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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-13907
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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
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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
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On May 19, 1997, there were 9,543,394 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
BALANCE SHEETS
AS OF APRIL 30, 1997 AND OCTOBER 31, 1996
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ASSETS
April 30, October 31,
1997 1997
--------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 5,638,409 $ 5,736,650
Marketable securities, short-term............................. 8,694,825 13,761,050
Accounts receivable, net of an allowance for doubtful
accounts of $24,500 at April 30, 1997 and $21,400
at October 31, 1996......................................... 1,656,035 1,465,809
Other receivables............................................. 602,255 632,386
Inventories................................................... 1,516,027 1,972,728
Prepaid expenses.............................................. 379,728 284,811
Deferred income taxes......................................... 157,750 914,300
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Total current assests......................................... 18,645,029 24,767,734
----------- -----------
Equipment and leasehold improvements, net....................... 1,614,051 1,370,256
Intangible assets, net.......................................... 1,123,366 1,213,600
Marketable securities, long-term................................ 4,219,062 10,173,086
Deferred income taxes........................................... 177,643 182,200
Net assets of discontinued operations........................... -- 174,403
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TOTAL ASSETS.............................................. $25,779,151 $37,881,279
=========== ===========
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
2
BIO-VASCULAR, INC.
BALANCE SHEETS
AS OF APRIL 30, 1997 AND OCTOBER 31, 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, October 31,
1997 1996
--------- -----------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable............................................ $ 383,881 $ 306,376
Accrued expenses............................................ 424,229 554,368
Accrued loss on disposal of discontinued operations......... 204,612 1,800,000
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Total current liabilities............................... 1,012,722 2,660,744
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COMMITMENTS AND CONTINGENCY (NOTE 4)
SHAREHOLDERS' EQUITY:
Common stock: authorized 20,000,000 shares of $.01
Par value issued and outstanding, 9,543,394 at
April 30, 1997 and 9,484,898 at October 31, 1996........... 95,434 94,849
Additional paid-in capital.................................. 29,546,360 39,500,239
Accumulated deficit......................................... (4,536,665) (3,838,537)
Unrealized marketable securities holding loss............... (61,495) (51,107)
Unearned compensation....................................... (277,205) (484,909)
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Total shareholders' equity.................................... 24,766,429 35,220,535
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $25,779,151 $37,881,279
=========== ===========
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
3
BIO-VASCULAR, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1997 AND 1996
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Three Months Ended Six Months Ended
April 30, April 30,
(unaudited) (unaudited)
1997 1996 1997 1996
---- ---- ---- ----
Net Revenue............................................... $2,481,038 $2,493,696 $4,806,479 $5,330,421
Cost of Revenue........................................... 1,017,955 715,785 2,021,994 1,518,076
---------- ---------- ---------- ----------
Gross margin............................................ 1,463,083 1,777,911 2,784,485 3,812,345
Operating Expenses:
Selling, general, and administrative.................... 1,336,616 1,500,282 2,512,796 2,729,098
Research and development................................ 249,203 202,641 462,887 416,474
---------- ---------- ---------- ----------
Income (loss) from operations............................. (122,736) 74,988 (191,198) 666,773
Other income, net......................................... 294,050 291,636 576,070 564,879
---------- ---------- ---------- ----------
Income from continuing operations before income taxes..... 171,314 366,624 384,872 1,231,652
Provision for income taxes................................ 74,000 104,000 163,000 445,000
---------- ---------- ---------- ----------
Income from continuing operations......................... 97,314 262,624 221,872 786,652
Loss from discontinued operations, net of income taxes.... (920,000) (286,979) (920,000) (605,615)
---------- ---------- ---------- ----------
Net income (loss)......................................... $ (822,686) $ (24,355) $ (698,128) $ 181,037
========== ========== ========== ==========
Per share amounts
Continuing operations................................... 0.01 0.03 0.02 0.08
Discontinued operations................................. (0.10) (0.03) (0.10) (0.06)
---------- ---------- ---------- ----------
Net income (loss)....................................... $ (0.09) $ 0.00 $ (0.07) $ 0.02
========== ========== ========== ==========
Weighted average shares outstanding....................... 9,511,000 9,439,000 9,501,000 9,903,000
========== ========== ========== ==========
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
4
BIO-VASCULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
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Six Months Ended
April 30
(unaudited)
1997 1996
---- ----
NET CASH PROVIDED BY CONTINUING OPERATIONS............................................... $ 273,253 $ 258,960
NET CASH USED IN DISCONTINUED OPERATIONS................................................. -- (591,760)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...................................... 273,253 (332,800)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of equipment................................................................. 10,000 --
Purchases of equipment and improvements.................................................. (435,583) (229,663)
Additions to intangibles................................................................. (32,845) (512,773)
Investments in marketable securities..................................................... (3,000,000) (10,034,938)
Maturities of marketable securities...................................................... 6,000,000 3,000,000
Cash investment in discontinued subsidiary............................................... (3,733,489) --
Discontinued operations, net............................................................. 586,677 (182,800)
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Net cash used in investing activities.................................................... (605,240) (7,960,174)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to sale of stock........................................................... -- (87,327)
Proceeds related to the exercise of stock options, net of restricted stock repurchased... 233,746 324,480
----------- ------------
Net cash provided by financing activities................................................ 233,746 237,153
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................ (98,241) (8,055,821)
----------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 5,736,650 15,424,969
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 5,638,409 $ 7,369,148
=========== ============
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
5
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS
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(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 six months ended April 30, 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 October 28, 1996, the Bio-Vascular Board of Directors approved the spin-off
("the Distribution") of Vital Images, Inc. ("Vital Images") to the shareholders
of Bio-Vascular. On May 12, 1997, the Company distributed all of the shares of
Vital Images to Bio-Vascular shareholders and on that date Vital Images began
operating as an independent public company. All Bio-Vascular shareholders of
record as of May 5, 1997 received one share of Vital Images common stock for
each two shares of Bio-Vascular stock held on that date. Cash will be issued in
lieu of fractional shares. The Company has attempted to structure the
transaction as tax-free, but since no revenue ruling will be sought, no
assurance can be made about the final tax treatment of the transaction.
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. At the date of Distribution, Bio-Vascular contributed to Vital
Images an additional $1,845,000 of cash equivalents, bringing Vital Images cash,
cash equivalents and marketable securities balances on that date, again to
$10,000,000. Additionally, Bio-Vascular made capital contributions to Vital
Images of $3,079,000 representing net advances of cash made to Vital Images over
the period beginning May 24, 1994, the date on which Vital Images was acquired
by the Company, and ending May 11, 1997, the last date on which Vital Images was
a part of the Company. The accompanying unaudited financial statements of the
Company as of April 30, 1997 reflect all of these transactions. 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 million
contribution and the carrying value of Vital Images' net assets. The
accompanying unaudited financial statements of the Company as of April 30, 1997
reflect all of these transactions.
As a result of the Company's spin-off of Vital Images, 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 the discontinued business for the three and six months ended
April 30, 1996 was $293,000 and $435,000, respectively. Because an additional
six weeks were required to complete the spin-off, the
6
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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Company reported an additional loss on discontinued operations of $920,000. 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) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
April 30, October 31,
1997 1996
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Inventories:
Raw materials and supplies.................. $ 461,763 $ 511,683
Work-in-process............................. 389,260 544,278
Finished goods.............................. 665,004 916,767
---------- ----------
$1,516,027 $1,972,728
========== ==========
Condensed Statements of Cash Flows:
During the six months ended April 30, 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.
(4) 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.
(5) MAJOR CUSTOMERS:
Percentage
Significant Gross Percentage of of Accounts
Customer Sales Gross Sales Receivable
-------- ----- ----------- ----------
Period ended April 30, 1997...... Futuretech $1,014,066 20% 17%
Life Systems 749,084 15% 14%
CardioMedical 507,300 10% 11%
Pacific West 364,425 7% 10%
Period ended April 30, 1996...... Futuretech $ 982,693 17% 11%
Life Systems 837,823 15% 18%
CardioMedical 629,082 11% 11%
7
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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Net export sales amounted to 22%, and 21% for the six month period ended April
30, 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:
Six Months Ended
April 30,
1997 1996
---- ----
Europe and Middle East................................. $650,966 $719,023
Asia and Pacific Region................................ 337,057 312,150
Canada................................................. 99,080 122,639
Latin America and Others............................... 6,461 30,516
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Spin-off of Vital Images
On October 28, 1996, the Bio-Vascular Board of Directors approved the spin-off
("the Distribution") of Vital Images, Inc. ("Vital Images") to the shareholders
of Bio-Vascular, believing that strategically and financially, the timing and
circumstances were right to separate the Company's Surgical and Medical
Visualization Businesses for the long-term benefit of the shareholders. Both
organizations, it is believed, will benefit from a tighter focus on their
respective markets, will be able to invest in research and development at levels
appropriate to their respective stages of development and will be able to evolve
unique organizational and marketing structures to better serve their
substantially different markets.
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 as
of May 5, 1997 received one share of Vital Images common stock for each two
shares of Bio-Vascular stock held on that date. Cash will be issued in lieu of
fractional shares. 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.
Based on the Company's original estimate that the Distribution would be
effective on or about March 31, 1997, the Company recorded a Loss on Disposal at
October 31, 1996 of $1,348,000, which included estimates of Vital Images net
losses from November 1, 1996 through March 31, 1997, along with the estimated
transaction costs related to the spin-off, net of an estimated tax benefit.
Because an additional six weeks were required to complete the spin-off, the
Company reported an additional loss on discontinued operations of $920,000. 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.
The Company's continuing business develops, manufactures and markets proprietary
specialty medical products for use in thoracic, cardiac, neuro and vascular
surgery.
Medicare Non-Coverage Decision
The Health Care Financing Administration ("HCFA"), the agency of the Federal
Government that administers Medicare, made a non-coverage decision for lung
volume reduction surgery ("LVRS"), a surgical treatment for late-stage
emphysema, that was effective January 1, 1996. This decision significantly
impacted the Company's revenue from sales of Peri-Strips. Peri-Strips, which
were cleared to market by the Food and Drug Administration in April of 1994, are
used to enable LVRS. At the time that this non-coverage decision was put into
effect, the Company estimates that approximately 70% of the patients undergoing
LVRS were Medicare patients. There has been no Medicare reimbursement for this
procedure since the January 1, 1996 effective date of the non-coverage decision.
While the Company understands that several private insurance companies and
managed care organizations are currently reimbursing LVRS based
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
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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.
The National Institute of Health (NIH), in collaboration with HCFA, has outlined
and is in the process of organizing a seven year, prospective, randomized study
of LVRS to determine whether it is safe and efficacious. The study, as it is
currently designed, is limited to 2,580 patients, of which 1,380 would be
eligible to have the LVRS procedure. Members of Congress, responding to the
concerns of their constituents and supported by a significant number of
favorable peer-reviewed published medical articles bearing out the safety and
efficacy of LVRS, are questioning HCFA's study as it is currently planned.
Because HCFA and 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, continues to work for restoration of coverage of LVRS for
Medicare dependent patients.
Results of Continuing Operations
Comparison of the Three Months Ended April 30, 1997 with
the Three Months Ended April 30, 1996
Net revenue was essentially flat at $2,481,000 for the 1997 quarter compared to
$2,494,000 for the 1996 quarter, primarily as a result of the decrease in
revenue from Peri-Strips. Peri-Strips revenue decreased $152,000, or 16% to
$780,000 in the 1997 quarter from $932,000 in the 1996 quarter, however, Peri-
Strips revenue increased slightly over the 1997 first quarter level of $762,000.
The Company believes that the higher Peri-Strip revenue in the second quarter of
1996 was largely due to the number of cases being performed at no charge for
selected Medicare patients that were awaiting LVRS when HCFA made its non-
coverage decision. Revenue from sales of other Tissue-Guard products, Dura-
Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased $117,000, or 14%
to $946,000 from $829,000. Growing market share for the Dura-Guard and Vascu-
Guard products were responsible for the increase. Biograft revenue decreased by
$18,000, or 8%, 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 $39,000, or 8% to $543,000 from $504,000. The Company
believes that the growth in revenue, which is attributable to Flo-Rester, is due
to its use in minimally invasive coronary bypass surgery, a procedure which is
increasing.
The gross margin percentage was 59% in the 1997 quarter and 71% 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 year from the first quarter
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
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level due to anticipated increases in production volume. This forward-looking
statement will be influenced primarily by the accuracy of the Company's current
estimates of production volume for 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 decreased $164,000, or 11% to
$1,337,000 from $1,500,000. The decrease is primarily due to the management of
discretionary expenses. General and administrative expense decreased $136,000,
or 16%, while selling expense decreased $28,000, or 4%.
Research and development ("R&D") expense increased $47,000, or 23% to $249,000
from $203,000 in the 1996 quarter. 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 lower gross margins, continuing operations had an operating
loss in the 1997 quarter of $123,000 compared to operating income from
continuing operations of $75,000 in the 1996 quarter. Other income, primarily
interest income, was $294,000 and $292,000 in the 1997 and 1996 quarters,
respectively. As a result, continuing operations had income before income taxes
in the 1997 and 1996 quarters of $171,000 and $367,000, respectively.
The Company recorded a provision for income taxes of $74,000 for the 1997
quarter, which is based on the Company's estimate of its annual effective rate
for fiscal 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 $104,000.
Income from continuing operations was $97,000, or $0.01 per share for the 1997
quarter, and $263,000, or $0.03 per share for the 1996 quarter. The loss from
discontinued operations in the 1997 quarter was $920,000, or $0.10 per share,
resulting in a net loss for the 1997 quarter of $823,000, or $0.09 per share.
The loss from discontinued operations in the 1996 quarter was $287,000, or $0.03
per share, resulting in a net loss for the 1996 quarter of $24,000, or no cents
per share.
Comparison of the Six Months Ended April 30, 1997 with
the Six Months Ended April 30, 1996
Net revenue decreased $524,000, or 10% to $4,806,000 from $5,330,000, primarily
as a result of the decrease in revenue from Peri-Strips. Peri-Strips revenue
decreased $898,000, or 37% to $1,542,000 from $2,440,000. The decrease in
revenue from Peri-Strips is primarily due to the Medicare LVRS non-coverage
decision which affects all of the 1997 period and only part of the 1996 period.
Revenue from sales of other
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
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Tissue-Guard products, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-
Guard, increased $345,000, or 25% to $1,748,000 from $1,403,000, primarily due
to increases in revenue from the sales of Dura-Guard and Vascu-Guard, arising
from market share gains. Biograft revenue decreased by $92,000, or 18%,
comparing the first halves 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 $119,000, or 12% to $1,099,000 from $980,000, with the
majority of the increase in revenue from sales of Flo-Rester. The Company
believes that the growth in revenue from Flo-Rester is due to its use in
minimally invasive coronary bypass surgery, a procedure which is increasing.
The gross margin percentage was 58% in 1997 and 72% 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 59%
in the second quarter of 1997. It is expected that the gross margin percentage
will continue to increase slightly during the year from the first quarter level
due to anticipated increases in production volume. This forward-looking
statement will be influenced primarily by the accuracy of the Company's current
estimates of production volume for 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 decreased $216,000, or 8% to
$2,513,000 from $2,729,000. The decrease is primarily due to the management of
discretionary expenses. General and administrative expense decreased $107,000,
or 7%, while selling expense decreased $109,000, or 9%.
R&D expense increased $46,000, or 11% to $463,000 from $416,000. 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, continuing operations had an operating loss in the first six
months of 1997 of $191,000 compared to operating income from continuing
operations of $667,000 in the first six months of 1996. Other income, primarily
interest income, was $576,000 and $565,000 in the 1997 and 1996 quarters,
respectively. As a result, continuing operations had income before income taxes
in the 1997 and 1996 quarters of $384,000 and $1,232,000, respectively.
The Company's recorded provision for income taxes for the first half of 1997 is
$163,000 and is based on the Company's estimate of its annual effective rate for
fiscal 1997. In the first half 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
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
continuing operations in the first half of 1996 quarter was $445,000.
Income from continuing operations was $222,000, or $0.02 for 1997 and $787,000,
or $0.08 per share for 1996. The loss from discontinued operations for 1997 was
$920,000, or $0.10 per share, resulting in a net loss for 1997 of $698,000, or
$0.07 per share (difference due to rounding). The loss from discontinued
operations in 1996 was $606,000, or $0.06 per share, resulting in net income for
1996 of $181,000, or $0.02 per share.
Liquidity and Capital Resources
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. At the date of Distribution, May 12, 1997, Bio-Vascular
contributed an additional $1,845,000, bringing Vital Images' cash, cash
equivalents and marketable securities balances on that date, again to
$10,000,000. Additionally, Bio-Vascular made capital contributions of $3,079,000
representing net advances of cash made to Vital Images over the period beginning
May 24, 1994, the date on which Vital Images was acquired by the Company, to May
11, 1997, the last date on which Vital Images was a part of the Company. These
transactions are all included in the April 30, 1997 financial statements of Bio-
Vascular.
At April 30, 1997, after accounting for all the transactions of the
Distribution, the Company has cash, cash equivalents and marketable securities
totaling $18,553,000. At April 30, 1997, working capital was $17,632,000 and the
current ratio is 18 to 1.
Operating activities provided $276,000. The Company invested $436,000 in
equipment and leasehold improvements primarily related to new manufacturing
processes related to both an existing and a new product. Financing activities
provided $234,000 and represents stock option exercises, net of restricted stock
repurchased and a tax benefit associated with the option exercises. Finally, the
Company made the final investment in Vital Images, using $1,845,000 to bring
their cash balances to $10,000,000 at the date of Distribution.
Historically, the cash needs of the Company have been met by cash generated from
operations and investments. The Company believes its cash, cash equivalents and
marketable securities of $18,552,000, which is fully adjusted for the
Distribution, along with cash provided by continuing operations, 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
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
based on both common shares outstanding and consideration of the dilutive
effects of common stock equivalents.
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 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.
14
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PART II. OTHER INFORMATION
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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
The following is a report of the voting results of the Company's annual
shareholders meeting held on March 19, 1997.
1. Proposal to elect six directors was approved. John T. Karcanes, James F.
Lyons, Richard W. Perkins, Edward E. Strickland, Timothy M. Scanlan and
Anton R. Potami were elected until the next annual meeting of shareholders
or until their successors are duly elected and qualified. There were no
broker non-votes. The tabulation was as follows:
Director Votes For Votes Against
-------- --------- -------------
John T. Karcanes 8,766,185 54,373
James F. Lyons 8,764,125 56,430
Richard W. Perkins 8,764,108 56,447
Anton R. Potami 8,763,952 56,603
Timothy M. Scanlan 8,764,632 55,923
Edward E. Strickland 8,761,955 58,600
2. Proposal to amend the Corporation's Restated Articles of Incorporation, as
amended, to create a class of Preferred Stock, issuable in series, was
approved. There were 3,471,740 votes cast in favor and 1,036,122 votes cast
against the proposal, with 62,225 shares abstaining. There were 4,250,468
broker non-votes, which were treated as shares not entitled to vote on the
proposal.
15
ITEM 5. OTHER INFORMATION
Effective as of May 12, 1997 (the "Distribution Date") the Company completed the
spin-off distribution (the "Distribution") of all of the issued and outstanding
shares of common stock, $.01 par value per share, together with certain
preferred stock purchase rights attached thereto ("Vital Images Common Stock"),
of Vital Images, Inc. ("Vital Images"). Prior to the Distribution, Vital Images
was a wholly-owned subsidiary of the Company engaged in the Company's Medical
Visualization Business.
The Distribution was made to holders of record of the Company's common stock,
$.01 par value per share ("Bio-Vascular Common Stock"), as of May 5, 1997, on
the basis of one share of Vital Images Common Stock for each two shares of Bio-
Vascular Common Stock held as of that date. No holder of Bio-Vascular Common
Stock was required to pay any cash or other consideration for the shares of
Vital Images Common Stock received in the Distribution, to surrender or exchange
any shares of Bio-Vascular Common Stock, or to take any other action in order to
receive the shares of Vital Images Common Stock to which they were entitled in
the Distribution. No certificates or scrip representing fractional shares of
Vital Images Common Stock were issued to the Company's shareholders in the
Distribution. Pursuant to an agreement among the Company, Vital Images and
American Stock Transfer & Trust Company as distribution agent (the "Distribution
Agent") the Distribution Agent was directed to aggregate all fractional shares
of Vital Images Common Stock otherwise issuable in the Distribution into whole
shares and sell them in the open market at then-prevailing prices on behalf of
shareholders who would have otherwise been entitled to receive such fractional
share interests. Cash payments in the amount of the pro rata share of such total
sale proceeds, net of any commissions incurred in connection with such sales,
will be made in lieu of such fractional interests.
In anticipation of the Distribution, the Company agreed to assign to Vital
Images $10,000,000 in cash, cash equivalents and marketable securities,
effective November 1, 1996. Subsequently, the Company's Board of Directors
determined, effective as of the Distribution Date, to make such additional
capital contributions to Vital Images as necessary to bring Vital Images' cash,
cash equivalents and marketable securities balances to a combined $10,000,000,
resulting in an additional $1,845,000 contribution by Bio-Vascular as of that
date.
Upon completion of the Distribution, Vital Images became an independent public
company, separate from the Company. However, in order to provide for an orderly
transition of Vital Images to an independent company, the Company and Vital
Images entered into certain agreements regarding corporate matters relating to
the Distribution, transition services to be provided to Vital Images by the
Company for a limited period following the Distribution, employee benefit
matters and tax and indemnification matters. Each of these agreements is
intended to set forth, on an arms-length basis, the agreement of the parties
with respect to the subject matter thereof.
Following the Distribution, the Company and Vital Images have separate
management and Boards of Directors. Two individuals, Messrs. Richard W. Perkins
and Edward E. Strickland, currently serve as directors of both the Company and
Vital Images, although it is expected that Mr. Perkins will only serve as a
director of Vital Images for a transitional period of approximately 12 to 18
months and will not seek reelection as a director of Vital Images thereafter.
16
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 19.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
quarter ended April 30, 1997.
17
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.
May 27, 1997 /s/ M. Karen Gilles
-----------------------------
M. Karen Gilles
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
18
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
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3.1 Restated Articles of Incorporation of the Company, as amended (filed
herewith electronically).
3.2 Amendment to Restated Articles of Incorporation, as amended, dated March
20, 1997 (filed herewith electronically).
4.1 Restated Articles of Incorporation of the Company, as amended (see Exhibit
3.1).
4.2 Amendment to Restated Articles of Incorporation, as amended, dated March
20, 1997 (see Exhibit 3.2).
10.1 1988 Stock Option Plan, as amended (filed herewith electronically).
10.2 1995 Stock Incentive Plan, as amended (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 April 30, 1997
(filed herewith electronically).
27.2 Restated Financial Data Schedule for the three month period ended April
30, 1996 (filed herewith electronically).