Exhibit 13.1
The following information appears on pages 16-20 of the Company's 2000 Annual
Report to Shareholders.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
Forward-Looking Statements: Certain statements contained in this Annual Report
include "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. Forward-looking 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, the risk factors listed from time-to-time in the Company's filings with
the Securities and Exchange Commission, such as the year-end Annual Report on
Form 10-K.
OVERVIEW
Bio-Vascular, Inc. (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 specializes in custom designed engineering and
manufacturing of complex precision micro-wire forms, including guidewires, micro
coils, stylets and delivery device components for use in interventional
cardiovascular and neurological devices.
The acquisition of MMT was completed July 31, 1998, the end of the Company's
fiscal 1998 third quarter. MMT's financial results were included in the
Company's consolidated results of operations beginning in the fourth quarter of
1998. The Company believes that the addition of MMT's business 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.
Fiscal 2000 represents the Company's first profitable year since fiscal 1995, a
direct result of the growth strategy adopted by the Company three years ago.
Since fiscal 1997, the Company's net revenues have increased 126% from $9.7
million in fiscal 1997, increasing to record levels in fiscal 1998 and 1999
while ultimately achieving a new record of $21.9 million in fiscal 2000. Both
business units reported record annual net revenue in fiscal 2000.
The Company has continued to advance its strategy for growth at both business
units, focusing on opportunities to grow through 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 improvement 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
1
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. 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.
RESULTS OF OPERATIONS
Years Ended October 31, 2000 and 1999
Consolidated net revenue in fiscal 2000 increased to a new record of
$21,926,000, an increase of $3,022,000 from $18,904,000 reported during fiscal
1999. The Branded Medical Device unit's net revenue for fiscal 2000 increased
$1,508,000 or 13% to $13,189,000 from $11,681,000 for fiscal 1999. The Micro
Medical Technologies unit contributed net revenue of $8,737,000 in 2000, up
$1,514,000 or 21% from fiscal 1999 revenue of $7,223,000. The combined 16% net
revenue growth from these business units is primarily attributable to increased
sales unit volume due in part to the new indications for existing branded
products, new branded product introductions and the expansion of MMT's design,
engineering and manufacturing customer base.
The Branded Medical Device unit experienced revenue gains from all major product
lines during fiscal 2000. Revenue from the Tissue-Guard(TM) product line
increased to $5,857,000 during fiscal 2000, reflecting a 12% increase over
fiscal 1999, led by sales of Dura-Guard(R) and Vascu-Guard(R). Revenue from
Peri-Strips(R) and Peri-Strips Dry(R) increased 12% to $3,509,000 in fiscal 2000
from $3,125,000 in fiscal 1999, due in part to the February 2000 FDA clearance
for use of the product in the bariatric surgical procedures of gastric banding
and gastric bypass. Sales of Surgical Tools, including the new Neurosurgical
Dissection Kit, for fiscal 2000 increased $475,000 or 19% to $3,035,000 from
$2,560,000 in fiscal 1999.
The Company's consolidated gross margin percentage of 51% in fiscal 2000 is
slightly higher than the fiscal 1999 margin of 50%, primarily due to gross
margin improvements at the Branded Medical Device unit. The Branded Medical
Device unit's gross margin percentage increased seven percentage points to 64%
as a result of the incremental sales volume combined with the effective
management of operations-related spending levels and production activities.
MMT's gross margin percentage decreased to 31% in fiscal 2000 from 38% in fiscal
1999. The decrease in MMT's gross margin during the year is due to pricing
considerations and the assumption of the precious metal component of product
production in fiscal 2000. Under these precious metal handling agreements with
key customers, the MMT unit agreed to purchase critical precious metals on
behalf of certain customers for use in the manufacturing of products for which
MMT is paid a handling fee for the incremental personnel and working capital
resource commitments it is undertaking. Although the impact of the precious
metal component of production is a reduction in the gross margin percentage, the
substance of the transactions adds positive incremental dollars to the gross
margin of the MMT unit. The Company expects the consolidated gross margin
percentage to increase in fiscal 2001 as a direct result of increased sales
volume. This forward-looking statement is influenced primarily by the Company's
current estimate of standard costs and production forecasts and would be
impacted by significant increases or decreases in production volumes of the
2
Company's products, by material changes in the Company's product mix and by the
accuracy of the Company's estimates of standard costs and other manufacturing
costs.
Selling, general and administrative (SG&A) expense decreased $212,000, or 2%, to
$8,378,000 in fiscal 2000 from $8,590,000 in fiscal 1999, which is primarily
attributable to excellent expense management at the Branded Medical Device unit.
Decreased spending on external costs to assert a reversal of HCFA's lung volume
reduction surgery non-coverage decision and direct marketing materials
presenting the Branded Medical Device unit's new corporate logo and image
(introduced in fiscal 1999), in addition to the full amortization of goodwill
associated with product rights as of October 31, 1999, contributed to an overall
decrease in the Branded Medical Device unit's SG&A expense of $437,000 or 6%, to
$6,323,000 in fiscal 2000 from $6,760,000 in fiscal 1999. MMT's SG&A expense
during fiscal 2000 increased $226,000, or 12% to $2,055,000, due primarily to a
termination charge associated with an employment contract. As a direct result
of incremental sales volume combined with the excellent expense management at
the Branded Medical Device unit in fiscal 2000, SG&A as a percentage of net
revenue decreased seven percentage points to 38% in fiscal 2000 from 45% in
fiscal 1999.
Research and development (R&D) expense in fiscal 2000 was $1,952,000, an
increase of $287,000 or 17% from the fiscal 1999 expense of $1,665,000. The
Company continued its growth and opportunity creation strategy as demonstrated
through the dedication of significant resources to R&D at both its Branded
Medical Device and MMT units. The increase in R&D expense in fiscal 2000 over
1999 reflects the Branded Medical Device unit's continued investment in pre-
clinical feasibility studies for new products in development, and the MMT unit's
continued investment in the growth of design and engineering services offered
through its Technology Development Center (TDC). R&D expense is expected to
fluctuate based on project timing. This forward-looking statement will be
influenced primarily by the number of projects and the related R&D personnel
requirements, development and regulatory approval path, expected costs and the
timing of those costs for each project.
The Company's consolidated operating income increased by more than $1,670,000
during the year, improving from an operating loss of $794,000 in fiscal 1999 to
operating income of $879,000 during fiscal 2000. This move to operating income
in 2000 reflects an increase of more than $2,100,000 in operating income of the
Branded Medical Device unit, which improved from an operating loss of $1,411,000
in fiscal 1999 to operating income of $702,000 in fiscal 2000. Offsetting this
positive income change, the MMT unit's operating income decreased to $177,000 in
fiscal 2000 from $617,000 in fiscal 1999.
Other income, primarily net interest income, was $162,000 in fiscal 2000 and
$183,000 in fiscal 1999. The decrease in net interest income is related to lower
average cash and investment balances in fiscal 2000 as compared to fiscal 1999,
primarily due to cash expenditures for the Company's stock repurchase program
(which was completed as of October 31, 1999), purchases of equipment and
leasehold improvements and repayments of long-term obligations. The Company's
net income before income taxes was $1,041,000 in fiscal 2000 as compared to a
loss of $611,000 in fiscal 1999.
The Company recorded a provision for income taxes of $452,000 in fiscal 2000,
representing an effective tax rate of 43%, as compared to a benefit from income
taxes of $91,000 at an effective tax rate of 15% in fiscal 1999. The fiscal
2000 effective tax rate is higher than the statutory rates due to the impact of
permanent differences, including nondeductible goodwill associated with the
acquisition of Jerneen, partially offset by the impact of research and
experimentation credits. As a result of the magnitude of its pre-tax income in
fiscal 2000, the Company fully applied its net operating loss carryforwards as
of October 31, 1999 against net taxable income in fiscal 2000. As of October
31, 2000, the Company has recorded $444,000 of deferred tax assets related to
certain credit carryforwards, primarily research and experimentation credits,
and $189,000 of other net deferred tax assets. The Company expects to fully
apply its net deferred tax assets against future taxable income.
The Company's consolidated net income was $589,000, or seven cents per diluted
share in fiscal 2000, as compared to a net loss of $520,000, or six cents per
share in fiscal 1999.
3
Years Ended October 31, 1999 and 1998
Consolidated net revenue in fiscal 1999 increased to $18,904,000, up $6,887,000
or 57%, from $12,017,000 in fiscal 1998. The Branded Medical Device unit
reported net revenue of $11,681,000, up $1,061,000 from the 1998 revenue level
of $10,620,000. The MMT unit contributed net revenue of $7,223,000 in 1999, as
compared to revenue of $1,397,000 contributed during the fourth quarter of 1998.
The 31% revenue growth of the MMT unit is attributable to both increased sales
unit volume as well as new products resulting from its quick turn prototyping
emphasis. This 31% rate takes into account all of fiscal 1998, of which the
first three quarters were not included in the Company's 1998 results.
The Branded Medical Device business experienced 25% revenue growth from its
surgical productivity tools to $2,560,000 in 1999 from $2,051,000 in 1998.
Revenue from the Flo-Thru Intraluminal Shunt(TM), which received market
clearance in August 1998, accounted for approximately 57% of the increase in
surgical productivity tools revenue during the year. The Tissue-Guard(TM)
product line, exclusive of Peri-Strips(R), contributed 14% revenue growth in
fiscal 1999 over 1998 driven by sales of Vascu-Guard(R) and Dura-Guard(R).
While Peri-Strips(R) revenue increased in each of the last three quarters of
1999 compared to the same periods in 1998, competitive activities in the first
quarter of the year resulted in a 3% decrease in Peri-Strips(R) revenue in
fiscal 1999.
The Company's consolidated gross margin percentage decreased to 50% in fiscal
1999 from 57% in fiscal 1998, due primarily to the inclusion of the MMT unit in
the consolidated operating results for the full year in 1999 as compared to one
quarter in 1998. In 1999, the MMT unit's gross margin was 38% while the Branded
Medical Device unit's gross margin was 57%.
SG&A expense increased $1,928,000 or 29%, from fiscal 1998 to 1999. The full
year inclusion of the MMT unit accounts for approximately 73% of the overall
period to period increase in SG&A expense. Since the MMT unit has less SG&A
infrastructure than does the Branded Medical Device unit, SG&A as a percentage
of net revenues decreased from 55% for the 1998 period to 45% for the 1999
period. The remaining SG&A increase is primarily due to increased sales and
marketing costs within the Branded Medical Device unit.
R&D expense for the period increased $117,000 or 8%, between fiscal 1999 and
1998, to $1,665,000. The inclusion of the engineering and development
activities of the MMT unit was the primary reason for the overall period to
period increase in R&D expense. The Company continued to focus its efforts on
new product development, as demonstrated through its allocation of significant
resources to R&D at both its business units. The Company's 1999 product
development activities included a number of projects involving new and advanced
tissue formats. Also, the Company's product development efforts resulted in the
filing of two patents during fiscal 1999 to protect new and proprietary
technologies. One of the applications related to the manufacture and use of
stent coverings formed of biological tissues, and the other pertains to the
Company's new "resorbable" line of tissue implant materials. Lastly, during
fiscal 1999, the MMT unit opened its Technology Development Center (TDC).
The consolidated operating loss in fiscal 1999 was reduced by $621,000 or 44%,
to $794,000 from an operating loss of $1,415,000 in 1998. The MMT unit
contributed $617,000 to operating income in fiscal 1999, up $555,000 from
operating income of $62,000 contributed in the fourth quarter of 1998.
Other income, primarily net interest income, was $183,000 in fiscal 1999 and
$746,000 in fiscal 1998. The $563,000 decrease in net interest income is
related to significantly lower average cash and investment balances in fiscal
1999, primarily due to cash expenditures for the Company's stock repurchase
program and the July 1998 Jerneen acquisition, and an increase in interest
expense related to acquired capital equipment leases and other liabilities. The
Company's loss before income taxes was $611,000 in fiscal 1999 as compared to a
loss of $669,000 in fiscal 1998.
The Company recorded a benefit from income taxes of $91,000 in fiscal 1999,
representing an effective tax rate of 15%, as compared to an effective tax rate
of 28% in fiscal 1998. The fiscal 1999 effective tax rate is less than the
statutory rates primarily due to the impact of permanent differences, including
4
nondeductible goodwill associated with the acquisition of Jerneen, partially
offset by the impact of research and experimentation credits. The decrease in
the effective tax rate from fiscal 1998 to 1999 is primarily due to a lower
operating loss before tax benefit combined with an increase in nondeductible
goodwill in fiscal 1999 as compared to 1998.
The fiscal 1999 net loss was $520,000, or six cents per share, compared to a net
loss of $483,000, or five cents per share in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $5,480,000 at October 31, 2000 as compared to
$5,596,000 at October 31, 1999, a reduction of $116,000.
Operating activities provided cash of $1,042,000 in 2000 as compared to
providing cash of $740,000 in 1999. Cash was provided by operations during
fiscal 2000 through the combination of net income and non-cash expenses for the
year, substantially offset by an increase in working capital primarily used for
inventories and accounts receivable.
Investing activities used $872,000 of cash during fiscal 2000, which included
$714,000 in purchases of equipment and leasehold improvements and the issuance
of a collateralized note receivable of $106,000 to an unrelated party due in
fiscal 2001.
Financing activities used $286,000 of cash during fiscal 2000, including cash
repayments of $369,000 for capital equipment leases and other long-term
obligations, offset by proceeds of $83,000 related to stock-based compensation
plans. The Company has capital lease and other long-term obligations of
$392,000 at October 31, 2000, requiring payments through fiscal 2004.
The Company believes existing cash and cash equivalents will be sufficient to
satisfy its cash requirements for the next 12 months. This forward-looking
statement, as well as the Company's long-term cash requirements, will be a
function of a number of variables, including R&D priorities, acquisition
opportunities and the growth and profitability of the business.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its consolidated financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially, all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. Fluctuations in currency exchange rates in
other countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the countries
in which the products are sold.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts is not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies.
NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting
5
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is required to be adopted by the Company during the
quarter ended January 31, 2001. The Company does not expect the adoption of SFAS
No. 133 to have a significant impact on its consolidated results of operations
or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ended October 31, 2001. The Company has
preliminarily evaluated the guidance outlined in SAB Nos. 101 and 101B, and does
not believe the adoption of SAB Nos. 101 and 101B will significantly impact the
Company's revenue recognition practices or consolidated financial statements.
6
The following consolidated financial statements and related notes appears on
pages 21-33 of the Company's 2000 Annual Report to Shareholders.
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2000 AND 1999
- ---------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 5,480 $ 5,596
Accounts receivable, net.................................................. 3,561 3,123
Inventories, net.......................................................... 3,926 2,576
Deferred income taxes..................................................... 216 307
Other..................................................................... 549 398
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Total current assets................................................... 13,732 12,000
Equipment and leasehold improvements, net................................. 4,630 4,936
Goodwill and other intangible assets, net................................. 6,024 6,594
Deferred income taxes..................................................... 417 540
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Total assets........................................................... $24,803 $24,070
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 741 $ 680
Accrued expenses.......................................................... 1,754 1,551
Current maturities of long-term obligations............................... 294 369
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Total current liabilities.............................................. 2,789 2,600
Capital lease obligations................................................. 15 159
Other liabilities......................................................... 377 527
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Total liabilities...................................................... 3,181 3,286
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Commitments (Note 7)
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at October 31, 2000 and 1999................ - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 8,975,061 and 8,960,633
at October 31, 2000 and 1999, respectively............................. 90 90
Additional paid-in capital................................................ 27,596 27,661
Unearned compensation..................................................... (287) (601)
Accumulated deficit....................................................... (5,777) (6,366)
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Total shareholders' equity............................................. 21,622 20,784
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Total liabilities and shareholders' equity............................. $24,803 $24,070
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
7
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
(in thousands, except per share data)
2000 1999 1998
----- ---- ----
Net revenue............................................. $ 21,926 $ 18,904 $ 12,017
Cost of revenue......................................... 10,717 9,443 5,222
----------- ----------- -----------
Gross margin............................................ 11,209 9,461 6,795
Operating expenses:
Selling, general and administrative..................... 8,378 8,590 6,662
Research and development................................ 1,952 1,665 1,548
----------- ----------- -----------
Operating income (loss)................................. 879 (794) (1,415)
Other income, net, primarily interest................... 162 183 746
----------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes....................................... 1,041 (611) (669)
Provision for (benefit from) income taxes............... 452 (91) (186)
----------- ----------- -----------
Net income (loss)....................................... $ 589 $ (520) $ (483)
=========== =========== ===========
Basic and diluted earnings per share:
Net income (loss)....................................... $ 0.07 $ (0.06) $ (0.05)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
8
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
(in thousands, except share data) Unrealized
Marketable
Additional Unearned Securities Accumulat-
Common Stock Paid -In Compen- Holding ed
Shares Par Value Capital sation Gain (Loss) Deficit Total
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance at October 31, 1997......... 9,563,609 $ 96 $29,665 $(447) $ 1 $(5,363) $23,952
Stock option activity, net of tax
benefit........................ 80,760 1 248 23 - - 272
Employee Stock Purchase Plan
activity....................... 8,247 - 25 - - - 25
Employee restricted stock
activity....................... 56,961 1 248 (135) 114
Non-employee restricted stock
activity....................... - - - 45 - - 45
Stock repurchased by the Company.... (978,266) (10) (4,085) - - - (4,095)
Stock issued in conjunction with
the acquisition of Jerneen..... 585,872 5 2,595 - - - 2,600
Net and comprehensive loss.......... - - - - - (483) (483)
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance at October 31, 1998......... 9,317,183 93 28,696 (514) 1 (5,846) 22,430
Stock option activity, net of tax
benefit........................ - - (1) - - - (1)
Employee Stock Purchase Plan
activity....................... 22,396 1 44 - - - 45
Employee restricted stock
activity....................... 100,888 1 307 (124) 184
Non-employee restricted stock
activity....................... 5,000 - 14 37 - - 51
Stock repurchased by the Company.... (484,834) (5) (1,399) - - - (1,404)
Unrealized marketable securities
holding loss, net.............. - - - - (1) - (1)
Net loss............................ - - - - - (520) (520)
Comprehensive loss.................. - - - - - - (521)
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance at October 31, 1999......... 8,960,633 90 27,661 (601) - (6,366) 20,784
Stock option activity, net of tax
benefit........................ 26,419 - 52 - - - 52
Employee Stock Purchase Plan
activity....................... 26,331 1 59 - - - 60
Employee restricted stock
activity....................... (40,322) (1) (180) 265 - - 84
Non-employee restricted stock
activity....................... 2,000 - 4 49 - - 53
Net and comprehensive income........ - - - - - 589 589
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance at October 31, 2000......... 8,975,061 $ 90 $27,596 $(287) $ - $(5,777) $21,622
========== ========== ========= ==========- =========== =========== ===========
The accompanying notes are in integral part of the consolidated financial
statements.
9
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
(In thousands)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss)........................................................ $ 589 $ (520) $ (483)
Adjustments to reconcile income (loss) from operations
to net cash provided by operating activities:
Depreciation and amortization of equipment
and leasehold improvements............................................ 1,040 861 494
Amortization of goodwill and other intangible assets..................... 622 748 384
Provision for uncollectible accounts..................................... 48 14 88
Provision for inventory obsolescence..................................... 23 118 179
Non-cash compensation.................................................... 166 283 220
Deferred income taxes.................................................... 214 (123) (166)
Loss on disposal of equipment............................................ 9 - -
Changes in operating assets and liabilities:
Accounts receivable...................................................... (486) (681) 139
Inventories.............................................................. (1,373) (388) (485)
Other current assets..................................................... (45) 129 17
Accounts payable......................................................... 32 116 (313)
Accrued expenses......................................................... 176 225 230
Accrued income taxes..................................................... 27 (42) 18
------- ------- -------
Net cash provided by operating activities............................. 1,042 740 322
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITES:
Purchase of equipment and leasehold improvements......................... (714) (1,334) (964)
Investments in marketable securities..................................... - (987) (8,675)
Proceeds upon maturity of marketable securities.......................... - 4,978 13,159
Proceeds upon sale of marketable securities.............................. - - 2,750
Purchase of Jerneen, net of cash acquired (Note 2)....................... - (59) (2,816)
Investments in patents and trademarks.................................... (52) (101) (67)
Issuance of note receivable.............................................. (106) - -
------- ------- -------
Net cash (used in) provided by investing activities................... (872) 2,497 3,387
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from issuance of bank note...................................... - - 275
Repayments on bank note.................................................. - (261) (14)
Net proceeds related to stock-based compensation plans................... 83 (4) 236
Repurchase of the Company's common stock................................. - (1,404) (4,095)
Repayment of capital lease obligations................................... (234) (230) (53)
Repayments of other long-term obligations................................ (135) (125) (34)
Repayment of debt in conjunction with the acquisition of Jerneen......... - - (2,408)
------- ------- -------
Net cash used in financing activities................................. (286) (2,024) (6,093)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................. (116) 1,213 (2,384)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................... 5,596 4,383 6,767
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 5,480 $ 5,596 $ 4,383
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
10
Bio-Vascular, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
Bio-Vascular, Inc. ("Bio-Vascular" or the "Company") is a diversified medical
device company, engaged in developing, manufacturing and bringing to market
products to improve the quality of human life. The Company operates through two
business units: Branded Medical Devices and Jerneen Micro Medical Technologies
(MMT). The Branded Medical Device unit includes implantable biomaterials,
surgical productivity tools, and licensed and distributed products for use in
critical surgeries, including bariatric, thoracic, cardiac, neurological,
vascular and ophthalmic surgeries. Branded Medical Devices are manufactured
using the Company's patented and proprietary technologies. The Micro Medical
Technologies unit specializes in custom designed engineering and manufacturing
of complex precision micro-wire components for use in interventional
cardiovascular and neurological devices. MMT operates through the Company's
wholly owned subsidiary, Jerneen Micro Medical Technologies Inc. ("Jerneen"),
which was acquired in July 1998.
Basis of Consolidation: The consolidated financial statements include the
accounts of Bio-Vascular, Inc. and its wholly-owned subsidiary, Jerneen, after
elimination of intercompany accounts and transactions.
Use of Estimates: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and highly
liquid investments purchased with an original maturity of three months or less.
Cash equivalents at October 31, 2000 and 1999 consisted primarily of commercial
paper and one money market fund.
Inventories: Inventories, which are comprised of component parts, subassemblies
and finished goods, are valued at the lower of first-in, first-out (FIFO) cost
or market. On a quarterly basis, the Company compares the amount of the
inventories on hand with its latest forecasted requirements to determine
reserves for excess or obsolete inventories.
Equipment and Leasehold Improvements: Equipment and leasehold improvements are
stated at cost. Depreciation and amortization are calculated using the straight-
line method over the estimated useful lives of the related assets. Furniture,
fixtures and computer equipment are depreciated over a 3- to 7-year life and
manufacturing equipment is depreciated over a 5- to 10-year life. Amortization
of leasehold improvements is recorded on a straight-line basis over the life of
the related facility leases or the estimated useful life of the assets,
whichever is shorter. Major replacements and improvements are capitalized and
maintenance and repairs which do not improve or extend the useful lives of the
respective assets are charged to operations. The asset and related accumulated
depreciation or amortization accounts are adjusted for asset retirements and
disposals with the resulting gain or loss, if any, recorded in the Consolidated
Statements of Operations at the time of disposal.
Long-Lived Assets: The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. Impairment losses are recorded
whenever indicators of impairment are present.
Goodwill and Other Intangible Assets: Goodwill and other intangible assets are
recorded at cost and are amortized using the straight-line method over their
estimated useful lives, generally 10 to 17 years. The Company evaluates the net
realizability of goodwill and other intangible assets on an ongoing basis based
on current and anticipated undiscounted cash flows.
Revenue Recognition: The Company recognizes revenue when product has been
shipped to the customer if there is evidence that the customer has agreed to
purchase our products, delivery and performance has occurred, the price and
11
terms of sale are fixed and collection of the receivable is expected. The
Company records estimated sales returns and other discounts based on historical
trends when revenue is recognized.
Research and Development: Research and development costs are expensed as
incurred.
Income Taxes: The Company accounts for income taxes using the asset and
liability method. The asset and liability method provides that deferred tax
assets and liabilities are recorded based on the differences between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes ("temporary differences"). Temporary differences relate
primarily to capital loss carryforwards, research and experimentation tax credit
carryforwards, depreciation, non-compete obligations, and receivable and
obsolete inventory reserves.
Net Income (Loss) Per Common Share: Basic EPS is computed based on the weighted
average number of common shares outstanding, while diluted EPS is computed based
on the weighted average number of common shares outstanding adjusted by the
weighted average number of additional shares that would have been outstanding
had the potential dilutive common shares been issued. Potential dilutive shares
of common stock include stock options and other stock-based awards granted under
the Company's stock-based compensation plans, when their impact is not anti-
dilutive.
New Accounting Pronouncements: In June 1998, Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is required to be adopted by the Company during the
quarter ended January 31, 2001. The Company does not expect adoption of SFAS No.
133 to have a significant impact on its consolidated results of operations or
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ended October 31, 2001. The Company has preliminarily
evaluated the guidance outlined in SAB Nos. 101 and 101B, and does not believe
the adoption of SAB Nos. 101 and 101B will significantly impact the Company's
revenue recognition practices or consolidated financial statements.
Reclassifications: Certain reclassifications have been made to the fiscal 1999
and 1998 consolidated financial statements to conform with the fiscal 2000
presentation. These reclassifications had no effect on net income (loss) or
earnings (loss) per share.
2. ACQUISITION OF BUSINESS:
On July 31, 1998, the Company completed the acquisition of Jer-Neen
Manufacturing Co., Inc. of Lino Lakes, Minnesota, which was accounted for as a
purchase. Pursuant to the terms of the acquisition agreement, all of the issued
and outstanding shares of common stock of Jerneen were exchanged for 585,872
shares of Bio-Vascular common stock, valued at $2,600,000, and an aggregate of
$1,750,000 in cash, excluding transaction costs. The Company also paid $950,000
for a 10-year non-compete agreement covering the former Jerneen shareholders.
Goodwill acquired by the Company amounted to $5,200,000 and will be amortized
using the straight-line method over 15 years. The Company acquired $2,400,000 of
Jerneen's outstanding debt, which was paid immediately upon completion of the
transaction. The remaining fair value of net assets of Jerneen acquired in the
transaction totaled $1,772,000, including equipment and improvements of
$2,217,000, patents of $387,000, receivables of $848,000, inventories of
$381,000, less capital lease obligations of $677,000, accounts payable and
accrued expenses of $713,000 and other long-term obligations of $815,000.
The acquisition occurred on July 31, 1998, therefore only the results of
Jerneen's operations for the three-month period ended October 31, 1998 are
included in the Company's Consolidated Statement of Operations for fiscal 1998.
The Company's Consolidated Statement of Operations for fiscal 1999 and 2000
include the full year results of Jerneen's operations. In October 2000, the name
Jer-Neen Manufacturing Co., Inc. was legally changed to Jerneen Micro Medical
Technologies, Inc.
The following unaudited pro forma financial information reflects the combined
results of the Company and Jerneen for fiscal 1998 had the acquisition occurred
at the beginning of fiscal 1998:
12
Net revenue $ 16,180,000
Operating loss (1,158,000)
Net loss (561,000)
Basic and diluted earnings per share (0.06)
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
2000 1999
- --------------------------------------------------------------------------------------------------------
Accounts Receivable, Net:
Trade receivables $ 3,676,000 $ 3,221,000
Less allowance for doubtful accounts (115,000) (98,000)
---------------------------------
$ 3,561,000 $ 3,123,000
=================================
Inventories, Net:
Raw materials and supplies $ 1,222,000 $ 1,534,000
Work in process 1,612,000 549,000
Finished goods 1,389,000 1,071,000
Less reserve for inventory obsolescence (297,000) (578,000)
---------------------------------
$ 3,926,000 $ 2,576,000
=================================
Equipment and Leasehold Improvements, Net:
Furniture, fixtures, and computer equipment $ 1,479,000 $ 1,412,000
Manufacturing equipment 3,628,000 2,934,000
Leasehold improvements 1,967,000 1,929,000
Equipment in process 149,000 256,000
Furniture, fixtures, and computer equipment
under capital leases 154,000 154,000
Manufacturing equipment under capital leases 604,000 604,000
Less accumulated depreciation and leasehold
improvement amortization (3,130,000) (2,230,000)
Less accumulated amortization of capital leases (221,000) (123,000)
---------------------------------
$ 4,630,000 $ 4,936,000
=================================
Goodwill and Other Intangible Assets, Net:
Goodwill $ 6,764,000 $ 6,764,000
Patents and other intangibles 1,311,000 1,266,000
Non-compete agreement 950,000 950,000
Less accumulated amortization (3,001,000) (2,386,000)
---------------------------------
$ 6,024,000 $ 6,594,000
=================================
13
Accrued Expenses:
Payroll, other employee benefits and related taxes $ 939,000 $ 827,000
Accrued income taxes 266,000 239,000
Other accrued expenses 549,000 485,000
-------------------------------
$ 1,754,000 $ 1,551,000
===============================
Supplemental Cash Flow Information: The Company paid interest of $102,000,
$129,000 and $39,000 during fiscal 2000, 1999 and 1998, respectively. Income tax
payments made by the Company totaled $241,000, $107,000 and $3,000 for the years
ended October 31, 2000, 1999 and 1998, respectively. The Company recorded
$29,000 and $109,000 in accounts payable at October 31, 2000 and 1999,
respectively, for equipment purchases made during the years then ended.
4. SEGMENT INFORMATION:
The Company's operations, which are based mainly in Minnesota, are comprised of
two segments, "Branded Medical Device unit" and the "Jerneen Micro Medical
Technologies unit," based upon the similarities of the underlying business
operations and products of each. The Branded Medical Device unit develops,
manufactures and markets implantable biomaterials and other devices for use in
critical surgeries, including bariatric, thoracic, cardiac, neurological,
vascular and ophthalmic surgeries. The Jerneen Micro Medical Technologies unit
specializes in custom designed engineering and manufacturing of complex
precision micro-wire components for use in interventional cardiovascular and
neurological devices. The Company evaluates the performance of its business
segments and allocates resources to them based upon their respective current or
future earnings contribution to the consolidated earnings of the Company or
based on the segment's product research and development efforts in process at
that time. Information for the business segments for fiscal years 2000, 1999 and
1998 is presented in the table below:
2000 1999 1998
- ------------------------------------------------------------------------------
Net revenue
Branded Medical Devices $ 13,189,000 $ 11,681,000 $ 10,620,000
Micro Medical Technologies 8,737,000 7,223,000 1,397,000
------------------------------------------
Total 21,926,000 18,904,000 12,017,000
Operating income (loss)
Branded Medical Devices 702,000 (1,411,000) (1,477,000)
Micro Medical Technologies 177,000 617,000 62,000
------------------------------------------
Total 879,000 (794,000) (1,415,000)
Depreciation and amortization
Branded Medical Devices 668,000 784,000 690,000
Micro Medical Technologies 994,000 825,000 188,000
------------------------------------------
Total 1,662,000 1,609,000 878,000
Capital expenditures
Branded Medical Devices 215,000 443,000 848,000
Micro Medical Technologies 528,000 1,000,000 116,000
------------------------------------------
Total 743,000 1,443,000 964,000
14
Identifiable assets
Branded Medical Devices 17,806,000 16,704,000 16,114,000
Micro Medical Technologies 6,997,000 7,366,000 9,868,000
---------------------------------------------
Total 24,803,000 24,070,000 25,982,000
=============================================
See note 11 - Major Customers and Net Revenue by Geographic Area, for
additional information regarding concentrations.
5. INCOME TAXES:
Provision for (Benefit from) Income Taxes:
2000 1999 1998
- -----------------------------------------------------------------------------------------
Current:
Federal $ 215,000 $ 21,000 $ (22,000)
State 23,000 11,000 2,000
---------------------------------------------
238,000 32,000 (20,000)
---------------------------------------------
Deferred:
Federal 207,000 (101,000) (143,000)
State 7,000 (22,000) (23,000)
---------------------------------------------
214,000 (123,000) (166,000)
=============================================
Total $ 452,000 $ (91,000) $ (186,000)
---------------------------------------------
Reconciliation of Effective Income Tax Rate:
2000 1999 1998
- -----------------------------------------------------------------------------------------
Income (loss) before
income taxes $ 1,041,000 $ (611,000) $ (669,000)
---------------------------------------------
Statutory federal rate 354,000 (208,000) (227,000)
State taxes, net of
federal benefit 20,000 (7,000) (14,000)
Permanent differences 145,000 194,000 101,000
Research and
experimentation credits (60,000) (65,000) (45,000)
Other, net (7,000) (5,000) (1,000)
---------------------------------------------
Provision for (benefit from)
income taxes $ 452,000 $ (91,000) $ (186,000)
=============================================
15
Components of Deferred Tax Assets (Liabilities):
2000 1999 1998
- -----------------------------------------------------------------
Inventory reserve $ 109,000 $ 213,000 $ 173,000
Other, net 107,000 94,000 47,000
---------------------------------
Net current deferred
tax assets 216,000 307,000 220,000
Credit carryforwards 444,000 417,000 325,000
Operating loss carryforwards - 165,000 228,000
Capital loss carryforwards 143,000 143,000 141,000
Depreciation (210,000) (238,000) (220,000)
Non-compete obligation 248,000 247,000 240,000
Other, net (65,000) (51,000) (69,000)
Less valuation allowance (143,000) (143,000) (141,000)
---------------------------------
Net long-term deferred
tax assets 417,000 540,000 504,000
---------------------------------
Net deferred tax assets $ 633,000 $ 847,000 $ 724,000
=================================
A tax benefit of $8,000 and $12,000 related to the exercise of stock options was
recorded to additional paid-in capital in fiscal 1999 and 1998, respectively.
There was no tax benefit related to the exercise of stock options during fiscal
2000.
In conjunction with the acquisition of Jerneen in fiscal 1998, the Company
acquired net deferred tax assets of $31,000.
The valuation allowance relates solely to capital loss carryforwards, which have
been determined to be unrealizable. Credit carryforwards expire from 2009 to
2015. Management expects to fully utilize its remaining net deferred tax assets
against future taxable income.
6. CAPITAL LEASES AND LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following at October 31:
2000 1999
- -----------------------------------------------------------------
Capital leases $ 159,000 $ 393,000
Contractual obligations to landlord 176,000 245,000
Contractual obligation to former
shareholder of Jerneen 351,000 417,000
---------------------
686,000 1,055,000
Less current portion 294,000 (369,000)
---------------------
$ 392,000 $ 686,000
=====================
The Company is the lessee of certain machinery and equipment under capital lease
obligations expiring through 2002. The assets and liabilities under capital
leases have been recorded at the fair value of the asset when placed in service.
16
Interest rates on capitalized leases vary from 9.75% to 15.24% and are imputed
based on the lessor's implicit rate of return.
The contractual obligations to the landlord relate to leasehold improvements and
are payable in monthly installments of $8,000 through January 2003. The
obligations were financed at fixed interest rates ranging from 10% to 12%.
The contractual obligation to a former shareholder of Jerneen is payable in
monthly installments of $8,000 through October 2004. The interest is imputed
based on the Company's borrowing rate of 10%.
Aggregate maturities of capital leases and long-term obligations are as follows:
Year Ending October 31
- --------------------------------------------------------------------------------
2001 $ 294,000
2002 181,000
2003 107,000
2004 104,000
----------
$ 686,000
==========
7. COMMITMENTS:
Operating Leases: The Company is committed under non-cancellable operating
leases for the rental of its office and production facilities. At October 31,
2000, the remaining terms on the leases range from two to five years. In
addition to base rent charges, the Company also pays apportioned real estate
taxes and common costs on its leased facilities. Total facilities rent expense,
including real estate taxes and common costs, was $597,000, $525,000 and
$458,000 for the years ended October 31, 2000, 1999 and 1998, respectively.
As of October 31, 2000, future minimum lease payments, excluding real estate
taxes and common costs, due under existing non-cancellable operating leases are
as follows:
Year Ending October 31
- --------------------------------------------------------------------------------
2001 $ 458,000
2002 421,000
2003 310,000
2004 270,000
2005 191,000
----------
$1,650,000
==========
Royalties: In connection with the acquisition of product licenses and product
manufacturing rights, the Company is obligated for the payment of royalties as
follows:
. 5% on net sales of Peri-Strips and Peri-Strips Dry until the
expiration of the related patents through May 2015.
. 3% of the net sales of the Bio-Vascular Probe through 2001.
Royalty expense was approximately $204,000, $185,000 and $203,000 for the years
ended October 31, 2000, 1999 and 1998, respectively, and is included in cost of
revenue.
17
8. SHAREHOLDERS' EQUITY:
Authorized Shares: The Company's authorized capital stock consists of
20,000,000 shares of common stock and 5,000,000 shares of undesignated preferred
stock.
Stock Repurchase Plan: In fiscal 1997, the Company's Board of Directors adopted
a stock repurchase plan (the "Plan") and authorized the purchase of up to
500,000 shares of its common stock. During fiscal 1998, the Company's Board of
Directors amended the Plan to authorize the repurchase of up to 1,500,000 common
shares. During fiscal 1999, the Company completed its repurchase of 1,500,000
shares of its common stock for an aggregate cash outlay of $5,649,000 since the
inception of the Plan.
Shareholder Rights Plan: In June 1996, the Company's Board of Directors
declared a dividend distribution of one common stock purchase right (a "Right")
for each outstanding share of the Company's common stock on July 15, 1996. The
Company also entered into a Rights Agreement governing the terms of the Rights,
and each share of common stock issued subsequent to July 15, 1996 has been
issued with an attached Right pursuant to the terms of the Rights Agreement.
Upon exercise, each Right entitles the holder thereof to purchase one-tenth of a
share of common stock at a purchase price currently set at $6.00 per share,
subject to adjustment to reflect the value of the Company following the spin-off
of Vital Images, Inc. Upon the occurrence of certain events in connection with:
(i) a person or group acquiring 15% or more of the Company's outstanding common
stock; (ii) a third party announcing an offer to purchase a 15% or greater stake
in the Company; or (iii) the Board of Directors declaring a person to be an
"adverse person" based upon such person being a holder of 10% or more of the
Company's outstanding stock and the Board's belief that such person's shares
were acquired for short-term financial gain or that the shareholder might
otherwise adversely affect the Company's business or prospects, the Rights
become exercisable and entitle each holder thereof (other than the acquiring
person or "adverse person") to purchase, for a price equal to 10 times the then-
current purchase price of the Right, shares of common stock (or other securities
of the Company) or equity securities of the acquiring company, as the case may
be, having a market value equal to twenty times the then-current purchase price
of the Right. In general, the Company is entitled to redeem the Rights in whole
at a price of $.001 per Right (payable in cash, stock, or other consideration
deemed appropriate by the Board of Directors) prior to the first to occur of any
such events. Each Right will expire on June 11, 2006, if not previously redeemed
or exercised.
Stock-Based Compensation: The Company has various stock award and stock option
plans and an employee stock purchase plan ("ESPP"). Under the stock award and
stock option plans, the Company is authorized to grant up to 1,941,836 shares of
its common stock for issuance under these plans. At October 31, 2000, 432,543
shares remained available for grant under these plans. Under the ESPP, the
Company is authorized to sell and issue up to 300,000 shares of its common stock
to its employees. At October 31, 2000, a total of 228,121 shares remained
available for grant under the ESPP.
The Company has also reserved 147,290 shares of its common stock for issuance in
connection with outstanding stock option grants that were not made pursuant to a
formal stock incentive plan.
The Company applies Accounting Principles Board ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations to account for its stock-
based compensation plans, when applicable, but has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which
requires pro forma disclosures regarding the Company's stock-based compensation
plans.
Stock Awards: Under certain compensation agreements, an arrangement which
provides for awards of common stock to key management was adopted in 1992.
These awards of common stock are subject to forfeiture if employment terminates
prior to the end of the prescribed periods. Vesting periods range from one to
five years. The market value of the shares at the time of grant is recorded as
unearned stock compensation. The unearned amount is amortized to compensation
expense over the periods during which the vesting lapses. As part of these same
compensation agreements, the Company agreed to buy back the number of shares
which would allow the employees to meet their income tax obligations arising
from the non-cash compensation related to the earned shares. The number of
shares bought back by the Company from employees totaled 13,941, 10,831 and
7,911 during 2000, 1999 and 1998, respectively. Stock awards granted to
employees is summarized as follows:
18
Unearned Stock Awards Market Value
---------------------
Balance Shares at Grant
- --------------------------------------------------------------------------
Balance at October 31, 1997 $ 288,000 55,072 $4.25 - $14.00
Granted 428,000 99,548 3.50 - 5.13
Earned (142,000) (27,937) 3.50 - 14.00
Cancelled / Forfeited (151,000) (34,676) 3.69 - 4.75
- --------------------------------------------------------------------------
Balance at October 31, 1998 423,000 92,007 3.50 - 14.00
Granted 424,000 124,351 2.69 - 3.63
Earned (231,000) (53,464) 2.69 - 14.00
Cancelled / Forfeited (70,000) (12,632) 4.05 - 11.88
- --------------------------------------------------------------------------
Balance at October 31, 1999 546,000 150,262 2.69 - 5.13
Granted 42,000 15,697 2.09 - 4.44
Earned (183,000) (48,544) 2.59 - 5.13
Cancelled / Forfeited (124,000) (42,078) 2.09 - 5.06
- --------------------------------------------------------------------------
Balance at October 31, 2000 $ 281,000 75,337 $2.69 - $ 5.13
==========================================================================
Shares of common stock have also been awarded to certain medical professionals
as compensation for services provided in the Company's product development
activities. These awards vest in accordance with the service agreement and
totaled 5,000 shares granted in 1999 and 6,000 shares in 2000. There were no
such awards in 1998.
The weighted average market value at grant date for stock awards was $3.61,
$3.20 and $4.29 for 2000, 1999 and 1998, respectively.
Stock Options: The exercise price of each stock option generally equals 100% of
the market price of the Company's stock on the date of grant and has a maximum
term of up to 10 years. Employee option grants generally vest ratably over one
to five years, while options granted to non-employee directors of the Company
generally vest ratably over three years. A summary of the status of the
Company's stock options for the years ended October 31 is as follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,371,804 $4.51 1,221,539 $4.82 1,305,106 $5.43
Granted 148,402 3.97 296,936 3.44 463,989 4.50
Exercised (26,419) 3.43 - - (80,760) 2.91
Cancelled (264,270) 4.15 (146,671) 5.25 (466,796) 6.52
----------------------------------------------------------------
Outstanding at end of year 1,229,517 4.54 1,371,804 4.51 1,221,539 4.82
----------------------------------------------------------------
Options exercisable at
end of year 792,348 4.72 769,883 4.74 669,920 4.99
================================================================
19
The following table summarizes information about stock options outstanding at
October 31, 2000:
Weighted
Weighted Average
Weighted Average Exercise
Number of Average Remaining Number of Price of
Options Exercise Contractual Options Exercisable
Range of Prices Outstanding Price Life (years) Exercisable Options
- --------------------------------------------------------------------------------------------
$ 1.87 - $ 3.25 245,579 $2.74 4.15 154,026 $2.68
3.31 - 4.25 289,859 3.76 4.39 196,805 3.77
4.38 - 5.00 437,927 4.69 6.02 228,974 4.60
5.05 - 7.54 173,223 5.83 3.93 129,614 6.05
8.63 - 12.21 82,929 9.10 3.42 82,929 9.10
- --------------------------------------------------------------------------------------------
$ 1.87 - $12.21 1,229,517 $4.54 4.79 792,348 $4.72
============================================================================================
Employee Stock Purchase Plan: The Company sponsors an employee stock purchase
plan under which 300,000 shares of common stock were reserved for future
issuance. The ESPP was established to enable employees of the Company to invest
in Company stock through payroll deduction. Options are granted to employees to
purchase shares of stock at a price that is the lower of 85% of the fair market
value of the stock on the first or last day of each offering period. There were
26,331, 22,396 and 8,247 shares purchased through the Plan in 2000, 1999 and
1998, respectively.
For the year ended October 31, compensation expense recorded for stock-based
compensation awards (stock awards and stock options) was as follows:
2000 1999 1998
- --------------------------------------------------
Employee $183,000 $209,000 $135,000
Non-employee 15,000 74,000 85,000
----------------------------
Total $198,000 $283,000 $220,000
============================
FAS No. 123 Disclosure: Had compensation expense for the Company's stock-based
compensation plans been determined based on the fair market value at the grant
dates consistent with SFAS No. 123, the Company's net income (loss) and income
(loss) per share would have changed to the pro forma amounts indicated below:
2000 1999 1998
- ------------------------------------------------------------------
Net Income (Loss)
As reported $ 589,000 $ (520,000) $ (483,000)
Pro forma 292,000 (1,128,000) (946,000)
Basic and Diluted Income
(Loss) Per Share
As reported 0.07 (0.06) (0.05)
Pro forma 0.03 (0.12) (0.10)
The pro forma information includes stock options granted and purchases under the
ESPP in 2000, 1999 and 1998. The weighted average fair value per option granted
during 2000, 1999 and 1998 was $0.86, $0.76 and $1.40, respectively, for the
ESPP and $3.33, $1.98 and $3.04, respectively, for all other options. The
weighted average fair value was calculated by using the fair value of each
option on the date of grant. The fair value of the ESPP options was based on
the 15% purchase discount. The fair value of all other options was estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions:
20
2000 1999 1998
- --------------------------------------------------------------------------
Expected option term 5.0 years 5.0 years 6.4 years
Expected volatility factor 81% 67% 69%
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.26% 5.17% 5.73%
9. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted shares
outstanding for the years ended October 31:
2000 1999 1998
Numerator:
Net income (loss) $ 589,000 $ (520,000) $ (483,000)
Denominator:
Denominator for basic
earnings per share -
weighted average
common shares 8,906,678 9,025,823 9,228,265
Effect of dilutive securities:
Shares associated with
deferred compensation 75,337 - -
Shares associated with
option plans 59,436 - -
Dilutive potential common
shares 134,773 - -
Denominator for diluted
earnings per share -
weighted average common
shares and dilutive potential
common shares 9,041,451 9,025,823 9,228,265
In fiscal 1999 and 1998, none of the options outstanding or unearned restricted
stock awards were included in the computation of diluted earnings per share for
the year then ended because the Company had incurred net losses during those
periods and the inclusion of the options and awards would have been anti-
dilutive.
10. EMPLOYEE BENEFIT PLAN:
Salary Reduction Plan: The Company sponsors salary reduction plans for all
employees which qualify under Section 401(k) of the Internal Revenue Code.
Employee contributions are limited to 15% of their annual compensation, subject
to annual limitations. At its discretion, the Company may make matching
contributions equal to a percentage of the salary reduction or other
discretionary amount. The Company has made no contributions to the plans since
inception.
21
11. MAJOR CUSTOMERS AND NET REVENUE BY GEOGRAPHIC AREA:
Substantially all of the Company's international net revenues are negotiated,
invoiced and paid in U.S. dollars. The following tables summarize significant
customers and international net revenues by geographic area:
2000 1999 1998
Percent of Accounts Receivable
by Significant Customers
A. 24% 16% 13%
B. 16% 19% 9%
C. 9% 12% 11%
D. 7% 9% 11%
Percent of Net Revenues
by Significant Customers
A. 22% 25% 6%
B. 16% 16% 16%
C. 9% 9% 12%
D. 7% 8% 11%
International Net Revenues
by Geographic Area
Europe $2,198,000 $2,052,000 $1,531,000
Asia and Pacific region 761,000 552,000 825,000
Canada 310,000 278,000 217,000
Other 119,000 183,000 56,000
Total $3,388,000 $3,065,000 $2,629,000
Percent of total net revenue 15% 16% 22%
The Company does not require collateral from its customers to support their
accounts receivable. Customer A is a customer of the Micro Medical Technologies
unit and B, C and D are customers of the Branded Medical Device unit. The
Company's international revenues are primarily generated from the Branded
Medical Device unit. All of the Company's long-lived assets are located in the
United States.
22
The following report appears on page 34 of the Company's 2000 Annual Report to
Shareholders.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Bio-Vascular, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income and shareholders'
equity, and cash flows present fairly, in all material respects, the financial
position of Bio-Vascular, Inc., and its subsidiary at October 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Bio-Vascular, Inc.'s management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PriceWaterhouseCoopers LLP
Minneapolis, Minnesota
December 1, 2000
23
The following information appears on page 34 of the Company's 2000 Annual Report
to Shareholders.
BIO-VASCULAR, INC. QUARTERLY RESULTS
--------------------------------------------------------------------------------------------------
First Second Third Fourth
Fiscal 2000 (unaudited) Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------
Net revenue $4,382,000 $5,343,000 $6,354,000 $5,847,000
Gross margin 2,358,000 2,640,000 3,206,000 3,005,000
Operating income (loss) (287,000) (108,000) 692,000 582,000
Net income (loss) (129,000) (38,000) 402,000 354,000
Net income (loss) per share (0.01) (0.00) 0.04 0.04
--------------------------------------------------------------------------------------------------
Fiscal 1999 (unaudited)
--------------------------------------------------------------------------------------------------
Net revenue $3,829,000 $4,893,000 $5,169,000 $5,013,000
Gross margin 1,917,000 2,497,000 2,584,000 2,463,000
Operating income (loss) (441,000) (291,000) 23,000 (85,000)
Net income (loss) (318,000) (202,000) 42,000 (42,000)
Net income (loss) per share (0.03) (0.02) 0.00 (0.00)
--------------------------------------------------------------------------------------------------
Quarterly calculations of net income (loss) per share are made independently
during the fiscal year.
COMMON STOCK INFORMATION
Price Range
The Company's common stock is currently traded on the Nasdaq National Market
under the symbol "BVAS." The following table sets forth, for each of the fiscal
periods indicated, the range of high and low closing sale prices per share as
reported by the Nasdaq National Market. These prices do not include adjustments
for retail mark-ups, mark-downs or commissions.
- -----------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------
Quarter Ended High Low High Low
- -----------------------------------------------------------------------------------------------------------
January 31 $3.125 $2.000 $4.375 $3.125
April 30 8.188 2.688 3.375 2.375
July 31 5.063 2.938 3.719 2.438
October 31 5.250 3.938 3.281 2.250
- -----------------------------------------------------------------------------------------------------------
Dividends
The Company has not declared or paid any cash dividends on its common stock
since its inception, and the Board of Directors presently intends to retain all
earnings for use in the business for the foreseeable future.
Shareholders
As of November 30, 2000, there were approximately 4,200 beneficial owners and
1,000 registered shareholders of the Company's common stock.
24
The following information appears on page 3 of the Company's 2000 Annual Report
to Shareholders.
Bio-Vascular, Inc.
Financial Highlights Schedule for Annual Report Disclosure
Summary Statements of Operations Data:
For the Year Ended October 31 2000 1999 1998 1997 1996
- ----------------------------- ---- ---- ---- ---- ----
(in thousands, except per share data)
Net revenue $ 21,926 $ 18,904 $ 12,017 $ 9,694 $ 10,125
Gross margin 11,209 9,461 6,795 5,727 6,682
Operating income (loss) 879 (794) (1,415) (1,305) 571
Net income (loss) 589 (520) (483) (604) 1,219
Net income (loss) per share:
Basic 0.07 (0.06) (0.05) (0.06) 0.13
Diluted 0.07 (0.06) (0.05) (0.06) 0.12
Weighted average shares outstanding:
Basic 8,907 9,026 9,228 9,499 9,387
Diluted 9,041 9,026 9,228 9,499 9,876
The above information includes the Company's acquisition of Jerneen in July 1998
and excludes discontinued operations in connection with the 1997 spin-off of
Vital Images, Inc. Earnings per share amounts have been presented for all years
pursuant to the provisions of Statement of Financial Accounting Stardard No.
128, Earnings Per Share; see Note 9 to the financial statements.
Summary Balance Sheet Data:
(in thousands)
At October 31 2000 1999 1998 1997 1996
- ------------- ---- ---- ---- ---- ----
Working capital $ 10,943 $ 9,400 $ 11,386 $ 16,906 $ 22,107
Total assets 24,803 24,070 25,982 25,134 37,881
Long-term obligations 392 686 1,055 - -
Shareholders' equity 21,622 20,784 22,430 23,952 35,221
In connection with the 1997 spin-off of Vital Images, Inc. Shareholders' Equity
was reduced by $10,124,000, which represents the contribution of cash and
investments plus the carrying value of Vital Images' net assets.
25