<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 DECEMBER 31, 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 December 31, 1998.
COMMON STOCK PAR VALUE OF $.01 19,211,021
------------------------------- ------------------
(Title of Class) (Number of Shares)
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Financial Information PAGE
<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........................................................................12-16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................................................17
Signature.............................................................................................18
</TABLE>
2
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
-------------------- --------------
ASSETS (AUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 3,647,919 $ 1,897,905
Marketable securities..................................... -- 993,146
Accounts receivable, net of allowance for doubtful
accounts of $126,000 and $117,000, respectively........ 1,478,225 1,439,285
Inventories................................................ 886,071 681,106
Prepaid expenses and deposits.............................. 134,520 86,722
-------------- ------------
Total current assets................................... 6,146,735 5,098,164
-------------- ------------
Property and Equipment, at cost:
Machinery and equipment.................................... 2,832,124 2,765,385
Furniture and fixtures..................................... 218,528 215,924
Leasehold improvements..................................... 332,333 304,563
-------------- ------------
3,382,985 3,285,872
Less-Accumulated depreciation and amortization............. 2,721,297 2,399,602
-------------- ------------
661,688 886,270
-------------- ------------
Equity investment in 3DV Systems, Ltd....................... 2,749,900 --
Other Assets, net of accumulated amortization of $74,000
and $69,000, respectively.................................. 166,192 187,383
-------------- ------------
Total assets........................................... $ 9,724,515 $ 6,171,817
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank.............................. $ 66,915 $ 52,383
Accounts payable........................................... 823,643 525,141
Accrued expenses........................................... 1,592,103 1,777,775
-------------- ------------
Total current liabilities.............................. 2,482,661 2,355,299
-------------- ------------
Deferred development fee ....................................... 803,384 --
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--19,211,021 shares at
December 31, 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........................................ (45,583,270) (44,433,904)
-------------- ------------
Total stockholders' equity............................. 6,438,470 3,816,518
-------------- ------------
Total liabilities and stockholders' equity............. $ 9,724,515 $ 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 Ended Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ..................................................... $ 1,942,554 $ 2,007,583 $ 5,784,350 $ 5,694,957
Cost of sales ................................................. 1,652,325 1,970,531 4,763,085 5,027,158
------------ ------------ ------------ ------------
Gross profit .................................................. 290,229 37,052 1,021,265 667,799
Selling, general and administrative expenses
733,593 947,149 2,164,223 2,810,442
Research and development expenses ............................. 52,369 126,211 156,830 661,850
------------ ------------ ------------ ------------
Loss from operations .......................................... (495,733) (1,036,308) (1,299,788) (2,804,493)
Interest income ............................................... 54,845 30,236 138,136 103,524
Interest expense .............................................. 399 399
Other income (expense), net ................................... 6,460 -- 12,286 178,258
------------ ------------ ------------ ------------
Net loss ...................................................... $ (434,428) $ (1,006,471) $ (1,149,366) $ (2,523,110)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted net loss per common share
$ (0.02) $ (0.07) $ (0.06) $ (0.17)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing basic and diluted
net loss per common share ..................................... 19,211,021 14,886,863 17,901,432 14,760,457
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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
----------------------
Additional Total
Number $.01 Paid-in- Accumulated Stockholders'
of Shares Par 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 ....................... (1,149,366) (1,149,366)
---------- ------------ ------------ ------------ ------------
Balance, December 31, 1998 ...... 19,211,021 $ 192,110 $ 51,829,630 $(45,583,270) $ 6,438,470
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (1,149,366) $ (2,523,110)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................. 326,450 372,414
Equity in losses of 3DV Systems, Ltd.......................... 997,000 --
Loss on disposal of property and equipment ................... -- 58,410
Amortization of deferred credit............................... -- (36,558)
Changes in assets and liabilities:
Accounts receivable......................................... (38,940) 596,063
Inventories................................................. (204,965) 95,217
Prepaid expenses and deposits............................... (47,798) 68,954
Accounts payable............................................ 298,502 344,903
Accrued expenses............................................ (185,672) 12,633
Deferred development fee.................................... 803,384 --
-------------- ------------
Net cash provided by (used for) operating activities...... 798,595 (1,011,074)
-------------- ------------
Cash flows provided by (used for) investing activities
Decrease in marketable securities............................... 993,146 --
Purchase of property and equipment.............................. (97,113) (133,022)
Investment in 25% of equity of 3DV Systems, Ltd.................. (3,000,000) --
Decrease in other assets........................................ 16,436 8,249
-------------- ------------
Net cash used for investing activities.................... (2,087,531) (124,773)
--------------- ------------
Cash flows provided by financing activities:
Proceed from acceptances payable to a bank...................... 14,532 23,061
Proceeds from the sale of common stock, net..................... 2,943,727 2,000,000
Exercise of Stock Options....................................... 80,691 --
-------------- ------------
Net cash provided by financing activities................. 3,038,950 2,023,061
-------------- ------------
Net increase in cash and cash equivalents............................ 1,750,014 887,214
Cash and cash equivalents, beginning of period....................... 1,897,905 2,681,271
-------------- ------------
Cash and cash equivalents, end of period............................. $ 3,647,919 $ 3,568,485
-------------- ------------
-------------- ------------
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>
December 31, March 31,
1998 1998
------------ ----------
(audited)
<S> <C> <C>
Raw materials................................................. $ 290,835 $ 181,125
Work-in-process............................................... 113,547 178,625
Finished goods................................................ 481,689 321,356
--------- ---------
$ 886,071 $ 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 and nine months ended December 31, 1998, the Company
recorded payments of $149,000 and $189,000, respectively, 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 and nine months ended December 31, 1998,
the Company recognized losses of $707,000 and $997,000, respectively,
representing 100% of the losses of 3DV from August 20, 1998 through December 31,
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 months ended December 31, 1998 decreased $65,000, or 3%,
compared to the prior year three-month period. During this period sales of
medical products increased by $42,000, or 4%, and sales of industrial products
decreased by $107,000, or 12%.
In the three months ended December 31, 1998, sales of the Company's disposable
EndoSheath(R) technology decreased by $15,000, while sales of endoscopes
increased by $67,000. Sales of other medical products decreased $10,000 in the
same period. The reduction in sales of sheaths in the third fiscal quarter was
due primarily to a decrease of $67,000 in the sales of fiberoptic sigmoidoscope
sheaths resulting from a recall of that product line by the Company. The recall
was initiated voluntarily by the Company in October 1998 when, after routine
testing, the Company discovered the potential for a small quantity of this
product to leak during use. The Company had received no complaints from
customers suggesting the occurrence of a leak, but undertook the recall to
ensure customer and patient safety, and to emphasize its commitment to quality.
The recall was classified by the Food and Drug Administration (the "FDA") to be
a Class II recall, indicating that the probability of serious adverse health
consequences was remote. As a result of the recall and the subsequent
requirement to ship replacement sheaths to customers, the Company utilized
approximately 36% of its output of fiberoptic sigmoidoscope sheaths to ship
approximately 50% of the required replacements to customers. The Company expects
to ship the remainder of the replacements in the three months ended March 31,
1999. All costs of the recall were not determinable by December 31, 1998, as the
Company was waiting for a review of its procedures by the FDA in order to
proceed with inspection and reprocessing of returned sheaths. The Company
expects to complete the recall process by March 31, 1999.
Sales of ENT EndoSheaths increased $47,000, or 14%, in the three months ended
December 31, 1998, compared to the prior-year period. This sales increase was
due primarily to increased demand by the ENT market for the Company's
EndoSheaths.
In the three months ended December 31, 1998, sales of endoscopes increased by
$67,000, compared to the same period in fiscal 1998. This increase was due
primarily to higher sales of ENT endoscopes, which increased by $102,000, or
27%, compared to the three months ended December 31, 1997. This increase was due
primarily to the timing of orders for endoscopes received by the Company from
its sole distributor, and by the receipt of product by the Company from its sole
supplier. After December 31, 1998, the Company has no plans to order endoscopes
from this supplier, or to sell that endoscope to any customers. Alternatively,
the Company has initiated plans to sell its own ENT endoscope, the ENT-2000, the
initial shipments of which occurred in the three months ended December 31, 1998.
12
<PAGE>
By manufacturing and selling its own scope, the Company believes it will gain
a cost advantage, and increase the gross profit derived from this product
line. The Company has contracted with a number of independent domestic sales
representative organizations to sell and promote the product.
Sales of other medical endoscopes declined in the three months ended December
31, 1998, compared to the same period in fiscal 1998. This decline was due
primarily to lower demand for the Company's sigmoidoscopes and bronchoscopes.
The Company believes this lower demand is due to pressures on health care
facilities to contain costs. The Company's sigmoidoscopes and bronchoscopes are
unique in that the Company's EndoSheaths are specifically for use with these
scopes. The Company believes that, due to the fact that the Company's sheaths
are not separately reimbursable items for a Medicare patient under the rules
established by the Health Care Financing Administration, health care facilities
resist purchasing the scopes when they will not be reimbursed for the cost of
the sheaths. The Company believes that third-party reimbursement sufficient to
cover the additional cost for the sheath will be available for most procedures
using its EndoSheath/reusable flexible endoscope systems, but cannot predict
when such approval will occur.
The lower sales of industrial products in the three months ended December 31,
1998, compared to the same period in fiscal 1998 were due primarily to lower
demand during this period for the Company's products by the defense and aircraft
maintenance markets.
Net sales for the nine months ended December 31, 1998 increased by $89,000, or
2%, compared to the same period in fiscal 1998. During this period sales of
medical products decreased by $36,000, or 1%, and sales of industrial products
increased by $125,000, or 5%, compared to the same period in fiscal 1998.
Sales of EndoSheaths increased by $135,000, while sales of endoscopes decreased
by $138,000. The increase in sales of EndoSheaths was due primarily to increased
sales of the Company's ENT sheath, which has increased by 26% for the nine
months ended December 31, 1998, compared to the same period in fiscal 1998. The
decrease in sales of endoscopes was due primarily to lower demand for ENT
scopes, as well as lower demand for sigmoidoscopes and bronchoscopes. 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 during
the three months ended June 30, 1998 for the Company's products from the defense
and airplane maintenance markets.
Gross profit for the three and nine months ended December 31, 1998 increased to
$290,000, or 15% of net sales, and $1,021,000, or 18% of net sales,
respectively, versus $37,000, or 2% of net sales, and $668,000, or 12% of net
sales, for the comparable prior year three-month and nine-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 manufacturing expenses resulting from reductions in staffing.
Selling, general and administrative expenses for each of the three-month and
nine-month periods ended December 31, 1998 decreased by 23%, or $214,000 and
$646,000, respectively, compared to the prior year three-month and nine-month
periods. Selling, general and administrative expenses amounted to 38% and 37% of
net sales, respectively, in the three-month and nine-month periods ended
December 31, 1998. For the three-month and nine-month periods ended December 31,
1997, these expenses amounted to 47% and 49% 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
13
<PAGE>
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.
Research and development expenses for the three and nine months ended December
31, 1998 decreased $74,000, or 59%, and $505,000, or 76%, respectively, compared
to the prior year three-month and nine-month periods. These expenses amounted to
3% of net sales, for each of the three-month and nine- month periods ended
December 31, 1998. In the three-month and nine-month periods ended December 31,
1997, these expenses amounted to 6% and 12% of net sales, respectively. 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 nine months ended December 31, 1998,
increased by $25,000 and $35,000, respectively, compared to the prior year
three-month and nine-month periods due to higher cash balances. The source of
the higher cash balances resulted primarily from the transactions with 3DV
Systems, Ltd., Imagineering, Ltd. and Asahi Optical Company, Ltd., as more fully
described in Note 3.
Other income (expense), net for the nine months ended December 31, 1998
decreased $166,000 compared to the prior year nine-month period, due primarily
to decreased royalty income. The agreement which was the primary source of
royalties for the three and nine months ended December 31, 1997 expired July 1,
1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $3,648,000 in cash and cash
equivalents, and working capital of $3,664,000. The Company also had a cash
collateralized demand line of credit with a bank for borrowings of up to
$250,000. At December 31, 1998, there was approximately $183,000 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 $1,750,000 in the nine
months ended December 31, 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 decrease of
approximately $182,000 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, support of research and development
efforts in the Company's investments in Israel and the purchase of capital
equipment.
Also, in the nine months ended December 31, 1998 the Company recorded payments
to Imagineering, losses by Vision-Sciences, Ltd., the company's Israeli
subsidiary, and equity in 100% of the losses of 3DV. The combined amount of
these charges was $1,186,000, 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 at least 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.
14
<PAGE>
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.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating and upgrading its
information technology infrastructure to address its exposure to the "Year 2000"
computer problem. 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 has established a plan for the attainment of compliance of its primary
software system and computer hardware. The Company's Chairman and CEO approved
the plan during the three months ended December 31, 1998. In addition, during
the three months ended December 31, 1998, the Company initiated a plan to review
the telecommunications systems at its offices in Orangeburg, NY and Natick, MA.
Additional plans will be formulated to review the Company's manufacturing
equipment during the three months ended March 31, 1999.
The Company has completed preliminary tests of its video processor, which is
used with its video sigmoidoscope. Results of these preliminary tests indicated
that the video processor would process the date change successfully from
December 31, 1999 to January 1, 2000. 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. During the three months ended December 31, 1998,
the Company initiated the process to upgrade its primary software system to the
version that has been certified Year 2000 compliant by the Information
Technology Association of America. The Company expects this process to be
completed by March 31, 1999.
In the three months ended December 31, 1998, the Company initiated a process to
procure new hardware that will utilize a 32-bit operating system, to upgrade its
desktop software to be Year 2000 compliant and to upgrade its network to be Year
2000 compliant. The Company expects this process will be completed by March 31,
1999.
During the three months ended December 31, 1998, the Company initiated a review
of its telecommunications systems at its New York and Massachusetts locations.
These reviews indicated the telecommunications equipment at both sites is
currently Year 2000 compliant.
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, but expects to send questionnaires to
significant customers and vendors by March 31, 1999.
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. As of December 31, 1998 the Company had placed purchase orders
for approximately $156,000. 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, 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 plans
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 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/A dated November 3, 1998, as filed by the
Company on November 3, 1998, pursuant to Item 7 of Form 8-K, dated
August 20, 1998, as filed by the Company on September 4, 1998.
17
<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: February 12, 1999 By:
/s/ GERALD B. LICHTENBERGER
---------------------------
Dr. Gerald B. Lichtenberger, Ph. D.
Vice President of Business Development
/s/ JAMES A. TRACY
---------------------------
James A. Tracy
Vice President Finance, Chief Financial
Officer and Controller (Principal Financial
Officer and Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VISION-SCIENCES, INC. 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000894237
<NAME> VISION-SCIENCES, INC
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1999 MAR-31-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997 APR-01-1998 APR-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997
<CASH> 3,647,919 1,897,905<F1> 0 0
<SECURITIES> 0 993,146<F1> 0 0
<RECEIVABLES> 1,604,225 1,556,285<F1> 0 0
<ALLOWANCES> 126,000 117,000<F1> 0 0
<INVENTORY> 886,071 681,106<F1> 0 0
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<INCOME-PRETAX> (434,428)<F2> (1,006,471)<F3> (1,149,366)<F4> (2,523,110)<F5>
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<FN>
<F1> AMOUNTS ARE AS OF MARCH 31, 1998
<F2> AMOUNTS ARE FOR THE 3 MONTHS ENDED DEC 31, 1998
<F3> AMOUNTS ARE FOR THE 3 MONTHS ENDED DEC 31, 1997
<F4> AMOUNTS ARE FOR THE 9 MONTHS ENDED DEC 31, 1998
<F5> AMOUNTS ARE FOR THE 9 MONTHS ENDED DEC 31, 1997
</FN>
</TABLE>
