Cogentix Medical 10-Q 2001 Q3 Quarterly report

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, 2001

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  ý   No  o

                Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2001.

Common Stock, par value of $.01	27,105,355
(Title of Class)	(Number of Shares)

VISION-SCIENCES, INC.

TABLE OF CONTENTS

Part I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statement of Stockholders' Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Part II.	Other Information
	Item 4	Submission of Matters to a Vote of Stockholders
	Signature

PART I - FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			March 31,
	2001			2001
				(audited)
ASSETS
Current Assets:
Cash and cash equivalents	$	3,301,700		$	2,568,724
Marketable securities	801,852			1,243,068
Accounts receivable, net of allowance for doubtful accounts of $84,000 and $98,000, respectively	930,055			1,148,092
Inventories	1,301,085			1,006,016
Prepaid expenses and deposits	84,288			66,339
Total current assets	6,418,980			6,032,239
Property and Equipment, at cost:
Machinery and equipment	3,083,563			2,984,511
Furniture and fixtures	208,934			208,934
Leasehold improvements	451,973			450,396
	3,744,470			3,643,841
Less-Accumulated depreciation and amortization	3,198,649			3,083,860
	545,821			559,981
Equity investment in 3DV Systems, Ltd. (Note 3)	-			500,000
Other assets, net of accumulated amortization of $32,000 and $28,000, respectively	99,271			102,441
Total assets	$	7,064,072		$	7,194,661
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Acceptances payable to a bank	$	52,205		$	38,713
Current portion of note payable	51,244			52,931
Accounts payable	441,728			287,458
Accrued expenses	1,079,154			1,377,455
Total current liabilities	1,624,331			1,756,557
Note payable, net of current portion	-			23,989
Potential obligations to non-qualified option holders	224,938			188,515
Stockholders' Equity:
Common stock, $.01 par value—
Authorized—50,000,000 shares
Issued and outstanding—27,105,355 shares at
September 30, 2001 and 26,520,831 shares at March 31, 2001.	271,052			265,207
Additional paid-in capital	58,386,502			57,601,457
Accumulated deficit	(53,442,751		)	(52,641,064		)
Total stockholders' equity	5,214,803			5,225,600
Total liabilities and stockholders' equity	$	7,064,072		$	7,194,661

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2001			2000			2001			2000
Net sales	$	1,720,279		$	1,706,969		$	3,452,159		$	3,286,625
Cost of sales	1,059,524			1,110,905			2,204,516			2,273,641
Gross profit	660,755			596,064			1,247,643			1,012,984
Selling, general and administrative expenses	695,422			689,613			1,340,238			1,499,582
Research and development expenses(1)	29,760			76,273			62,900			148,250
Stock-based compensation	(102,231		)	99,203			(102,231		)	246,067
Income (loss) from operations	37,804			(269,025		)	(53,264		)	(880,915		)
Interest income	35,182			20,069			79,111			42,744
Interest expense	(1,799		)	(1,050		)	(3,981		)	(1,050		)
Equity in losses of 3DV Systems Ltd	-			-			(500,000		)	(222,553		)
Other income	1,972			1,421			3,616			1,643
Net income (loss) before cumulative effect of change in accounting principle	73,159			(248,585		)	(474,518		)	(1,060,131		)
Cumulative effect of change in accounting principle (Note 2)	-			-			327,169			-
Net income (loss) after cumulative effect of change in accounting principle	$	73,159		$	(248,585	)	$	(801,687	)	$	(1,060,131	)
Basic and diluted net income (loss) per common share	$	0.00		$	(0.01	)	$	(0.03	)	$	(0.05	)
Shares used in computing basic and diluted net income (loss) per common share	27,105,355			20,933,413			26,872,272			20,930,061

(1)   Excludes non-cash stock-based compensation, as follows:

Research and development expenses (1) $ (102,231 ) $ 99,203 $ (102,231 ) $ 246,067

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

	Common Stock
	Number of Shares	$.01 Par Value		Additional Paid-in-Capital		Accumulated Deficit			Total Stockholders’ Equity			Total Comprehensive Loss
Balance, March 31, 2001 (audited)	26,520,831	$	265,207	$	57,601,457	$	(52,641,064	)	$	5,225,600
Reclass of potential obligations to non-qualified option holders	-	-		188,515		-			188,515
Exercise of stock options	2,000	20		2,355		-			2,375
Sale of common stock, net	582,524	5,825		594,175		-			600,000
Net loss	-	-		-		(801,687		)	(801,687		)	$	(801,687	)
Total comprehensive loss												$	(801,687	)
Balance September 30, 2001	27,105,355	$	271,052	$	58,386,502	$	(53,442,751	)	$	5,214,803

See accompanying notes to consolidated financial statements.

VISION-SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended			Six Months Ended
	September 30, 2001			September 30, 2000
Cash flows from operating activities:
Net loss	$	(801,687	)	$	(1,060,131	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization	117,959			132,046
Equity in losses of 3DV Systems, Ltd.	500,000			222,553
Loss on disposal of property and equipment	-			2,773
Stock compensation to non-employees	224,938			298,207
Changes in assets and liabilities:
Accounts receivable	218,037			226,668
Inventories	(295,069		)	43,384
Prepaid expenses and deposits	(17,949		)	(233,994		)
Accounts payable	154,270			26,100
Accrued expenses	(298,301		)	(137,071		)
Net cash used for operating activities	(197,802		)	(479,465		)
Cash flows provided by (used for) investing activities
Decrease in marketable securities	441,216			-
Purchase of property and equipment, net	(100,629		)	(32,294		)
Net cash provided by (used for) investing activities	340,587			(32,294		)
Cash flows provided by (used for) financing activities:
Foreign exchange losses	-			(1,062		)
Proceeds from note payable to stockholders	-			150,000
Payments on note payable for leasehold improvements	(25,676		)	(3,893		)
Proceeds from acceptances payable to a bank	13,492			19,737
Proceeds from the sale of common stock, net	600,000			-
Exercise of stock options	2,375			323
Net cash provided by financing activities	590,191			165,105
Net increase (decrease) in cash and cash equivalents	732,976			(346,654		)
Cash and cash equivalents, beginning of period	2,568,724			1,581,381
Cash and cash equivalents, end of period	$	3,301,700		$	1,234,727
Supplemental Disclosure of Non-Cash Investing Activities:
Leasehold improvements acquired in exchange for note payable	$	-		$	105,000
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	3,981		$	1,050

See accompanying notes to consolidated financial statements.

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 market value, which approximates amortized cost. Cash equivalents are short-term, highly liquid investments with original maturities of less than three months.
		c.	Marketable Securities: Marketable securities are carried at market value, which approximates amortized cost.  The Company has classified its investments in marketable securities as available-for-sale securities.  At September 30, 2001, the Company’s marketable securities consisted of commercial paper with a maturity of 177 days.
		d.	Inventories: Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and consist of the following:

	September 30,		March 31,
	2001		2001
			(audited)
Raw materials	$	366,654	$	118,194
Work-in-process	204,539		177,804
Finished goods	729,892		710,018
	$	1,301,085	$	1,006,016
Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead.

e. 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:

	Estimated
Asset Classification	Useful Life
Machinery and Equipment	3-5 Years
Furniture and Fixtures	5 Years

	Leasehold improvements are amortized over the shorter of their estimated useful lives or the lives of the leases.
f.	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 outstanding stock options have not been considered, as their effect would be antidilutive.
g.	Revenue Recognition: The Company recognizes revenue upon product shipment.
h.	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.
i.	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.

j.	Accounting for Derivatives: In September 2000, the Emerging Issues Task Force issued EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, which requires freestanding contracts that are settled in a company’s own stock, including common stock options and warrants, to be designated as an equity instrument, an asset or a liability.  Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations.  A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required.  In accordance with EITF 00-19, the Company has determined that outstanding options as of September 30, 2001 to purchase 1,335,747 shares of the Company’s common stock should be designated as a liability.
	Under the transition rules of EITF 00-19, effective June 30, 2001, the Company recorded these options as a liability at fair value with the required adjustment included as a cumulative adjustment in its results of operations for the three months ended June 30, 2001.  Pursuant to EITF 00-19, as of June 30, 2001, the Company recorded an option liability totaling approximately $327,000, which was included under “Potential obligations to non-qualified option holders” in the Company’s balance sheet.  For the three months ended September 30, 2001, the fair value of these outstanding options declined to approximately $225,000.  Accordingly, the Company recorded a credit in its results of operations of approximately $102,000 for the three months ended September 30, 2001.
k.	Recent Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 requires all entities to recognize the fair value of liabilities for an asset retirement in the period in which it is incurred if reasonable estimates of fair value can be made.  This statement is effective for all financial statements issued for fiscal years beginning after June 15, 2002.
	In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  This statement applies to the accounting for long-lived assets, including reporting the effects of the disposal of a segment of a business.  This statement is effective for all financial statements issued for fiscal years beginning after December 15, 2001.  Management does not expect that these statements will have a material impact on the Company's financial statements.

3.	Investments in Israel
	3DV Systems Ltd.
	The Company accounts for its investment in 3DV Systems Ltd. (“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 April and May 2000, 3DV executed a third round of financing with investors other than the Company.  In March 2001, 3DV executed a fourth round of financing with all its investors.  As part of this round, the Company invested $500,000 in Series A Convertible Subordinated Notes (the “Notes”) of 3DV.  The Notes are non-interest bearing, and are convertible into shares of 3DV at the higher of $22.63 per share or the price paid for common shares of 3DV in any subsequent financing that occurs on or before March 31, 2002.  As a result, the Company owned approximately 25% and 24%, respectively, of the outstanding shares of 3DV as of June 30, 2000 and 2001.
	In September 2001, 3DV executed a fifth round of financing with investors other than the Company, including two employee-directors of the Company.  The terms of this financing are substantially the same as the fourth round.  The amount being raised is $2,000,000, payable in two equal installments in September 2001 and December 2001.  Subsequent to the installment of September 2001, the Company holds approximately 24% of the outstanding shares of 3DV, and would hold approximately 18% of the shares of 3DV, if all employee options and Notes were converted to common shares.
	In the three months ended June 30, 2000, 3DV incurred losses of approximately $2,412,000.  The Company’s investment in 3DV totaled $222,553 at March 31, 2000, and accordingly, the Company recognized equity in losses of 3DV of the total value of that investment in the three months ended June 30, 2000.  The Company recognized no losses in the three-month periods ended September 30, 2000, December 31, 2000 and March 31, 2001.
	In the three months ended June 30, 2001, 3DV incurred losses of approximately $2,177,000.  The Company’s investment in 3DV totaled $500,000 at March 31, 2001, and accordingly, the Company recognized equity in losses of 3DV of the total value of that investment in the three months ended June 30, 2001. The Company recognized no losses in the three-month period ended September 30, 2001.

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, Vision-Sciences Ltd., the Company’s Israeli subsidiary, and the Egypt Project.
	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, 2001 was $0.  Data regarding management’s view of the Company’s segments are provided in the following tables.

Three months ended September 30,	Medical			Industrial			Corporate			Adjustments			Total
2001
Sales to external customers	$	884,186		$	836,093		$	-		$	-		$	1,720,279
Intersegment sales	-			144,283						(144,283		)	-
Operating income (loss)	(18,648		)	132,415			(75,963		)	-			37,804
Interest income (expense)	-			(1,799		)	35,182			-			33,383
Depreciation and amortization	52,691			8,436			-			-			61,127
Other significant non-cash items:
Expenditures for fixed assets	60,036			741			-			-			60,777
2000
Sales to external customers	$	814,250		$	892,719		$	-		$	-		$	1,706,969
Intersegment sales	-			89,604						(89,604		)	-
Operating income (loss)	(59,978		)	73,688			(282,735		)	-			(269,025		)
Interest income (expense)	-			(1,050		)	20,069			-			19,019
Depreciation and amortization	24,362			5,854			-			-			30,216
Other significant non-cash items:
Leasehold improvement acquired in exchange for note payable	-			105,000			-			-			105,000
Expenditures for fixed assets	4,617			30,033			-			-			34,650

Six months ended September 30,	Medical			Industrial			Corporate			Adjustments			Total
2001
Sales to external customers	$	1,613,167		$	1,838,992		$	-		$	-		$	3,452,159
Intersegment sales	-			258,380						(258,380		)	-
Operating income (loss)	(160,082		)	313,341			(206,523		)	-			(53,264		)
Interest income (expense)	-			(3,981		)	79,111			-			75,130
Depreciation and amortization	101,061			16,898			-			-			117,959
Other significant non-cash items:
Equity in losses of 3DV Systems	-			-			(500,000		)	-			(500,000		)
Cumulative effect of change inaccounting principle	-			-			(327,169		)	-			(327,169		)
Total assets	1,838,461			1,244,522			4,200,004			(218,915		)	7,064,072
Expenditures for fixed assets	99,888			741			-			-			100,629
2000
Sales to external customers	$	1,686,769		$	1,599,856		$	-		$	-		$	3,286,625
Intersegment sales	-			258,328						(258,328		)	-
Operating income (loss)	(263,045		)	(23,815		)	(594,055		)	-			(880,915		)
Interest income (expense)	-			(1,050		)	42,744			-			41,694
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		)
Leasehold improvement acquired in exchange for note payable	-			105,000			-			-			105,000
Total assets	2,346,008			979,153			1,573,882			(593,903		)	4,305,140
Expenditures for fixed assets	8,744			37,945			(14,395		)	-			32,294

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, 2001 (“Q2 02”) were $1,720,279, an increase of $13,310, or 1%, compared to the three-month period ended September 30, 2000 (“Q2 01”).  During this period, sales of medical products increased by $69,936, or 9%, and sales of industrial products decreased by $56,626, or 6%.

The increase in medical sales was due primarily to higher demand for the Company’s endoscopes and EndoSheathsÒ for the Ear-Nose-Throat (“ENT”) market of approximately $112,000 and $23,000, respectively, and higher demand for EndoSheaths and endoscopes for the pulmonary market of approximately $24,000.  This higher demand was offset partially by lower demand for the Company’s gastrointestinal (“GI”) products of approximately $93,000.  In addition, sales of accessories increased by approximately $4,000.

The number of ENT EndoSheath units shipped in Q2 02 was greater by 24% than in Q2 01.  However, lower average selling prices per unit resulted in a sales increase of 5%.  The lower average selling price was due to two factors, lower prices instituted by the Company in June 2001 to make the ENT EndoSheath more affordable to customers and to a higher percentage of units shipped to international distributors.  Shipments to international distributors have a lower average selling price than do shipments to domestic end users.  The Company shipped approximately 62,400 ENT EndoSheaths in Q2 02, an increase of 11,900, or 24%, compared to shipments of approximately 50,500 in Q2 01.  Shipments to international distributors comprised approximately 54% of total ENT EndoSheath unit shipments in Q2 02, compared to approximately 52% in Q2 01.  International demand for the Company’s ENT EndoSheath continues to be high, especially in Europe and Australia.  During Q2 02, the Company acquired approximately 34 new domestic ENT customers, and unit shipments to all domestic customers increased by 18% in Q2 02, compared to Q2 01, primarily due to higher demand generated by the lower prices.

The decrease in sales of GI endoscopes was due primarily to lower demand in Q2 02, compared to Q2 01.  The Company believes the continued lack of reimbursement for the GI EndoSheath by insurance companies to health care providers is the primary cause for the lower demand.

The lower sales of industrial products in Q2 02, compared to Q2 01, were due primarily to lower demand during this period for the Company’s products by the defense and aircraft maintenance markets.

Net sales for the six months ended September 30, 2001 (“2001”) increased by $165,534, or 5% compared to the six-month period ended September 30, 2000 (“2000”).  During this period, sales of the medical segment decreased by $73,602, or 4%, and sales of the industrial segment increased by $239,136, or 15%.

The decrease in medical sales was due to lower demand for the Company’s endoscopes and EndoSheaths for the GI market of approximately $251,000.  This was partially offset by higher demand for the Company's endoscopes and EndoSheaths for the ENT market of approximately $135,000, for the pulmonary market of approximately $24,000, and accessories of approximately $19,000.

The number of ENT EndoSheath units shipped in 2001 was greater by 19% than in 2000.  However, lower average selling prices per unit resulted in a sales increase of 2%.  The lower average selling price was due to two factors, lower prices instituted by the Company in June 2001 to make the ENT EndoSheath more affordable to customers and an increase in the percentage of units shipped to international distributors. Shipments to international distributors have a lower average selling price than do shipments to domestic end users.  The Company shipped approximately 113,900 ENT EndoSheaths in 2001, an increase of 18,300, or 19%, compared to shipments of approximately 95,600 in 2000.  Shipments to international distributors comprised approximately 54% of total ENT EndoSheath unit shipments in 2001, compared to approximately 47% in 2000.  International demand for the Company’s ENT EndoSheath continues to be high, especially in Europe and Australia.  During 2001, the Company acquired approximately 73 new domestic ENT customers, and unit shipments to all domestic customers increased in the period by approximately 2%, compared to 2000, due to higher demand generated by the lower prices.  The Company expects the lower unit prices will encourage more usage of the ENT EndoSheath, both in domestic and international markets.  However, there can be no assurance that the higher number of units shipped will more than offset the lower unit selling prices.

Gross profit in Q2 02 increased to $660,755, or 38% of net sales, compared to $596,064, or 35% of net sales in Q2 01.  Gross profit decreased slightly in the medical segment, due primarily to the lower prices for ENT EndoSheaths, lower volume of products shipped to the GI market and higher costs for utilities.  Gross profit increased in the industrial segment, due primarily to higher sales volume, a favorable product mix and lower facility costs.

Gross profit in 2001 increased to $1,247,643, or 36% of net sales, compared to $1,012,984, or 31% of net sales in 2000.  Gross profit decreased by approximately 12% in the medical segment, due primarily to the lower prices for ENT EndoSheaths, lower volume of products shipped to the GI market and a less favorable product mix resulting in less efficient manufacturing operations.  Gross profit increased in the industrial segment, due primarily to higher sales volume, a favorable product mix resulting in higher manufacturing efficiencies and lower facility costs.

Selling, general and administrative (“SG&A”) expenses in Q2 02 increased by $5,809, or 1% compared to Q2 01.  SG&A expenses amounted to 40% of net sales in Q2 02 and in Q2 01.  The increase in these categories was primarily attributable to higher expenses in the industrial and corporate segments of $8,000 and $22,000, respectively, offset partially by lower expenses in the medical segment of $24,000.  The industrial segment incurred higher expenses for commissions, due to the mix of sales, and higher expenses for product promotion.  These were partially offset by lower facility costs.  The corporate segment incurred higher payroll costs and higher costs for consulting fees and patent applications related to the CMOS innovations.  The medical segment had lower costs for payroll, which will change after Q2 02, as the Company hired a new VP of Sales and Marketing in October 2001.

SG&A expenses decreased by $159,344 in 2001, compared to 2000.  SG&A expenses amounted to 39% of sales in 2001, compared to 46% of sales in 2000.  SG&A expenses decreased in the medical and industrial segments by $132,000 and $34,000, respectively, while increasing by $7,000 in the corporate segment.  The primary causes for the decrease in the medical segment were lower costs for payroll and commissions.  In the industrial segment the decrease in SG&A expenses was due primarily to lower facility costs, resulting from their move to more efficient office space in September 2000.  The corporate segment incurred higher expenses for payrolls and consulting fees related to CMOS patents, while reducing costs for investor relations and domestic legal fees.

Research and development (“R&D”) expenses decreased by $46,513 in Q2 02 compared to Q2 01, and were 2% of sales in Q2 02, compared to 4% of sales in Q2 01.  The lower expenses for R&D were due primarily to lower spending for payroll costs by the medical segment, and a favorable comparison to Q2 01 which included a charge of approximately $26,000 for the Egypt Project. The lower costs for payroll in the medical segment will change after Q2 02, as the Company hired a new Project Engineering Manager in October 2001.

R&D expenses decreased by $85,350 for 2001, compared to 2000, and were 2% of sales in 2001, compared to 5% in 2000.  The primary causes for this decrease were lower costs for payrolls in the medical segment of approximately $39,000 in 2001, compared to 2000, a charge of $26,000 related to the Egypt Project in 2000 which did not recur in 2001 and a reduction of approximately $20,000 for costs related to the company’s subsidiary in Israel.

Stock-based compensation costs declined by $201,434 in Q2 02, compared to Q2 01.  This charge is computed using the Black-Scholes method, which uses stock price volatility, the closing price of the Company’s common stock as traded on the Nasdaq SmallCap and other factors to determine the compensation amount of non-qualified options.  For Q2 02, the change in the Company’s closing stock price was the largest cause for the reduction in this cost.

The Company did not record equity in losses of 3DV Systems in Q2 02 nor in Q2 01.  For 2001 the Company recorded equity in the losses of 3DV of $500,000, compare to $222,553 in 2000.  See Note 3 above.

The net loss per share for the three months ended September 30, 2001 was $.00, compared to a net loss of $.01 per share for the same period last year.  For 2001, the loss per share was $.03, compared to $.05 for 2000.

Liquidity and Capital Resources

As of September 30, 2001, the Company had $4.1 million in cash, cash equivalents and marketable securities, and working capital of  $4.8 million.  The Company also had a cash collateralized demand line of credit with a bank for borrowings of up to $250,000.  At September 30, 2001, 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 increased by $733,000 in the six months ended September 30, 2001, due primarily to cash provided by financing activities of $590,000, and cash provided by investing of $341,000.  These were partially offset by cash used in operations of $198,000.

In the fiscal year ended March 31, 2001, the Company entered into a contract for approximately $203,000, subsequently increased by approximately $26,000, for the design and manufacture of new equipment for manufacturing its ENT EndoSheaths, and has made advance payments to the supplier of $132,000 as of September 30, 2001.  The Company expects to make other progress payments for the new equipment in the second half of the fiscal year ending March 31, 2002 (“FY 02”) amounting to approximately $96,000.  The Company expects total spending for property and equipment will not exceed $350,000 for all of FY 02.  The Company expects the new equipment will be in place during the second half of FY 02.  In addition, as reported in the Company’s Form 10-K for the fiscal year ended March 31, 2001, the Company will continue to evaluate its investment in 3DV, and may make further investments if it believes it is in the best interests of the Company’s shareholders.

The Company has incurred losses since its inception, and losses are expected to continue at least during FY 02.  The Company has funded the losses principally with the proceeds from public and private equity financings.  Although the Company does not anticipate the need for additional financing in FY 02, management has decided that new financing may be desirable.  However, there can be no assurance that additional funding will be available, or available on reasonable terms.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, in the normal course of business, is subject to the risks associated with fluctuations in interest rates and changes in foreign currency exchange rates.

Interest and Market Risk

The Company maintains a portfolio of marketable, primarily fixed income, available-for-sale securities of various issuers, types and maturities.  The Company has not used derivative financial instruments in its investment portfolio.  The Company attempts to limit its exposure to interest rate and credit risk by placing its investments with high-quality financial institutions and has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.

Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk.  Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates decline.  Due in part to these factors, the Company’s future investment income may fall short of expectations due to changes in interest rates, or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates.

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, 2001, the Company’s liabilities relating to Japanese Yen were approximately $68,000.

PART II - OTHER INFORMATION

Item 4: Submission of Matters to a Vote of Stockholders

The Company held the 2001 Annual General Meeting of Shareholders (the “Annual Meeting”) on August 16, 2001.  At the Annual Meeting, the following actions were taken:

1.	The stockholders re-elected Lewis C. Pell and John J. Wallace as Class I Directors, to serve for a three-year term.  Holders of 21,227,006 shares of Common Stock voted for and holders of 108,770 shares of Common Stock withheld voting for each of Mr. Pell and Mr. Wallace.  In addition to Mr. Pell and Mr. Wallace, Katsumi Oneda, Dr. Gerald B. Lichtenberger, Ph.D., and Fred E. Silverstein, M.D. continue to serve on the Board of Directors.
2.	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 16,457,416 shares of Common Stock voted for the proposal, holders of 197,694 shares of Common Stock voted against the proposal and holders of 4,633 shares of Common Stock abstained from voting on the proposal.
3.	The stockholders ratified the appointment of Arthur Andersen LLP as the Company’s independent auditor for the current fiscal year.  Holders of 21,314,396 shares of Common Stock voted for ratification, holders of 16,780 shares of Common Stock voted against ratification and holders of 4,600 shares of Common Stock abstained from ratification.

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	None.
(b)	Reports on Form 8-K
	None.

SIGNATURES

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 2, 2001	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)