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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended January 31, 1999
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)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (651) 603-3700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
On March 1, 1999, there were 9,379,689 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS/
AS OF JANUARY 31, 1999 AND OCTOBER 31, 1998
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January 31, October 31,
1999 1998
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ..................................... $ 5,509,179 $ 4,383,366
Marketable securities, short-term ............................. 1,993,611 3,990,839
Accounts receivable, net ...................................... 2,367,834 2,456,018
Inventories, net .............................................. 2,502,263 2,305,924
Deferred income taxes ......................................... 172,106 219,754
Other ......................................................... 376,690 527,402
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Total current assets ...................................... 12,921,683 13,883,303
Equipment and leasehold improvements, net ..................... 4,481,765 4,353,876
Goodwill and other intangible assets, net ..................... 7,079,846 7,240,772
Deferred income taxes ......................................... 701,695 504,268
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Total assets .............................................. $ 25,184,989 $ 25,982,219
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 499,199 $ 460,337
Accrued expenses .............................................. 1,192,295 1,421,054
Current maturities of long-term obligations ................... 365,564 615,961
------------ ------------
Total current liabilities ................................. 2,057,058 2,497,352
Capital lease obligations ..................................... 327,154 392,845
Other noncurrent liabilities .................................. 629,210 661,648
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Total liablities .......................................... 3,013,422 3,551,845
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Contingencies (Note 6)
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at January 31, 1999 and
October 31, 1998 .......................................... -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
9,350,561 issued and outstanding at January 31, 1999 and
9,317,183 at October 31, 1998 ............................. 93,506 93,172
Additional paid-in capital .................................... 28,823,584 28,695,840
Unearned compensation ......................................... (581,918) (514,538)
Accumulated other comprehensive income ........................ (273) 1,103
Accumulated deficit ........................................... (6,163,332) (5,845,203)
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Total shareholders' equity ................................ 22,171,567 22,430,374
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Total liabilities and shareholders' equity ................ $ 25,184,989 $ 25,982,219
============ ============
The accompanying notes are an integral part of the interim unaudited
consolidated financial statements.
2
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED JANUARY 31, 1999 AND 1998
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Three Months Ended
January 31,
1999 1998
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(Unaudited)
Net revenue ................................. $ 3,829,183 $ 2,462,554
Cost of revenue ............................. 1,912,183 1,038,220
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Gross margin ................................ 1,917,000 1,424,334
Operating expenses:
Selling, general and administrative ......... 2,024,849 1,512,768
Research and development .................... 332,611 464,867
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Operating loss .............................. (440,460) (553,301)
Other income, net ........................... 59,731 245,820
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Loss before benefit from income taxes ....... (380,729) (307,481)
Benefit from income taxes ................... (62,600) (102,566)
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Net loss .................................... $ (318,129) $ (204,915)
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Basic and diluted earnings per share:
Net loss .................................... $ (.03) $ (.02)
=========== ===========
The accompanying notes are an integral part of the interim unaudited
consolidated financial statements.
3
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED JANUARY 31, 1999 AND 1998
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Three Months Ended
January 31,
1999 1998
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(Unaudited)
NET CASH USED IN OPERATING ACTIVITIES ......................... $ (119,331) $ (412,764)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ........................ (327,717) (151,958)
Investments in marketable securities .......................... (986,806) (5,687,293)
Proceeds upon maturities of marketable securities ............. 2,990,850 2,000,000
Investments in patents and trademarks ......................... (26,902) (12,823)
Payment of transaction costs related to acquisition of Jer-Neen (51,229) --
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Net cash provided by (used in) investing activities ........... 1,598,196 (3,852,074)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank note ....................................... (260,774) --
Proceeds related to stock options, Employee Stock Purchase
Plan and restricted stock ................................. 1,725 20,872
Repurchase of the Company's common stock ...................... (6,250) (962,537)
Repayments of capital lease obligations ....................... (55,042) --
Repayments of other long-term obligations ..................... (32,711) --
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Net cash used in financing
activities .................................................... (353,052) (941,665)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 1,125,813 (5,206,503)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD .................................................... 4,383,366 6,766,687
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CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 5,509,179 $ 1,560,184
=========== ===========
The accompanying notes are an integral part of the interim unaudited
consolidated financial statements.
4
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements of
Bio-Vascular, Inc. ("Bio-Vascular" or "the Company") have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's 1999 Annual Report to
Shareholders and incorporated by reference in the Company's Form 10-K for the
year ended October 31, 1998.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
financial position, results of operations and cash flows of the Company as of
and for the interim periods presented have been included. Operating results and
cash flows for the three months ended January 31, 1999 are not necessarily
indicative of the results of operations and cash flows of the Company that may
be expected for the year ending October 31, 1999.
(2) ACQUISITION OF BUSINESS:
On July 31, 1998, the Company completed the acquisition of Jer-Neen
Manufacturing Co., Inc. ("Jer-Neen") of Lino Lakes, Minnesota. Jer-Neen is a
value-added manufacturer of precision component products used within the medical
device industry. Jer-Neen's product line includes micro coils, wire forms and
spring components used in implantable defibrillation, interventional medicine
and other surgical applications. The acquisition has been accounted for as a
purchase.
Since the acquisition occurred in July 1998 and was accounted for as a purchase,
the results of operations and cash flows for the three-month period ended
January 31, 1998 do not include Jer-Neen's results of operations and cash flows
for that period.
(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
January 31, October 31,
1999 1998
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(Unaudited)
Inventories, net:
Raw materials and supplies................ $ 1,345,268 $ 1,242,003
Work in process........................... 506,964 519,424
Finished goods............................ 1,157,451 1,024,317
Less reserve for inventory obsolescence... (507,420) (479,820)
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$ 2,502,263 $ 2,305,924
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Consolidated Condensed Statements of Cash Flows:
In 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.
In 1998, the Company's Board of Directors amended the Plan to authorize the
repurchase of up to 1,500,000 shares. As of January 31, 1999, the Company has
repurchased 1,017,166 shares of its common stock totaling $4,251,000 since the
inception of the Plan.
5
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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(4) EARNINGS PER SHARE:
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, during fiscal year 1998. Earnings per share for the periods
presented have been prepared in accordance with the provisions of SFAS No. 128.
The following table sets forth the computation of shares outstanding used in the
calculation of basic and diluted earnings per share:
Three Months Ended
January 31,
1999 1998
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(Unaudited)
Denominator for basic earnings per share -
weighted-average common shares ..................... 9,200,611 9,401,963
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Effect of dilutive securities:
Shares associated with deferred compensation .......... -- --
Shares associated with option plans ................... -- --
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Dilutive potential common shares ...................... -- --
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Denominator for diluted earnings per share -
adjusted weighted-average common shares and dilutive
potential common shares ............................ 9,200,611 9,401,963
========= =========
As of January 31,
1999 1998
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(Unaudited)
Options outstanding.............................. 1,387,888 1,236,295
Exercise prices.................................. $1.87 - $13.03 $1.87 - $13.03
Expiration dates................................. 1999 - 2007 1998 - 2006
Options outstanding with exercise prices greater
than the average market price of the Company's
common stock for the three-month period ended
January 31 ................................... 1,244,669 1,200,427
For the three-month periods ended January 31, 1999 and 1998, none of the options
outstanding were included in the computation of diluted earnings per share for
those periods because the Company had incurred net losses, and the inclusion of
options would have been anti-dilutive.
6
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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(5) 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
customer information and international net revenues by geographic area:
January 31, October 31,
1999 1998
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(Unaudited)
Percent of accounts receivable by significant
customers:
A............................................ 10% 9%
B............................................ 9% 11%
C............................................ 10% 11%
D............................................ 18% 13%
Three Months Ended
January 31,
1999 1998
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(Unaudited)
Percent of net revenues by significant customers:
A............................................ 13% 20%
B............................................ 8% 14%
C............................................ 8% 15%
D............................................ 25% -
E............................................ 6% 10%
Three Months Ended
January 31,
1999 1998
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(Unaudited)
International net revenues by geographic area:
Europe....................................... $ 437,887 $ 326,586
Asia and Pacific Region...................... 119,497 107,215
Canada....................................... 63,342 74,429
Other........................................ 28,242 10,734
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Total........................................ $ 648,968 $ 518,964
========= =========
Percent of total net revenues................ 17% 21%
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"), was issued by the Financial Accounting
Standards Board. SFAS 131 establishes new standards for the way public business
enterprises report information about operating segments. The Company must adopt
SFAS 131 for fiscal year end 1999. Management is in the process of evaluating
the effect on its financial reporting.
7
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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(6) CONTINGENCIES:
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 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 insurance coverage, are reasonably adequate to
protect against potential material product liability losses.
(7) COMPREHENSIVE INCOME:
Effective November 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
in the financial statements. The Company's only component of other comprehensive
income is the unrealized gain/loss on available-for-sale investments.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Forward-Looking Statements:
Certain statements contained in this Form 10-Q 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 upon
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, 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
The Company develops, manufactures and markets branded proprietary and patented
specialty medical products for use in thoracic, cardiac, neuro, ophthalmic and
vascular surgery. The Company's branded products include the Tissue-Guard(TM)
product line, the Biograft(R) peripheral vascular graft and surgical
productivity tools used in cardiac and vascular surgery. Tissue-Guard products
are made from bovine pericardium, the thin membrane surrounding the heart of
cattle, processed using proprietary tissue-fixation technology. The Company's
wholly-owned subsidiary, Jer-Neen Manufacturing Co., Inc. ("Jer-Neen"), is a
value added manufacturer of precision, unbranded wire component products such as
micro coils, wire forms and spring components used in implantable
defibrillation, interventional medicine and other surgical applications within
the medical industry. Jer-Neen was purchased by the Company on July 31, 1998,
the end of the Company's fiscal 1998 third quarter.
Results of Operations
Comparison of the Three Months Ended January 31, 1999 with
the Three Months Ended January 31, 1998
Revenue increased $1,366,000, or 55%, to $3,829,000 from $2,463,000. The
Jer-Neen component business contributed net revenues of $1,402,000, exceeding
management's expectations. The branded products business reported revenues of
$2,427,000 down $36,000 from the 1998 revenue level of $2,463,000. The branded
products business experienced 17% revenue growth from its Tissue-Guard product
line, exclusive of Peri-Strips(R), with all products contributing incremental
revenue over the prior year's quarter. Peri-Strips decreased 21% to $612,000
from $779,000 as the product felt the effects of increased competition in the
domestic marketplace. This competition was often in the form of pricing. The
Company expects to regularly contend with a strong element of competition in
attractive markets, such as Lung Volume Reduction Surgery. Additionally, the
Japanese acceptance of Lung Volume Reduction Surgery has been much lower than
expected and thereby affecting the near-term expected growth potential for
Peri-Strips. Biograft revenue decreased $13,000, or 8%, to $163,000 from
$176,000, continuing a downward trend. Revenue from sales of surgical
productivity tools decreased 4% to $506,000 from $527,000. However, the Company
expects revenues from productivity tools to show an annual increase when
compared to the prior year. This forward looking statement is influenced
primarily by the Company's estimate of customer demand for its products and the
competition experienced in the marketplace.
The Company's gross margin percentage was 50% for the 1999 quarter as compared
to 58% for the 1998 quarter. In the 1999 quarter, the component product line
margin was 38%, while the branded products' margin was 57%. The Company expects
the gross margin percentage for fiscal year 1999 to be lower than the fiscal
1998 level as the component product business will be included in the
consolidated operating results for the full year in 1999 rather than one
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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quarter as in 1998.
Selling, general and administrative (SG&A) expense increased $512,000, or 34%,
between 1999 and 1998. The inclusion of the component business accounts for over
three-fourths of the overall quarter to quarter increase in SG&A expense. Since
Jer-Neen has less SG&A infrastructure than does the branded products business,
SG&A as a percentage of net revenues decreased from 61% for the 1998 quarter to
53% for the 1999 quarter. The remaining SG&A increase is primarily due to
increased sales and marketing costs within the branded products segment.
Increased sales and marketing costs were primarily related to increased
personnel costs, conventions costs (including the related employee travel) and
marketing materials launching the new Bio-Vascular corporate logo and image.
Research and development (R&D) expense decreased $132,000, or 28%, between 1999
and 1998 due to the timing of clinical study activity between the comparative
quarters. Product development activities in the first quarter of 1999 continued
to focus on a number of both near- and long-term opportunities. The near-term
opportunities focused on furthering the Company's current tissue expertise
through product line expansions and enhancements. Long-term projects focused on
product designs which utilize new tissue technologies. R&D expense is expected
to increase as projects under development continue to progress. 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 operating loss in the 1999 quarter was $440,000 as compared to an operating
loss of $553,000 for the first quarter of 1998. The component business
contributed $50,000 in operating income to the fiscal 1999 first quarter.
Other income, primarily net interest income, was $60,000 in 1999 and $246,000 in
1998. The decrease in net interest income is related to significantly lower cash
and investment balances in 1999, primarily due to cash expenditures for the
Company's stock repurchase program and the Jer-Neen acquisition, and interest
expense related to acquired liabilities and capital equipment leases. Operations
had a loss before income taxes of $381,000 in 1999 as compared to a loss of
$307,000 in 1998.
The Company recorded a benefit from income taxes of $63,000 in 1999, an
effective tax rate of 16%, as compared to a effective tax rate of 33% in 1998.
The 1999 effective tax rate is less than the statutory rates primarily due to
the impact of permanent differences, including nondeductible goodwill related to
the acquisition of Jer-Neen, partially offset by the impact of research and
experimental credits.
The first quarter 1999 net loss from operations was $318,000, or $0.03 per
share, compared to a net loss of $205,000, or $0.02 per share in 1998.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities were $7,500,000 at January 31,
1999 as compared to $8,400,000 at October 31, 1998, a reduction of $900,000.
Operating activities used cash of $119,000 in the first three months of 1999, as
compared to $413,000 in the first three months of fiscal 1998. Cash was used by
continuing operations through an increase in inventory levels and by reducing
accrued expenses. These cash uses were offset by non-cash expenses in excess of
the loss from operations and receivable collection efforts which generated a
reduction in receivables.
Investing activities included $328,000 used for the purchase of equipment and
leasehold improvements, $27,000 invested in intangible assets and $51,000 used
for acquisition costs related to Jer-Neen.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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Financing activities used $334,000 of cash to repay a bank note and other
liability obligations of Jer-Neen, including capital equipment lease
obligations. The Company has long-term obligations of $956,000 at January 31,
1999. Payments are required through 2004.
The Company believes existing cash and investments will be sufficient to satisfy
its cash requirements for the foreseeable future. This forward looking
statement, as well as the Company's long term cash requirements, will be a
function of a number of variables, including research & development priorities,
stock repurchase program activities, acquisition opportunities, and the growth
and profitability of the business.
New Accounting Standards
Effective November 1, 1998, the Company adopted SFAS No. 130 ("SFAS 130"),
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in the financial statements. The Company's only component of other
comprehensive income is the unrealized gain/loss on available-for-sale
investments.
SFAS No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and
Related Information, establishes new standards for the way public business
enterprises report information about operating segments. The Company must adopt
SFAS 131 for fiscal year end 1999 and management is in the process of evaluating
the effect on its financial reporting.
Year 2000 Readiness - Update
The following Year 2000 disclosure update is required by the rules and
regulations of the Securities and Exchange Commission and constitutes a "Year
2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act.
The "Year 2000" or "Y2K" problem references the problem caused by computer
systems that have historically been written using two digits rather than four
digits to define the applicable year. Additionally, Y2K includes a problem
calculating leap year if a computer system does not correctly identify the year
2000 as being a leap year. Company computer systems and other equipment and
technology having date sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000 and may not recognize the year 2000 as a
leap year. The Company has instituted a Year 2000 readiness program (the "Y2K
Plan") in order to identify, evaluate and address its exposure to these
problems.
For purposes of its Y2K Plan, the Company defines "Year 2000 compliant" to mean
that a product or service accurately process dates and times into and between
the twentieth and twenty-first centuries, into and between the years 1900 and
2000, performs correct leap year calculations and properly exchanges date and
time information with other products or services when used in combination. The
goal of the Y2K Plan is to ensure that the Company's equipment, systems and
processes and those of its significant business partners are sufficiently Year
2000 compliant such that no date/time issue will have any adverse impact on the
services or products that the Company provides its customers or the timely and
accurate processing of transactions.
State of Readiness. As part of the Company's Y2K Plan, management has
substantially completed its evaluation of its information technology ("IT") and
non-information technology ("non-IT") systems, including manufacturing
equipment, telephone and mechanical systems and other equipment and systems
having embedded, date sensitive technology for Year 2000 compliance. The
Company's Y2K Plan is focused on assessing and assuring compliance in the
following areas: IT and non-IT hardware, operating systems, software
applications and custom applications.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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Additionally, the Company is in the process of reviewing the Year 2000
compliance status of its customers, vendors and other service providers.
Hardware. The Company has substantially completed its assessment of its IT and
non-IT hardware for Y2K compliance. The Company estimates that most of its IT
and non-IT hardware has either been upgraded for Y2K compliance or has been
certified internally or through the appropriate vendor to be compliant. As of
January 31, 1999, certain non-IT hardware systems remain under review. The
Company expects that these remaining systems will be upgraded or certified as
Y2K compliant by June 30, 1999.
Operating Systems. The Company's operating systems are Novell Netware, Microsoft
NT and Microsoft Windows 95. Novell has certified Netware to be Y2K compliant.
Microsoft has certified Windows 95 to be compliant. Microsoft has certified that
its NT 4.x software is compliant upon installation of the most recent service
patches released or the installation of a software upgrade released in December
1998. The Company expects to install the Microsoft NT software upgrade by April
30, 1999.
Software Applications. The Company's primary information system applications
consist of Micro-MAX MRP system, Great Plains Accounting and DataWorks Vantage.
Micro-MAX released a service upgrade in 1998 that addressed its Y2K compliance.
Great Plains Accounting has been certified Y2K compliant for a number of years
and DataWorks has certified Vantage to be Y2K compliant. The Company's secondary
software systems consist of "off-the-shelf" software. The Company has
substantially completed the process of obtaining from its vendors certification
that each secondary software package is compliant. None of these secondary
software programs are critical to the Company's ability to accurately and timely
process transactions. The Company expects that all remaining secondary software
applications will either be assessed to be not dependent on date/time accuracy,
certified by the vendor to be Y2K compliant or replaced by June 30, 1999.
Custom Applications. The Company has only a few custom applications written in
"off-the-shelf" software. These applications were written in versions of
software which have been determined not to be Y2K compliant. In each instance
the Company has determined that date/time is either not essential to the
functioning of the application, can be worked around, or that the application's
function can either be accomplished manually or completed in another manner
using alternative software. Accordingly, the Company may choose not to address
the Y2K issues related to these custom applications.
Third Party Relationships. Because Y2K issues may also impact the Company by
affecting the business and operations of the Company's vendors, customers and
other business partners, the Company is in the process of communicating with
these parties in order to determine their Y2K compliant status. The Company has
begun to communicate with its customers, vendors and other business partners
regarding their Y2K compliance status. However, the Company has not been able to
determine if the failure of a third-party to be Y2K compliant will have a
material adverse affect on the Company. The Company anticipates that this part
of its Y2K plan will be substantially complete by June 30, 1999.
Costs to Address Year 2000 Issues. Although the ultimate cost of attaining Year
2000 compliance is not fully known at this time, management anticipates that
external costs will not be material. These costs will be funded from operations.
The Company does not track internal personnel time spent on IT projects,
including the Y2K project. To date, no IT projects have been delayed as a result
of the Company's Y2K project. In the event the Company's Y2K Plan is not
successful or timely implemented, the Company may need to devote more resources
to the process and additional costs may be incurred. Such a situation could have
a material adverse effect on the Company's financial condition and results of
operations.
The costs of Year 2000 compliance and the expected completion dates are the best
estimates of Company management. Estimated costs of the Company's Y2K project
and projected completion dates are forward-looking statements that may be
impacted by the Company's current belief as to the extent of its internal
exposure to the Y2K
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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problem, the timeliness and accuracy of information provided by the Company's
vendors, customers and other business partners in response to Y2K compliance
inquiries by the Company, the cost and availability of upgrades, corrections or
replacements for IT and non-IT systems identified as non-compliant, and the cost
of and the Company's ability to procure the services of consultants or qualified
personnel to assist with its Y2K Plan.
Worst Case Scenario. The Company believes that its most reasonably likely, worst
case scenario as a result of the Year 2000 problem will be the failure of one or
more significant vendors, customers or business partners to become Year 2000
complaint and the inability of the Company to determine or react on a timely
basis in order to mitigate the effects on the Company. If the operations of any
significant vendor, customer or other business partner are disrupted due to the
Year 2000 problem and the Company is unable to develop and implement an
effective contingency plan, the Company's ability to carry on essential
activities could be materially impacted. Even though the Company is undertaking
its Y2K Plan in an effort to mitigate its risks, there can be no assurance that
this scenario or any other impact of the Y2K problem will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Contingency Plans. To date, the Company has not yet developed any detailed
contingency plans to address Year 2000 compliance deficiencies, as it is still
in the process of gathering data from its customers, vendors and other business
partners regarding their Year 2000 compliance and otherwise implementing its Y2K
Plan. To the extent that the Company identifies Year 2000 compliance issues that
cannot be addressed on a timely basis, it will seek to develop appropriate
contingency plans in order to mitigate its risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation which is ordinary and incidental
to its business. In the opinion of management, the ultimate resolution of the
pending legal proceeding will not have a material adverse effect on the
Company's future business, financial condition, results of operations or cash
flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
the exhibit index beginning on page 16.
(b) Form 8-K. During the quarter ended January 31, 1999 the Company filed the
following report on Form 8-K in connection with the acquisition of
Jer-Neen:
Amendment No. 3 to Current Report on Form 8-K/A dated July 31, 1998,
reporting Item 7 - Financial Statements and Exhibits. This amendment
included audited financial statements of Jer-Neen as of and for the year
ended October 31, 1997, unaudited interim financial statements as of July
31, 1998 and for the nine-month periods ended July 31, 1998 and 1997, and
pro forma financial information for the year ended October 31, 1997 and for
the nine-month period ended July 31, 1998.
14
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BIO-VASCULAR, INC.
Dated: March 12, 1999 /s/ Connie L. Magnuson
-----------------------------------
Connie L. Magnuson
Vice-President of Finance and Chief
Financial Officer
(Principal Financial Officer)
15
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
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10.1 Lease Agreement effective August 27, 1997 between Jer-Neen
Manufacturing Co., Inc. and F&G Incorporated (filed herewith
electronically).
10.2 Change in Control Agreement dated February 1, 1999 between the Company
and B. Nicholas Oray (filed herewith electronically).
27.1 Financial Data Schedule for the three-month period ended January 31,
1999 (filed herewith electronically).
16