<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-20970
VISION-SCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3430173
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 STRATHMORE ROAD, NATICK, MA 01760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 650-9971
NONE
(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of December 31,1999.
COMMON STOCK, PAR VALUE OF $.01 20,789,235
(Title of Class) (Number of Shares)
<PAGE>
VISION-SCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Item 1. Financial Information PAGE
<S> <C>
Consolidated Balance Sheets................................................................ 3
Consolidated Statements of Operations ..................................................... 4
Consolidated Statement of Stockholders' Equity ............................................ 5
Consolidated Statements of Cash Flows ..................................................... 6
Notes to Consolidated Financial Statements................................................. 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 12-16
Item 3. Qualitative and Quantitative Disclosure about Market Risk.................................... 16- 17
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................................... 18
Item 6. Exhibits and Reports on Form 8-K .............................................................. 18
Signature .............................................................................................. 19
</TABLE>
2
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------------ -----------------
(AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 1,579,708 $ 2,224,863
Marketable securities...................................... 261,950 970,608
Accounts receivable, net of allowance for doubtful
accounts of $133,000 and $130,000, respectively........ 959,220 1,089,371
Inventories................................................ 1,000,656 633,571
Prepaid expenses and deposits.............................. 106,966 98,692
----------- -----------
Total current assets................................... 3,908,500 5,017,105
----------- -----------
Property and Equipment, at cost:
Machinery and equipment.................................... 2,855,698 2,741,919
Furniture and fixtures..................................... 201,104 199,070
Motor vehicles............................................. 36,308 23,956
Leasehold improvements..................................... 313,155 279,642
----------- -------------
3,406,265 3,244,587
Less-Accumulated depreciation and amortization............. 2,875,375 2,561,713
----------- ------------
530,890 682,874
---------- ------------
Equity investment in 3DV Systems, Ltd....................... 476,500 2,053,900
Other Assets, net of accumulated amortization of $20,000
and $22,000, respectively.................................. 110,368 128,457
-------------- ------------
Total assets........................................... $ 5,026,258 $ 7,882,336
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current Liabilities:
<S> <C> <C>
Acceptances payable to a bank.............................. $ 81,943 $ 32,333
Accounts payable........................................... 432,915 452,378
Accrued expenses........................................... 1,637,726 1,601,977
Deferred development fee .................................. 14,621 345,821
--------- -----------
Total current liabilities.............................. 2,167,205 2,432,509
--------- -----------
Stockholders' Equity:
Common stock, $.01 par value--
Authorized--25,000,000 shares
Issued and outstanding--20,789,235 shares at
December 31,1999 and 19,212,021 shares at
at March 31, 1999...................................... 207,891 192,119
Additional paid-in capital................................. 53,474,623 51,830,808
Accumulated deficit........................................ (50,823,461) (46,573,100)
------------ -------------
Total stockholders' equity............................. 2,859,053 5,449,827
------------ ------------
Total liabilities and stockholders' equity............. $ 5,026,258 $ 7,882,336
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------------ --------------------------------------
1999 1998 1999 1998
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales.................................. $ 1,861,488 $ 1,942,554 $ 5,218,053 $ 5,784,350
Cost of sales.............................. 1,262,256 1,652,325 3,933,811 4,763,085
------------- ------------- ------------- ---------------
Gross profit............................. 599,232 290,229 1,284,242 1,021,265
Selling, general and administrative expenses 792,552 733,593 2,397,675 2,164,223
Research and development expenses............ 46,958 52,369 143,878 156,830
------------- ----------------- ------------------ ------------------
Loss from operations..................... (240,278) (495,733) (1,257,311) (1,299,788)
Interest income............................ 26,517 54,845 85,990 138,136
Other income(expense), net................. (1,055,142) 6,460 (3,074,058) 12,286
------------- ----------------- ------------------ ------------------
Net loss................................. $(1,268,903) $ (434,428) $(4,245,379) $(1,149,366)
============= ================= =================== =================
Basic and diluted net loss per common share
$ (0.06) $ (0.02) $ (0.22) $ (0.06)
============= ================= ================== ==================
Shares used in computing basic and diluted
net loss per common share.............. 20,210,231 19,211,021 19,659,206 17,901,432
============= ================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------------------
Additional Total
Number $.01 Paid-in- Accumulated Stockholders'
of Shares Par Value Capital Deficit Equity
----------------- ---------------- ---------------- --------------- --------------
Balance, March 31, 1999
<S> <C> <C> <C> <C> <C>
(audited)
19,212,021 $ 192,119 $51,830,808 $(46,573,100) $ 5,449,827
Exercise of stock options 134,126 1,341 158,246 - 159,587
Sale of common stock, net 1,443,088 14,431 1,485,569 - 1,500,000
Foreign exchange gain (loss) - - - (4,982) (4,982)
Net loss - - - (4,245,379) (4,245,379)
----------------- ---------------- ---------------- --------------- --------------
Balance, December 31,1999 20,789,235 $ 207,891 $53,474,623 $(50,823,461) $ 2,859,053
----------------- ---------------- ---------------- --------------- --------------
----------------- ---------------- ---------------- --------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
December 31,1999 December 31,1998
------------------- ---------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss........................................................ $ (4,245,379) $ (1,149,366)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................. 318,418 326,450
Equity in losses of 3DV Systems, Ltd.......................... 3,077,400 997,000
Changes in assets and liabilities:
Accounts receivable......................................... 130,151 (38,940)
Inventories................................................. (367,085) (204,965)
Prepaid expenses and deposits............................... (8,274) (47,798)
Accounts payable............................................ (19,463) 298,502
Accrued expenses............................................ 35,749 (185,672)
Deferred development fee.................................... (331,200) 803,384
--------------- ------------
Net cash provided by (used for) operating activities...... (1,409,683) 798,595
--------------- ------------
Cash flows provided by (used for) investing activities
Decrease in marketable securities............................... 708,658 993,146
Purchase of property and equipment.............................. (161,678) (97,113)
Investment in 3DV Systems, Ltd.................................. (1,500,000) (3,000,000)
Decrease in other assets........................................ 13,333 16,436
--------------- -------------
Net cash used for investing activities.................... (939,687) (2,087,531)
--------------- -------------
Cash flows provided by financing activities:
Foreign exchange losses......................................... (4,982) -
Proceed from acceptances payable to a bank...................... 49,610 14,532
Proceeds from the sale of common stock, net..................... 1,500,000 2,943,727
Exercise of stock options....................................... 159,587 80,691
--------------- -------------
Net cash provided by financing activities................. 1,704,215 3,038,950
--------------- -------------
Net increase (decrease) in cash and cash equivalents................. (645,155) 1,750,014
Cash and cash equivalents, beginning of period....................... 2,224,863 1,897,905
--------------- -------------
Cash and cash equivalents, end of period............................. $ 1,579,708 $ 3,647,919
=============== =============
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in connection with equity
Investment in 3DV Systems Ltd................................... $ - $ 746,900
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of
management, all adjustments (consisting only of normal and recurring
adjustments) that the Company considers necessary for a fair presentation
of such information. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to
such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
the Company's latest annual report to stockholders. The results for the
interim periods presented are not necessarily indicative of results to be
expected for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described below:
a. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
b. CASH EQUIVALENTS: Cash equivalents are carried at amortized cost,
which approximates market value. Cash equivalents are short-term,
highly liquid investments with original maturities of less than three
months.
c. INVENTORIES: Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and consist of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------------------- -----------------
(audited)
<S> <C> <C>
Raw materials................................................. $ 286,481 $ 169,653
Work-in-process............................................... 147,920 186,806
Finished goods................................................ 566,255 277,112
--------- ---------
$ 1,000,656 $ 633,571
=========== =========
</TABLE>
Work-in-process and finished goods inventories consist of material,
labor, and manufacturing overhead.
7
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. DEPRECIATION AND AMORTIZATION: The Company provides for
depreciation and amortization using the straight-line method in
amounts that allocate the cost of the assets to operations over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
Estimated
ASSET CLASSIFICATION Useful Life
-----------
<S> <C>
Motor vehicles ......................................... 3 Years
Machinery and Equipment................................. 3-5 Years
Furniture and Fixtures.................................. 5 Years
</TABLE>
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the lives of the leases.
e. BASIC AND DILUTED NET LOSS PER COMMON SHARE: Basic and diluted
net loss per common share is based on the weighted average number
of common shares outstanding. Shares of common stock issuable
pursuant to stock options and warrants have not been considered,
as their effect would be antidilutive.
f. REVENUE RECOGNITION: The Company recognizes revenue upon product
shipment.
g. FOREIGN CURRENCY TRANSACTIONS: 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 May and August 1999, the Company loaned a total of $1,000,000 to 3DV
Systems Ltd. ("3DV"), an Israeli company in which the Company had a 25%
interest. The loans were non-interest bearing Convertible Capital Notes
(the "Notes"), issued pursuant to the Investment Agreement dated August 6,
1998 between the Company and 3DV. The issuance of the Notes was part of the
Company's commitment to finance the working capital needs of 3DV for
calendar years 1999 and 2000. The Notes are convertible into common stock
of 3DV according to provisions of the Investment Agreement. The Company
recorded the Notes as part of its investment in 3DV.
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 is comprised of the Company's Notes, and an additional
$500,000 in cash invested on December 23, 1999.
Mr. Braun was co-founder and Chairman of Maxis Corporation, acquired in
1997 by Electronic Arts (Nasdaq NM: ERTS), and is recognized as one of the
leading technology innovators in the multimedia industry. DIC, based in
Israel, is a subsidiary of the I.D.B. Holding Group and invests and
participates in the initiation, development and direction of a diverse
portfolio of business enterprises, in the areas of industry, electronics,
communications, retail services, real estate, investments and finance. PEC
is a subsidiary of DIC. Elron (Nasdaq NM: ELRNF) is a multinational high
technology holding company whose operations serve the defense,
communications, medical, information technology and other markets.
Upon the closing of the SSA, the Company's Notes converted into common
stock of 3DV which, with the current common stock of 3DV held by the
Company and the new common stock issued to the Company and the other
investors, resulted in the Company owning approximately 26% of the fully
diluted share capital of 3DV.
As part of the SSA in November 1999, the Company and 3DV executed an
Amendment to the Investment 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 Investment 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.
9
<PAGE>
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. INVESTMENTS IN ISRAEL (CONTINUED)
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 will
continue 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-month and nine-month periods ended December 31, 1999, the Company
recognized other expense of $1,055,400 and $3,077,400, respectively, as
its portion of the losses of 3DV.
IMAGINEERING LTD. AND VISION-SCIENCES, LTD.
In the three months and nine months ended December 31, 1999, the Company
made payments of $50,000 and $367,041, respectively, to fund the contract
with Imagineering Ltd. and the operations of Vision-Sciences, Ltd. These
payments were offset by $331,200 of deferred development fees received
from Asahi Optical Co., Ltd. ("Asahi") pursuant to the License Agreement
between the Company and Asahi dated August 6, 1998, and an increase in
the Company's investment in Vision-Sciences, Ltd.
4. SEGMENT INFORMATION
The Company has three reportable segments - Medical, Industrial and
Corporate. The medical segment designs, manufactures and sells EndoSheaths
and sells endoscopes to users in the health care industry. The industrial
segment designs, manufactures and sells borescopes to a variety of users,
primarily in the aircraft maintenance industry. In addition, the industrial
segment manufactures and repairs endoscopes for the medical segment. The
corporate segment consists of certain administrative expenses beneficial to
the Company as a whole and the management oversight of the Company's
investment in 3DV Systems Ltd., Vision-Sciences Ltd and the Company's
contractual relations with Imagineering Ltd.
The accounting policies of the segments are described in the summary of
significant accounting policies. The Company evaluates segment performance
based upon operating income. Identifiable assets are those used directly in
the operations of each segment. Corporate assets include cash, marketable
securities, the assets of Vision-Sciences, Ltd. and the investment in
3DV Systems Ltd. The carrying value of 3DV at December 31, 1999 was
$476,500. 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 December 31, Medical Industrial Corporate Adjustments Total
- --------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 919,513 $ 941,975 $ - $ - $ 1,861,488
Intersegment sales - 172,340 - (172,340) -
Interest income, net - - 26,517 - 26,517
Operating income (loss) (133,635) 20,912 (127,555) - (240,278)
Depreciation and amortization 94,847 3,961 2,084 - 100,892
Other significant non-cash items:
Equity in losses of 3DV Systems - - (1,055,400) - (1,055,400)
Total assets 2,415,368 821,364 2,409,174 (619,648) 5,026,258
Expenditures for fixed assets 39,244 - 21,660 - 60,904
1998
Sales to external customers $ 1,143,130 $ 799,424 $ - $ - $ 1,942,554
Intersegment sales - 52,708 - (52,708) -
Interest income, net - - 54,845 - 54,845
Operating income (loss) (268,911) (69,301) (157,521) - (495,733)
Depreciation and amortization 98,722 10,925 1,996 - 111,643
Other significant non-cash items:
Equity in losses of 3DV Systems - - - - -
Total assets 3,264,053 1,163,738 6,421,775 (1,125,051) 9,724,515
Expenditures for fixed assets 67,976 - - - 67,976
</TABLE>
<TABLE>
<CAPTION>
Nine months ended December 31, Medical Industrial Corporate Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 2,494,982 $ 2,723,071 $ - $ - $ 5,218,053
Intersegment sales - 430,699 - (430,699) -
Interest income, net - - 85,990 - 85,990
Operating income (loss) (862,004) 37,085 (432,392) - (1,257,311)
Depreciation and amortization 291,948 20,393 6,077 - 318,418
Other significant non-cash items:
Equity in losses of 3DV Systems - - (3,077,400) - (3,077,400)
Total assets 2,415,368 821,364 2,409,174 (619,648) 5,026,258
Expenditures for fixed assets 138,018 2,000 21,660 - 161,678
1998
Sales to external customers $ 3,158,452 $ 2,625,898 $ - $ - $ 5,784,350
Intersegment sales - 145,988 - (145,988) -
Interest income, net - - 138,136 - 138,136
Operating income (loss) (811,799) (3,322) (484,667) - (1,299,788)
Depreciation and amortization 289,399 35,055 1,996 - 326,450
Other significant non-cash items:
Equity in losses of 3DV Systems - - - - -
Total assets 3,264,053 1,163,738 6,421,775 (1,125,051) 9,724,515
Expenditures for fixed assets 97,113 - - - 97,113
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Except for the historical information herein, the matters discussed in this Form
10-Q include forward-looking statements that may involve a number of risks and
uncertainties. Future results may vary significantly based upon a number of
important factors including, but not limited to, risks in market acceptance of
new products and services and continuing demand for same, the impact of
competitive products and pricing, seasonality, changing economic conditions, the
ability of the Company to attain Year 2000 readiness and other risk factors
detailed in the Company's most recent annual report and other filings with the
Securities and Exchange Commission.
Net sales for the three months ended December 31, 1999 decreased $81,000, or 4%,
compared to the prior year three-month period. During this period sales of
medical products decreased by $224,000, or 20%, and sales of industrial products
increased by $143,000, or 18%.
The decrease in medical sales was due primarily to a decrease in sales of ENT
endoscopes of $331,000, offset partially by an increase in the sales of ENT
EndoSheaths(R) of $93,000, or 24%.
The increase in sales dollars of the ENT EndoSheaths is due to the shift in our
strategy to selling directly to end users, compared to selling to a master
distributor who would then resell to the end users. This shift began April 1,
1999. During the three months ended December 31, 1999, we shipped approximately
43,000 units of ENT EndoSheaths, compared to 51,000 units in the same period of
fiscal 1999. Although the number of units shipped was lower than for the same
period in fiscal 1999, the sales dollars were higher due primarily to the higher
prices we were able to receive by selling directly to users and eliminating the
distributor.
We expected this transition to take time due to the training required of our new
sales representatives, the time required to properly promote our new strategy to
current and future customers and to the time required to allow the former master
distributor to deplete its inventory. We believe the transition period for the
sales of ENT sheaths is nearing an end. However, we believe it will continue for
up to the next two fiscal quarters for the ENT endoscopes, as the sales cycle
for an endoscope is longer than that of a disposable sheath. We are committed to
the strategy of selling directly to end users, and believe it will result in
higher sales and gross profit of ENT products. However, there can be no
assurance that this strategy will be successful.
The higher sales of industrial products in the three months ended December 31,
1999, compared to the same period in fiscal 1999 were due primarily to higher
demand during this period for our products by the aircraft maintenance and
defense markets.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Net sales for the nine months ended December 31, 1999 decreased by $566,000, or
10%, compared to the same period in fiscal 1999. During this period, sales of
medical products declined $663,000, or 21%, and sales of industrial products
increased $97,000, or 4%.
The decrease in medical sales was due primarily to lower sales of ENT endoscopes
of $653,000, offset partially by higher sales of ENT EndoSheaths of $35,000 and
higher sales of sigmoidoscope EndoSheaths of $86,000.
The higher sales of industrial products were due primarily to slightly higher
demand from the aircraft maintenance and defense markets.
Gross profit for the three months ended December 31, 1999 increased to $599,000,
or 32% of net sales, compared to $290,000, or 15% 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. We have also come down the learning curve in
manufacturing our Slide-On(TM) ENT EndoSheath, leading to higher absorption of
fixed manufacturing overhead. In addition, the higher volume of industrial
products yielded better utilization of fixed manufacturing costs.
Gross profit for the nine months ended December 31, 1999 increased to
$1,284,000, compared to $1,021,000 for the comparable prior year nine-month
period. The percentage that gross profit bears to sales increased to 25% in the
nine-month period ended December 31, 1999, compared to 18% in the nine-month
period ended December 31, 1998. This higher gross profit percentage is due
primarily to the higher prices we are able to attain by selling directly to the
end users. These higher prices were partially offset by increased startup costs
to manufacture the new Slide-On ENT EndoSheaths during the first two fiscal
quarters.
Selling, general and administrative expenses for the three-month period ended
December 31, 1999 increased by 8%, or $59,000 compared to the prior year
three-month period. Selling, general and administrative expenses amounted to 43%
of net sales, compared to 38% in the three-month period ended December 31, 1998.
The increase in these expenses was primarily attributable to increased payroll
costs and higher expenses for commissions paid to our independent sales
representatives.
For the nine months ended December 31, 1999 selling, general and administrative
expenses increased by $233,000, or 11%. Selling, general and administrative
expenses were 46% of sales, compared to 37% of sales in the same period in
fiscal 1999. The increase in these expenses was due primarily to higher expense
for payrolls, commissions and product promotion.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses for the three months ended December 31, 1999
decreased $5,000 compared to the prior year three-month period. These expenses
amounted to 3% of net sales in the three- month periods ended December 31, 1999
and 1998.
For the nine-month period ended December 31, 1999 research and development
expenses declined $13,000, and were 3% of sales for the nine-month periods ended
December 31, 1999 and 1998.
Other expense, net for the three months ended December 31, 1999 increased by
$1,062,000 due to the equity in losses of 3DV Systems that the Company
recognized in the fiscal quarter ended December 31, 1999 of $1,055,400. The
losses at 3DV were similar to prior fiscal quarters, as 3DV continues in its
development stage operations.
For the nine months ended December 31, 1999, other expense increased by
$3,086,300, due primarily to equity in losses of 3DV System Ltd. of $3,077,400.
The net loss per share for the three months ended December 31, 1999 was $.06,
compared to $.02 per share for the same period last year. Without the equity in
losses of 3DV, the loss would have been $.01 per share for the three months
ended December 31, 1999.
The net loss per share for the nine months ended December 31, 1999 was $.22,
compared to $.06 per share for the nine months ended December 31, 1998. Without
the equity in losses of 3DV, the loss would have been $.06 per share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $1,842,000 in cash, cash equivalents
and marketable securities, and working capital of $1,741,000. The Company also
had a cash collateralized demand line of credit with a bank for borrowings of up
to $250,000. At December 31, 1999, there was approximately $168,000 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 $367,000 in the nine months ended December 31, 1999,
due primarily to increases in inventories of medical products of $261,000 and
increases in industrial inventories of $106,000. The increase in medical
products was due primarily to increases in the quantities of finished sheaths
for both sigmoidoscopes and ENT scopes. These increases were due to
anticipation of increases in demand, improved manufacturing efficiencies and
as a precaution against any unforeseen events related to the Year 2000
problem. The Company did not want to risk health care professionals not being
able to access the Company's products if they incurred unforeseen events
related to the Year 2000 problem. The Company does not know of any customer
who has experienced any significant problem regarding the change in dates to
2000. 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 increase in inventory of
industrial products was due primarily to the timing of purchases of raw
materials for industrial scopes.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's cash and cash equivalents decreased by $645,000 in the nine months
ended December 31, 1999, due primarily to net cash used in US operations of
$1,018,000, offset by sales of marketable securities of $709,000. In addition,
the Company loaned $1,500,000 to 3DV, which was offset by sales of common stock
to two of the Company's employee/directors for $1,500,000. The sales were
approved by the Board of Directors, and occurred in August and December 1999. In
addition, the Company used cash of $336,000 to fund its operations in Israel.
The Company has incurred losses since its inception, and losses are expected to
continue at least through the fiscal year ending March 31, 2000. The Company has
funded the losses principally with the proceeds from public and private equity
financings. Management believes that, after the refinancing at 3DV is completed,
the Company will not be 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.
YEAR 2000 READINESS DISCLOSURE
The Company has evaluated its information technology infrastructure to address
its exposure to the "Year 2000" computer problem. The areas of concern to the
Company include its products, its primary software and hardware system, its
telecommunications, its machinery and equipment and the Year 2000 readiness of
its primary vendors and customers. The Company established a plan that was
approved by its Chairman and CEO for the attainment of readiness of its
information technology infrastructure.
The Company has completed preliminary tests of its video processor, which is
used with its video sigmoidoscope. Results of these preliminary tests indicated
that the video processor would process the date change successfully from
December 31, 1999 to January 1, 2000. The primary products sold by the Company
do not contain embedded microchips, and the Company believes these products are
Year 2000 ready.
The major areas of concern are the Company's primary software system and its
telecommunications equipment. During the year ended March 31, 1999, the Company
upgraded its primary software system to the version that has been certified Year
2000 compliant by the Information Technology Association of America.
During the fiscal year ended March 31, 1999, the Company procured and installed
new hardware that utilizes a 32-bit operating system, upgraded its desktop
software to be Year 2000 ready and upgraded its network to be Year 2000 ready.
During the fiscal year ended March 31, 1999, the Company reviewed its
telecommunications systems at its New York and Massachusetts locations. These
reviews indicated the telecommunications equipment at both sites is currently
Year 2000 ready.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000 READINESS DISCLOSURE (CONTINUED)
The Company has contacted customers and vendors with whom it has a material
relationship to determine the readiness of those customers and vendors, and to
determine what risks the Company might incur if those customers and vendors do
not become Year 2000 ready in a timely fashion.
The Company currently estimates that the cost to attain readiness did not exceed
$200,000, and that as of December 31,1999 it has completed 95% of the work
necessary to be Year 2000 ready. The Company will continue to test its
procedures and equipment as the need arises. At this time the Company does not
have a contingency plan, but will develop one if the need arises.
The Company is not aware of any significant problems that have occurred to date
relating to the Year 2000 problem.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
INTEREST AND MARKET RISK
The Company maintains a portfolio of marketable, primarily fixed income,
available-for-sale securities of various issuers, types and maturities. The
Company has not used derivative financial instruments in its investment
portfolio. The Company attempts to limit its exposure to interest rate and
credit risk by placing its investments with high-quality financial institutions
and has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
Investments in both fixed-rate and floating-rate interest earning instruments
carry a degree of interest rate risk. Fixed-rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates
decline. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates, or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The fair market value
of marketable securities held at December 31, 1999 was $261,950.
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 December 31, 1999 the
Company's liabilities relating to Japanese Yen were approximately $125,000.
16
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
(CONTINUED)
FOREIGN CURRENCY EXCHANGE (CONTINUED)
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 December 31, 1999, the Company had no open forward currency contracts.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 1999, we issued an aggregate of 609,756 shares of our common stock
to Katsumi Oneda, our President and Chief Executive Officer, and Lewis C. Pell,
our Vice-Chairman of the Board of Directors. The price per share was
approximately $.82, representing aggregate proceeds to us of $500,000. The
shares of common stock in both of these sales were issued without registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
an exemption from registration under Section 4(2) of the Securities Act.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vision-Sciences, Inc.
Date: February 11, 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)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
VISION-SCIENCES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999 MAR-31-2000 MAR-31-1999
<PERIOD-START> OCT-01-1999 OCT-01-1998 APR-01-1999 APR-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998
<CASH> 1,579,708 2,224,863<F3> 0 0
<SECURITIES> 261,950 970,608<F3> 0 0
<RECEIVABLES> 1,092,220 1,219,371<F3> 0 0
<ALLOWANCES> 133,000 130,000<F3> 0 0
<INVENTORY> 1,000,656 633,571<F3> 0 0
<CURRENT-ASSETS> 3,908,500 5,017,105<F3> 0 0
<PP&E> 3,406,265 3,244,587<F3> 0 0
<DEPRECIATION> 2,875,375 2,561,713<F3> 0 0
<TOTAL-ASSETS> 5,026,258 7,882,336<F3> 0 0
<CURRENT-LIABILITIES> 2,167,205 2,432,509<F3> 0 0
<BONDS> 0 0<F3> 0 0
0 0<F3> 0 0
0 0<F3> 0 0
<COMMON> 207,891 192,119<F3> 0 0
<OTHER-SE> 2,651,162 5,257,708<F3> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 5,026,258 7,882,336<F3> 0 0
<SALES> 1,861,488 1,942,554 5,218,053 5,784,350
<TOTAL-REVENUES> 0 0 0 0
<CGS> 1,262,256 1,652,325 3,933,811 4,763,085
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 1,868,135<F1> 724,657 5,529,621<F2> 2,170,631
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (1,268,903) (434,428) (4,245,379) (1,149,366)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,268,903) (434,428) (4,245,379) (1,149,366)
<EPS-BASIC> (.06) (.02) (.22) (.06)
<EPS-DILUTED> (.06) (.02) (.22) (.06)
<FN>
<F1>Includes $1,055,400 of equity in losses of 3DV
<F2>Includes $3,077,400 of equity in losses of 3DV
<F3>Amounts are as of March 31, 1999 (Audited)
</FN>
</TABLE>
