** **

**UNITEDSTATES**

**SECURITIESAND 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, 2001**                    |
|                                                                      |   |                                                                                           |
| **OR**                                                                    |
|                                                                      |   |                                                                                           |
| **o**                                                                     |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                      |   |                                                                                           |
| **For the transition period from  _______________ to _________________.** |

 

**COMMISSION FILE NUMBER  0-22743**

 

 

**VISTAMEDICAL TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                     |   | **94-3184035**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

**5451 AVENIDA ENCINAS, SUITE A**

**CARLSBAD, CA  92008**

(Address ofprincipal executive offices)

** **

**(760) 603-9120**

(Registrant'stelephone number, including area code)

 

 

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past 90 days:**

 

| **(1)** | **Yes **ý     |   | **No **o     |
|---------|-------------------------|--------|-------------------|
| **(2)** | **Yes ****ý** |   | **No ****o** |

 

As of October 31,2001, there were 4,913,031 shares of $.01 par value common stock outstanding.

 

 

 

**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, 2001 and December 31, 2000            |
|                    | Consolidated  Statements of Operations for the three months ended September 30,        |
|                    | 2001  and 2000, and the nine months ended September 30, 2001 and 2000                  |
|                    | Consolidated  Statements of Cash Flows for the nine months ended September 30,         |
|                    | 2001 and 2000                                                                          |
|                    | 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 |
|                    |                                                                                   |
| 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              |

**PART 1.  FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**Vista MedicalTechnologies, Inc.**

**Consolidated Balance Sheets**

 
|                                                                                                |   | **September  30, 2001** |      | **December  31, 2000** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                                                                |   | **(Unaudited)**         |      |                   |   |
| ASSETS                                                                                              |   |                    |      |                   |   |
| Current assets:                                                                                     |   |                    |      |                   |   |
| Cash and cash equivalents                                                                           |   | $                       | 960,623   |                   | $      | 2,589,006 |   |
| Marketable securities                                                                               |   | 371,235                 |      | 345,224                |   |
| Accounts receivable, net                                                                            |   | 1,303,712               |      | 1,363,915              |   |
| Inventories, net                                                                                    |   | 1,323,155               |      | 1,701,668              |   |
| Other current assets                                                                                |   | 199,916                 |      | 116,868                |   |
| Total current assets                                                                                |   | 4,158,641               |      | 6,116,681              |   |
| Property and equipment, net                                                                         |   | 416,101                 |      | 900,083                |   |
| Patents and other assets, net                                                                       |   | 44,903                  |      | 137,747                |   |
| TOTAL ASSETS                                                                                        |   | $                       | 4,619,645 |                   | $      | 7,154,511 |   |
|                                                                                                |   |                    |      |                   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                |   |                    |      |                   |   |
| Current liabilities:                                                                                |   |                    |      |                   |   |
| Accounts payable                                                                                    |   | $                       | 529,503   |                   | $      | 460,168 |   |
| Accrued compensation                                                                                |   | 226,064                 |      | 192,660                |   |
| Deferred revenue payments                                                                           |   | 166,667                 |      | -                      |   |
| Accrued liabilities                                                                                 |   | 387,467                 |      | 350,521                |   |
| Total current liabilities                                                                           |   | 1,309,701               |      | 1,003,349              |   |
|                                                                                                |   |                    |      |                   |   |
| 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 - 8,750,000                                                                       |   |                    |      |                   |   |
| Issued and outstanding shares - 4,897,346 on December 31, 2000 and  4,931,031 on September 30, 2001 |   | 49,130                  |      | 48,973                 |   |
| Additional paid-in capital                                                                          |   | 68,099,868              |      | 68,003,535             |   |
| Notes receivable from stockholders                                                                  |   | (78,375                 | )         | (78,375                | )      |
| Deferred compensation                                                                               |   | (122,995                | )         | (267,951               | )      |
| Accumulated deficit                                                                                 |   | (64,637,684             | )         | (61,555,020            | )      |
| Total stockholders' equity                                                                          |   | 3,309,944               |      | 6,151,162              |   |
|                                                                                                |   |                    |      |                   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                          |   | $                       | 4,619,645 |                   | $      | 7,154,511 |   |
|                                                                                                |   |                    |      |                   |   |

 

Note: The balance sheet at December 31, 2000 has been derived from the auditedfinancial statements at that date but does not does not include all of the informationand footnotes required by generally accepted accounting principles for complete

financialstatements.

 

See accompanying notes

 

**VISTA MEDICAL TECHNOLOGIES, INC.**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
|                                                      |   | **Three Months Ended  September 30,** |      | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
| **2001**                                                  |   | **2000**                              |      | **2001**                             |   | **2000** |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Sales                                                     |   | $                                     | 2,281,486 |                                 | $      | 1,518,717 |   | $ | 6,286,087 |   | $ | 4,837,601 |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Cost of Sales                                             |   | 1,353,226                             |      | 1,396,657                            |   | 4,616,816 |   | 4,384,316 |   |
| Research and  development                                 |   | 713,484                               |      | 417,885                              |   | 1,582,917 |   | 1,280,023 |   |
| Sales and  marketing                                      |   | 629,965                               |      | 403,304                              |   | 1,713,337 |   | 1,232,611 |   |
| Sales expense  reversal                                   |   | -                                     |      | (750,000                             | )      | - |   | (750,000 | ) |
| General and  administrative                               |   | 467,556                               |      | 392,922                              |   | 1,518,285 |   | 1,366,817 |   |
| Restructuring                                             |   | -                                     |      | (121,016                             | )      | - |   | (399,750 | ) |
| Total cost and  expenses                                  |   | 3,164,231                             |      | 1,739,752                            |   | 9,431,355 |   | 7,114,017 |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Loss from  operations                                     |   | (882,745                              | )         | (221,035                             | )      | (3,145,268 | ) | (2,276,416 | ) |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Interest income                                           |   | 11,990                                |      | 67,322                               |   | 62,604 |   | 159,433 |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Net loss                                                  |   | $                                     | (870,755  | )                                    | $      | (153,713 | ) | $ | (3,082,664 | ) | $ | (2,116,983 | ) |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Basic and  diluted loss per share                         |   | $                                     | (0.18     | )                                    | $      | (0.03 | ) | $ | (0.63 | ) | $ | (0.49 | ) |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |
| Share used in  computing basic and diluted loss per share |   | 4,908,503                             |      | 4,881,336                            |   | 4,903,878 |   | 4,363,649 |   |
|                                                      |   |                                  |      |                                 |   |   |   |   |   |

 

See accompanying notes

 

 

**Vista Medical Technologies,Inc.**

**Consolidated Statements ofCash Flows**

**(Unaudited)**

 
|                                                                          |   | **Nine Months Ended September 30,** |       |
|-------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                          |   | **2001**                            |       | **2000** |   |
| OPERATING ACTIVITIES                                                          |   |                                |       |   |   |
| Net loss                                                                      |   | $                                   | (3,082,664 | ) | $ | (2,116,983 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |   |                                |       |   |   |
| Depreciation and amortization                                                 |   | 610,391                             |       | 459,243 |   |
| Amortization of deferred  compensation                                        |   | 216,556                             |       | 263,283 |   |
| Changes in operating assets and liabilities, net of effect of  acquisitions:  |   |                                |       |   |   |
| Accounts receivable                                                           |   | 60,203                              |       | (8,268 | ) |
| Inventories                                                                   |   | 378,512                             |       | 587,433 |   |
| Other current assets                                                          |   | (83,048                             | )          | 202,905 |   |
| Accounts payable                                                              |   | 69,335                              |       | (491,938 | ) |
| Accrued compensation                                                          |   | 33,404                              |       | (15,003 | ) |
| Deferred revenue                                                              |   | 166,667                             |       | - |   |
| Accrued liabilities                                                           |   | 36,946                              |       | (1,284,060 | ) |
| Net cash flows used for operating  activities                                 |   | (1,593,698                          | )          | (2,403,388 | ) |
|                                                                          |   |                                |       |   |   |
| INVESTING ACTIVITIES                                                          |   |                                |       |   |   |
| Purchases of short-term investments                                           |   | (26,010                             | )          | (16,104 | ) |
| Purchase of property and equipment                                            |   | (33,566                             | )          | (62,958 | ) |
| Net cash flows provided by (used  for) investing activities                   |   | (59,576                             | )          | (79,062 | ) |
|                                                                          |   |                                |       |   |   |
| FINANCING ACTIVITIES                                                          |   |                                |       |   |   |
| Issuance of common stock                                                      |   | 24,891                              |       | 4,705,472 |   |
| Net cash flows provided by financing  activities                              |   | 24,891                              |       | 4,705,472 |   |
| Net (decrease) increase in cash and  cash equivalents                         |   | (1,628,383                          | )          | 2,223,022 |   |
| Cash and cash equivalents at  beginning of period                             |   | 2,589,006                           |       | 1,368,910 |   |
| Cash and cash equivalents at end of  period                                   |   | $                                   | 960,623    |   | $ | 3,591,932 |   |

 

See accompanyingnotes

 

**VISTA MEDICAL TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

** **

1.  Basis of Presentation  

 

                The auditedconsolidated financial statements of Vista Medical Technologies, Inc. (the"Company") and the notes thereto for the year ended December 31, 2000included in the Company's Annual Report on Form 10-K filed with the Securitiesand Exchange Commission contain additional information about the Company, itsoperations and its financial statements and accounting  practices, and should be read in conjunctionwith this quarterly report on Form 10-Q. The unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial statements and with the instructions on Form10-Q, Article 10 of Regulation S-K. Accordingly, certain information and footnote disclosures normallycontained in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to therules and regulations of the Securities and Exchange Commission.  

 

                The accompanyingunaudited consolidated financial statements of the Company reflect alladjustments of a normal recurring nature which are, in the opinion of management,necessary for a fair presentation of the financial position, results ofoperations and cash flows for all periods presented.  The interim financial information contained herein is notnecessarily indicative of results for any future interim periods or for thefull fiscal year ending December 31, 2001. 

 

Reverse Stock Split  

 

                On August 17, 2001.the Company effected a 1 for 4 reverse stock split of the outstanding shares ofcommon stock.  All common share and pershare amounts have been restated to reflect the reverse stock split.  

 

2.  Inventories

 
|                |   | **September  30, 2001** |      | **December  31, 2000** |   |
|---------------------|--------|-------------------------|-----------|------------------------|--------|
|                |   | **(Unaudited)**         |      |                   |   |
|                |   |                    |      |                   |   |
| Parts and materials |   | $                       | 1,653,369 |                   | $      | 2,261,441 |   |
| Work in process     |   | 296,602                 |      | 461,269                |   |
| Finished goods      |   | 1,087,176               |      | 1,224,706              |   |
|                |   | 3,037,147               |      | 3,947,416              |   |
| Less: reserves      |   | (1,713,992              | )         | (2,245,748             | )      |
| Inventories, net    |   | $                       | 1,323,155 |                   | $      | 1,701,668 |   |

 

3.  Promotion Agreement

 

                In June  2001, the Company entered into a Supply andPromotion Agreement with Ethicon Endo-Surgery, Inc. (EES).  Under the agreement, the Company willreceive payments in return for the Company’s commitment to require use of EESequipment in certain training programs sponsored by the Company for the benefit of its customers.  The Company is also required to provide limitedcompensation to EES sales representatives. The agreement grants EES with theright of first negotiation to acquire certain Company technology.   EES may terminate the agreement upon 90days notice.  The Company will recognizerevenue ratably over the term of the agreement.  At September 30, 2001, the Company has received $500,000 underthe agreement and deferred $166,667 of such payment.   

 

4.  Stock Options

 

                At the Annual Meeting held onJune 7, 2001, the stockholders ratified an increase of 187,500 shares of commonstock to our 1997 Stock Option/Stock Issuance Plan.  As of September 30, 2001, we had a total of 892,500 sharesreserved for issuance under our 1997 Stock Option/Stock Issuance Plan    

 

5.  Line of Credit

 

                In October 2001, the Company secureda $2,000,000 line of credit facility (the facility) with a bank for one yearwith automatic yearly renewals.  Thefacility is secured by qualified accounts receivable and bears interest at therate of prime plus 2%.  Borrowings underthe facility are limited to 80% of qualified accounts receivable.

6.  Loss Per Share 

 
|                                       |   | **Three  Months Ended September 30,** |     |
|--------------------------------------------|--------|---------------------------------------|----------|
|                                       |   | **2001**                              |     | **2000** |   |
|                                       |   |                                  |     |   |   |
| Net (loss)                                 |   | $                                     | (870,755 | ) | $ | (153,713 | ) |
| Weighted average common shares outstanding |   | 4,908,503                             |     | 4,881,336 |   |
| Basic and diluted loss per share           |   | ($0.18                                | )        | ($0.03 | ) |
|                                            |        |                                       |          |  |  |  |  |

 

7.  New Accounting Standards

 

                In June 1998, the FinancialAccounting Standards Board (FASB) issued SFAS 133, “ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGINGACTIVITIES,” as amended in June 2000 by SFAS 138,  “ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAINHEDGING ACTIVITIES,” which requires companies to recognize all derivatives aseither assets or liabilities in the balance sheet and measure such instrumentsat fair value.  As amended by SFAS 137,“ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THEEFFECTIVE DATE OF FASB STATEMANT NO. 133,” the provisions of SFAS 133  required adoption no later than thebeginning of the Company’s fiscal year ending December 31, 2001.  We adopted SFAS 133 effective January 1,2001.  As we do not engage in anyhedging or derivative activities, the adoption of SFAS 133, as amended by SFAS138, did not have a material impact on the Company’s financial statements.

 

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

 

                THIS QUARTERLY REPORT MAYCONTAIN PREDICTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THATINVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT"RISKS AND UNCERTAINTIES." WHILE THIS OUTLOOK REPRESENTS OUR CURRENT JUDGMENT ON THE FUTUREDIRECTION OF OUR BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUALRESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW.  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 QUARTERLYREPORT.  THE FOLLOWING DISCUSSION SHOULDBE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTESTHERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND OUR 2000ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGECOMMISSION.  

 

**Overviewof our business**  

 

                We develop, manufacture andmarket products that provide information to doctors performing minimallyinvasive general surgical, cardiac surgical and other selected microsurgicalprocedures.  We also develop and sponsortraining and support programs for medical personnel which enhance the adoptionof procedures incorporating use of our visualization technology.  Our products combine a head mounted displaywith video cameras to provide surgeons with critical visual information duringthese microsurgical procedures, combined with the ability to view newadditional information in a voice-controlled, picture-in-picture format, tofacilitate real-time decision making during surgery.  Our product lines include the ORPC Advanced Visualization andInformation System for general surgery and other complex endoscopic proceduresand the Series 8000 Advanced Visualization and Information System, for use incardiac surgery.  In general terms,endoscopic surgery involves a telescopic viewing device which is inserted intoa small incision in the body and which allows the surgeon an adequate view ofthe internal part of the body being repaired.  

 

**Our results of operations forthree-months and nine-months ended September 30, 2001 versus three-months andnine-months ended September 30, 2000**  

 

                Sales.  We had revenue from product sales and contract revenue of$2,281,000 and $6,286,000 for the three-and nine-months ended September 30,2001, respectively, compared to revenues from product sales of $1,519,000 and$4,838,000 for the three-and nine-months ended September 30, 2000,respectively.  The increase in revenuefor both the three-and nine-month periods was due primarily to increased unitsales from our Laparascopic Bariatric Surgery Program coupled with contractrevenue recognition of $250,000 from our Supply and Promotion Agreement withEthicon Endo-Surgery, Inc.

                Cost of Sales.  Our cost of sales were $1,353,000 and$4,617,000 for the three- and nine-months ended September 30, 2001,respectively, and $1,397,000 and $4,384,000 for the three- and nine-months endedSeptember 30, 2000, respectively.  Ourgross margins were 40% and 27% for the three-and nine-months ended September30, 2001, respectively, and 8% and 9% for the three-and nine-months endedSeptember 30, 2001, respectively.  Theincrease in gross margin was primarily due to increased unit sales of ourhigher margin Laparascopic Bariatric Surgery Program coupled with contractrevenue recognition of $250,000 from an agreement with Ethicon Endo-Surgery,Inc., with no cost of sales.  

 

                Research and DevelopmentExpenses.  Our research and developmentexpenses were $713,000 and $1,583,000 for the three-and nine months endedSeptember 30, 2001, respectively, and $418,000 and $1,280,000 for the three-andnine-months ended September 30, 2000, respectively.  The increase in research and development expenses was primarilyattributable to next generation product development.  We expect our research and development expenses to remain at ornear current levels in the next several quarters as we finalize our nextgeneration of products for the general surgery market.  

 

                Sales and MarketingExpenses.  Our sales and marketingexpenses were $630,000 and $1,713,000 for the three-and nine-months endedSeptember 30, 2001, respectively, and $403,000 and $1,233,000 for the three-and nine-months ended September 30, 2000, respectively. The increase in salesand marketing expense reflects a ramp up of field activities for the obesitysurgery market.  We expect our sales andmarketing expenses to increase proportionately during the next several quartersas we continue to ramp up our field activities for the obesity surgerymarket.  

 

                General and AdministrativeExpenses.  Our general andadministrative expenses were $468,000 and $1,518,000 for the three-andnine-months ended September 30, 2001, respectively, and $393,000 and $1,367,000for the three- and nine-months ended September 30, 2000, respectively. Theincrease in general and administrative expenses is due primarily to higherprofessional and legal fees.  We expectour general and administrative expenses to remain at or near current levels forthe next several quarters.

 

                Restructuring Expenses.  We had no charges associated withrestructuring expenses for both the three-and nine-months ended September 30,2001, and credits of $121,000 and $400,000 for the three- and nine-months endedSeptember 30, 2000.  The credits in 2000were related to the subletting of a portion of our facility in Westborough,Massachusetts.  The partial recoveryreported in the 2000 period represents the subletting of approximately one halfof the facility space for which a $690,000 restructuring charge had beenincurred in the three-months ended September 30, 1999.  

 

                Interest Income.  Our net interest income was $12,000 and$63,000 for the three- and nine-month periods ended September 30, 2001,respectively, and $67,000 and $159,000 for the three-and nine-months endedSeptember 30, 2000, respectively.  Thisdecrease was due primarily to a decrease in the investment balances of$4,8000,000 resulting from a completed sale of common stock to three of ourstockholders in April, 2000.

**Liquidity and capital resources**  

 

                Net cash used for operatingactivities for the nine-months ended September 30, 2001 was $1,594,000 comparedto net cash used of $2,403,000 for the corresponding nine-month period in2000.  The decrease in net cash used inoperating activities was primarily attributable to lower purchases of inventoryduring the 2001 period and the receipt of $500,000 of payments under anagreement with Ethicon Endo-Surgery.  

 

                Net cash used by investingactivities was $60,000 for the nine-months ended September 30, 2001 compared to$79,000 of net cash used in the same period in 2000.  The decrease in net cash used by investing activities during the2001 period was primarily attributable to increasing balances of short terminvestments reaching maturity offset by decreasing purchases of property andequipment.  

 

                Net cash provided by financingactivities was $25,000 for the nine-months ended September 30, 2001 compared to$4,705,000 for the same period in 2000. The decrease  in net cashprovided by financing activities during the 2001 period was primarilyattributable to the closing of a Securities Purchase Agreement  in April, 2000 with three of ourstockholders netting proceeds of approximately $4,591,000, partially offsetby  a reduction in purchases of stock byemployees through our employee stock purchase plan and a lower level of stockoption exercises.  

 

                We recently announced that weare working on a strategic initiative to extend our business to become moreinvolved in the medical treatment of severe obesity.  If we decide to pursue this initiative, we will be required toraise additional funds to support our operations.  In addition, even if we do not pursue this initiative, 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 additional 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. Even if we are successful in raising additional funds, a slow rate ofmarket acceptance of our products or our inability to scale up manufacturingwould accelerate our use of proceeds and require us to seek additional funds tosupport our operating requirements.  Weexpect to continue to incur substantial losses for at least the next 3 - 6months.  As of September 30, 2001, ouraccumulated deficit was approximately $64,638,000.  

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

                At September 30, 2001, ourinvestment portfolio included fixed-income securities of $1.0 million.  These securities are subject to interestrate risk and will decline in value if interest rates increase.  Due to the short duration of our investmentportfolio, an immediate 10 percent increase in interest rates would have nomaterial impact on our financial condition or results of operations.  

 

We generallyconduct business, including sales to foreign customers, in U.S. dollars and asa result have limited foreign currency exchange rate risk.  The effect of an immediate 10 percent changein foreign exchange rates would not have a material impact on our financialcondition or results of operations.

RISKS AND UNCERTAINTIES

 

                You should consider thefollowing risk factors carefully in evaluating an investment in our commonstock in addition to the other information in this report.  If any of these or other risks actuallyoccurs, the trading price of our common stock could decline, and you may loseall or part of your investment. You are cautioned that the statements in thisquarterly 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 quarterly 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 quarterlyreport.  The following discussion shouldbe read in conjunction with our consolidated financial statements and notesthereto.  

 

**Wemay need additional funds to support our currently proposed operations.  If we are unable to obtain them, we may haveto significantly scale back our operations or forego opportunities in newmarket segments.**

 

                We recently announced that weare working on a strategic initiative extending our business to become moreinvolved in the medical treatment of severe obesity.  We have not yet decided to pursue this initiative, but, if we do,we will be required to raise additional funds to support our operations.  In addition, if we are unable to sustain ourcash flow under our current business plan, we will be required to raiseadditional funds.  If we are unable toraise sufficient funds from an offering of securities or otherwise, we may beunable to continue operations at their current level and may be unable topursue this new objective.  Moreover,our liquidity and capital requirements will depend upon other numerous 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

 

•         Thecosts of developing marketing and distribution capabilities.

                Even if we are successfulin raising additional funds, a slow rate of market acceptance of our productsor our inability to scale up manufacturing would accelerate our use of proceedsand require us to seek additional funds to support our operating requirements.

 

**We have a history of losses and may not becomeprofitable.**

 

                Since our formation in July1993, and as of September 30, 2001, we had incurred cumulative net losses of$64.6 million.  We expect to incursubstantial losses for at least the next 3-6 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. 

 

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

 

                We only have a small directsales force and, in the past, we were primarily dependent on agreements withthird parties for sales of the majority of products derived from our corethree-dimensional technology.  Two ofour primary distribution agreements were terminated in 2000. We entered into anarrangement with Jomed N.V. in May, 2000 to transition distribution in cardiacsurgery and to continue supporting our cardiac customer base.  However, this transition may not be achievedwithout operational disruption and unplanned cost.  If we are unable to make this transition, we may be unsuccessfulin distributing our cardiac surgery products and may lose revenues.

 

                In addition, during the lastyear, we changed our strategic emphasis for our core three-dimensionaltechnology for applications in general surgery, gynecology and urology.  We cannot assure you that we will besuccessful in these areas of sales. Even if we are successful, we cannot assure you that the revenueachieved in these areas of emphasis will be sufficient to compensate for anyloss of sales revenue from the termination of our previous distributionagreements for cardiac products.  Eitherof these results could have an adverse affect on our financial condition andresults of operations.

 

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

 

                Products derived from our coretechnology – the ORPC for general surgery and the Series 8000 for minimallyinvasive cardiac surgery - are expected to account for the majority of ourrevenues over the next several years. The demand for these products may not be sufficient to allow us toachieve profitable operations.

 

                Our development efforts for improvementsto these products may not be successful. In addition, other products under development may not be shown to besafe or effective, capable of being manufactured in commercial quantities atacceptable costs, acquire appropriate regulatory clearances or be successfullymarketed.

**Our success is dependent upon acceptance of a minimallyinvasive approach to complex procedures as a reliable, safe and cost effectivealternative to existing treatments.**

 

                Complex minimally invasiveprocedures are only performed on a very limited basis by a relatively smallnumber of highly skilled surgeons.  Weare unable to predict how quickly, if at all, minimally invasive procedureswill be adopted by the medical community or, if they are adopted, the number ofprocedures that will be performed.

 

                Even if the clinical safety andeffectiveness of complex minimally invasive procedures is established ingeneral surgery, cardiac and other specialties, surgeons, specialists and otherphysicians may choose not to recommend the procedures for any number of otherreasons.  Adoption of these proceduresby doctors will depend, for example, upon our ability to facilitate and sponsortraining of surgeons to perform complex minimally invasive procedures and thewillingness of such surgeons to perform such procedures.  Doctors may also elect not to recommend theminimally invasive procedures based on possible unavailability of acceptablereimbursement from health care payors. Health care payor acceptance may require evidence of the costeffectiveness of minimally invasive procedures as compared to other currentlyavailable treatments.  We believe thatphysician endorsements will be essential for clinical adoption of minimallyinvasive procedures and these endorsements may not be obtained.  Patient acceptance of new procedures willdepend upon doctor recommendations, as well as other factors, including theeffectiveness of, and the rate and severity of complications associated with,the procedure as compared to other treatments.

 

**Widespread use of ourproducts will require sponsoring the training of a large number of surgeons,and the time required to institute a training program and to train suchsurgeons could adversely affect near term market acceptance.**

 

                Evaluations of visualization technologysuch as ours 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 a large number of surgeons to use, thepotential markets and applications for our products would be significantlylimited.

 

**There are significantrisks associated with any scale-up of manufacturing which may be required tomeet market demand and become profitable.**

 

                We have never establishedhigh-volume manufacturing operations and if we are required to do so to meetmarket demand or to become profitable, we may not be able to establish ormaintain reliable operations at commercially reasonable costs.  We may also require additional manufacturingfacilities if production volumes increase. Acquisition of new manufacturing facilities would also likely involverelocation.  Difficulties in scaling upmanufacturing of products 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

•         otherproduction constraints.

 

                We have considered and willcontinue to consider as appropriate, the internal manufacture of sub-assembliescurrently provided by third-party subcontractors, as well as the implementationof new production processes.  Ourmanufacturing yields or costs may increase as a result of the transition toin-house production or to new production processes when such efforts areundertaken.  In addition, costs incomplying with FDA good manufacturing practices or changes in such practicesmay exceed our expectations.

 

**We may face componentshortages and are dependent in some instances on single sources of supply.**

 

                Any significant supplyinterruption, or inventory shortage or overage, would negatively impact ourability to manufacture our products.  Weuse and rely on specific components and services used in our systems for whichwe have only a single source of supply. The manufacture of our products in larger commercial quantities willrequire 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 to manufacture ourproducts based on forecasted product orders and intend to purchasesubassemblies and components prior to receipt of purchase orders from customers.  Lead times for ordered materials andcomponents vary significantly and depend on factors such as the businesspractices of the specific supplier, contract terms and general demand for acomponent 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 tosignificant domestic and international regulation and may not be able to obtainnecessary regulatory clearances to sell our products.**

 

                The manufacture and sale ofmedical devices intended for commercial distribution are subject to extensivegovernmental regulation.  Our failure tocomply with regulatory requirements would jeopardize our ability to market ourproducts.  Noncompliance with applicablerequirements can result in failure of the regulatory agency to grant pre-marketclearance or approval for devices, withdrawal or suspension of approval, totalor partial suspension of production, fines, injunctions, civil penalties,refunds, recall or seizure of products and criminal prosecution.

                Medical devices areregulated in the United States primarily by the FDA and, to a lesser extent, bystate agencies.  Sales of medical deviceproducts outside the United States are subject to foreign regulatoryrequirements that vary from country to country.  Generally, medical devices require pre-market clearance orpre-market approval prior to commercial distribution.  A determination that information available on the medical deviceis not sufficient to grant the needed clearance or approval will delay marketintroduction of the product.  Inaddition, material changes or modifications to, and changes in intended use of,medical devices also are subject to FDA review and clearance or approval.  The FDA regulates the research, testing,manufacture, safety, effectiveness, labeling, storage, record keeping,promotion and distribution of medical devices in the United States and 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.

 

**Weexpect to encounter rapid technological change and significant competition.**

 

                The medical device market inwhich we compete is characterized by intensive development efforts and rapidlyadvancing technology.  Our futuresuccess will depend, in large part, upon our ability to anticipate and keeppace with advancing technology and competing innovations.  We may not be successful in identifying,developing and marketing new products or enhancing our existing products.

 

                We believe that a number oflarge 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 heart surgery, to generalsurgery or to head, neck and spine microsurgery.

 

                Technological advances withother therapies such as drugs, interventional procedures or future innovationsin surgical techniques could make such other therapies more effective or lowerin cost than minimally invasive microsurgery procedures and could renderminimally invasive microsurgery obsolete.

 

**We expect fluctuations inour operating results.**

 

                Our results of operations mayvary significantly from quarter to quarter depending upon numerous 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;

•         customerorder deferrals in anticipation of enhancements or of new product introductionsby us or our competitors;

•         productquality problems;

•         personnelchanges; and

•         thelevel of international sales.

 

**Our profitability isdirectly related to the level of reimbursements for surgical procedures usingour products.**

 

                Our profitability is directlyrelated to the level of payments for the surgical procedures in which ourproducts are involved, either by Medicare or private insurance companies.  We could be adversely affected by changes inpayment policies of government or private health care payors, particularly tothe extent any such changes affect payment for the procedure in which ourproducts are intended to be used.  It isa continuing trend in U.S. health care for such payments to be under continualscrutiny and downward pressure.  Webelieve that reimbursement in the future will be subject to increasedrestrictions, both in the United States and in foreign markets and that theoverall escalating cost of medical products and services has led to and willcontinue to lead to increased pressures on the health care industry, bothforeign and domestic, to reduce the cost of products and services, includingproducts which we offer.

 

            We expect that our products typically will be used byhospitals and surgical centers, which bill various third-party payors, such asgovernmental programs and private insurance plans, for the health care servicesprovided to their patients.  Third-partypayors carefully review and increasingly challenge the prices charged formedical products and services or negotiate a flat rate fee in advance.  Payment rates from private companies alsovary depending on the procedure performed, the third-party payor, the insuranceplan and other factors.  Medicarecompensates hospitals at a pre determined fixed amount for the costs associatedwith an in-patient hospitalization based on the patient’s discharge diagnosisand compensates physicians at a pre determined fixed amount based on theprocedure performed, regardless of the actual costs incurred by the hospital orphysician in furnishing the care and unrelated to the specific devices orsystems used in that procedure. Medicare and other third-party payors are increasingly scrutinizing whetherto cover new products and the level of payment for new procedures.  The flat fee reimbursement trend is causinghospitals to control costs strictly in the context of a managed care system inwhich health care providers contract to provide comprehensive health care for afixed cost per person.  We are unable topredict what changes will be made in the reimbursement methods utilized by suchthird-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.  There can be no assurance that these financing systems willendorse the use of our products.

 

**We have limitedexperience directly marketing our products overseas and may not be successfulin expanding into international markets without experienced partners.**

 

                We have limited experience inmarketing 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 regulatingmanufacture and sale of medical devices. In addition, the laws of some foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

**We may be subject toproduct liability claims and have limited insurance coverage.**

 

                We face an inherent andsignificant business risk of exposure to product liability claims in the eventthat 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 toprotect our intellectual property, we may be unable to prevent other companiesfrom using our technology in competitive products.**

 

                Our future success will depend,in part, on our ability to continue to develop patentable products, enforce ourpatents and obtain patent protection for our products both in the United Statesand in other countries.  The patentpositions of medical device companies, however, are generally uncertain andinvolve complex legal and factual questions. Patents may never issue from any patent applications owned by orlicensed to us.  Even  if patents do issue, the claims allowed maynot be sufficiently 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 substantial cost in International Trade Commissionproceedings to enjoin importation of products which would compete unfairly withour products.  Any adverse outcome ofany patent 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.

 

                We rely on unpatented tradesecrets to protect our proprietary technology. Others may independently develop or otherwise acquire the same orsubstantially equivalent technologies or otherwise gain access to ourproprietary technology or disclose such technology.  It is difficult to protect rights to such unpatented proprietarytechnology.  Third parties may obtainpatent rights to such unpatented trade secrets, which patent rights could beused to assert infringement claims against us. We also rely on confidentiality agreements with our collaborators,employees, advisors, vendors and consultants to protect our proprietarytechnology.  These agreements may bebreached, we may not have adequate remedies for any breach and our tradesecrets may otherwise become known or be independently developed bycompetitors.  In addition, ouragreements with employees and consultants require disclosure of ideas,developments, discoveries or inventions conceived during employment orconsulting, as the case may be, and assignment to us of proprietary rights tosuch matters related to our business and technology.  The extent to which efforts by others will result in patents andthe effect on us of the issuance of such patents is unknown.

 

**We have licensed someaspects of our products from third parties and may lose the rights to theseessential aspects under the agreements which govern those relationships.**

 

                We have licensed some aspects ofour technology from third parties.  Therights under the governing agreements may be terminated if we breach ourobligations or in other circumstances. Our failure to retain rights to theselicensed rights could negatively impact our business.

**If we are not able to attract and retain key technicaland senior management personnel and doctors to participate in our advisoryboards, it may adversely affect our ability to obtain financing or develop ourproducts.**

 

                Our future business andoperating results depend in significant part upon the continued contributionsof our key technical and senior management personnel, many of whom would bedifficult to replace and some of whom perform important functions beyond thosesuggested by their job titles or descriptions. Our business and future operating results also depend in significantpart upon our ability to attract and retain qualified management,manufacturing, technical, marketing and sales and support personnel for ouroperations.  Competition for suchpersonnel is intense, and we may not be successful in attracting or retainingsuch personnel.

 

                Members of our clinical advisoryboards consult with us exclusively in the field of visualization, but are freeto consult with other non-competing instrumentation companies and are employedelsewhere on a full-time basis.  As aresult, they only spend a limited amount of time on our business.  Although we have entered into consultingagreements,  including confidentialityprovisions with each of the members of our clinical advisory boards, theconsulting and confidentiality agreements between us and each of the members ofour clinical advisory boards may be terminated 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 prices and tradingvolumes for securities of emerging companies, like ours, have historically beenhighly volatile and have experienced significant fluctuations unrelated to theoperating performance.  The market priceof our common stock has historically been highly volatile and may besignificantly affected 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 thatcompany.  Such litigation, if broughtagainst us, could result in substantial costs and a diversion of management’sattention and resources.

 

**Our use of hazardousmaterials may result in unexpected and substantial claims against us for whichwe do not have sufficient financial resources.**

 

                Our research and developmentactivities may involve the controlled use of hazardous materials andchemicals.  The risk of accidentalcontamination or injury from these materials cannot be completelyeliminated.  In the event of such anaccident, we could be held liable for any resultant damages, and any suchliability could exceed our resources. We may incur substantial cost to comply with environmental regulations.

 

**We do not anticipatepaying any dividends and any gains from your investment in our stock will haveto come from increases in the price of such stock.**

 

                We currently intend to retainany future earnings for use in our business and do not anticipate paying anycash dividends in the foreseeable future.

 

**Our charter documents mayprevent us from participating in transactions that could be beneficial to you.**

 

Our charterdocuments contain provisions that may make it more difficult or discourage achange in control.  This may adverselyaffect the market price of our common stock.PART II. OTHER INFORMATION

 

Item 1.    LegalProceedings

 

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

 

Item 2.    Changesin Securities and Use of Proceeds

 

                a.             Not applicable

 

                b.             Not applicable

 

                c.             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           Certificate of Amendment of Second Restated Certificate ofIncorporation of the Company  

 

B)            Reports on Form 8-K

 

                No reports on Form 8-K werefiled by the Company during the three months ended September 30, 2001.

 

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, 2001 |                                                              |   | /s/ John R. Lyon |   |
|   |              | John R. Lyon                                                      |
|   |              | President, Chief Executive Officer and Director                   |
|   |              |                                                              |
| Date:  | November 12, 2001 |                                                              |   | /s/ Stephen A. Gorgol |   |
|   |              | Stephen A. Gorgol                                                 |
|   |              | Vice President of Finance, Chief Financial Officer  and Secretary |
|        |                   |                                                                   |  |  |  |  |