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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1994 Commission File Number 0-13907
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BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
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Minnesota 41-1526554
________________________ ____________________________________
(State of Incorporation) (I.R.S. Employer Identification No.)
2575 UNIVERSITY AVENUE, ST. PAUL, MINNESOTA 55104-1024
(Address of principal executive offices)
TELEPHONE NUMBER: (612) 603-3700
__________________________
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 par value
___________________________
ITEM 6 - SELECTED FINANCIAL DATA
--------------------------------
The following selected historical financial data for the fiscal years ended
October 31, 1990 through October 31, 1994 has been derived from the audited
consolidated financial statements of the Company as restated for the pooling-of-
interests due to the merger with Vital Images, Incorporated and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the notes to the Consolidated Financial
Statements included elsewhere in this Amendment No. 1 to Annual Report, on
Form 10-K/A.
SUMMARY STATEMENTS OF OPERATIONS DATA:
-------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ----------- ----------- ----------- -----------
Net Revenue $ 6,631,518 $6,144,273 $6,010,899 $5,086,249 $4,423,336
Loss from operations (1,431,165) (456,731) (309,220) (293,701) (279,939)
Loss before extraordinary item (1,879,522) (158,144) (158,718) (337,037) (345,435)
Extraordinary item - -- -- -- 59,031 --
gain on early
extinguishment of debt
Net loss (1,879,522) (158,144) (158,718) (278,006) (345,435)
Per common share data:
Loss before extraordinary item $ (0.26) $ (0.02) $ (0.02) $ (0.05) $ (0.07)
Extraordinary item -- -- -- 0.01 --
----------- ---------- ---------- ---------- ----------
Net loss $ (0.26) $ (0.02) $ (0.02) $ (0.04) $ (0.07)
=========== ========== ========== ========== ==========
Weighted average
shares outstanding 7,277,000 7,055,000 6,743,000 6,162,000 4,611,000
SUMMARY BALANCE SHEET DATA:
--------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
Working capital $5,235,926 $6,577,045 $5,534,654 $5,240,806 $1,038,664
Intangible assets, net 797,872 1,098,563 1,322,150 1,337,513 1,545,128
Total assets 7,912,696 9,468,893 8,626,148 8,283,015 4,359,329
Long-term debt -- 52,076 99,335 167,345 1,086,700
Shareholders' equity 6,785,539 8,476,742 7,643,046 7,449,108 2,119,062
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION.
-------------------
OVERVIEW
The Company has two business segments which market products on a worldwide
basis. Its primary business is the Surgical Business, which develops,
manufactures and markets proprietary specialty medical products for use in
thoracic, cardiac, neuro and vascular surgery. The Company's Imaging Business,
through its wholly-owned subsidiary, Vital Images, also develops, markets and
supports certain software products for interactive visualization and analysis of
three dimensional image data for medical applications. Net revenue generated by
Vital Images is derived from software licensing and maintenance fees.
The Company acquired Vital Images on May 24, 1994. The acquisition was a
"pooling-of-interests," and financial results for all reporting periods have
been restated as if Vital Images had been merged into the Company from
inception. Historically, Vital Images was engaged in developing and marketing
3-D volume rendered, imaging software for various disciplines and industries,
but principally for confocal microscopy, other medical research, and gas and oil
exploration (the "Imaging Business"). After the acquisition, the Company
decided to exit the microscopy business due to the limited market opportunity in
microscopy and its relatively low margins. Although the Company continues to
provide support to existing microscopy customers, it does not actively pursue
new microscopy customers. At the time of the acquisition, the largest near-term
market opportunity for the Imaging Business was the VoxelGeo(R) product for gas
and oil exploration applications. The Company funded the research and
development of the second generation of this product, VoxelGeo(R) 2.0, in order
to generate revenue to fund future development of clinical medical applications
of the Company's imaging software. In the process of developing VoxelGeo(R)
2.0, the Company rewrote the entire code of its core 3-D volume rendering
technology. A significant portion of all of the Company's 3-D volume rendered
imaging software results from certain "core technology," and therefore
improvements or changes to this "core technology" advance all applications of
the software. In order to conserve resources and receive the benefit of
industry expertise, the Company entered into a global marketing alliance in
August 1994 with CogniSeis Development, Inc. ("CogniSeis"), a company with
complementary software technologies for gas and oil exploration and an
established presence in the industry. Under the agreement, CogniSeis assumed
exclusive marketing and customer support responsibilities for VoxelGeo(R) in
exchange for 50% of software license and maintenance fee revenue.
2
RESULTS OF OPERATIONS
The following table sets forth the net revenue, gross margin and operating
income (loss) of the Company and for each business segment for the periods
shown:
YEARS ENDED OCTOBER 31,
-------------------------
1992 1993 1994
------ ------ -------
(IN THOUSANDS)
NET REVENUE
Surgical............... $4,185 $4,423 $ 4,952
Imaging................ 1,826 1,721 1,680
------ ------ -------
Total................ 6,011 6,144 6,632
====== ====== =======
GROSS MARGIN
Surgical............... 2,519 2,586 3,028
Imaging................ 1,086 1,042 1,170
------ ------ -------
Total................ 3,605 3,628 4,198
====== ====== =======
OPERATING INCOME (LOSS)
Surgical............... 399 333 171
Imaging................ (708) (790) (1,183)
------ ------ -------
Total................ (309) (457) (1,431)*
====== ====== =======
*Includes approximately $420 of acquisition costs not allocated to a
business segment.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1994 WITH THE YEAR ENDED OCTOBER 31,
1993
Net Revenue. Net revenue increased 8% to $6,632,000 for fiscal 1994 from
$6,144,000 for fiscal 1993. The increase was due entirely to a 12% increase in
revenue of the Surgical Business when comparing these periods. Tissue-Guard net
revenue increased 88% to $1,675,000 for fiscal 1994 from $891,000 for fiscal
1993. Peri-Strips(R) accounted for 88% of the increase in Tissue-Guard product
line net revenue. The Company considers Peri-Strips(R) a product with
significant revenue growth potential, and expects to see revenue increases in
fiscal 1995 and 1996 as a result.
Biograft(R) net revenue decreased 14% for fiscal 1994 when compared to
fiscal 1993. The Company believes that this decline was strongly influenced by
the changing health care environment, specifically cost containment, which
prompted surgeons to choose drug therapy more frequently than surgical
intervention in the treatment of peripheral vascular disease. Net revenue of the
surgical productivity tools increased 3% between fiscal 1994 and fiscal 1993.
Net revenue of the Imaging Business decreased 2% between fiscal 1994 and
fiscal 1993. The Company believes that the decrease, which was primarily in
software license revenues, arose from the market's anticipation of VoxelGeo(R)
2.0 and customers' decisions to delay software purchases until the delivery of
this version of the VoxelGeo(R) software, offset by maintenance revenue
increases. Although the number of sales of VoxelGeo(R) software licenses and
maintenance contracts is expected to increase due to the alliance with
CogniSeis, the initial effect of this alliance may result in a short-term
decrease in revenues due to the revenue sharing arrangement. Despite the fact
that this alliance may result in a short-term decrease in revenues, it will also
result in an immediate decrease in the costs of sales and marketing associated
with the gas and oil business.
Gross Margin. The gross margin percentage increased to 63% of net revenue
for fiscal 1994 from 59% of net revenue for fiscal 1993. Gross margin
percentages of the Surgical Business were 61% and 58% in fiscal 1994 and fiscal
1993, respectively. This improvement in the Surgical Business gross margin was
primarily due to the lower average cost of labor associated with the addition of
significant numbers of entry-level production
3
personnel in response to anticipated sales increases of Peri-Strips(R). The
Surgical Business is planning a move to a larger facility in the third quarter
of 1995 which is expected to decrease the gross margins for at least the short
term. Gross margin percentages of the Imaging Business were 70% and 60% in
fiscal 1994 and 1993, respectively. The increase in the Imaging Business gross
margin percentage was due to product and service mix.
Selling, General and Administrative. Selling, general and
administrative expense increased 13% to $3,541,000 for fiscal 1994 from
$3,126,000 for fiscal 1993 and increased slightly as a percentage of sales to
53% for fiscal 1994 from 51% for fiscal 1993. The increase in expense was
primarily attributable to retention of a Chief Operating Officer in April 1994
and the increased level of business activity of the Surgical Business.
Research and Development. Research and development expense increased
74% to $1,669,000 for fiscal 1994 from $959,000 for fiscal 1993 and increased as
a percentage of net revenue to 25% for fiscal 1994 from 16% in fiscal 1993. The
majority of the increase was attributable to advancing the core technology of
the Imaging Business concurrent with the development of VoxelGeo(R) 2.0. In both
fiscal 1994 and fiscal 1993, 25% of research and development expenditures were
for the Surgical Business and 75% were for the Imaging Business. Research and
development efforts of the Surgical Business over the last year and a half have
already resulted in the Peri-Strips product and the Vascu-Guard product. The
Company has several other projects underway in the Surgical Business. The
Company expects research and development expense to increase in both the
Surgical and Imaging Businesses in the next year.
Acquisition Costs. The costs of the acquisition of Vital Images,
which were all incurred in fiscal 1994 were $420,000. These one-time costs,
which accounted for 29% of the operating loss incurred by the Company in fiscal
1994, were for legal, accounting, and other professional fees.
Operating Income (Loss). The Company had operating losses of
$1,431,000 and $457,000 in fiscal 1994 and fiscal 1993, respectively. The
Surgical Business had operating income of $171,000 and $333,000 and the Imaging
Business had operating losses of $1,183,000 and $790,000 for fiscal 1994 and
fiscal 1993, respectively. The increase in the Company's operating loss arose
primarily from the increase in research and development expenditures and the
cost of the acquisition of Vital Images.
Other Income and Expense. The Company realized a capital loss of
$610,000 in fiscal 1994 on an investment in mutual fund shares of the Piper
Jaffray Institutional Government Income Portfolio (the "Fund"), resulting in net
other expense of $438,000 for the fiscal year. The Fund invested in various
bonds and other obligations issued or guaranteed as to payment of principal and
interest by the United States Government. Included in the investments of the
Fund were mortgage-related securities and their derivatives, such as interest-
only and principal-only securities and inverse floating rate securities. During
the first quarter of calendar 1994, the Fund's value declined. The Company
closely monitored its investment in the Fund and held discussions with the
Fund's management concerning their recovery strategy. The Company decided to
sell its shares in the Fund when it believed that any meaningful recovery was no
longer possible in a reasonable timeframe, and as concern about the Fund
continued to aggravate the immediate downside potential. The Company liquidated
these mutual fund shares during September and October 1994.
Income Taxes. The tax provisions recorded in fiscal 1994 and fiscal
1993 represented alternative minimum taxes due to limitations in the use of net
operating loss ("NOL") carryforwards and state minimum taxes. As of October 31,
1994, the Company had NOL carryforwards of approximately $1,000,000 expiring
in 2002 to 2009 available to offset income from operations and $500,000
available to offset future capital gains through 1999. The Company also had
carryforwards arising from pre-merger losses of Vital Images totalling
approximately $2,400,000 available to offset post-merger income of Vital Images
if it reaches profitability. The portion of the pre-merger loss carryforwards
that may be used in any year is restricted due to limitations resulting from the
significant change of ownership. These carryforwards begin to expire in 2005.
The deferred tax assets associated with the carryforwards have been totally
offset by a valuation allowance because of uncertainty that sufficient taxable
income will be generated prior to the expiration of the carryforwards.
4
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1993 WITH THE YEAR ENDED OCTOBER 31,
1992
Net Revenue. Net revenue increased 2% to $6,144,000 for fiscal 1993
from $6,011,000 for fiscal 1992. All of the increase was attributable to the
Surgical Business, and primarily to increased revenue from Biograft(R) and
Supple Peri-Guard(TM). Net revenue from the Surgical Business increased by 6%
and net revenue from the Imaging Business decreased by 6%. The increase in
Surgical Business net revenue was solely as a result of increases in unit sales
volumes, as average selling prices for all Surgical Business products
effectively decreased due to a greater number of sales made to distributors at
wholesale prices.
Supple Peri-Guard(TM), an alternative soft-tissue patch developed by
the Company, was introduced to international markets at the beginning of fiscal
1992 and to the domestic market at the beginning of fiscal 1993. Net revenue
from this product increased 296% between fiscal 1992 and fiscal 1993.
Net revenue from sales of Biograft(R) increased 23% from fiscal 1992
to fiscal 1993, with large increases in the first part of 1993 relative to 1992,
offset by decreasing revenue and unit sales in the latter half of 1993 as
proposed health care reform and cost concerns accelerated. Net revenue from
surgical productivity tools decreased 11% between fiscal 1992 and fiscal 1993.
The 6% decrease in Imaging Business net revenue between fiscal 1992
and fiscal 1993 was primarily the result of an increase in maintenance revenue
which was offset by a decrease in software license revenue. The increase in
maintenance revenue was due to maintenance contracts from an increasing
installed base of software.
Gross Margin. Gross margin percentages of both the Surgical Business
and Imaging Business were relatively flat for fiscal 1993 and fiscal 1992.
Selling, General and Administrative. Selling, general and
administrative expense decreased 7% to $3,126,000 for fiscal 1993 from
$3,349,000 for fiscal 1992, and decreased as a percentage of net revenue to 51%
for fiscal 1993 from 56% for fiscal 1992, due to reduced staffing levels in both
business segments.
Research and Development. Research and development expense increased
70% to $959,000 for fiscal 1993 from $565,000 for fiscal 1992 and was 16% and 9%
of net revenue for those respective years. Research and development expense of
the Surgical Business increased to $240,000 for fiscal 1993 from $46,000 for
fiscal 1992. This increase was the early result of a strategic decision to
develop a full research and development capability for the Surgical Business.
Research and development expense of the Imaging Business increased 39% to
$719,000 for fiscal 1993 from $519,000 for fiscal 1992.
Operating Income (Loss). The Company had operating losses of $457,000
and $309,000 in fiscal 1993 and fiscal 1992, respectively. The Surgical
Business had operating income of $333,000 and $399,000 and the Imaging Business
had operating losses of $790,000 and $708,000 in fiscal 1993 and fiscal 1992,
respectively.
Other Income and Expense. During fiscal 1993, the Company made its
first investment in the Fund. The Company sold its investment in the Fund in
fiscal 1993, realizing a capital gain of $101,000. Dividend and capital gain
income on this investment contributed significantly to the Company's net other
income of $319,000 in fiscal 1993. In fiscal 1992, the Company had net other
income of $165,000.
Income Taxes. The tax provisions recorded in fiscal 1993 and fiscal
1992 represented alternative minimum taxes due to limitations in the use of NOL
carryforwards and state minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and marketable securities of
$3,619,000 at October 31, 1994. This compares to cash, cash equivalents and
marketable securities of $5,582,000 at October 31, 1993, or a decrease of
$1,963,000. The majority of this decrease represents cash used in funding
equipment additions and for one-time circumstances, which were: the acquisition
costs of $420,000 and the capital loss of $610,000 that the Company
5
realized on its investment in the Fund. At October 31, 1994 the Company remains
invested in only U.S. Treasuries, an investment strategy the Company intends
to continue during 1995.
During fiscal 1994, the Company used $799,000 of cash in operating
activities. Factoring out the one-time acquisition costs, the cash used in
operating activities in fiscal 1994 was $379,000. The Company invested $505,000
in fixed assets, which includes $106,000 in clean room workstations and related
fixtures for the Surgical Business and $372,000 in computer hardware, printers,
related peripherals, and software (approximately 77% of this for the Imaging
Business and 23% for the Surgical Business). The Company used $124,000 in
financing activities during fiscal 1994 to pay off all of the Imaging Business'
notes, leaving a capital lease with a balance of $12,000 at year end as the
Company's only debt.
During fiscal 1993, cash provided by operating activities was
$1,062,000. Net investment activities during fiscal 1993 provided cash of
$2,007,000, with the redemption of $2,352,000 of marketable securities providing
cash. Cash of $170,000 was used to purchase fixed assets and $174,000 was used
in the capitalization of software development costs. Financing activities
provided $581,000 during fiscal 1993, with net cash of $705,000 provided through
the sale of common stock and exercise of options, and $124,000 used to reduce
debt.
Working capital at October 31, 1994 was $5,236,000 compared to working
capital of $6,577,000 at October 31, 1993. The current ratios at October 31,
1994 and 1993 were 5.7 to 1, and 8.1 to 1, respectively. While the Company
believes its present level of cash and cash equivalents may be adequate to fund
the expansion of its Surgical Business facility, Surgical or Imaging development
activities, and other positioning strategies over the next two years, the
Company may need to raise additional capital in the future to meet planned
research and development and other expenses. There can be no assurance that the
Company will be able to obtain any required additional funding on satisfactory
terms, if at all.
INFLATION
Management believes that inflation has not had a material effect on
the Company's results of operations or financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates may
therefore reduce the demand for the Company's products by increasing the price
of the Company's products in the currency of the countries in which the products
are sold.
6
QUARTERLY OPERATING DATA
The following table sets forth certain unaudited operating data for
the four quarters in fiscal 1993 and 1994. In the opinion of management, the
data includes all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the information set forth therein.
1993 1994
-------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
Net revenue.................. $1,645 $1,633 $1,478 $1,388 $1,569 $1,574 $1,559 $1,930
Gross margin................. 959 992 871 806 925 1,006 947 1,320
Operating income (loss)...... (71) (102) (67) (217) (284) (299) (408) (440)
Net income (loss)............ 17 (51) (28) (96) (243) (250) (881) (506)
Net income (loss) per share.. $ .00 $ (.01) $ (.00) $ (.01) $ (.03) $ (.03) $ (.12) $ (.07)
The first through third quarters of 1994 were impacted by acquisition
costs of $420,000, while the third and fourth quarters of 1994 were impacted due
to non-operating losses of $539,000 and $71,000, respectively, arising from the
Company's investment in the Fund.
7
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The Company's Financial Statements and the reports of its independent
accountants are included herein on pages 9 through 25 of this
Amendment No. 1 to Annual Report on Form 10-K/A.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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a)
1) The following Financial Statements are included herein (page numbers
refer to pages in this Amendment No. 1 to Annual Report on Form
10-K/A).
Page
----
Reports of Independent Accountants................................. 9
Consolidated Balance Sheets as of October 31, 1993 and 1994........ 11
Consolidated Statements of Operations for the
Years Ended October 31, 1992, 1993 and 1994........................ 12
Consolidated Statements of Shareholders' Equity
for the Years Ended October 31, 1992, 1993, and 1994............... 13
Consolidated Statements of Cash Flows for the Years
Ended October 31, 1992, 1993 and 1994.............................. 14
Notes to Consolidated Financial Statements......................... 15
2) Consolidated Financial Statement Schedules
The following financial statement schedule and independent
accountant's report thereon is included herein and should be read in
conjunction with the financial statements referred to above (page
numbers refer to pages in this Amendment No. 1 to Annual Report on
Form 10-K/A):
Page
Reports of Independent Accountants on Financial Statement Schedule 25
Schedule VIII - Valuation and Qualifying Accounts 27
All other financial statement schedules not listed have been omitted
because the required information is included in the Financial
Statements or the Notes thereto, or is not applicable.
3) Exhibits
Reference is made to the Exhibit Index hereinafter contained on page E-1
of this report.
The Company shall furnish a copy of any exhibit to a shareholder who
requests a copy in writing upon payment to the Company of a fee of $5.00
per exhibit. Requests should be sent to: M. Karen Gilles, Chief Financial
Officer, Vice President of Finance and Secretary, Bio-Vascular, Inc., 2575
University Avenue, St. Paul, Minnesota 58104-1024.
The following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(a)(3):
A. The Registrant's 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.21 to the Registrant's report on Form 10-
K for the year ended October 31, 1988 (File No. 0-13907).
B. Vital Images, Incorporated 1990 Management Incentive Stock Option
Plan (as filed in connection with this report)./*/
C. Vital Images, Incorporated 1992 Stock Option Plan (as filed in
connection with this report)./*/
D. Employment letter agreement dated April 7, 1994 between the
Registrant and Mr. John Karcanes (as filed in connection with
this report)./*/
E. Employment agreement dated May 24, 1994 between the Registrant
and Dr. Vincent Argiro (as filed in connection with this
report)./*/
F. Form of Change in Control Agreement dated November 16, 1994
entered into between the Registrant and each of Mr. Karcanes and
certain other executive officers of the Registrant (as filed in
connection with this report)./*/
G. Form of Change in Control Agreement dated November 16, 1994
entered into between the Registrant and Dr. Argiro (as filed in
connection with this report)./*/
b) Reports on Form 8-K.
None.
c) Exhibits
Reference is made to the Exhibit Index hereinafter contained on page E-1
of this report.
-----------------------------------------
/*/ Indicates items previously filed.
8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Bio-Vascular, Inc.:
We have audited the accompanying consolidated balance sheets of Bio-Vascular,
Inc. as of October 31, 1993 and 1994 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bio-Vascular, Inc.
as of October 31, 1993 and 1994, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
We previously audited and reported on the statements of operations,
stockholders' equity and cash flows of Vital Images, Incorporated for the year
ended December 31, 1992. Such financial statements were audited and reported on
prior to their restatement for the 1994 pooling-of-interests described in Note
2. The contribution of Vital Images, Incorporated to combined net revenue
represented 30 percent of the 1992 restated total and Vital Images, Incorporated
contributed a net loss of $714,201 to the combined 1992 restated net loss total
of $158,718. Separate financial statements of Bio-Vascular, Inc. included in the
1992 restated consolidated statements of operations, shareholders' equity and
cash flows were audited and reported on separately by other auditors. We also
audited the combination of the consolidated statements of operations,
shareholders' equity and cash flows for the year ended October 31, 1992, after
restatement for the 1994 pooling-of-interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 of Notes
to Consolidated Financial Statements.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 16, 1994 except for the last two paragraphs of Note 6, as to which the
date is January 2, 1995
9
INDEPENDENT AUDITORS' REPORT
Bio-Vascular, Inc.
We have audited the statements of operations, changes in shareholders' equity,
and cash flows of Bio-Vascular, Inc. (the Company) for the year ended October
31, 1992 prior to restatement for the merger with Vital Images, Incorporated.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements (not presented herein) present fairly,
in all material respects, the results of operations and cash flows of the
Company for the year ended October 31, 1992 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 11, 1992
10
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 31,
ASSETS 1993 1994
------ ----------- -----------
Current assets:
Cash and cash equivalents................ $5,582,365 $2,347,954
Marketable securities.................... -- 1,270,841
Accounts receivable, net of an allowance
for doubtful accounts of $30,000 in 1993
and $40,000 in 1994 .................... 966,581 1,466,669
Inventories.............................. 890,220 1,132,669
Prepaid expenses and other current as-
sets.................................... 64,717 123,631
---------- ----------
Total current assets................... 7,503,883 6,341,764
Equipment and leasehold improvements, net.. 653,794 773,060
Software development costs, net of accumu-
lated amortization of $310,795 at October
31, 1993.................................. 212,653 --
Intangibles and other assets, net.......... 1,098,563 797,872
---------- ----------
Total assets........................... $9,468,893 $7,912,696
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt........ $ 83,413 $ 11,968
Accounts payable......................... 171,409 455,338
Accrued expenses......................... 375,581 485,020
Deferred revenues........................ 296,435 153,512
---------- ----------
Total current liabilities.............. 926,838 1,105,838
Long-term debt, less current portion....... 52,076 --
Deferred revenue, less current portion..... 13,237 21,319
---------- ----------
Total liabilities...................... 992,151 1,127,157
---------- ----------
Commitments (Note 7).......................
Shareholders' equity:
Common stock: authorized 10,000,000
shares of $.01 par value; issued
and outstanding, 7,232,823 shares and
7,318,125 shares in 1993 and 1994,
respectively............................ 72,328 73,181
Additional paid-in capital............... 11,485,997 11,685,163
Accumulated deficit...................... (2,967,840) (4,847,362)
Unearned compensation.................... (54,420) (12,625)
Unearned restricted stock................ (59,323) (112,818)
---------- ----------
Total shareholders' equity............... 8,476,742 6,785,539
---------- ----------
Total liabilities and shareholders' eq-
uity.................................. $9,468,893 $7,912,696
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
11
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------
1992 1993 1994
---------- ---------- -----------
Net revenue............. $6,010,899 $6,144,273 $ 6,631,518
Cost of revenue......... 2,406,038 2,516,691 2,433,368
---------- ---------- -----------
Gross margin.......... 3,604,861 3,627,582 4,198,150
Operating expenses:
Selling, general and ad-
ministrative........... 3,349,207 3,125,779 3,540,582
Research and develop-
ment................... 564,874 958,534 1,668,813
Acquisition costs....... -- -- 419,920
---------- ---------- -----------
Operating income
(loss)............... (309,220) (456,731) (1,431,165)
Other income (expense),
net.................... 164,597 318,702 (438,007)
---------- ---------- -----------
Income (loss) before in-
come taxes............. (144,623) (138,029) (1,869,172)
Income tax provision.... 14,095 20,115 10,350
---------- ---------- -----------
Net income (loss)..... $ (158,718) $ (158,144) $(1,879,522)
========== ========== ===========
Net income (loss) per
share.................. $ (.02) $ (.02) $ (.26)
========== ========== ===========
Weighted average shares
outstanding............ 6,743,000 7,055,000 7,277,000
========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
12
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
------------------ ADDITIONAL UNEARNED RETAINED
PAR PAID-IN DEFERRED RESTRICTED EARNINGS
SHARES VALUE CAPITAL COMPENSATION STOCK (DEFICIT) TOTAL
--------- ------- ----------- ------------ ---------- ----------- ----------
Balances at October 31,
1991................... 6,589,801 $65,898 $10,197,262 $(130,220) $(2,650,978) $7,481,962
Issuance of common
stock in connection
with product license
agreement............. 100,000 1,000 199,000 200,000
Stock options granted.. 42,000 (42,000)
Stock options canceled. (42,348) 42,348
Exercise of stock
options............... 34,314 342 72,171 72,513
Restricted stock
granted............... 39,279 393 177,087 $(177,480)
Restricted stock
purchased by the
Company............... (4,029) (40) (18,131) (18,171)
Restricted stock
earned................ 59,905 59,905
Compensation expense... 38,409 38,409
Net loss............... (158,718) (158,718)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1992................... 6,759,365 67,593 10,627,041 (91,463) (117,575) (2,809,696) 7,675,900
Exercise of stock
options............... 85,160 852 167,112 167,964
Issuance of common
stock in connection
with product license
agreement............. 50,000 500 99,500 100,000
Issuance of stock, net
of offering costs of
$58,158............... 297,500 2,975 533,867 536,842
Stock options canceled. (19,203) 19,203
Restricted stock
granted............... 11,246 112 45,968 (46,080)
Restricted stock
purchased by the
Company............... (3,183) (32) (10,712) (10,744)
Restricted stock
earned................ 59,584 59,584
Compensation expense... 17,840 17,840
Restricted stock
forfeited............. (9,944) (99) (44,649) 44,748
Stock issued for
services.............. 42,679 427 87,073 87,500
Net loss............... (158,144) (158,144)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1993................... 7,232,823 72,328 11,485,997 (54,420) (59,323) (2,967,840) 8,476,742
Exercise of stock
options............... 36,115 361 66,882 67,243
Stock options canceled. (18,495) 18,495
Restricted stock
granted............... 58,578 586 198,476 (199,062)
Restricted stock
canceled.............. (10,564) (106) (45,167) 45,273
Restricted stock
purchased by the
Company............... (4,650) (46) (22,848) (22,894)
Restricted stock
earned................ 58,174 58,174
Compensation
expense/compensation
paid in stock......... 12,500 125 43,625 23,300 67,050
Restricted stock
forfeited............. (12,252) (123) (41,997) 42,120
Stock issued for
services.............. 5,575 56 18,690 18,746
Net loss............... (1,879,522) (1,879,522)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1994................... 7,318,125 $73,181 $11,685,163 $(12,625) $(112,818) $(4,847,362) $6,785,539
========= ======= =========== ========= ========= =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
13
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------
1992 1993 1994
---------- ---------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (158,718) $ (158,144) $(1,879,522)
Adjustments to
reconcile net
loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........ 725,356 689,488 851,872
Provision for
inventory
obsolescence........ -- 10,000 --
Provision for
uncollectible
accounts............ 5,885 12,890 10,000
Issuance of common
stock in connection
with product license
agreement........... -- 100,000 --
Loss on disposal of
fixed assets........ -- -- 40,961
Non-cash
compensation........ 98,314 164,924 143,970
(Gain) loss on sale
of marketable
securities.......... -- (100,555) 609,653
Changes in assets and
liabilities,
exclusive of
investing and
financing
activities:
Accounts
receivable........ 31,219 172,428 (510,088)
Inventories........ (162,030) 23,265 (242,449)
Other current
assets............ 90,673 (10,604) (58,914)
Other assets....... -- (132) --
Accounts payable... 66,421 37,271 283,929
Accrued expenses... 216 19,838 86,513
Deferred revenues.. 106,231 101,462 (134,841)
---------- ---------- -----------
Net cash provided
by (used in)
operating
activities....... 803,567 1,062,131 (798,916)
---------- ---------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of equipment
and improvements...... (320,800) (169,908) (504,725)
Additions to
intangibles........... (9,601) (748) (10,190)
Capitalization of
software development
costs................. (68,991) (173,547) --
Investments in
marketable securities. (1,559,825) -- (3,301,877)
Redemptions of
marketable securities. 1,916,905 2,351,562 1,421,383
Change in other assets. (657) -- 16,192
---------- ---------- -----------
Net cash provided
by (used in)
investing
activities....... (42,969) 2,007,359 (2,379,217)
---------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from the
issuance of debt...... 155,171 -- --
Payments on debt....... (185,915) (123,680) (123,521)
Proceeds related to the
sale, issuance and
repurchase of common
stock and exercise of
stock options......... 72,513 704,806 67,243
---------- ---------- -----------
Net cash provided
by (used in)
financing
activities....... 41,769 581,126 (56,278)
---------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 802,367 3,650,616 (3,234,411)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 1,224,440 1,931,749 5,582,365
---------- ---------- -----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $2,026,807 $5,582,365 $ 2,347,954
========== ========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest. $ 26,320 $ 21,867 $ 7,617
========== ========== ===========
Cash paid for income
taxes................. $ 12,926 $ 6,635 $ 17,490
========== ========== ===========
Acquisition of
equipment under
capital leases........ $ 6,792 $ 27,162 $ 12,049
========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
14
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
As a result of the acquisition of Vital Images, Incorporated (Vital Images)
in fiscal 1994 (Note 2), Bio-Vascular, Inc. (the Company or Bio-Vascular) has
two businesses, a Surgical Business (the business which existed prior to the
acquisition of Vital Images) and an Imaging Business (the business of Vital
Images prior to the merger). The Surgical Business develops, manufactures and
markets proprietary specialty medical products used in thoracic, cardiac,
neuro and vascular surgery. The Company, through its wholly owned subsidiary,
Vital Images, also develops, markets and supports certain software products
for interactive visualization and analysis of three-dimensional image data.
The end users of the Imaging Business' software have been primarily
researchers and innovators who have adapted the core technology to meet their
needs. During fiscal 1994, the primary focus of the Imaging Business
was one of development, directed towards more specific industry applications
of its core technology. Also during fiscal 1994, the Imaging Business
has sought to establish marketing and customer support alliances, enabling it
to direct more of its resources to this development process.
Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Periods:
Vital Images financial statements were reported on a calendar year basis
prior to the merger with Bio-Vascular. Vital Images financial statements have
been restated to be on a fiscal year basis for the year ended October 31,
1993. Vital Images financial statements for the year ended 1992 are combined
on a calendar year basis with the Company's financial statements for the
fiscal year ended October 31, 1992. As a result, the Company's restated
consolidated financial statements for the fiscal years ended October 31, 1993
and 1992, both include results of Vital Images for the months of November and
December of 1992. Vital Images revenues were $403,975 and its net loss was
$32,854 for this two-month period.
Cash Equivalents:
The Company considers all highly liquid investments with original maturities
of less than three months to be cash equivalents. The Company's cash and cash
equivalents balances are concentrated in a money market fund with one
financial institution.
Marketable Securities:
Investments with original maturities of three months or more are classified
as marketable securities and generally consist of United States Government or
United States Government backed instruments. Marketable securities are carried
at amortized cost, as the Company has the intention and the ability to hold
these securities to maturity (which maturity is less than one year).
Unrealized holding gains and losses were not significant.
Inventories:
Inventories are valued at the lower of cost or market, utilizing standard
costs which approximate the first-in, first-out method. All inventories are
held by the Surgical Business.
15
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using accelerated and straight-line methods over the
estimated useful lives (three to seven years) or lease life. Major
replacements and improvements are capitalized, and maintenance and repairs
which do not improve or extend the lives of the respective assets are charged
to operations. The asset and related accumulated depreciation or amortization
accounts are adjusted for asset retirement or disposal with the resulting gain
or loss shown in non-operating income.
Software Development Costs:
Software development costs incurred in the research and development of new
software products are expensed as incurred until technological and market
feasibility have been established. After technological and market feasibility
are established, any additional development or enhancement costs for these
products are capitalized until the product is available for sale to customers.
Amortization of capitalized costs is computed using the straight-line method
based upon a one to three year estimated economic life of the software
products. If delays in product releases lead to uncertainty concerning the
ultimate recovery of capitalized costs, those costs are expensed at the time
recovery becomes uncertain.
Goodwill, Product Licenses and Other Intangibles:
Goodwill, product licenses and other intangibles of the Surgical Business
are recorded at cost and are being amortized using the straight-line method
over ten years. In 1992, the Imaging Business acquired a license (Note 7)
which is being amortized on a straight-line basis over the estimated period of
realizability of three years. The Company evaluates the net realizability of
goodwill and other intangibles on an ongoing basis based on current and
anticipated undiscounted cash flows.
Revenue Recognition:
The Company recognizes Surgical Business revenue and software revenues of
the Imaging Business upon shipment of the products. Included in the sales
price of the Imaging Business' software products is an initial maintenance
contract varying in length from three to six months. Renewal maintenance
contracts are generally one year in length. Revenue from maintenance
contracts, including those sold as part of its software products and those
sold separately, is deferred and recognized on a straight-line basis over
applicable maintenance contract periods. Costs associated with maintenance
revenues are charged to operations as incurred.
Research and Development:
Research and development costs are expensed as incurred.
Income Taxes:
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences").
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with generally accepting accounting principles requires management
to make estimates and assumptions that affect the reported amounts
16
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of assets and liabilities and disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses during the reporting
periods.
Net Loss Per Common Share:
Net loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding.
(2) ACQUISITION:
On May 24, 1994, Bio-Vascular acquired Vital Images. The acquisition was
effected through a "stock for stock" exchange of 1,645,025 shares of Bio-
Vascular common stock for the 1,645,025 shares of Vital Images common and
Series A preferred stock outstanding. The merger was accounted for under the
"pooling-of-interests" method of accounting for financial reporting purposes.
Accordingly, the accompanying consolidated financial statements have been
restated to retroactively include the financial position, results of
operations and cash flows of Vital Images for all periods presented.
Combined and separate results of Bio-Vascular and Vital Images for periods
prior to the acquisition are set forth in the table below. Costs related to
the acquisition of approximately $420,000 were expensed as incurred in the
first through third quarters of fiscal year 1994.
BIO-
VASCULAR VITAL IMAGES COMBINED
---------- ------------ ----------
Year ended October 31, 1992:
Net revenue...................... $4,185,110 $1,825,789 $6,010,899
Net income (loss)................ 555,483 (714,201) (158,718)
Year ended October 31, 1993:
Net revenue...................... 4,422,775 1,721,498 6,144,273
Net income (loss)................ 650,634 (808,778) (158,144)
Six months ended April 30, 1994
(unaudited):
Net revenue...................... 2,228,152 915,138 3,143,290
Net loss......................... (203,586) (289,565) (493,151)
17
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) CERTAIN CONSOLIDATED FINANCIAL STATEMENT INFORMATION:
OCTOBER 31, OCTOBER 31,
1993 1994
----------- -----------
Inventories consisted of the following:
Raw materials and supplies.............. $ 167,420 $ 224,949
Work-in-process......................... 80,467 292,746
Finished goods.......................... 642,333 614,974
---------- -----------
$ 890,220 $ 1,132,669
========== ===========
Equipment and leasehold improvements
consisted of the following:
Furniture, fixtures and computer
equipment.............................. $1,100,321 $ 1,450,998
Laboratory equipment.................... 72,903 81,686
Manufacturing equipment................. 281,556 254,480
Leasehold improvements.................. 145,070 155,242
---------- -----------
Less accumulated depreciation and
amortization......................... (946,056) (1,169,346)
---------- -----------
$ 653,794 $ 773,060
========== ===========
Intangibles and other assets consisted
of the following:
Goodwill................................ $1,318,499 $ 1,318,499
Less accumulated amortization......... (460,101) (603,167)
---------- -----------
858,398 715,332
---------- -----------
Product licenses and other intangibles.. 667,797 679,366
Less accumulated amortization......... (449,721) (602,491)
---------- -----------
218,076 76,875
---------- -----------
Other assets............................ 22,089 5,665
---------- -----------
$1,098,563 $ 797,872
========== ===========
Accrued expenses consisted of the
following:
Payroll and other employee benefits... $ 144,923 $ 215,910
Royalties............................. 68,040 85,233
Research reimbursement, shareholder... 91,482 91,482
Other................................. 71,136 92,395
---------- -----------
$ 375,581 $ 485,020
========== ===========
18
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED OCTOBER
31,
-----------------------------
1992 1993 1994
-------- -------- ---------
Depreciation and
amortization consisted of
the following:
Depreciation............ $288,291 $327,784 $ 344,496
Amortization of
intangibles............ 223,109 256,501 294,723
Amortization of software
development costs...... 213,956 105,203 212,653
-------- -------- ---------
$725,356 $689,488 $ 851,872
======== ======== =========
Other income (expense)
net, consisted of the
following:
Interest income......... $176,340 $234,653 $ 221,023
Interest expense........ (27,425) (21,867) (7,617)
Capital gain (loss) on
sale of investment (1). -- 100,555 (609,653)
Loss on disposal of
equipment, net......... -- -- (40,961)
Miscellaneous income
(expense).............. 15,682 5,361 (799)
-------- -------- ---------
$164,597 $318,702 $(438,007)
======== ======== =========
--------
(1) Relates entirely to the Company's investment during 1993 and 1994 in
mutual fund shares of the Piper Jaffray Institutional Government Income
Portfolio.
(4) LINE OF CREDIT:
The Company has a $150,000 revolving line of credit which expires January
31, 1995. There were no borrowings under the line of credit during fiscal 1994
and 1993. The line of credit bears interest at prime plus 1.0% and is
collateralized primarily by all of the corporate assets. After completion of the
merger, the Company paid off all of the long-term debt of Vital Images except
for capital leases with interest ranging from 12% to 15%. The Company has no
long-term debt at October 31, 1994.
(5) INCOME TAXES:
The recorded tax provisions for the years ended October 31, 1992, 1993 and
1994, respectively, represent alternative minimum taxes due to limitations in
the use of net operating loss carryforwards and state minimum taxes. The
Surgical Business of the Company utilized approximately $717,000 and $740,000 of
net operating loss carryforwards in fiscal 1992 and 1993, respectively. The
Company incurred a loss for the year ended October 31, 1994.
As of October 31, 1994, the Company has net operating loss carryforwards of
approximately $1,000,000 available to offset income from operations and $500,000
to offset future capital gains, as well as research and experimentation tax
credit carryforwards. The net operating loss carryforwards expire in 2002 to
2009, while the capital loss carryforward expires in 1999. The Company also has
carryforwards arising from the pre-merger losses of Vital Images totaling
approximately $2,400,000. These pre-merger carryforwards can only be applied to
the post-merger net income
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the Imaging Business and are restricted as to the amount that can be
utilized in any year due to limitations resulting from the significant change
of ownership. These carryforwards begin to expire in 2005.
There are no significant differences between the tax bases of assets and
liabilities and their financial reporting amounts. The deferred tax assets
associated with the carryforwards have been totally offset by a valuation
allowance because of uncertainty that the Company and the Imaging Business will
generate sufficient taxable income prior to the expiration of the carryforwards.
(6) SHAREHOLDERS' EQUITY:
Warrants:
As a result of the merger, the Company assumed the warrant obligations of
Vital Images which were outstanding at the time of the merger. During 1991, in
connection with the private placement and issuance of common shares, Vital
Images issued stock warrants for the purchase of 32,143 shares of common
stock. The warrants are exercisable through October 1996, at an exercise price
of $4.00 per share. No warrants have been exercised through October 31, 1994.
Restricted Stock:
Under certain compensation agreements, an arrangement which provides for
awards of restricted common stock to key management was adopted in 1992. These
awards of restricted common stock are subject to forfeiture if employment
terminates prior to the end of the prescribed periods. Vesting periods range
from two to four years. The market value of the shares at the time of grant is
recorded as unearned restricted stock. The unearned amount is amortized to
compensation expense over the periods during which the restrictions lapse.
During the years ended October 31, 1992, 1993, and 1994, 13,093, 13,744 and
14,302 restricted shares, respectively, were earned. At October 31, 1994, 35,204
shares of restricted stock which were granted at per share prices of $3.25 to
$3.4375, and vest over periods beginning October 31, 1995 and ending October 31,
1996 remain unearned. As part of these same compensation agreements, the Company
agreed to buy back the number of shares which would allow the employees to meet
their income tax obligations arising from the non-cash compensation related to
the earned restricted shares.
Deferred Compensation:
Prior to the merger, Vital Images granted stock options at prices different
from the estimated market value of the underlying common stock. The difference
between the estimated market value and the exercise price was recorded as
deferred compensation and is amortized on a straight-line basis over the
vesting periods of the related options.
20
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plans:
The Company has four stock option plans, an Employee Incentive Stock Option
Plan (the "1988 Plan"), a Directors' Stock Option ("DSO") Plan, and two plans,
the obligations of which were assumed by the Company as a result of the
acquisition of Vital Images: the 1990 Management Incentive Stock Option Plan
(the "1990 Plan"), and the 1992 Stock Option Plan (the "1992 Plan"). The
Company does not intend to grant further options under either the 1990 or the
1992 plans.
Under the Company's plans, 795,425 shares of common stock remain reserved
for issuance to directors, officers and employees at October 31, 1994. Options
under the plans are exercisable over periods of up to ten years from the date
of grant. The Company has reserved and granted 275,000 shares of common stock
for issuance in connection with non-plan options which have been granted to
consultants, an officer, and directors of the Company. These options are
exercisable over periods of up to seven years from the date of grant. Option
activity is summarized as follows:
PLANS NON-PLAN PRICE PER SHARE
-------- -------- ---------------
Balances at October 31, 1991................ 302,450 169,850 $1.00 -$ 5.375
Granted................................... 391,075 5,000 $2.00 -$ 6.875
Exercised................................. (17,550) (16,764) $1.06 -$ 4.250
Canceled.................................. (18,300) (9,236) $1.00 -$ 5.375
-------- --------
Balances at October 31, 1992................ 657,675 148,850 $1.00 -$ 6.875
Granted................................... 101,100 24,000 $1.875-$ 4.750
Exercised................................. (28,600) (56,560) $1.250-$ 2.500
Canceled.................................. (136,000) (9,900) $1.00 -$ 6.500
-------- --------
Balances at October 31, 1993................ 594,175 106,390 $1.00 -$ 6.875
Granted................................... 74,000 226,000 $2.00 -$ 3.4375
Exercised................................. (7,725) (28,390) $1.00 -$ 2.375
Canceled.................................. (45,600) (29,000) $1.00 -$ 5.375
-------- --------
Balances at October 31, 1994................ 614,850 275,000 $1.00 -$ 6.875
======== ========
Options for the purchase of 608,850 shares of common stock at prices ranging
from $1.00 to $6.875 were exercisable at October 31, 1994.
Subsequent Events.
Subsequent to the end of the 1994 fiscal year, the Company granted options
for 180,442 shares of common stock under various stock option programs,
exercisable over periods beginning October 31, 1995 and ending October 31,
1998. These options were granted at the market value on the date of grant at
prices ranging from $4.75 to $5.125 per share.
In addition, the Company granted to employees 60,252 shares of restricted
common stock, vesting over periods beginning October 31, 1995 and ending October
31, 1998. These restricted stock shares were granted at the market value on the
date of grant at a price of $4.75 per share.
21
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS
Operating Leases:
In November 1989, the Company entered into a new noncancelable operating lease
for rental of a combined office and production facility housing their Surgical
Business in St. Paul, Minnesota, which extended the existing lease for five
years. Total base rental expense for this facility operating lease aggregated
$91,308 for each of the years ended October 31, 1992, 1993 and 1994. The Company
also pays apportioned real estate taxes and common costs on this leased
facility. Common costs are currently about 8.8% of base rent at this facility.
Vital Images leases office facilities for the Imaging Business in Fairfield,
Iowa, under a non-cancelable operating lease expiring on June 1, 1997. The lease
includes an option to renew for one four-year period. Total base rental expense
for the Iowa facility was $83,074 for the year ended December 31, 1992 and
$55,064 and $72,090 for the years ended October 31, 1993 and 1994.
Future minimum payments under all operating leases at both facility locations
(St. Paul, MN and Iowa) at October 31, 1994 are payable as follows:
1995--$135,212, 1996--$74,340 and 1997--$43,365.
Royalties:
In connection with the acquisition of product licenses and product
manufacturing rights, the Company is obligated for the payment of royalties as
follows:
Surgical Business Royalties:
. 2.5% or 3% of net sales of the Biograft through 1998 (2.5% if Biograft
annual sales are under $2,000,000; 3.0% if annual sales are over
$2,000,000). In addition, a royalty of an additional 5% of net sales was
in place through November 2, 1993 (which coincides with the expiration of
the patent)
. 5% on net sales of Peri-Strips through December 2001, or if a patent
issues, until the expiration of the patent
. 5.5% of net sales of the Flo-Rester occluder under two agreements with 3%
payable through July 1995 and 2.5% payable through September 1996
. 3% of net sales of Peri-Guard Processed Bovine Pericardium and Cardio-
Cool through July of 1995
. 3% of net sales of the Bio-Vascular Probe through 2001
. 5% on the next $1,369,555 of aggregate net sales of the Bioflow(R) Small
Diameter Graft after October 31, 1994, and 7% on all net sales
thereafter, payable through October 1998. The Company no longer actively
markets this product.
Royalty expense for the Surgical Business was approximately $231,000,
$247,000, and $169,000 for the years ended October 31, 1992, 1993, and 1994,
respectively, and is included in cost of revenue.
Imaging Business Royalties:
. 5% of net sales of licensed volume visualization software (which
encompasses the core technology) and direct descendant software. The
royalty will terminate on May 24, 1996, two years after the merger of
22
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Vital Images with and into the Company. Prior to June 1992, the royalty
was based on 10% of the net computed value of Vital Images' gross revenue
from all sources, less cost of goods sold, returns, discounts, taxes
(excluding income taxes), allowances, and research and development costs.
In June 1992, Vital Images issued 100,000 shares of common stock to the
licensor in exchange for the modification of the royalty agreement to the
5% of net sales amount. Royalty fee expense under this arrangement totaled
$52,381 for the year ended December 31, 1992, $56,278 for the year ended
October 31, 1993 and $58,875 for the year ended October 31, 1994.
. Base royalty of 6% on net sales for the period fifteen months from the
first commercial sales of any product using the technology developed
under a licensing/research agreement with the licensor entered into in
January 1993. This agreement provides for exclusive (domestic and
international) rights to make, market, and further develop existing
technology and future improvements relating to certain computer programs
and electronic designs for use in the fields of obstetrics and
gynecology, and nonexclusive rights in all other fields or applications.
Under the research portion of the agreement, which expired in July of
1993, development costs of up to $200,000 were to be paid by Vital
Images. During the year ended October 31, 1993, Vital Images paid
$108,518 and had accrued $91,482, the remaining maximum potential amount
related to the development costs under this agreement, all of which were
included in research and development in the statement of operations. In
exchange for the license agreement, the Company paid an initial licensing
fee of $100,000, which was charged to research and development in the
statement of operations for the year ended October 31, 1993. This initial
licensing fee was concurrently used, by the licensor for the purchase of
50,000 shares of common stock. An additional royalty (in addition to the
6% of net revenues) is payable in the amount of $1,000 for each system
sold by the Imaging Business incorporating the technology. To maintain
the exclusivity of the license agreement, the Company is subject to
minimum annual payments, payable on the first through fifth anniversary
of the date of first commercial sale of a product derived from the
licensed technology. The minimum royalty obligation is $1,600,000 and is
payable as $75,000, $225,000, $500,000, and $800,000 on the successive
anniversary dates. The minimum annual payments can be applied against the
base and additional royalty obligations. Under terms of the agreement,
the royalty will terminate seven years from the first commercial sale of
the product. Commercial sales of this product have not yet commenced at
October 31, 1994. It is not certain that the Imaging Business will ever
develop a product from the technology obtained under this agreement.
(8) EMPLOYEE BENEFIT PLANS:
The Company has a salary reduction plan established on January 1, 1991,
which qualifies under Section 401(k) of the Internal Revenue Code. Employee
contributions are limited to 20% of their annual compensation, subject to
yearly limitations. At the discretion of the Board of Directors, the Company
may make matching contributions equal to a percentage of the salary reduction
or other discretionary amount. The Company has made no contributions to the
plan since its inception.
(9) BUSINESS SEGMENTS AND MAJOR CUSTOMERS:
The following is information relating to the Company's business segments,
including foreign revenues. A description of these segments appears in Note 1.
Cost allocations are necessary in the determination of operating
23
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
results by segment. For this reason, management does not represent that these
segments, if operated as independent businesses, would result in the operating
results shown.
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------
1992 1993 1994
---------- ---------- -----------
Net revenue:
Surgical Business..... $4,185,110 $4,422,775 $ 4,951,743
Imaging Business...... 1,825,789 1,721,498 1,679,775
---------- ---------- -----------
Total net revenue... 6,010,899 6,144,273 6,631,518
========== ========== ===========
Operating income (loss):
Surgical Business..... 399,046 333,058 171,363
Imaging Business...... (708,266) (789,789) (1,182,608)
Corporate............. -- -- (419,920)
---------- ---------- -----------
Total operating
income (loss).. (309,220) (456,731) (1,431,165)
========== ========== ===========
Total assets:
Surgical Business..... 7,489,005 8,363,642 7,087,981
Imaging Business...... 1,137,143 1,105,251 824,715
---------- ---------- -----------
Total assets........ 8,626,148 9,468,893 7,912,696
========== ========== ===========
Depreciation and
amortization expense:
Surgical Business..... 303,509 334,416 407,372
Imaging Business...... 421,847 355,072 444,500
---------- ---------- -----------
Total depreciation
and amortization
expense:........... 725,356 689,488 851,872
========== ========== ===========
Capital expenditures:
Surgical Business..... 241,341 59,388 273,908
Imaging Business...... 79,459 110,520 230,817
---------- ---------- -----------
Total capital
expenditures....... 320,800 169,908 504,725
========== ========== ===========
Foreign Revenues:
All of the Company's foreign revenues are derived from the sale of products
produced in the United States. All of the Company's foreign transactions are
negotiated, invoiced and paid in United States dollars. Foreign sales (primary
to Europe) totaled 28%, 29% and 32% of fiscal 1992, 1993 and 1994 net revenue,
respectively. The Surgical Business contributed 70% of the fiscal 1994 foreign
revenues, 83% of the fiscal 1993 foreign revenues and 77% of the fiscal 1992
foreign revenues. The balance of foreign revenues in each fiscal year came from
the Imaging Business.
Major Customers:
For the years ended October 31, 1994, 1993 and 1992, no sales were made to one
customer or one distributor that accounted for 10% or greater of the Company's
gross revenues.
24
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Bio-Vascular, Inc. is
included on page 9 of this Form 10-K/A. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 8 of this Form 10-K/A.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 16, 1994
25
INDEPENDENT AUDITORS' REPORT
Bio-Vascular, Inc.
We have audited the statements of operations, changes in shareholders' equity,
and cash flows (prior to restatement for the merger with Vital Images,
Incorporated) of Bio-Vascular, Inc. (the Company) for the year ended October 31,
1992 and have issued our report thereon dated December 11, 1992. Our audit also
included the financial statement schedule of Bio-Vascular, Inc. for the year
ended October 31, 1992 prior to restatement for the merger with Vital Images,
Incorporated, listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedule
(not presented herein), when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 11, 1992
26
SCHEDULE VIII
BIO-VASCULAR, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------
Allowance for doubtful accounts:
Year ended October 31, 1994 $30,000 $10,000 $ -- $40,000
Year ended October 31, 1993 $20,000 $12,890 $2,890 $30,000
Year ended October 31, 1992 $20,000 $ 5,885 $5,885 $20,000
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ---------
Reserve for obsolete inventory:
Year ended October 31, 1994 $10,000 -- -- $10,000
Year ended October 31, 1993 -- $10,000 -- $10,000
Year ended October 31, 1992 -- -- -- --
27
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 thereunder duly authorized.
BIO-VASCULAR, INC.
By /s/ M. Karen Gilles
--------------------------
M. Karen Gilles
Vice President of Finance/CFO
(Principal Financial Officer)
Dated: September 18, 1995
S-1
EXHIBIT INDEX TO
AMENDMENT NO. 1 TO
ANNUAL REPORT ON
FORM 10-K/A
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994
EXHIBIT INDEX
2.1 Agreement, dated as of July 31, 1985, among Genetic Laboratories, Inc.,
Vascular Services Diversified, Inc., and the Registrant, including first
amendment thereto (incorporated by reference to Exhibit 2.1 to the
Company's registration statement on Form 10, SEC File No. 0-13907).
2.2 Amendment No. 2 to the Agreement referred to in Exhibit 2.1, effective
July 31, 1985 (incorporated by reference to Exhibit 19.1 to the
Registrant's report on Form 10-Q for the quarter ended April 30, 1986,
SEC File No. 0-13907).
2.3 License Agreement, dated September 25, 1985, between the Registrant and
Genetic Laboratories, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's registration statement on Form 10, SEC File No. 0-13907).
2.4 Amendment to License Agreement, dated June 13, 1986, between the
Registrant and Genetic Laboratories, Inc. (incorporated by reference to
Exhibit 10.4 to the Registrant's report on form 8-K, dated June 15, 1986,
SEC File No. 0-13907).
2.5 Debt and Royalty Restatement Agreement, dated June 16, 1986, among
Genetic Laboratories, Inc., Vascular Services Diversified, Inc., and the
Registrant (incorporated by reference to Exhibit 19.3 to the Registrant's
report on Form 10-Q, for the quarter ended April 30, 1986, SEC File No.
0-13907).
2.6 Purchase Agreement, dated February 17, 1986, between the Registrant and
Genetic Laboratories, Inc., including Bill of Sale and Assignment
(incorporated by reference to Exhibit 19.4 to the Registrant's report on
Form 10-Q, for the quarter ended April 30, 1986, SEC File No. 0-13907).
2.7 Purchase and sale agreement dated October 30, 1989 and closed December
28, 1989 between the Registrant & Meadox Medicals, Inc. (incorporated by
reference to Exhibit 2.1, to the Registrant's report on Form 8-K, dated
January 11, 1990, SEC File No. 0-13907).
3.1 Restated Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's registration statement on
Form 10, SEC File No. 0-13907).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's registration statement on Form 10, SEC File No. 0-13907).
4.1 Form of common stock Certificate of Registrant (incorporated by reference
to Exhibit 4.1 to the Registrant's registration statement on Form 10, SEC
File No. 0-13907).
10.1 Assignment and Assumption Agreement, dated July 31, 1985, between the
Registrant and Genetic Laboratories, Inc., including the Purchase
Agreement, dated June 4, 1984, between Genetic Laboratories, Inc., and
Xomed, Inc. (incorporated by reference to Exhibit 19.5 to the
Registrant's report on Form 10-Q, for the quarter ended April 30, 1986,
SEC File No. 0-13907).
10.2 Assignment, dated June 13, 1986, by Genetic Laboratories, Inc. to
Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's
report on Form 8-K, dated June 15, 1986, SEC File No. 0-13907).
10.3 Confirmatory Assignment, dated June 13, 1986, by Genetic Laboratories,
Inc., to the Registrant (incorporated by reference to Exhibit 10.7 to the
Registrant's report on Form 8-K dated June 15, 1986, SEC File No.
0-13907).
10.5 Trademark Assignment Agreement, dated June 19, 1986, between the
Registrant and Genetic Laboratories, Inc. (incorporated by reference to
Exhibit 19.10 to the Registrant's report on Form 10-Q, for the quarter
ended April 30, 1986, SEC File No. 0-13907).
10.6 Assignment, dated June 26, 1986, between the Registrant and Genetic
Laboratories, Inc. (incorporated by reference to Exhibit 19.11 to the
Registrant's report on Form 10-Q, for the quarter ended April 30, 1986,
SEC File No. 0-13907).
10.19 Lease Agreement, as amended, dated June 2, 1988 between Registrant and
Commers Klodt Partnership. (incorporated by reference to Exhibit 10.19 to
the Registrant's report on Form 10-K, SEC File No. 0-13907).
10.21 The 1988 Stock Option Plan of the Registrant (incorporated by reference
to Exhibit 10.21 to the Registrant's report on Form 10-K, for the year
ended October 31, 1988 SEC File No. 33-7249).
10.22 Lease Agreement, as amended, dated November 15, 1989 between Registrant
and Commers-Klodt Partnership. (filed herewith)/*/
10.23 Agreement and Plan of Merger dated as of December 31, 1993 between Bio-
Vascular, Inc. and Vital Images, Incorporated. (filed herewith)/*/
10.24 Vital Images, Incorporated 1990 Management Incentive Stock Option Plan.
(filed herewith)/*/
10.25 Vital Images, Incorporated 1992 Stock Option Plan. (filed herewith)/*/
10.26 Employment letter dated April 7, 1994 between the Registrant and Mr. John
Karcanes. (filed herewith)/*/
10.27 Employment agreement dated May 24, 1994 between the Registrant and Dr.
Vincent Argiro. (filed herewith)/*/
10.28 Form of Change in Control Agreement dated November 16, 1994 entered into
between the Registrant and each of Mr. Karcanes and certain other
executive officers of the Registrant. (filed herewith)/*/
10.29 Form of Change in Control Agreement dated November 16, 1994 entered into
between the Registrant and Dr. Argiro. (filed herewith)/*/
21.1 List of Subsidiaries of the Registrant. (filed herewith)
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith)
23.2 Consent of Deloitte & Touche LLP (filed herewith)
---------------------------------------
/*/ Indicates items previously filed.
E-1