<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-20970
VISION-SCIENCES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3430173
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 Strathmore Road, Natick, MA 01760
------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 650-9971
--------------
None
(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 1998.
Common Stock, par value of $.01 19,211,021
- ------------------------------- ----------
(Titles of Class) (Number of Shares)
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<S> <C>
Consolidated Balance Sheets............................................................................3
Consolidated Statements of Operations..................................................................4
Consolidated Statement of Stockholders' Equity.........................................................5
Consolidated Statements of Cash Flows..................................................................6
Notes to Consolidated Financial Statements..........................................................7-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................12-14
Year 2000 Compliance ..............................................................................15-16
Part II Other Information .................................................................................17-18
Signature.............................................................................................19
</TABLE>
2
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
--------------------- ------------------
ASSETS (audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 4,625,759 $ 1,897,905
Marketable securities...................................... - 993,146
Accounts receivable, net of allowance for doubtful
accounts of $121,000 and $117,000, respectively ....... 1,182,215 1,439,285
Inventories................................................ 739,665 681,106
Prepaid expenses and deposits.............................. 83,976 86,722
-------------- ------------
Total current assets................................... 6,631,615 5,098,164
-------------- ------------
Property and Equipment, at cost:
Machinery and equipment.................................... 2,764,196 2,765,385
Furniture and fixtures..................................... 218,480 215,924
Leasehold improvements..................................... 332,333 304,563
-------------- ------------
3,315,009 3,285,872
Less-Accumulated depreciation and amortization 2,611,239 2,399,602
-------------- ------------
703,770 886,270
-------------- ------------
Equity investment in 3DV Systems, Ltd........................... 3,456,900 -
Other Assets, net of accumulated amortization of $72,000
and $69,000, respectively.................................. 173,004 187,383
-------------- ------------
Total assets........................................... $ 10,965,289 $ 6,171,817
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank.............................. $ 56,327 $ 52,383
Accounts payable........................................... 810,141 525,141
Accrued expenses........................................... 1,567,165 1,777,775
-------------- ------------
Total current liabilities.............................. 2,433,633 2,355,299
-------------- ------------
Deferred development fee ....................................... 1,658,758 -
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--19,211,021 shares at
September 30, 1998 and 16,643,071 shares at
at March 31, 1998...................................... 192,110 166,430
Additional paid-in capital................................. 51,829,630 48,083,992
Accumulated deficit........................................ (45,148,842) (44,433,904)
-------------- ------------
Total stockholders' equity............................. 6,872,898 3,816,518
-------------- ------------
Total liabilities and stockholders' equity $ 10,965,289 $ 6,171,817
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended
September 30, September 30,
------------------------------------------ ------------------------------------
1998 1997 1998 1997
-------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales.................................. $ 1,965,061 $ 1,822,906 $ 3,841,796 $ 3,687,374
Cost of sales.............................. 1,545,838 1,551,412 3,110,760 3,056,627
--------- --------- --------- ---------
Gross profit............................... 419,223 271,494 731,036 630,747
Selling, general and
administrative expenses.................... 740,668 1,002,184 1,430,630 1,863,293
Research and development
expenses................................... 51,933 277,714 104,461 535,639
--------- --------- --------- ---------
Loss from operations....................... (373,378) (1,008,404) (804,055) (1,768,185)
Interest income............................ 47,810 36,581 83,291 73,288
Other income(expense), net................. 4,592 66,444 5,826 178,258
--------- --------- --------- ---------
Net loss................................... $ (320,976) $(905,379) $(714,938) $(1,516,639)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss
per common share $ (0.02) $ (0.06) $ (0.04) $ (0.10)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and diluted
net loss per common share 17,831,130 14,696,909 17,243,059 14,696,909
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Number $.01 Additional Total
of Shares Par Paid-in- Accumulated Stockholders'
Value Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, March 31,
1998, (audited) 16,643,071 $ 166,430 $ 48,083,992 $(44,433,904) $ 3,816,518
Exercise of stock
options 67,950 680 80,011 80,691
Sale of common
stock, net 2,000,000 20,000 2,923,727 2,943,727
Issuance of common
stock in
connection with
investment in 3DV
Systems, Ltd. 500,000 5,000 741,900 746,900
Net loss (714,938) (714,938)
---------- ------------ ------------ ------------ ------------
Balance, September
30, 1998 19,211,021 $ 192,110 $ 51,829,630 $(45,148,842) $ 6,872,898
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $ (714,938) $(1,516,639)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ...................................... 214,807 245,596
Equity in losses of 3DV Systems, Ltd. .............................. 290,000 --
Loss on disposal of property and equipment ......................... -- 27,856
Amortization of deferred credit .................................... -- (36,558)
Changes in assets and liabilities:
Accounts receivable .............................................. 257,070 881,710
Inventories ...................................................... (58,559) 42,725
Prepaid expenses and deposits .................................... 2,746 72,714
Accounts payable ................................................. 285,000 349,452
Accrued expenses ................................................. (210,610) (109,932)
Deferred development fee ......................................... 1,658,758 --
----------- -----------
Net cash provided by (used for) operating activities ............ 1,724,274 (43,076)
----------- -----------
Cash flows provided by (used for) investing activities
Decrease in marketable securities .................................... 993,146 --
Purchase of property and equipment ................................... (29,137) (75,731)
Investment in 25% of equity of 3DV Systems, Ltd. ..................... (3,000,000) --
Decrease in other assets ............................................. 11,209 3,909
----------- -----------
Net cash used for investing activities ......................... (2,024,782) (71,822)
----------- -----------
Cash flows provided by (used for) financing activities:
Proceed from (payments of) acceptances payable to a bank ............. 3,944 (19,741)
Proceeds from the sale of common stock, net .......................... 2,943,727 --
Exercise of Stock Options ............................................ 80,691 --
----------- -----------
Net cash provided by (used for) financing activities ........... 3,028,362 (19,741)
----------- -----------
Net increase (decrease) in cash and cash equivalents ...................... 2,727,854 (134,639)
Cash and cash equivalents, beginning of period ............................ 1,897,905 2,681,271
----------- -----------
Cash and cash equivalents, end of period .................................. $ 4,625,759 $ 2,546,632
----------- -----------
----------- -----------
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in connection with equity
investment in 3DV Systems, Ltd. ..................................... $ 746,900 $ --
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in
the opinion of management, all adjustments (consisting only of normal
and recurring adjustments) that the Company considers necessary for a
fair presentation of such information. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest
annual report to stockholders. The results for the interim periods
presented are not necessarily indicative of results to be expected for
the full fiscal year.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below:
a. Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in
consolidation.
b. Cash Equivalents: Cash equivalents are carried at amortized
cost, which approximates market value. Cash equivalents are
short-term, highly liquid investments with original maturities
of less than three months.
c. Inventories: Inventories are stated at the lower of cost or
market using the first-in, first-out (FIFO) method and consist
of the following:
<TABLE>
<CAPTION>
September 30 March 31,
1998 1998
------------------ -----------------
(audited)
<S> <C> <C>
Raw materials................................ $ 292,019 $ 181,125
Work-in-process.............................. 125,992 178,625
Finished goods............................... 321,654 321,356
--------- ----------
$ 739,665 $ 681,106
--------- ----------
--------- ----------
</TABLE>
Work-in-process and finished goods inventories consist of
material, labor, and manufacturing overhead.
7
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
2. Summary of Significant Accounting Policies (Continued)
d. Depreciation and Amortization: The Company provides for
depreciation and amortization using the straight-line method
in amounts that allocate the cost of the assets to operations
over their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- -----------
<S> <C>
Machinery and Equipment........................................................ 5 Years
Furniture and Fixtures......................................................... 5 Years
</TABLE>
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the lives of the leases.
e. Basic and Diluted Net Loss Per Common Share: Basic and diluted
net loss per common share is based on the weighted average
number of common shares outstanding. Shares of common stock
issuable pursuant to stock options and warrants have not been
considered, as their effect would be antidilutive.
f. Revenue Recognition: The Company recognizes revenue upon
product shipment.
g. Foreign Currency Transactions: The Company charges
foreign currency exchange gains or losses, in
connection with its purchases of products from vendors
in Japan, to operations in accordance with SFAS No. 52,
Foreign Currency Translation.
h. Income Taxes: The Company accounts for income taxes under the
liability method in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred tax assets or
liabilities are computed based upon the differences between
the financial statement and income tax bases of assets and
liabilities as measured by the enacted tax rates.
The Company has recorded a valuation allowance equal to its
net deferred tax asset due to the uncertainty of realizing the
benefit of this asset.
8
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. Agreements with 3DV Systems Ltd., Imagineering, Ltd. and Asahi Optical
Co., Ltd.
On August 20, 1998, pursuant to an Investment Agreement, dated August 6, 1998
between Vision-Sciences, Inc., (the "Company") and 3DV Systems Ltd., a
privately-held Israeli company ("3DV"), (the "Agreement") the Company purchased
338,099 shares of common stock of 3DV (the "Shares"), for a purchase price of $3
million in cash, $500,000 of which the Company had previously advanced to 3DV in
May 1998. The Company funded the purchase price from proceeds received from
Asahi Optical Co., Ltd., (Asahi Kogaku Kogyo Kabushiki Kaisha), a Japanese
corporation ("Asahi"), pursuant to the License Agreement between the Company and
Asahi described below. The Shares were previously unissued shares of common
stock of 3DV and, after the closing of the transaction, represent 25% of the
fully diluted share capital of 3DV. Prior to the investment by the Company, 3DV
was a wholly-owned subsidiary of RDC Rafael Development Corporation Ltd.
("RDC"), an Israeli company.
Pursuant to the Agreement, the Company also issued 500,000 shares of its common
stock, $.01 par value per share (the "Common Stock"), to RDC in exchange for
certain rights. These rights include an option to purchase all of the remaining
shares of capital stock of 3DV owned by RDC, which represent 62.85% of the
fully-diluted share capital of 3DV, at the then fair market value of such
shares. This option is exercisable by the Company during the period May 15, 2000
to November 14, 2000.
In addition, RDC has the right to require the Company to purchase up to the
remaining 75% of the fully-diluted share capital of 3DV, including 12.15% that
would be owned by employees of 3DV, at the then fair market value of such
shares. Two of the Company's directors, Mr. Katsumi Oneda and Mr. Lewis C. Pell,
have been appointed to the Board of Directors of 3DV.
The terms of the Agreement were determined on the basis of arms'-length
negotiations. Prior to the execution of the Agreement, neither the Company nor
any of its affiliates had any material relationship with either 3DV or RDC.
In connection with these transactions with 3DV and RDC, the Company also entered
into a License and Manufacturing Agreement (the "L&M Agreement") with 3DV, dated
August 6, 1998, pursuant to which the Company obtained exclusive, worldwide,
perpetual and royalty-free rights to commercially exploit products in certain
fields of use that incorporate, or use, component parts embodying technology
developed by 3DV. The L&M Agreement allows the Company to sublicense certain of
these rights to approved assigns. Asahi, which manufactures and markets a wide
variety of cameras, medical endoscopes and industrial imaging systems worldwide
under the brand name Pentax, is the sole approved assign under the L&M
Agreement, and the Company has sublicensed certain of its rights under the L&M
Agreement to Asahi pursuant to the License Agreement described below.
9
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. Agreements with 3DV Systems Ltd., Imagineering, Ltd. and Asahi Optical
Co., Ltd. (Continued)
On August 6, 1998, the Company executed a Memorandum of Understanding (the
"MOU") with Imagineering, Ltd., ("Imagineering") pursuant to which the Company
will acquire exclusive rights to research to be performed in association with
certain innovations (the "Innovations") that are designed to improve the
performance of CMOS-based Image Sensors. The MOU grants the Company exclusive
rights to any resulting patent applications and patent rights that result from
such research. A consultant to Imagineering will perform the research, and the
Company plans to grant the consultant a nonstatutory stock option for 1,000,000
shares of the Company's Common Stock, which will vest 100% upon the delivery of
the Innovations. In addition, the Company will fund the cost of the research by
Imagineering, initially for a period of one year. The terms of the MOU were
determined on the basis of arms'-length negotiations. Prior to the execution of
the MOU, neither the Company nor any of its affiliates had any material
relationship with Imagineering.
The Company also executed a License Agreement (the "License") with Asahi, dated
August 6, 1998, pursuant to which the Company granted Asahi exclusive rights, as
an approved assign under the L&M Agreement, to certain technology in certain
fields and to acquire from the Company and 3DV certain products having
application in those fields. Notwithstanding the License, the Company has
reserved the right to use the technology licensed to Asahi in products bearing
the Company's own trademarks within certain fields of use. In addition, the
License grants Asahi a worldwide, perpetual, royalty-free license to patentable
and non-patentable technology relating to the utilization or application of
CMOS-based Image Sensors, as researched or developed by the Company, pursuant to
the MOU with Imagineering. Pursuant to the License Agreement, on August 17,
1998, Asahi paid the Company $5 million in cash in exchange for the rights
described above and the issuance by the Company to Asahi of 2,000,000 shares of
Common Stock. The terms of the License Agreement were determined on the basis of
arms'-length negotiations. Prior to the execution of the License Agreement,
neither the Company nor any of its affiliates had any material relationship with
Asahi.
The Company recorded the value of common stock at $1.4938 per share, the average
closing price of the Company's shares on Nasdaq for the ten trading days ended
August 20, 1998. The difference between the market value of the Company's common
stock and the gross proceeds was recorded as a deferred development fee,
representing a prepayment of $2,012,400 by Asahi for future development costs to
be funded by the Company. The Company incurred fees of approximately $67,000,
$44,000 of which was applied to additional paid-in capital, and $23,000 of which
was applied to the deferred development fee.
In the event that the Company fails to comply with the terms of the License, it
may be required to repurchase the stock issued to Asahi. Management believes
that all events that would require repurchase are within the control of the
Company. Therefore, the stock purchased by Asahi has been classified as elements
of stockholders' equity.
10
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. Agreements with 3DV Systems Ltd., Imagineering, Ltd. and Asahi Optical
Co., Ltd. (Continued)
The deferred development fee was initially comprised of $657,000 of expected
development costs to be incurred by Imagineering and funded by the Company, and
$1,332,000 of expected development costs to be incurred by 3DV and funded by the
Company's investment in 3DV. The amount applicable to Imagineering is based upon
the MOU, and other costs that the Company expects to incur during the CMOS
development. If the costs related to Imagineering are greater than the estimate,
the Company will record the excess as charges to its statement of operations.
Any losses incurred by 3DV in excess of $1,332,000 will be recorded in the
statement of operations of the Company.
In the three months ended September 30, 1998, the Company recorded an initial
payment of $40,000 to fund Imagineering and Vision-Sciences, Ltd., and recorded
a corresponding reduction in the deferred development fee.
The Company accounts for its investment in 3DV using the equity method of
accounting. Due to the fact that the Company has committed to finance the
working capital needs of 3DV for the calendar years 1999 and 2000, the Company
will absorb 100% of the losses of 3DV, up to the value of the Company's
investment in 3DV. For the three months ended September 30, 1998, the Company
recognized losses of $290,000, representing 100% of the losses of 3DV from
August 20, 1998 through September 30, 1998. The Company recorded this loss by
reducing its investment in 3DV and with a corresponding reduction in the
deferred development fee.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Except for the historical information herein, the matters discussed in this Form
10-Q include forward-looking statements that may involve a number of risks and
uncertainties. Future results may vary significantly based upon a number of
factors including, but not limited to, risks in market acceptance of new
products and services and continuing demand for same, the impact of competitive
products and pricing, seasonality, changing economic conditions, the ability of
the Company to attain Year 2000 compliance and other risk factors detailed in
the Company's most recent annual report and other filings with the Securities
and Exchange Commission.
Net sales for the three and six months ended September 30, 1998 increased
$142,000 and $154,000, respectively, or 8% and 4%, respectively, versus the
comparable prior year three-month and six-month periods. For the three months
ended September 30, 1998 sales of medical products increased by $34,000, or by
3%, and sales of industrial products increased by $108,000, or 13%. For the
six-month period, sales of medical products decreased by $78,000, or 4%, while
sales of industrial products increased by $232,000, or 15%.
Sales of the Company's disposable EndoSheath(R) technology increased $115,000
and $148,000 in the three-month and six-month periods ended September 30, 1998,
respectively, compared to the same periods last year. These increases in sales
were due primarily to increased demand by the ENT market for the Company's
sheaths, which increased by 37% and 34% for the respective three-month and
six-month periods. Sales of endoscopes decreased by $66,000 and $206,000 in the
same periods, due primarily to lower sales of ENT scopes. These lower sales were
due to manufacturing delays at the Company's primary supplier of ENT scopes. In
addition, in the three months ended September 30, 1997 the Company recorded
non-recurring sales of $52,600 of medical devices to a company in the
image-guided surgery market, under an original equipment manufacturing
arrangement. Sales of industrial products increased due to higher demand for the
Company's products from the defense and airplane maintenance markets.
Gross profit for the three and six months ended September 30, 1998 increased to
$419,000, or 21% of net sales, and $731,000, or 19% of net sales, respectively,
versus $271,000, or 15% of net sales, and $631,000, or 17% of net sales, for the
comparable prior year three-month and six-month periods. The increase in gross
profit was due primarily to the increase in sales of disposable EndoSheaths,
which have a higher gross profit than endoscopes, and to reduced factory
overhead expenses resulting from reductions in staffing.
Selling, general and administrative expenses for the three and six months ended
September 30, 1998 decreased $262,000, or 26%, and $433,000, or 23%,
respectively, compared to the prior year three-month and six-month periods.
Selling, general and administrative expenses amounted to 38% and 37% of net
sales, respectively, in the three-month and six-month periods ended September
30, 1998. For the three-month and six-month periods ended September 30, 1997,
these expenses amounted to 55% and 51% of net sales, respectively. The decrease
in these expenses was primarily attributable to reduced expenses for product
promotion and payroll costs. The Company has reduced its efforts to promote
sales of scopes for the gastroenterology and pulmonary markets while it
concentrates on penetrating the market for ENT products and investing in new
technologies.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Research and development expenses for the three and six months ended September
30, 1998 decreased $226,000, or 81%, and $431,000, or 80%, respectively,
compared to the prior year three-month and six-month periods. These expenses
amounted to 3% of net sales for each of the three-month and six- month periods
ended September 30, 1998. In each of the three-month and six-month periods ended
September 30, 1997, these expenses amounted to 15% of net sales. The decrease in
these expenses was due primarily to reduced headcount resulting from the
Company's decisions to focus primarily on improvements in its ENT products, and
to invest in new technologies in Israel.
Interest income, net, for the three and six months ended September 30, 1998,
increased $11,000 and $10,000, respectively, versus the comparable prior year
three-month and six-month periods due to higher cash balances. The source of the
higher cash balances resulted primarily from the transactions described in Note
3.
Other income (expense), net for the three and six months ended September 30,
1998 decreased $62,000 and $172,000, respectively, compared to the prior year
three-month and six-month periods, due primarily to decreased royalty income.
The agreement which was the primary source of royalties for the three and six
months ended September 30, 1997 expired July 1, 1997.
Liquidity and Capital Resources
As of September 30, 1998, the Company had $4,626,000 in cash and cash
equivalents, and working capital of $4,198,000. The Company also had a cash
collateralized demand line of credit with a bank for borrowings of up to
$250,000. At September 30, 1998, there was approximately $194,000 available
under this line for use in support of general working capital needs and the
issuance of commercial and standby letters of credit.
The Company's cash and cash equivalents increased by $2,728,000 in the six
months ended September 30, 1998, due primarily to the receipt of $4.9 million,
net, from Asahi, less the Company's investment of $3 million in 3DV, as
described in Note 3. In addition, the Company incurred a net cash increase of
approximately $800,000 due primarily to the maturity of marketable securities,
changes in working capital and other assets and the exercise of stock options,
partially offset by operating losses and the purchase of capital equipment.
As discussed in Note 3, the Company recorded a deferred development fee
resulting from the purchase by Asahi of 2,000,000 shares of the Company' common
stock. The amount of the deferred development fee applicable to Imagineering is
based upon the MOU and other costs that the Company expects to incur over
approximately a one year period during the CMOS development. These costs include
the establishment and maintenance of Vision-Sciences, Ltd., an Israeli
corporation formed by the Company in September 1998 to oversee the development
of advanced CMOS technology and coordinate activities with 3DV.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Also, as discussed in Note 3, in the three months ended September 30, 1998 the
Company recorded an initial payment to Imagineering and equity in 100% of the
losses of 3DV. The combined amount of these charges was $330,000, recorded by
the Company as reductions of the deferred development fee.
The Company has incurred losses since its inception, and losses are expected to
continue through the fiscal year ending March 31, 1999. The Company has funded
the losses principally with the proceeds from public and private equity
financings. In April 1998 management implemented plans to further reduce the
funds required to operate its business of manufacturing and selling endoscopes
and EndoSheaths, and believes the Company, as restructured, will not require
additional outside funding during fiscal 1999 for that business. In addition,
the Company believes that, subsequent to the transaction described in Note 3, it
has sufficient capital to fund all of its operations during fiscal 1999.
However, due to the commitment by the Company to fund working capital
requirements for 3DV in calendar years 1999 and 2000, there can be no assurances
that additional funding will not be necessary in the second half of calendar
1999 and in 2000, and management may be required to obtain additional financing
or an alternative means of support during fiscal year 2000. Such financing, if
required, may not be available on favorable terms, if at all.
14
<PAGE>
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information technology
infrastructure to assess its exposure to the "Year 2000" computer problem. The
Company has formed a committee of senior management employees, who along with
outside consultants, are assessing its readiness, and the Company is in the
process of establishing a formal plan to attain compliance. The committee
expects to have a formal plan approved by the Company's Board of Directors by
December 31, 1998. The areas of concern to the Company include its products, its
primary software and hardware system, its telecommunications, its machinery and
equipment and the Year 2000 readiness of its primary vendors and customers.
The Company is in the process of testing its products to determine what effect
the change in the date from December 31, 1999 to January 1, 2000 will have on
their operation. The primary products sold by the Company do not contain
embedded microchips, and the Company believes these products do not have any
risk of generating inaccurate date output after December 31, 1999.
The major areas of concern are the Company's primary software system and its
telecommunications equipment. The vendor of the primary software system that the
Company utilizes notified its customers in September 1998 that, although the
version of software utilized by the Company was written with code that uses a
100-year calendar beginning with 1979, the vendor cannot guarantee that the
version of software utilized by the Company will not generate inaccurate date
output after December 31, 1999. Current versions of the vendor's software have
been certified Year 2000 compliant by the Information Technology Association of
America, and the vendor recommends that its customers upgrade to that version.
As part of its yearly maintenance contracts with this vendor, the Company has
purchased the upgrades to this software, and plans to install them prior to
March 31, 1999. The Company has not changed this software with any proprietary
code, and does not anticipate significant problems with the installation.
In order to provide the most efficient operating system for the upgraded
software, the Company plans to procure new hardware that will utilize a 32-bit
operating system. In addition, the Company plans to upgrade its desktop software
to be Year 2000 compliant, and to enable the Company to take better advantage of
the features inherent in the upgraded software. Also, its plan requires the
Company to upgrade its network to be Year 2000 compliant.
The Company plans to assess its telecommunications systems and machinery and
equipment to determine if these systems are currently Year 2000 compliant, and
if not, to determine the cost and time required to make them compliant. The
Company has not begun this portion of the assessment.
The Company plans to contact the customers and vendors with whom it has a
material relationship to determine the readiness of those customers and vendors,
and to determine what risks the Company might incur if those customers and
vendors do not become Year 2000 compliant in a timely fashion. The Company has
not begun this portion of the assessment.
15
<PAGE>
YEAR 2000 COMPLIANCE
(Continued)
The Company currently estimates that the cost to attain compliance will not
exceed $200,000, and that it will complete the work necessary to be compliant by
June 30, 1999. The Company currently estimates that approximately one half of
this amount will be spent for capital items, and the other half for items that
will be recorded in the Company's statement of operations. Currently, the
Company believes it can fund the cost of compliance with its cash balances and,
if necessary or advantageous, borrowings. However, due to the lack of a formal
approved plan for Year 2000 compliance, there can be no assurance that the cost
will not exceed this amount, or that the Company will complete its work by that
date.
If the Company does not implement a plan to become Year 2000 compliant, it risks
not being able to conduct normal business transactions in a timely manner,
including processing orders and invoices and paying vendors. At this time, the
Company cannot quantify this risk, and therefore has embarked upon its
assessment described above. At this time the Company does not have a contingency
plan, but will develop one if the need arises.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On August 20, 1998, the Company issued 500,000 shares of its Common Stock to RDC
in exchange for certain rights. In addition, on August 20, 1998, the Company
issued 2,000,000 shares of its Common Stock to Asahi for an aggregate purchase
price of $2,987,600, which proceeds were used by the Company to make an
investment in 3DV. No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon an exemption from the
registration provisions of the Securities Act of 1933 set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering or
Regulation S promulgated thereunder, as the purchasers were not US persons as
defined under Regulation S.
Item 4: Submission of Matters to a Vote of Security-Holders
(a) The Company held the 1998 Annual General Meeting of Shareholders (the
"Annual Meeting") on August 18, 1998. At the Annual Meeting, the following
actions were taken:
1. The stockholders elected Lewis C. Pell as a Class I Director, to serve for
a three-year term. Holders of 15,805,506 shares of Common Stock voted for
Mr. Pell, and 67,720 shares withheld from voting. Katsumi Oneda, Gerald B.
Lichtenberger, Ph.D., Fred E. Silverstein, M.D. and Kenneth W. Anstey
continued to serve as directors of the Company after the meeting.
2. The stockholders ratified certain amendments to and the continuance of the
1990 Stock Option Plan by a vote of 11,392,956 shares of Common Stock for,
309,226 shares of Common Stock against and 14,633 shares of Common Stock
not voting.
3. The stockholders ratified the appointment of Arthur Andersen LLP as the
Company's independent auditors for the current fiscal year by a vote of
15,843,156 shares of Common Stock for, 15,970 shares of Common Stock
against and 14,100 shares of Common Stock not voting.
Item 5: Other Information
Proposals of stockholders intended to be presented at the Company's 1999 Annual
meeting of Stockholders must be received at the Company's principal executive
offices not later than March 25, 1999 in order to be included in the Company'
proxy statement and form of proxy relating to the 1999 Annual Meeting.
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended, if a stockholder who intends to present a proposal at the 1999
Annual Meeting of Stockholders does not notify the Company of such proposal on
or prior to June 8, 1999, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the Annual Meeting, even though there is no discussion of the proposal
in the 1999 proxy statement.
17
<PAGE>
PART II - OTHER INFORMATION
(Continued)
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 20, 1998, as filed by the
Company on September 4, 1998, pursuant to Item 2 of Form 8-K.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vision-Sciences, Inc.
Date: November 13, 1998 By:
/s/ Gerald B. Lichtenberger
---------------------------
Dr. Gerald B. Lichtenberger, Ph. D.
Executive Vice President, Chief Operating Officer
/s/ James A. Tracy
--------------------------
James A. Tracy
Vice President Finance, Chief Financial Officer and
Controller (Principal Financial Officer and
Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
VISION-SCIENCES, INC FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
</LEGEND>
<CIK> 0000894237
<NAME> VISION-SCIENCES, INC
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1999 MAR-31-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997 APR-01-1998 APR-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997
<CASH> 4,625,759 1,897,905<F1> 0 0
<SECURITIES> 0 993,146 0 0
<RECEIVABLES> 1,303,215 1,556,285 0 0
<ALLOWANCES> 121,000 117,000 0 0
<INVENTORY> 739,665 681,106 0 0
<CURRENT-ASSETS> 6,631,615 5,098,164 0 0
<PP&E> 3,315,009 3,285,872 0 0
<DEPRECIATION> 2,611,239 2,399,602 0 0
<TOTAL-ASSETS> 10,965,289 6,171,817 0 0
<CURRENT-LIABILITIES> 2,433,633 2,355,299 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 192,110 166,430 0 0
<OTHER-SE> 6,680,788 3,650,088 0 0
<TOTAL-LIABILITY-AND-EQUITY> 10,965,289 6,171,817<F1> 0 0
<SALES> 1,965,061<F2> 1,822,906<F3> 3,841,796<F4> 3,687,374<F5>
<TOTAL-REVENUES> 0 0 0 0
<CGS> 1,545,838 1,551,412 3,110,760 3,056,627
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 792,601 1,279,898 1,535,091 2,398,932
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (320,976) (905,379) (714,938) (1,516,639)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (320,976) (905,379) (714,938) (1,516,639)
<EPS-PRIMARY> (.02)<F2> (.06)<F3> (.04)<F4> (.10)<F5>
<EPS-DILUTED> 0 0 0 0
<FN>
<F1>AMOUNTS ARE AS OF MARCH 31, 1998
<F2>AMOUNTS ARE FOR THE 3 MONTHS ENDED SEP 30 1998
<F3>AMOUNTS ARE FOR THE 3 MONTHS ENDED SEP 30 1997
<F4>AMOUNTS ARE FOR THE 6 MONTHS ENDED SEP 30 1998
<F5>AMOUNTS ARE FOR THE 6 MONTHS ENDED SEP 30 1997
</FN>
</TABLE>
