-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ER9edfuqW+Cn71wIPFo3N9u5BmPk+afcr7R/Hh3McmXbvTrYdhDykxr8MmrKGFKH ux64gHara4j1BQk7q+8oFQ== 0000950131-97-005366.txt : 19970912 0000950131-97-005366.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950131-97-005366 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970902 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIO VASCULAR INC CENTRAL INDEX KEY: 0000780127 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 411526554 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13907 FILM NUMBER: 97674184 BUSINESS ADDRESS: STREET 1: 2575 UNIVERSITY AVENUE CITY: ST PAUL STATE: MN ZIP: 55114-1024 BUSINESS PHONE: 6126313529 10-Q 1 FORM 10-Q ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________________________________________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ____ Commission File Number 0-13907 ___________________________________________________ BIO-VASCULAR, INC. (Exact name of Registrant as specified in its charter) State of Incorporation: Minnesota I.R.S. Employer Identification No.: 41-1526554 Principal Executive Offices: 2575 University Avenue St. Paul, Minnesota 55114 Telephone Number: (612) 603-3700 ___________________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ ___________________________________________________ On August 22, 1997, there were 9,543,200 shares of the Registrant's common stock, par value $.01 per share, outstanding.
ITEM 1. FINANCIAL STATEMENTS BIO-VASCULAR, INC. CONDENSED BALANCE SHEETS AS OF JULY 31, 1997 AND OCTOBER 31, 1996 - -------------------------------------------------------------------------------------------------------------- ASSETS July 31, October 31, 1997 1996 -------------- ------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents................................ $ 4,206,698 $ 5,736,650 Marketable securities, short-term........................ 7,728,521 13,761,050 Accounts receivable, net................................. 1,770,689 1,465,809 Other receivables........................................ 470,273 632,386 Inventories.............................................. 1,577,465 1,972,728 Prepaid expenses......................................... 347,067 284,811 Deferred income taxes.................................... 162,050 914,300 ----------- ----------- Total current assets..................................... 16,262,763 24,767,734 ----------- ----------- Equipment and leasehold improvements, net................... 1,635,937 1,370,256 Intangible assets, net...................................... 1,058,146 1,213,600 Marketable securities, long-term............................ 6,239,649 10,173,086 Deferred income taxes....................................... 191,843 182,200 Net assets of discontinued operations....................... -- 174,403 ----------- ----------- TOTAL ASSETS............................................. $25,388,338 $37,881,279 =========== ===========
(The accompanying notes are an integral part of the interim unaudited financial statements.) 2
BIO-VASCULAR, INC. CONDENSED BALANCE SHEETS AS OF JULY 31, 1997 AND OCTOBER 31, 1996 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY July 31, October 31, 1997 1996 -------------- -------------- (Unaudited) CURRENT LIABILITIES: Accounts payable.......................................... $ 456,417 $ 306,376 Accrued expenses.......................................... 493,788 554,368 Accrued loss on disposal of discontinued operations....... 26,967 1,800,000 ----------- ----------- Total current liabilities................................. 977,172 2,660,744 COMMITMENTS AND CONTINGENCY (NOTE 5) ----------- ----------- SHAREHOLDERS' EQUITY: Common stock: authorized 20,000,000 shares of $.01 par value issued and outstanding, 9,543,200 at July 31, 1997 and 9,484,898 at October 31, 1996........... 95,432 94,849 Additional paid-in capital................................ 29,593,140 39,500,239 Accumulated deficit....................................... (5,028,063) (3,838,537) Unrealized marketable securities holding loss............. (3,289) (51,107) Unearned compensation..................................... (246,054) (484,909) ----------- ----------- Total shareholders' equity................................... 24,411,166 35,220,535 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................................... $25,388,338 $37,881,279 =========== ===========
(The accompanying notes are an integral part of the interim unaudited financial statements.) 3 BIO-VASCULAR, INC. CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1997 AND 1996 - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended July 31, July 31, (unaudited) (unaudited) 1997 1996 1997 1996 ---------- ---------- ----------- ---------- Net Revenue..................................... $2,408,686 $2,527,896 $ 7,215,165 $7,858,317 Cost of Revenue................................. 952,370 1,057,944 2,974,365 2,576,020 ---------- ---------- ----------- ---------- Gross margin................................. 1,456,316 1,469,952 4,240,800 5,282,297 Operating Expenses: Selling, general, and administrative......... 1,628,820 1,294,859 4,141,616 4,023,957 Research and development..................... 325,155 237,998 788,042 654,472 ---------- ---------- ----------- ---------- Income (loss) from operations................... (497,659) (62,905) (688,858) 603,868 Other income, net............................... 305,961 255,663 882,032 820,541 ---------- ---------- ----------- ---------- Income (loss) from continuing operations before income taxes............................ (191,698) 192,758 193,174 1,424,409 Provision for income taxes...................... 299,700 81,500 462,700 526,500 ---------- ---------- ----------- ---------- Income (loss) from continuing operations........ (491,398) 111,258 (269,526) 897,909 Loss from discontinued operations, net of income taxes................................... -- 287,926 920,000 893,540 ---------- ---------- ----------- ---------- Net income (loss)............................... $ (491,398) $ (176,668) $(1,189,526) $ 4,369 ========== ========== =========== ========== Per share amounts Continuing operations........................ (.05) .01 (.03) .09 Discontinued operations...................... -- (.03) (.10) (.09) ---------- ---------- ----------- ---------- Net income (loss)............................ $ (.05) $ (.02) $ (.13) $ - ========== ========== =========== ========== Weighted average shares outstanding............. 9,545,000 9,440,000 9,512,000 9,870,000 ========== ========== =========== ==========
(The accompanying notes are an integral part of the interim unaudited financial statements.) 4 BIO-VASCULAR, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ----------- ------------ NET CASH PROVIDED BY CONTINUING OPERATIONS.................... $ 51,615 $ 11,229 NET CASH USED IN DISCONTINUED OPERATIONS...................... - (694,237) ----------- ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......... 51,615 (683,008) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment............................... 10,030 - Purchases of equipment and improvements....................... (544,492) (282,203) Additions to intangibles...................................... (32,845) (553,742) Investments in marketable securities.......................... (7,000,000) (21,000,000) Maturities of marketable securities........................... 9,000,000 13,795,921 Cash investment in discontinued subsidiary.................... (3,733,489) - Discontinued operations, net.................................. 449,033 (267,783) ----------- ------------ Net cash used in investing activities......................... (1,851,763) (8,307,807) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Costs related to sale of stock................................ - (87,326) Proceeds related to the exercise of stock options, net of restricted stock repurchased.................................. 270,196 653,712 ----------- ------------ Net cash provided by financing activities..................... 270,196 566,386 ----------- ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (1,529,952) (8,424,429) ----------- ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 5,736,650 15,424,969 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 4,206,698 $ 7,000,540 =========== ============
(The accompanying notes are an integral part of the interim unaudited financial statements.) 5 BIO-VASCULAR, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (1) BASIS OF PRESENTATION: The accompanying unaudited financial statements of Bio-Vascular ("Bio-Vascular" or "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary, including items of a normal recurring nature, for a fair presentation have been included. Operating results for the nine months ended July 31, 1997 are not necessarily indicative of the results that may be expected for the year ending October 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report to Shareholders and in Form 10-K for the year ended October 31, 1996. (2) DISCONTINUED OPERATIONS: On May 12, 1997, the Company completed the spin-off distribution of all of the shares of Vital Images, Inc. (Vital Images) to shareholders of Bio-Vascular, with Vital Images thereafter operating as an independent public company. All Bio-Vascular shareholders of record received one share of Vital Images common stock for each two shares of Bio-Vascular stock held, with cash issued in lieu of fractional shares. The Company attempted to structure the transaction as tax- free, but since no revenue ruling was sought, no assurance can be made about the final tax treatment of the transaction. At the date of distribution, Bio-Vascular made a final contribution of cash to Vital Images of $1,845,000 to bring Vital Images' cash and investment balances to $10,000,000, as required by the terms of the Distribution Agreement between the companies. Bio-Vascular's total contribution to Vital Images in conjunction with the distribution was $11,845,000. The Company recorded the distribution of Vital Images common stock to its shareholders as of March 19, 1997, the date the Board of Directors of the Company gave final approval for the transaction. The distribution was recorded by reducing shareholders' equity by $10,183,000, which represents the $10,000,000 cash and investment balance, plus the carrying value of Vital Images' net assets. The accompanying unaudited financial statements of the Company as of July 31, 1997 reflect all of these transactions. The Company's financial statements and notes report Vital Images as discontinued operations. Prior years' financial statements and notes have been restated accordingly. Net revenue of discontinued operations for the three and nine months ended July 31, 1996 was $194,000 and $629,000, respectively. Because the completion of the spin-off extended six weeks beyond the estimated date, the Company reported an additional loss on discontinued operations of $920,000 in the second quarter. This amount relates entirely to Vital Images' net losses and spin-off related costs that exceeded those estimated and accrued on October 31, 1996, the end of the previous fiscal year. (3) INCOME TAXES: When the Company finalized its accounting for the spin-off of Vital Images in May 1997, the Company 6 BIO-VASCULAR, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED - -------------------------------------------------------------------------------- expected to utilize a significant portion of Vital Images' net operating loss carry forwards against the Company's fiscal 1997 taxable income. As a result of events occurring during the third quarter, the Company determined that the expected tax benefit will not be realized. Thus, the Company wrote-off the associated tax asset and recorded a net income tax expense of $299,700. The deferred tax asset of $353,893 at July 31, 1997, is principally related to research and experimental tax credits, which expire between 2009 and 2012. (4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
July 31, October 31, 1997 1996 ---------- ------------ Accounts Receivable............................ $1,796,789 $1,487,209 Allowance for doubtful accounts................ (26,100) (21,400) ---------- ---------- $1,770,689 $1,465,809 ========== ========== Inventories: Raw materials and supplies..................... $ 539,163 $ 511,683 Work-in-process................................ 466,968 544,278 Finished goods................................. 571,334 916,767 ---------- ---------- $1,577,465 $1,972,728 ========== ==========
Condensed Statements of Cash Flows: During the nine months ended July 31, 1997, the Company contributed approximately $8,000,000 of marketable securities to Vital Images, along with cash and cash equivalents of approximately $3,733,000 and related accrued interest receivable. (5) CONTINGENCY: In late 1996, the Company received notice of a suit brought against it in Japan by a former Japanese distributor, claiming wrongful termination and economic damage of $500,000. The Company believes the claim to be completely without merit and intends to pursue this matter vigorously. 7 BIO-VASCULAR, INC. NOTES TO FINANCIAL STATEMENTS--CONTINUED - -------------------------------------------------------------------------------- (6) MAJOR CUSTOMERS:
Percentage of Significant Gross Percentage of Accounts Customer Sales Gross Sales Receivable -------- ----- ----------- ---------- Nine months ended July 31, 1997....... Futuretech 1,476,722 20% 11% Life Systems 1,032,235 14% 12% CardioMedical 879,437 12% 15% Pacific West 502,951 7% 12% Nine months ended July 31, 1996....... Futuretech 1,471,780 18% 16% Life Systems 1,225,894 15% 15% CardioMedical 956,964 12% 15%
Net export sales amounted to 23%, and 21% for the nine month period ended July 31, 1997 and 1996, respectively. Substantially all of the Company's export sales are negotiated, invoiced and paid in U.S. dollars. Gross export sales by geographic area are summarized as follows:
Nine Months Ended July 31, 1997 1996 --------- --------- Europe and Middle East.................................. 1,044,776 1,097,381 Asia and Pacific Region................................. 504,869 485,563 Canada.................................................. 165,186 147,823 Latin America and Others................................ 9,825 48,408
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Although net revenue for the quarter was down 5% over the same quarter in 1996 due largely to a decline in revenue from sales of Peri-Strips, the Company continues to see impressive revenue growth from its core Tissue Guard product line, excluding Peri-Strips. The Tissue Guard product line was up 46% over the third quarter of 1996 and up 17% over the second quarter of 1997. All products in the Tissue Guard product line, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard had significant sales increases in the quarter. Domestic revenue from Peri-Strips continues to be significantly affected by the Health Care Financing Administration's ("HCFA") non-coverage decision in January 1996 for lung volume reduction ("LVR") surgery. Revenue from Peri- Strips was down 42% from the third quarter of 1996 and down 24% from the second quarter of 1997. The Company believes that some hospitals in the U.S. are no longer promoting LVR cases. However, the Company is encouraged that surgeons and other medical professionals continue to seek training on the LVR surgical procedure. Peri-Strips revenue was also down in the quarter from the Company's original expectations due to a delay in the start date for a study of LVR surgery sponsored jointly by HCFA and the National Institute of Health. The start date is subject to the completion of organizational and procedural activities. The Company had originally received indications that the study would commence in June 1997. The Company accordingly anticipated demand for the Peri-Strip product associated with the HCFA study and corresponding Peri- Strips revenue in the second half of fiscal 1997. The Company now believes that the earliest surgeries under the study will begin is January 1998. Peri-Strips Dry, an advanced version of Peri-Strips was launched in mid-July 1997. The Company believes the Peri-Strips Dry design provides significant advantages for thorascopic surgical procedures over the original Peri-Strips "sleeve" design. Peri-Strips Dry eliminates the need to extract the sutured sleeve backing that was part of the original design. A specially formulated PSD Gel enables the Peri-Strips Dry strip to adhere to the surgical stapler. Thorascopic procedures are currently estimated to comprise 75% of the total LVR surgeries performed in Europe. The majority of surgeons in Europe have performed LVR surgery without the benefit of a staple-line buttress. The Company was successful in convincing a leading European thoracic surgeon to evaluate Peri-Strips Dry. This surgeon is now the lead investigator for the Company's marketing clinical trials currently underway at three European sites. The Company expects European revenue growth from Peri-Strips Dry and Peri-Strips will be gradual as reimbursement is obtained on a country-by- country basis. Currently, European patients pay directly for the product. In the U.S., Peri-Strips Dry is expected to replace the original Peri-Strips sleeve configuration for thorascopic procedures. The Spin-off of Vital Images On May 12, 1997, the Company distributed all of the shares of Vital Images to shareholders of Bio-Vascular and on that date, Vital Images began operating as an independent public company. Vital Images is currently traded on the OTC Bulletin Board under the symbol VTAL. All Bio-Vascular shareholders of record received one share of Vital Images common stock for each two shares of Bio- Vascular stock held. Both organizations should benefit from a tighter focus on their respective markets, be able to invest in 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- research and development at levels appropriate to their respective stages of development and be able to evolve unique organizational and marketing structures to better serve their substantially different markets. As a result of the Company's spin-off of Vital Images, the Company's financial statements and notes thereto report the business of Vital Images as discontinued operations. Medicare Non-Coverage Decision Effective January 1, 1996, HCFA made a non-coverage decision with respect to LVR surgery, a surgical treatment for late-stage emphysema. This decision significantly impacted the Company's revenue from sales of Peri-Strips. At the time that this non-coverage decision was put into effect, the Company estimates that approximately 70% of the patients undergoing LVR surgery were Medicare patients. While the Company understands that several private insurance companies and managed care organizations continue to reimburse LVR surgery based on their own evaluation of the procedure and its outcomes, it is unknown whether these private payers will change their reimbursement practices in the future or if more private payers will begin to cover the procedure. The National Institute of Health (NIH), in collaboration with HCFA, has outlined and is in the process of organizing a prospective, randomized study of LVR surgery to determine whether it is safe and efficacious. The study, as it is currently designed, is limited to a small number of patients relative to the number of Medicare dependent patients who would be otherwise eligible for the procedure. Congress, responding to the concerns of their constituents and in light of a significant number of favorable peer-reviewed published medical articles bearing out the safety and efficacy of LVR, requested HCFA to present to Congress updated information on the LVR procedure by January 1997. HCFA requested an extension until April 1997 and as of the date of this report had not yet complied with Congress' request. Because HCFA and the NIH appear intent on proceeding with the study, no assumption can be made as to whether the efforts of Congress or the mounting evidence regarding the benefits of this procedure will cause them to alter the study. The Company, however, will continue to work for restoration of coverage of LVR surgery for Medicare dependent patients. Results of Continuing Operations Comparison of the Three Months Ended July 31, 1997 with the Three Months Ended July 31, 1996 Net revenue was $2,409,000 for the 1997 quarter compared to $2,528,000 for the 1996 quarter, primarily as a result of the decrease in revenue from sales of Peri-Strips. Peri-Strips revenue decreased $423,000, or 42% to $594,000 in the 1997 quarter from $1,017,000 in the 1996 quarter. Revenue from sales of other Tissue-Guard products, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri- Guard, increased $348,000, or 46% to $1,105,000 from $757,000. All Tissue Guard products showed significant increases. Biograft revenue decreased by $56,000, or 23%, comparing the 1997 and 1996 quarters, continuing a trend representative of the late stage of this product's life cycle. Revenue from sales of surgical productivity tools (Flo-Rester and the Bio-Vascular Probe) increased 3% to $518,000 from $505,000. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- The gross margin percentage was 60% in the 1997 quarter and 58% in the 1996 quarter. During fiscal 1996, the gross margin percentages declined through the quarters, primarily due to decreases in the production volume in response to decreases in expected demand for Peri-Strips as a result of the HCFA decision. The gross margin percentage was 62% by the fourth quarter of 1996 and was 57% in the first quarter of 1997. It is expected that the gross margin percentage will increase slightly during the fourth quarter of 1997 from its third quarter level due to increasing production volume. This forward-looking statement will be influenced primarily by the accuracy of the Company's current estimates of production volume for the fourth quarter of 1997, and would be impacted by significant increases or decreases in actual production volume as compared to the estimate, by material changes in the Company's product mix and by the accuracy of the Company's estimates of product costs. Selling, general and administrative expense increased $334,000, or 26% to $1,629,000 from $1,295,000. General and administrative expense increased $243,000, or 36%, The increase is primarily due to one time costs related to the resignation in the period of the Company's former president and CEO and increases in regulatory and other costs. Selling expense increased $91,000, or 15% primarily due to the Peri-Strips Dry market launch. Research and development ("R&D") expense increased $87,000, or 37% to $325,000 from $238,000 in the 1996 quarter. The Company has several projects under development including the Company's small diameter graft. R&D expense is expected to increase as these and other projects continue to progress. This forward-looking statement will be influenced primarily by the number of projects, the related R&D personnel requirements, the development path and success of each project, the expected costs, and the timing of these costs. R&D efforts have recently resulted in two new product opportunities. The Company filed a 510(k) application in May with the U.S. Food and Drug Administration (the "FDA") for CV Peri-Guard. The intended uses for CV Peri-Guard include intra-cardiac patching and vessel repair. The Company currently expects FDA clearance for CV Peri-Guard during the first quarter of 1998. This forward- looking statement is subject to the length of time required for FDA review of the Company's application, any FDA requests for further data regarding CV Peri- Guard, and the FDA's determination that CV Peri-Guard meets the criteria for 510(k) marketing clearance. CV Peri-Guard will be the newest addition to the Tissue Guard product line. The Company also intends to file a 510(k) application to obtain FDA clearance for a new ophthalmic indication of its Supple tissue before the end of calendar 1997. This product will be another extension of the Tissue Guard product line and will have indications for use in enucleation surgery. Enucleation removes a patient's damaged eye and supporting tissue and replaces it with an implant. The Company's tissue would be used in the procedure as an orbital implant wrap instead of using cadaver sclera to encase the orbital prosthesis. The Company estimates that 25,000 to 30,000 enucleation procedures are performed worldwide each year. The foregoing forward-looking information regarding the Company's intent to file for 510(k) marketing clearance for these applications will depend upon the Company's assessment of the development 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- and potential market opportunities for these products compared to the expected costs of applying for, and the likelihood of receiving, such clearance. Continuing operations had an operating loss in the 1997 quarter of $498,000 compared to an operating loss of $63,000 in the 1996 quarter. Other income, primarily interest income, was $306,000 and $256,000 in the 1997 and 1996 quarters, respectively. As a result, continuing operations had loss before income taxes in the 1997 quarter of $192,000 as compared to income before income taxes in the 1996 quarter of $193,000. The Company recorded a provision for income taxes of $300,000 for the 1997 quarter. The provision includes a write-off of an income tax asset. When the Company finalized its accounting for the spin-off of Vital Images in May 1997, the Company expected to utilize a significant portion of Vital Images' net operating loss carry forwards against the Company's anticipated fiscal 1997 taxable income. These net operating losses were generated by Vital Images prior to its spin-off and are only available to the Company in the 1997 fiscal year, reverting solely to Vital Images thereafter. Because the Company now expects fiscal 1997 taxable income to fall short of the Company's original expectations the tax asset had no further value to Bio-Vascular, and accordingly, was written-off in the quarter ended July 31, 1997. In the 1996 quarter, the Company allocated its provision for income taxes to continuing and discontinued operations based on their respective pretax income contribution and tax attributes. As a result, the amount of the provision allocated to continuing operations in the 1996 quarter was $81,500. The net loss was $491,000, or $.05 per share for the 1997 quarter. The 1996 quarter had income from continuing operations of $111,000, or $.01 per share and a loss from discontinued operations of $288,000, or $.03 per share, resulting in a net loss for the 1996 quarter of $177,000, or $.02 per share. The 1997 quarter had no discontinued operations activity. Comparison of the Nine Months Ended July 31, 1997 with the Nine Months Ended July 31, 1996 Net revenue decreased $643,000, or 8% to $7,215,000 from $7,858,000, primarily as a result of the decrease in revenue from Peri-Strips. Peri-Strips revenue decreased $1,320,000, or 38% to $2,136,000 from $3,456,000. The decrease in revenue from Peri-Strips is primarily due to the Medicare LVR non-coverage decision which affects all of the 1997 period as compared to three quarters of the 1996 period. Revenue from sales of other Tissue-Guard products, Dura- Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased $692,000, or 32% to $2,852,000 from $2,160,000, primarily due to increases in revenue from the sales of Dura-Guard and Vascu-Guard, arising from market share gains. Biograft revenue decreased by $148,000, or 20%, comparing the first three fiscal quarters of 1997 and 1996, continuing a trend representative of the late stage of this product's life cycle. Revenue from sales of surgical productivity tools (Flo-Rester and the Bio- Vascular Probe) increased $133,000, or 9% to $1,622,000 from $1,489,000, with the majority of the increase in revenue from sales of 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- Flo-Rester. The Company believes that the growth in revenue from Flo-Rester is due primarily to its use in minimally invasive coronary bypass surgery, a procedure which is increasing. The gross margin percentage was 59% in 1997 and 67% in 1996. In fiscal 1996, the gross margin percentages declined through the quarters, primarily due to decreases in the production volume in response to decreases in expected demand for Peri-Strips as a result of the HCFA decision. The gross margin percentage was 62% by the fourth quarter of 1996, 57% in the first quarter of 1997, and 60% in the third quarter of 1997. It is expected that the gross margin percentage will continue to increase slightly during the last fiscal quarter of 1997 as production volume continues to increase. This forward-looking statement will be influenced primarily by the accuracy of the Company's current estimates of production volume for the fourth quarter of 1997, and would be impacted by significant increases or decreases in actual production volume as compared to the estimate, by material changes in the Company's product mix and by the accuracy of the Company's estimates of standard costs. Selling, general and administrative expense increased $118,000, or 29% to $4,142,000 from $4,024,000. General and administrative expense increased $135,000, or 6%, while selling expense decreased $18,000, or 1%. The relative low increase in expenses is due to the Company overall management of discretionary expenditures. Research and development ("R&D") expense increased $134,000, or 20% to $788,000 from $654,000 in 1996. The Company has several projects under development and R&D expense is expected to increase as these projects progress. This forward-looking statement will be influenced primarily by the number of projects, the related R&D personnel requirements, the development path of each project, the expected costs, and the timing of these costs. Primarily due to the decrease in revenue from Peri-Strips, compounded by lower gross margins earlier in the year, continuing operations had an operating loss in the first nine months of fiscal 1997 of $689,000 compared to operating income from continuing operations of $604,000 in the first nine months of fiscal 1996. Other income, primarily interest income, was $882,000 and $821,000 in 1997 and 1996, respectively. As a result, continuing operations had income before income taxes in 1997 and 1996 of $193,000 and $1,424,000, respectively. The Company's recorded provision for income taxes for the first nine months of 1997 is $463,000 and is based on the Company's estimate of its annual effective rate for fiscal 1997 and a write-off of an income tax asset in the third quarter as described above. In the first nine months of 1996, the Company allocated its provision for income taxes to continuing and discontinued operations based on their respective pretax income contribution and tax attributes. As a result, the amount of the provision allocated to continuing operations in the first nine months of 1996 was $526,500. Net loss from continuing operations was $270,000, or $.03 per share for 1997 as compared to net income of $898,000, or $.09 per share for 1996. The loss from discontinued operations for 1997 was $920,000, or $.10 per share, resulting in a net loss for 1997 of $1,190,000, or $.13 per share. The loss from discontinued 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- operations in 1996 was $894,000, or $.09 per share, resulting in net income for 1996 of $4,000, or $.00 per share. Liquidity and Capital Resources For the nine months ended July 31, 1997, operating activities provided $51,600 as compared to $149,000 (excluding $694,000 used by discontinued operations) of net cash provided by operating activities in the same period in 1996. Cash was provided by continuing operations, in the current nine month period, by non-cash expenses and decreases in inventories. These cash increases were partially offset by increases in accounts receivable and slight decreases in accrued expenses. The Company invested $544,000 in equipment and leasehold improvements primarily related to new manufacturing processes related to Peri-Strips Dry and the Bio-Vascular Probe. Financing activities provided $270,000 and represents stock option exercises, net of restricted stock repurchased and a tax benefit associated with the option exercises. Finally, the Company made a final investment in Vital Images, using $1,845,000 to bring Vital Images' cash and investment balances to $10,000,000 as required by the terms of the Distribution Agreement between the companies. At July 31, 1997, the Company has cash and investments totaling $18,200,000. The Company announced in August 1997 its intention to repurchase up to 500,000 shares of its common stock. Such purchases will be made in the open market from time-to-time as price opportunities arise. The Company believes its existing cash and investments will be sufficient to satisfy its cash requirements for the foreseeable future. New Accounting Standard In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share (EPS) was issued by the Financial Accounting Standards Board. This standard, which the Company must adopt effective with its first quarter of fiscal 1998, requires dual presentation of basic and diluted EPS on the face of the statement of operations. Net income per common share currently presented by the Company is comparable to the basic EPS required under SFAS 128. Diluted EPS for the Company would be calculated based on both common shares outstanding and consideration of the dilutive effects of common stock equivalents. The Company expects that earnings per share computed under the new standard will approximate earnings per share currently reported. Certain Important Factors This Form 10-Q contains certain forward-looking statements. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "estimate", or "continue" or comparable terminology are intended forward-looking statements. These statements by their 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED - -------------------------------------------------------------------------------- nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, including the availability of third party reimbursement, the extent to which the Company's products gain market acceptance, litigation regarding patent and other intellectual property rights, the introduction of competitive products by others, the progress of product development and clinical studies, and the receipt and timing of regulatory approvals, among others. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 15 ------------------------------------------------------------------------------ PART II. OTHER INFORMATION ------------------------------------------------------------------------------ ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in the exhibit index beginning on page 18. (b) Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended July 31, 1997. 16 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. BIO-VASCULAR, INC. September 2, 1997 /s/ M. Karen Gilles ------------------------------------ M. Karen Gilles President and Chief Executive Officer (Principal Financial Officer) 17 BIO-VASCULAR, INC. INDEX TO EXHIBITS - -------------------------------------------------------------------------------- 10.1 1990 Management Incentive Stock Option Adjustment Plan (filed herewith electronically). 10.2 1992 Stock Option Adjustment Plan (filed herewith electronically). 11.1 Computation of income (loss) per share (filed herewith electronically). 27.1 Financial Data Schedule for the three month period ended July 31, 1997 (filed herewith electronically). 27.2 Restated Financial Data Schedule for the three month period ended July 31, 1996 (filed herewith electronically). 18 EX-10.1 2 1990 MANAGEMENT INCENTIVE STOCK OPTION ADJUSTMENT PLAN Exhibit 10.1 BIO-VASCULAR, INC. 1990 MANAGEMENT INCENTIVE STOCK OPTION ADJUSTMENT PLAN 1. Background; Purpose of Plan. ----------------------------- a. In or about 1990, Vital Images, Incorporated, an Iowa corporation ("VII"), adopted the Vital Images, Incorporated 1990 Management Incentive Stock Option Plan (the "1990 Plan") for the purposes of (i) attracting and retaining the best available officers, directors and key employees for VII and (ii) providing additional incentive to the officers, directors and key employees of VII. b. In Section 1(k) of that certain Agreement and Plan of Merger by and between VII and Bio-Vascular, Inc., a Minnesota corporation ("the Company") dated December 31, 1993 (the "Merger Agreement"), the Company agreed to assume the rights and obligations of VII with respect to options issued under the 1990 Plan which were outstanding at the Effective Time, as defined in the Merger Agreement. Pursuant to the Company's assumption of VII's obligations under the 1990 Plan, each optionee under the 1990 Plan became entitled to purchase from the Company shares of the Company's Common Stock (a "Company Option"), in an amount determined under the provisions of the Merger Agreement, on the same terms and conditions as set forth in the 1990 Plan, except that shares of Company Common Stock were substituted for VII Common Stock. c. VII, the corporate name of which has been changed to Vital Images, Inc. ("Vital Images") has entered into that certain Distribution Agreement, dated as of May 2, 1997 (the "Distribution Agreement"), between Vital Images and the Company, pursuant to which the Company will distribute (the "Distribution") all of the outstanding shares of Vital Images's Common Stock to the Company's shareholders of record on the Record Date (as defined in the Distribution Agreement). In connection with the Distribution, each holder of a Company Option as of the Record Date will be entitled to retain such Company Option, provided that such Company Option will be adjusted to reflect the Distribution (an "Adjusted Company Option"). In addition, as of the Record Date, each holder of a Company Option will also be entitled to receive an option to purchase Vital Images Common Stock that will be adjusted to reflect the Distribution (an "Adjusted Vital Images Option"). d. The sole purpose of this the Bio-Vascular, Inc. 1990 Management Incentive Stock Option Adjustment Plan (the "Plan") is to provide for the grant of such Adjusted Company Options, and no additional option grants of any kind will be granted under this Plan. 2. Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee"), as hereinafter provided. The Committee shall be appointed from time to time by the Board of Directors and shall consist of not fewer than three of its members. However, if the Board of Directors shall at any time consist of three members or less, then such committee shall consist of the entire Board of Directors. Members of the Board of Directors who serve on the Committee shall be eligible to participate in the Plan. The Board of Directors shall designate one of the members of the Committee as its Chairman. The Committee shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members and the Committee's determinations shall constitute recommendations to the Board of Directors which the Board shall have discretion to act upon. Any decision or determination reduced to writing and signed by all members of the Committee shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). For purposes of administration, the Committee, subject to the terms of the Plan, shall have authority to establish such rules and regulations, make such determinations and interpretations, as it deems necessary or advisable, and all determinations and interpretations approved by the Board shall be final, conclusive and binding on all persons, including persons granted options hereunder ("Optionees") and their legal representatives and beneficiaries. No member of the Committee or the Board of Directors shall be liable for any act or omission with respect to his service on the Committee or with respect to the Plan, if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interests of the Company. The Committee and the name of the individuals administering the 1990 Plan (the "Vital Images Committee") shall reasonably cooperate and communicate with each other to promote the purposes of the Plan. 3. Stock Available for Options. There shall be available for options under the Plan a total of 300,000 shares of Common Stock, subject to any adjustments which may be made pursuant to Section 5(g). Shares of Stock with respect to which options are granted pursuant to the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Stock covered by options which have terminated or expired prior to exercise shall not be available for further options hereunder. 4. Eligibility. Options under the Plan shall be granted to officers, directors or key employees of Employer ("Management") who hold outstanding Company Options on the Record Date. For purposes of the Plan, "Employer" means the Company if the participant renders services to the Company or any subsidiary of the Company and means Vital Images if the participant renders services to Vital Images or any subsidiary of Vital Images. 5. Terms and Conditions of Options. The Committee shall, in its discretion, prescribe (for approval or rejection by the Board of Directors) the terms and conditions of the options to be granted hereunder which shall be evidenced by an option agreement, which terms and conditions need not be the same in each case, subject to the following: a. Number of Shares. Each option shall state the number of shares of Common Stock to which it pertains. b. Option Price. Each option shall state the price at which each share of Stock covered by an option granted under the Plan shall be purchased, which may be more or less than the then fair market value of the Company's stock. 2 c. Option Period. The period for exercise of an option (the "Option Period") shall in no event be more than ten years from the date on which the option is granted. With respect to each person who is granted options under this Plan, the Committee and the Board shall have the right, among other things, to determine that his right to exercise such options shall vest, ratably, monthly or annually, or otherwise, over a determined period (the "Vesting Period"), except as provided in Section 5(e), commencing on the date of grant. Any shares of Stock not purchased as the right to exercise ratably accrues may be purchased thereafter at any time before the expiration of the Option Period except as provided in Section 5(e). d. Exercise of Options. In order to exercise an option, the holder thereof (the "Optionee") shall deliver to Company written notice specifying the number of shares of Common Stock to be purchased, and unless otherwise determined, together with a certified or bank cashier's check payable to the order of the Company in the full amount of the purchase price therefor. An Optionee shall not have any rights of a stockholder until the shares of Stock are issued to him. An option may not be exercised for less than the lessor of (i) ten shares of Stock, or (ii) the number of shares of Stock remaining subject to such option. e. Effect of Termination of Employment or Directorship. The transfer by a participant in the Plan of employment or other service from one Employer or its subsidiaries to the other Employer and its subsidiaries will not be deemed to constitute a termination of employment or other service for purposes of the Plan. Notwithstanding anything to the contrary in this Plan or any option agreement issued hereunder, for employees of the Employer whose positions of employment terminate within two years of the commencement of such employment with the Employer, and for directors of the Employer serving solely as a director (where such persons are not employees of the Employer) whose position as a director terminates within two years of the commencement of such position, after such Optionee has ceased (for any reason) to be in the employ of the Employer, or ceased (for any reason) to be a director of the Employer if he is serving solely as a director, options may only be exercised within a period of 90 days after such termination and only by payment of the purchase price for all stock under option in cash or by certified check. Nothing in the Plan or in any option granted pursuant to the Plan shall be construed to confer on any individual any right to continue in the employ of the Employer or interfere in any way with the right of the Employer to terminate his employment at any time. f. Nontransferability of Options. During the lifetime of an Optionee, options held by such Optionee shall be exercisable only by him. No option shall be transferable other than by will or the laws of descent and distribution. g. Adjustments for Change in Stock Subject to Plan and Other Events. Except as otherwise may be provided in the Option Agreement in the event any of the following occurs after the Distribution Date: a reorganization, recapitalization, stock split, stock dividend, combination of shares, consolidation, merger (other 3 than a merger or consolidation which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares), any sale or transfer by the Company of all or substantially all of its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then outstanding voting securities of the Company, rights offering, or any other change in the corporate structure or rights with respect to any shares of the Company, the Committee shall make such adjustments, if any, in the number and kind of shares of Stock subject to the Plan, in the number and kind of shares covered by outstanding options, and/or in the option price per share to provide that the Optionee shall have the right following such event, during the period that such options shall be exercisable, to exercise such options for the kind and amount of securities, cash and other property receivable upon such event by a holder of the number and kind of shares of Stock for which such options might have been exercised immediately prior to such event. The provisions of this paragraph (g) shall apply to any outstanding options but in no event shall any option be exercisable after the date of termination of the exercise period of such option specified in Sections 5(c). h. Registration, Listing and Qualification of Shares of Stock/Shareholders Agreement. Each option shall be subject to the requirements that if at any time the Stock covered thereby is not registered, listed or qualified upon any securities exchange or under any federal or state law, and (1) if the Board of Directors shall determine that such registration, listing or qualification or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Stock thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors, or (2) if the Board of Directors shall determine that such registration, listing or qualification or the consent or approval of any governmental regulatory body is not necessary and/or not desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Stock thereunder, the Board of Directors may impose any conditions upon the exercise of such options as it shall deem necessary or desirable in view of such determination and no such option may be exercised unless and until such conditions have been satisfied. Without limiting the foregoing, the Company may require that any person exercising an option shall make such representations and agreements and furnish such information as the Company deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. Each option shall also be subject to the Optionee, on exercise of such option, being required to execute a Shareholders' Agreement in form and substance satisfactory to the Board of Directors, providing for a right of first refusal in favor of the Company and/or certain of its shareholders in connection with the transfer of Stock and such other provisions as shall be determined by the Board. 4 i. Withholding of Taxes. No option may be exercised unless the Optionee has paid, or has made provision satisfactory to the Committee for payment of, Federal, state and local income taxes, or any other taxes (other than stock transfer taxes) which the Company or Vital Images may be obligated to collect as a result of the issue or transfer of shares of Stock upon the exercise of an option. j. Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of options, as it deems advisable. 6. Amendment and Termination. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no option shall be granted hereunder after, January 1, 2000; provided, however, that the Board of Directors may at any time prior to that date terminate the Plan. The Board of Directors may at any time amend the Plan. No termination or amendment of the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee with respect to any option held by such Optionee. 7. Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including but not limited to, the right of the Company to grant options for proper corporate purposes other than under the Plan to any officer, director, employee or other person, firm, corporation or association. 5 EX-10.2 3 1992 STOCK OPTION ADJUSTMENT PLAN Exhibit 10.2 BIO-VASCULAR, INC. 1992 STOCK OPTION ADJUSTMENT PLAN 1. Background; Purpose of Plan. a) In or about 1992, Vital Images, Incorporated, an Iowa corporation ("VII"), adopted the Vital Images, Incorporated 1992 Stock Option Plan (the "1992 Plan") for the purposes of (i) attracting and retaining the best available personnel for positions of substantial responsibility at VII, (ii) providing additional incentive to the "Employees" and "Consultants" of VII and (iii) promoting the success of VII's business. b) In Section 1(k) of that certain Agreement and Plan of Merger by and between VII and Bio-Vascular, Inc., a Minnesota corporation ("the Company") dated December 31, 1993 (the "Merger Agreement"), the Company agreed to assume the rights and obligations of VII with respect to options issued under the 1992 Plan which were outstanding at the Effective Time, as defined in the Merger Agreement. Pursuant to the Company's assumption of VII's obligations under the 1992 Plan, each optionee under the 1992 Plan became entitled to purchase from the Company shares of the Company's Common Stock (a "Company Option"), in an amount determined under the provisions of the Merger Agreement, on the same terms and conditions as set forth in the 1992 Plan, except that shares of Company Common Stock were substituted for VII Common Stock. c) VII, the corporate name of which has been changed to Vital Images, Inc. ("Vital Images"), has entered into that certain Distribution Agreement, dated as of May 2, 1997 (the "Distribution Agreement"), between Vital Images and the Company, pursuant to which the Company will distribute (the "Distribution") all of the outstanding shares of Vital Images' Common Stock to the Company's shareholders of record on the Record Date (as defined in the Distribution Agreement). In connection with the Distribution, each holder of a Company Option as of the Record Date will be entitled to retain such Company Option, provided that such Company Option will be adjusted to reflect the Distribution (an "Adjusted Company Option"). In addition, as of the Record Date, each holder of a Company Option will also be entitled to receive an option to purchase Vital Images Common Stock that will be adjusted to reflect the Distribution (an "Adjusted Vital Images Option"). d) The sole purpose of this Bio-Vascular, Inc. 1992 Stock Option Adjustment Plan (the "Plan") is to provide for the grant of such Adjusted Company Options, and no additional option grants of any kind will be granted under this Plan. 2. Definitions. Except as otherwise set forth herein, the following terms will have the meanings set forth below, unless the context clearly requires otherwise: a) "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. b) "Code" shall mean the Internal Revenue Code of 1986, as amended. c) "Committee" shall mean the Committee appointed by the Board of Directors of the Company in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. d) "Common Stock" shall mean the Common Stock of the Company. e) "Consultant" shall mean any person who is engaged by Vital Images or any Parent or Subsidiary of Vital Images to render consulting services and is compensated for such consulting services, and any director of Vital Images whether compensated for such services or not; provided that if and in the event Vital Images registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by Vital Images. f) "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board of Directors of Vital Images; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. g) "Employee" shall mean any person, including officers and directors, employed by Vital Images or any Parent or Subsidiary of Vital Images. The payment of a director's fee by Vital Images shall not be sufficient to constitute "employment" by Vital Images. h) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422A of the Code. i) "Nonstatutory Stock Option" shall mean an Option not intended to qualify as an Incentive Stock Option. j) "Option" shall mean a stock option granted pursuant to the Plan. k) "Optioned Stock" shall mean the Common Stock subject to an Option. l) "Optionee" shall mean an Employee or Consultant who receives an Option. m) "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 425(e) of the Code. n) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. o) "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 425(f) of the Code. p) "Vital Images Committee" means, with respect to Vital Images Options and Vital Images Adjusted Options, the group of individuals administering the 1992 Plan. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 500,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 4. Administration of the Plan. a) Procedure. The Plan shall be administered by the Board of Directors of the Company. (i) Subject to subparagraph (ii), the Board of Directors (by action of a majority of the Directors in office when the Committee is appointed) may appoint a Committee consisting of not less than two members of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. Subject to the conditions otherwise herein stated, the Committee shall have the authority to administer the Plan on behalf of the Board of Directors, except as prohibited by law under Iowa Code 490.825. Specifically, among other matters enumerated in Iowa Code 490.825, the Committee, pursuant to section 490.825.5.h., shall not authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize the Committee to do so within limits as may be specifically prescribed by the Board of Directors. Rather, the Board itself shall have authority for and exercise approval of all such matters contemplated in section 490.825.5.h. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him. (ii) Notwithstanding the foregoing subparagraph (i), if and in any event the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, from the effective date of such registration until six months after the termination of such registration, any grants of Options to officers or directors shall only be made by the Board of Directors provided, however, that if a majority of the Board of Directors is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year, any grants of Options to directors must be made by, or only in accordance with the recommendation of, a Committee consisting of three or more persons, who may but need not be directors or employees of the Company, appointed by the Board of Directors and having full authority to act in the matter, none of whom is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year. Any Committee administering the Plan with respect to grants to officers who are not also directors shall conform to the requirements of the preceding sentence. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. (iii) Subject to the foregoing subparagraphs (i) and (ii), from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. b) Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Incentive Stock Options or Nonstatutory Stock Options; (ii) upon review of relevant information and in accordance with Section 8(b) of the Plan, to determine the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. c) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. d) Cooperation Between Committees. The Committee and the Vital Images Committee will reasonably cooperate and communicate with each other to promote the purposes of the Plan. 5. Eligibility. a) Nonstatutory Stock Options may be granted only to Employees and Consultants who hold outstanding Company Options under the 1992 Plan as of the Record Date. Incentive Stock Options may be granted only to Employees who hold outstanding Company Options under the 1992 Plan as of the Record Date. b) No Incentive Stock Option may be granted to an Employee which, when aggregated with all other incentive stock options granted to such Employee by the Company or any Parent or Subsidiary of the Company, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the Option covering such Share) in excess of $100,000 becoming first available for purchase upon exercise of one or more incentive stock Options during any calendar year. c) Section 5(b) of the Plan shall apply only to an Incentive Stock Option evidenced by an "Incentive Stock Option Agreement" which sets forth the intention of the Company and the Optionee that such Option shall qualify as an incentive stock option. Section 5(b) of the Plan shall not apply to any Option evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the intention of the Company and the Optionee that such Option shall be a Nonstatutory Stock Option. d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with Vital Images, nor shall it interfere in any way with his right or the right of Vital Images to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective as of the Distribution Date. It shall continue in effect for a term of ten (10) years after the effective date of the 1992 Plan, unless sooner terminated under Section 13 of the Plan. 7. Term of Option. The term of each Incentive Stock Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement. The term of each Nonstatutory Stock Option shall be ten (10) years and one (1) day from the date of grant thereof or such shorter term as may be provided in the Nonstatutory Stock Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, (a) if the Option is an Incentive Stock Option, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement, or (b) if the Option is a Nonstatutory Stock Option, the term of the Option shall be five (5) years and one (1) day from the date of grant thereof or such shorter term as may be provided in the Nonstatutory Stock Option Agreement. 8. Exercise Price and Consideration. a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of the grant. (B) granted to any person, the per Share exercise price shall be no less than 85% of the fair market value per Share on the date of grant. (iii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. b) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per share shall be the mean of the bid and asked prices (or the closing price per share if the Common Stock is listed on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on the date of grant of the Option, as reported in the Wall Street Journal. c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under the Iowa Business Corporation Act. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. b) Termination of Status as an Employee or Consultant. In the event of termination of an Optionee's Continuous Status as an Employee of Vital Images or Consultant of Vital Images (as the case may be), such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise such Optionee's Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. c) Disability of Optionee. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of the Optionee's total and permanent disability (as defined in Section 22(e) (3) of the Internal Revenue Code), the Optionee may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Optionee's Option to the extent the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. d) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of the Optionee's death an Employee or Consultant and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within three (3) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant three (3) months after the date of death, subject to the limitation set forth in Section 5(b); or (ii) within thirty (30) days (or such period of time not exceeding three (3) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within three (3) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from any of the following if it occurs after the Distribution Date: a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to the number or prices of shares of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action. In the event of a merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan: (i) any increase in the number of shares subject to the Plan, other than in connection with an adjustment under Section 11 of the Plan; (ii) any change in the designation of the class of persons eligible to be granted Options; or (iii) if the Company has a class of equity securities registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to the participants under the Plan. b) Shareholder Approval. If any amendment requiring shareholder approval under Section 13 (a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 17 of the Plan. c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 16. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 17. Shareholder Approval. a) Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it must be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company or if such shareholder approval is obtained by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company; provided, however, that approval at a meeting or by written consent may be obtained by a lesser degree of shareholder approval if the Board determines, in its discretion after consultation with the Company's legal counsel, that such a lesser degree of shareholder approval will comply with all applicable laws and will not adversely affect the qualification of the Plan under Section 422A of the Code. b) If and in the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approvals of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 17(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an officer or director after such registration, do the following: (i) furnish in writing to the holders entitled to vote for the plan substantially the same information which would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date of which such information is first sent or given to shareholders. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. EX-11.1 4 COMPUTATION OF INCOME (LOSS) PER SHARE EXHIBIT 11.1 BIO-VASCULAR, INC. COMPUTATION OF INCOME (LOSS) PER SHARE (In thousands, except share data)
Three Months Ended Nine Months Ended July 31, July 31, (unaudited) (unaudited) ------------- ---------- 1997 1996 1997 1996 ---- ---- ---- ---- Net income (loss) data: Income from continuing operations.................... $ (491) $ 111 $ (270) $ 898 Loss from discontinued operations.................... -- (288) (920) (894) ---------- ---------- ---------- ---------- Net income (loss).................................... $ (491) $ (177) $ (1,190) $ 4 ========== ========== ========== ========== Net income (loss) per common and common equivalent share, primary: Continuing operations................................ $ (.05) $ .01 $ (.03) $ (.09) Discontinued operations.............................. -- (.03) (.10) (.09) ---------- ---------- ---------- ---------- Net income (loss).................................... $ (.05) $ (.02) $ (.13) $ -- ========== ========== ========== ========== Net income (loss) per common and common equivalent share, fully diluted: Continuing operations................................ $ (.05) $ .01 $ (.03) $ .09 Discontinued operations.............................. -- (.03) (.10) (.09) ---------- ---------- ---------- ---------- Net income (loss).................................... $ (.05) $ (.02) $ (.13) $ -- ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES Primary: Weighted average number of common shares outstanding......................................... 9,544,748 9,439,783 9,511,990 9,386,040 Common equivalent shares: Dilutive stock options and warrants, using Treasury Stock Method............................. -- -- -- 473,869 ---------- ---------- ---------- ---------- 9,544,748 9,439,783 9,511,990 9,859,909 ========== ========== ========== ========== Fully diluted: Weighted average number of common shares outstanding......................................... 9,544,748 9,439,783 9,511,990 9,386,040 Common equivalent shares: Dilutive stock options and warrants, using Treasury Stock Method............................. -- -- -- 483,529 ---------- ---------- ---------- ---------- 9,544,748 9,439,783 9,511,990 9,869,569 ========== ========== ========== ==========
EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements and related notes for the period ended July 31, 1997 and is qualified in its entirety by reference to such financial statements. 9-MOS OCT-31-1997 NOV-01-1996 JUL-31-1997 4,206,698 13,968,170 1,796,789 26,100 1,577,465 16,262,763 2,760,573 1,124,636 25,388,338 977,172 0 0 0 95,432 24,315,734 25,388,338 7,215,165 7,215,165 2,974,365 1,202,658 0 0 0 193,174 462,700 (269,526) (920,000) 0 0 (1,189,526) (.13) (.13)
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements and related notes for the period ended July 31, 1996 and the financial statements and related notes for the period ended July 31, 1997 and is qualified in its entirety by reference to such financial statements. 9-MOS OCT-31-1996 NOV-01-1995 JUL-31-1996 7,000,540 12,956,600 1,920,177 60,000 2,075,074 25,223,388 3,653,285 1,727,531 37,044,004 1,128,748 0 0 0 94,572 35,820,684 37,044,004 7,858,317 7,858,317 2,576,020 4,678,429 0 0 0 1,424,409 526,500 897,909 (893,540) 0 0 4,369 .00 .00
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