<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 June 30, 2000
COMMISSION FILE NUMBER 0-20970
VISION-SCIENCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
--------------
</TABLE>
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 June 30, 2000.
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE OF $.01 20,933,413
(Title of Class) (Number of Shares)
</TABLE>
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Item 1. Financial Information
Consolidated Balance Sheets.......................................................... 3
Consolidated Statements of Operations ............................................... 4
Consolidated Statement of Stockholders' Equity ...................................... 5
Consolidated Statements of Cash Flows ............................................... 6
Notes to Consolidated Financial Statements........................................... 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 12-14
Item 3. Qualitative and Quantitative Disclosure about Market Risk............................... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ....................................................... 16
Signature ....................................................................................... 17
</TABLE>
2
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------------------- --------------
(AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 1,370,174 $ 1,581,381
Accounts receivable, net of allowance for doubtful
accounts of $156,000 at June 30 and March 31........... 918,465 1,079,590
Inventories................................................ 1,351,338 1,278,084
Prepaid expenses and deposits.............................. 91,023 76,743
------------ -----------
Total current assets................................... 3,731,000 4,015,798
------------ -----------
Property and Equipment, at cost:
Machinery and equipment.................................... 2,882,983 2,870,944
Furniture and fixtures..................................... 202,067 202,067
Motor vehicles............................................. - 20,949
Leasehold improvements..................................... 313,154 313,154
------------ -----------
3,398,204 3,407,114
Less-Accumulated depreciation and amortization............. 2,942,781 2,846,318
------------ -----------
455,423 560,796
------------ -----------
Equity investment in 3DV Systems, Ltd........................... - 222,553
Other Assets, net of accumulated amortization of $24,000
and $22,000, respectively.................................. 107,198 108,783
------------ -----------
Total assets........................................... $ 4,293,621 $ 4,907,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank.............................. $ 85,265 $ 32,512
Accounts payable........................................... 443,644 374,684
Accrued expenses........................................... 1,463,507 1,586,248
------------ -----------
Total current liabilities.............................. 1,992,416 1,993,444
------------ -----------
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--20,933,413 shares at
June 30, 2000 and 20,901,128 shares at
March 31, 2000......................................... 209,333 209,010
Additional paid-in capital................................. 54,253,462 54,054,458
Accumulated deficit........................................ (52,161,590) (51,348,982)
------------ -----------
Total stockholders' equity............................. 2,301,205 2,914,486
------------ -----------
Total liabilities and stockholders' equity............. $ 4,293,621 $ 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
June 30
------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Net sales.................................. $ 1,579,656 $ 1,501,173
Cost of sales.............................. 1,162,737 1,289,142
-------------- --------------
Gross profit.......................... 416,919 212,031
Selling, general and administrative
expenses ............................... 809,969 830,399
Research and development expenses.......... 218,841 51,090
-------------- --------------
Loss from operations.................. (611,891) (669,458)
Interest income............................ 22,676 34,175
Equity in losses of 3DV Systems Ltd........ (222,553) (1,091,000)
Other income, net.......................... 222 1,436
-------------- --------------
Net loss.............................. $ (811,546) $ (1,724,847)
============== ==============
Basic and diluted net loss per common
share................................... $ (0.04) $ (0.09)
============== ==============
Shares used in computing basic and
diluted net loss per common share....... 20,926,672 19,212,746
============== ==============
</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 option grants to non-
employees 199,004 199,004
Foreign exchange loss - - - (1,062) (1,062) $ (1,062)
Net loss - - - (811,546) (811,546) (811,546)
-------------- ------------ ----------------- ---------------- ------------- ---------------
Total comprehensive income
(loss) $ (812,608)
===============
Balance June 30, 2000 20,933,413 $ 209,333 $ 54,253,462 $(52,161,590) $2,301,205
============== ============ ============== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (811,546) $ (1,724,847)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................. 101,830 108,954
Equity in losses of 3DV Systems, Ltd.......................... 222,553 1,091,000
Loss on disposal of property and equipment.................... 2,773 -
Stock option grants to non-employees.......................... 199,004 -
Changes in assets and liabilities:
Accounts receivable......................................... 161,125 (25,597)
Inventories................................................. (73,254) (146,894)
Prepaid expenses and deposits............................... (14,280) 16,855
Accounts payable............................................ 68,960 184,268
Accrued expenses............................................ (122,742) 107,668
Deferred development fee.................................... - (165,000)
------------ ------------
Net cash used for operating activities.................... (265,577) (553,593)
------------ ------------
Cash flows provided by (used for) investing activities
Decrease in marketable securities............................... - 404,218
Purchase of property and equipment.............................. (12,039) (68,132)
Proceeds from disposal of equipment............................. 14,395 -
Investment in 3DV Systems, Ltd.................................. - (500,000)
Decrease in other assets........................................ - 13,433
------------ ------------
Net cash provided by (used for) investing activities...... 2,356 (150,481)
------------ ------------
Cash flows provided by financing activities:
Foreign exchange losses......................................... (1,062) -
Proceed from acceptances payable to a bank...................... 52,753 54,073
Exercise of stock options....................................... 323 13,063
------------ ------------
Net cash provided by financing activities................. 52,014 67,136
------------ ------------
Net decrease in cash and cash equivalents............................ (211,207) (636,938)
Cash and cash equivalents, beginning of period....................... 1,581,381 2,224,863
------------ ------------
Cash and cash equivalents, end of period............................. $ 1,370,174 $ 1,587,925
============ ============
</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>
June 30, March 31,
2000 2000
----------------- -----------------
(audited)
<S> <C> <C>
Raw materials................................................. $ 221,110 $ 176,620
Work-in-process............................................... 179,384 215,626
Finished goods................................................ 950,844 885,838
----------- -----------
$ 1,351,338 $ 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 November 1999, 3DV completed a Share Subscription Agreement (the
"SSA"), among the Company, Mr. Jeff Braun, Discount Investment
Corporation ("DIC"), PEC Israel Economic Corporation ("PEC") and Elron
Electronic Industries Ltd. ("Elron"). The purpose of the SSA was to
raise $4.5 million of new equity capital for 3DV. The Company's portion
of the SSA was $1.5 million. That investment was comprised of the
Company's Notes, and an additional $500,000 in cash invested on
December 23, 1999.
Upon the closing of the SSA, the Company's Notes converted into common
stock of 3DV which, with the current common stock of 3DV then held by
the Company and the new common stock issued to the Company and the
other investors, resulted in the Company owning approximately 29% of
the outstanding shares of 3DV.
As part of the SSA in November 1999, the Company and 3DV executed an
Amendment to the Agreement signed on August 6, 1998. Upon completion of
investments totaling $3 million or more, which occurred with the
Company's investment of $500,000 on December 23, 1999, the Amendment
deleted Sections 3 and 4 of the Agreement. The deletion of these
sections eliminated the Company's option to purchase the remaining
outstanding shares of 3DV under certain conditions, and exempted the
Company from guaranteeing the working capital requirements of 3DV.
In April 2000, 3DV executed a Share Purchase Agreement (the "SPA") with
investors other than the Company. After the SPA is fully implemented,
the Company will own 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. 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 has
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. In the three months ended June 30, 1999, the Company
recognized $1,091,000, 100% of the losses of 3DV.
9
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. SEGMENT INFORMATION
The Company has three reportable segments - Medical, Industrial and
Corporate. The medical segment designs, manufactures and sells
EndoSheaths and sells endoscopes to users in the health care industry.
The industrial segment designs, manufactures and sells borescopes to a
variety of users, primarily in the aircraft maintenance industry. In
addition, the industrial segment manufactures and repairs endoscopes
for the medical segment. The corporate segment consists of certain
administrative expenses beneficial to the Company as a whole and the
management oversight of the Company's investment in 3DV Systems Ltd.
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 Systems Ltd. The carrying value of 3DV
at June 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)
4. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three months ended June 30, Medical Industrial Corporate Adjustments Total
----------------------------------------- ------------------ ------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
2000
Sales to external customers $ 872,518 $ 707,138 $ - $ - $ 1,579,656
Intersegment sales - 168,724 - (168,724) -
Interest income, net - - 22,676 - 22,676
Operating income (loss) (203,067) (97,503) (311,321) - (611,891)
Depreciation and amortization 97,676 4,145 9 - 101,830
Other significant non-cash items:
Equity in losses of 3DV Systems - - (222,553) - (222,553)
Total assets 2,553,905 945,019 1,490,582 (695,885) 4,293,621
Expenditures for fixed assets 4,127 7,912 (14,395) - (2,356)
1999
Sales to external customers $ 607,950 $ 893,223 $ - $ - $ 1,501,173
Intersegment sales - 117,070 - (117,070) -
Interest income, net - - 34,175 - 34,175
Operating income (loss) (500,713) (16,411) (152,334) - (669,458)
Depreciation and amortization 96,128 10,830 1,996 - 108,954
Other significant non-cash items:
Equity in losses of 3DV Systems - - (1,091,000) - (1,091,000)
Total assets 2,355,934 1,034,972 3,641,171 (680,516) 6,351,561
Expenditures for fixed assets 66,132 2,000 - - 68,132
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Except for the historical information herein, the matters discussed in this Form
10-Q include forward-looking statements that may involve a number of risks and
uncertainties. Future results may vary significantly based upon a number of
important factors including, but not limited to, risks in market acceptance of
new products and services and continuing demand for same, the impact of
competitive products and pricing, seasonality, changing economic conditions, 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 June 30, 2000 increased by $78,000, or 5%,
compared to the prior year three-month period. During this period sales of
medical products increased by $264,000, or 44%, and sales of industrial products
decreased by $186,000, or 21%.
The increase in medical sales was due primarily to an increase in sales of
EndoSheaths-Registered Trademark- for the Ear-Nose-Throat ("ENT") market of
$319,000, offset partially by a decrease in the sales of sigmoidoscope
EndoSheaths to the gastrointestinal ("GI") market of $99,000, or 27%. In
addition, sales of endoscopes for the GI and ENT markets increased in the
aggregate by $45,000.
The increase in sales of EndoSheaths and endoscopes was due to higher demand
from both domestic and international customers. The Company shipped
approximately 45,100 ENT EndoSheaths in the three months ended June 30, 2000, an
increase of 34,000 compared to shipments of approximately 11,100 in the same
period last year. The increase reflects the continued penetration of domestic
ENT users, a buildup of our international distributors and a poor fiscal quarter
ended in June 1999 due to excess inventory present at our former master
distributor. During the three months ended June 30, 2000, the Company acquired
approximately 56 new domestic ENT customers.
International sales of ENT EndoSheaths in the three months ended June 30, 2000
were 26% of total sales of ENT EndoSheaths. International ENT EndoSheath unit
shipments increased to 18,500 from less than 100 in the prior year period. The
increase in international shipments is due to the establishment of the Company's
international distribution channel in the second quarter of fiscal 2000. Demand
during the three months ended June 30, 2000 was especially strong in Europe and
Australia.
In addition to the year-to-year increase in the sale of ENT EndoSheaths, the
unit sales increased by approximately 2,900 in the three months ended June 30,
2000 compared to the three months ended March 31, 2000. This increase was due
primarily to the increase in shipments to international distributors, offset by
a slight decline in shipments to domestic users.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (CONTINUED)
The increase in sales of endoscopes was due primarily to an increase in demand
for sigmoidoscopes and ENT scopes. The Company believes the increased demand for
sigmoidoscopes reflects expected volume increase in flexible sigmoidoscopies by
current customers and new customers who believe the Company's system is superior
to conventional scopes for infection control and more cost-effective than
conventional sigmoidoscopes. The sales of ENT endoscopes increased 36% in the
three months ended June 30, 2000 compared to the same period last year. The
increase is due primarily to increased demand generated by the Company's
international distributors.
The lower sales of industrial products in the three months ended June 30, 2000,
compared to the same period in fiscal 2000, were due primarily to lower demand
for new products during this period by the aircraft maintenance and defense
markets. Repair sales increased by 11% in the period.
Gross profit for the three months ended June 30, 2000 increased to $417,000, or
26% of net sales, compared to $212,000, or 14% of net sales for the comparable
prior year three-month period. The increase in gross profit was due primarily to
the higher prices attained for ENT EndoSheaths, resulting from our direct sales
strategy, and to manufacturing efficiencies. The gross profit of the medical
segment was 30% of sales, compared to a negative gross profit in the same period
last year. The gross profit of the industrial segment declined to 22%, compared
to 30% in the same period last year, due to the lower volume of sales.
Selling, general and administrative expenses for the three-month period ended
June 30, 2000 decreased by 2%, or $20,000 compared to the prior year three-month
period. Selling, general and administrative expenses amounted to 51% of net
sales, compared to 55% in the three-month period ended June 30, 1999. The
decrease in these expenses was primarily attributable to lower costs for payroll
and consulting fees.
Research and development expenses increased by $168,000 in the three months
ended June 30, 2000 compared to the same period last year, and were 14% of
sales, compared to 3% of sales in the three months ended June 30, 1999. The
higher expenses for research and development were due to 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 June 30, 2000, the
Company recorded compensation expense of $147,000 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.
During the three months ended June 30, 2000, the Company decided to reduce its
commitment to an operating entity in Israel. The Company continues to pursue the
filing of patents, but has hired outside consultants to perform the work.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (CONTINUED)
Equity in losses of 3DV Systems for the three months ended June 30, 2000
decreased by $868,000 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 June 30, 2000 was $.04,
compared to $.09 per share for the same period last year. Without the
compensation expense in connection with the option granted to a non-employee and
the equity in losses of 3DV, the loss would have been $.02 per share for the
three months ended June 30, 2000 and $.03 for the three months ended June 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had $1,370,000 in cash and cash equivalents,
and working capital of $1,739,000. The Company also had a cash collateralized
demand line of credit with a bank for borrowings of up to $250,000. At June 30,
2000, there was approximately $165,000 available under this line for use in
support of general working capital needs and the issuance of commercial and
standby letters of credit.
Inventories increased $73,000 in the three months ended June 30, 2000, due
primarily to increases in inventories of medical products of $85,000, offset by
a decrease in industrial inventories of $12,000. The increase in medical
products was due primarily to an increase in the quantities of ENT scopes,
offset partially by a decrease in the value of finished sheaths for
sigmoidoscopes. The Company continually reviews inventory levels, and will
continue to establish inventory levels that it believes are consistent with
demand for its products and other market circumstances. The decrease in
inventory of industrial products was due primarily to a lower level of
work-in-process due to reduced order flow.
The Company's cash and cash equivalents decreased by $211,000 in the three
months ended June 30, 2000, due primarily to net cash used in operations of
$266,000, offset by $52,000 of proceeds from acceptances payable to a bank.
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. After the last two rounds of financing executed by 3DV in December
1999 and April 2000, the Company is no longer required to fund operations at
3DV. Management continues to pursue additional sources of capital; however,
there can be no assurance that additional funding will be available, or
available on reasonable terms.
14
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
INTEREST AND MARKET RISK
The Company maintains a portfolio of marketable, primarily fixed income,
available-for-sale securities of various issuers, types and maturities. The
Company has not used derivative financial instruments in its investment
portfolio. The Company attempts to limit its exposure to interest rate and
credit risk by placing its investments with high-quality financial institutions
and has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
Investments in both fixed-rate and floating-rate interest earning instruments
carry a degree of interest rate risk. Fixed-rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
decline. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates, or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates.
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 June 30, 2000 the Company's
liabilities relating to Japanese Yen were approximately $95,000.
The Company faces exposure, due to the cash required to support Vision-Sciences,
Ltd., its Israeli subsidiary, to adverse movements in the value of the New
Israel Shekel (NIS). 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.
At June 30, 2000, the Company had no open forward currency contracts.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vision-Sciences, Inc.
Date: August 14, 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)
17
