly relatedto the level of reimbursements for surgical procedures using our products.**

 

Our profitabilityis directly related to the level of payments for the surgical procedures inwhich our products are involved, either by Medicare or private insurancecompanies.  We could be adverselyaffected by changes in payment policies of government or private health carepayors, particularly to the extent any such changes affect payment for theprocedure in which our products are intended to be used.  It is a continuing trend in U.S. health carefor such payments to be under continual scrutiny and downward pressure.  We believe that reimbursement in the future willbe subject to increased restrictions, both in the United States and in foreignmarkets and that the overall escalating cost of medical products and serviceshas led to and will continue to lead to increased pressures on the health careindustry, both foreign and domestic, to reduce the cost of products andservices, including products which we offer.

 

We expect that ourproducts typically will be used by hospitals and surgical centers, which billvarious third-party payors, such as governmental programs and private insuranceplans, for the health care services provided to their patients.  Third-party payors carefully review andincreasingly challenge the prices charged for medical products and services ornegotiate a flat rate fee in advance. Payment rates from private companies also vary depending on theprocedure performed, the third-party payor, the insurance plan and otherfactors.  Medicare compensates hospitalsat a predetermined fixed amount for the costs associated with an in-patienthospitalization based on the patient’s discharge diagnosis and compensatesphysicians at a pre-determined fixed amount based on the procedure performed,regardless of the actual costs incurred by the hospital or physician infurnishing the care and unrelated to the specific devices or systems used inthat procedure.  Medicare and otherthird-party payors are increasingly scrutinizing whether to cover new productsand the level of payment for new procedures. The flat fee reimbursement trend is causing hospitals to control costsstrictly in the context of a managed care system in which health care providerscontract to provide comprehensive health care for a fixed cost per person.  We are unable to predict what changes willbe made in the reimbursement methods utilized by such third-party payors.

 

If we obtain thenecessary foreign regulatory registrations or approvals, market acceptance ofour products in international markets would be dependent, in part, upon theacceptance by the prevailing health care financing system in each country.  Health care financing systems ininternational markets vary significantly by country and include both governmentsponsored health care programs and private insurance.  We cannot assure you that these financing systems will endorsethe use of our products.

 

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**We have limited experience directlymarketing our products overseas and may not be successful in expanding intointernational markets without experienced partners.**

 

We have limited experiencein directly marketing our products overseas. Changes in overseas economic conditions, currency exchange rates,foreign tax laws or tariffs or other trade regulations could negatively impactour business.  The anticipatedinternational nature of our business is also expected to subject ourrepresentatives, agents and distributors to laws and regulations of the foreignjurisdictions in which they operate or in which our products are sold,including laws regulating manufacture and sale of medical devices.  In addition, the laws of some foreigncountries do not protect our intellectual property rights to the same extent asdo the laws of the United States.

 

**We may be subject to productliability claims and have limited insurance coverage.**

 

We face an inherentand significant business risk of exposure to product liability claims in theevent that the use of our products results in personal injury or death.  Also, in the event that any of our productsproves to be defective, we may be required to recall or redesign suchproducts.  Our current product liabilityinsurance coverage limit is $10.0 million per occurrence and in theaggregate.  Our coverage limits may notbe adequate to protect us from any liabilities we might incur in connectionwith the development, manufacture and sale of our products.  In addition, increased product liabilitycoverage may be required if additional products are used in clinicalevaluations or successfully commercialized. Product liability insurance is expensive and in the future may not beavailable to us on acceptable terms, if at all.  A successful product liability claim or series of claims broughtagainst us in excess of our insurance coverage or a product recall wouldnegatively impact our business.

 

**If we are unable to protect ourintellectual property, we may be unable to prevent other companies from usingour technology in competitive products.**

 

Our future successwill depend, in part, on our ability to continue developing patentableproducts, enforcing our patents and obtaining patent protection for ourproducts both in the United States and in other countries.  The patent positions of medical devicecompanies, however, are generally uncertain and involve complex legal and factualquestions.  Patents may never issue fromany patent applications owned by or licensed to us.  Even if patents do issue, the claims allowed may not besufficiently broad to protect our technology. In addition, issued patents owned by or licensed to us may bechallenged, invalidated or circumvented, or the rights granted thereunder maynot provide us with competitive advantages.

 

The medical deviceindustry has been characterized by extensive litigation regarding patents andother intellectual property rights. Litigation, which would result in substantial expense, may be necessaryto enforce any patents issued or licensed to us and/or to determine the scopeand 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 ininterference proceedings declared by the United States Patent and TrademarkOffice, which could result in substantial expense, to determine the priority ofinventions covered by our issued United States patents or pending patentapplications.  Furthermore, we may haveto participate at

 

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substantial cost in International Trade Commission proceedings toenjoin importation of products which would compete unfairly with ourproducts.  Any adverse outcome of anypatent litigation, including interference proceedings, could subject us tosignificant liabilities to third parties, require disputed rights to belicensed from or to third parties or require us to cease using the technologyin dispute.  Any such licenses may notbe available on acceptable terms, if at all. Furthermore, parties making such claims may be able to obtain injunctiveor other equitable relief that could effectively block our ability to make,use, sell or otherwise practice our intellectual property, whether or notpatented or described in pending patent applications, or to further develop orcommercialize our products in the United States and abroad and could result inthe award of substantial damages. Defense of any lawsuit or failure to obtain any such license coulddamage our business.

 

In addition topatents, we rely on unpatented trade secrets to protect our proprietarytechnology.  Others may independentlydevelop or otherwise acquire the same or substantially equivalent technologiesor otherwise gain access to our proprietary technology or disclose thistechnology.  It is difficult to protectrights to unpatented proprietary technology. Third parties may obtain patent rights to these unpatented tradesecrets, which patent rights could be used to assert infringement claimsagainst us.  We also rely onconfidentiality agreements with our collaborators, employees, advisors, vendorsand consultants to protect our proprietary technology.  These agreements may be breached, we may nothave adequate remedies for any breach and our trade secrets may otherwisebecome known or be independently developed by competitors.  In addition, our agreements with employees andconsultants require disclosure of ideas, developments, discoveries orinventions conceived during employment or consulting, as the case may be, andassignment to us of proprietary rights to such matters related to our businessand technology.  The extent to whichefforts by others will result in patents and the effect on us of the issuanceof such patents is unknown.

 

**We have licensed some aspects of ourproducts from third parties and may lose the rights to these essential aspectsunder the agreements which govern those relationships.**

 

We have licensedsome aspects of our technology from third parties.  The rights under the governing agreements may be terminated if webreach our obligations or in other circumstances.  Our failure to retain rights to these licensed rights couldnegatively impact our business.

 

**If we are not able to attract andretain key technical and senior management personnel and doctors to participatein our advisory boards, it may adversely affect our ability to obtain financingor develop our products.**

 

Our futurebusiness and operating results depend in significant part upon the continuedcontributions of our key technical and senior management personnel, many ofwhom would be difficult to replace and some of whom perform important functionsbeyond those suggested by their job titles or descriptions.  Our business and future operating resultsalso depend in significant part upon our ability to attract and retainqualified management, manufacturing, technical, marketing and sales and supportpersonnel for our operations.  Competitionfor such personnel is intense, and we may not be successful in attracting orretaining such personnel.

 

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Members of ourclinical advisory boards consult with us exclusively in the field of visualization,but are free to consult with other non-competing instrumentation companies andare 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 consultingagreements, including confidentiality provisions, with each of the members ofour clinical advisory boards, the consulting and confidentiality agreementsbetween us and each of the members of our clinical advisory boards may beterminated or breached.

 

**Our stock price could continue to bevolatile and your investment in our common stock could suffer a decline invalue, adversely affecting our ability to raise additional capital.**

 

The market pricesand trading volumes for securities of emerging companies, like ours, havehistorically been highly volatile and have experienced significant fluctuationsunrelated to  operatingperformance.  The market price of ourcommon stock has historically been highly volatile and may be significantlyaffected by factors such as:

 

•                                          actualor anticipated fluctuations in our operating results;

 

•                                          changesin financial estimates by securities analysts;

 

•                                          announcementsof technological innovations;

 

•                                          newproducts or new contracts by us or our competitors;

 

•                                          regulatoryannouncements;

 

•                                          developmentswith respect to patents or proprietary rights;

 

•                                          conditionsand trends in the medical device and other technology industries;

 

•                                          adoptionof new accounting standards affecting the medical device industry; and

 

•                                          generalmarket conditions.

 

In addition, thestock market has from time to time experienced significant price and volumefluctuations that have particularly affected the market prices for shares ofearly stage companies.  These broadmarket fluctuations may adversely affect the market price of our commonstock.  In the past, following periodsof 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, couldresult in substantial costs and a diversion of management’s attention andresources.

 

**Our use of hazardous materials mayresult in unexpected and substantial claims against us for which we do not havesufficient financial resources.**

 

Our research anddevelopment activities may involve the controlled use of hazardous materialsand chemicals.  The risk of accidentalcontamination or injury from these materials cannot be completely eliminated.  In the event of such an accident, we couldbe held liable for any resultant damages, and any such liability could exceedour resources.  We may incur substantialcost to comply with environmental regulations.

 

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**We do not anticipate paying anydividends and any gains from your investment in our stock will have to comefrom increases in the price of such stock.**

 

We currentlyintend to retain any future earnings for use in our business and do notanticipate paying any cash dividends in the foreseeable future.

 

**Our charter documents may prevent usfrom participating in transactions that could be beneficial to you.**

 

Our charter documents contain provisions that may make it moredifficult or discourage a change in control. This may adversely affect the market price of our common stock.

 

Item 4.   Controls and Procedures

 

(a)  Evaluation of Disclosure Controls andProcedures

Based on their evaluation, as of a date withinninety (90) days of the filing of this Form 10-Q, the Company’s Chief ExecutiveOfficer and Chief Financial Officer have concluded the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14 and 15d-14 under theSecurities Exchange Act of 1934) are effective.

 

(b)  Changes in Internal Controls

There have been no significant changes in internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

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PART II.  OTHERINFORMATION

 

Item 1.    LegalProceedings

 

From time to time,we may be involved in litigation relating to claims arising out of ouroperations in the normal course of business. We are currently not a party to any litigation that could have amaterial adverse effect on our results of operations or the  financial position of our business.

 

Item 2.    Changesin Securities and Use of Proceeds

 

a.             Not applicable

 

b.             Not applicable

 

c.             Not applicable

 

d.             Not applicable

 

Item 3.    Defaultsupon Senior Securities

 

None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

None

 

Item 5.    OtherInformation

 

None.

 

Item 6.    Exhibitsand Reports on Form 8-K

 

A)     Exhibits

 
| 3.1  | (1)    | Second Restated Certificate of Incorporation                                                                                                             |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | (2)    | Certificate of Amendment of Second Restated  Certificate of Incorporation                                                                                |
| 3.3  | (3)    | Restated Bylaws                                                                                                                                          |
| 4.1  | (3)    | Form of Certificate for Common Stock                                                                                                                     |
| 99.1 |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes - Oxley Act of 2002 |
| 99.2 |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes - Oxley Act of 2002 |

 

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(1)                                  Incorporatedby reference to our Form 10-K/A filed on September 10, 1998.

 

(2)                                  Incorporatedby reference to our Form 10-Q filed on November 14, 2001.

 

(3)                                  Incorporatedby reference to our Registration Statement on Form S-1, as amended, Filed onJuly 2, 1997.

 

B)      Reportson Form 8-K

 

No reports on Form8-K were filed by the Company during the three months ended September 30, 2002.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |              |   | VISTA MEDICAL TECHNOLOGIES,INC.                                   |
|--------|-------------------|--------|-------------------------------------------------------------------|
|   |              |   |                                                              |
|   |              |   |                                                              |
| Date:  | November 12, 2002 |   |                                                              | /s/ John R. Lyon |   |
|   |              |   | John R. Lyon                                                      |
|   |              |   | President, Chief Executive Officer and  Director                  |
|   |              |   |                                                              |
|   |              |   |                                                              |
| Date:  | November 12, 2002 |   |                                                              | /s/ Stephen A. Gorgol |   |
|   |              |   | Stephen A. Gorgol                                                 |
|   |              |   | Vice President of Finance, Chief Financial  Officer and Secretary |

 

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**Certifications**

 

I, John R. Lyon, President, Chief Executive Officerand Director of Vista Medical Technologies, Inc., certify that:

 

1.                                       I have reviewed this quarterly report on Form10-Q of Vista Medical Technologies, Inc.;

 

2.                                       Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                       The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                     evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)                                      all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                     any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

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6.                                       The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 12, 2002 |   | By:                                                  | /s/  JOHN R. LYON |
|-------------------------------|--------|------------------------------------------------------|-------------------|
|                          |   | **John R. Lyon**                                     |
|                          |   | **President, Chief Executive Officer and  Director** |

 

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**Certifications**

 

I, Stephen A. Gorgol, Vice President of Finance andChief Financial Officer of Vista Medical Technologies, Inc., certify that:

 

1.                                       I have reviewed this quarterly report on Form10-Q of Vista Medical Technologies, Inc.;

 

2.                                       Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presentedin this quarterly report;

 

4.                                       The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                     evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                    The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)                                      all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                     any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       The registrant’s other certifying officersand I have indicated in this quarterly report

 

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whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 12, 2002 |   | By:                                                        | /s/  STEPHEN A. GORGOL |
|-------------------------------|--------|------------------------------------------------------------|------------------------|
|                          |   | **Stephen A. Gorgol**                                      |
|                          |   | **Vice President of Finance and Chief  Financial Officer** |

 

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