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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended March 31, 1999
Commission File No. 0-20970
VISION-SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 13-3430173
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9 STRATHMORE ROAD 01760
NATICK, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 650-9971
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
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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 requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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Aggregate market value of Common Stock held by non-affiliates of the Registrant
as of May 28, 1999 based upon the last sale price of the Common Stock on the
Nasdaq SmallCap Market as reported by Nasdaq: $10,022,419
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Number of shares outstanding of the Registrant's Common Stock as of May 28,
1999 19,212,021
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Documents incorporated by reference: Portions of the Proxy Statement for the
1999 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements,
including statements about new product introductions, expectations as to future
sales of the Company's products, the availability of supplies, the sufficiency
of the Company's capital resources to meet anticipated capital requirements, the
Company's intentions to expand its indirect sales force and the Company's
expectations as to future expenditures, including research and development
expenditures. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. These forward-looking statements involve risks and uncertainties,
and the Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to the availability of capital
resources, the availability of third-party reimbursement, government regulation,
commercialization and technological difficulties, general economic conditions
and other risks detailed below. See "Certain Factors That May Affect the
Company's Future Operating Results."
Vision-Sciences, Inc. (the "Company") develops, manufactures and markets
products for endoscopy which have infection control advantages over conventional
flexible endoscopes. The Company has developed, and is marketing, proprietary
flexible endoscope systems designed to eliminate the risk of cross-contamination
to patients and health-care professionals which results from the reuse of
conventional flexible endoscopes. The Company's systems consist of two main
components--a proprietary sterile disposable sheath, known as an
EndoSheath-Registered Trademark- System (EndoSheath) and a reusable flexible
endoscope incorporating the Company's proprietary design. The EndoSheath is
designed to cover all surfaces of the endoscope that come in contact with the
patient and contains the air, water, suction and accessory channels that are a
part of conventional flexible endoscopes, thus providing a contamination-free
instrument and substantially reducing the burdensome cleaning required of
conventional flexible endoscopes. The Company has developed a family of
disposable EndoSheath/reusable flexible endoscope systems for gastrointestinal
endoscopy and began commercial shipments of its first such system, a fiberoptic
sigmoidoscope, in April 1993.
The Company also manufactures and sells disposable EndoSheaths for use with
certain conventional flexible endoscopes currently sold by the Company and other
manufacturers. In December 1992 the Company began commercial shipments of its
first such EndoSheath, for use with one of its nasopharyngo-laryngoscopes ("ENT
endoscopes"). In January 1993 the Company received clearance from the U.S. Food
and Drug Administration (the "FDA") to market four additional disposable
EndoSheaths for use with certain other ENT endoscopes. In February 1994 the
Company received clearance from the FDA to market its black and white CCD video
sigmoidoscope and EndoSheath system. In February 1995 the Company received
clearance from the FDA to market its 130 cm length fiberoptic colonoscope and
EndoSheath system and its fiberoptic gastroscope and EndoSheath system. In
December 1995 the Company received clearance from the FDA to market its
fiberoptic ENT scope. In December 1996 the Company received clearance from the
FDA to market its fiberoptic bronchoscope and EndoSheath system. In January 1997
the Company received clearance from the FDA to market its color video
sigmoidoscope. In April 1999 the Company received clearance from the FDA to
market its Slide-On-TM- EndoSheath for use with not only the Company's ENT
endoscope, but also for ENT endoscopes of other companies.
ENDOSCOPY
BACKGROUND
Endoscopy is a minimally invasive technique that is being used with
increased frequency in a growing number of medical applications. Endoscopes are
used for a variety of screening and diagnostic procedures and are also used
therapeutically as an alternative to more traditional surgical procedures.
Endoscopic
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therapeutic procedures, unlike more traditional "open" surgical procedures, can
be performed without a major incision, in most cases without general anesthesia,
and are, therefore, safer and less expensive than traditional surgical
procedures. In addition, endoscopic procedures are typically performed on an
outpatient basis and generally involve less recovery time and patient discomfort
than traditional surgery. The patient benefits and cost savings associated with
endoscopy have caused many governmental reimbursement programs and private
health insurance plans to encourage the use of endoscopic procedures in a number
of medical applications.
Flexible endoscopes are tubular instruments that enter the body through a
natural orifice and enable physicians to view the interior of a body organ or
cavity remotely and perform various screening, diagnostic, and therapeutic
procedures. Flexible endoscopes generally utilize fiberoptic bundles or video
camera technology for image production. The physician can steer the distal
portion of a flexible endoscope with control knobs on the endoscope's operator
body. By maneuvering the tip of the endoscope, the physician can access body
regions through lengthy and twisted passageways (such as the colon) and perform
a variety of procedures. Most flexible endoscopes contain a series of channels
running the length of the endoscope for delivery of air, water, suction and
accessory devices, such as biopsy forceps and cutting instruments.
Rigid endoscopes generally utilize a stainless steel tube encasing a series
of high resolution lenses to transmit the optical image. Most rigid endoscopes
do not contain the channels that are characteristic of flexible endoscopes.
Rigid endoscopes are currently utilized for diagnostic and surgical procedures
such as arthroscopy, laparoscopy, and urological and gynecological procedures.
While rigid endoscopes for other medical applications, such as bronchoscopes,
sigmoidoscopes, and nasopharyngo-laryngoscopes are still marketed, they have
largely been supplanted by flexible endoscopes, which offer improved patient
comfort and better handling capabilities. The Company does not currently plan to
participate in the rigid endoscope market.
APPLICATIONS
Flexible endoscopes are widely used in hospitals, clinics, and physicians'
offices primarily on an outpatient basis. The Company's flexible endoscopes are
designed primarily for screening, diagnostic, and therapeutic procedures in
fields such as gastroenterology, surgery, primary care, otolaryngology
(ear-nose-throat medicine, or "ENT"), and pulmonary medicine. The Company
estimates, based on various industry sources, that approximately 20 million
flexible endoscopic procedures in these fields were performed in the United
States in 1995.
GASTROINTESTINAL ENDOSCOPY. The Company estimates that based on industry
sources, over 12 million flexible endoscopic procedures involving the screening,
diagnosis or treatment of the colon, esophagus, stomach and duodenum were
performed in the United States in 1995. Continued growth in such procedures is
expected to result from an increase in sigmoidoscopies performed for the purpose
of detecting cancer of the descending colon, as well as the increased medical
needs associated with an aging population. The American Cancer Society has
recommended that every adult over the age of 50 (currently approximately 65
million Americans) receive a screening sigmoidoscopy every three to five years.
The most common flexible endoscopes used in gastrointestinal endoscopy are
as follows:
- SIGMOIDOSCOPES are used for viewing the sigmoid colon and descending colon
for screening and diagnostic purposes, such as screening for colon cancer.
An estimated 4.7 million procedures were performed in the United States in
1995 by gastroenterologists, family practitioners, and general and
colon-rectal surgeons in hospitals, clinics, and physicians' offices
primarily on an outpatient basis.
- COLONOSCOPES are used for viewing the complete colon for screening,
diagnostic and therapeutic purposes, such as removing polyps. Colonoscopy
is often performed following sigmoidoscopy. An
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estimated 3.6 million procedures were performed in the United States in
1995, primarily by gastroenterologists and colon-rectal surgeons in
hospitals and clinics.
- GASTROSCOPES are used for viewing the esophagus and the stomach for
diagnostic and therapeutic purposes, such as detecting and cauterizing
ulcers. An estimated 4.2 million procedures were performed in the United
States in 1995 by gastroenterologists in hospitals and clinics.
- DUODENOSCOPES are used for viewing and intubating the biliary and
pancreatic ducts from the duodenum for diagnostic and therapeutic
purposes, such as detecting gallstones. An estimated 400,000 procedures
were performed in the United States in 1995 by gastroenterologists in a
hospital setting.
ENT ENDOSCOPES. These endoscopes are used for viewing the ears, nose,
throat and larynx for diagnostic purposes, such as testing for throat cancer.
The Company estimates that based on industry sources, approximately 4 million
such procedures were performed in the United States in 1995, generally by
otolaryngologists and allergists in hospitals, clinics, and physicians' offices.
PULMONARY ENDOSCOPES. A bronchoscope and an intubation endoscope are
flexible endoscopes used for viewing the trachea, bronchi and lungs for
diagnostic and therapeutic purposes, generally by pulmonary specialists and
anesthesiologists in a clinic or hospital setting. The Company estimates that
based on industry sources, approximately 1 million procedures using flexible
bronchoscopes were performed in the United States in 1995. Because pneumonia is
common in persons infected with the HIV virus, and because bronchoscopy is often
used to make this diagnosis, there has been increased usage of bronchoscopes for
this purpose, as well as greater recognition of the need to perform
bronchoscopies in a contamination-free manner to protect both the HIV positive
patients (who have weakened immune systems) and subsequent patients on whom the
bronchoscope is used.
PROBLEMS WITH CONVENTIONAL FLEXIBLE ENDOSCOPES
While endoscopy represents a significant advance in the field of clinical
medicine, conventional flexible endoscopes present a number of health risks and
problems to both patients and medical personnel. Conventional flexible
endoscopes are intended for repeated use in hundreds of procedures and, with
each use, come in contact with some combination of the patient's blood, tissue,
mucus, saliva and stool. Therefore, a conventional flexible endoscope must be
meticulously manually cleaned and disinfected after each procedure. However, the
design of conventional flexible endoscopes makes it difficult to attain
high-level disinfection after cleaning. As a result, the repeated use of
conventional flexible endoscopes and the difficulty in thoroughly cleaning and
disinfecting them after each use create the following problems:
- Patients, and to a lesser degree the physician using the flexible
endoscope and the nurse assistant cleaning it, are exposed to the risk of
infection from contaminated endoscopes that results from their repeated
use.
- The nurses or other medical personnel who clean the endoscope face health
risks from exposure to toxic disinfecting agents used in the cleaning
process.
- The proper cleaning of a flexible endoscope is relatively expensive,
time-consuming and arduous.
- The repeated cleaning of a flexible endoscope subjects it to wear and
tear, reduces its useful life, and impairs the quality of its optics; in
addition, improper cleaning can cause blocked channels, which require
expensive endoscope repairs.
- The time needed to clean a flexible endoscope after each use results in a
period of "down time" during which the endoscope cannot be used and may
require users to buy and maintain multiple endoscopes.
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DIFFICULTY OF PROPER CLEANING. The problems associated with cleaning
conventional flexible endoscopes can be better understood by examining the
cleaning procedures they require. The cleaning of endoscopes is generally the
responsibility of the nurse or endoscopic assistant. The Society of
Gastroenterology Nurses and Associates, Inc., in 1990 published Recommended
Guidelines for Infection Control in Gastrointestinal Endoscopy Settings (the
"SGNA Guidelines"). Although cleaning procedures for endoscopes vary widely, the
following is a summary of the principal steps in the cleaning procedures that
are called for by the SGNA Guidelines.
- Inspection--Endoscopes should be tested for leaks and inspected for
damage. Even small leaks can lead to costly fiberoptic or video component
damage or contamination of the endoscope.
- Cleaning--After gross cleaning to remove patient material, endoscopes
should be thoroughly rinsed, the detachable parts should be removed and
cleaned and exteriors should be sponge-cleaned. All internal channels that
are accessible should be scrubbed with brushes, while unreachable air and
water channels should be rinsed clear of residual patient organic matter,
as the presence of such matter diminishes the effectiveness of the
disinfecting agents used. The endoscope should then be washed in a
detergent and enzyme solution, with such cleaning agents drawn through
internal channels. The endoscope should then be rinsed, with excess water
removed, since residual water can dilute disinfectants.
- Disinfection--Endoscopes should be disinfected using recommended chemical
agents or an automated cleaner. Disinfectants must also be drawn through
internal channels during this process. Although certain sterilization
methods are available for flexible endoscopes, conventional heat
sterilization will destroy flexible endoscopes.
- Rinsing--To ensure that patients are not exposed to toxic disinfectants,
endoscopes should be thoroughly rinsed using either tap water or sterile
water, followed by a final rinse in an alcohol solution.
- Drying--Endoscopes and channels should be dried using forced air, flushed
with an alcohol solution and dried again, prior to storage.
- Storage--Endoscopes should be hung vertically in well-ventilated cabinets
to prevent recontamination or damage between uses.
Proper cleaning of conventional flexible endoscopes, even when done in
compliance with the SGNA Guidelines, is difficult to achieve for a number of
reasons. Firstly, the design of conventional flexible endoscopes, which includes
channels, joints and crevices, makes it difficult to reach and clean all parts
of the endoscope. As the SGNA Guidelines state, an endoscope's "complex and
fragile structure presents problems in cleaning/disinfecting/sterilizing".
Secondly, the Company believes the most important step in the cleaning process
is the manual removal of organic material, and therefore, the opportunity for
human error is always present, even if optimal cleaning procedures are followed.
Finally, there are questions concerning the efficiency of some disinfecting
agents used in the endoscope cleaning process. For example, in 1991 the FDA
recommended that the medical profession cease the use of Sporicidin, a
widely-used endoscope disinfectant, based upon the FDA's conclusion that this
disinfectant does not work. The FDA has also required that the manufacturers of
chemical glutaraldehyde-based disinfectants change the recommended soak time on
their instructions for use from 20 minutes to 45 minutes, and increased the
temperature from 20 degrees Celsius to 25 degrees Celsius. This longer soak time
means slower turnaround on conventional scopes, and the increased temperature of
the glutaraldehyde is hazardous due to increased caustic vapors released during
heating.
HEALTH RISKS. Because flexible endoscopes are difficult to clean properly,
sterilization (the complete elimination of microbial life) is virtually
impossible to achieve. Therefore, "high-level disinfection" (the elimination of
all microbial life other than the most highly resistant spores) is the standard
for flexible endoscope cleaning currently recommended by the Centers for Disease
Control. However, studies indicate
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that high-level disinfection is often not attained and that cross-contamination
remains a risk to patients and medical personnel.
An FDA-sponsored study published in The American Journal of Medicine in
March 1992, reported that 23.9% of the gastrointestinal endoscopes tested
produced 100,000 or more bacterial colonies AFTER all cleaning and disinfection
procedures had been completed, and the endoscopes were deemed ready for use on
the next patient. This study concluded that "actual disinfection/sterilization
procedures for endoscopes are not always optimal, and high-level disinfection of
gastrointestinal endoscopes is not always achieved." Numerous infectious agents,
including tuberculosis and salmonella, have been reported in the medical
literature as having been transmitted through the use of contaminated
endoscopes. Concern about the risk of endoscopic cross-contamination has also
been heightened by the increasing prevalence of the HIV and hepatitis viruses.
The cleaning procedures required for endoscopes also subject medical
personnel to health risks (such as severe eye, nose and throat irritation,
nausea, headaches, asthma and skin rashes) from exposure to toxic disinfecting
agents. The Occupational Safety and Health Administration has classified
glutaraldehyde, a key ingredient in many endoscope disinfecting agents, as a
highly toxic material and requires hospitals, clinics, and physicians' offices
to reduce the level of emissions to 0.2 parts per million wherever
glutaraldehyde is used. In addition, toxic disinfectants must be disposed of in
compliance with applicable environmental laws.
OTHER PROBLEMS. In addition to the health problems posed by the use and
cleaning of conventional flexible endoscopes, the required cleaning of these
products is relatively expensive, time-consuming and arduous. The Company
estimates, based upon its own experience, that the cleaning and disinfection
procedure required following each use of a flexible endoscope, if done in
compliance with the FDA recommendations, would take 60 minutes. The repeated
cleaning in harsh chemical disinfectants also subjects a flexible endoscope to
wear and tear, reducing its useful life and impairing the quality of its optics.
Moreover, the failure to clean all organic materials from a flexible endoscope's
channels is a common cause of blocked channels, which require expensive
endoscope repairs as well as a back-up inventory of endoscopes. In addition, the
need to properly clean a flexible endoscope after each use requires that each
doctor performing endoscopies must either have access to a number of endoscopes
or be forced to wait an estimated 60 minutes between each endoscopic procedure
(assuming the endoscope is cleaned in compliance with FDA Guidelines).
COMPANY STRATEGY
The Company's primary business strategy is to develop, manufacture and
market products for endoscopy which have infection-control advantages over
conventional flexible endoscopes. To implement this strategy, the Company has
developed, and is marketing and selling, proprietary flexible endoscope systems
which consist of two main components--a proprietary sterile disposable sheath,
known as an EndoSheath, and a reusable flexible endoscope incorporating the
Company's proprietary design. In particular, the Company has developed, and is
marketing and selling, a family of disposable EndoSheath/ reusable flexible
endoscope systems for gastrointestinal endoscopy, ENT endoscopy and pulmonary
endoscopy. The Company has also developed, and is marketing and selling, ENT
EndoSheaths for use with certain conventional flexible ENT endoscopes currently
sold by other manufacturers.
The Company believes that its EndoSheath technology offers the following
advantages over conventional reusable flexible endoscopes:
- It represents the only known effective technology designed to eliminate
the risk of cross-contamination from prior use of a flexible endoscope.
- It is designed to substantially reduce the health risks to nurses and
other medical personnel resulting from exposure to toxic disinfecting
agents used in the cleaning process.
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- It significantly reduces the time and effort involved in the cleaning and
disinfection of conventional flexible endoscopes by hospital staff.
- It will reduce endoscope wear and tear resulting from repeated cleaning
and reduces endoscope repair costs, as the air, water, suction and
accessory channels that are the source of a majority of repairs have been
made part of the disposable EndoSheath.
- It reduces endoscope "down time" and thereby allows hospitals and clinics
to stock a smaller number of flexible endoscopes, since there is little
delay before an endoscope is ready for use in the next procedure.
- It increases the number of patients physicians can examine because of the
reduced delay in endoscope processing between procedures.
During the fiscal year ended March 31, 1999, the Company has also pursued a
strategy of exploring diversification toward the development of improved
endoscopes and related imaging devices. Included in these exploratory areas have
been the following:
- The use of advanced CMOS sensors in video endoscopes, in order to reduce
their cost and size over traditional CCD sensored video endoscopes.
- The use of 3-Dimensional visualization enhancements to improve the
perception of endoscopic images for both medical and industrial markets.
These and other areas of exploration have been undertaken with appropriate
third-party assistance, where applicable. The goal of these investigations has
been to analyze opportunities to further leverage the Company's core
competencies in its current markets, while at the same time analyzing new
technologies the Company may develop or acquire to enhance its offerings. As of
the date of this filing, there are no firm commitments to pursue any of these
strategic directions.
PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS
The Company's primary products include proprietary flexible endoscopes,
EndoSheaths, and related products for a variety of medical applications. In
addition, the Company currently manufactures and sells ENT endoscopes,
borescopes (endoscope-like devices for industrial applications), and related
products.
ENDOSHEATH/ENDOSCOPE SYSTEMS
The Company has developed a family of proprietary flexible endoscope systems
for gastrointestinal and pulmonary applications consisting of two main
components--proprietary sterile disposable sheaths, known as EndoSheaths and
reusable flexible endoscopes incorporating the Company's propriety design. The
EndoSheaths and endoscopes included in this system are functional only when used
together.
Conventional flexible endoscopes generally include fiberoptic bundles or
video cameras for image production, a series of channels for delivery of air,
water, suction, and accessory devices and an operator body containing user
control knobs. The Company's proprietary design separates these features between
the disposable EndoSheath and the reusable endoscope. The Company's proprietary
flexible endoscopes include the lighting, imaging and operator control features
necessary to perform the intended medical procedures. The endoscopes also
include microswitches instead of valves, and control knobs that may be removed
for sterilization. The EndoSheaths, which are designed to cover all surfaces of
the endoscope that come in contact with the patient, contain the air, water,
suction, and accessory channels that are a part of conventional flexible
endoscopes, thus eliminating the need to clean these channels. The Company
believes, based upon its own quality assurance testing of this product and
physicians who have purchased and are using the system, that this product
functions clinically in essentially the same manner as conventional flexible
endoscopes, requiring no retraining of personnel or changes in procedural
techniques.
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Installation of the EndoSheath onto the reusable endoscope can be performed
in a matter of minutes and is accomplished by inflating the sterile EndoSheath
with air, allowing the endoscope to be easily inserted into the EndoSheath.
After an endoscopic procedure, the disposable EndoSheath is then re-inflated,
and the flexible endoscope is removed from the EndoSheath. The EndoSheath and
packaging are then discarded, and the reusable endoscope is ready for use with a
new EndoSheath in the next procedure. This process takes 4 to 5 minutes, as
compared to the 60 minutes estimated for the proper cleaning of a conventional
flexible endoscope.
Due to the fact that the Company believes that sigmoidoscopy is one of the
most frequently performed endoscopic procedures, a fiberoptic sigmoidoscope was
the Company's first disposable EndoSheath/reusable flexible endoscope system.
The Company received FDA clearance of its 510(k) Pre-market Notification for
this product in October 1992 and began commercial shipments of this product in
April 1993. The Company also received FDA clearance of its 510(k) Pre-market
Notification for its black and white CCD video sigmoidoscope and EndoSheath
system in February 1994, its 130 cm length fiberoptic colonoscope and EndoSheath
system in February 1995, its fiberoptic gastroscope and EndoSheath system in
February 1995, and its fiberoptic ENT scope in December 1995. In December 1996
the Company received clearance from the FDA to market its fiberoptic
bronchoscope and EndoSheath system. In January 1997 the Company received
clearance from the FDA to market its color video sigmoidoscope.
ENT ENDOSHEATHS
The Company has developed EndoSheaths for use with ENT endoscopes. ENT
endoscopes do not contain air, water, suction, or accessory channels and,
therefore, do not require the Company's proprietary flexible endoscope design in
order to be used with an EndoSheath. In addition, because ENT endoscopes do not
contain channels, the EndoSheath covers the distal end of the endoscope thus
making these EndoSheaths a simpler and less expensive product. The Company
received FDA clearance of its 510(k) Pre-market Notification for its first ENT
EndoSheath in October 1992 and began commercial shipments of this product in
December 1992. In January 1993, the Company received FDA clearance of its 510(k)
Pre-market Notification covering four additional disposable EndoSheaths for use
with the Company's other ENT endoscope, two ENT endoscopes sold by Pentax
Precision Instrument Corporation ("Pentax"), and an ENT endoscope sold by
Olympus Optical Co., Ltd. ("Olympus"). The Company began shipping its EndoSheath
for use with an endoscope sold by Olympus in March 1993 and began shipments of
the three other EndoSheaths during fiscal 1994. In December 1995 the Company
received clearance from the FDA to market its own fiberoptic ENT scope, and in
April 1999 the Company received clearance from the FDA to market its Slide-On
ENT EndoSheath barrier for use with the Company's ENT endoscope and with the
endoscopes of other manufacturers.
OTHER PRODUCTS
Under the Machida name, the Company designs, manufactures and markets
flexible borescopes, which are similar in design to endoscopes and are used for
inspection and quality-control functions in industrial applications, such as the
inspection of aircraft engines and nuclear power plants. Through Machida, the
Company was the first to offer a flexible borescope with a grinding attachment
that allows users to "blend", or smooth small cracks, in small turbine blades of
jet engines without disassembling the engine, which would involve significant
expense and delay. The Company also offers a variety of ancillary products for
use with flexible endoscopes and borescopes, such as light sources, cameras,
adapters, accessories and imaging systems. Sales of these non-medical and
ancillary products were approximately $3.6 million, or 48%, of the Company's net
sales in fiscal 1999. The Company expects that net sales of these products over
the next several years will remain relatively constant and will constitute a
continually decreasing percentage of the Company's total business.
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SALES AND MARKETING
The Company expects that the customers for its disposable EndoSheaths,
flexible endoscopes and related products will be Gastroenterologists, Colon and
Rectal Surgeons, Otolaryngologists, Pulmonologists, Primary Care Physicians, and
high-volume users in hospitals, medical clinics, and physicians' offices. As of
May 31, 1999, the Company had three marketing employees, and utilized
independent sales representatives, distributors and/or dealers in both North
America and Europe, and intends to expand this indirect sales force over the
next year.
Although the Company has no specific plans or commitments in this regard,
the Company may also license to one or more third parties rights to manufacture
and sell reusable flexible endoscopes incorporating the Company's proprietary
design features, while retaining the rights to manufacture and sell the
EndoSheaths used with these endoscopes.
The Company sold its ENT endoscopes, disposable ENT EndoSheaths, and related
ancillary ENT products through an exclusive five-year distribution agreement,
which commenced in March 1994, with the ENT Division of Smith & Nephew, Inc.
("Smith & Nephew"). In March 1998 the Company and Smith & Nephew replaced this
agreement with a new agreement that expired in March 1999. That agreement
included a firm, non-cancelable purchase order for the supply of 200,000 ENT
EndoSheaths during fiscal year 1999. The Company fulfilled that order during
fiscal 1999. Effective April 1999, the Company is selling its ENT endoscopes and
ENT EndoSheaths through its own channel of independent sales representatives and
international distributors. As of May 31, 1999 the Company had signed agreements
with 23 independent sales representatives and 11 international distributors. The
Company believes selling through its own sales representative and distributor
channel will result in improved market penetration resulting in higher sales and
gross profit of ENT EndoSheaths in its third and fourth quarters of fiscal 2000.
The Company believes sales through this channel will not be higher in its fiscal
first and second quarters due primarily to an excess of EndoSheath inventory
from Smith & Nephew, and to the time and effort required by management to train
the new sales representatives and international distributors. The Company
expects to incur higher costs for commissions and sales promotion in fiscal
2000.
The Company's borescopes are sold both directly by its Machida subsidiary
and through independent sales representatives.
In the fiscal year ended March 31, 1999, sales to foreign customers
accounted for approximately 8% of the Company's annual net sales. The Company
currently sells certain models of its borescopes and endoscopes outside of the
United States. Although the Company expects to continue to sell such products
outside of the United States, the Company expects that the substantial majority
of the sales of its new EndoSheaths and proprietary flexible endoscopes will be
made to customers within the United States.
Sales to unaffiliated customers outside of the United States were
approximately $698,000, $619,000 and $606,000 for the fiscal years ended March
31, 1997, 1998 and 1999, respectively.
For the fiscal years ended March 31, 1997, 1998 and 1999 Smith & Nephew
accounted for 36%, 35% and 35% of net sales, respectively.
MANUFACTURING AND SUPPLIERS
The Company produces its EndoSheaths at its Natick, Massachusetts facility
using molded and extruded components purchased from independent vendors, some of
which are manufactured to the Company's specifications. Most purchased
components are available from multiple sources. With the exception of its supply
agreement with Asahi Optical Co., Ltd. ("Asahi") and Applied Fiberoptics, Inc.
discussed below, the Company has no agreements with any of its vendors or
suppliers and purchases its required components and supplies on a purchase-order
basis. The Company contracts with third parties for the sterilization of the
EndoSheaths.
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The Company assembles its flexible endoscopes designed for use with its
EndoSheaths at its Orangeburg, New York facility using purchased components and
subassemblies, as well as certain proprietary components produced by the
Company. Most purchased components and subassemblies are available from more
than one supplier. However, certain critical components, such as image bundles
and operator control bodies are currently being purchased solely from Asahi,
which is the parent company of a competitor of the Company. These components are
being purchased pursuant to a supply agreement, which expires in March 2001,
subject to earlier termination by mutual consent or upon breach or bankruptcy
and which may be extended with the consent of both parties. The Company believes
that while substitute components, which are currently produced by sources other
than Asahi, would be available, such substitute components may be more expensive
and of a lower quality and may require a redesign of the Company's endoscope and
additional regulatory clearances. Moreover, such substitute components may not
be immediately available in quantities needed by the Company. The Company's
inability to obtain a sufficient quantity of such critical components on
favorable terms could materially adversely affect the Company's business. To
date, the Company has encountered no significant difficulties or delays in
obtaining a sufficient quantity of such critical components or subassemblies for
the Company's proprietary flexible endoscopes designed for use with its
EndoSheaths. However, there can be no assurance that no difficulties or delays
will be experienced in the future as the Company increases its manufacturing
operations.
The Company had entered into a manufacturing agreement, due to expire in
February 2001, with Applied Fiberoptics of Sturbridge, Massachusetts, to supply
a fiberoptic ENT scope. During the fiscal year ended March 31, 1999, the Company
and Applied Fiberoptics amended the terms of the agreement to allow for each
party to design, manufacture and sell its own ENT endoscope.
The Company's borescopes are assembled using components and sub-assemblies
purchased from independent vendors. While most components and sub-assemblies are
currently available from more than one supplier, certain critical components are
currently purchased only from Machida Endoscope Company, Ltd., an unaffiliated
Japanese company. The failure of the Company to obtain a sufficient quantity of
such components on favorable terms could materially adversely affect the
Company's business.
The Company's light sources, camera, adapters, accessories and imaging
systems for non-medical applications are generally purchased by the Company from
a variety of vendors.
The Company has negotiated the worldwide, royalty-free exclusive right from
a third party to use polymer technology for manufacturing optically clear
windows to be included in its EndoSheaths for use with ENT endoscopes. The
Company has also negotiated a license to include the same technology in its
EndoSheaths for use with intubation endoscopes and bronchoscopes.
COMPETITION
The Company believes that the primary competitive factors in the flexible
endoscope market are the safety and effectiveness (including optical quality) of
the products offered, ease of product use, product reliability, price, physician
familiarity with the manufacturer and its products and third-party reimbursement
policies. In its non-medical markets, the Company believes that product
effectiveness, ease of product use, product reliability and price are the
principal competitive factors. The Company's ability to compete in its markets
is affected by its product development and innovation capabilities, its ability
to obtain required regulatory clearances, its ability to protect the proprietary
technology included in its products, its manufacturing and marketing skills and
its ability to attract and retain skilled employees.
The flexible endoscopes and related products currently sold and under
development by the Company face competition primarily from medical products
companies such as Olympus and Pentax, a subsidiary of Asahi. In addition, any
company that is able to significantly redesign conventional flexible endoscopes
to simplify the cleaning process, or significantly improve the current methods
of cleaning flexible endoscopes,
10
<PAGE>
would provide competition for the Company's products. The principal competitors
for the Company's non-medical products are Olympus and Welch Allyn, Inc.
Many of the Company's competitors and potential competitors have greater
financial resources, research and development personnel, and manufacturing and
marketing capabilities than the Company. In addition, it is possible that other
large health care companies may enter the flexible endoscope market in the
future.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company's
strategy regarding the protection of its proprietary rights and innovations is
to seek patents on those portions of its technology that it believes are
patentable, and to protect as trade secrets other confidential and proprietary
information.
The Company and its subsidiaries currently hold 21 U.S. and 18 foreign
patents and have 3 U.S. patent applications and 4 patent applications pending,
all of which relate to its disposable EndoSheaths and reusable flexible
endoscopes. These issued patents will expire on various dates in the years 2004
through 2017. There can be no assurance that the Company's pending patent
applications will result in patents being issued or that competitors of the
Company will not circumvent, or challenge the validity of, any patents issued to
the Company. In addition, in the event that another party infringes the
Company's patent rights, the enforcement of such rights is at the option of the
Company and can be a lengthy and costly process, with no guarantee of success.
Some of the technology used in, and that may be important to, the Company's
products is not covered by any patent or patent application of the Company. The
Company seeks to maintain the confidentiality of its proprietary technology by
requiring all employees who work with proprietary information to sign
confidentiality agreements and by limiting access by parties outside the Company
to such confidential information. However, there can be no assurance that these
measures will prevent the unauthorized disclosure or use of this information, or
that others will not be able to independently develop such information.
Moreover, as is the case with the Company's patent rights, the enforcement by
the Company of its trade secret rights can be lengthy and costly, with no
guarantee of success.
To date, no claims have been brought against the Company alleging that its
technology or products infringe intellectual property rights of others. However,
there can be no assurance that such claims will not be brought against the
Company in the future or that any such claims will not be successful.
GOVERNMENT REGULATION
The medical products currently marketed and under development by the Company
are regulated as medical devices by the FDA under the federal Food, Drug and
Cosmetic Act (the "FDC Act") and require regulatory clearance prior to
commercialization in the United States. Under the FDC Act, the FDA regulates
clinical testing, manufacturing, labeling, distribution and promotion of medical
devices in the United States. Various states and other countries in which the
Company's products may be sold in the future may impose additional regulatory
requirements.
Following the enactment of the Medical Device Amendments to the FDC Act in
May 1976, the FDA classified medical devices in commercial distribution into one
of three classes, Class I, II, or III. This classification is based on the
controls necessary to reasonably ensure the safety and effectiveness of the
medical device. Class I devices are those devices whose safety and effectiveness
can reasonably be ensured through general controls, such as adequate labeling,
pre-market notification, and adherence to the FDA's Quality System Regulations
("QSR"). Some Class I devices are further exempted from some of the general
controls. Class II devices are those devices whose safety and effectiveness can
reasonably be ensured
11
<PAGE>
through the use of special controls, such as performance standards, post-market
surveillance, patient registries and FDA guidelines. Class III devices are
devices that must receive pre-market approval by the FDA to ensure their safety
and effectiveness. Generally, Class III devices are limited to life-sustaining,
life-supporting or implantable devices.
If a manufacturer or distributor of medical devices can establish that a new
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a Class III medical device for which the FDA has not
required pre-market approval, the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) Pre-market Notification.
The 510(k) Pre-market Notification and the claim of substantial equivalence may
have to be supported by various types of information indicating that the device
is as safe and effective for its intended use as a legally marketed predicate
device.
Following submission of the 510(k) Pre-market Notification, the manufacturer
or distributor may not place the device into commercial distribution until an
order is issued by the FDA. By regulation, the FDA has no specific time limit by
which it must respond to a 510(k) Pre-market Notification. At this time, the FDA
typically responds to the submission of a 510(k) Pre-market Notification within
approximately 90 days. The FDA may declare that the device is "substantially
equivalent" to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. Such determination or request
for additional information could delay the Company's market introduction of its
products and could have a material adverse effect on the Company.
If a manufacturer or distributor cannot establish to the FDA's satisfaction
that a new device is substantially equivalent, the manufacturer or distributor
will have to seek pre-market approval ("PMA") or reclassification of the new
device. A PMA application would have to be submitted and be supported by
extensive data, including pre-clinical and clinical trial data, to demonstrate
the safety and efficacy of the device. Upon receipt, the FDA will conduct a
preliminary review of the PMA application to determine whether the submission is
sufficiently complete to permit a substantive review. If sufficiently complete,
the submission is declared fileable by the FDA. By regulation, the FDA has 180
days to review a PMA application once it is determined to be fileable. While the
FDA has responded to PMA applications within the allotted time period, PMA
reviews more often occur over a significantly protracted time period and
generally take approximately two years or more from the date of filing to
complete. A number of devices for which FDA marketing clearance has been sought
have never been cleared for marketing.
If human clinical trials of a proposed device are required and the device
presents "significant risk", the manufacturer or distributor of the device will
have to file an investigational device exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
testing. If the IDE application is approved, human clinical trials may begin at
the specific number of investigational sites and could include the number of
patients approved by the FDA.
Flexible endoscopes, EndoSheaths, and accessory products have been
classified by the FDA as Class II devices, and a Section 510(k) Pre-market
Notification must be submitted to and cleared by the FDA before such devices can
be sold. The Company has received FDA clearance of its 510(k) Pre-market
Notifications for the following products as of the dates noted. The Company
expects that it will be required
12
<PAGE>
to obtain 510(k) clearance for each additional disposable EndoSheath/reusable
flexible endoscope system that it develops in the future.
<TABLE>
<CAPTION>
DATE OF CLEARANCE PRODUCT
- ------------------- ---------------------------------------------------------------------------------------------
<S> <C>
October 1992 EndoSheath/reusable fiberoptic sigmoidoscope system
October 1992 EndoSheath for use with the Company's flexible ENT endoscope
January 1993 Four models of EndoSheaths for use with certain other ENT endoscopes
February 1994 EndoSheath/reusable black and white CCD video sigmoidoscope system
February 1995 EndoSheath/reusable fiberoptic 130 cm length colonoscope system
February 1995 EndoSheath/reusable fiberoptic gastroscope system
December 1995 Fiberoptic ENT scope
July 1996 EndoSheath for use with the Company's reusable fiberoptic ENT endoscope
August 1996 Vacuum ENT EndoSheath barrier
November 1996 EndoSheath barrier for use with the Company's fiberoptic sigmoidoscope
December 1996 EndoSheath barrier for use with the Company's fiber/video sigmoidoscopes
December 1996 EndoSheath barrier/reusable fiberoptic bronchoscope system
January 1997 EndoSheath barrier/reusable color video sigmoidoscope system
April 1999 Slide-On EndoSheath for use with the Company's fiberoptic ENT endoscope
April 1999 Four models of Slide-On EndoSheaths for use with certain other ENT endoscopes
</TABLE>
Effective July 1998, the Company's Natick, Massachusetts facility was
certified as having established and is maintaining a quality system that meets
the requirements of ISO 9001 and EN 46001. In addition, both the Natick and
Orangeburg, New York facilities received their EC certificate, indicating they
maintain a quality system that conforms to the essential requirements of the
Council Directive 93/42/EEC, applying this system at every stage from design to
final controls. The Natick and Orangeburg facilities are registered with the FDA
as medical device manufacturers. As a result, these facilities are subject to
the FDA's QSR's, which regulate their design, manufacturing, testing, quality
control and documentation procedures. The Company is also required to comply
with the FDA's labeling requirements, as well as its information reporting
regulations. The export of medical devices is also subject to regulation in
certain instances. The Company's compliance with these various regulatory
requirements will be monitored through periodic inspections by the FDA.
The process of obtaining required regulatory clearances can be lengthy and
expensive, and compliance with ISO 9001 and the FDA's QSR's and regulatory
requirements can be burdensome. Moreover, there can be no assurance that the
required regulatory clearances will be obtained, and those obtained may include
significant limitations on the uses of the product in question. In addition,
changes in existing regulations or the adoption of new regulations could make
regulatory compliance by the Company more difficult in the future. The failure
to obtain the required regulatory clearances or to comply with applicable
regulations may result in fines, delays or suspensions of clearances, seizures,
or recalls of products, operating restrictions and criminal prosecutions, and
could have a material adverse effect on the Company.
THIRD-PARTY REIMBURSEMENT
Hospitals, medical clinics and physicians' offices that purchase medical
devices such as the Company's EndoSheaths and flexible endoscopes generally rely
on third-party payors, such as Medicare, Medicaid, and private health insurance
plans to pay for some or all of the costs of the screening, diagnostic and
therapeutic procedures performed with these devices. Whether a particular
procedure qualifies for third-party reimbursement depends upon such factors as
the safety and effectiveness of the procedure, and reimbursement may be denied
if the medical device used is experimental or was used for a non-approved
indication. The Company believes, based upon its knowledge of third-party
reimbursement practices, advice from consultants in this area and six years of
selling experience, that third-party reimbursement will be available for most
procedures using its disposable EndoSheath/reusable flexible endoscope systems.
13
<PAGE>
However, the Company's Sigmoidoscope EndoSheath when used in a physician's
office on a Medicare patient has, to date, not received a reimbursement value
from the Health Care Financing Administration.
Third-party payors use a variety of mechanisms to determine reimbursement
amounts for procedures such as endoscopies. In some cases, reimbursement amounts
are based upon the provider's costs associated with the procedure, including
materials costs. In such a situation, the cost of the EndoSheath used in the
procedure would likely be covered by the reimbursement payment. In other cases,
payment is a fixed amount per procedure, per hospital day, or per hospital stay;
such a payment would not cover the cost of materials, such as the EndoSheath,
used in the procedure. However, in some cases where reimbursement is a fixed
amount per procedure, an additional materials reimbursement may be available to
cover the cost of certain supplies used. As endoscopies performed with
conventional flexible endoscopes do not require any significant supplies,
materials reimbursements for the Company's EndoSheaths may become available at
some point in the future.
There can be no assurance that third-party reimbursement will be available
for procedures performed with the Company's products or that the cost of the
Company's EndoSheaths would be covered by such reimbursement in the future. In
addition, reimbursement standards and rates may change. The Company believes
that the failure of users of the Company's products to obtain adequate
reimbursement from third-party payors could have a materially adverse effect on
the Company.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's products exposes the Company to significant
product liability risks. The Company maintains product liability insurance with
coverage limits of $2,000,000 per year. The Company believes that this level of
coverage is adequate, given its past sales levels and its anticipated sales
levels for the fiscal year ending March 31, 2000. The Company will reevaluate
the adequacy of this coverage when and if its sales levels substantially
increase. No product liability claims have been brought against the Company to
date. However, there can be no assurance that product liability insurance will
continue to be available to the Company on acceptable terms, or that product
liability claims in excess of the Company's insurance coverage, if any, will not
be successfully asserted against the Company in the future.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part upon its
ability to develop new products and enhance its existing products. In the past
the Company has devoted significant funds and efforts to research and
development. In order to lower expenses in the year ended March 31, 1998, the
Company reduced its efforts in the development of new products. The Company
expects to incur costs for research and development in fiscal 2000 comparable to
amounts incurred in fiscal 1999.
The Company's research and development efforts in fiscal 1997 focused on the
fiberoptic bronchoscope and EndoSheath system, the vacuum ENT EndoSheath, the
color CCD video sigmoidoscope and EndoSheath system as well as refinement and
cost reduction of existing products. During fiscal 1998, the research and
development efforts focused on image-guided surgical applications using
third-party surgical navigation technology combined with EndoSheath technology
and refinement and cost reduction of existing products. During fiscal 1999, the
research and development efforts focused on the development of a new ENT scope
and the Company's Slide-On ENT EndoSheath. The Company's research and
development expenses in fiscal years 1997, 1998, and 1999 were $2,289,000,
$763,000 and $209,000, respectively. The Company's research and development
efforts in fiscal 2000 are expected to be concentrated primarily on continuing
enhancements of, and additions to, the fiberoptic sigmoidoscope, the fiberoptic
ENT endoscope and its EndoSheath systems. During fiscal 2000 the Company also
expects to expend efforts in areas related to advanced endoscopic imaging
technology, including CMOS sensors and 3-Dimensional imaging systems. These
efforts will be undertaken primarily through relationships with 3DV Systems Ltd.
and Imagineering, Ltd., two Israeli corporations with which the Company has
agreements.
14
<PAGE>
EMPLOYEES
As of April 30, 1999, the Company had 79 employees. No Company employees are
represented by a labor union. The Company believes that its employee relations
are good. The Company's success will depend in large part upon its ability to
attract and retain highly qualified scientific, management, sales and marketing
personnel.
ITEM 2. PROPERTIES
The Company's principal executive offices, manufacturing, sales and medical
research and development facilities currently occupy approximately 20,000 square
feet of space in Natick, Massachusetts under a lease that expires in November
2003. The operations of the Company's Machida subsidiary are located in
Orangeburg, New York under a lease for approximately 25,000 square feet which
expires in August 2000. As part of its plans to reduce expenses in fiscal 1999,
the Company consolidated its operations in Natick into one facility. As part of
that consolidation, the Company paid $105,000 in March 1999 to its landlord as a
lease termination fee.
The Company's currently occupied Natick facilities and the Orangeburg
facility are registered with the FDA as medical device manufacturing facilities
and are, therefore, subject to the FDA's QSR's regarding manufacturing, testing,
quality control and documentation procedures. The Company believes that the
physical characteristics and layouts of these facilities are adequate to
manufacture its products in compliance with applicable FDA regulations. In
addition, the Company's Natick facilities are registered as meeting the
requirements of ISO 9001 and EN 46001. The Natick facility is registered as
meeting the requirements of Council Directive 93/42/EEC, allowing the Company to
sell its medical products in Europe.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1999, there were no material legal proceedings to which the
Company or any of its subsidiaries is a party, or of which any of their
properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the last quarter of the fiscal year ended March 31, 1999.
EXECUTIVE OFFICERS OF THE COMPANY
Katsumi Oneda, a co-founder of the Company, has been President, Chief
Executive Officer, and Chairman of the Board of Directors of the Company since
October 1993. He served as Vice-Chairman of the Board of Directors of the
Company from May 1992 to October 1993, as Honorary Chairman of the Board of
Directors from October 1991 to October 1993, and as Chairman of the Board of
Directors from September 1990 to October 1991. From 1979 to December 1990, he
was President and Chief Executive Officer of Pentax Precision Instrument
Corporation. Mr. Oneda is a director of several private companies. He has been a
director of the Company since 1987.
Lewis C. Pell, a co-founder of the Company, has been Vice-Chairman of the
Board of Directors of the Company since May 1992. Mr. Pell has served as a
director of Heart Technology, Inc., a publicly-held medical device company. Mr.
Pell is a founder or co-founder of a number of other privately-held medical
device companies, including Biosense, Inc., Influence, Inc., Flexiclave, Inc.,
iSight, Inc., Vitality Biotechnologies, Inc. Mr. Pell was co-founder and a
director of Versaflex Delivery Systems, Inc. and INStent, Inc., which were sold
in 1988 and 1996, respectively, to Medtronic, Inc. In 1983, Mr. Pell co-founded
American Endoscopy, Inc. and served as a director until it was sold in 1986 to
C.R. Bard, Inc. In September 1979, he co-founded Pentax Precision Instrument
Corporation and served as Executive Vice President and director
15
<PAGE>
until December 1990, when it was sold to Asahi Optical Company. Mr. Pell is a
director of several private companies.
Gerald B. Lichtenberger, Ph.D., has served as Vice President, Business
Development since December 1998. From January 1997 to December 1998 he served as
Executive Vice President, Chief Operating Officer and Secretary of the Company.
Prior to joining the Company, Dr. Lichtenberger served since 1990 as President
and a Director of iSight, Inc., a developer and manufacturer of digital video
cameras and components. Dr. Lichtenberger was Vice President of Strategic
Planning and Vice President of Operations of Pentax Precision Instrument
Corporation from 1986 until 1990, and was President, Chief Executive Officer and
Chairman of the Board of Directors of Systems of the Future, Inc. from 1979
until 1986.
James A. Tracy joined the Company in July 1997 and was elected Vice
President Finance in August 1997. From 1994 to 1996 Mr. Tracy was the Vice
President Finance at ORS Environmental Systems, a manufacturer of environmental
equipment and sensor instrumentation. From 1990 to 1994 he was Vice President
Finance at Sigma Designs, Inc., a publisher of CAD software. From 1986 to 1990
he was Vice President Finance for Aegis, Inc., a manufacturer of microcircuit
packages. Prior to 1986 he worked for other manufacturing companies. Mr. Tracy
received a CPA certificate in 1975.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
From December 15, 1992 to October 29, 1997, the Company's Common Stock was
quoted on the Nasdaq National Market, and since October 30, 1997, the Company's
Common Stock has been traded on the Nasdaq SmallCap Market under the symbol
VSCI. The following table sets forth the high and low sale prices for the Common
Stock on the Nasdaq National Market, or the Nasdaq SmallCap Market, as the case
may be, as reported by Nasdaq during the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 1999 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................. 2 7/8 7/16
2nd Quarter.................................................................. 2 1 1/32
3rd Quarter.................................................................. 1 7/16 3/4
4th Quarter.................................................................. 3 29/32
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 1998 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................. 1 5/8 7/8
2nd Quarter.................................................................. 3 9/16 3 1/32
3rd Quarter.................................................................. 3 1/8 1 1/8
4th Quarter.................................................................. 2 1/8 1 9/32
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices without
retail mark-up, mark-down, or commission and may not necessarily represent
actual transactions.
As of May 28, 1999, there were 19,212,021 outstanding shares of Common Stock
held by 256 stockholders of record, in addition to which there were
approximately 1,750 beneficial stockholders.
The Company has never paid cash dividends on its Common Stock, and the
Company does not expect to pay any cash dividends on its Common Stock in the
foreseeable future. In accordance with a demand line-of-credit agreement that
the Company has with a bank, the Company is prevented from paying cash dividends
on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data and should be
read in conjunction with the financial statements and related notes on Appendix
A to this report.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 7,702 $ 6,222 $ 8,330 $ 7,998 $ 7,476
Gross profit (loss)................................. 193 (978) 736 1,419 1,274
Net loss from operations............................ (8,727) (9,736) (6,453) (2,902) (1,965)
Net loss per share.................................. (.83) (.84) (.46) (.17) (.12)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.... 6,421 5,866 2,681 2,891 3,195
Total assets........................................ 12,837 11,076 6,850 6,172 7,882
Total liabilities................................... 2,020 2,579 2,461 2,355 2,433
Stockholders' equity................................ 10,817 8,497 4,389 3,817 5,450
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Vision-Sciences, Inc. develops, manufactures and markets unique flexible
endoscope products utilizing disposable sheaths which provide the users quick,
efficient product turnover while ensuring the patient a contaminant-free
product.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1999 AND 1998
Net sales for the fiscal year ended March 31, 1999 were $7,476,000, a
decrease of $522,000, or 7%, compared to the prior fiscal year. The decrease in
net sales was primarily attributable to medical sales decreasing $489,000, or
11%, and industrial sales decreasing $33,000, or 1%, compared to the prior
fiscal year ended March 31, 1998.
The decrease in medical sales resulted primarily from a decline in the sales
of scopes of $418,000, or 28%, partially offset by an increase in the sales of
the Company's proprietary EndoSheath-Registered Trademark- product of $48,000,
or 2%. In addition, sales of $138,000 of certain medical devices in fiscal 1998
did not recur in fiscal 1999. The decrease in sales of scopes was due primarily
to the Company's decision to begin selling its own proprietary ENT-2000 scope
and cease selling a similar scope the Company had previously purchased from a
supplier. The Company made this decision as part of its strategy to improve its
penetration of the market for ENT scopes and sheaths. The other part of the
strategy is to sell ENT sheaths directly to users utilizing a sales
representative network established by the Company, as compared to selling ENT
scopes and sheaths through a master distributor. The Company believes this
strategy will result in higher sales and gross profit for this line of products.
The Company believes it will take time to implement this strategy, primarily due
to the efforts required to recruit and train its sales representatives, and to
conduct advertising and promotion efforts that will communicate this strategy to
current and new customers. This transition period began in the fourth quarter of
fiscal 1999, and the Company expects it to continue at least during the first
quarter of fiscal year 2000.
Sales of industrial products in fiscal year 1999 were consistent with sales
in fiscal year 1998. Within this segment reduced demand for repair services was
offset by increased demand from industrial customers for new borescopes.
Gross profit for the fiscal year ended March 31, 1999 decreased $146,000,
and was 17% of sales, compared to 18% of sales in the prior fiscal year. Gross
profit on medical sales increased by $171,000, due primarily to a more
profitable mix of sales oriented toward sheaths. Also, the benefits of the
Company's reduction of overhead expenses in April 1998 was offset by the
non-recurring sales of certain medical devices that occurred in fiscal 1998. The
Company expects the gross profit of medical sales to increase in fiscal year
2000 due to the continued shift of sales toward sheaths, and to improved pricing
derived from the strategy of selling directly to end users.
Gross profit on industrial sales decreased by $317,000, due primarily to the
mix of sales preventing the same utilization of material inventory as this
segment experienced in fiscal 1998.
Selling, general, and administrative expenses for the fiscal year ended
March 31, 1999 decreased $530,000 or 15%, to $3,029,000, compared to the prior
fiscal year and represented 41% of net sales versus 45% in the prior fiscal
year. The decrease resulted primarily from sales and marketing expenses
decreasing $293,000, or 19%, versus the prior fiscal year, primarily due to
reduced expenses for payrolls and product promotion. General and administrative
expenses decreased by $237,000, or 12%, compared to the prior fiscal year,
primarily due to lower expenses for payrolls. In addition, the Company utilized
reserves, established in prior years, of approximately $335,000 to record
certain non-recurring expenses incurred in the year ended March 31, 1999.
Research and development expenses for the fiscal year ended March 31, 1999
decreased $553,000, or 73%, versus the prior fiscal year and represented 3% of
net sales in the current year versus 10% of net
18
<PAGE>
sales in the prior fiscal year. These lower expenses were due primarily to
reduced headcount and lower spending for new products. In fiscal 2000 the
Company plans to continue spending at approximately the same rate for research
and development for new products, and on making improvements to its existing
products.
Interest income, net, for the fiscal year ended March 31, 1999 increased
$36,000 or 24%, to $183,000, compared to the prior fiscal year due to higher
levels of cash equivalents and marketable securities.
Other income, net for the fiscal year ended March 31, 1998 decreased
$534,000 compared to the prior fiscal year, primarily due to equity in losses of
3DV and decreased royalty income. As explained in Note 4 of Notes to the
Consolidated Financial Statements, the Company accounts for its investment in
3DV using the equity method of accounting, absorbing 100% of the losses of that
entity. From August 1998 through March 1999, the Company recognized $1,693,000
of losses incurred by 3DV. These losses were partially offset by $1,332,000 of
development fees received from Asahi to fund the development costs of 3DV. In
fiscal 2000, the Company expects 3DV will incur losses of approximately
$2,800,000. Under the agreements signed in August 1998, the Company is required
to fund the working capital need of 3DV. The Company is pursuing sources of
capital that it expects to need to fund these working capital needs in fiscal
year 2000.
In addition, income from royalty agreements decreased by approximately
$171,000 due to the expiration of royalty agreements.
FISCAL YEARS ENDED MARCH 31, 1998 AND 1997
Net sales for the fiscal year ended March 31, 1998 were $7,998,000, a
decrease of $332,000, or 4%, compared to the prior fiscal year. The decrease in
net sales was primarily attributable to medical sales decreasing $238,000, or
5%, and industrial sales decreasing $94,000, or 3%, compared to the prior fiscal
year ended March 31, 1997.
The decrease in medical sales resulted primarily from a decline in the sales
of scopes of $605,000, or 29%, offset by an increase in the sales of the
Company's proprietary EndoSheath-Registered Trademark- product of $319,000, or
15%. The decrease in sales of scopes was due primarily to lower demand for
scopes that use the Company's proprietary EndoSheath technology. In addition,
the Company had an increase in the sales of certain medical devices of $138,000.
The Company does not expect to continue to sell these devices in fiscal 1999,
but will concentrate on penetrating the market for EndoSheaths, especially the
ENT market. Sales of the Company's ENT sheath increased by $278,000, or 28%,
compared to the sales in fiscal 1997, due primarily to the fact that the ENT
sheaths are less expensive, and can be utilized on scopes manufactured by other
companies. The decrease in industrial sales for the fiscal year ended March 31,
1998, compared to the prior fiscal year, resulted primarily from reduced demand
from the defense market.
Gross profit for the fiscal year ended March 31, 1998 increased $683,000, or
93%, to $1,419,000. The increase in gross profit was due primarily to an
improved sales mix oriented towards sheaths, which have a higher gross margin
than scopes. In addition, the Company incurred significantly lower costs for
scrap and manufacturing overhead, and was able to increase its utilization of
manufacturing capacity, as compared to the prior fiscal year.
Selling, general, and administrative expenses for the fiscal year ended
March 31, 1998 decreased $1,341,000, or 27%, to $3,559,000, compared to the
prior fiscal year and represented 44% of net sales versus 59% in the prior
fiscal year. The decrease resulted primarily from sales and marketing expenses
decreasing $1,296,000, or 46%, versus the prior fiscal year, primarily due to
reduced headcount, and general and administrative expenses decreasing $45,000,
or 2%, versus the prior fiscal year, primarily due to lower expenses for
business insurance and other costs.
Research and development expenses for the fiscal year ended March 31, 1998
decreased $1,527,000, or 67%, versus the prior fiscal year and represented 10%
of net sales in the current year versus 27% of net sales in the prior fiscal
year. These lower expenses were due primarily to reduced headcount and lower
19
<PAGE>
spending for new products. In fiscal 1999 the Company plans to continue to
reduce spending for research and development for new products, and concentrate
on making improvements to its existing products.
Interest income, net, for the fiscal year ended March 31, 1998 decreased
$27,000, or 16%, to $147,000, compared to the prior fiscal year due to lower
levels of cash equivalents and marketable securities.
Other income, net for the fiscal year ended March 31, 1998 increased
$86,000, or 95% over the prior fiscal year, primarily due to increased royalty
income from new and existing agreements, including an initial license fee of
$50,000 received in the three months ended June 30, 1997. The agreement which
was the primary source of royalties for fiscal 1997 expired in July 1997. The
Company does not expect to derive significant income from royalties in fiscal
1999.
LIQUIDITY AND CAPITAL RESOURCES
In the fiscal years ended March 31, 1997 and 1998 the amount of cash used in
the Company's operations was $4,964,000 and $1,624,000, respectively. In the
fiscal year ended March 31, 1999 the Company generated $472,000 of cash from
operations. Cash used in operations during fiscal years 1997 and 1998 was
primarily devoted to manufacturing, marketing and research and development. In
fiscal year 1999 cash generated from operations was derived from the payment by
Asahi Optical Co., Ltd. for deferred development cost, working capital
management and depreciation expense. These inflows were offset by costs for
manufacturing, marketing, product development and payments to support the
contractual obligations of the Company to Imagineering and support of
Vision-Sciences, Ltd., the Company's Israeli subsidiary.
Accounts receivable declined $350,000 in the year ended March 31, 1999, due
primarily to improved collections compared to the prior year. Days sales
outstanding at March 31, 1999 was 57, compared to 44 at March 31, 1998. The
increase in days sales outstanding is due primarily to slower collection of
accounts receivable from a major customer. The Company received payment from
this customer in early April 1999.
The Company's inventories decreased from $681,000 at March 31, 1998 to
$634,000 at March 31, 1999. The decrease was primarily due to reductions of
finished goods inventories due to increased shipment of sheaths.
The Company currently plans to spend no more than $250,000 on capital
purchases in fiscal year 2000. These capital expenditures are expected to relate
primarily to manufacturing equipment, tooling, molds and, to a lesser extent,
computer equipment and software, leasehold improvements, demonstration
equipment, and furniture and fixtures. The Company has no material commitments
for capital expenditures. The Company anticipates a negative cash flow during at
least the first three quarters of fiscal 2000.
At March 31, 1999 the Company's principal sources of liquidity included an
aggregation of $3.2 million in cash and cash equivalents and marketable
securities. In addition, the Company has a demand bank line of credit under
which the Company may borrow up to $250,000 in cash, net of any outstanding
letters of credit. At March 31, 1999, the Company had acceptances payable
totaling $32,000 maturing in April 1999. The Company has pledged $250,000 to
secure the bank line of credit. The line is subject to renewal in February 2002.
The Company has incurred losses since its inception, and losses are expected
to continue through the fiscal year ending March 31, 2000. The Company has
funded the losses principally with the proceeds from public and private equity
financings. The Company has reduced its operating losses significantly in the
year ended March 31, 1999, compared to the year ended March 31, 1998, and
expects the operating loss in fiscal 2000 will be less than in fiscal 1999.
However, due to the requirement to recognize 100% of the losses of 3DV Systems
Ltd., the Company expects that the net loss in fiscal 2000 will exceed the net
loss in fiscal 1999.
20
<PAGE>
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 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 is in the process of contacting 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 ready in a timely fashion.
The Company currently estimates that the cost to attain readiness will not
exceed $200,000, and that it will complete the work necessary to be ready by
June 30, 1999. For the year ended March 31, 1999, the Company incurred
approximately $140,000 in its effort to become Year 2000 ready.
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.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE OPERATING RESULTS
Factors that may affect the Company's future operating results include,
without limitation, the following:
The Company has incurred substantial losses since its inception, and there
can be no assurance that the Company will achieve a profitable level of
operations in the future. The Company anticipates a negative cash flow during at
least the first three quarters of fiscal 2000, due primarily to the Company's
commitment to fund the working capital requirements of 3DV. The fulfillment of
this commitment will most likely require the Company to obtain additional
financing. There can be no assurance that such financing will be available on
terms acceptable to the Company, if at all. Therefore, there is substantial
doubt concerning the Company's ability to continue as a going concern.
There can be no assurance that third-party reimbursement will be available
for procedures performed with the Company's products or that the cost of the
Company's EndoSheaths would be covered by such reimbursement in the future. In
addition, reimbursement standards and rates may change. The Company
21
<PAGE>
believes that the failure of users of the Company's products to obtain adequate
reimbursement from third-party payors has had and is expected to continue to
have a materially adverse effect on the Company.
The Company's products and its manufacturing practices are subject to
regulation by the FDA and by other state and foreign regulatory agencies. The
process of obtaining required regulatory clearances can be lengthy and
expensive, and compliance with the FDA's QSR requirements can be burdensome.
Moreover, there can be no assurance that the required regulatory clearances will
be obtained, and those obtained may include significant limitations on the uses
of the product in question. In addition, changes in existing regulations or the
adoption of new regulations could make regulatory compliance by the Company more
difficult in the future. The failure to obtain the required regulatory
clearances or to comply with applicable regulations may result in fines, delays
or suspensions of clearances, seizures, or recalls of products, operating
restrictions and criminal prosecutions, and could have a material adverse effect
on the Company.
Certain critical components of the Company's products, such as image bundles
and operator control bodies are currently being purchased solely from Asahi
Optical Co., Ltd., which is the parent company of a competitor of the Company.
These components are being purchased pursuant to a supply agreement, which
expires in March 2001, subject to earlier termination by mutual consent or upon
breach or bankruptcy and which may be extended with the consent of both parties.
The Company believes that while substitute components, which are currently
produced by sources other than Asahi, would be available, such substitute
components may be more expensive and of a lower quality and may require a
redesign of the Company's endoscope and additional regulatory clearances.
Moreover, such substitute components may not be immediately available in
quantities needed by the Company. The Company's inability to obtain a sufficient
quantity of such critical components on favorable terms could materially
adversely affect the Company's business. In addition, the Company's borescopes
are assembled using components and sub-assemblies purchased from independent
vendors. While most components and sub-assemblies are currently available from
more than one supplier, certain critical components are currently purchased only
from Machida Endoscope Company, Ltd. The failure of the Company to obtain a
sufficient quantity of such components on favorable terms could materially
adversely affect the Company's business.
The Company's ability to compete in its markets is affected by its product
development and innovation capabilities, its ability to obtain required
regulatory clearances, its ability to protect the proprietary technology
included in its products, its manufacturing and marketing skills and its ability
to attract and retain skilled employees. The flexible endoscopes and related
products currently sold and under development by the Company face competition
primarily from medical products companies such as Olympus and Pentax, a
subsidiary of Asahi. In addition, any company that is able to significantly
redesign conventional flexible endoscopes to simplify the cleaning process, or
significantly improve the current methods of cleaning flexible endoscopes, would
provide competition for the Company's products. The principal competitors for
the Company's non-medical products are Olympus and Welch Allyn, Inc. Many of the
Company's competitors and potential competitors have greater financial
resources, research and development personnel, and manufacturing and marketing
capabilities than the Company. In addition, it is possible that other large
health care companies may enter the flexible endoscope market in the future.
The Company's success depends in part on its ability to maintain patent
protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. There can be no
assurance that the Company's pending patent applications will result in patents
being issued or that competitors of the Company will not circumvent, or
challenge the validity of, any patents issued to the Company. There can be no
assurance that measures taken by the Company to protect its proprietary
information will prevent the unauthorized disclosure or use of this information,
or that others will not be able to independently develop such information. In
addition, in the event that another party infringes the Company's patent rights
or other proprietary rights, the enforcement of such rights is at the option of
the Company and can be a lengthy and costly process, with no guarantee of
success. Moreover, there can be no assurance that claims alleging infringement
by the Company of other's proprietary rights will not be brought against the
Company in the future or that any such claims will not be successful.
22
<PAGE>
The nature of the Company's products exposes the Company to significant
product liability risks. The Company maintains product liability insurance with
coverage limits of $2,000,000 per year. The Company believes that this level of
coverage is adequate, given its past sales levels and its anticipated sales
levels for the fiscal year ending March 31, 2000. The Company will reevaluate
the adequacy of this coverage when and if its sales levels substantially
increase. No product liability claims have been brought against the Company to
date. However, there can be no assurance that product liability insurance will
continue to be available to the Company on acceptable terms, or that product
liability claims in excess of the Company's insurance coverage, if any, will not
be successfully asserted against the Company in the future.
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 is currently in the process of obtaining information
regarding the "Year 2000" compliance status of its significant customers and
suppliers; however, there can be no assurance that the Company's customers and
suppliers will not be adversely affected by the "Year 2000" problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 March 31, 1999 was $970,608.
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 March 31, 1999 the Company's
liabilities relating to Japanese Yen were approximately $46,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is attached as Appendix A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in (1) the table
appearing under the heading "Election of Directors" in the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement"), which table is incorporated herein by reference, and (2) Part I
hereof under the caption "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the headings "Election
of Directors--Director Compensation; Executive Compensation; and Agreements with
Senior Executives" in the 1999 Proxy Statement, which sections are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the heading "Stock
Ownership of Certain Beneficial Owners and Managers" in the 1999 Proxy
Statement, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item appears under the heading "Certain
Relationships and Related Transactions" in the 1999 Proxy Statement, which
section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements.
1. FINANCIAL STATEMENTS. The following financial statements and schedule of
Vision-Sciences, Inc. are included as APPENDIX A of this Report:
Consolidated Balance Sheets--March 31, 1998 and 1999.
Consolidated Statements of Operations--For the years ended March 31, 1997,
1998 and 1999.
Consolidated Statements of Stockholders' Equity--For the years ended March
31, 1997, 1998 and 1999.
Consolidated Statements of Cash Flows--For the years ended March 31, 1997,
1998 and 1999.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENTS. The following financial statements and schedule of 3DV
Systems Ltd. are included as APPENDIX B of this Report:
Consolidated Balance Sheets--December 31, 1997 and 1998.
Consolidated Statements of Operations--For the years ended December 31,
1997, 1998 and from inception.
Consolidated Statements of Stockholders' Equity--For the years ended
December 31, 1997, 1998 and from inception.
Consolidated Statements of Cash Flows--For the years ended December 31,
1997, 1998 and from inception.
Notes to Consolidated Financial Statements.
24
<PAGE>
3. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial
statement schedule is included on page S-1.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and, therefore, have been
omitted.
4. EXHIBITS. The exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the Exhibit Index on page
E-1.
(b) Reports on Form 8-K.
Not applicable.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
VISION-SCIENCES, INC.
By: /s/ KATSUMI ONEDA
-----------------------------------------
Katsumi Oneda
President, Chief Executive
Officer and Chairman of
the Board of Directors
</TABLE>
Date: June 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ KATSUMI ONEDA Officer and Chairman of
- ------------------------------ the Board of Directors June 23, 1999
Katsumi Oneda (Principal Executive
Officer)
/s/ GERALD B. LICHTENBERGER Vice President, Business
- ------------------------------ Development and June 23, 1999
Gerald B. Lichtenberger Secretary
Vice President Finance,
/s/ JAMES A. TRACY Chief Financial and
- ------------------------------ Accounting Officer June 16, 1999
James A. Tracy (Principal Financial and
Accounting Officer)
/s/ KENNETH ANSTEY
- ------------------------------ Director June 16, 1999
Kenneth Anstey
/s/ LEWIS C. PELL
- ------------------------------ Director June 23, 1999
Lewis C. Pell
/s/ FRED E. SILVERSTEIN
- ------------------------------ Director June 18, 1999
Fred E. Silverstein
</TABLE>
<PAGE>
APPENDIX A
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND 1999
TOGETHER WITH AUDITORS' REPORT
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-1
Consolidated Balance Sheets................................................................................ F-2
Consolidated Statements of Operations...................................................................... F-3
Consolidated Statements of Stockholders' Equity............................................................ F-4
Consolidated Statements of Cash Flows...................................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
Schedule II--Valuation and Qualifying Accounts............................................................. S-1
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vision-Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of
Vision-Sciences, Inc. (a Delaware corporation) and subsidiaries as of March 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
We did not audit the financial statements of 3DV Systems Ltd., the
investment which is reflected in the accompanying financial statements using the
equity method of accounting. The investment in 3DV Systems Ltd. represents 26
percent of total assets and the equity in its net loss represents 17 percent of
net loss. The statements of 3DV Systems Ltd. were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
the amounts included for 3DV Systems Ltd., is based on the report of the other
auditors.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vision-Sciences, Inc. and
subsidiaries as of March 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred substantial losses for the years ended March 31, 1997, 1998 and 1999,
and losses are expected to continue at least through 2000. The Company may be
required to obtain additional funding or alternative means of financial support
in order to continue to operate as a going concern. Given these factors, there
is substantial doubt concerning the Company's ability to continue as a going
concern. Management's plans in regard to these matters are discussed in Note 1.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 19, 1999
F-1
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 1,897,905 $ 2,224,863
Marketable securities........................................................... 993,146 970,608
Accounts receivable, net of allowance for doubtful accounts of $117,000 and
$130,000 in 1998 and 1999, respectively....................................... 1,439,285 1,089,371
Inventories..................................................................... 681,106 633,571
Prepaid expenses and deposits................................................... 86,722 98,692
-------------- --------------
Total current assets.......................................................... 5,098,164 5,017,105
-------------- --------------
Property and Equipment, at cost:
Machinery and equipment......................................................... 2,765,385 2,741,919
Furniture and fixtures.......................................................... 215,924 199,070
Motor vehicles.................................................................. -- 23,956
Leasehold improvements.......................................................... 304,563 279,642
-------------- --------------
3,285,872 3,244,587
Less--Accumulated depreciation and amortization................................. 2,399,602 2,561,713
-------------- --------------
886,270 682,874
-------------- --------------
Equity Investment in 3DV Systems Ltd. ............................................ -- 2,053,900
Other Assets, net of accumulated amortization of $15,000 and $22,000 in 1998 and
1999, respectively.............................................................. 187,383 128,457
-------------- --------------
Total assets.................................................................. $ 6,171,817 $ 7,882,336
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank................................................... $ 52,383 $ 32,333
Accounts payable................................................................ 525,141 452,378
Accrued expenses................................................................ 1,777,775 1,601,977
-------------- --------------
Total current liabilities..................................................... 2,355,299 2,086,688
-------------- --------------
Deferred Development Fee (Note 3)................................................. -- 345,821
Commitments (Note 6)
Stockholders' Equity:
Preferred stock, $.01 par value--
Authorized--5,000,000 shares
Issued and outstanding--none.................................................. -- --
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--16,643,071 shares and 19,212,021 shares at 1998 and
1999, respectively.......................................................... 166,430 192,119
Additional paid-in capital...................................................... 48,083,992 51,830,808
Accumulated deficit............................................................. (44,433,904) (46,573,100)
-------------- --------------
Total stockholders' equity.................................................... 3,816,518 5,449,827
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 6,171,817 $ 7,882,336
-------------- --------------
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales............................................................ $ 8,329,971 $ 7,997,838 $ 7,475,921
Cost of Sales........................................................ 7,593,485 6,578,721 6,202,330
------------- ------------- -------------
Gross profit....................................................... 736,486 1,419,117 1,273,591
Selling, General and Administrative Expenses......................... 4,900,380 3,558,688 3,028,911
Research and Development Expenses.................................... 2,289,275 762,558 209,460
------------- ------------- -------------
Loss from operations............................................... (6,453,169) (2,902,129) (1,964,780)
Interest Income, net................................................. 174,602 147,287 182,899
Other Income (Expense), net.......................................... 90,520 176,874 (357,315)
------------- ------------- -------------
Net loss........................................................... $ (6,188,047) $ (2,577,968) $ (2,139,196)
------------- ------------- -------------
Basic and Diluted Net Loss per Common Share.......................... $ (.46) $ (.17) $ (.12)
------------- ------------- -------------
------------- ------------- -------------
Shares Used in Computing Basic and Diluted Net Loss per Common
Share.............................................................. 13,456,323 15,224,000 18,224,448
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<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, 1996.................. 12,972,699 $ 129,726 $ 44,035,454 $ (35,667,889) $ 8,497,291
Sale of common stock................... 1,684,210 16,842 1,983,158 -- 2,000,000
Exercise of stock options and
warrants............................. 40,000 400 79,600 -- 80,000
Net loss............................... -- -- -- (6,188,047) (6,188,047)
------------ ---------- ------------- -------------- -------------
Balance, March 31, 1997.................. 14,696,909 146,968 46,098,212 (41,855,936) 4,389,244
Sale of common stock................... 1,941,748 19,417 1,980,583 -- 2,000,000
Exercise of stock options and
warrants............................. 4,414 45 5,197 -- 5,242
Net loss............................... -- -- -- (2,577,968) (2,577,968)
------------ ---------- ------------- -------------- -------------
Balance, March 31, 1998.................. 16,643,071 166,430 48,083,992 (44,433,904) 3,816,518
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
Exercise of stock options and
warrants............................. 68,950 689 81,189 -- 81,878
Net loss............................... -- -- -- (2,139,196) (2,139,196)
------------ ---------- ------------- -------------- -------------
Balance, March 31, 1999.................. 19,212,021 $ 192,119 $ 51,830,808 $ (46,573,100) $ 5,449,827
------------ ---------- ------------- -------------- -------------
------------ ---------- ------------- -------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $ (6,188,047) $ (2,577,968) $ (2,139,196)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.................................... 538,801 491,191 413,588
Equity in losses of 3DV Systems Ltd.............................. -- -- 1,693,000
Loss on disposal of property and equipment....................... 213,575 75,172 12,809
Amortization of deferred credit.................................. (73,107) (36,558) --
Changes in assets and liabilities--
Accounts receivable............................................ (725,028) 410,122 349,914
Inventories.................................................... 1,097,378 25,236 47,535
Prepaid expenses and deposits.................................. 135,883 63,299 (11,970)
Accounts payable............................................... 81,088 25,999 (72,763)
Accrued expenses............................................... (44,644) (100,863) (166,840)
Deferred development fee....................................... -- -- 345,821
------------- ------------- -------------
Net cash provided by (used in) operating activities................ (4,964,101) (1,624,370) 471,898
------------- ------------- -------------
Cash Flows from Investing Activities:
Decrease (increase) in marketable securities....................... 4,177,322 (993,146) 22,538
Purchase of property and equipment................................. (235,835) (192,413) (225,617)
Investment in 25% of equity of 3DV Systems Ltd..................... -- -- (3,000,000)
Decrease in other assets........................................... 16,585 15,189 52,584
------------- ------------- -------------
Net cash provided by (used in) investing activities................ 3,958,072 (1,170,370) (3,150,495)
------------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds from (payments of) acceptances payable to a bank.......... (81,351) 6,132 (20,050)
Proceeds from the sale of common stock, net........................ 2,000,000 2,000,000 2,943,727
Proceeds from exercise of stock options and warrants............... 80,000 5,242 81,878
------------- ------------- -------------
Net cash provided by financing activities.......................... 1,998,649 2,011,374 3,005,555
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents................. 992,620 (783,366) 326,958
Cash and Cash Equivalents, beginning of year......................... 1,688,651 2,681,271 1,897,905
------------- ------------- -------------
Cash and Cash Equivalents, end of year............................... $ 2,681,271 $ 1,897,905 $ 2,224,863
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Issuance of common stock in connection with equity investment in
3DV Systems Ltd.................................................. $ -- $ -- $ 746,900
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest............................. $ -- $ 399 $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Vision-Sciences, Inc. (the "Company") was organized in 1987 to manufacture
and assemble optical products. The Company's products and accessories, which
provide minimally invasive access to areas not readily visible to the human eye,
are used within two industry segments, medical and industrial. Segment
information is presented in Note 7.
The Company expects to derive a substantial portion of its future revenues
from its disposable EndoSheath/reusable endoscope systems. The Company has
invested substantial funds in this product's development. The Company has
incurred losses for the years ended March 31, 1997, 1998 and 1999, and losses
are expected to continue at least through fiscal 2000. Management believes the
Company, in order to fund the research and development efforts at 3DV Systems
Ltd., 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. The Company is also subject to other risks, including, but not limited
to, the successful marketing of its products, United States Food and Drug
Administration (FDA) clearance and regulation, and dependence on key personnel.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in the notes to
consolidated financial statements. The preparation of the accompanying
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results in
the future could differ from those estimates.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(B) BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company calculates earnings per share according to Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Basic net
loss per share is calculated by dividing the net loss by the weighted average
number of common shares outstanding. For the years ended March 31, 1997, 1998
and 1999 diluted net loss per common share is the same as basic net loss per
common share as the inclusion of other shares of stock issuable pursuant to
stock options and warrants would be antidilutive.
(C) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using the
straight-line method in amounts that allocate the cost of the assets 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>
F-6
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasehold improvements are amortized over the shorter of their estimated
useful lives or the lives of the leases.
(D) REVENUE RECOGNITION
The Company recognizes revenue upon product shipment.
(E) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Raw materials........................................... $ 181,125 $ 169,653
Work-in-process......................................... 178,625 186,806
Finished goods.......................................... 321,356 277,112
--------- ---------
$ 681,106 $ 633,571
--------- ---------
--------- ---------
</TABLE>
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
(F) OTHER ASSETS
Other assets consist of deposits and patent costs. Patent costs are
amortized on a straight-line basis over 17 years. The Company follows the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that
long-lived assets be reviewed for impairment by comparing the fair value of the
assets with their carrying amount. Any write-downs are to be treated as
permanent reductions in the carrying value of the assets. The Company believes
that the carrying values of these assets are fully realizable as of March 31,
1999.
(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. For each of the three years in
the period ended March 31, 1999 these amounts were not material.
(H) CASH AND CASH EQUIVALENTS
The Company classifies investments with original maturities of three months
or less, consisting of U.S. Government issues and commercial paper, as cash
equivalents. Cash equivalents are stated at amortized cost, which approximates
market value.
(I) MARKETABLE SECURITIES
Marketable securities consist of marketable financial instruments with
original maturities greater than 90 days. The Company has established guidelines
relative to concentration, maturities and credit ratings that maintain safety
and liquidity.
F-7
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has classified its investments in marketable securities as
available-for-sale securities, in accordance with SFAS No. 115. Marketable
securities are recorded at market value, which approximates amortized cost.
As of March 31, 1999, the Company's marketable securities consisted of
commercial paper and corporate notes with a weighted average maturity of 176
days.
(J) RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to operations as incurred.
(K) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentration of credit risk are principally cash, marketable securities and
accounts receivable. The Company places its cash in federally insured
institutions and invests in marketable securities in highly rated investment
vehicles. Concentration of credit risk with respect to accounts receivable
relates to certain domestic and international customers to whom the Company
makes substantial sales (see Note 7). To reduce risk, the Company routinely
assesses the financial strength of its customers and obtains letters of credit
or advance payments for most of its international sales; as a consequence, the
Company believes that its accounts receivable credit risk exposure is limited.
The Company maintains an allowance for potential credit losses, but historically
has not experienced any significant credit losses related to any individual
customer or group of customers in any particular industry or geographic area.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS requires
disclosure of an estimate of the fair value of certain financial instruments.
The Company's financial instruments consist of cash equivalents, accounts
receivable and acceptances payable. The estimated fair value of these financial
instruments approximates their carrying value at March 31, 1998 and 1999. The
estimated fair values have been determined through information obtained from
market sources and management estimates.
(M) COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME requires companies to classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. The Company's only item of other comprehensive income relates to
unrealized gains or losses on marketable securities.
(2) DEBT
The Company has a demand line-of-credit agreement with a bank in support of
general working capital needs and the issuance of commercial and standby letters
of credit. Borrowings under the agreement bear interest at the bank's prime rate
(7.75% at March 31, 1999) and are secured by the Company's cash and marketable
securities held by the bank. The Company may borrow up to $250,000 (net of any
letters of credit) under the line of credit, which is subject to renewal by the
bank on
F-8
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(2) DEBT (CONTINUED)
February 15, 2002. Under this agreement, the Company is also subject to certain
covenants, including the prohibition of paying cash dividends on its common
stock. At March 31, 1999, the Company had acceptances payable aggregating
$32,333, maturing in April 1999.
(3) 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 on the differences between
the financial statement and income tax bases of assets and liabilities as
measured by the enacted tax rates.
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets with the approximate income tax effect of each type
of temporary difference are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................. $16,189,000 $17,009,000
Nondeductible reserves............................ 1,206,000 1,004,000
Research and development credit carryforwards..... 425,000 437,000
Other temporary differences....................... 304,000 314,000
Depreciation...................................... (95,000) (80,000)
----------- -----------
$18,029,000 $18,684,000
Less--Valuation allowance......................... 18,029,000 18,684,000
----------- -----------
Net deferred tax asset........................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
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.
At March 31, 1999, the Company has operating loss carryforwards available to
offset future federal taxable income of approximately $42,521,000. These
operating loss carryforwards expire at various dates through 2019 and are
subject to review and possible adjustment by the Internal Revenue Service.
The Internal Revenue Code limits the amount of net operating loss
carryforwards that companies may use in any one year in the event of cumulative
changes in ownership over a three-year period in excess of 50%.
(4) STOCKHOLDERS' EQUITY
(A) SALE OF COMMON STOCK
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. 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
F-9
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
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. The value of the shares issued was $746,900, and was
recorded as a component of the Company's investment in 3DV.
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.
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 is performing 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. The Company will record the fair value of the option on the
date it is granted. In addition, the Company is funding 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
F-10
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
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 incurred by 3DV and Imagineering and 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 an
element of stockholders' equity.
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 fiscal year ended March 31, 1999, the Company recorded an expense
relating to payments made of $311,000 to fund Imagineering and Vision-Sciences,
Ltd. This expense was offset by $311,000 of the development fees received from
Asahi.
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. From August 1998 through March 1999 the Company recognized
$1,693,000 of losses incurred by 3DV. These losses were partially offset by
$1,332,000 of development fees received from Asahi to fund the development costs
of 3DV.
During fiscal 1998, two of the Company's stockholders/executives invested
$2,000,000 in the Company's common stock at a price per share equal to 80% of
the average closing price of the stock on the Nasdaq SmallCap Market during the
five-day trading period ending on December 22, 1997. The proceeds of the common
stock sales were received directly by the Company in exchange for newly issued
shares of common stock.
F-11
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
(B) STOCK OPTION PLANS
The Company has a stock option plan (the "1990 Plan") under which it may
grant key employees and consultants incentive and nonstatutory stock options at
the fair value of the stock on the date of grant. Options become exercisable at
varying dates ranging up to five years from the date of grant. The Board of
Directors has authorized the issuance of options for the purchase of up to
4,375,000 shares of common stock under the 1990 Plan, of which 2,661,391 shares
remain available for future grant.
A summary of the 1990 Plan activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF SHARES PRICE RANGE OPTION PRICE
---------- -------------- -------------
<S> <C> <C> <C>
Outstanding, March 31, 1996........................................... 1,110,372 $ 1.88--$7.50 $ 5.27
Granted............................................................. 729,000 1.19-- 3.00 1.38
Exercised........................................................... (40,000) 2.00 2.00
Canceled............................................................ (296,550) 1.88-- 7.25 5.58
---------- -------------- -----
Outstanding, March 31, 1997........................................... 1,502,822 $ 1.19--$7.50 $ 3.41
Granted............................................................. 843,525 1.13-- 1.25 1.18
Exercised........................................................... (4,414) 1.19 1.19
Canceled............................................................ (734,511) 1.19-- 7.25 3.85
---------- -------------- -----
Outstanding, March 31, 1998........................................... 1,607,422 $ 1.13--$7.50 $ 2.04
Granted............................................................. 80,000 1.00-- 1.75 1.43
Exercised........................................................... (68,950) 1.19 1.19
Canceled............................................................ (297,175) 1.19-- 1.25 1.19
---------- -------------- -----
Outstanding, March 31, 1999........................................... 1,321,297 $ 1.00--$7.50 $ 2.24
---------- -------------- -----
---------- -------------- -----
Exercisable, March 31, 1999........................................... 942,047 $ 1.13--$7.50 $ 2.63
---------- -------------- -----
---------- -------------- -----
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at March 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ---------------------------- --------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.00--1.25................. 990,550 7.32 $ 1.19 678,800 $ 1.21
1.53--1.88................. 70,000 8.97 1.61 10,000 1.88
3.00--4.00................. 46,897 5.21 3.33 39,397 3.40
5.44--7.50................. 213,850 4.93 7.07 213,850 7.07
--------- --- ----- ----------- -----
1,321,297 6.94 $ 2.24 942,047 $ 2.63
--------- --- ----- ----------- -----
--------- --- ----- ----------- -----
</TABLE>
F-12
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires the measurement
of the fair value of stock-based compensation to be included in the statement of
operations or disclosed in the notes to the financial statements. The Company
has determined that it will continue to account for stock-based compensation for
employees under APB Opinion No. 25 and elects the disclosure-only alternative
under SFAS No. 123 for stock-based compensation awarded in the years ended March
31, 1997, 1998 and 1999 using the Black-Scholes option pricing model prescribed
by SFAS No. 123. The underlying assumptions used are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
--------- -------------
<S> <C> <C>
Risk-free interest rate............................................. 6.57% 4.45%--5.46%
Expected dividend yield............................................. -- --
Expected lives...................................................... 5 years 5 years
Expected volatility................................................. 64% 68%
Weighted average value of grants per share.......................... $.72 $.87
Weighted average remaining contractual life of options outstanding
(years)........................................................... 7.79 6.94
</TABLE>
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, pro forma net loss and net loss per share would
have been:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C> <C>
Net loss-- As reported........................ $(2,578,000) $(2,139,000)
Pro forma.......................... (2,815,000) (2,501,000)
Net loss per share-- As reported........................ $ (.17) $ (.12)
Pro forma.......................... (.18) (.14)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to March 31, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Under the 1990 Plan, there remain 3,982,688 shares of common stock reserved
for the exercise of stock options.
On August 16, 1993, the Company adopted another stock option plan (the "1993
Plan") under which it may grant up to 200,000 nonstatutory stock options to
nonemployee directors of the Company at the fair value of the stock on the date
of grant. Options become exercisable over a four-year period from the date of
grant. The Company has reserved 200,000 shares of common stock for the exercise
of stock options under the 1993 Plan. As of March 31, 1999, 140,000 shares are
available for future grant under the 1993 Plan.
F-13
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the 1993 Plan activity is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE WEIGHTED AVERAGE
OF SHARES PRICE RANGE OPTION PRICE
----------- --------------- -----------------
<S> <C> <C> <C>
Outstanding, March 31, 1996........................................ 80,000 $ 5.50--$11.63 $ 10.09
Granted.......................................................... -- -- --
Exercised........................................................ -- -- --
Canceled......................................................... -- -- --
----------- --------------- ------
Outstanding, March 31, 1997........................................ 80,000 $ 5.50--$11.63 $ 10.09
Granted.......................................................... 20,000 1.50 1.50
Exercised........................................................ -- -- --
Canceled......................................................... (60,000) $ 5.50--$11.63 9.58
----------- --------------- ------
Outstanding, March 31, 1998........................................ 40,000 $ 1.50--$11.63 $ 6.56
Granted.......................................................... 20,000 1.63 1.63
Exercised........................................................ -- -- --
Canceled......................................................... -- -- --
----------- --------------- ------
Outstanding, March 31, 1999........................................ 60,000 $ 1.50--$11.63 $ 4.92
----------- --------------- ------
----------- --------------- ------
Exercisable, March 31, 1999........................................ 32,000 $ 1.50--$11.63 $ 7.84
----------- --------------- ------
----------- --------------- ------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at March 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------- -----------
<S> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING
NUMBER OF CONTRACTUAL NUMBER OF
EXERCISE PRICE SHARES LIFE (YEARS) SHARES
- -------------------------------------------------------- ----------- --------------- -----------
$ 1.50.................................................. 20,000 8.38 8,000
1.63.................................................. 20,000 9.38 4,000
11.63.................................................. 20,000 4.38 20,000
----------- -----------
60,000 7.38 32,000
----------- -----------
----------- -----------
</TABLE>
(C) STOCK COMPENSATION AGREEMENT
During the year ended March 31, 1999, the Company entered into an agreement
with a consulting firm who will provide services that will be paid in shares of
common stock of the Company. The maximum value of services to be rendered under
the contract is $200,000. The contract expires on December 31, 1999. The number
of shares of common stock to be issued will be based upon the total amount
earned during 1999 divided by the lowest closing bid price of the Company's
common stock during calendar 1999. As of March 31, 1999 the firm had earned
$84,400, which, based upon the lowest closing price of the Company's common
stock during the three months ended March 31, 1999 of $.91 per share, equates to
93,126 shares of the Company's common stock. Based upon the closing price of the
Company's common
F-14
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) STOCKHOLDERS' EQUITY (CONTINUED)
stock at March 31, 1999 of $1.38 per share, the Company recorded total
compensation cost of $128,000 relating to this agreement for the year ended
March 31, 1999.
(5) COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company conducts a portion of its operations in certain facilities
leased from a partnership owned in part by certain stockholders/executive
officers. Rental expense charged to operations for these facilities was
approximately $204,000, $186,000 and $198,000 for the years ended March 31,
1997, 1998 and 1999, respectively. In addition, the Company leased other
facilities from nonrelated parties under various agreements that expire through
November 2003. Rental expense charged to operations under leases from nonrelated
parties was approximately $283,000, $283,000 and $163,000 for the years ended
March 31, 1997, 1998 and 1999, respectively. Future minimum lease commitments
under all operating leases are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- ----------------------------------------------------------------------------------
<S> <C>
2000.............................................................................. $ 327,000
2001.............................................................................. 209,000
2002.............................................................................. 127,000
2003.............................................................................. 132,000
2004.............................................................................. 79,000
----------
$ 874,000
----------
----------
</TABLE>
(6) 401(k) PLAN
The Company has a 401(k) plan (the Plan) whereby employees may contribute a
certain percentage of their annual compensation, up to a defined maximum. The
Company may, but is not obligated to, contribute up to a certain percentage of
each employee's contribution. During the years ended March 31, 1997, 1998 and
1999, the Company recorded expense of approximately $31,000, $31,000 and
$23,000, respectively, relating to the Plan.
(7) SEGMENT INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement established standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers.
The Company has determined it 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 investments
in 3DV, Vision-Sciences, Ltd. and its contractual relations with Imagineering.
F-15
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(7) SEGMENT INFORMATION (CONTINUED)
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. The carrying value of the investment in 3DV at March
31, 1999 is $2,053,900. Data regarding management's view of the Company's
segments is provided in the following tables.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, MEDICAL INDUSTRIAL CORPORATE ADJUSTMENTS TOTAL
- ---------------------------------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
1999
Sales to external customers............. $ 3,880,493 $ 3,595,428 $ -- $ -- $ 7,475,921
Intersegment sales...................... -- 277,069 -- (277,069) --
Interest income, net.................... -- -- 182,899 -- 182,899
Operating (loss) income................. (1,341,415) 12,681 (636,046) -- (1,964,780)
Depreciation and amortization........... 367,704 45,884 -- -- 413,588
Other significant non-cash items:
Equity in losses of 3DV Systems Ltd..... -- -- (367,242) -- (367,242)
Total assets............................ 2,551,927 987,387 5,249,371 (906,349) 7,882,336
Expenditures for fixed assets........... 159,854 65,763 -- -- 225,617
1998
Sales to external customers............. $ 4,369,845 $ 3,627,993 $ -- $ -- $ 7,997,838
Intersegment sales...................... -- 437,667 -- (437,667) --
Interest income, net.................... -- -- 147,287 -- 147,287
Operating (loss) income................. (2,561,707) 369,590 (710,012) -- (2,902,129)
Depreciation and amortization........... 442,933 48,258 -- -- 491,191
Other significant non-cash items:....... -- -- -- -- --
Total assets............................ 3,274,683 1,088,445 2,891,051 (1,082,362) 6,171,817
Expenditures for fixed assets........... 192,413 -- -- -- 192,413
1997
Sales to external customers............. $ 4,608,050 $ 3,721,921 $ -- $ -- $ 8,329,971
Intersegment sales...................... -- 777,198 -- (777,198) --
Interest income, net.................... -- -- 174,602 -- 174,602
Operating (loss) income................. (6,181,018) 345,379 (617,530) -- (6,453,169)
Depreciation and amortization........... 484,790 54,011 -- -- 538,801
Other significant non-cash items:
Total assets............................ 4,742,522 1,164,445 2,681,271 (1,738,405) 6,849,833
Expenditures for fixed assets........... 232,663 3,172 -- -- 235,835
</TABLE>
F-16
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(7) SEGMENT INFORMATION (CONTINUED)
The following table identifies sales by geographic region. Sales are
attributable to geographic regions based upon the location of customers.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------
GEOGRAPHIC REGION 1997 1998 1999
- --------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Asia and Australia........................... $ 182,100 $ 148,244 $ 119,698
Canada....................................... 143,862 99,021 139,866
Europe....................................... 97,744 125,391 96,516
Middle East and Africa....................... 94,654 68,853 40,697
South America................................ 179,801 177,791 209,542
United States................................ 7,631,810 7,378,538 6,869,602
---------- ---------- ----------
Total........................................ $8,329,971 $7,997,838 $7,475,921
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For the fiscal years ended March 31, 1997, 1998 and 1999, one customer
accounted for 36%, 35% and 35% of net sales, respectively. At March 31, 1999,
two customers accounted for 31% of accounts receivable.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued payroll and related expenses........................ $ 863,542 $1,030,231
Accrued other............................................... 914,233 571,746
---------- ----------
$1,777,775 $1,601,977
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
SCHEDULE II
VISION-SCIENCES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE, CHARGED TO BALANCE,
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS YEAR
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Deducted from Assets Accounts:
Allowance for doubtful accounts--
Year ended March 31, 1997.................................... $ 52,000 $ 75,000 $ -- $ 127,000
Year ended March 31, 1998.................................... 127,000 17,000 27,000 117,000
Year ended March 31, 1999.................................... 117,000 17,000 4,000 130,000
</TABLE>
S-1
<PAGE>
APPENDIX B
3DV SYSTEMS LTD.
(A COMPANY IN THE DEVELOPMENT STAGE)
FINANCIAL STATEMENTS
DECEMBER 31, 1998
IN U.S. DOLLARS
F-18
<PAGE>
3DV SYSTEMS LTD.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Auditors' Report..................................................................................... F-20
Balance Sheets....................................................................................... F-21
Statements of Operations............................................................................. F-22
Statements of Shareholders' Equity, (Deficit)........................................................ F-23
Statements of Cash Flows............................................................................. F-24-F-25
Notes to the Financial Statements.................................................................... F-26-F-41
</TABLE>
F-19
<PAGE>
Tirat HaCarmel, February 23, 1999
AUDITORS' REPORT TO THE SHAREHOLDERS OF 3DV SYSTEM LTD.
We have audited the accompanying balance sheets of 3DV Systems Ltd. ("the
Company") as of December 31, 1998 and 1997, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's Board
of Directors and of its management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Auditors Regulations
(manner of auditors performance), 1973. Such standards are substantially
identical to generally accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurances that the financial statements are free of material misstatement,
whether due to error or intentional misrepresentation. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998 and 1997, the results of its operations, changes in shareholders'
equity (deficit) and cash flows for the years then ended, in conformity with
generally accepted accounting principles in the United States (U.S. GAAP).
Without qualifying our opinion, we would like to draw attention to the
following:
1. As explained in Note 2 (b) to the financial statements, in order to
reduce the uncertainty about the Company's ability to continue as a going
concern, a shareholder is committed to provide the financial support
required by the Company to meet its financial obligations as they become
due for a period of not less than one year. Based on the above
commitment, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
2. The Company is in the development stage, whereby its principal
activities in the reported periods are the development of products in the
field of 3D laser camera. The Company has not yet generated any revenues.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
F-20
<PAGE>
3DV SYSTEMS LTD.
BALANCE SHEETS AS OF DECEMBER 31
<TABLE>
<CAPTION>
NOTE 1998 1997
--------- --------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... 3 1,725 131
Accounts receivable..................................... 4 109 116
----- ------
1,834 247
----- ------
CARS LEASING DEPOSITS................................... 5 7 10
----- ------
AMOUNT FUNDED FOR EMPLOYEES' RIGHTS UPON RETIREMENT..... 11 61 17
----- ------
OPTION.................................................. 6 -- --
----- ------
FIXED ASSETS, NET....................................... 7 291 140
----- ------
KNOW-HOW, NET........................................... 8 1 1
----- ------
2,194 415
----- ------
----- ------
CURRENT LIABILITIES
Accounts payable:....................................... 9
Trade................................................. 347 87
Other................................................. 128 77
Related parties....................................... 3 71
----- ------
478 235
----- ------
LONG-TERM LOANS FROM PARENT COMPANY..................... 10 2,109 1,711
----- ------
EMPLOYEES' RIGHTS UPON RETIREMENT....................... 11 63 17
----- ------
COMMITMENTS............................................. 18 -- --
----- ------
SHAREHOLDERS' EQUITY, (DEFICIT)......................... 12 (456) (1,548)
----- ------
2,194 415
----- ------
----- ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
3DV SYSTEMS LTD.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 * CUMULATIVE
----------------- ----------------- -----------------
NOTE U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
-----
<S> <C> <C> <C> <C>
Research and development costs, net................... 13 2,118 1,148 3,462
Marketing expenses.................................... 51 -- 51
General and administrative expenses................... 14 240 198 571
----- ----- -----
OPERATING LOSS........................................ 2,409 1,346 4,084
Financing income, net................................. 15 (39) (2) (41)
----- ----- -----
LOSS BEFORE INCOME TAXES.............................. 2,370 1,344 4,043
Income taxes.......................................... 16 -- -- --
----- ----- -----
NET LOSS.............................................. 2,370 1,344 4,043
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
* Cumulative amounts from the Company's inception.
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
3DV SYSTEMS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, (DEFICIT)
<TABLE>
<CAPTION>
EMPLOYEES'
SHARE SHARE CAPITAL STOCK ACCUMULATED
CAPITAL PREMIUM RESERVE OPTIONS LOSS
----------- ----------- ----------- ------------- -------------
U.S.$ THOUSANDS
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1997...................... 1 -- (1) -- (329)
Shares issued...................................... 2 -- -- -- --
Linkage differences on loans received from Parent
Company.......................................... -- -- 6 -- --
Employees' stock options (see Note 12(b),13)....... -- -- -- 117 --
Net loss for the year.............................. -- -- -- -- (1,344)
--
----- --- --- ------
BALANCE AS OF DECEMBER 31, 1997.................... 3 -- 5 117 (1,673)
Shares issued [see Note 12(a)(2)].................. -- 2,927 -- -- --
Linkage differences on loans received from Parent
Company.......................................... -- -- 167 -- --
Employees' stock options (see Note 12(b),13)....... -- -- -- 368 --
Net loss for the year.............................. -- -- -- -- (2,370)
--
----- --- --- ------
BALANCE AS OF DECEMBER 31, 1998.................... 3 2,927 172 485 (4,043)
--
--
----- --- --- ------
----- --- --- ------
CUMULATIVE AMOUNTS FROM THE COMPANY'S INCEPTION
Shares issued...................................... 3 2,927 -- -- --
Linkage differences on loans received from Parent
Company.......................................... -- -- 172 -- --
Employees' stock options (see Note 12(b),13)....... -- -- -- 485 --
Deficit accumulated during development stage....... -- -- -- -- (4,043)
--
----- --- --- ------
BALANCE AS OF DECEMBER 31, 1998.................... 3 2,927 172 485 (4,043)
--
--
----- --- --- ------
----- --- --- ------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY,
(DEFICIT)
-------------
<S> <C>
BALANCE AS OF JANUARY 1, 1997...................... (329)
Shares issued...................................... 2
Linkage differences on loans received from Parent
Company.......................................... 6
Employees' stock options (see Note 12(b),13)....... 117
Net loss for the year.............................. (1,344)
------
BALANCE AS OF DECEMBER 31, 1997.................... (1,548)
Shares issued [see Note 12(a)(2)].................. 2,927
Linkage differences on loans received from Parent
Company.......................................... 167
Employees' stock options (see Note 12(b),13)....... 368
Net loss for the year.............................. (2,370)
------
BALANCE AS OF DECEMBER 31, 1998.................... (456)
------
------
CUMULATIVE AMOUNTS FROM THE COMPANY'S INCEPTION
Shares issued...................................... 2,930
Linkage differences on loans received from Parent
Company.......................................... 172
Employees' stock options (see Note 12(b),13)....... 485
Deficit accumulated during development stage....... (4,043)
------
BALANCE AS OF DECEMBER 31, 1998.................... (456)
------
------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
3DV SYSTEMS LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 * CUMULATIVE
----------------- ----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... (2,370) (1,344) (4,043)
Adjustments Required to Reconcile Net Loss to Net Cash Used
in Operating Activities:
Severance pay, net....................................... 2 (1) 2
Depreciation............................................. 60 30 93
Employees' stock options................................. 368 117 485
Changes in Operating Assets and Liabilities:
Decrease (increase) in accounts receivable............. 7 (93) (109)
Increase in accounts payable........................... 311 67 475
Increase (decrease) in related parties (1)............. (68) (24) 4
Linkage differences on cash balances denominated in
non-U.S.$............................................ 3 -- (7)
------ ------ ------
NET CASH USED IN OPERATING ACTIVITIES........................ (1,687) (1,248) (3,100)
------ ------ ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Payments for purchase of fixed assets...................... (211) (53) (384)
Cars leasing deposits...................................... 3 (2) (7)
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES........................ (208) (55) (391)
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES:
Loans received from Parent Company......................... 565 1,396 2,281
Shares issued (1).......................................... 2,927 -- 2,928
------ ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................... 3,492 1,396 5,209
------ ------ ------
Effect of exchange rate changes on cash...................... (3) 7 7
------ ------ ------
INCREASE IN CASH AND CASH EQUIVALENTS........................ 1,594 100 1,725
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............... 131 31 --
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................... 1,725 131 1,725
------ ------ ------
------ ------ ------
</TABLE>
TRANSACTIONS NOT INVOLVING CASH FLOWS
- ------------------------
(1) The Company issued 840,000 shares of NIS 0.01 par value to its Parent
Company, against know-how which the Company received. (Note 8, 12(c)).
* Cumulative amounts from the Company's inception.
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
3DV SYSTEMS LTD.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 * CUMULATIVE
----------------- ----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
SUPPLEMENTARY INFORMATION:
Income taxes paid............................................ -- -- --
Interest paid *.............................................. -- -- --
------ ------ ------
-- -- --
------ ------ ------
------ ------ ------
</TABLE>
- ------------------------
* Net of linkage differences equal to the changes in the U.S. dollar exchange
rate on monetary items not in U.S. dollars.
** Cumulative amounts from the Company's inception.
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
3DV SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1--GENERAL
3DV Systems Ltd. (hereinafter--"the Company") was incorporated on June 16,
1996, as an Israeli Company and commenced operations in July 1996.
The Company is in the development stage, whereby its principal activities in
the reported period are the development of products in the field of 3D laser
camera. The Company has not yet generated any revenues.
The Company is a subsidiary of R.D.C. Rafael Development Corporation Ltd.
(the "Parent Company"). See also Note 12(a)(2).
NOTE 2--BASIS OF PRESENTATION
ONE. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting periods.
Actual results could differ from those estimates.
TWO. The financial statements have been prepared assuming that the Company
will continue as a going-concern. A shareholder Vision Sciences Inc. is
committed to provide the financial support required by the Company to meet its
financial obligations as they become due, for a period of not less than one
year, beginning December 31, 1998 (see Note 12(a)(2)).
THREE. REPORTING CURRENCY
(1) The accompanying financial statements are presented in U.S. dollars in
conformity with accounting principles generally accepted in the United States.
The Company's sales markets are expected to be substantially outside of
Israel in non-Israeli currencies, mainly in U.S. dollars or linked thereto.
Therefore, the Company's functional currency is the U.S. dollar.
The Company's transactions denominated in currencies other than the U.S.
dollar are remeasured into U.S. dollars and recorded based on the exchange rate
at the time of the transaction. Monetary balances in currencies other than the
U.S. dollar are translated into dollars using period-end exchange rates. Gains
and losses from the aforementioned re-measurements and translations are recorded
in the statement of operations.
(2) Details of the exchange rate and the C.P.I. in Israel are given as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, CHANGES % CHANGES %
1998 1997 1998 1997
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Consumer Price Index *--points............................. 166.3 153.1 8.62 6.99
U.S. Dollar 1 = NIS........................................ 4.16 3.536 17.65 8.77
</TABLE>
- ------------------------
* Average basis 1993 = 100
FOUR. The high technology industry in which the Company is involved is
highly competitive and is characterized by the risks of rapidly changing
technologies. Penetration into world market requires
F-26
<PAGE>
3DV SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
investment of considerable resources and continuous development efforts. The
Company's future success is dependent upon several factors including the
technological quality and price\performance of its products relative to those of
its competitors. There can be no assurance that the Company will be able to
maintain the high technological quality of its product or to continue to develop
or market its new products effectively. The Company employs 5 key employees who
own major intellectual property. Management is of the opinion that if several of
the above employees leave, then the Company will be vulnerable to the risk of a
severe impact on the Company's know-how in the near term.
FIVE. SIGNIFICANT ACCOUNTING POLICIES:
(1) FIXED ASSETS
Fixed assets are stated at depreciated cost. The Company provides for
depreciation which is computed by the straight-line method over the estimated
useful life of the assets as follows:
<TABLE>
<S> <C>
Computers..................................................................................................... 3-4 years
Instruments and laboratory equipment.......................................................................... 7-15 years
Motor vehicles................................................................................................ 7 years
Office furniture and equipment................................................................................ 17 years
</TABLE>
(2) RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of participation from the Office of the
Chief Scientist of Israeli government are charged to the statement of operations
as incurred. Government participation is recorded on an accrual basis.
(3) DEFERRED TAXES
The Company accounted for deferred taxes under the liability method. As
described in FAS 109 when it is not more likely than not that deferred tax
assets will be realized, the Company provides for valuation allowance against
deferred tax assets resulted from operating loss carried-forward and from timing
differences between the recognition of expenses in the financial statements and
for tax purposes.
(4) STOCK BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards No.123 ("SFAS
123"), The Company measures compensation cost of stock issued to employees under
Accounting Principles Board Opinion No.25 ("APB 25"), (See Note 12b).
(5) DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of cash, accounts
receivable, fund of employees' rights upon retirement and accounts payable and
accruals. Due to the nature of such financial instruments, their fair value does
not materially differ from their carrying amount.
F-27
<PAGE>
3DV SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
(6) DISCLOSURE OF CUMULATIVE AMOUNTS FROM THE COMPANY INCEPTION
Under FAS 7, the Company provides cumulative amounts, from the Company's
inception till December 31, 1998, in the statements of operations, cash flows
and shareholders' equity.
(7) PREPARATIONS OF THE COMPUTER SYSTEMS FOR YEAR 2000
The costs required to prepare and convert the existing programs of the
Company, to be able to differentiate between years belonging to the 20th century
and years belonging to the 21st century (year 2000 compliance), are recorded as
current expense when incurred. As for uncertainties that arise form this issue
see also Note 18h.
NOTE 3--CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------------- -------------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Foreign currency........................................... 1,425 --
Israeli currency........................................... 300 131
----- ---
1,725 131
----- ---
----- ---
</TABLE>
Cash equivalents in Israeli currency include bank deposits, bearing an
annual interest rate of 12.6% unlinked and which the date of maturity at the
time of the deposit was not in excess of three months. Cash equivalents in
foreign currency include bank deposit, bearing an annual interest rate of 4.77%
and which the date of maturity at the time of the deposit was not in excess of
three months.
The carrying amount of cash equivalents approximates market value.
NOTE 4--ACCOUNTS RECEIVABLE*
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Due from the Chief Scientist (See Note 13, 18(c)).............. 1 88
Government institutions........................................ 70 25
Advance to supplier............................................ 3 --
Prepaid expenses............................................... 27 1
Employees...................................................... 1 2
Related parties................................................ 7 --
--- ---
109 116
--- ---
--- ---
</TABLE>
- ------------------------
* See Note 19, 2e(5).
NOTE 5--CARS LEASING DEPOSITS
During 1996 and 1997, the Company signed operating lease contracts with
Albar Ltd. (related party) for the rental of vehicles for a period of three
years. The rental payments are linked to the Israeli
F-28
<PAGE>
3DV SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CARS LEASING DEPOSITS (CONTINUED)
Consumer Price Index. The Company has deposited amounts representing rental
payment for three months in respect of this contracts. The deposit is linked to
the Israeli Consumer Price Index, and bears no interest.
NOTE 6--OPTION
On December 22, 1998 the Company signed an option agreement ("the
agreement") with the Parent Company. According to the Agreement the Parent
Company granted the Company an option to purchase, from the Parent Company up to
75,000 shares of VSI, par value U.S.$ 0.01 per share for the purchase price of
U.S.$ 0.9 per share. The option may be exercised by the Company as of October 6,
1999 and for a period of six years thereafter, at any time, either in whole or
in part, from time to time. The Company shall pay the price for the option
shares purchased in cash. From the time that the Parent Company will demand it,
not prior to December 1, 2000, the payment shall be linked to the Israeli CPI or
U.S.$. Any dividends received by the Parent Company during the term of the
option on any option shares prior to their delivery to the Company shall be held
by the Parent Company in trust for the Company and shall be remitted to the
Company upon the exercise of the option in respect of those option shares on
which such dividends were received.
Since the Company didn't record a liability for employees as mentioned in
Note 18 (f) and since the management estimate that the option's value is not
material, the Company stated the option at value of U.S.$ 0 (nil).
NOTE 7--FIXED ASSETS, NET
<TABLE>
<CAPTION>
INSTRUMENTS OFFICE
& FURNITURE
LABORATORY MOTOR AND
COMPUTERS EQUIPMENT VEHICLES EQUIPMENT TOTAL
-------- --------- ---------- --------- -----
U.S.$ THOUSANDS
<S> <C> <C> <C> <C> <C>
COST
Balance at beginning of year*...... 98 15 17 43 173
Additions.......................... 123 80 -- 8 211
--- --- --- --- -----
BALANCE AT END OF YEAR............. 221 95 17 51 384
--- --- --- --- -----
ACCUMULATED DEPRECIATION
Balance at beginning of year....... 25 -- 3 5 33
Depreciation for the year.......... 44 9 3 4 60
--- --- --- --- -----
BALANCE AT END OF YEAR............. 69 9 6 9 93
--- --- --- --- -----
DEPRECIATED COST AT DECEMBER 31,
1998............................. 145 93 11 42 291
--- --- --- --- -----
--- --- --- --- -----
DEPRECIATED COST AT DECEMBER 31,
1997*............................ 73 15 14 38 140
--- --- --- --- -----
--- --- --- --- -----
</TABLE>
- ------------------------
* Reclassified
F-29
<PAGE>
3DV SYSTEMS LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--KNOW-HOW, NET
According to an agreement signed in 1997 between the Parent Company and the
Company, the Parent Company and Rafael Armament Development Authority ("Rafael")
had transferred to the Company all their rights and interest in the Laser Photo
Project and the Laser Photo Technology ("the know-how") against issuance of
840,000 Ordinary Shares par value NIS 0.01 (see Note 12(c)). Rafael reserves the
rights to utilize the know-how, royalty-free, perpetual and non-transferable,
for military purpose only.
According to U.S. GAAP, transfer of non-monetary asset (the know-how) to a
private Company (3DV System Ltd.) by its shareholders (the Parent Company) in
exchange for stock, should be recorded at the transferor's historical cost basis
determined under generally accepted accounting principles. The know-how which
was transferred to the Company stated in the balance sheet of the Company at the
value of (a notional value) U.S.$ 1 thousand.
In June 1998, the Company agreed with the tax authority to record
retroactivity on June 30, 1996, an asset, for tax purposes only, of U.S.$ 180
thousand of know-how. This asset can be amortized at a fixed rate of 12.5% per
year using the straight line method.
NOTE 9--ACCOUNTS PAYABLE *
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
---------------- ----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
TRADE
Open accounts........................................................................... 200 47
Checks payable.......................................................................... 147 40
--- ---
347 87
--- ---
--- ---
OTHER
Institutions............................................................................ 52 24
Liabilities to employees................................................................ 55 30
Accrued expenses........................................................................ 21 23
--- ---
128 77
--- ---
--- ---
RELATED PARTIES (SEE NOTE 17B)............................................................ 3 71
--- ---
--- ---
</TABLE>
- ------------------------
* See Note 19, 2e(5).
NOTE 10--LONG-TERM LOANS FROM PARENT COMPANY
Since its incorporation the Company received loans of U.S.$ 2,281 thousand
from its Parent Company, in order to finance its operational activities. These
loans are linked to the Israeli Consumer Price Index, bear no interest and their
maturity date has not yet been determined. Management's opinion is that these
loans would not be repayable in the current year. These loans do not bear real
market interest and therefore, linkage differences on these loans are credited
to a capital reserve in shareholders' equity.
F-30
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EMPLOYEES' RIGHTS UPON RETIREMENT *
The Company is required to make severance payments to dismissed employees.
The Company covers its obligations for severance pay by making payments of
premiums to insurance companies. The amounts accumulated at the insurance
companies are not under the control nor the management of the Company. The
balances presented in the financial statements represent the liability for
severance pay and the amounts accumulated at the insurance companies as
mentioned above. Accordingly, the net liability is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------------- ---------------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Employees' rights upon retirement.......................... 63 17
Amount funded for employees' rights upon retirement........ 61 17
-- --
2 --
-- --
-- --
</TABLE>
- ------------------------
* See Note 2e(5).
NOTE 12--SHARE CAPITAL
ONE) SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ISSUED AND PAID
AUTHORIZED FOR
NUMBER OF SHARES NUMBER OF SHARES
----------------- ------------------
<S> <C> <C>
Ordinary Shares of NIS (0.01) each..................... 5,170,000 1,204,167
----------------- ----------
----------------- ----------
Ordinary Shares A of NIS (0.01) each................... 900,000 15,000
----------------- ----------
----------------- ----------
</TABLE>
(1) On April 30, 1997, the Company's General Shareholders Meeting adopted a
resolution to alter the share capital of the Company as follows:
(1) To subdivide all the existing 29,400 Ordinary Shares into 2,940,000
Ordinary Shares of NIS 0.01 value each.
(2) To increase the Company's authorized share capital by NIS 31,300,
to be composed of 2,230,000 Ordinary Shares of NIS 0.01 par value each and
900,000 Ordinary Shares A of NIS 0.01 value each. The rights of the Ordinary
Shares A are the same as the Ordinary Shares except for rights to
participate or to vote in shareholders meetings. The Ordinary Shares A shall
be converted into Ordinary Shares, on a one-to-one basis and without any
payment, automatically upon the registration of any of the Company's shares
for trade in any stock market, in Israel or abroad.
(2) In August 1998, the Company, the Parent Company and Vision Sciences Inc.
("VSI") a Delaware corporation signed an Investment Agreement ("the Agreement").
According to this Agreement, the Company issued 338,099 Ordinary Shares, par
value NIS 0.01 per share which represent 25% of the fully diluted share capital
of the Company in consideration for U.S.$ 3 million in cash. In addition, VSI
has the right to acquire an additional 60% of the share capital of the Company
in the future from the Parent Company, at the then fair market value, under
certain conditions, and the Parent Company has the right to require VSI to
purchase up to the remaining 75% including 15% which would be owned by employees
of
F-31
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SHARE CAPITAL (CONTINUED)
the Company under certain conditions ("Put/Call Rights"). The put/call rights
are for the period May 15, 2000 until November 14, 2000.
VSI is required to advance funds needed to finance the operations of the
Company in fiscal years 1999 and 2000. In consideration, the Company will issue
to VSI non-interest bearing, redeemable capital notes convertible into ordinary
shares of the Company if the Put/Call Rights are not exercised by either the
Parent Company or VSI. If the Put/Call Right is not exercised, the conversion
price of the capital notes shall be based upon the valuation of the first
purchase of the Company's shares. See also Note 18(d) and 18(e).
(3) In December 1998, the Company issued to VSI 16,068 ordinary Shares of
the Company, par value 0.01 per share in consideration of their par value. The
issuance was executed due to the increase in the number of ordinary A shares
that are subject to employee stock option plan (see Note 12(b)(1)).
TWO) EMPLOYEE STOCK OPTION PLAN
(1) The Board of Directors of the Company, at its meeting in August 1997,
approved the resolution to adopt the Company's employee stock option plan
("ESOP"), providing for the allotment without consideration of options to
employees of the Company, whose eligibility will be determined from time to time
by the Company's salary committee, for the purchase of up to 135,000 Ordinary
Shares A of the Company of par value NIS 0.01 each. Each option will entitle the
holder to purchase one Ordinary Share A of par value NIS 0.01 each at an
exercise price of NIS 0.01 per option. The options vest over a period of two to
four years and are exercisable for a period of eight years from the date of
grant.
The options will be allotted to a trustee who will hold them in trust on
behalf of the employees, in accordance with Section 102 of the Income Tax
Ordinance in Israel and related regulations.
In December 1998, the Board of Directors of the Company resolved to increase
the number of Ordinary Shares A of the Company that are reserved under the ESOP,
up to 197,500.
(2) The Board of Directors of the Company, at its meeting in August 1997,
resolved to allot 15,000 Ordinary Shares A of the Company, of a par value of NIS
0.01 each, to a key employee, at a price equal to their par value. Such shares
will constitute 1.23% of the Company's share capital.
Based on the above resolutions, the options allotments are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
NUMBER OF NUMBER OF
OPTIONS OPTIONS
--------------- ---------------
<S> <C> <C>
Total options under the ESOP................ 197,500 137,500
------- -------
Options as of January 1..................... 60,000 --
Options granted during the year............. 71,936 60,000
------- -------
Options as of December 31................... 131,936 60,000
------- -------
65,564 77,500
------- -------
------- -------
</TABLE>
Management of the Company evaluated the fair value of the Company's Ordinary
Shares A based upon the price per Ordinary Share in a private placement which
took place on August 25, 1998 (See Note 12(a)(2)). Management's assumption is
that the fair value of the Company's Ordinary Shares A grew at a
F-32
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SHARE CAPITAL (CONTINUED)
fixed rate commencing the Company inception until the above private placement
date. Accordingly, the Company evaluated the fair value of Ordinary Shares A,
issued prior to the private placement, by the straight-line method over the
period commencing the inception of the Company (at such time the Company's price
per share is assumed to the U.S.$ 0 (nil)) through the private placement date,
in order to compute a discount from the private placement price, for such
Ordinary Shares A.
The Company did not take into account a discount due to the fact that the
Company's Ordinary Shares A do not have the right to vote as mentioned in Note
12(a)(1)(2) above because the Stock Option Plan provides that upon initial
public offering, under certain other conditions, Ordinary Shares A will
automatically be converted into Ordinary Shares. The Company recorded
compensation cost in 1997 of U.S.$ 0 (nil) thousand due to Ordinary Shares A
granted to a key employee based upon the fair value of Ordinary Shares A as
described above. The Company applied APB 25 and recorded in 1998 compensation
cost of U.S.$ 368 thousand (U.S.$ 117 thousand in 1997) due to the above options
equal to the intrinsic value of the above options using the fair value of
Ordinary Shares A as described above.
A Company which applies APB 25 should provide pro-forma net income as if the
fair value based accounting method in FAS 123 had been used to account for stock
option compensation cost. Since the exercise price of the above options is a
symbolic value and at this stage the Company can not estimate the standard
deviation of its price per share, the Company can not measure the fair value
based accounting method described in FAS 123.
Under the ESOP as of December 31, 1998, the Company did not yet issue
another 65,564 options with contingent compensation cost of U.S.$ 555 thousand.
THREE) ISSUANCE SHARES TO PARENT COMPANY AGAINST KNOW-HOW.
In August 1997, the Company allotted 840,000 Ordinary Shares par value NIS
0.01 each to the Parent Company in consideration of the know-how which the
Company received (see Note 8).
F-33
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--RESEARCH AND DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 * CUMULATIVE
--------------- --------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
Salaries and related expenses (1)................ 1,081 659 1,783
Patent registration expenses..................... 148 57 250
Materials........................................ 356 231 665
Subcontractors................................... 209 93 302
Vehicle expenses................................. 87 64 159
Communications................................... 9 14 23
Overseas travel.................................. 22 75 115
Depreciation..................................... 53 23 78
Rent and maintenance............................. 43 34 78
Professional publication......................... 76 9 85
Other............................................ 35 5 41
----- ----- -----
2,119 1,264 3,579
Less: grants received from the Chief Scientist... 1 116 117
----- ----- -----
2,118 1,148 3,462
----- ----- -----
----- ----- -----
(1) Include compensation expenses in respect of
options granted (see Note 12(b)(2)).......... 368 117 485
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
* Cumulative amounts from the Company's inception.
F-34
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 * CUMULATIVE
----------------- ----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
Salaries and related expenses.................... 110 96 294
Accounting services by Parent Company............ 16 8 27
Legal and accounting............................. 29 14 61
Consulting....................................... 5 5 10
Insurance........................................ -- 1 1
Office expenses.................................. 8 8 24
Maintenance...................................... 5 14 23
Communications................................... 11 11 24
Overseas travel.................................. 7 7 14
Entertainment.................................... 8 6 15
Vehicle expenses................................. 11 6 25
Tax of benefits.................................. 6 7 13
Depreciation..................................... 7 7 15
Transporting..................................... 15 5 20
Other............................................ 2 3 5
--- --- ---
240 198 571
--- --- ---
--- --- ---
</TABLE>
- ------------------------
* Cumulative amounts from the Company's inception.
NOTE 15--FINANCING INCOME, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 * CUMULATIVE
----------------- ----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C> <C>
Interest income and linkage difference relating
to monetary items.............................. (44) (6) (51)
Bank charges..................................... 5 4 10
-- -- --
(39) (2) (41)
-- -- --
-- -- --
</TABLE>
- ------------------------
* Cumulative amounts from the Company's inception.
NOTE 16--INCOME TAXES
ONE. The Israel tax is computed on the basis of the Company's results in
nominal NIS determined for statutory purposes.
The Company is assessed for tax purposes under the Income Tax Law
(Inflationary Adjustments 1985), the purpose of which is to prevent taxation on
inflationary profits.
TWO. As of the balance sheet date the Company accumulated losses for tax
purposes are approximately U.S. 2.9 million. These losses are linked to the
Israeli Consumer Price Index and may be utilized against future taxable income.
F-35
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INCOME TAXES (CONTINUED)
THREE. Deferred income taxes are provided primarily for operating loss for
tax purposes and for all the differences between the tax and the accounting
basis of assets and liabilities bases on the tax rate that is expected to be in
effect at the time the deferred income taxes will be realized. Realization of
the deferred tax assets is dependent on generating sufficient taxable income in
the period that the deferred tax assets are realized. Based on all available
information, Management believes that all of the deferred tax assets are not
realizable. Under FAS 109, a valuation allowance was established in respect of
all of the deferred tax assets because it is not more likely than not that such
assets will be realized in the foreseeable future.
FOUR. The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Deferred tax assets:
Employees' rights............................................ 9 15
Employee stock options....................................... 175 42
Non deductible research and development costs................ 97 23
Know-how for tax purposes only (see Note 8) (1).............. 48 53
Loss for tax purposes........................................ 1,048 533
------ ---
1,377 666
Valuation allowance (1)........................................ (1,377) (666)
------ ---
-- --
------ ---
------ ---
Statutory tax rate............................................. 36% 36%
------ ---
------ ---
</TABLE>
- ------------------------
(1) The tax asset generated by the know-how was recorded against a capital
reserve which was offset by the valuation allowance.
F-36
<PAGE>
3DV SYSTEMS LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INCOME TAXES (CONTINUED)
FIVE. Reconciliation of theoretical tax expense to the actual tax expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Loss before income taxes as reported in the statements of
operations................................................... (2,370) (1,344)
------ ------
------ ------
Statutory tax on the above amount (36%)........................ (853) (484)
INCREASE IN TAXES RESULTING FROM PERMANENT DIFFERENCES:
Non-deductible operating expenses.............................. 7 8
Linkage differences on loans received from Parent Company...... 60 --
Others......................................................... 23 (3)
------ ------
(763) (479)
TIMING DIFFERENCES IN RESPECT OF WHICH VALUATION ALLOWANCE WERE
RECORDED AGAINST DEFERRED TAX ASSET:
Non-deductible expenses in respect of employees' liabilities... 137 45
Non-deductible research and development expenses............... 97 23
Depreciation of know-how for tax purpose only.................. (7) (8)
Research and Development expenses which were recorded in the
books of last year and are tax deductible in current year.... (20) (46)
Loss for tax purposes carried forward from last year........... (492) (68)
Loss for tax purposes in the current year...................... 1,048 533
------ ------
-- --
------ ------
------ ------
</TABLE>
SIX. Composition of taxes on income included in the statements of
operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Current tax expenses........................................... -- --
Deferred tax................................................... 711 491
Valuation allowance............................................ (711) (491)
--- ---
-- --
--- ---
--- ---
</TABLE>
F-37
<PAGE>
3DV SYSTEM LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--RELATED PARTIES TRANSACTIONS AND BALANCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997
----------------- -----------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
A. TRANSACTIONS:
Payments to:
Parent Company............................. 101 54
Rafael..................................... 18 227
Vsoft Ltd.................................. 10 11
Accounting services by Parent Company........ 16 8
Computers purchased from Vsoft Ltd........... -- 15
Leasing payments to Albar Ltd................ 32 39
Deposit to Albar Ltd......................... (3) 2
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
B. BALANCE OF AMOUNTS DUE TO:
Accounts payable--Current accounts:
Parent Company............................. 2 19
Rafael..................................... 1 48
Vsoft Ltd.................................. -- 4
Long-term liabilities:
Loans from Parent Company (see Note 8,
2(b)).................................... 2,109 1,711
</TABLE>
NOTE 18--COMMITMENTS
ONE. The Company guaranteed its commitment in respect of contracts with
Albar Ltd (see Note 5). As of December 31, 1998, the maximum credit risk for
these guarantees totaled U.S.$ 64 thousand.
TWO. The Company sub-leases its premises from its Parent Company. Minimum
future rental payment for a year, due under the Company and the Parent Company's
lease agreement is U.S.$ 32 thousand. The rental payment is linked to the
Consumer Price Index and updated by 1% each year.
THREE. The Company is committed to pay royalties to the Government of
Israel in respect of sales of product, the research and development of which
were made with the participation of the Chief Scientist. The amount of royalty
payment is computed on the portion of sales proceeds from such products at rates
varying from 3% to 5%. The commitment is limited to the amount of the
participation received, U.S.$ 117 thousand.
FOUR. In August 1998, the Company signed a License and Manufacturing
Agreement ("L&M Agreement") with VSI granting VSI exclusive, perpetual, royalty
free and worldwide rights under the six initial patents as described in the L&M
Agreement, to commercially exploit products in certain fields of use that
incorporate, or use, component parts embodying technology developed by the
Company. VSI shall have the right to sublicense certain of these rights to other
assignees which shall be subject to the prior written approval of the Company.
Pursuant to the L&M Agreement the Company expect to derive more revenues by
selling its components to VSI or Approved Assign.
F-38
<PAGE>
3DV SYSTEM LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--COMMITMENTS (CONTINUED)
FIVE. In August 1998, the Company signed a Collaboration agreement
("Collaboration agreement") with ASAHI Optical Co. Ltd. ("AOC") a Japanese
corporation. AOC which is an Approved Assign under the L&M Agreement has
licensed certain proprietary technology rights of the Company. The Collaboration
agreement set forth the principles under which AOC and the Company shall
cooperate with each other and negotiate in good faith the term of any
collaborative research and joint development of 3D cameras or 3D imaging modules
or devices, which Collaboration Agreement shall set forth the proposed scope of
work for such collaboration, the costs and expenses of the project to be born by
the parties and, subject to certain conditions, the rights of the parties in and
to any intellectual property rights, including any patents or patent
applications, arising out of any such collaboration("Developed Technologies").
The Company shall have a non-exclusive, worldwide, perpetual license to the
Developed Technologies for use and incorporation in any product commercialized
by the Company or components resulting from the Developed Technologies, provided
that AOC shall be entitled to receive from the Company a royalty in the such
case equal to 3% of the gross revenues derived by the Company from the sale of
such 3DV component. The Company shall not be entitled to use the Developed
Technologies or otherwise grant a license of the Developed Technologies in
connection with any other collaborative research and joint development
arrangement between the Company and any non-affiliate of the Company without the
prior written consent of AOC.
SIX. The Board of Directors of the Company at its meeting on December 22,
1998 adopted the Company's Stock Appreciation Plan (the "plan"). The plan shall
provide key employees of the Company with special rewards corresponding to the
fair market value of a specified number of VSI shares, who acquired 25% interest
in the Company. In order to finance payment of the awards granted under the plan
the Company has entered into an Option Agreement with RDC under which RDC
granted the Company the option to purchase 75,000 share of common stock of VSI,
which shares shall be sold by the Company (see Note 6).
A participant in the plan (an employee of the Company who is awarded
according to the plan) may exercise the right to receive payment of any portion
of the units awarded to his/her credit, at any time and from time to time as
from October 6, 1999 and until October 5, 2005 (the "Exercise Period") by
delivering to the Company a written notice, stating the number of whole units
payment of which is requested. The right to receive payments is limited within
the exercise period only and shall subsequently expire. Any income which may
accrue to the participant as a result of the plan will not be regarded as part
of his salary for the purpose of any pension, severance pay, saving or other
benefits applicable to employee-employer relations.
Until the end of the year the Company has not yet granted any unit according
to the plan.
SEVEN. The Company agreed to pay to key employees a special lump sum bonus,
in the event that the Company shall sell its rights in all or a major portion of
its technology. The lump sum bonus will be calculated based upon the percentage
of the employees shareholding in the Company.
EIGHT. UNCERTAINTY RESULTING FROM THE YEAR 2000 ISSUE The issue of year
2000 arises because many computerized systems use two digits instead of four for
identification of the year. Systems that are sensitive to dates may identify the
year 2000 as 1900 or as some other date, a fact which will cause errors in the
processing of data that includes dates in the year 2000. Similar problems may
also occur in systems that use the digits "99" in a date field as indication of
something other than the year 1999. The effects of the year 2000 issue may occur
on January 1, 2000, before or after, and if they are not resolved their effects
on
F-39
<PAGE>
3DV SYSTEM LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--COMMITMENTS (CONTINUED)
operations and financial reporting may range from insignificant mistakes to a
significant systems failure that may affect the ability to carry on regular
business operations. It is impossible to guarantee that all the aspects of the
year 2000 issue effecting the Company, including those relating to the
remediation efforts of customers, suppliers or other outside parties, will be
solved in full.
NOTE 19--CONCENTRATION OF CURRENCY RISK--MONETARY BALANCES IN NON--U.S. DOLLAR
CURRENCIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
ISRAELI CURRENCY* ISRAELI CURRENCY*
-------------------------- --------------------------
UNLINKED LINKED** UNLINKED LINKED**
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
U.S.$ THOUSANDS U.S.$ THOUSANDS
ASSETS:
Current assets:
Cash and cash equivalents........................................... 300 -- 131 --
Accounts receivable................................................. 106 -- 115 --
Cars leasing deposits............................................... -- 7 -- 10
--- ----- --- -----
406 7 246 10
--- ----- --- -----
--- ----- --- -----
LIABILITIES:
Current liabilities:
Accounts payable.................................................... 374 -- 230 --
Non-current liabilities:
Long-term loans from Parent Company................................. -- 2,109 -- 1,711
--- ----- --- -----
374 2,109 230 1,711
--- ----- --- -----
--- ----- --- -----
</TABLE>
- ------------------------
* Does not include balances in U.S. dollars or linked thereto.
** To the Israeli CPI.
NOTE 20--ADJUSTMENT TO ISRAELI GAAP
The effect of the differences between U.S. GAAP and Israeli GAAP on the
financial statements is as follows:
(1) ON STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
U.S.$ THOUSANDS U.S.$ THOUSANDS
<S> <C> <C>
Net loss as reported........................... 2,370 1,344
Compensation expenses in respect of options
granted...................................... 368 117
----- -----
Net loss according to Israeli GAAP............. 2,002 1,227
----- -----
----- -----
</TABLE>
F-40
<PAGE>
3DV SYSTEM LTD.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--ADJUSTMENT TO ISRAELI GAAP (CONTINUED)
(2) ON BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
--------------------------------------------- ----------------------------
AS PER
AS REPORTED ADJUSTMENT ISRAELI GAAP AS REPORTED ADJUSTMENT
------------- ------------- --------------- ------------- -------------
U.S.$ THOUSANDS
<S> <C> <C> <C> <C> <C>
Amount funded for employees' rights upon
retirement............................. 61 (61) -- 17 (17)
Employees' rights upon retirement........ (63) 61 (2) (17) 17
Accumulated loss......................... 4,043 (485) 3,558 1,673 (117)
Employees' stock options................. (485) 485 -- (117) 117
----- --- ----- ----- ---
3,556 -- 3,556 1,556 --
----- --- ----- ----- ---
----- --- ----- ----- ---
<CAPTION>
AS PER
ISRAELI GAAP
---------------
<S> <C>
Amount funded for employees' rights upon
retirement............................. --
Employees' rights upon retirement........ --
Accumulated loss......................... 1,556
Employees' stock options................. --
-----
1,556
-----
-----
</TABLE>
F-41
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- --------- --------------------------------------------------------------------------------------------- -----
<C> <S> <C>
3.1.(1) Restated Certificate of Incorporation of the Company, as amended to date.....................
3.2.(2) By-laws, as amended to date..................................................................
*10.1.(4) 1990 Stock Option Plan, as amended...........................................................
*10.2.(4) 1993 Director Option Plan....................................................................
10.3.(2) Registration Rights Agreement dated as of February 28, 1992 among the Registrant and the
persons listed therein.......................................................................
*10.4.(2) Vision-Sciences, Inc. 401(k) Plan, as amended................................................
10.5.(2) Supply Agreement between Machida Incorporated and Steve Onody dated August 29, 1991..........
10.6.(2) Purchase Agreement between Vascu-Care, Inc. and Steve Onody dated August 29, 1991............
10.7.(2) Lease between Paul D. McKeon, Trustee of Six Strathmore Road Trust and V-M Ventures
Incorporated dated October 24, 1990, as amended by Amendment No. 1 to Lease dated September
1, 1990......................................................................................
10.8.(7) Amendment No. 2 to Lease between Paul D. McKeon, Trustee of Six Strathmore Road Trust and
Vision-Sciences, Inc.........................................................................
10.9.(7) Amendment No. 3 to Lease between Paul D. McKeon, Trustee of Six Strathmore Road Trust and
Vision-Sciences, Inc.........................................................................
10.10.(2) Lease between Machida Incorporated and J&J Associates dated September 1, 1990................
10.11.(7) Renewal to Lease between Machida Incorporated and J&J Associates dated September 1, 1995.....
10.12.(2) Lease between Machida Incorporated and South Bay Club Apartments dated July 12, 1991.........
10.13.(2) Non-Exclusive License Agreement among Opielab, Inc., O.S. Limited Partnership and Asahi
Optical Co., Ltd. dated September 28, 1988...................................................
10.14.(3) License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc. dated June 10,
1993.........................................................................................
10.17.(2) Distributorship Agreement dated January 1, 1991 between Storz Instrument Company and Machida
Incorporated, as amended.....................................................................
*10.18.(2) Form of Vision-Sciences, Inc. Invention, Non-Disclosure and Non-Competition Agreement for
employees....................................................................................
10.19.(2) Supply Agreement between the Company and Asahi Optical Co., Ltd. dated March 16, 1992........
10.20.(2) Royalty Agreement between Vision-Sciences, Inc. and C.R. Bard, Inc. dated December 12,
1989.........................................................................................
10.21.(2) Consulting Agreement between Vision-Sciences, Inc. and Richard Rothstein dated November 1,
1991.........................................................................................
10.22.(2) Agreement, Assumption and Release dated as of September 1, 1992 among Stephen Onody,
Vascu-Care, Inc., Machida Incorporated and Summit Technologies, Inc..........................
10.23.(5) Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc.
dated April 5, 1994..........................................................................
10.24.(7) Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc.
dated April 5, 1995..........................................................................
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- --------- --------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.25.(7) Amendment to License Agreement between Vision-Sciences, Inc. and Advanced Polymers, Inc.
dated February 14, 1996......................................................................
10.26.(5) Agreement between Vision-Sciences, Inc. and Smith & Nephew Richards, Inc. dated March 28,
1994.........................................................................................
10.27.(6) Commercial Loan Agreement (including Security Agreement and Promissory Note) between
Vision-Sciences, Inc. and The First National Bank of Boston dated January 24, 1995...........
10.28.(7) Extension to Commercial Loan Agreement between Vision-Sciences, Inc. and The First National
Bank of Boston dated November 16, 1995.......................................................
10.29.(7) Lease between Paul D. McKeon, Trustee of 14 Burr Street Realty Trust and Vision-Sciences,
Inc. dated April 23, 1993....................................................................
**10.30.(8) Investment Agreement dated as of August 6, 1998 between Vision-Sciences, Inc., 3DV Systems
Ltd. and RDC Rafael Development Corporation Ltd..............................................
**10.31.(8) License and Manufacturing Agreement dated as of August 6, 1998 between Vision-Sciences, Inc.
and 3DV Systems Ltd..........................................................................
**10.32.(8) Memorandum of Understanding dated August 6, 1998 between Vision-Sciences, Inc. and
Imagineering, Ltd............................................................................
**10.33.(8) License Agreement dated as of August 6, 1998 between Vision-Sciences, Inc. and Asahi Optical
Co., Ltd.....................................................................................
21.1.(1) Subsidiaries of the Company..................................................................
23.1. Consent of Arthur Andersen LLP...............................................................
27.1 Financial Data Schedule......................................................................
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
** Confidential treatment granted as to certain portions, which portions have
been deleted and filed separately with the Securities and Exchange
Commission.
(1) Incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended March 31, 1993.
(2) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-53490).
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993.
(4) Incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended March 31, 1994.
(5) Incorporated by reference from the Quarterly Report on Form 10-Q/A for the
quarter ended June 30, 1994.
(6) Incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended March 31, 1995.
(7) Incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended March 31, 1996.
(8) Incorporated by reference from the Current Report on Form 8-K dated August
20, 1998.
E-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, included in this Form 10K, into Vision-Sciences, Inc.'s previously
filed Registration Statement File Nos. 33-57298, 33-80762, 33-80764 and
333-72547.
------------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K FOR
THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000894237
<NAME> VISION SCIENCES, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 2,224,863 1,897,905
<SECURITIES> 970,608 993,146
<RECEIVABLES> 1,219,371 1,556,285
<ALLOWANCES> 130,000 117,000
<INVENTORY> 633,571 681,106
<CURRENT-ASSETS> 5,017,105 5,098,164
<PP&E> 3,244,587 3,285,872
<DEPRECIATION> 2,561,713 2,399,602
<TOTAL-ASSETS> 7,882,336 6,171,817
<CURRENT-LIABILITIES> 2,086,688 2,355,299
<BONDS> 0 0
0 0
0 0
<COMMON> 192,119 166,430
<OTHER-SE> 5,257,708 3,650,088
<TOTAL-LIABILITY-AND-EQUITY> 7,882,336 6,171,817
<SALES> 0 0
<TOTAL-REVENUES> 7,475,921 7,997,838
<CGS> 6,202,330 6,578,721
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,238,371 4,321,246
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 399
<INCOME-PRETAX> (2,139,196) (2,577,968)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,139,196) (2,577,968)
<EPS-BASIC> (.12) (.17)
<EPS-DILUTED> (.12) (.17)
</TABLE>
