<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-20970
VISION-SCIENCES, INC.
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3430173
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 STRATHMORE ROAD, NATICK, MA 01760
----------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 650-9971
--------------
NONE
----
(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 2000.
COMMON STOCK, PAR VALUE OF $.01 20,933,413
------------------------------- ------------------------
(Title of Class) (Number of Shares)
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Part I. Item 1. Financial Information PAGE
----
Consolidated Balance Sheets............................................................. 3
Consolidated Statements of Operations................................................... 4
Consolidated Statement of Stockholders' Equity.......................................... 5
Consolidated Statements of Cash Flows................................................... 6
Notes to Consolidated Financial Statements.............................................. 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 13-16
Item 3. Qualitative and Quantitative Disclosure about Market Risk .............................. 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Stockholders......................................... 18
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
Signature........................................................................................ 20
</TABLE>
2
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
-------------------- --------------
(AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 1,234,727 $ 1,581,381
Accounts receivable, net of allowance for doubtful
accounts of $104,000 and $156,000, respectively........ 852,922 1,079,590
Inventories................................................ 1,234,700 1,278,084
Prepaid expenses and deposits.............................. 310,737 76,743
------------ ------------
Total current assets................................... 3,633,086 4,015,798
------------ ------------
Property and Equipment, at cost:
Machinery and equipment.................................... 2,885,392 2,870,944
Furniture and fixtures..................................... 202,067 202,067
Motor vehicles............................................. .- 20,949
Leasehold improvements..................................... 450,396 313,154
------------ ------------
3,537,855 3,407,114
Less-Accumulated depreciation and amortization............. 2,971,413 2,846,318
------------ ------------
566,442 560,796
------------ ------------
Equity investment in 3DV Systems, Ltd........................... - 222,553
Other Assets, net of accumulated amortization of $25,000
and $22,000, respectively.................................. 105,612 108,783
------------ ------------
Total assets........................................... $ 4,305,140 $ 4,907,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank.............................. $ 52,249 $ 32,512
Current portion notes payable to stockholders.............. 50,000 -
Current portion obligation under capital lease............. 49,863 -
Accounts payable........................................... 400,784 374,684
Accrued expenses........................................... 1,449,177 1,586,248
------------ ------------
Total current liabilities.............................. 2,002,073 1,993,444
------------ ------------
Note payable to stockholders.................................... 100,000 -
Obligation under capital lease.................................. 51,244 -
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--50,000,000 shares
Issued and outstanding--20,933,413 shares at
September 30, 2000 and 20,901,128 shares
at March 31, 2000...................................... 209,333 209,010
Additional paid-in capital................................. 54,352,665 54,054,458
Accumulated deficit........................................ (52,410,175) (51,348,982)
------------ ------------
Total stockholders' equity............................. 2,151,823 2,914,486
------------ ------------
Total liabilities and stockholders' equity............. $ 4,305,140 $ 4,907,930
============ ============
</TABLE>
See accompanying notes to consolidated financial
statements.
3
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------ --------------------------------------
2000 1999 2000 1999
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 1,706,969 $ 1,855,393 $ 3,286,625 $ 3,356,565
Cost of sales................................ 1,110,905 1,382,413 2,273,641 2,671,555
------------ ------------ ------------ ------------
Gross profit............................ 596,064 472,980 1,012,984 685,010
Selling, general and administrative
expenses..................................... 689,613 774,724 1,499,582 1,605,123
Research and development expenses............ 175,476 45,830 394,317 96,920
------------ ------------ ------------ ------------
Loss from operations.................... (269,025) (347,574) (880,915) (1,017,033)
Interest income.............................. 20,069 25,298 42,744 59,474
Equity in losses of 3DV Systems Ltd.......... - (931,000) (222,553) (2,022,000)
Other income, net............................ 371 1,649 593 3,084
------------ ------------ ------------ ------------
Net loss................................ $ (248,585) $ (1,251,627) $ (1,060,131) $ (2,976,475)
============ ============ ============ ============
Basic and diluted net loss per common share.. $ (0.01) $ (0.06) $ (0.05) $ (0.15)
============ ============ ============ ============
Shares used in computing basic and diluted
net loss per common share.................... 20,933,413 19,549,789 20,930,061 19,382,188
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial
statements.
4
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
--------------- --------------
Total Total
Number $.01 Additional Accumulated Stockholders' Comprehensive
of Shares Par Value Paid-in-Capital Deficit Equity Loss
-------------- ------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 2000
(audited) 20,901,128 $ 209,010 $ 54,054,458 $(51,348,982) $ 2,914,486
Exercise of stock options 32,285 323 - - 323
Stock compensation to
non-employees 298,207 298,207
Foreign exchange loss - - - (1,062) (1,062) $ (1,062)
Net loss - - - (1,060,131) (1,060,131) (1,060,131)
---------- --------- ------------ ------------ ----------- ------------
Total comprehensive income
(loss) $ (1,061,193)
============
Balance September 30, 2000 20,933,413 $ 209,333 $ 54,352,665 $(52,410,175) $ 2,151,823
========== ========= ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $(1,060,131) $ (2,976,475)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................. 132,046 217,525
Equity in losses of 3DV Systems, Ltd.......................... 222,553 2,022,000
Loss on disposal of property and equipment.................... 2,773 -
Stock compensation to non-employees........................... 298,207 -
Changes in assets and liabilities:
Accounts receivable......................................... 226,668 (60,120)
Inventories................................................. 43,384 (153,715)
Prepaid expenses and deposits............................... (233,994) 5,112
Accounts payable .......................................... 26,100 182,665
Accrued expenses............................................ (137,071) 94,604
Deferred development fee.................................... - (317,042)
----------- ------------
Net cash used for operating activities.................... (479,465) (985,446)
----------- ------------
Cash flows provided by (used for) investing activities
Decrease in marketable securities............................... - 706,058
Purchase of property and equipment, net......................... (137,294) (100,774)
Investment in 3DV Systems, Ltd.................................. - (1,000,000)
Decrease in other assets........................................ - 13,333
----------- ------------
Net cash used for investing activities.................... (137,294) (381,383)
----------- ------------
Cash flows provided by (used for) financing activities:
Foreign exchange losses......................................... (1,062) -
Proceeds from notes payable to stockholders..................... 150,000 -
Proceeds from obligations under capital lease................... 101,107 -
Proceed from acceptances payable to a bank...................... 19,737 16,455
Proceeds from the sale of common stock, net..................... - 1,000,000
Exercise of stock options....................................... 323 44,250
----------- ------------
Net cash provided by financing activities................. 270,105 1,060,705
----------- ------------
Net decrease in cash and cash equivalents............................ (346,654) (306,124)
Cash and cash equivalents, beginning of period....................... 1,581,381 2,224,863
----------- ------------
Cash and cash equivalents, end of period............................. $ 1,234,727 $ 1,918,739
=========== ============
</TABLE>
See accompanying notes to consolidated financial
statements.
6
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by the Company in accordance with generally accepted
accounting principles, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in
the opinion of management, all adjustments (consisting only of normal
and recurring adjustments) that the Company considers necessary for a
fair presentation of such information. Certain information and footnote
disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest
annual report to stockholders. The results for the interim periods
presented are not necessarily indicative of results to be expected for
the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below:
a. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated
financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in
consolidation.
b. CASH EQUIVALENTS: Cash equivalents are carried at amortized
cost, which approximates market value. Cash equivalents are
short-term, highly liquid investments with original
maturities of less than three months.
c. INVENTORIES: Inventories are stated at the lower of cost or
market using the first-in, first-out (FIFO) method and
consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
-------------------- -----------------
(audited)
<S> <C> <C>
Raw materials................................................. $ 136,042 $ 176,620
Work-in-process............................................... 226,501 215,626
Finished goods................................................ 872,157 885,838
--------- ---------
$ 1,234,700 $ 1,278,084
=========== ===========
</TABLE>
Work-in-process and finished goods inventories consist of
material, labor, and manufacturing overhead.
7
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. DEPRECIATION AND AMORTIZATION: The Company provides for
depreciation and amortization using the straight-line method
in amounts that allocate the cost of the assets to operations
over their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-------------------- -----------
<S> <C>
Machinery and Equipment .................................... 3-5 Years
Furniture and Fixtures...................................... 5 Years
</TABLE>
Leasehold improvements are amortized over the shorter of
their estimated useful lives or the lives of the leases.
e. BASIC AND DILUTED NET LOSS PER COMMON SHARE: Basic and diluted
net loss per common share is based on the weighted average
number of common shares outstanding. Shares of common stock
issuable pursuant to stock options and warrants have not been
considered, as their effect would be antidilutive.
f. REVENUE RECOGNITION: The Company recognizes revenue upon
product shipment.
g. FOREIGN CURRENCY TRANSACTIONS: In accordance with SFAS No. 52
FOREIGN CURRENCY TRANSLATION, the Company charges foreign
currency exchange gains or losses, in connection with its
purchases of products from vendors in Japan, to operations,
and charges foreign exchange translation gains and losses to
retained earnings.
h. INCOME TAXES: The Company accounts for income taxes under the
liability method in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. Under SFAS No. 109, deferred tax assets or
liabilities are computed based upon the differences between
the financial statement and income tax bases of assets and
liabilities as measured by the enacted tax rates.
The Company has recorded a valuation allowance equal to its
net deferred tax asset due to the uncertainty of realizing the
benefit of this asset.
8
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. INVESTMENTS IN ISRAEL
3DV SYSTEMS LTD.
In April and May 2000, 3DV Systems Ltd. ("3DV") executed a third round
of financing with investors other than the Company. Subsequent to this
round of financing, the Company owns approximately 25% of the
outstanding shares of 3DV.
The Company accounts for its investment in 3DV using the equity method
of accounting. Due to the Company's commitment to finance the working
capital needs of 3DV, the Company absorbed 100% of the losses of 3DV up
through December 23, 1999. On that date 3DV completed a second round of
financing which resulted in an amendment to the Agreement between 3DV
and the Company signed on August 6, 1998. The effect of that amendment
was to eliminate the Company's option to purchase the remaining shares
of 3DV under certain conditions, and to exempt the Company from
guaranteeing the working capital requirements of 3DV. Subsequent to
December 23, 1999, the Company continued to account for its investment
in 3DV using the equity method of accounting. However, after December
23, 1999 the Company included only its proportional share of 3DV's
losses, not 100% of 3DV's losses.
In the three months ended June 30, 2000, 3DV incurred losses of
approximately $2,412,000. As the Company's investment in 3DV totaled
$222,553 at March 31, 2000, the Company recognized equity in losses of
3DV of the total value of that investment in the three months ended
June 30, 2000, and recognized no loss in the three months ended
September 30, 2000. In the three and six months ended September 30,
1999, the Company recognized $931,000 and $2,022,000, respectively, of
the losses of 3DV.
4. EGYPT PROJECT
In September 2000, the Company contributed $269,000 to the University
of Georgia ("UGA") in support of the University of Georgia Hepatitis
Project, Proposal No. 022297-01 (the "Egypt Project"). Payments were
comprised of a direct grant of $119,000 contributed by the Company, and
$150,000 contributed in the form of a loan (the "Loan") to UGA. The
Loan bears no interest and only stipulates that it will be repaid to
the Company in the event that the total funds received by UGA for the
Egypt Project exceed its first-year budget.
The Company obtained the $150,000 by borrowing the funds from two of
its principal shareholders, who are also directors of the Company. The
terms of the loans are three years, and the loans bear interest at a
rate of 9.5%, payable quarterly, beginning December 2000. Principal and
interest are payable in cash or in Common Stock, $.01 par value, of the
Company. The number of shares of Common Stock used to make any payments
will be calculated based upon the closing sale price of the Company's
Common Stock on the Nasdaq SmallCap Market on the day prior to the date
the payment is due.
9
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. EGYPT PROJECT (CONTINUED)
The Egypt Project had no activities and incurred no costs as of
September 30, 2000, other than those charged against a pending award
approved by UGA for approximately $26,000. In addition, in the event
that the Egypt Project is cancelled, UGA agreed to refund any unspent
funds to the Company. As a result, in the three months ended September
30, 2000 the Company expensed $26,000 as research and development
expense and recorded approximately $243,000 as a prepaid asset on
September 30, 2000.
5. SEGMENT INFORMATION
The Company has three reportable segments - Medical, Industrial and
Corporate. The medical segment designs, manufactures and sells
EndoSheaths and sells endoscopes to users in the health care industry.
The industrial segment designs, manufactures and sells borescopes to a
variety of users, primarily in the aircraft maintenance industry. In
addition, the industrial segment manufactures and repairs endoscopes
for the medical segment. The corporate segment consists of certain
administrative expenses beneficial to the Company as a whole and the
management oversight of the Company's investment in 3DV Systems Ltd.
and Vision-Sciences Ltd.
The accounting policies of the segments are described in the summary of
significant accounting policies. The Company evaluates segment
performance based upon operating income. Identifiable assets are those
used directly in the operations of each segment. Corporate assets
include cash, marketable securities, the assets of Vision-Sciences,
Ltd. and the investment in 3DV. The carrying value of the investment in
3DV at September 30, 2000 was $0. Data regarding management's view of
the Company's segments are provided in the following table.
10
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
5. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THree months ended September 30, Medical Industrial Corporate Adjustments Total
-------------------------------- ----------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
2000
Sales to external customers $814,250 $ 892,719 $ - $ - $1,706,969
Intersegment sales - 89,604 (89,604) -
Interest income, net - - 20,069 20,069
Operating income (loss) (59,978) 73,688 (282,735) (269,025)
Depreciation and amortization 24,362 5,854 - - 30,216
Other significant non-cash items:
Equity in losses of 3DV Systems - - - - -
Total assets 2,346,008 979,153 1,573,882 (593,903) 4,305,140
Expenditures for fixed assets 4,617 135,033 - - 139,650
1999
Sales to external customers $ 967,520 $ 887,873 $ - $ - $1,855,393
Intersegment sales - 141,289 - (141,289) -
Interest income, net - - 25,298 - 25,298
Operating income (loss) (227,656) 32,585 (152,503) - (347,574)
Depreciation and amortization 100,973 5,602 1,996 - 108,571
Other significant non-cash items:
Equity in losses of 3DV Systems - - (931,000) - (931,000)
Total assets 2,377,730 909,352 3,239,145 (599,434) 5,926,793
Expenditures for fixed assets 32,642 - - - 32,642
</TABLE>
11
<PAGE>
VISION-SCIENCES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
5. SEGMENT INFORMATION (CONTINUED)
Six months ended September 30, Medical Industrial Corporate Adjustments Total
------------------------------ ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
2000
Sales to external customers $1,686,769 $1,599,856 $ - $ - $ 3,286,625
Intersegment sales - 258,328 (258,328) -
Interest income, net - - 42,744 - 42,744
Operating income (loss) (263,045) (23,815) (594,055) - (880,915)
Depreciation and amortization 122,038 9,999 9 - 132,046
Other significant non-cash items:
Equity in losses of 3DV Systems - - (222,553) - (222,553)
Total assets 2,346,008 979,153 1,573,882 (593,903) 4,305,140
Expenditures for fixed assets 8,744 142,945 (14,395) - 137,294
1999
Sales to external customers $1,575,470 $1,781,095 $ - $ - $ 3,356,565
Intersegment sales - 258,359 - (258,359) -
Interest income, net - - 59,474 - 59,474
Operating income (loss) (728,370) 16,174 (304,837) - (1,017,033)
Depreciation and amortization 197,101 16,431 3,993 - 217,525
Other significant non-cash items:
Equity in losses of 3DV Systems - - (2,022,000) - (2,022,000)
Total assets 2,377,730 909,352 3,239,145 (599,434) 5,926,793
Expenditures for fixed assets 98,774 2,000 - - 100,774
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Except for the historical information herein, the matters discussed in this Form
10-Q include forward-looking statements that may involve a number of risks and
uncertainties. Future results may vary significantly based upon a number of
important factors including, but not limited to, risks in market acceptance of
new products and services and continuing demand for same, the impact of
competitive products and pricing, seasonality, changing economic conditions, and
other risk factors detailed in the Company's most recent annual report and other
filings with the Securities and Exchange Commission.
Net sales for the three months ended September 30, 2000 ("Q2 01") were
$1,707,000, a decrease of $148,000, or 8%, compared to the prior year
three-month period ("Q2 00"). During this period sales of medical products
decreased by $153,000, or 16%, and sales of industrial products increased by
$5,000, or 1%.
The decrease in medical sales was due primarily to decreases in sales of
EndoSheaths(R) of $84,000 and endoscopes of $67,000. Sales of EndoSheaths(R) for
the Ear-Nose-Throat ("ENT") market decreased by $38,000, and sales of
EndoSheaths to the gastrointestinal ("GI") market decreased by $42,000. Sales of
ENT endoscopes decreased by $52,000 and sales of sigmoidoscopes decreased by
$15,000.
The decrease in sales of ENT EndoSheaths was due to the mix of shipments being
oriented more to international distributors than to domestic customers. The
Company shipped approximately 50,500 ENT EndoSheaths in Q2 01, an increase of
4,600 compared to shipments of approximately 45,900 in Q2 00. Shipments to
international distributors comprised approximately 52% of total ENT EndoSheath
shipments in Q2 01, compared to approximately 25% in Q2 00. International demand
for the Company's ENT EndoSheath continues to be high, especially in Europe and
Australia. Although during the three months ended September 30, 2000, the
Company acquired approximately 51 new domestic ENT customers, shipments to all
domestic customers declined in Q2 01, compared to Q2 00, due to lower demand and
to irregular ordering patterns in Q2 00. The higher volume of international
shipments did not offset the lower volume of domestic shipments, as the average
sales price for ENT EndoSheaths sold to international distributors is lower than
the average sales price for domestic customers.
In addition to the year-to-year increase in the unit sales of ENT EndoSheaths,
the unit sales increased by approximately 5,400 in Q2 01 compared to Q1 01, or
12%. This increase was due primarily to the increase in shipments to
international distributors, offset partially by a decline in domestic shipments.
The decrease in sales of ENT endoscopes was due primarily to lower demand from
international distributors on Q2 01, compared to Q2 00 when one new
international distributor accounted for $39,000 in sales of ENT endoscopes. The
Company expects demand for ENT endoscopes will increase in the future as it
penetrates the domestic and international markets for these endoscopes.
The higher sales of industrial products in Q2 01, compared to Q2 00 were due
primarily to slightly higher demand during this period for our products by the
defense and aircraft maintenance markets.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net sales for the six months ended September 30, 2000 decreased by $70,000, or
2%, compared to the same period in fiscal 2000. During this period, sales of
medical products increased $111,000, or 7%, and sales of industrial products
declined $181,000, or 10%.
The increase in medical sales was due primarily to higher sales of ENT
EndoSheaths of $281,000, offset by lower sales of GI EndoSheaths of $140,000 and
lower sales of ENT endoscopes of $41,000. The higher sales of ENT EndoSheaths
was due to higher demand from both domestic customers and international
distributors, compared to the six months ended September 30, 1999, when the
Company had first begun to sell ENT EndoSheaths directly through its own sales
channels.
The lower sales of industrial products were due primarily to lower demand from
the defense and aircraft maintenance markets in Q1 01.
Gross profit in Q2 01 increased to $596,000, or 35% of net sales, compared to
$473,000, or 25% of net sales in Q2 00. The increase in gross profit was due
primarily to lower overhead spending and improved efficiencies in manufacturing
our new Slide-On(TM) ENT EndoSheaths, offset partially by lower sales.
Gross profit for the six months ended September 30, 2000 increased to
$1,013,000, compared to $685,000 for the comparable prior year six-month period.
The increase in gross profit was due primarily to higher volume of ENT
EndoSheaths, lower overhead spending and improved manufacturing efficiencies,
compared to the same period in fiscal 2000.
Selling, general and administrative expenses in Q2 01 decreased by $85,000, or
11% compared to Q2 00. Selling, general and administrative expenses amounted to
40% of net sales, compared to 42% in Q2 00. The decrease in these expenses was
primarily attributable to decreased expenses for commissions due to lower
domestic sales of both medical and industrial products, and decreased
administrative expenses.
For the six months ended September 30, 2000 selling, general and administrative
expenses decreased by $106,000, or 7%. Selling, general and administrative
expenses were 46% of sales for the six months ended September 30, 2000, compared
to 48% of sales in the same period in fiscal 2000. The decrease in these
expenses was due primarily to lower expenses for commissions, payrolls,
consulting services and general administrative expenses.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Research and development expenses increased by $130,000 in Q2 01 compared to Q2
00, and were 10% of sales in Q2 01, compared to 2% of sales in Q2 00. The higher
expenses for research and development were due to stock compensation to an
Imagineering Ltd. consultant working on the CMOS sensors. During fiscal 2000 the
Imagineering Ltd. consultant delivered the innovations per the contractual
obligation and the Company granted an option for 1,000,000 shares of the
Company's common stock with a fair market value of $422,000 as compensation for
work performed. According to the Statement of Financial Accounting Standard
("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company is
required to recalculate the fair value of the option on a quarterly basis until
the option lapses or is exercised. For the three months ended September 30,
2000, the Company recorded compensation expense of $99,000 for the time value of
the option. The cost associated with the option was recorded as a research and
development expense and as an increase to additional paid in capital in the
equity section of the consolidated balance sheet.
In addition, during the three months ended September 30, 2000, the Company
agreed to participate in the Egypt Project. See Note 4. The expenses incurred as
of September 30, 2000 were approximately $26,000. In total the Company paid
$269,000 to the University of Georgia, sponsor of the Egypt Project, in Q2 01.
As the Egypt Project had no activity that would have disallowed the Company from
having the funds returned to it, the Company recorded the remainder of the funds
spent as a prepaid asset. The Company expects the Egypt Project will begin
during Q3 01, during which time the Company would lose control of the funds and
expense the remaining prepaid asset.
The purpose of the Egypt Project is to determine the rate of cross-infection of
hepatitis C virus from the use of flexible endoscopes. The Company expects the
Egypt Project to comprise multiple phases over a period of two years. There is
no guarantee that the Company will participate in the Egypt Project beyond its
current commitment.
For the six-month period ended September 30, 2000 research and development
expenses increased by $297,000, and were 12% of sales, compared to 3% of sales
for the same period in 1999. The increase in research and development expenses
was due primarily to compensation expense related to a stock option granted to
the Imagineering Ltd. consultant of $246,000, costs related to the Egypt Project
of $26,000 and expenses related to Vision-Science, Ltd., the Company's Israeli
subsidiary.
Equity in losses of 3DV Systems for the three and six months ended September 30,
2000 decreased by $931,000 and $1,799,000, respectively, due to the Company no
longer being responsible for funding the working capital needs of 3DV.
The net loss per share for the three months ended September 30, 2000 was $.01,
compared to $.06 per share for the same period last year. Without the
compensation expense related to an option granted to a non-employee and equity
in losses of 3DV, the loss would have been $.01 per share for the three months
ended September 30, 2000 and $.02 for the three months ended September 30, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The net loss per share for the six months ended September 30, 2000 was $.05,
compared to $.15 per share for the six months ended September 30, 1999. Without
the compensation expense related to an option granted to a non-employee and the
equity in losses of 3DV, the loss would have been $.03 per share and $.05 per
share for the six months ended September 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $1,235,000 in cash and cash
equivalents, and working capital of $1,631,000. The Company also had a cash
collateralized demand line of credit with a bank for borrowings of up to
$250,000. At September 30, 2000, there was approximately $198,000 available
under this line for use in support of general working capital needs and the
issuance of commercial and standby letters of credit.
The Company's cash and cash equivalents decreased by $347,000 in the six months
ended September 30, 2000, due primarily to net cash used in operations of
$479,000 and purchases of equipment and leasehold improvements of $137,000,
offset partially by notes payable to stockholders and obligations under capital
lease.
The Company has incurred losses since its inception, and losses are expected to
continue at least during the fiscal year ending March 31, 2001. The Company has
funded the losses principally with the proceeds from public and private equity
financings. Management believes that, in order to fund improvements in
manufacturing, support marketing expenses and to fund research and development,
the Company will require additional financial support for the fiscal year 2001.
Management is pursuing additional sources of capital; however, there can be no
assurance that additional funding will be available, or available on reasonable
terms.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
INTEREST AND MARKET RISK
The Company maintains a portfolio of marketable, primarily fixed income,
available-for-sale securities of various issuers, types and maturities. The
Company has not used derivative financial instruments in its investment
portfolio. The Company attempts to limit its exposure to interest rate and
credit risk by placing its investments with high-quality financial institutions
and has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
Investments in both fixed-rate and floating-rate interest earning instruments
carry a degree of interest rate risk. Fixed-rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
decline. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates, or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates.
FOREIGN CURRENCY EXCHANGE
The Company faces exposure, due to purchases of raw materials from Japanese
suppliers, to adverse movements in the value of the Japanese Yen. This exposure
may change over time, and could have a materially adverse effect on the
Company's financial results. The Company may attempt to limit this exposure by
purchasing forward contracts, as required. Most of the Company's liabilities are
settled within 90 days of receipt of materials. At September 30, 2000 the
Company's liabilities relating to Japanese Yen were approximately $57,000.
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PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company held the 2000 Annual General Meeting of Shareholders (the "Annual
Meeting") on August 17, 2000. At the Annual Meeting, the following actions were
taken:
1. The stockholders re-elected Kenneth W. Anstey and Gerald B.
Lichtenberger, Ph.D. as Class III Directors, to serve for a three-year
term. Holders of 17,404,038 shares of Common Stock voted for and holders of
128,990 shares of Common Stock voted against each of Mr. Anstey and Dr.
Lichtenberger. In addition to Mr. Anstey and Dr. Lichtenberger, Katsumi
Oneda, Lewis C. Pell and Fred E. Silverstein continue to serve on the Board
of Directors.
2. The stockholders adopted an Amendment to the Company's Certificate of
Incorporation, increasing the number of authorized shares of Common Stock
from 25,000,000 to 50,000,000. Holders of 17,397,918 shares of Common Stock
voted for the proposal, holders of 108,890 shares of Common Stock voted
against the proposal and holders of 26,220 shares of Common Stock abstained
from voting on the proposal.
3. The stockholders adopted a proposal to approve the future issuance of up to
$5,000,000 of Common Stock, provided such issuance did not exceed
10,000,000 shares of Common Stock, in an offering exempt from registration
under the Securities Act of 1933 (the "Act"), as amended, on terms approved
by the Board of Directors. Holders of 17,314,942 shares of Common Stock
voted for the proposal, holders of 188,866 shares of Common Stock voted
against the proposal and holders of 29,220 shares of Common Stock abstained
from voting on the proposal.
4. The stockholders adopted the 2000 Stock Incentive Plan. Holders of
13,167,067 shares of Common Stock voted for the proposal, holders of
274,756 shares of Common Stock voted against the proposal, holders of
32,325 shares of Common Stock abstained from voting on the proposal and
holders of 4,058,880 shares of Common Stock were broker non-votes on the
proposal.
5. The stockholders ratified the issuance of 833,332 shares of Common Stock on
September 9, 1999 and 609,756 shares of Common Stock on December 21, 1999
in offerings exempt from registration under the Act, both such offerings
previously approved by the Board of Directors. Holders of 15,742,944 shares
of Common Stock voted for the proposal, holders of 312,276 shares of Common
Stock voted against the proposal and holders of 34,720 shares of Common
Stock abstained from voting on the proposal.
6. The stockholders ratified the appointment of Arthur Andersen LLP as the
Company's independent auditor for the current fiscal year. Holders of
17,482,858 shares of Common Stock voted for ratification, holders of 26,570
shares of Common Stock voted against ratification and holders of 23,600
shares of Common Stock abstained from ratification.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Promissory Note dated October 17, 2000 in the amount of $75,000
by the Company in favor of Katsumi Oneda.
10.2 Promissory Note dated October 17, 2000 in the amount of $75,000
by the Company in favor of Lewis C. Pell.
27.1 Financial data schedule
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vision-Sciences, Inc.
Date: November 13, 2000 By:
/s/ Gerald B. Lichtenberger
---------------------------
Dr. Gerald B. Lichtenberger, Ph. D.
Vice President of Business Development
/s/ James A. Tracy
------------------
James A. Tracy
Vice President Finance, Chief Financial
Officer and Controller (Principal
Financial Officer and Principal Accounting
Officer)
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