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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 2000
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
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BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
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Minnesota 41-1526554
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(State of Incorporation) (I.R.S. Employer Identification No.)
2575 UNIVERSITY AVENUE, ST. PAUL, MINNESOTA 55114-1024
(Address of principal executive offices)
TELEPHONE NUMBER: (651) 603-3700
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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
Common Stock Purchase Rights
---------------------------
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of January 19, 2001, 8,978,172 shares of Common Stock of the Registrant were
outstanding, and the aggregate market value of the Registrant's outstanding
Common Stock (based upon the last reported sale price of the Common Stock on
that date by the Nasdaq National Market), excluding shares owned beneficially by
executive officers and directors, was approximately $40,449,224.
Parts I and II of this Annual Report on Form 10-K incorporate by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Annual Report to Shareholders for the fiscal year ended October 31,
2000 (the "2000 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates documents incorporated by reference (to the extent specific
sections are referred to herein) from the Registrant's Proxy Statement for its
Annual Meeting of Shareholders to be held February 28, 2001 (the "2001 Proxy
Statement").
Tissue-Guard(TM), Peri-Strips(R), Peri-Strips Dry(R), PSD Gel(TM), Dura-
Guard(R), Vascu-Guard(R), Supple Peri-Guard(R), Peri-Guard(R), CV Peri-Guard(R),
Ocu-Guard(TM), Biograft(R), Flo-Rester (R), Bio-Vascular Probe(R) and Flo-Thru
Intraluminal Shunt(TM) are trademarks of the Company.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. For this purpose, any statements contained in this Form 10-K
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 the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. All forward-looking statements in this document are
based on information available to the Company as of the date hereof, and the
Company assumes no obligation to update any forward-looking statements. Such
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may include, among others, those factors set forth
under the heading "Important Factors" on page 13.
PART I
ITEM 1 - Business
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(a) General Development of Business
Introduction
Bio-Vascular, Inc. ("Bio-Vascular" or the "Company") is a diversified medical
device company, engaged in developing, manufacturing and marketing products to
significantly improve the quality of human life. The Company operates through
two business units: Branded Medical Devices and Jerneen Micro Medical
Technologies (MMT), the Company's wholly owned subsidiary. The Branded Medical
Device business includes branded implantable biomaterials, surgical productivity
tools, and licensed and distributed products for use in critical surgeries,
including bariatric (stomach and intestines), thoracic (chest and lungs),
cardiac (heart), neurosurgical (brain and spine), and vascular (arteries and
veins) surgeries. Branded Medical Devices are manufactured using the Company's
patented and proprietary technologies. MMT custom designs, engineers and
manufactures precision micro wire components that are used primarily in
implantable interventional cardiovascular and neurological devices, such as
pacemakers, defibrillators, and neuro and spinal electro-stimulation devices.
History
Bio-Vascular was incorporated in July of 1985. In 1985, the Company was spun-off
to the shareholders of its then parent company, thereafter operating as a
separate public company. In the spin-off, the Company acquired the rights to
certain cardiovascular products, including Peri-Guard and Flo-Rester.
In 1994, the Company acquired Vital Images, Inc. ("Vital Images"), a company
involved in the development of software for three-dimensional visualization and
analysis of image data. In 1996, the Company made the decision to spin Vital
Images off. In 1997, the Company completed the spin-off distribution of all the
shares of Vital Images to the shareholders of Bio-Vascular, with Vital Images
thereafter operating as an independent company, with its own publicly traded
securities. The distribution was effected in order to allow each company to
maximize its individual strategic opportunities, as the direction of Vital
Images' business had begun to diverge from the core medical device business of
Bio-Vascular.
In July 1998, the Company completed the acquisition of Jer-Neen Manufacturing
Co., Inc. This acquisition broadens the Company's participation in the medical
device industry, increases the Company's immediate and long-term revenue
potential and achieves a balance of market opportunities consistent with the
strategic objectives targeted by the Company. In October 2000, the name Jer-Neen
Manufacturing Co., Inc. was legally changed to Jerneen Micro Medical
Technologies, Inc.
The Company has continued to advance and execute its strategy for growth,
focusing on opportunities to grow through
2
acquisition, licensing and distribution, expansion of markets for its current
products, and internal new product research and development activities. The
following are a few of the fiscal 2000 highlights which demonstrate the
Company's dedication to this growth strategy. In February 2000, the Company
announced the introduction of APEX Processing(TM), a product enhancement
establishing a new tissue-processing standard. By reducing the cellular content
to the lowest quantifiable level in bovine pericardial tissue, Apex
Processing(TM) enhances the purity of our tissue-based products while
maintaining the physical qualities of the product. Also in February 2000, the
Company received 510(k) marketing clearance from the U.S. Food and Drug
Administration (FDA) and CE mark approval in Europe for use of Peri-Strips(R)
products in gastric bypass and gastric banding procedures. Gastric bypass and
gastric banding are frequently used as surgical weight reduction control methods
for morbid obesity. By 2004, the number of these gastric procedures performed in
the United States is expected to reach 100,000, up from an estimated 45,000
procedures performed in 1999. This, along with the trend toward laparoscopic
gastric bypass procedures, would expand the U.S. market potential to an
estimated $100 million annually.
In March 2000, the Company acquired the exclusive U.S. distribution rights for a
precision dissection kit manufactured by the Feather Safety Razor Co. in Japan,
and began to distribute this product in the third quarter of the year for use in
neurosurgical procedures. This exclusive distribution opportunity was
subsequently expanded to include Canada as well as cardiovascular and vascular
markets in both the U.S. and Canada. These products, product applications and
distribution rights all contributed to the Company's revenue growth in fiscal
2000. In September 2000, we acquired the exclusive U.S. distribution rights to
the surgical glues, GLUEBRAN and GLUEBRAN2. As part of the distribution
agreement, the Company is responsible for obtaining U.S. FDA marketing approval.
This requires a Pre-Market Approval (PMA) process, the FDA's most rigorous
regulatory path, and is expected to take at least two years. Lastly, in October
2000, our new product development efforts resulted in the 510(k) marketing
clearance from the FDA of our implantable urethral sling product for use in the
surgical treatment of stress urinary incontinence (SUI). The urethral sling uses
the Company's remodelable/resorbable tissue technology, which provides for
greater biocompatibility and lower levels of inflammation and fibrosis when
compared to competitive products. The Company plans a staged release of this
product during fiscal 2001 to maximize market advantage.
MMT reestablished a strong revenue growth rate following mid-year organizational
and personnel changes. In the final six months of fiscal 2000, MMT increased
revenue at a 35% rate when compared to the same period in fiscal 1999 while
generating operating income during this six month period of $670,000, exceeding
the full 1999 operating profit levels of $617,000. For fiscal 2001, the Company
will continue to drive its growth strategy by further capitalizing on all of our
fiscal 2000 accomplishments, while identifying new opportunities that extend our
growth into future years.
Bio-Vascular's principal executive offices are located at 2575 University
Avenue, St. Paul, Minnesota 55114-1024. The Company can be contacted by
telephone at (651) 603-3700, by facsimile at (651) 642-9018, or by electronic
mail at info@biovascular.com.
(b) Financial Information About Industry Segments
The information under the caption "Segment Information" on page 27 of the
Company's 2000 Annual Report is incorporated herein by reference.
(c) Narrative Description of Business
The table below summarizes the revenue contributed by the Company's significant
products or product lines for the periods indicated. The MMT segment financial
results were included in the Company's consolidated results of operations
beginning in the fourth quarter of fiscal 1998.
3
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Net Revenue Contribution by Years Ended October 31,
Significant Product or Product Line:
(In thousands) 2000 % 1999 % 1998 %
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Tissue-Guard Products:
Peri-Strips and Peri-Strips Dry $ 3,509 16% $ 3,125 17% $ 3,233 27%
Other Tissue-Guard Products 5,857 27% 5,239 27% 4,588 38%
Surgical Tools 3,035 14% 2,560 14% 2,051 17%
Biograft 788 3% 757 4% 748 6%
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Total Branded Medical Devices 13,189 60% 11,681 62% 10,620 88%
Micro Medical Technologies 8,737 40% 7,223 38% 1,397 12%
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Total Net Revenue $21,926 100% $18,904 100% $12,017 100%
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Products, Markets and Competition
Description of the Branded Medical Devices Unit
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The following table summarizes the Company's branded product lines and
associated products, and describes procedures in which such products are used.
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Product Line Product Application/Representative Procedure
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Tissue-Guard Peri-Strips Staple-line buttress for sealing air leaks in lung resection, gastric
bypass and gastric banding procedures and prosthesis for the repair
of soft tissue deficiencies
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Peri-Strips Dry Staple-line buttress for sealing air leaks in lung resection, gastric
bypass and gastric banding procedures
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Vascu-Guard Vascular patch used in carotid endarterectomy and other peripheral
vascular procedures when the artery must be repaired
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Dura-Guard Repair patch used to seal the dura mater in neurosurgeries
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Peri-Guard Tissue patch used for pericardial closure and soft tissue repair
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Supple Peri-Guard More "supple" tissue patch used for pericardial closure and soft
tissue repair
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CV Peri-Guard Tissue patch used for intracardiac patching and great vessel repair
in adults
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Ocu-Guard Ophthalmic wrapping material used in enucleation procedures
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Surgical Bio-Vascular Probe Tool used to locate arterial blockage in surgical bypass procedures
Tools
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Flo-Rester Internal vessel occluder used in coronary artery bypass graft surgery
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Flo-Thru Intraluminal Internal vessel stent used during minimally invasive cardiac surgery
Shunt
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BVI Neurosurgical System with a variety of interchangeable blades and handles that is
Dissection Kit used during microsurgery dissection
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Other Biograft Peripheral vascular bypass graft used in lower limb vascular
reconstruction
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4
Tissue-Guard Product Line
The Company's core competency in its Branded Medical Devices business is the
development and manufacture of implantable biomaterial products for use by
surgeons in various surgical procedures where reinforcing, reconstructing and
repairing tissue and preventing leaks of air, blood or other body fluids is
necessary for the achievement of a favorable outcome. Surgeons can use
autologous tissue in situations where tissue repair is necessary which requires
the surgeon to excise the tissue from another part of the patient's body. The
second surgical site increases the cost of the procedure and lengthens the time
the patient is under anesthesia, thereby increasing the risk of complication and
resulting in additional pain and recovery time for the patient. Surgeons seek a
readily available implantable medical products, whether tissue-based or
synthetic, as an alternative to harvesting autologous tissue from the patient as
a means of reducing surgical costs and improving patient outcomes.
The Company's Tissue-Guard products are produced from bovine pericardium. Many
of the product characteristics and competitive advantages of this product line
are derived from the collagen configuration of the bovine pericardium. Collagen,
which is a fibrous protein found in all multi-cellular animals, makes the
pericardium durable and provides superior handling characteristics, similar to
autologous tissue. These characteristics allow for effective host tissue
incorporation. Host cells deposit a collagen matrix on the surface of the
pericardial product allowing the Tissue-Guard product to integrate into the host
tissue. The Company believes this integration enhances the long-term tensile
strength (the maximum stress a material subjected to a stretching load can
withstand without tearing) of its Tissue-Guard products.
The bovine pericardium is processed using proprietary and patented tissue-
fixation technologies. During fiscal 2000, the Company introduced Apex
Processing(TM), a manufacturing technique which incorporates a unique cross-
linking technology with an enhanced purification process. The processing
technology provides the lowest quantifiable cellularity and residual
glutaraldehyde known to exist in a bovine pericardium product. Many studies have
shown that purity, reduced cellular content and low residual glutaraldehyde
levels can improve clinical results by reducing inflammatory response, reducing
thrombogenicity, limiting the promotion of calcification and promoting host
tissue incorporation similar to the body's natural healing process.
Peri-Strips and Peri-Strips Dry
Peri-Strips and Peri-Strips Dry soft tissue stapling buttresses are used in a
variety of pulmonary resections including bullectomies, bronchial resections,
lobectomies, segmentectomies, wedge resections and lung volume reduction
surgery. In February 2000, the Company received FDA market clearance for the use
of these products in gastric bypass and gastric banding surgeries, treatments
for morbid obesity. These products provide for reapproximation and reinforcement
at the surgical staple line to prevent air and fluid leaks at the site. By 2004,
the number of these gastric procedures performed in the United States is
expected to reach 100,000, up from an estimated 45,000 procedures performed in
1999. This, along with the trend toward laparoscopic gastric bypass procedures,
would expand the U.S. market potential to an estimated $100 million annually.
Peri-Strips and Peri-Strips Dry are customized to fit disposable, reusable and
endoscopic staplers of varying sizes made by a variety of manufacturers.
There are more than 30 clinical papers published regarding the use of Peri-
Strips and Peri-Strips Dry bovine pericardium to reduce air leaks and improve
patient outcomes. Results of a study commissioned by the Company, using Peri-
Strips Dry in surgical procedures to treat lung cancers and other lung tumors
improved the patient recovery times through decreased duration of air leak, time
to chest tube removal and hospital stay in comparison to procedures completed
without the product. The study's reported one-day decrease in length of hospital
stays could result in a net savings of up to $4,500 per patient, as estimated by
the Company.
Dura-Guard
Dura-Guard, a dural repair patch, is primarily used to prevent Cerebral Spinal
Fluid (CSF) leakage in craniotomy procedures (surgical operations involving the
brain and skull) when the dura must be repaired and suturing without a patch is
not deemed sufficient. Craniotomies are typically performed to treat various
brain conditions, such as tumors, aneurysms, blood clots, head injuries and
abscesses. The dura, the fibrous layer below the skull which protects the brain
and spinal cord must be cut with a scalpel or scissors and resected to expose
the brain during these procedures. After the specific brain condition has been
treated by the surgeon, the dura must be closed to prevent leakage of cerebral
spinal fluid. While the dura is frequently closed with direct suture, surgeons
who consider the prevention of fluid leakage to be critical to the outcome of
the operation will use a dural repair patch.
5
Dura-Guard is designed to close dural incisions by fusing with the patient's
dura with little or no adhesion to the underlying brain cortex, a complicating
factor following any cranial surgery. Studies commissioned by the Company have
shown that fibrous bone cells invade the Dura-Guard surface facing the cranium,
as they do the human dura, inviting good host tissue incorporation. The collagen
configuration of the processed bovine pericardium in Dura-Guard conforms around
the sutures used to affix the patch, thereby providing a barrier between the
skull and the tissue layers underlying the dura and preventing the leakage of
cerebral spinal fluid.
Vascu-Guard
Vascu-Guard, a vascular repair patch, is used in carotid endarterectomy and
other peripheral vascular repairs in which closing an artery without a patch is
insufficient. Carotid endarterectomy is a surgical procedure used to remove
atherosclerotic plaque (fat deposits with a proliferation of fibrous connective
cells along the artery walls) build-up in carotid arteries, the principal
arteries located in the neck that supply blood to the brain.
The build-up of atherosclerotic plaque in the carotid arteries increases the
risk of stroke. A substantial portion of strokes are caused by a fragment of
atherosclerotic plaque breaking away from the inner wall of the carotid artery
and becoming lodged in an artery in the brain. Drug therapy is often prescribed
to treat early indications of atherosclerotic plaque build-up. If the condition
progresses to a point where drug therapy is not effective, surgical intervention
is often required.
Although the artery can often be closed without a patch, use of a patch has been
shown to significantly reduce the risk of recurrent disease. Certain patients
require patching due to the small size of their carotid arteries, or to decrease
the incidence of post-operative occlusion. Company commissioned studies have
shown that Vascu-Guard supports endothelialization (growth of a cell layer
normally lining the interior of blood vessels) and that its non-thrombogenic
blood flow surface imitates the blood flow characteristics of autologous
vessels. In addition, its pulsatility (ability to reflect movement signifying
the rhythmic pumping of the heart) allows a surgeon to readily verify normal
blood flow after implantation.
Ocu-Guard
Ocu-Guard, an orbital implant wrap, is used in enucleation (removal of the eye)
surgery. Enucleation is a procedure to remove a patient's eye that has become
painful or nonfunctional as a result of trauma, malignancy or end-stage diseases
such as glaucoma or diabetes. Following enucleation surgery, a patient commonly
receives an orbital implant from which the visible prosthetic eye is attached.
The implant used in the majority of these procedures requires a soft-tissue
wrap, such as Ocu-Guard.
Ocu-Guard is manufactured in convenient, pre-formed configurations to fit the
most common orbital implant sizes. The preformed configuration reduces implant
preparation time, provides ease of insertion and a snug fit around the implant.
Ocu-Guard has excellent handling characteristics allowing for ease of suturing.
Ocu-Guard helps provide motility to the prosthetic eye by facilitating muscle
attachment to the implant and vascular in-growth.
CV Peri-Guard
CV Peri-Guard, an intracardiac repair patch, is used in a variety of surgical
procedures performed on the heart. Specific procedures in which CV Peri-Guard is
used include aortic and atrial patching, atrial and ventricular septal defect
repair, valve annuloplasty, and ventricular aneurysm repair. The Company's Peri-
Guard products have more than 15 years of clinical use as a cardiac patch, but
cardiac indications for use under the Company's FDA marketing clearance were
previously limited to pericardial closure. With CV Peri-Guard, marketing
clearance was received from the FDA for a much broader range of cardiac uses and
specifically for intracardiac repair.
Biograft
Biograft, a peripheral vascular graft manufactured from human umbilical vein, is
indicated for use in lower limb vascular reconstruction when a saphenous vein is
not available. Certain diseases, such as diabetes, can cause a restriction or
occlusion in the arteries which provide blood to the legs. If left untreated,
insufficient blood flow can ultimately result in the need for amputation. If
drug therapy is not deemed an effective treatment based upon the severity of the
restriction or blockage, the use of a graft in peripheral vascular
reconstructive surgery may be
6
needed. In this type of surgical procedure, the surgeon can bypass the blocked
artery to regain blood circulation, thereby saving the affected limb. Diabetics,
in particular, are often at risk for amputation of a lower limb due to
insufficient blood flow in the femoral artery in the thigh. By implanting a
graft from the upper portion of the femoral artery to either the lower femoral
artery or to the popliteal artery below the knee, the surgeon is able to
increase blood flow below the site of the restriction or blockage. Long-term
patency (openness), and a thrombo-resistant surface that provides smooth blood
flow are essential qualities of an effective graft.
Saphenous veins (autologous veins from the leg) typically provide the most
effective grafting material. In many instances, however, a suitable saphenous
vein may be unavailable in sufficient quantity or quality, and a substitute
graft must be used. The primary alternative substitute grafts involve synthetic
grafts made from PTFE, bio-synthetic materials or tissue-based grafts, such as
Biograft.
Biograft is similar to an autologous vessel and offers a thrombo-resistant
surface, which provides smooth blood flow and minimizes turbulence and risk of
occlusion. It also minimizes intimal hyperplasia, the build up of cells on the
interior of the blood vessel, which results in restricted blood flow. In
addition, a knitted and supportive Dacron mesh placed around the graft allows
for easier handling and promotes tissue integration for strength and stability.
Surgical Tools: Bio-Vascular Probe, Flo-Rester, Flo-Thru Intraluminal Shunt and
the BVI Neurosurgical Dissection Kit.
Bio-Vascular Probe is a flexible shaft with different sizes of bulbous tips on
either end and are available in varying sizes. Surgeons use Bio-Vascular Probes
to locate occlusions or blockages in arteries and to ascertain the blood flow
characteristics of arteries. A Bio-Vascular Probe is inserted and fed into an
artery. When the tip of the probe meets resistance, the surgeon is able to
identify the exact location of the occlusion. The probe is then extracted and a
bypass is completed below the occlusion. In addition, a Bio-Vascular Probe can
be used to atraumatically lift the edge of the incision to assist the surgeon in
the accurate placement of sutures.
Flo-Rester, a vessel occluder, is manufactured from medical grade silicone. Flo-
Rester products are designed to interrupt blood flow. In surgical procedures
where continual blood flow is not required, Flo-Rester provides a stented,
blood-free, operative site during surgery. These products are primarily used
during coronary artery bypass graft surgeries in which blood is routed past the
heart through a heart / lung bypass machine in order to keep the heart free of
blood during surgery. During such procedures, incidental blood flow can obstruct
the surgeon's view of the operative site and interfere with precise suturing.
Flo-Rester consists of a flexible shaft with small bulbs at each end that are
inserted into the blood vessel to stop the blood flow at the point where the
artery bypass is sutured to the artery.
Flo-Thru Intraluminal Shunt is intended for use in minimally invasive beating
heart cardiac procedures where the patient is not placed on a heart / lung
bypass machine. The device enables a surgeon to perform a safe, easy and precise
anastomosis during coronary artery bypass by facilitating a bloodless, stented
operative field while maintaining distal blood flow. Flo-Thru Intraluminal Shunt
is a single-piece radiopaque silicone tube with atraumatic bulbs, of varying
size, on either ends of the silicone tube. Similar to Flo-Rester, a radiopaque
tab identifying the outer diameter of the bulbs is attached to the shunt by a
tether, which is used to facilitate positioning and removal.
The BVI Neurosurgical Dissection Kit, manufactured by Feather Safety Razor Co.
in Japan and distributed by Bio-Vascular in the United States and Canada, is
used by surgeons during neuro, cardiac and vascular microsurgery. This system of
interchangeable handles with a variety of uniquely shaped, high-quality
precision blades ensures an appropriate solution for virtually all microsurgery
dissection and resection tasks.
Competition
The Company's Branded Medical Devices compete primarily on the basis of product
performance, service and price. The surgical products market in which the
Company competes is characterized by intense competition. This market is
dominated by very large, established manufacturers that have broader product
lines, greater distribution capabilities, substantially greater capital
resources and larger marketing, research and development staffs and facilities
than the Company. Many of these competitors offer broader product lines within
the Company's specific product market, particularly in the Company's surgical
tool product markets and/or in the general field of medical devices and
supplies. Broad product lines give many of the Company's competitors the ability
to negotiate
7
exclusive, long-term medical device supply contracts and, consequently, the
ability to offer comprehensive pricing for their products, including those that
compete with the Company's products. By offering a broader product line in the
general field of medical devices and supplies, competitors may also have an
advantage in marketing competing products to group purchasing organizations,
health maintenance organizations and other managed care organizations that
increasingly seek to reduce costs by centralizing and consolidating their
purchasing functions.
Competition with Tissue-Guard products is primarily from synthetic materials,
other biological tissues and cadaveric tissue. The ability of these alternative
products to compete with Tissue-Guard products varies based on each such
product's indication for use, relative feature benefits and surgical preference.
There can be no assurance that competing products will not achieve greater
acceptance or that future products developed by competitors will not offer
similar or enhanced performance advantages relative to the Tissue-Guard
products.
Synthetic patches are generally cheaper to produce and to the extent that
comparable synthetic patches are available and effective in surgical procedures,
the Company faces significant price competition for its Tissue-Guard products.
There are other multi-purpose patches made from bovine and other types of animal
tissue that compete with the Company's products. The Company does not believe
that these alternative bovine pericardium products have specific FDA marketing
clearance for all surgical specialty markets in which the Company competes. In
addition, cadaveric tissue from tissue banks is sometimes utilized in
neurological and ophthalmic surgery. The Company believes that the collagen
characteristics exclusive to tissue, the special configuration of its Tissue-
Guard products and the proprietary tissue-fixation and purification processes it
employs, offer significant product performance and it intends to continue to
compete on these bases. Tissue-Guard products also offer the distinct advantage
of availability, product uniformity and ideal handling characteristics.
Competitive products to Biograft include synthetic grafts and other biological
grafts. Surgeons generally prefer the patient's own vessels for lower limb
vascular reconstruction. When the patient's own vessels are not available in
sufficient quality or quantity, surgeons choose a prosthetic graft such as
Biograft, or synthetic grafts made from PTFE produced by W. L. Gore &
Associates, Inc., IMPRA, Inc. or other grafts made of biological materials, such
as the CryoVein(R) by CryoLife, Inc.
Description of the Micro Medical Technologies Unit
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The Jerneen Micro Medical Technologies unit custom designs, engineers and
manufactures precision micro-wire components that are used primarily in
implantable interventional cardiovascular and neurological device, such as
pacemakers, defibrillators, and neuro and spinal electro-stimulation devices.
These products include micro precision coils, stylets and related wire products
and guidewire components and subassemblies. Each of these component categories
comprises approximately one third of the segment's revenues.
Micro precision coils
Micro precision coils are precision wire components, comprised normally of
several strands of specialty wire materials wound into specific configurations.
These coils are manufactured utilizing proprietary processes and typically
involve the use of specialty metals such as medical grade stainless steel,
silver, platinum, and various other alloys. These micro coils are used to either
carry the electrical current required for operation of a medical device or to
assist the installation of the medical device within the patient's body. A
subcategory of coils is called helices which compose the distal portion of many
pacing and defibrillation leads that are used to actively fix the lead tip to
the endocardium.
Stylets and related wire products
Stylets and related wire products are produced through the application of
proprietary processes using medical grade stainless steel and plastic cap and
body components. Stylets are typically used in the placement of cardiovascular
and vascular devices within the patient's body.
Guidewire components and subassemblies
Guidewire components and subassemblies are made of medical grade stainless
steel, and are manufactured through a combination of proprietary processes and
one critical, but adapted, grinding process. A guidewire is typically used at
the beginning of a surgical procedure to locate and provide a channel for the
placement of a diagnostic or
8
therapeutic device.
There are a number of significant trends affecting the growth and development of
the Company's MMT business. The first is the rapidly growing use of implantable
cardiac rhythm management devices in the treatment of sudden cardiac death,
atrial fibrillation and heart failure. The second trend is the development of
less invasive diagnostic and therapeutic procedures in the cardiovascular and
interventional medicine segments. These procedures require improved
diagnostics, therapies, and placement of medical devices such as stents.
Significant international markets also exist in Europe and Japan.
Competition
The MMT unit competes on the basis of superior quality of processes and
production, rapid and flexible customer response, early development partnering
and to a modest degree, price. The component part usually comprises a minor
portion of the total device-level price. Accordingly, vendor performance and
responsiveness are generally more critical factors. There are four primary
competitors to the Company, one of which is substantially larger than the
Company with annual revenues estimated in the range of $70 million. Given the
concentration of the wire component product industry, the Company believes that
medical device customers are generally motivated to promote healthy competition
among their various suppliers in order to ensure multiple supply sources for
their critical device components.
The primary medical device companies involved in the interventional cardiac and
neurological products include Medtronic, Inc., Guidant Corporation (which
acquired Sulzer Intermedics during fiscal 1999), St. Jude Medical (through its
Pacesetter unit), Boston Scientific and Johnson and Johnson Cordis. In
addition, numerous early stage companies are pursuing new technologies in
cardiovascular and interventional medicine, especially neurological
intervention. The Company anticipates that the cardiovascular and
interventional medicine industry will continue to experience significant
consolidation with the acquisition of earlier stage companies by the major
industry participants. Although there can be no assurance, the Company believes
that this consolidation will not hinder its component products segment growth
opportunity as the major participants are expected to continue to seek multiple
supply sources for critical device components such as those offered by the
Company. In addition, the Company believes early stage companies will flourish
due to the inability of consolidated companies to rapidly innovate.
Intellectual Property
Branded Medical Device Unit
- ---------------------------
In its Branded Medical Device business, the Company relies on patents, trade
secrets and proprietary know-how which it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties.
Supple Peri-Guard, which is used in the manufacture of the majority of the
Company's Tissue-Guard products, is protected exclusively by trade secrets. The
Company owns United States patents related to Peri-Strips, Peri-Strips Dry and
Peri-Guard. The Company currently has the following United States patents
pending; one relating to Ocu-Guard, another relating to the manufacturing and
use of stent coverings formed of biological tissues and another associated with
the Company's new "resorbable" line of tissue implant materials. The Company
also has an exclusive, worldwide, perpetual license to make, use and sell its
Flo-Rester product.
Micro Medical Technologies Unit
- -------------------------------
In its MMT business, the Company relies exclusively on trade secret protection
for its processes. The Company seeks to practice strict trade secret discipline
with all employees, consultants, customers and other parties. A non-disclosure
protocol is maintained on behalf of each of its customers, consistent with MMT's
sensitivity to customer expectations and needs. The technology and equipment
utilized in the manufacturing process is a combination of proprietary know-how,
and the adaptation of and development utilizing readily-available equipment.
Marketing and Customers
Branded Medical Device Unit
- ---------------------------
The Company's Branded Medical Device's sales strategy is to ensure that the
Company has products of superior quality supported by innovative and effective
sales and marketing programs. These programs include surgical trade
9
shows, support of the gathering, publication and presentation of clinical data
and new product information by key surgeons and the development of strategic
physician alliances. The marketing and sales strategy of the Company also
includes developing and maintaining a close working relationship with the
hospitals and surgeons who purchase and use the Company's products in order to
assess and satisfy their needs.
The Company sells its products through a combination of third-party distributors
and independent sales representatives. The Company's marketing and sales
function works closely with these distributors and representatives on the
implementation of marketing strategy and sales assistance including product
knowledge, training and presentation. The Company generally has written
agreements with its distribution partners. These agreements generally impose
limited geographic exclusivity and minimum purchase obligations. These
agreements are typically terminable upon breach of the agreement by the
distributor, including breach of the minimum sales obligations imposed by the
agreement.
Micro Medical Technologies Unit
- -------------------------------
MMT's strategy is to proactively seek significant business relationships with
both the large participants and early development firms in five major markets:
1) cardiac rhythm management, 2) cardiovascular intervention, 3) neurological
intervention, 4) neuro stimulation and 5) minimally invasive surgery. The
primary marketing strategy is to provide a rapid, flexible and creative response
to customer needs, coupled with state of the art, high quality production.
Additionally, the Company's marketing strategy seeks to differentiate itself
from competitors by promoting its custom design and engineering capabilities,
supported by its relatively large engineering and technical staff, and extensive
medical device experience amongst its professional employees. The Company
utilizes its Technology Development Center and Rapid Response Unit for design,
development and prototype services. The utilization of these highly-technical
solutions and timely, effective delivery of development prototypes is believed
to provide a key competitive advantage to both the customer and MMT's business.
MMT also achieved ISO 9002 certification in 1996 as a further demonstration to
its customers of its quality commitment. The Company is also in the process of
developing systems, capabilities and facilities for FDA Quality System
Regulation certification.
Information regarding the Company's significant customers under the caption
"Major Customers and Net Revenue by Geographic Area" on page 33 of the Company's
2000 Annual Report is incorporated herein by reference.
Additional Information Regarding the Branded Medical Device and MMT Units
Backlog
- -------
At October 31, 2000, the Branded Medical Devices segment did not have any
customer order backlogs representing firm customer orders not yet shipped.
Because the MMT products business is "build-to-order", MMT typically has firm
customer orders awaiting manufacture and release based on customer specified
future timeframes. MMT's order backlog was $2,691,000 at October 31, 2000 as
compared to $1,406,000 at October 31, 1999. MMT does not expect any difficulty
fulfilling these backlog orders as scheduled in fiscal 2001. The Company does
not believe that its backlog is a meaningful indicator of its future business in
the MMT segment.
Raw Materials
- -------------
The Company acquires bovine pericardium for use in the Tissue-Guard product line
from United States Department of Agriculture ("USDA") inspected meat packing
facilities. The Company acquires human umbilical cords for use in Biograft from
various hospitals throughout the United States. The supply of wire, plastics
and plastic components required for the branded surgical tools and MMT's
products is currently adequate. The Company has not experienced any product
shortages arising from interruptions in the supply of any raw materials or
components, and has identified alternative sources of supply for significant raw
materials and components.
Research and Development
- ------------------------
As a component of the Company's business growth strategy, the Company continues
to make a significant investment in new product design and engineering in both
its Branded Medical Device and MMT units. The Company's consolidated research
and development expense for fiscal 2000, 1999 and 1998 was $1,952,000,
$1,665,000 and $1,548,000, respectively.
10
The majority of the Company's investment is on branded product opportunities
applying both existing and newly developed technological expertise in the
processing of biomaterials. Current Branded Medical Device development efforts
include pre-clinical feasibility studies for applications utilizing the
Company's new remodelable tissue. In October 2000, the Company received 510(k)
marketing clearance from the FDA of our implantable urethral sling product for
use in the surgical treatment of stress urinary incontinence (SUI). The
urethral sling uses the Company's remodelable/resorbable tissue technology,
which provides for greater biocompatibility and lower levels of inflammation and
fibrosis when compared to competitive products. The Branded Medical Device's
longer-term initiatives, among others, include a small diameter graft for
coronary bypass surgeries. These are typically projects with long development
timelines, but potentially very large returns.
The Company also targets research resources to the design and engineering of
development stage solutions to meet MMT's customers' specifications. This is a
partnership to resolve problems and achieve high performance solutions,
typically occurring when the customer's program is entering the prototype stage.
During fiscal 2000, the MMT unit continued its investment in the growth of
design and engineering services offered through its Technology Development
Center (TDC). The design rights to the components produced by the MMT unit
accrue to the customer in the vast majority of cases.
Governmental Regulation
General
- -------
The medical device industry in which the Company's branded medical device unit
and the customers of the Company's MMT unit operate is subject to extensive and
rigorous regulation by the Food and Drug Administration ("FDA") and by
comparable agencies in foreign countries. In the United States, the FDA
regulates the introduction, manufacturing, labeling and record keeping
procedures for medical devices including the Company's branded products and
medical devices incorporating MMT's products.
Food and Drug Administration
- ----------------------------
FDA regulations classify medical devices as either Class I, II or III devices,
which are subject to general controls, special controls or pre-market approval
("PMA") requirements, respectively. While most Class I devices are exempt from
pre-market submission, it is necessary for most Class II devices, as well as
some Class I devices to be cleared by a 510(k) pre-market notification prior to
marketing. This establishes that the device is ''substantially equivalent'' to
a device that was legally marketed prior to May 28, 1976, the date on which the
Medical Device Amendments of 1976 became effective. The 510(k) pre-market
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device or
the particular application for the device requires a more rigorous review, the
FDA will require the manufacturer to submit a PMA application for a Class III
device that must be reviewed and approved by the FDA prior to sale and marketing
of the device in the United States. The PMA application must contain the
results of clinical trials and relevant prototype tests, laboratory and animal
studies. It must also contain a complete description of the device, its
components and a detailed description of the methods, facilities and controls
used for manufacturing, including the method of sterilization. In addition, the
submission must include the proposed labeling, advertising literature and
training methods, if applicable. The process of obtaining PMA can be expensive,
uncertain, lengthy and frequently requires anywhere from one to several years
from the date of FDA submission, if approval is obtained at all. Moreover, PMA,
if granted, may include significant limitations on the indicated uses for which
a product may be marketed. FDA enforcement policy strictly prohibits the
marketing of approved medical devices for unapproved uses. In addition, product
approvals can be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing.
Of the Company's current branded products, Biograft is a Class III device.
Biograft received marketing clearance from the FDA pursuant to the PMA process.
All other branded products have all been classified as Class II medical devices
and have received 510(k) marketing clearance from the FDA.
The Company's Branded Medical Device's manufacturing operation is subject to
periodic inspections by the FDA, whose primary purpose is to audit the Company's
compliance with the Quality System Regulations (''QSR'') published by the FDA
and other applicable government standards. Strict regulatory action may be
initiated in response to audit deficiencies or to product performance problems.
The Company believes that its manufacturing
11
and quality control procedures are in compliance with the requirements of the
FDA regulations.
International Regulation
- ------------------------
International regulatory bodies have established varying regulations governing
product standards, packaging and labeling requirements, import restrictions,
tariff regulations and duties and tax. Many of these regulations are similar to
those of the FDA. In Japan, a potentially significant market for the Company's
branded products, clinical trials of certain branded products are required
before such products can be cleared for sale in the Japanese market. The Company
relies on its independent distributors to comply with the majority of the
foreign regulatory requirements, including registration of the Company's branded
products with the appropriate governmental authorities. To date, the Company has
complied with the regulatory requirements in the foreign countries in which its
branded products are marketed. See Important Factors - Bovine Tissue Products on
Page 13 of this Report.
The registration system in the European Union ("EU") for the Company's Branded
Medical Devices requires that the Company's quality system conform with the ISO
9001 international quality standard and that its Branded Medical Devices conform
with "essential requirements" set forth by the Medical Device Directive ("MDD").
The Company's manufacturing facilities and processes under which the Company's
Branded Medical Devices are produced were inspected and audited by the British
Standards Institute ("BSI") to verify the Company's compliance with the
essential requirements of the MDD. BSI also verified that the Company's quality
system conforms with the ISO 9001 international quality standard and that its
products conform with the "essential requirements" set forth by the MDD for the
class of Branded Medical Devices produced by the Company. BSI certified the
Company's conformity with both the ISO 9001 standard and the MDD essential
requirements, entitling the Company to place the "CE" mark on all the Company's
current branded products, except Biograft which is exempt. See Important
Factors - Human Tissue Products on Page 13 of this Report.
Third Party Reimbursement
The Company's Branded Medical Devices are purchased primarily by hospitals and
other end-users, while MMT's unbranded component products are sold directly to
medical device manufacturers which distribute finished medical devices to
hospitals and other end-users. Hospitals and end-users of such products, in
turn, bill various third party payers for the services provided to the patients.
These payers, which include Medicare, Medicaid, private health insurance plans
and managed care organizations, reimburse all or part of the costs and fees
associated with the procedures utilizing the Company's products.
The availability and level of reimbursement from third-party payers is
significant to the Company's business. For Medicare carriers, HCFA may
establish a national coverage policy, including the amount to be reimbursed, for
coverage of claims submitted for reimbursement related to a specific procedure.
Private health insurance plans and managed care organizations make their own
determinations regarding coverage and reimbursement based either upon "usual and
customary" fees or, increasingly, upon a similar prospective payment system.
In response to the focus of national attention on rising health care costs, a
number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payers to curb these costs. The development or increased use of
more cost effective treatments for diseases could cause such payers to decrease
or deny reimbursement for surgeries or to favor non-surgical alternatives to
those surgical procedures currently utilizing the Company's Branded Medical
Devices. There has also been a significant increase in the number of Americans
enrolling in some form of managed care plan. Higher managed care utilization
typically drives down the payments for health care procedures, which in turn
places pressure on medical supply prices. This causes hospitals to implement
tighter vendor selection and certification processes, by reducing the number of
vendors used, purchasing more products from fewer vendors and trading discounts
on price for guaranteed higher volumes to vendors. Hospitals have also sought
to control and reduce costs over the last decade by joining group purchasing
organizations or purchasing alliances. The Company cannot predict what
continuing or future impact these practices, the existing or proposed
legislation, or such third-party payer measures within a constantly changing
healthcare landscape may have on its future business, financial condition or
results of operations.
Employees
At October 31, 2000, the Company employed approximately 230 full-time and part-
time individuals, with
12
approximately 115 employees at each business unit. The Company's employees are
not represented by a union, and the Company considers its relationship with its
employees to be good.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The information under the caption "Major Customers and Net Revenue by Geographic
Area" on page 33 of the Company's 2000 Annual Report is incorporated herein by
reference.
ITEM 1A - Important Factors
- ---------------------------
The following factors are important and should be considered carefully in
connection with any evaluation of the Company's business, financial condition,
results of operations and prospects. Additionally, the following factors could
cause the Company's actual results to materially differ from those reflected in
any forward-looking statements of the Company.
Health Care Industry: Health care industry factors, including the
unpredictability of reductions and limitations on third-party (governmental
health programs, private health insurance, managed care organizations and other
similar programs) reimbursement levels for procedures using the Company's
products and increased customer demands for price concessions.
Competitive Industry: Competitive industry factors including the ability of the
Branded Medical Devices unit and the customers of MMT to contend with rapid
product innovation and technological change in the medical device industry, and
the Company's ability to effectively compete with larger, well-established
manufacturers of competing products.
Intellectual Property: Intellectual property factors, including the protection
of intellectual property through trade secrets, propriety know-how,
confidentiality agreements and patents, both owned and licensed, and the
Company's ability to ensure such protective measures are obtained and remain
effective to keep competitors from using similar technologies or from marketing
comparable products. Litigation may be necessary to enforce such protective
measures or to defend the Company's technology that a competitor claims
infringes upon their product.
Human Tissue Product: Human tissue product factors include recently focused
attention on the safety of tissue banks, spurred by incidents of the
transmission of human disease during tissue transplantation. In the United
States, regulations drafted by the FDA have outlined requirements for tissue
banks. Although the current regulations have specifically excluded from
regulation medical devices subject to FDA review, including preserved umbilical
cord vein grafts such as Biograft (the Company's only product derived from human
tissue), proposed rules indicate that medical devices containing human tissue
products may be subject to additional controls. Also, the long-term future
regulatory environment for Biograft in Europe is uncertain. The MDD issued by
the EU explicitly excludes medical devices from human tissue; however, there is
an effort developing to include such devices under a comprehensive regulatory
program. This effort is in the early stages, and the Company understands that a
consensus on such a directive could take several years. As a result, Biograft
may be subject to additional regulations in the United States and Europe, which
could make it uneconomical to sell Biograft under a regulatory program.
Bovine Tissue Products: Bovine Tissue Product factors include Bovine Spongiform
Encephalopathy ("BSE"), which has been identified in cattle in the United
Kingdom and has received much publicity in Europe regarding beef for dietary
consumption. Under the direction of the USDA, the U.S. government has had an
active program of surveillance and import controls since the late 1980's,
designed to prevent the introduction of BSE into U.S. cattle. To date all
evidence indicates that U.S. cattle are free of BSE. The Company obtains all of
its raw pericardium for its Tissue-Guard products from USDA-inspected
slaughterhouses. The World Health Organization (WHO) has categorized the levels
of BSE infectivity of tissue and fluids on a scale of 1 to 4, with category 4
representing no detectable infectivity. The WHO has classified raw pericardium
in category 4. The Company's notified body under the MDD, the BSI, has
specifically reviewed Tissue-Guard sourcing and manufacturing processes and has
certified the Company's bovine pericardium products. While the Company's Dura-
Guard product has not been approved for sale in Japan and France, the Company
understands that regulatory approvals will not be granted in those countries for
the use of animal derivative products, including bovine pericardium, when used
as a dura mater substitute. Any prohibition by certain countries of bovine
pericardium products as a result of concerns related to BSE could have a
material adverse effect on the Company's business, financial condition and
results of operations.
13
Governmental Regulation: Governmental regulation factors, including the laws
and regulations, policies and judicial decisions that affect the regulation of
the Company's products, and delays and uncertainties in the regulatory approval
process in the United States and other countries, which could result in lost
market opportunities.
Product Liability Claims and Product Recall: Product liability claims and
product recall factors, including unexpected safety, performance and efficacy
concerns with the Company's products, which could lead to product recalls,
withdrawals, loss of sales and significant liability claims against the Company.
Also, the risk that the Company's product liability insurance coverages would
not be adequate to cover product liability claims made against the Company.
Dependence on Distributors and Sales Representatives: The risks pertaining to
the Company's dependence on domestic and international distributors and sales
representatives, which are utilized to transact a significant portion of the
Company's current business related to its Branded Medical Device unit, and the
effects on the Company's operations due to a loss of a significant distributor
or a significant number of other distributors or sales representatives.
Euro Conversion: The Euro conversion factors, including the uncertain impact of
the conversion on the competitive environment in which the Company operates and
its relationships with international distributors. The Company currently
denominates all of its foreign transactions in U.S. dollars.
Dependence on Significant Customer: The risks associated with the Company's
significant dependence on one MMT customer, and the effects on the Company's
operations and financial results with changes in the customer's ordering
patterns or loss of the customer.
ITEM 2 - Properties
- -------------------
The Company leases approximately 36,000 square feet of office and manufacturing
space for its general offices and Branded Medical Device business at 2575
University Avenue, St. Paul, Minnesota. The base rent of this lease, which
commenced August 1, 1995 and expires July 31, 2005, is approximately $255,000
annually. The Company also has two leases on two facilities for its MMT
business totaling 29,000 square feet at 471 and 475 Apollo Drive, Lino Lakes,
Minnesota. The base rent of the first lease for 25,000 square feet, which
commenced December 1, 1997 and expires five years from that date with a
subsequent five year option, is approximately $103,000 annually. The base rent
of the second lease for 4,000 square feet, which commenced April 1, 1999 and
expires five years from that date with a subsequent five year option, is
approximately $34,500 annually. The Company pays apportioned real estate taxes
and common costs on all leased facilities. The Company believes that its
current space will be adequate for at least the next twelve months.
ITEM 3 - Legal Proceedings
- --------------------------
The Company is currently involved in litigation which is ordinary and incidental
to its business. Management believes losses, if any, that might eventually be
sustained from such litigation would not be material to the Company's
consolidated financial position, results of operations or cash flows for any
period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.
ITEM 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
14
ITEM 4A - Executive Officers of the Registrant
- ----------------------------------------------
The Company's executive officers, their ages, and their offices held as of
December 31, 2000 are as follows:
- -------------------------------------------------------------------------------------------------------
Name Age Title
- -------------------------------------------------------------------------------------------------------
M. Karen Gilles 58 President, Chief Executive Officer and Director
- -------------------------------------------------------------------------------------------------------
Fariborz Boor Boor 42 President and Chief Operating Officer of Jerneen Micro Medical
Technologies
- -------------------------------------------------------------------------------------------------------
David A. Buche 39 Vice President of Marketing and Sales
- -------------------------------------------------------------------------------------------------------
Mary L. Frick 47 Vice President of Regulatory/Clinical/Quality Affairs
- -------------------------------------------------------------------------------------------------------
Evan S. Johnston 40 Vice President of Operations
- -------------------------------------------------------------------------------------------------------
Connie L. Magnuson 39 Vice President of Finance and Chief Financial Officer
- -------------------------------------------------------------------------------------------------------
B. Nicholas Oray, Ph.D. 49 Vice President of Research and Development
- -------------------------------------------------------------------------------------------------------
M. Karen Gilles. Ms. Gilles has served as President and Chief Executive Officer
of the Company since July 1997 and as a Director of the Company since August
1997. Prior to July 1997, Ms. Gilles held the positions of Chief Financial
Officer of the Company from December 1990, Vice President of Finance from 1989,
and Secretary of the Company from November 1991. Ms. Gilles served as the
Director of Finance and Administration of the Company from April 1989 to
December 1989.
Fariborz Boor Boor. Mr. Boor Boor has served as the President and Chief
Operating Officer of Jerneen Micro Medical Technologies (Jerneen) since November
2000. Prior to November 2000, he held the position of Vice President and Chief
Operating Officer of Jerneen from March 2000. Prior to March 2000, Mr. Boor
Boor held the position of Director of Operations from April 1999, and Director
of Quality and Regulatory Affairs from September 1998. From 1989 to 1998, Mr.
Boor Boor held various engineering, quality, and manufacturing management
positions at Plastech Corporation, a plastics injection molding company serving
various industries including the medical device industry. From 1979 to 1989, Mr.
Boor Boor held various manufacturing management positions including the Division
management of the Fastener Division of Phillips Plastics Corporation serving the
automotive industry.
David A. Buche. Mr. Buche has served as Vice President of Marketing and Sales
since January 1998. Prior to January 1998, Mr. Buche held the positions of
Director of Marketing from November 1997 and Director of International Marketing
and Sales from March 1995. From 1988 to February 1995, Mr. Buche held various
product and sales management positions at Spectranetics Corporation, a company
that develops and markets technology for interventional cardiovascular therapy.
Mary L. Frick. Ms. Frick has served as Vice President of
Regulatory/Clinical/Quality Affairs since November 2000 and as Director of
Regulatory/Clinical/Quality Affairs since November 1998. Prior to this, she
held the position of Group Manager of Regulatory/Clinical/Quality Affairs from
June to November of 1998. From 1984 to June 1998, Ms. Frick held a series of
management positions in Research, Operations and Regulatory/Clinical Affairs at
INCSTAR Corporation, a diagnostic medical device manufacturer. From 1979 to
1984, Ms. Frick worked in research at the University of Minnesota-Medical
School.
Evan S. Johnston. Mr. Johnston has served as Vice President of Operations since
November 2000. Joining the Company in September 1998, Mr. Johnston served as
Director of Operations from November 1999. From 1996 to 1998, Mr. Johnston held
the position of Director of Manufacturing and Operations at LecTec Corp., a
manufacturer of skin interface medical devices. From 1995 to 1996, he served as
Director of Manufacturing and Lakeside Nameplate Co., a custom manufacturer of
electronic membrane switches. Mr. Johnston served as Manager of Industrial
Engineering from 1990 to 1995 at Orthomet Inc., a manufacturer of orthopedic
implants and related surgical instruments. From 1986 to 1990, Mr. Johnston held
various project management positions for Honeywell, Control Systems Division, a
developer of automation solutions for government and commercial industries.
Connie L. Magnuson. Ms. Magnuson joined the Company as Chief Financial Officer
and Vice President of Finance in November 1997 and has served as Corporate
Secretary since February 1998. From March 1997 to November 1997, Ms. Magnuson
served as Treasurer of Northern Technologies International Corporation. From
1996 to March 1997, Ms. Magnuson served as a private financial consultant. From
1983 to 1996, Ms. Magnuson held a series of positions with Deloitte and Touche
LLP, a public accounting firm, including Audit Senior Manager and Director of
Human Resources for their Minneapolis office.
15
B. Nicholas Oray, Ph.D. Dr. Oray joined the Company as Vice President of
Research and Development in April 1998. From 1997 to April 1998, he served as
Director of Research and Development at Seatrace Pharmaceuticals Inc. From 1993
to 1996, Dr. Oray held a series of positions with CryoLife Inc., including
Director of Bioadhesive Manufacturing and Associate Director of Biomedical
Products Laboratory. From 1991 to 1993, he held several positions with
F.A.C.T., a clinical research organization, including Director of Regulatory
Affairs and Associate Director of Clinical Trials Operations. From 1988 to
1990, Dr. Oray served as Director of Manufacturing, Director of Sterile
Manufacturing and Director of Purification and Production Group at Carrington
Laboratories, Inc.
16
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information under the caption "Common Stock Information" on page 34 of the
Company's 2000 Annual Report is incorporated herein by reference.
ITEM 6 - Selected Financial Data
- --------------------------------
The financial information in the tables and charts under the caption "Financial
Highlights" on pages 2 and 3 of the Company's 2000 Annual Report is incorporated
herein by reference.
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 16-20 of the Company's
2000 Annual Report is incorporated herein by reference.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's quantitative and qualitative disclosures about market risk are
included in Item 7.
ITEM 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's Consolidated Financial Statements and related Notes thereto on
pages 21-33 and the Report of Independent Accountants on page 34 of the
Company's 2000 Annual Report are incorporated herein by reference, as is the
unaudited information set forth under the caption "Quarterly Results" on page 34
of the Company's 2000 Annual Report.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
(a) Directors of the Registrant:
The information under the caption "Election of Directors - Information
About Nominees" and "Election of Directors - Other Information About
Nominees" in the Registrant's 2001 Proxy Statement is incorporated herein
by reference.
(b) Executive Officers of the Registrant:
Information concerning Executive Officers of the Company is included in
this Report on pages 15 and 16 under Item 4A, "Executive Officers of the
Registrant."
(c) Compliance with Section 16(a) of the Exchange Act:
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's 2001 Proxy Statement is
incorporated by reference herein.
17
ITEM 11 - Executive Compensation
- --------------------------------
The information under the captions "Executive Compensation" and "Election of
Directors - Directors' Compensation" in the Registrant's 2001 Proxy Statement is
incorporated by reference herein.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Registrant's 2001 Proxy Statement is
incorporated by reference herein.
ITEM 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
The information under the caption "Executive Compensation - Certain
Transactions" in the Registrant's 2001 Proxy Statement is incorporated by
reference herein.
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) List of documents filed as part of this Report:
1) Financial Statements, Related Notes and Report of Independent
Accountants:
The following items are incorporated herein by reference from the
pages indicated in the Company's 2000 Annual Report:
Page
----
- Consolidated Balance Sheets as of October 31, 2000 and 1999 21
- Consolidated Statements of Operations for the years ended
October 31, 2000, 1999 and 1998 22
- Consolidated Statements of Comprehensive Income and
Shareholders' Equity for the years ended October 31, 2000,
1999 and 1998 23
- Consolidated Statements of Cash Flows for the years ended
October 31, 2000, 1999 and 1998 24
- Notes to Consolidated Financial Statements 25-33
- Report of Independent Accountants 34
The unaudited selected quarterly financial data included under the
caption "Quarterly Results" on page 34 of the Company's 2000 Annual
Report is incorporated herein by reference.
2) Financial Statement Schedules:
The following financial statement schedule and Report of Independent
Accountants thereon are included herein and should be read in
conjunction with the Consolidated Financial Statements referred to
above (page numbers refer to pages in this Annual Report on Form 10-
K):
Page
----
- Report of Independent Accountants on Financial Statement
Schedule 21
- Schedule II - Valuation and Qualifying Accounts 22
All other financial statement schedules not listed have been omitted
because the required information is included in the Consolidated
Financial Statements or the Notes thereto, or is not applicable.
18
3) Exhibits:
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index on pages E-1 to E-3 of this Report.
The Company will 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: Connie L. Magnuson,
Vice President of Finance and Chief Financial Officer, Bio-Vascular,
Inc., 2575 University Avenue, St. Paul, Minnesota 55114-1024.
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 of Form 10-K pursuant to Item 14(c):
A. 1988 Stock Option Plan, as amended, (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1992 (File No.
0-13907)).
B. 1995 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report of
Form 10-K for the year ended October 31, 1998 (File No. 0-
13907)).
C. Employee Stock Purchase Plan, as amended (filed herewith
electronically).
D. Form of Change in Control Agreement entered into between the
Company and M. Karen Gilles (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1994 (File No. 0-13907)).
E. Form of Change in Control Agreement entered into between the
Company and each of Connie L. Magnuson dated January 12,
1998 and David A. Buche dated January 29, 1998 (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended January 31, 1998
(File No. 0-13907)).
F. Employment Agreement dated July 31, 1998 among the Company,
Jer-Neen Manufacturing Co., Inc. and James F. Pfau
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended July 31,
1998 (File No. 0-13907)).
G. Change in Control Agreement dated February 1, 1999 between
the Company and Dr. B. Nicholas Oray (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the period ended January 31, 1999 (File No.
0-13907)).
H. Change in Control Agreement dated March 1, 2000 between the
Company and Fariborz Boor Boor (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the period ended April 30, 2000 (File No. 0-13907)).
I. Amendment to form of change in control agreement between the
Company and M. Karen Gilles, Connie L. Magnuson, David A.
Buche, B. Nicholas Oray and Fariborz Boor Boor (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended July 31, 2000 (File
No. 0-13907)).
19
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter ended October
31, 2000.
(c) Exhibits:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on pages E-1 through E-3 of the Form 10-K.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on page 22 of the Form 10-K.
20
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULE
To the Shareholders and Board of Directors of Bio-Vascular, Inc.
Our audits of the consolidated financial statements referred to in our report
dated December 1, 2000 appearing in the 2000 Annual Report to Shareholders of
Bio-Vascular, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
December 1, 2000
21
SCHEDULE II
- --------------------------------------------------------------------------------
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, 2000............... $ 98,000 $ 48,000 $ 31,000 $115,000
Year ended October 31, 1999............... 128,000 14,000 44,000 98,000
Year ended October 31, 1998............... 21,000 113,000 6,000 128,000
- ----------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
beginning cost and at end of
Description of period expenses Deductions period
- ----------------------------------------------------------------------------------------------------------------
Reserve for obsolete inventories:
Year ended October 31, 2000............... $ 578,000 $ 23,000 $304,000 $297,000
Year ended October 31, 1999............... 479,000 118,000 19,000 578,000
Year ended October 31, 1998............... 373,000 194,000 88,000 479,000
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ M. Karen Gilles
-----------------------------------------------------
M. Karen Gilles, President and Chief Executive
Officer (Principal Executive Officer)
Dated: January 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on January 29, 2001 by the following persons on behalf of
the registrant and in the capacities indicated.
/s/ M. Karen Gilles
- --------------------------------------------------------------------------------
M. Karen Gilles
President, Chief Executive Officer and Director
/s/ Connie L. Magnuson
- --------------------------------------------------------------------------------
Connie L. Magnuson
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Timothy M. Scanlan
- --------------------------------------------------------------------------------
Timothy M. Scanlan
Chairman, Board of Directors
/s/ Richard W. Perkins
- --------------------------------------------------------------------------------
Richard W. Perkins, Director
/s/ Anton R. Potami
- --------------------------------------------------------------------------------
Anton R. Potami, Director
/s/ William G. Kobi
- --------------------------------------------------------------------------------
William G. Kobi, Director
/s/ Edward E. Strickland
- --------------------------------------------------------------------------------
Edward E. Strickland, Director
23
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 2000
- --------------------------------------------------------------------------------
2.1 Acquisition Agreement and Plan of Reorganization by and among the Company,
Jer-Neen Acquisition, Inc., Jer-Neen Manufacturing Co., Inc., George
Nelson, Jr., Ronald Breckner, James Pfau, Willard Sykes and Catherine
Sykes dated July 31, 1998 (incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the period ended July 31, 1998
(File No. 0-13907)).
3.1 Restated Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1997 (File No.
0-13907)).
3.2 Amendment to Restated Articles of Incorporation of the Company, as
amended, dated March 20, 1997 (incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended April
30, 1997 (File No. 0-13907)).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-4 (File No.
33-74750)).
4.1 Form of common stock Certificate of the Company (incorporated by reference
to Exhibit 4.1 to the Company's registration statement on Form 10 (File
No. 0-13907)).
4.2 Form of Rights Agreement, dated as of June 12, 1996, between Bio-Vascular,
Inc. and American Stock Transfer & Trust Company, which includes as
Exhibit A the form of Rights Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 12,
1996 (File No. 0-13907)).
4.3 Restated Articles of Incorporation of the Company, as amended (see Exhibit
3.1).
4.4 Amendment to Restated Articles of Incorporation of the Company, as
amended, dated March 20, 1997 (see Exhibit 3.2).
4.5 Amended and Restated Bylaws of the Company (see Exhibit 3.3).
10.1 Agreement dated as of July 31, 1985 among Genetic Laboratories, Inc.,
Vascular Services Diversified, Inc., and the Company, including first
amendment thereto, dated September 25, 1985 (incorporated by reference to
Exhibit 2.1 to the Company's registration statement on Form 10 (File No.
0-13907)).
10.2 Amendment No. 2 to the Agreement referred to in Exhibit 10.1, effective
July 31, 1985 (incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the period ended April 30, 1986 (File
No. 0-13907)).
10.3 License Agreement dated September 25, 1985 between the Company and Genetic
Laboratories, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's registration statement on Form 10 (File No. 0-13907)).
10.4 Amendment to License Agreement dated June 13, 1986 between the Company and
Genetic Laboratories, Inc. (incorporated by reference to Exhibit 10.4 to
the Company's Current Report on Form 8-K dated June 15, 1986 (File No. 0-
13907)).
10.5 Debt and Royalty Restatement Agreement dated June 16, 1986 among Genetic
Laboratories, Inc., Vascular Services Diversified, Inc. and the Company
(incorporated by reference to Exhibit 19.3 to the Company's Quarterly
Report on Form 10-Q for the period ended April 30, 1986 (File No. 0-
13907)).
E-1
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 2000
- --------------------------------------------------------------------------------
10.6 Purchase Agreement dated February 17, 1986, between the Company and
Genetic Laboratories, Inc. including Bill of Sale and Assignment
(incorporated by reference to Exhibit 19.4 to the Company's Quarterly
Report on Form 10-Q (File No. 0-13907)).
10.7 Purchase and sale agreement dated October 30, 1989 and closed December
28, 1989 between the Company and Meadox Medicals, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-
K dated January 11, 1990 (File No. 0-13907)).
10.8 Assignment and Assumption Agreement dated July 31, 1985 between the
Company 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
Company's Quarterly Report on Form 10-Q for the period ended April 30,
1986 (File No. 0-13907)).
10.9 Assignment dated June 13, 1986 by Genetic Laboratories, Inc. to the
Company (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 15, 1986 (File No. 0-13907)).
10.10 Confirmatory Assignment dated June 13, 1986 by Genetic Laboratories,
Inc., to the Company (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated June 15, 1986 (File No. 0-
13907)).
10.11 Confirmatory Assignment dated June 13, 1986 by Genetic Laboratories,
Inc., to the Company (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated June 15, 1986 (File No. 0-
13907)).
10.12 Trademark Assignment Agreement dated June 19, 1986 between the Company
and Genetic Laboratories, Inc. (incorporated by reference to Exhibit
19.10 to the Company's Quarterly Report on Form 10-Q for the period
ended April 30, 1986 (File No. 0-13907)).
10.13 Assignment dated June 26, 1986 between the Company and Genetic
Laboratories, Inc. (incorporated by reference to Exhibit 19.11 to the
Company's Quarterly Report on Form 10-Q for the period ended April 30,
1986 (File No. 0-13907)).
10.14 1988 Stock Option Plan, as amended, (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1992 (File No. 0-13907)).
10.15 1995 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report of Form 10-K for the year
ended October 31, 1998 (File No. 0-13907)).
10.16 Employee Stock Purchase Plan, as amended (filed herewith
electronically)).
10.17 Form of Change in Control Agreement entered into between the Company
and M. Karen Gilles (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended October 31,
1994 (File No. 0-13907)).
10.18 Form of Change in Control Agreement entered into between the Company
and each of Connie L. Magnuson dated January 12, 1998 and David A.
Buche dated January 29, 1998 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the period
ended January 31, 1998 (File No. 0-13907)).
E-2
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 2000
- --------------------------------------------------------------------------------
10.19 Employment Agreement dated July 31, 1998 among the Company, Jer-Neen
Manufacturing Co., Inc. and Mr. James F. Pfau (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended July 31, 1998 (File No. 0-13907)).
10.20 Change in Control Agreement dated February 1, 1999 between the Company
and Dr. B. Nicholas Oray (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the period ended January
31, 1999 (File No. 0-13907)).
10.21 Change in Control Agreement dated March 1, 2000 between the Company and
Fariborz Boor Boor (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended April 30,
2000 (File No. 0-13907)).
10.22 Amendment to form of change in control agreement between the Company and
M. Karen Gilles, Connie L. Magnuson, David A. Buche, B. Nicholas Oray
and Fariborz Boor Boor (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended July 31,
2000 (File No. 0-13907)).
10.23 Lease Agreement effective August 1, 1995 between the Company and CMS
Investors, Inc. (incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended October 31, 1995
(File No. 0-13907)).
10.24 Purchase and Sale Agreement dated December 1, 1995 among the Company,
Bioplasty, Inc. and Uroplasty, Inc. (incorporated by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995 (File No. 0-13907)).
10.25 License Agreement dated December 1, 1995 between the Company and
Uroplasty, Inc. (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended October 31, 1995
(File No. 0-13907)).
10.26 Assignment of U.S. Patent dated December 1, 1995 among the Company,
Bioplasty, Inc. and Uroplasty, Inc. (incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995 (File No. 0-13907)).
10.27 Lease Agreement effective August 27, 1997 between Jer-Neen Manufacturing
Co., Inc. and F&G Incorporated (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
January 31, 1999 (File No. 0-13907)).
13.1 Portions of the Company's 2000 Annual Report to Shareholders
incorporated herein by reference (filed herewith electronically).
21.1 List of Subsidiaries of the Company (filed herewith electronically).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith electronically).
27.1 Financial Data Schedule for the year ended October 31, 2000 (filed
herewith electronically).
E-3