________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-13907
___________________________________________________
BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (612) 603-3700
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ______
___________________________________________________
On August 22, 1997, there were 9,543,200 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
CONDENSED BALANCE SHEETS
AS OF JULY 31, 1997 AND OCTOBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
July 31, October 31,
1997 1996
-------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,206,698 $ 5,736,650
Marketable securities, short-term........................ 7,728,521 13,761,050
Accounts receivable, net................................. 1,770,689 1,465,809
Other receivables........................................ 470,273 632,386
Inventories.............................................. 1,577,465 1,972,728
Prepaid expenses......................................... 347,067 284,811
Deferred income taxes.................................... 162,050 914,300
----------- -----------
Total current assets..................................... 16,262,763 24,767,734
----------- -----------
Equipment and leasehold improvements, net................... 1,635,937 1,370,256
Intangible assets, net...................................... 1,058,146 1,213,600
Marketable securities, long-term............................ 6,239,649 10,173,086
Deferred income taxes....................................... 191,843 182,200
Net assets of discontinued operations....................... -- 174,403
----------- -----------
TOTAL ASSETS............................................. $25,388,338 $37,881,279
=========== ===========
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
2
BIO-VASCULAR, INC.
CONDENSED BALANCE SHEETS
AS OF JULY 31, 1997 AND OCTOBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, October 31,
1997 1996
-------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 456,417 $ 306,376
Accrued expenses.......................................... 493,788 554,368
Accrued loss on disposal of discontinued operations....... 26,967 1,800,000
----------- -----------
Total current liabilities.................................
977,172 2,660,744
COMMITMENTS AND CONTINGENCY (NOTE 5) ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock: authorized 20,000,000 shares of $.01
par value issued and outstanding, 9,543,200 at
July 31, 1997 and 9,484,898 at October 31, 1996........... 95,432 94,849
Additional paid-in capital................................ 29,593,140 39,500,239
Accumulated deficit....................................... (5,028,063) (3,838,537)
Unrealized marketable securities holding loss............. (3,289) (51,107)
Unearned compensation..................................... (246,054) (484,909)
----------- -----------
Total shareholders' equity................................... 24,411,166 35,220,535
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY....................................................... $25,388,338 $37,881,279
=========== ===========
(The accompanying notes are an integral part of the interim unaudited
financial statements.)
3
BIO-VASCULAR, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
July 31, July 31,
(unaudited) (unaudited)
1997 1996 1997 1996
---------- ---------- ----------- ----------
Net Revenue..................................... $2,408,686 $2,527,896 $ 7,215,165 $7,858,317
Cost of Revenue................................. 952,370 1,057,944 2,974,365 2,576,020
---------- ---------- ----------- ----------
Gross margin................................. 1,456,316 1,469,952 4,240,800 5,282,297
Operating Expenses:
Selling, general, and administrative......... 1,628,820 1,294,859 4,141,616 4,023,957
Research and development..................... 325,155 237,998 788,042 654,472
---------- ---------- ----------- ----------
Income (loss) from operations................... (497,659) (62,905) (688,858) 603,868
Other income, net............................... 305,961 255,663 882,032 820,541
---------- ---------- ----------- ----------
Income (loss) from continuing operations
before income taxes............................ (191,698) 192,758 193,174 1,424,409
Provision for income taxes...................... 299,700 81,500 462,700 526,500
---------- ---------- ----------- ----------
Income (loss) from continuing operations........ (491,398) 111,258 (269,526) 897,909
Loss from discontinued operations, net of
income taxes................................... -- 287,926 920,000 893,540
---------- ---------- ----------- ----------
Net income (loss)............................... $ (491,398) $ (176,668) $(1,189,526) $ 4,369
========== ========== =========== ==========
Per share amounts
Continuing operations........................ (.05) .01 (.03) .09
Discontinued operations...................... -- (.03) (.10) (.09)
---------- ---------- ----------- ----------
Net income (loss)............................ $ (.05) $ (.02) $ (.13) $ -
========== ========== =========== ==========
Weighted average shares outstanding............. 9,545,000 9,440,000 9,512,000 9,870,000
========== ========== =========== ==========
(The accompanying notes are an integral part of the interim unaudited
financial statements.)
4
BIO-VASCULAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
----------- ------------
NET CASH PROVIDED BY CONTINUING OPERATIONS.................... $ 51,615 $ 11,229
NET CASH USED IN DISCONTINUED OPERATIONS...................... - (694,237)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......... 51,615 (683,008)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............................... 10,030 -
Purchases of equipment and improvements....................... (544,492) (282,203)
Additions to intangibles...................................... (32,845) (553,742)
Investments in marketable securities.......................... (7,000,000) (21,000,000)
Maturities of marketable securities........................... 9,000,000 13,795,921
Cash investment in discontinued subsidiary.................... (3,733,489) -
Discontinued operations, net.................................. 449,033 (267,783)
----------- ------------
Net cash used in investing activities......................... (1,851,763) (8,307,807)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to sale of stock................................ - (87,326)
Proceeds related to the exercise of stock options, net of
restricted stock repurchased.................................. 270,196 653,712
----------- ------------
Net cash provided by financing activities..................... 270,196 566,386
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (1,529,952) (8,424,429)
----------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 5,736,650 15,424,969
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 4,206,698 $ 7,000,540
=========== ============
(The accompanying notes are an integral part of the interim unaudited
financial statements.)
5
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Bio-Vascular ("Bio-Vascular"
or "the Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary, including items of a normal
recurring nature, for a fair presentation have been included. Operating results
for the nine months ended July 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending October 31, 1997. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report to Shareholders and in Form 10-K for the year ended
October 31, 1996.
(2) DISCONTINUED OPERATIONS:
On May 12, 1997, the Company completed the spin-off distribution of all of the
shares of Vital Images, Inc. (Vital Images) to shareholders of Bio-Vascular,
with Vital Images thereafter operating as an independent public company. All
Bio-Vascular shareholders of record received one share of Vital Images common
stock for each two shares of Bio-Vascular stock held, with cash issued in lieu
of fractional shares. The Company attempted to structure the transaction as tax-
free, but since no revenue ruling was sought, no assurance can be made about the
final tax treatment of the transaction.
At the date of distribution, Bio-Vascular made a final contribution of cash to
Vital Images of $1,845,000 to bring Vital Images' cash and investment balances
to $10,000,000, as required by the terms of the Distribution Agreement between
the companies. Bio-Vascular's total contribution to Vital Images in conjunction
with the distribution was $11,845,000. The Company recorded the distribution of
Vital Images common stock to its shareholders as of March 19, 1997, the date the
Board of Directors of the Company gave final approval for the transaction. The
distribution was recorded by reducing shareholders' equity by $10,183,000, which
represents the $10,000,000 cash and investment balance, plus the carrying value
of Vital Images' net assets. The accompanying unaudited financial statements of
the Company as of July 31, 1997 reflect all of these transactions. The Company's
financial statements and notes report Vital Images as discontinued operations.
Prior years' financial statements and notes have been restated accordingly.
Net revenue of discontinued operations for the three and nine months ended July
31, 1996 was $194,000 and $629,000, respectively. Because the completion of the
spin-off extended six weeks beyond the estimated date, the Company reported an
additional loss on discontinued operations of $920,000 in the second quarter.
This amount relates entirely to Vital Images' net losses and spin-off related
costs that exceeded those estimated and accrued on October 31, 1996, the end of
the previous fiscal year.
(3) INCOME TAXES:
When the Company finalized its accounting for the spin-off of Vital Images in
May 1997, the Company
6
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
expected to utilize a significant portion of Vital Images' net operating loss
carry forwards against the Company's fiscal 1997 taxable income. As a result of
events occurring during the third quarter, the Company determined that the
expected tax benefit will not be realized. Thus, the Company wrote-off the
associated tax asset and recorded a net income tax expense of $299,700.
The deferred tax asset of $353,893 at July 31, 1997, is principally related to
research and experimental tax credits, which expire between 2009 and 2012.
(4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
July 31, October 31,
1997 1996
---------- ------------
Accounts Receivable............................ $1,796,789 $1,487,209
Allowance for doubtful accounts................ (26,100) (21,400)
---------- ----------
$1,770,689 $1,465,809
========== ==========
Inventories:
Raw materials and supplies..................... $ 539,163 $ 511,683
Work-in-process................................ 466,968 544,278
Finished goods................................. 571,334 916,767
---------- ----------
$1,577,465 $1,972,728
========== ==========
Condensed Statements of Cash Flows:
During the nine months ended July 31, 1997, the Company contributed
approximately $8,000,000 of marketable securities to Vital Images, along with
cash and cash equivalents of approximately $3,733,000 and related accrued
interest receivable.
(5) CONTINGENCY:
In late 1996, the Company received notice of a suit brought against it in Japan
by a former Japanese distributor, claiming wrongful termination and economic
damage of $500,000. The Company believes the claim to be completely without
merit and intends to pursue this matter vigorously.
7
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
(6) MAJOR CUSTOMERS:
Percentage of
Significant Gross Percentage of Accounts
Customer Sales Gross Sales Receivable
-------- ----- ----------- ----------
Nine months ended July 31, 1997....... Futuretech 1,476,722 20% 11%
Life Systems 1,032,235 14% 12%
CardioMedical 879,437 12% 15%
Pacific West 502,951 7% 12%
Nine months ended July 31, 1996....... Futuretech 1,471,780 18% 16%
Life Systems 1,225,894 15% 15%
CardioMedical 956,964 12% 15%
Net export sales amounted to 23%, and 21% for the nine month period ended July
31, 1997 and 1996, respectively. Substantially all of the Company's export sales
are negotiated, invoiced and paid in U.S. dollars. Gross export sales by
geographic area are summarized as follows:
Nine Months Ended
July 31,
1997 1996
--------- ---------
Europe and Middle East.................................. 1,044,776 1,097,381
Asia and Pacific Region................................. 504,869 485,563
Canada.................................................. 165,186 147,823
Latin America and Others................................ 9,825 48,408
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Although net revenue for the quarter was down 5% over the same quarter in 1996
due largely to a decline in revenue from sales of Peri-Strips, the Company
continues to see impressive revenue growth from its core Tissue Guard product
line, excluding Peri-Strips. The Tissue Guard product line was up 46% over the
third quarter of 1996 and up 17% over the second quarter of 1997. All products
in the Tissue Guard product line, Dura-Guard, Vascu-Guard, Supple Peri-Guard
and Peri-Guard had significant sales increases in the quarter.
Domestic revenue from Peri-Strips continues to be significantly affected by
the Health Care Financing Administration's ("HCFA") non-coverage decision in
January 1996 for lung volume reduction ("LVR") surgery. Revenue from Peri-
Strips was down 42% from the third quarter of 1996 and down 24% from the
second quarter of 1997. The Company believes that some hospitals in the U.S.
are no longer promoting LVR cases. However, the Company is encouraged that
surgeons and other medical professionals continue to seek training on the LVR
surgical procedure. Peri-Strips revenue was also down in the quarter from the
Company's original expectations due to a delay in the start date for a study
of LVR surgery sponsored jointly by HCFA and the National Institute of Health.
The start date is subject to the completion of organizational and procedural
activities. The Company had originally received indications that the study
would commence in June 1997. The Company accordingly anticipated demand for
the Peri-Strip product associated with the HCFA study and corresponding Peri-
Strips revenue in the second half of fiscal 1997. The Company now believes
that the earliest surgeries under the study will begin is January 1998.
Peri-Strips Dry, an advanced version of Peri-Strips was launched in mid-July
1997. The Company believes the Peri-Strips Dry design provides significant
advantages for thorascopic surgical procedures over the original Peri-Strips
"sleeve" design. Peri-Strips Dry eliminates the need to extract the sutured
sleeve backing that was part of the original design. A specially formulated
PSD Gel enables the Peri-Strips Dry strip to adhere to the surgical stapler.
Thorascopic procedures are currently estimated to comprise 75% of the total
LVR surgeries performed in Europe. The majority of surgeons in Europe have
performed LVR surgery without the benefit of a staple-line buttress. The
Company was successful in convincing a leading European thoracic surgeon to
evaluate Peri-Strips Dry. This surgeon is now the lead investigator for the
Company's marketing clinical trials currently underway at three European
sites. The Company expects European revenue growth from Peri-Strips Dry and
Peri-Strips will be gradual as reimbursement is obtained on a country-by-
country basis. Currently, European patients pay directly for the product. In
the U.S., Peri-Strips Dry is expected to replace the original Peri-Strips
sleeve configuration for thorascopic procedures.
The Spin-off of Vital Images
On May 12, 1997, the Company distributed all of the shares of Vital Images to
shareholders of Bio-Vascular and on that date, Vital Images began operating as
an independent public company. Vital Images is currently traded on the OTC
Bulletin Board under the symbol VTAL. All Bio-Vascular shareholders of record
received one share of Vital Images common stock for each two shares of Bio-
Vascular stock held.
Both organizations should benefit from a tighter focus on their respective
markets, be able to invest in
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
research and development at levels appropriate to their respective stages of
development and be able to evolve unique organizational and marketing
structures to better serve their substantially different markets. As a result
of the Company's spin-off of Vital Images, the Company's financial statements
and notes thereto report the business of Vital Images as discontinued
operations.
Medicare Non-Coverage Decision
Effective January 1, 1996, HCFA made a non-coverage decision with respect to LVR
surgery, a surgical treatment for late-stage emphysema. This decision
significantly impacted the Company's revenue from sales of Peri-Strips. At the
time that this non-coverage decision was put into effect, the Company estimates
that approximately 70% of the patients undergoing LVR surgery were Medicare
patients. While the Company understands that several private insurance companies
and managed care organizations continue to reimburse LVR surgery based on their
own evaluation of the procedure and its outcomes, it is unknown whether these
private payers will change their reimbursement practices in the future or if
more private payers will begin to cover the procedure.
The National Institute of Health (NIH), in collaboration with HCFA, has outlined
and is in the process of organizing a prospective, randomized study of LVR
surgery to determine whether it is safe and efficacious. The study, as it is
currently designed, is limited to a small number of patients relative to the
number of Medicare dependent patients who would be otherwise eligible for the
procedure. Congress, responding to the concerns of their constituents and in
light of a significant number of favorable peer-reviewed published medical
articles bearing out the safety and efficacy of LVR, requested HCFA to present
to Congress updated information on the LVR procedure by January 1997. HCFA
requested an extension until April 1997 and as of the date of this report had
not yet complied with Congress' request. Because HCFA and the NIH appear intent
on proceeding with the study, no assumption can be made as to whether the
efforts of Congress or the mounting evidence regarding the benefits of this
procedure will cause them to alter the study. The Company, however, will
continue to work for restoration of coverage of LVR surgery for Medicare
dependent patients.
Results of Continuing Operations
Comparison of the Three Months Ended July 31, 1997 with
the Three Months Ended July 31, 1996
Net revenue was $2,409,000 for the 1997 quarter compared to $2,528,000 for the
1996 quarter, primarily as a result of the decrease in revenue from sales of
Peri-Strips. Peri-Strips revenue decreased $423,000, or 42% to $594,000 in the
1997 quarter from $1,017,000 in the 1996 quarter. Revenue from sales of other
Tissue-Guard products, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-
Guard, increased $348,000, or 46% to $1,105,000 from $757,000. All Tissue Guard
products showed significant increases. Biograft revenue decreased by $56,000, or
23%, comparing the 1997 and 1996 quarters, continuing a trend representative of
the late stage of this product's life cycle. Revenue from sales of surgical
productivity tools (Flo-Rester and the Bio-Vascular Probe) increased 3% to
$518,000 from $505,000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
The gross margin percentage was 60% in the 1997 quarter and 58% in the 1996
quarter. During fiscal 1996, the gross margin percentages declined through the
quarters, primarily due to decreases in the production volume in response to
decreases in expected demand for Peri-Strips as a result of the HCFA decision.
The gross margin percentage was 62% by the fourth quarter of 1996 and was 57% in
the first quarter of 1997. It is expected that the gross margin percentage will
increase slightly during the fourth quarter of 1997 from its third quarter level
due to increasing production volume. This forward-looking statement will be
influenced primarily by the accuracy of the Company's current estimates of
production volume for the fourth quarter of 1997, and would be impacted by
significant increases or decreases in actual production volume as compared to
the estimate, by material changes in the Company's product mix and by the
accuracy of the Company's estimates of product costs.
Selling, general and administrative expense increased $334,000, or 26% to
$1,629,000 from $1,295,000. General and administrative expense increased
$243,000, or 36%, The increase is primarily due to one time costs related to the
resignation in the period of the Company's former president and CEO and
increases in regulatory and other costs. Selling expense increased $91,000, or
15% primarily due to the Peri-Strips Dry market launch.
Research and development ("R&D") expense increased $87,000, or 37% to $325,000
from $238,000 in the 1996 quarter. The Company has several projects under
development including the Company's small diameter graft. R&D expense is
expected to increase as these and other projects continue to progress. This
forward-looking statement will be influenced primarily by the number of
projects, the related R&D personnel requirements, the development path and
success of each project, the expected costs, and the timing of these costs.
R&D efforts have recently resulted in two new product opportunities. The Company
filed a 510(k) application in May with the U.S. Food and Drug Administration
(the "FDA") for CV Peri-Guard. The intended uses for CV Peri-Guard include
intra-cardiac patching and vessel repair. The Company currently expects FDA
clearance for CV Peri-Guard during the first quarter of 1998. This forward-
looking statement is subject to the length of time required for FDA review of
the Company's application, any FDA requests for further data regarding CV Peri-
Guard, and the FDA's determination that CV Peri-Guard meets the criteria for
510(k) marketing clearance. CV Peri-Guard will be the newest addition to the
Tissue Guard product line.
The Company also intends to file a 510(k) application to obtain FDA clearance
for a new ophthalmic indication of its Supple tissue before the end of calendar
1997. This product will be another extension of the Tissue Guard product line
and will have indications for use in enucleation surgery. Enucleation removes a
patient's damaged eye and supporting tissue and replaces it with an implant. The
Company's tissue would be used in the procedure as an orbital implant wrap
instead of using cadaver sclera to encase the orbital prosthesis. The Company
estimates that 25,000 to 30,000 enucleation procedures are performed worldwide
each year. The foregoing forward-looking information regarding the Company's
intent to file for 510(k) marketing clearance for these applications will depend
upon the Company's assessment of the development
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
and potential market opportunities for these products compared to the expected
costs of applying for, and the likelihood of receiving, such clearance.
Continuing operations had an operating loss in the 1997 quarter of $498,000
compared to an operating loss of $63,000 in the 1996 quarter. Other income,
primarily interest income, was $306,000 and $256,000 in the 1997 and 1996
quarters, respectively. As a result, continuing operations had loss before
income taxes in the 1997 quarter of $192,000 as compared to income before
income taxes in the 1996 quarter of $193,000.
The Company recorded a provision for income taxes of $300,000 for the 1997
quarter. The provision includes a write-off of an income tax asset. When the
Company finalized its accounting for the spin-off of Vital Images in May 1997,
the Company expected to utilize a significant portion of Vital Images' net
operating loss carry forwards against the Company's anticipated fiscal 1997
taxable income. These net operating losses were generated by Vital Images
prior to its spin-off and are only available to the Company in the 1997 fiscal
year, reverting solely to Vital Images thereafter. Because the Company now
expects fiscal 1997 taxable income to fall short of the Company's original
expectations the tax asset had no further value to Bio-Vascular, and
accordingly, was written-off in the quarter ended July 31, 1997.
In the 1996 quarter, the Company allocated its provision for income taxes to
continuing and discontinued operations based on their respective pretax income
contribution and tax attributes. As a result, the amount of the provision
allocated to continuing operations in the 1996 quarter was $81,500.
The net loss was $491,000, or $.05 per share for the 1997 quarter. The 1996
quarter had income from continuing operations of $111,000, or $.01 per share
and a loss from discontinued operations of $288,000, or $.03 per share,
resulting in a net loss for the 1996 quarter of $177,000, or $.02 per share.
The 1997 quarter had no discontinued operations activity.
Comparison of the Nine Months Ended July 31, 1997 with
the Nine Months Ended July 31, 1996
Net revenue decreased $643,000, or 8% to $7,215,000 from $7,858,000, primarily
as a result of the decrease in revenue from Peri-Strips. Peri-Strips revenue
decreased $1,320,000, or 38% to $2,136,000 from $3,456,000. The decrease in
revenue from Peri-Strips is primarily due to the Medicare LVR non-coverage
decision which affects all of the 1997 period as compared to three quarters of
the 1996 period. Revenue from sales of other Tissue-Guard products, Dura-
Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased $692,000, or
32% to $2,852,000 from $2,160,000, primarily due to increases in revenue from
the sales of Dura-Guard and Vascu-Guard, arising from market share gains.
Biograft revenue decreased by $148,000, or 20%, comparing the first three
fiscal quarters of 1997 and 1996, continuing a trend representative of the
late stage of this product's life cycle.
Revenue from sales of surgical productivity tools (Flo-Rester and the Bio-
Vascular Probe) increased $133,000, or 9% to $1,622,000 from $1,489,000, with
the majority of the increase in revenue from sales of
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
Flo-Rester. The Company believes that the growth in revenue from Flo-Rester is
due primarily to its use in minimally invasive coronary bypass surgery, a
procedure which is increasing.
The gross margin percentage was 59% in 1997 and 67% in 1996. In fiscal 1996,
the gross margin percentages declined through the quarters, primarily due to
decreases in the production volume in response to decreases in expected demand
for Peri-Strips as a result of the HCFA decision. The gross margin percentage
was 62% by the fourth quarter of 1996, 57% in the first quarter of 1997, and
60% in the third quarter of 1997. It is expected that the gross margin
percentage will continue to increase slightly during the last fiscal quarter
of 1997 as production volume continues to increase. This forward-looking
statement will be influenced primarily by the accuracy of the Company's
current estimates of production volume for the fourth quarter of 1997, and
would be impacted by significant increases or decreases in actual production
volume as compared to the estimate, by material changes in the Company's
product mix and by the accuracy of the Company's estimates of standard costs.
Selling, general and administrative expense increased $118,000, or 29% to
$4,142,000 from $4,024,000. General and administrative expense increased
$135,000, or 6%, while selling expense decreased $18,000, or 1%. The relative
low increase in expenses is due to the Company overall management of
discretionary expenditures.
Research and development ("R&D") expense increased $134,000, or 20% to
$788,000 from $654,000 in 1996. The Company has several projects under
development and R&D expense is expected to increase as these projects
progress. This forward-looking statement will be influenced primarily by the
number of projects, the related R&D personnel requirements, the development
path of each project, the expected costs, and the timing of these costs.
Primarily due to the decrease in revenue from Peri-Strips, compounded by lower
gross margins earlier in the year, continuing operations had an operating loss
in the first nine months of fiscal 1997 of $689,000 compared to operating
income from continuing operations of $604,000 in the first nine months of
fiscal 1996. Other income, primarily interest income, was $882,000 and
$821,000 in 1997 and 1996, respectively. As a result, continuing operations
had income before income taxes in 1997 and 1996 of $193,000 and $1,424,000,
respectively.
The Company's recorded provision for income taxes for the first nine months of
1997 is $463,000 and is based on the Company's estimate of its annual
effective rate for fiscal 1997 and a write-off of an income tax asset in the
third quarter as described above. In the first nine months of 1996, the
Company allocated its provision for income taxes to continuing and
discontinued operations based on their respective pretax income contribution
and tax attributes. As a result, the amount of the provision allocated to
continuing operations in the first nine months of 1996 was $526,500.
Net loss from continuing operations was $270,000, or $.03 per share for 1997
as compared to net income of $898,000, or $.09 per share for 1996. The loss
from discontinued operations for 1997 was $920,000, or $.10 per share,
resulting in a net loss for 1997 of $1,190,000, or $.13 per share. The loss
from discontinued
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
operations in 1996 was $894,000, or $.09 per share, resulting in net income
for 1996 of $4,000, or $.00 per share.
Liquidity and Capital Resources
For the nine months ended July 31, 1997, operating activities provided $51,600
as compared to $149,000 (excluding $694,000 used by discontinued operations)
of net cash provided by operating activities in the same period in 1996. Cash
was provided by continuing operations, in the current nine month period, by
non-cash expenses and decreases in inventories. These cash increases were
partially offset by increases in accounts receivable and slight decreases in
accrued expenses.
The Company invested $544,000 in equipment and leasehold improvements
primarily related to new manufacturing processes related to Peri-Strips Dry
and the Bio-Vascular Probe. Financing activities provided $270,000 and
represents stock option exercises, net of restricted stock repurchased and a
tax benefit associated with the option exercises. Finally, the Company made a
final investment in Vital Images, using $1,845,000 to bring Vital Images' cash
and investment balances to $10,000,000 as required by the terms of the
Distribution Agreement between the companies. At July 31, 1997, the Company
has cash and investments totaling $18,200,000.
The Company announced in August 1997 its intention to repurchase up to 500,000
shares of its common stock. Such purchases will be made in the open market
from time-to-time as price opportunities arise.
The Company believes its existing cash and investments will be sufficient to
satisfy its cash requirements for the foreseeable future.
New Accounting Standard
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS
No. 128), Earnings per Share (EPS) was issued by the Financial Accounting
Standards Board. This standard, which the Company must adopt effective with
its first quarter of fiscal 1998, requires dual presentation of basic and
diluted EPS on the face of the statement of operations. Net income per common
share currently presented by the Company is comparable to the basic EPS
required under SFAS 128. Diluted EPS for the Company would be calculated based
on both common shares outstanding and consideration of the dilutive effects of
common stock equivalents. The Company expects that earnings per share computed
under the new standard will approximate earnings per share currently reported.
Certain Important Factors
This Form 10-Q contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "estimate", or "continue" or comparable terminology are intended
forward-looking statements. These statements by their
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors, including the
availability of third party reimbursement, the extent to which the Company's
products gain market acceptance, litigation regarding patent and other
intellectual property rights, the introduction of competitive products by
others, the progress of product development and clinical studies, and the
receipt and timing of regulatory approvals, among others.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
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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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed
in the exhibit index beginning on page 18.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
quarter ended July 31, 1997.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIO-VASCULAR, INC.
September 2, 1997 /s/ M. Karen Gilles
------------------------------------
M. Karen Gilles
President and Chief Executive Officer
(Principal Financial Officer)
17
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
10.1 1990 Management Incentive Stock Option Adjustment Plan (filed herewith
electronically).
10.2 1992 Stock Option Adjustment Plan (filed herewith electronically).
11.1 Computation of income (loss) per share (filed herewith electronically).
27.1 Financial Data Schedule for the three month period ended July 31, 1997
(filed herewith electronically).
27.2 Restated Financial Data Schedule for the three month period ended July
31, 1996 (filed herewith electronically).
18