** **

**UNITED STATES**

**SECURITIES 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 MARCH 31, 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 0-22743**

 

| **VISTA  MEDICAL TECHNOLOGIES, INC.**                           |
|-----------------------------------------------------------------|
| (Exact name of  registrant as 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)                       |
| **(760) 603-9120**                                              |
| (Registrant’s telephone  number, including area code)      |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 May 10, 2002 there were 4,938,020 shares of $.01 par value commonstock 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 March 31, 2002 and December 31, 2001                     |
|                    | Consolidated  Statements of Operations for the three months ended March 31, 2002 and 2001   |
|                    | Consolidated Statements  of Cash Flows for the three months ended March 31, 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 |
|                    |                                                                                        |
| 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              |
|                         |                                                                                             |  |

 

2

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PART 1. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Vista MedicalTechnologies, Inc.

Consolidated Balance Sheets

 
|                                                                                                                                                          |   | **March 31, 2002** |      | **December 31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-----------------------|--------|
|                                                                                                                                                          |   | **(Unaudited)**    |      |                  |   |
| ASSETS                                                                                                                                                        |   |               |      |                  |   |
| Current assets:                                                                                                                                               |   |               |      |                  |   |
| Cash and cash equivalents                                                                                                                                     |   | $                  | 961,782   |                  | $      | 800,547 |   |
| Marketable securities                                                                                                                                         |   | 456,033            |      | 516,855               |   |
| Accounts receivable, net                                                                                                                                      |   | 1,398,430          |      | 1,862,028             |   |
| Inventories, net                                                                                                                                              |   | 1,364,488          |      | 1,094,574             |   |
| Other current assets                                                                                                                                          |   | 124,015            |      | 154,827               |   |
| Total current assets                                                                                                                                          |   | 4,304,748          |      | 4,428,831             |   |
| Property and equipment, net                                                                                                                                   |   | 271,061            |      | 357,646               |   |
| Patents and other assets, net                                                                                                                                 |   | 26,729             |      | 37,013                |   |
| TOTAL ASSETS                                                                                                                                                  |   | $                  | 4,602,538 |                  | $      | 4,823,490 |   |
|                                                                                                                                                          |   |               |      |                  |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                          |   |               |      |                  |   |
| Current liabilities:                                                                                                                                          |   |               |      |                  |   |
| Accounts payable                                                                                                                                              |   | $                  | 734,641   |                  | $      | 741,003 |   |
| Accrued compensation                                                                                                                                          |   | 262,580            |      | 203,413               |   |
| Deferred revenue payments                                                                                                                                     |   | 166,667            |      | 416,667               |   |
| Accrued liabilities                                                                                                                                           |   | 654,776            |      | 371,319               |   |
| Total current liabilities                                                                                                                                     |   | 1,818,664          |      | 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 - 8,750,000  Issued and outstanding shares - 4,913,031 on  December 31, 2001 and 4,936,520 on March 31, 2002 |   | 49,365             |      | 49,130                |   |
| Additional paid-in capital                                                                                                                                    |   | 68,053,749         |      | 67,974,087            |   |
| Notes receivable from stockholders                                                                                                                            |   | (78,375            | )         | (78,375               | )      |
| Deferred compensation                                                                                                                                         |   | (87,342            | )         | (76,305               | )      |
| Accumulated deficit                                                                                                                                           |   | (65,153,523        | )         | (64,777,449           | )      |
| Total stockholders' equity                                                                                                                                    |   | 2,783,874          |      | 3,091,088             |   |

 

Note: The balance sheet at December 31, 2001 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

See accompanying notes.

 

3

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Vista MedicalTechnologies, Inc.

Consolidated Statementsof Operations

(Unaudited)

 
|                                                      |   | **Three Months Ended March 31,** |            |
|-----------------------------------------------------------|--------|----------------------------------|-----------------|
|                                                      |   | **2002**                         |            | **2001** |   |
|                                                      |   |                             |            |   |   |
| Sales                                                     |   | $                                |  2,672,910 |   | $ |  1,932,533 |   |
|                                                      |   |                             |            |   |   |
| Costs and expenses:                                       |   |                             |            |   |   |
|                                                      |   |                             |            |   |   |
| Cost of Sales                                             |   | 1,363,141                        |            | 1,531,906 |   |
| Research and development                                  |   | 424,225                          |            | 389,899 |   |
| Sales and marketing                                       |   | 723,433                          |            | 487,697 |   |
| General and administrative                                |   | 543,436                          |            | 495,983 |   |
| Total cost and expenses                                   |   | 3,054,235                        |            | 2,905,485 |   |
|                                                      |   |                             |            |   |   |
| Loss from operations                                      |   | (381,325                         | )               | (972,952 | ) |
|                                                      |   |                             |            |   |   |
| Interest income                                           |   | 5,250                            |            | 32,738 |   |
|                                                      |   |                             |            |   |   |
| Net loss                                                  |   | $                                |  (376,075  | ) | $ |  (940,214 | ) |
|                                                      |   |                             |            |   |   |
|                                                      |   |                             |            |   |   |
| Basic and diluted loss per share                          |   | $                                |  (0.08     | ) | $ |  (0.19 | ) |
|                                                      |   |                             |            |   |   |
|                                                      |   |                             |            |   |   |
| Shares used in computing basic and diluted loss per share |   | 4,915,540                        |            | 4,897,346 |   |

 

See accompanying notes.

 

4

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Vista MedicalTechnologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 
|                                                                          |   | **Three Months Ended March 31,** |           |
|-------------------------------------------------------------------------------|--------|----------------------------------|----------------|
|                                                                          |   | **2002**                         |           | **2001** |   |
| OPERATING ACTIVITIES                                                          |   |                             |           |   |   |
| Net loss                                                                      |   | $                                |  (376,075 | ) | $ |  (940,214 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |   |                             |           |   |   |
| Depreciation and amortization                                                 |   | 116,641                          |           | 187,045 |   |
| Amortization of deferred compensation                                         |   | 24,963                           |           | 59,524 |   |
| Changes in operating assets and liabilities:                                  |   |                             |           |   |   |
| Accounts receivable                                                           |   | 463,598                          |           | 100,540 |   |
| Inventories                                                                   |   | (269,914                         | )              | (121,273 | ) |
| Other current assets                                                          |   | 30,812                           |           | 34,752 |   |
| Accounts payable                                                              |   | (6,361                           | )              | 12,698 |   |
| Accrued compensation                                                          |   | 59,167                           |           | 58,111 |   |
| Deferred revenue                                                              |   | (250,000                         | )              | — |   |
| Accrued liabilities                                                           |   | 283,457                          |           | (6,020 | ) |
| Net cash flows provided (used) for operating activities                       |   | 76,288                           |           | (614,837 | ) |
|                                                                          |   |                             |           |   |   |
| INVESTING ACTIVITIES                                                          |   |                             |           |   |   |
| Sales (Purchases) of short-term investments                                   |   | 60,822                           |           | 58,447 |   |
| Purchases of property and equipment                                           |   | (19,772                          | )              | (7,931 | ) |
| Net cash flows provided by investing activities                               |   | 41,050                           |           | 50,516 |   |
|                                                                          |   |                             |           |   |   |
| FINANCING ACTIVITIES                                                          |   |                             |           |   |   |
| Issuance of common stock                                                      |   | 43,897                           |           | 16,215 |   |
| Net cash flows provided by financing activities                               |   | 43,897                           |           | 16,215 |   |
| Net increase (decrease) in cash and cash equivalents                          |   | 161,235                          |           | (548,106 | ) |
| Cash and cash equivalents at beginning of period                              |   | 800,547                          |           | 2,589,006 |   |
| Cash and cash equivalents at end of period                                    |   | $                                |  961,782  |   | $ |  2,040,900 |   |

 

5

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VISTA MEDICALTECHNOLOGIES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

MARCH 31, 2002

(UNAUDITED)

 

1.   Basis of Presentation

 

The audited financial statements of Vista MedicalTechnologies, Inc. (the “Company”) and the notes thereto for the year endedDecember 31, 2001 included in the Company’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission, contain additional informationabout the Company, its operations, and its financial statements andaccounting  practices, and should beread in conjunction with this quarterly report on Form 10-Q.  These unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples and with the instructions on Form 10-Q except that certaininformation and footnote disclosures normally contained in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted.

 

The accompanying unaudited consolidated financialstatements of the Company reflect all adjustments of a normal recurring naturewhich are, in the opinion of management, necessary for a fair presentation ofthe financial position, results of operations and cash flows for all periodspresented.  The interim financialinformation contained herein is not necessarily indicative of results for anyfuture interim periods or for the full fiscal year ending December 31, 2002.

 

2.   Inventories

 

|                 |   | **March 31,  2002** |            | **December  31, 2001** |   |
|----------------------|--------|---------------------|-----------------|------------------------|--------|
|                 |   | **(Unaudited)**     |            |                   |   |
|                 |   |                |            |                   |   |
| Parts and  materials |   | $                   |  1,577,212 |                   | $      |  1,587,253 |   |
| Work in process      |   | 330,588             |            | 170,815                |   |
| Finished goods       |   | 831,063             |            | 858,202                |   |
|                 |   | 2,738,863           |            | 2,616,270              |   |
| Less: reserves       |   | (1,374,375          | )               | (1,521,696             | )      |
| Inventories, net     |   | $                   |  1,364,488 |                   | $      |  1,094,574 |   |

 

6

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3.   Loss Per Share

 
|                                             |   | **Three  Months Ended March 31,** |     |
|--------------------------------------------------|--------|-----------------------------------|----------|
|                                             |   | **2002**                          |     | **2001** |   |
|                                             |   |                              |     |   |   |
| Net (loss)                                       |   | $                                 | (376,076 | ) | $ | (940,214 | ) |
| Weighted average  common shares outstanding      |   | 4,915,540                         |     | 4,897,346 |   |
| Shares used in  basic and diluted loss per share |   | 4,915,540                         |     | 4,897,346 |   |
| Basic and  diluted loss per share                |   | $                                 | (0.08    | ) | $ | (0.19 | ) |

 

4.   Other Comprehensive Income

 

Other comprehensive income equals net income as marketable securitiesdid not generate any material unrealized gains or losses.

 

5.   New Accounting Standards

 

In March 2000, the FASB issued FASB interpretation (“FIN”) No. 44,“ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, ANINTERPRETATION OF APB OPINION NO. 25.” The interpretation requires that stockoptions that have been modified to effectively reduce the exercise pricegenerally be accounted for as variable. The Company adopted the Interpretation prospectively as of July 1,2000.  The adoption of theinterpretation has not had a significant impact on the Company’s financialstatements.

 

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,”and No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal yearsbeginning after December 15, 2001. Under the new rules, goodwill, along with intangible assets deemed tohave indefinite lives, will no longer be amortized but will be subject toannual impairment tests in accordance with the Statements.  Also, business combinations initiated afterJune 30, 2001 must be accounted for using the purchase method of accounting.  Adoption of SFAS 141 and 142 is not expectedto have a 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 QUARTERLY REPORT MAY CONTAIN PREDICTIONS,ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKSAND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT “RISKS ANDUNCERTAINTIES.”  WHILE THIS OUTLOOKREPRESENTS OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF OUR BUSINESS, SUCHRISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANYREVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCESARISING AFTER THE DATE OF THIS QUARTERLY REPORT.  THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OURCONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OFTHIS QUARTERLY REPORT ON FORM 10-Q AND OUR 2001 ANNUAL REPORT ON FORM 10-K,FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

**Overview of our business**

 

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 sponsor training andsupport programs for medical personnel which enhance the adoption of proceduresincorporating use of our visualization technology.  Our products combine a head mounted display with video cameras toprovide surgeons with critical visual information during these microsurgicalprocedures, combined with the ability to view new additional information in avoice-controlled, picture-in-picture format, to facilitate real-time decision makingduring surgery.  Our product linesinclude the ORPC Advanced Visualization and Information System for generalsurgery and other complex endoscopic procedures and the Series 8000 AdvancedVisualization and Information System, for use in cardiac surgery.  In general terms, endoscopic surgeryinvolves a telescopic viewing device which is inserted into a small incision inthe body and which allows the surgeon an adequate view of the internal part ofthe body being repaired.

 

**Ourresults of operations for three-months ended March 31, 2002 versus three-monthsended March 31, 2001**

 

Revenues.  Wehad revenues from product sales and contract revenue of $2,673,000 for thethree-months ended March 31, 2002, compared to revenues from product sales of$1,933,000 for the same period in 2001. The increase in revenue during the first quarter of 2002 compared to thecorresponding period in 2001 was due primarily to increased unit sales from ourLaparascopic Bariatric Surgery Program coupled with contract revenue recognitionof $250,000 from our Supply and Promotion Agreement with Ethicon Endo-Surgery,Inc.

 

Cost of Revenues. Our cost of revenues were $1,363,000 and $1,532,000 for the three-monthsended March 31, 2002 and 2001, respectively, with gross margins of 49% and 20%,

 

 

8

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respectively. The increase in gross margin was primarily due toincreased unit sales of our higher margin Laparascopic Bariatric SurgeryProgram coupled with contract revenue recognition of $250,000 from an agreementwith Ethicon Endo-Surgery, Inc., with no cost of sales.

 

Research and Development Expenses.  Our research and development expenses were$424,000 and $390,000 for the three-months ended March 31, 2002 and 2001,respectively.  The increase in researchand development expenses was primarily attributable to 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 and Marketing Expenses.  Our sales and marketing expenses were$723,000 and $488,000 for the three-months ended March 31, 2002 and 2001,respectively. The increase in sales and marketing expense during the 2002period reflects a ramp up of field activities for the obesity surgerymarket.  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 surgery market.

 

General and Administrative Expenses.  Our general and administrative expenses were$543,000 and $496,000 for the three-months ended March 31, 2002 and 2001,respectively.  The increase in generaland administrative expenses during the 2002 period reflects higher professionaland legal fees.  We expect our generaland administrative expenses to remain at or near current levels for the nextseveral quarters.

 

Interest Income. Our net interest income was $5,000 and $33,000 for the three-monthsended March 31, 2002 and 2001, respectively. The decrease in net interest income during the 2002 period was dueprimarily to decreasing cash balances.

 

**Liquidityand capital resources**

 

Net cash provided by operating activities for thethree-months ended March 31, 2002 was $76,000 compared to net cash used of$615,000 for the corresponding three-month period in 2001.  The increase in net cash provided byoperating activities during the 2002 period was primarily attributable to adecreased net loss and higher accounts receivable collections partially offsetby higher inventory purchases.

 

Net cash provided by investing activities was $41,000for the three-months ended March 31, 2002 compared to $51,000 of net cashprovided in the same period in 2001. The decrease in net cash provided by investing activities in 2002 wasprimarily attributable to increasing purchases of property and equipment.

 

Net cash provided by financing activities was $44,000for the three-months ended March 31, 2002 compared to $16,000 for the sameperiod in 2001.  The increase in netcash provided by financing activities during the 2002 period was primarilyattributable to an increase in purchases of stock by employees through ouremployee stock purchase plan and a higher level of stock

 

9

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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 willprovide a significant source of revenue in fiscal 2002.    We are also working on initiatives toextend our business, most immediately in the surgical obesity market, by addingnew products and services which could provide new sources of revenue in fiscal2002.  In October 2001, we also obtainedan additional financing source through a $2,000,000 bank line of creditfacility for one year with automatic yearly renewals.  At March 31, 2002 $2,000,000 was available under this credit facility.

 

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.  However, management has outlined a number ofaction steps that may be taken if operating results are worse than planned toensure that we have adequate sources of cash to meet our working capitalneeds.  During the second half of 2001,we received approval from our Board of Directors to implement an action plan infiscal 2002 if necessary to sustain operations. The key elements of the planare as follows:

 

•                                          Further reduce operating expenses byeliminating certain expenditures that are not essential to achieving criticalbusiness objectives (e.g., discretionary spending, further developmentefforts);

 

**•**                                          Eliminate planned expansion into new services andproduction of new products;

 

•                                          Deferral of the production phase of thenext generation Head Mounted Display, and

 

•                                          Borrow against the company’s $2,000,000credit facility.

 

Unanticipated decreases in operating revenues,increases in expenses or delays in product development may adversely impact theCompany’s cash position and require further cost reductions. No assurance canbe given that the Company will be able to achieve profitability or operateprofitably on a consistent basis in the future.  As of March 31, 2002, our accumulated deficit was approximately$65,154,000.

 

We have a $2,000,000 credit facility with a financialinstitution.  Interest on this facilitywas prime plus 2% at March 31, 2002.  AtMarch 31, 2002, we had no advances outstanding under this credit facility.  If we were to draw under this facility,changes in interest rates would affect the interest expense we would pay andcould impact our cash flows and results of operations.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

At March 31, 2002, our investment portfolio includedfixed-income securities of $0.8 million. These securities are subject to interest rate risk and will decline invalue if interest rates increase.  Dueto the short duration of our investment portfolio, an immediate 10 percentincrease

 

10

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in interest rates would have no material impact on our financialcondition or results of operations.

 

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.

 

11

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RISKS ANDUNCERTAINTIES

 

You should consider the following factors carefully inevaluating an investment in Vista Medical in addition to the other informationin this report.  You are cautioned thatthe statements in this annual report that are not descriptions of historicalfacts may be forward-looking statements that are subject to risks anduncertainties.  Our actual results coulddiffer materially from those currently anticipated due to a number of factors,including those identified in this section and elsewhere in this annualreport.  We undertake no obligation torelease publicly the results of any revisions to these forward-lookingstatements to reflect events or circumstances arising after the date of thisannual report.  The following discussionshould be read in conjunction with our consolidated financial statements andnotes thereto.

 

**We mayneed additional funds to support our currently proposed operations.  If we are unable to obtain them, we may haveto significantly scale back our operations or forgo opportunities in new marketsegments.**

 

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:

 

•                                          The extent to which our products gainmarket acceptance;

 

•**                                         **The progress and scope of productevaluations;

 

•                                          The timing and costs of filing future regulatorysubmissions;

 

•                                          The timing and costs required to receiveboth domestic and international governmental approvals;

 

•                                          The timing and costs of productintroductions;

 

•                                          The extent of our ongoing research anddevelopment programs;

 

•                                          The costs of sponsorship training of thephysicians to become proficient in the use of our products and procedures, and

 

•                                          The costs of developing marketing anddistribution capabilities.

 

Even if we are successful in raising additional funds,circumstances, such as a slow rate of market acceptance of our products or ourinability to scale up manufacturing, could accelerate our use of proceeds fromany offering of securities we might do and require us to seek additional fundsto support our operating requirements.

 

12

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

** **

Since our formation in July 1993, and as of March 31,2002, we have incurred cumulative net losses of $65.2 million.  We expect to incur losses for at least thenext 9 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 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 in distributingour cardiac surgery products and may lose revenues.

 

In addition, during 2000, we changed our strategicemphasis for our core three-dimensional technology and now focus onapplications in general surgery, gynecology and urology.  We cannot assure you that we will be successfulin these areas of sales.  Even if we aresuccessful, we cannot assure you that the revenue achieved in these areas ofemphasis will be sufficient to compensate for any loss of sales revenue fromthe termination of our previous distribution agreements for cardiacproducts.  Either of these results couldhave an adverse 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, which are derived from ourcore three-dimensional technology, are expected to account for the majority ofour revenues over the next several years. The demand for these products may not be sufficient to allow us toachieve 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 highlyskilled surgeons.  We are unable topredict how quickly, if at all, complex minimally invasive procedures will beadopted by the medical community or, if they are adopted, the number ofprocedures that will 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:

 

•                                          quality control and assurance;

 

•                                          component and service availability;

 

•                                          adequacy of control policies andprocedures;

 

•                                          lack of qualified personnel;

 

•                                          compliance with FDA regulations and theneed for further FDA approval of new manufacturing processes and facilities,and

 

•                                          other production constraints.

 

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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 significant supply interruption, or inventoryshortage or overage, would negatively impact our ability to manufacture ourproducts.  We use and rely on specificcomponents and services used in our systems for which we have only a singlesource of supply.  The manufacture of ourproducts in larger commercial quantities will require a substantial increase incomponent supplies and will likely necessitate the replacement of currentsuppliers or the addition of new suppliers. The qualification of additional or replacement vendors for specifiedcomponents or services is a lengthy process. In addition, the substitution of replacement vendors may entailre-engineering time and cost and could delay the supply of our products.

 

We expect to manufacture our products based onforecasted product orders and intend to purchase subassemblies and componentsprior to receipt of purchase orders from customers.  Lead times for ordered materials and components varysignificantly and depend on factors such as the business practices of thespecific supplier, contract terms and general demand for a component at a giventime.  Some components used in ourproducts have long lead times.  As aresult, there is a risk of excess or inadequate inventory if orders do notmatch forecasts.

 

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

** **

The manufacture and sale of medical devices intendedfor commercial distribution are subject to extensive governmentalregulation.  Our failure to comply withregulatory 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 are regulated in the United Statesprimarily by the FDA and, to a lesser extent, by state agencies.  Sales of medical device products outside theUnited States are subject to foreign regulatory requirements that vary fromcountry to country.  Generally, medicaldevices require pre-market clearance or pre-market approval prior to commercialdistribution.  A determination thatinformation available on the medical device is not sufficient to grant theneeded clearance or approval will delay market introduction of theproduct.  In addition, material changesor modifications to, and changes in intended use of, medical devices also aresubject to FDA review and clearance or approval.  The FDA regulates the research, testing, manufacture,

 

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safety, effectiveness, labeling, storage, record keeping, promotion anddistribution of medical devices in the United States and the export ofunapproved medical devices from the United States to other countries.  The time required to obtain approvalsrequired by foreign countries may be longer or shorter than that required forFDA 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 device market in which we compete ischaracterized by intensive development efforts and rapidly advancingtechnology.  Our future success willdepend, in large part, upon our ability to anticipate and keep pace withadvancing technology and competing innovations.  We may not be successful in identifying, developing and marketingnew products or enhancing our existing products.

 

We believe that a number of large companies, withsignificantly greater financial, manufacturing, marketing, distribution andtechnical resources and experience than ours, are focusing on the developmentof visualization products for minimally invasive microsurgery.  Several companies are currently developingand marketing visualization products for minimally invasive microsurgery whichcould be applied to general surgery or heart surgery.

 

Technological advances with other therapies such asdrugs, interventional procedures or future innovations in surgical techniquescould make such other therapies more effective or lower in cost than minimallyinvasive microsurgery procedures and could diminish growth prospects forminimally invasive microsurgery.

 

**We expect fluctuations in ouroperating results.**

** **

Our results of operations may vary significantly fromquarter to quarter depending upon numerous factors, including the following:

 

•                                          timing and results of productevaluations;

 

•                                          delays associated with the FDA and otherregulatory approval processes;

 

•                                          demand for and utilization of ourproducts;

 

•                                          changes in our pricing policies or thoseof our competitors;

 

•                                          changes in third-party paymentguidelines;

 

•                                          the number, timing and significance ofproduct enhancements and new product announcements by us or our competitors;

 

•                                          our ability to develop, introduce andmarket new and enhanced versions of our products on a timely basis;

 

•                                          customer order deferrals in anticipationof enhancements or new product introductions by us or our competitors;

 

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•                                          product quality problems;

 

•                                          personnel changes, and

 

•                                          the level of international sales.

 

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

** **

Our profitability is directly related to the level ofpayments for the surgical procedures in which our products are involved, eitherby Medicare or private insurance companies. We could be adversely affected by changes in payment policies ofgovernment or private health care payors, particularly to the extent any suchchanges affect payment for the procedure in which our products are intended tobe used.  It is a continuing trend inU.S. health care for such payments to be under continual scrutiny and downwardpressure.  We believe that reimbursementin the future will be subject to increased restrictions, both in the UnitedStates and in foreign markets and that the overall escalating cost of medicalproducts and services has led to and will continue to lead to increasedpressures on the health care industry, both foreign and domestic, to reduce thecost of products and services, including products 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 predetermined 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 scrutinizingwhether to 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 the necessary foreign regulatoryregistrations or approvals, market acceptance of our products in internationalmarkets would be dependent, in part, upon the acceptance by the prevailinghealth care financing system in each country. Health care financing systems in international markets varysignificantly by country and include both government sponsored health careprograms and private insurance.  Wecannot assure you that these financing systems will endorse the use of ourproducts.

 

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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 experience in directly marketing ourproducts overseas.  Changes in overseaseconomic conditions, currency exchange rates, foreign tax laws or tariffs orother trade regulations could negatively impact our business.  The anticipated international nature of ourbusiness is also expected to subject our representatives, agents anddistributors to laws and regulations of the foreign jurisdictions in which theyoperate or in which our products  aresold, 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 inherent and significant business risk ofexposure to product liability claims in the event that the use of our productsresults in personal injury or death. Also, in the event that any of our products proves to be defective, wemay be required to recall or redesign such products.  Our current product liability insurance coverage limit is $10.0million per occurrence and in the aggregate. Our coverage limits may not be adequate to protect us from anyliabilities we might incur in connection with the development, manufacture andsale of our products.  In addition,increased product liability coverage may be required if additional products areused in clinical evaluations or successfully commercialized.  Product liability insurance is expensive andin the future may not be available to us on acceptable terms, if at all.  A successful product liability claim orseries of claims brought against us in excess of our insurance coverage or aproduct recall would negatively 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 success will depend, in part, on ourability to continue developing patentable products, enforcing our patents andobtaining patent protection for our products both in the United States and inother countries.  The patent positionsof medical device companies, however, are generally uncertain and involvecomplex legal and factual questions. Patents may never issue from any patent applications owned by orlicensed to us.  Even if patents doissue, the claims allowed may not be sufficiently broad to protect ourtechnology.  In addition, issued patentsowned by or licensed to us may be challenged, invalidated or circumvented, orthe rights granted thereunder may not provide us with competitive advantages.

 

The medical device industry has been characterized byextensive litigation regarding patents and other intellectual propertyrights.  Litigation, which would resultin substantial expense, may be necessary to enforce any patents issued orlicensed to us and/or to determine the scope and validity of proprietary rightsof third parties or whether our products, processes or procedures infringe anysuch third-party proprietary rights.  Wemay also have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial expense,to determine the priority of inventions covered by our issued United Statespatents or pending patent applications. Furthermore, we may have to 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 to patents, 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 this technology.  It is difficult to protect rights to unpatented proprietarytechnology.  Third parties may obtainpatent rights to these 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 some aspects of ourproducts from third parties and may lose the rights to these essential aspectsunder the agreements which govern those relationships.**

** **

We have licensed some aspects of our technology fromthird parties.  The rights under thegoverning agreements may be terminated if we breach our obligations or in othercircumstances.  Our failure to retainrights to these licensed rights could negatively 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 future business and operating results depend insignificant part upon the continued contributions of our key technical andsenior management personnel, many of whom would be difficult to replace andsome of whom perform important functions beyond those suggested by their jobtitles or descriptions.  Our businessand future operating results also depend in significant part upon our abilityto attract and retain qualified management, manufacturing, technical, marketingand sales and support personnel for our operations.  Competition for such personnel is intense, and we may not besuccessful in attracting or retaining such personnel.

 

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Members of our clinical advisory boards consult withus exclusively in the field of visualization, but are free to consult withother non-competing instrumentation companies and are employed elsewhere on afull-time basis.  As a result, they onlyspend a limited amount of time on our business.  Although we have entered into consulting agreements, includingconfidentiality provisions, with each of the members of our clinical advisoryboards, the consulting and confidentiality agreements between us and each ofthe members of our clinical advisory boards may be terminated or breached.

 

**Ourstock price could continue to be volatile and your investment in our commonstock could suffer a decline in value, adversely affecting our ability to raiseadditional capital.**

 

The market prices and trading volumes for securitiesof emerging companies, like ours, have historically been highly volatile andhave experienced significant fluctuations unrelated to  operating performance.  The market price of our common stock hashistorically been highly volatile and may be significantly affected by factorssuch as:

 

•                                          actual or anticipated fluctuations in ouroperating results;

 

•                                          changes in financial estimates bysecurities analysts;

 

•                                          announcements of technologicalinnovations;

 

•                                          new products or new contracts by us orour competitors;

 

•                                          regulatory announcements;

 

•                                          developments with respect to patents orproprietary rights;

 

•                                          conditions and trends in the medicaldevice and other technology industries;

 

•                                          adoption of new accounting standardsaffecting the medical device industry, and

 

•                                          general market conditions.

 

In addition, the stock market has from time to timeexperienced significant price and volume fluctuations that have particularlyaffected the market prices for shares of early stage companies.  These broad market fluctuations mayadversely affect the market price of our common stock.  In the past, following periods of volatilityin the market price of a particular company’s securities, securities classaction litigation has often been brought against that company.  Such litigation, if brought against us,could result in substantial costs and a diversion of management’s attention andresources.

 

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

** **

Our research and development activities may involvethe controlled use of hazardous materials and chemicals.  The risk of accidental contamination orinjury 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 currently intend to retain any future earnings foruse in our business and do not anticipate paying any cash dividends in theforeseeable future.

 

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

** **

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

 

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PART II.  OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

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.  Changes in Securities and Use of Proceeds

 

a.       Not applicable

 

b.         Notapplicable

 

c.       Not applicable

 

Item 3.   Defaultsupon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.   Other Information

 

None.

 

Item 6.  Exhibits and Reports on Form 8-K

 

A)     Exhibits

 
| 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                                      |   |

 

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(1)                                  Incorporated by reference to our Form10-K/A filed on September 10, 1998.

 

(2)                                  Incorporated by reference to our Form10-Q filed on November 14, 2001.

 

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(3)                                  Incorporated by reference to ourRegistration Statement on Form S-1, as amended, Filed on July 2, 1997.

 

B)      Reportson Form 8-K

 

No reports on Form 8-K were filed by the Companyduring the three months ended March 31, 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | VISTA MEDICAL TECHNOLOGIES, INC.                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------|
|   |                                                                                                            |
|   |                                                                                                            |
| Date:  | May 10, 2002                                                                                                    |   | /s/ John R. Lyon |   |
|   | John R. Lyon                                                                                                    |
|   | President, Chief Executive Officer and  Director                                                                |
|   |                                                                                                            |
| Date:  | May 10, 2002                                                                                                    |   | /s/ Stephen A. Gorgol |   |
|   | Stephen A. Gorgol                                                                                               |
|   | Vice President of Finance, Chief Financial  Officer and Secretary  (Principal financial and accounting officer) |
|        |                                                                                                                 |  |  |  |  |

** **

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