<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, 1999
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, 1999.
Common Stock, par Value of $.01 20,082,353
(Title of Class) (Number of Shares)
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Item 1. 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
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................12-15
Item 3. Qualitative and Quantitative Disclosure about Market Risk..............16
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds..............................17
Item 4. Submission of Matters to a Vote of Stockholders........................17
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>
September 30, March 31,
1999 1999
------------ ------------
ASSETS (AUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................... $ 1,918,739 $ 2,224,863
Marketable securities ............................... 264,550 970,608
Accounts receivable, net of allowance for doubtful
accounts of $135,000 and $130,000, respectively . 1,149,491 1,089,371
Inventories ......................................... 787,286 633,571
Prepaid expenses and deposits ....................... 93,580 98,692
------------ ------------
Total current assets ............................ 4,213,646 5,017,105
------------ ------------
Property and Equipment, at cost:
Machinery and equipment ............................. 2,812,831 2,741,919
Furniture and fixtures .............................. 199,070 199,070
Motor vehicles ...................................... 23,956 23,956
Leasehold improvements .............................. 309,504 279,642
------------ ------------
3,345,361 3,244,587
Less-Accumulated depreciation and amortization ...... 2,776,068 2,561,713
------------ ------------
569,293 682,874
------------ ------------
Equity investment in 3DV Systems, Ltd. ................... 1,031,900 2,053,900
Other Assets, net of accumulated amortization of $19,000
and $22,000, respectively ........................... 111,954 128,457
------------ ------------
Total assets .................................... $ 5,926,793 $ 7,882,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank ....................... $ 48,788 $ 32,333
Accounts payable .................................... 635,043 452,378
Accrued expenses .................................... 1,696,581 1,601,977
Deferred development fee ............................ 28,779 345,821
------------ ------------
Total current liabilities ....................... 2,409,191 2,432,509
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--20,082,353 shares at
September 30, 1999 and 19,212,021 shares at
at March 31, 1999 ............................... 200,822 192,119
Additional paid-in capital .......................... 52,866,355 51,830,808
Accumulated deficit ................................. (49,549,575) (46,573,100)
------------ ------------
Total stockholders' equity ...................... 3,517,602 5,449,827
------------ ------------
Total liabilities and stockholders' equity ...... $ 5,926,793 $ 7,882,336
============ ============
</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 Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ................................. $ 1,855,393 $ 1,965,061 $ 3,356,565 $ 3,841,796
Cost of sales ............................. 1,382,413 1,545,838 2,671,555 3,110,760
------------ ------------ ------------ ------------
Gross profit .............................. 472,980 419,223 685,010 731,036
Selling, general and administrative
expenses .................................. 774,724 740,668 1,605,123 1,430,630
Research and development expenses ......... 45,830 51,933 96,920 104,461
------------ ------------ ------------ ------------
Loss from operations ...................... (347,574) (373,378) (1,017,033) (804,055)
Interest income ........................... 25,298 47,810 59,474 83,291
Other income(expense), net ................ (929,351) 4,592 (2,018,916) 5,826
------------ ------------ ------------ ------------
Net loss .................................. $ (1,251,627) $ (320,976) $ (2,976,475) $ (714,938)
============ ============ ============ ============
Basic and diluted net loss per common share
$ (0.06) $ (0.02) $ (0.15) $ (0.04)
============ ============ ============ ============
Shares used in computing basic and diluted
net loss per common share ................. 19,549,789 17,831,130 19,382,188 17,243,059
============ ============ ============ ============
</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, 1999
(audited) 19,212,021 $ 192,119 $ 51,830,808 $(46,573,100) $ 5,449,827
Exercise of stock options 37,000 370 43,880 -- 44,250
Sale of common stock, net 833,332 8,333 991,667 -- 1,000,000
Net loss -- -- -- (2,976,475) (2,976,475)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 20,082,353 $ 200,822 $ 52,866,355 $(49,549,575) $ 3,517,602
============ ============ ============ ============ ============
</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, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $(2,976,475) $ (714,938)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization .................................. 217,525 214,807
Equity in losses of 3DV Systems, Ltd. .......................... 2,022,000 290,000
Changes in assets and liabilities:
Accounts receivable .......................................... (60,120) 257,070
Inventories .................................................. (153,715) (58,559)
Prepaid expenses and deposits ................................ 5,112 2,746
Accounts payable ............................................. 182,665 285,000
Accrued expenses ............................................. 94,604 (210,610)
Deferred development fee ..................................... (317,042) 1,658,758
----------- -----------
Net cash provided by (used for) operating activities ....... (985,446) 1,724,274
----------- -----------
Cash flows provided by (used for) investing activities
Decrease in marketable securities ................................ 706,058 993,146
Purchase of property and equipment ............................... (100,774) (29,137)
Investment in 3DV Systems, Ltd. .................................. (1,000,000) (3,000,000)
Decrease in other assets ......................................... 13,333 11,209
----------- -----------
Net cash used for investing activities ..................... (381,383) (2,024,782)
----------- -----------
Cash flows provided by financing activities:
Proceed from (payments of) acceptances payable to a bank ......... 16,455 3,944
Proceeds from the sale of common stock, net ...................... 1,000,000 2,943,727
Exercise of stock options ........................................ 44,250 80,691
----------- -----------
Net cash provided by financing activities .................. 1,060,705 3,028,362
----------- -----------
Net increase (decrease) in cash and cash equivalents .................. (306,124) 2,727,854
Cash and cash equivalents, beginning of period ........................ 2,224,863 1,897,905
----------- -----------
Cash and cash equivalents, end of period .............................. $ 1,918,739 $ 4,625,759
=========== ===========
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 in accordance with generally accepted
accounting principles, 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 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 March 31,
30, 1999
1999
------------ -------------
(audited)
<S> <C> <C>
Raw materials................... $ 242,804 $ 169,653
Work-in-process................. 185,857 186,806
Finished goods.................. 358,625 277,112
--------- ---------
$ 787,286 $ 633,571
========= =========
</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>
Motor vehicles ...................................... 3 Years
Machinery and Equipment ............................ 3-5 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. INVESTMENTS IN ISRAEL
(A) 3DV SYSTEMS LTD.
In May 1999 and in August 1999, the Company loaned a total of
$1,000,000 to 3DV Systems Ltd. ("3DV"), an Israeli company in which the
Company has a 25% interest. The loans were non-interest bearing
Convertible Capital Notes (the "Notes"), issued pursuant to the
Investment Agreement dated August 6, 1998 between the Company and 3DV.
The issuance of the Notes is part of the Company's commitment to
finance the working capital needs of 3DV for calendar years 1999 and
2000. The Notes are convertible into common stock of 3DV according to
provisions of the Investment Agreement. The Company recorded the Notes
as part of its investment in 3DV.
The Company accounts for its investment in 3DV using the equity method
of accounting. Due to the Company's commitment to finance the working
capital needs of 3DV, the Company absorbs 100% of the losses of 3DV. In
the three-month and six-month periods ended September 30, 1999 3DV
incurred losses of $931,000 and $2,022,000, respectively, recorded as
other expense by the Company.
(B) IMAGINEERING LTD. AND VISION-SCIENCES, LTD.
In the three months and six months ended September 30, 1999, the
Company recorded an expense relating to payments made of $152,042 and
$317,042, respectively, to fund the contract with Imagineering Ltd. and
the operations of Vision-Sciences, Ltd. These expenses were offset by
$152,042 and $317,042 of deferred development fees received from Asahi
Optical Co., Ltd. ("Asahi") pursuant to the License Agreement between
the Company and Asahi dated August 6, 1998.
4. SEGMENT INFORMATION
The Company has three reportable segments - Medical, Industrial and
Corporate. The medical segment designs, manufactures and sells
EndoSheaths and sells endoscopes to users in the health care industry.
The industrial segment designs, manufactures and sells borescopes to a
variety of users, primarily in the aircraft maintenance industry. In
addition, the industrial segment manufactures and repairs endoscopes
for the medical segment. The corporate segment consists of certain
administrative expenses beneficial to the Company as a whole and the
management oversight of the Company's investment in 3DV Systems Ltd.,
Vision-Sciences Ltd and the Company's contractual relations with
Imagineering Ltd.
The accounting policies of the segments are described in the summary of
significant accounting policies. The Company evaluates segment
performance based upon operating income. Identifiable assets are those
used directly in the operations of each segment. Corporate assets
include cash, marketable securities and the investment in 3DV Systems
Ltd. The carrying value of 3DV at September 30, 1999 was $1,031,900.
Data regarding management's view of the Company's segments are provided
in the following table.
9
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three months ended September 30, Medical Industrial Corporate Adjustments Total
- ----------------------------------- ------------------ ------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1999
Sales to external customers $ 967,520 $ 887,873 $ -- $ -- $ 1,855,393
Intersegment sales -- 141,289 -- (141,289) --
Interest income, net -- -- 25,298 -- 25,298
Operating income (loss) (227,656) 32,585 (152,503) -- (347,574)
Depreciation and amortization 100,973 5,602 1,996 -- 108,571
Other significant non-cash items:
Equity in losses of 3DV Systems -- -- (931,000) -- (931,000)
Total assets 2,377,730 909,352 3,239,145 (599,434) 5,926,793
Expenditures for fixed assets 32,642 -- -- -- 32,642
1998
Sales to external customers $ 1,048,130 $ 916,931 $ -- $ -- $ 1,965,061
Intersegment sales -- 60,372 -- (60,372) --
Interest income, net -- -- 47,810 -- 47,810
Operating income (loss) (212,262) 1,435 (162,551) -- (373,378)
Depreciation and amortization 99,705 12,065 -- -- 111,770
Other significant non-cash items:
Equity in losses of 3DV Systems -- -- -- -- --
Total assets 2,809,510 961,492 8,082,659 (888,372) 10,965,289
Expenditures for fixed assets 27,600 -- -- -- 27,600
</TABLE>
10
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Six months ended September 30, Medical Industrial Corporate Adjustments Total
- ----------------------------------------- ------------------ ------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1999
Sales to external customers $ 1,575,470 $ 1,781,095 $ -- $ -- $ 3,356,565
Intersegment sales -- 258,359 -- (258,359) --
Interest income, net -- -- 59,474 -- 59,474
Operating income (loss) (728,370) 16,174 (304,837) -- (1,017,033)
Depreciation and amortization 197,101 16,431 3,993 -- 217,525
Other significant non-cash items:
Equity in losses of 3DV Systems -- -- (2,022,000) -- (2,022,000)
Total assets 2,377,730 909,352 3,239,145 (599,434) 5,926,793
Expenditures for fixed assets 98,774 2,000 -- -- 100,774
1998
Sales to external customers $ 2,015,322 $ 1,826,474 $ -- $ -- $ 3,841,796
Intersegment sales -- 93,280 -- (93,280) --
Interest income, net -- -- 83,291 -- 83,291
Operating income (loss) (542,888) 65,979 (327,146) -- (804,055)
Depreciation and amortization 190,677 24,130 -- -- 214,807
Other significant non-cash items:
Equity in losses of 3DV Systems -- -- -- -- --
Total assets 2,809,510 961,492 8,082,659 (888,372) 10,965,289
Expenditures for fixed assets 29,137 -- -- -- 29,137
</TABLE>
11
<PAGE>
ITEM 2. 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
important 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 readiness 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 September 30, 1999 decreased $110,000, or
6%, compared to the prior year three-month period. During this period sales of
medical products decreased by $81,000, or 8%, and sales of industrial products
decreased by $29,000, or 3%.
The decrease in medical sales was due primarily to a decrease in sales of
EndoSheaths(R) for sigmoidoscopy of $46,000 and lower sales of repairs and
accessories of $64,000. Sales of ENT EndoSheaths increased by $150,000; sales of
ENT endoscopes declined $129,000.
The increase in sales of the ENT EndoSheaths is due to the shift in our strategy
to selling directly to end users, compared to selling to a master distributor
who would then resell to the end users. This shift began April 1, 1999. During
the three months ended September 30, 1999 we shipped approximately 46,000 units
of ENT EndoSheaths, compared to 50,000 units in the same period of fiscal 1999.
Although the units shipped were lower than for the same period in fiscal 1999,
the sales dollars were higher due primarily to the higher prices we were able to
receive by selling directly to users and eliminating the distributor.
We expected this transition to take time due to the training required of our new
sales representatives, the time required to properly promote our new strategy to
current and future customers and to the time required to allow the former master
distributor to deplete its inventory. We believe the transition period for the
sales of ENT sheaths is nearing an end. However, we believe it will continue for
up to the next two fiscal quarters for the ENT endoscopes, as the sales cycle
for an endoscope is longer than that of a disposable sheath. We believe the
hiring of our new Vice President of Sales and Marketing in September 1999 will
contribute to this transition. We are committed to the strategy of selling
directly to end users, and believe it will result in higher sales and gross
profit of ENT products. However, there can be no assurance that this strategy
will be successful.
The lower sales of industrial products in the three months ended September 30,
1999, compared to the same period in fiscal 1999 were due primarily to slightly
lower demand during this period for our products by the defense and aircraft
maintenance markets.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net sales for the six months ended September 30, 1999 decreased by $485,000, or
13%, compared to the same period in fiscal 1999. During this period, sales of
medical products declined $440,000, or 22%, and sales of industrial products
declined $45,000, or 2%.
The decrease in medical sales was due primarily to lower sales of ENT endoscopes
of $321,000, lower sales of ENT EndoSheaths of $57,000 and lower sales of
repairs and accessories. Sales of sigmoidoscope EndoSheaths increased by $64,000
to partially offset these declines.
The lower sales of industrial products were due primarily to slightly lower
demand from the defense and aircraft maintenance markets.
Gross profit for the three months ended September 30, 1999 increased to
$473,000, or 25% of net sales, compared to $419,000, or 21% of net sales for the
comparable prior year three-month period. The increase in gross profit was due
primarily to the higher prices attained for ENT EndoSheaths, resulting from our
direct sales strategy. These higher prices were partially offset by increased
costs to manufacture the EndoSheaths. The increased manufacturing costs were due
to startup costs associated with manufacturing our new Slide-On(TM) ENT
EndoSheaths.
Gross profit for the six months ended September 30, 1999 decreased to $685,000,
compared to $731,000 for the comparable prior year six-month period. Although
the dollars of gross profit declined due primarily to lower sales, the
percentage that gross profit bears to sales increased to 20% in the six-month
period ended September 30, 1999, compared to 19% in the six-month period ended
September 30, 1998. This higher gross profit percentage is due primarily to the
higher prices we are able to attain by selling directly to the end users.
Selling, general and administrative expenses for the three-month period ended
September 30, 1999 increased by 5%, or $34,000 compared to the prior year
three-month period. Selling, general and administrative expenses amounted to 42%
of net sales, compared to 38% in the three-month period ended September 30,
1998. The increase in these expenses was primarily attributable to increased
expenses for payroll and recruiting costs. We hired a new Vice President of
Sales & Marketing in September 1999.
For the six months ended September 30, 1999 selling, general and administrative
expenses increased by $174,000, or 12%. Selling, general and administrative
expenses were 48% of sales, compared to 37% of sales in the same period in
fiscal 1999. The increase in these expenses was due primarily to higher expense
for payrolls, commissions and product promotion.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Research and development expenses for the three months ended September 30, 1999
decreased $6,000 compared to the prior year three-month period. These expenses
amounted to 2% of net sales in the three months ended September 30, 1999 and 3%
of net sales in the three months ended September 30, 1998.
For the six-month period ended September 30, 1999 research and development
expenses declined $7,500, and were 3% of sales for each of the six-month periods
ended September 30, 1999 and 1998.
Other expense, net for the three months ended September 30, 1999 increased by
$934,000 due to the equity in losses of 3DV Systems that the Company recognized
in the fiscal quarter ended September 30, 1999. The losses at 3DV were larger
than expected due to higher expenses for product development and product
promotion incurred during the three months ended September 30, 1999. Part of the
increased product promotion expenses included the exhibition in September 1999
of 3DV's new Z-Cam(TM), a 3-D camera system, at the International Broadcasters
Convention in Amsterdam.
For the six months ended September 30, 1999, other expense increased by
$2,025,000, due primarily to equity in losses of 3DV System Ltd. of $2,022,000.
The net loss per share for the three months ended September 30, 1999 was $.06,
compared to $.02 per share for the same period last year. Without the equity in
losses of 3DV, the loss would have been $.02 per share for the three months
ended September 30, 1999.
The net loss per share for the six months ended September 30, 1999 was $.15,
compared to $.04 per share for the six months ended September 30, 1998. Without
the equity in losses of 3DV, the loss would have been $.05 per share.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $2,183,000 in cash, cash equivalents
and marketable securities, and working capital of $1,804,000. The Company also
had a cash collateralized demand line of credit with a bank for borrowings of up
to $250,000. At September 30, 1999, there was approximately $201,000 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 decreased by $306,000 in the six months
ended September 30, 1999, due primarily to net cash used in US operations of
$695,000, offset by sales of marketable securities of $706,000. In addition, the
Company loaned $1,000,000 to 3DV, which was offset by the sale of common stock
to two of the Company's employee/directors for $1,000,000. The sale was approved
by the Board of Directors, and occurred in August 1999. In addition, the Company
used cash of $317,000 to fund its operations in Israel.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company has incurred losses since its inception, and losses are expected to
continue at least through the fiscal year ending March 31, 2000. The Company has
funded the losses principally with the proceeds from public and private equity
financings. Management believes that, in order to fund the research and
development efforts at 3DV, the Company will require additional financial
support for the fiscal year 2000. Management is pursuing additional sources of
capital; however, there can be no assurance that additional funding will be
available, or available on reasonable terms.
Year 2000 Readiness Disclosure
The Company has evaluated 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 established a plan that was
approved by its Chairman and CEO for the attainment of readiness of its
information technology infrastructure.
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 are
Year 2000 ready.
The major areas of concern are the Company's primary software system and its
telecommunications equipment. During the year ended March 31, 1999, the Company
upgraded its primary software system to the version that has been certified Year
2000 compliant by the Information Technology Association of America.
During the fiscal year ended March 31, 1999, the Company procured and installed
new hardware that utilizes a 32-bit operating system, upgraded its desktop
software to be Year 2000 ready and upgraded its network to be Year 2000 ready.
During the fiscal year ended March 31, 1999, the Company reviewed its
telecommunications systems at its New York and Massachusetts locations. These
reviews indicated the telecommunications equipment at both sites is currently
Year 2000 ready.
The Company has contacted 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 ready in a timely fashion.
The Company currently estimates that the cost to attain readiness will not
exceed $200,000, and that as of September 30, 1999 it has completed 95% of the
work necessary to be Year 2000 ready. The Company will continue to test its
procedures and equipment as the need arises. At this time the Company does not
have a contingency plan, but will develop one if the need arises.
15
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
INTEREST AND MARKET RISK
The Company maintains a portfolio of marketable, primarily fixed income,
available-for-sale securities of various issuers, types and maturities. The
Company has not used derivative financial instruments in its investment
portfolio. The Company attempts to limit its exposure to interest rate and
credit risk by placing its investments with high-quality financial institutions
and has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
Investments in both fixed-rate and floating-rate interest earning instruments
carry a degree of interest rate risk. Fixed-rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
decline. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates, or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The fair market value
of marketable securities held at September 30, 1999 was $264,550.
FOREIGN CURRENCY EXCHANGE
The Company faces exposure, due to purchases of raw materials from Japanese
suppliers, to adverse movements in the value of the Japanese Yen. This exposure
may change over time, and could have a materially adverse effect on the
Company's financial results. The Company may attempt to limit this exposure by
purchasing forward contracts, as required. Most of the Company's liabilities are
settled within 90 days of receipt of materials. At September 30, 1999 the
Company's liabilities relating to Japanese Yen were approximately $93,000.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, we issued an aggregate of 833,332 shares of our common stock
to Katsumi Oneda, our President and Chief Executive Officer, and Lewis C.
Pell, our Vice-Chairman of the Board of Directors. The price per share was
approximately $1.20, representing aggregate proceeds to us of $1,000,000. The
shares of common stock were issued without registration under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to an exemption from
registration under Section 4(2) of the Securities Act.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
We held the 1999 Annual General Meeting of Shareholders (the "Annual
Meeting") on August 24, 1999. At the Annual Meeting, the following actions
were taken:
1. The stockholders re-elected Katsumi Oneda and Fred E. Silverstein, M.D.
as Class II Directors, to serve for a three-year term. Holders of
15,615,380 shares of Common Stock voted for each of Mr. Oneda and Dr.
Silverstein. In addition to Mr. Oneda and Dr. Silverstein, Lewis C.
Pell, Gerald B. Lichtenberger and Kenneth Anstey continue to serve on
the Board of Directors.
2. The stockholders ratified the appointment of Arthur Andersen LLP as our
independent auditor for the current fiscal year by a vote of 15,604,090
shares of Common Stock for, 8,225 shares of Common Stock against and
25,000 shares of Common Stock not voting.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
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: November 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. FORM 10-Q FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999 MAR-31-2000 MAR-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998 APR-01-1999 APR-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998 SEP-30-1999 SEP-30-1998
<CASH> 1,918,739 2,224,863<F3> 0 0
<SECURITIES> 264,550 970,608<F3> 0 0
<RECEIVABLES> 1,284,491 1,219,371<F3> 0 0
<ALLOWANCES> 135,000 130,000<F3> 0 0
<INVENTORY> 787,286 633,571<F3> 0 0
<CURRENT-ASSETS> 4,213,646 5,017,105<F3> 0 0
<PP&E> 3,345,361 3,244,587<F3> 0 0
<DEPRECIATION> 2,776,068 2,561,713<F3> 0 0
<TOTAL-ASSETS> 5,926,793 7,882,336<F3> 0 0
<CURRENT-LIABILITIES> 2,409,191 2,432,509<F3> 0 0
<BONDS> 0 0<F3> 0 0
0 0<F3> 0 0
0 0<F3> 0 0
<COMMON> 200,822 192,119<F3> 0 0
<OTHER-SE> 3,316,780 5,257,708<F3> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 5,926,793 7,882,336<F3> 0 0
<SALES> 1,855,393 1,965,061 3,356,565 3,841,796
<TOTAL-REVENUES> 0 0 0 0
<CGS> 1,382,413 1,545,838 2,671,555 3,110,760
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 1,751,554<F1> 792,601 3,724,043<F2> 1,535,091
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (1,251,627) (320,976) (2,976,475) (714,938)
<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> (1,251,627) (320,976) (2,976,475) (714,938)
<EPS-BASIC> (.06) (.02) (.15) (.04)
<EPS-DILUTED> (.06) (.02) (.15) (.04)
<FN>
<F1>INCLUDES $931,000 EQUITY IN LOSS OF 3DV
<F2>INCLUDES $2,022,000 EQUITY IN LOSS OF 3DV
<F3>AMOUNTS ARE AS OF MARCH 31, 1999 (AUDITED)
</FN>
</TABLE>
