SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended April 30, 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
___________________________________________________
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
___________________________________________________
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 June 1, 1999, there were 9,139,277 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 APRIL 30, 1999 AND OCTOBER 31, 1998
- --------------------------------------------------------------------------------
April 30, October 31,
1999 1998
-------------------- --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents................................................ $ 6,682,565 $ 4,383,366
Marketable securities.................................................... - 3,990,839
Accounts receivable, net................................................. 2,932,279 2,456,018
Inventories, net......................................................... 2,451,109 2,305,924
Deferred income taxes.................................................... 239,754 219,754
Other.................................................................... 371,045 527,402
----------- -----------
Total current assets.................................................. 12,676,752 13,883,303
Equipment and leasehold improvements, net................................ 4,504,388 4,353,876
Goodwill and other intangible assets, net................................ 6,914,938 7,240,772
Deferred income taxes.................................................... 566,738 504,268
----------- -----------
Total assets.......................................................... $24,662,816 $25,982,219
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 822,410 $ 460,337
Accrued expenses......................................................... 1,312,063 1,421,054
Current maturities of long-term obligations.............................. 373,235 615,961
----------- -----------
Total current liabilities............................................. 2,507,708 2,497,352
Capital lease obligations................................................ 272,585 392,845
Other noncurrent liabilities............................................. 595,941 661,648
----------- -----------
Total liabilities........................................................ 3,376,234 3,551,845
----------- -----------
Contingencies (Note 6)
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at April 30, 1999 and
October 31, 1998...................................................... - -
Common Stock authorized 20,000,000 shares of $.01 par value;
9,133,301 issued and outstanding at April 30, 1999 and
9,317,183 at October 31, 1998............................................ 91,333 93,172
Additional paid-in capital............................................... 28,191,846 28,695,840
Unearned compensation.................................................... (631,317) (514,538)
Accumulated other comprehensive income................................... - 1,103
Accumulated deficit...................................................... (6,365,280) (5,845,203)
----------- -----------
Total shareholders' equity............................................ 21,286,582 22,430,374
----------- -----------
Total liabilities and shareholders' equity............................ $24,662,816 $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 AND SIX-MONTH PERIODS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Net revenue..................................... $ 4,893,173 $2,727,042 $8,722,356 $5,189,596
Cost of revenue................................. 2,395,735 1,077,169 4,307,918 2,115,389
----------- ---------- ---------- ----------
Gross margin.................................... 2,497,438 1,649,873 4,414,438 3,074,207
Operating expenses:
Selling, general, and administrative............ 2,342,512 1,655,072 4,367,360 3,167,840
Research and development........................ 446,306 360,954 778,917 825,821
----------- ---------- ---------- ----------
Operating loss.................................. (291,380) (366,153) (731,839) (919,454)
Other income, net............................... 47,850 214,433 107,580 460,252
----------- ---------- ---------- ----------
Loss before benefit from income taxes........... (243,530) (151,720) (624,259) (459,202)
Benefit from income taxes....................... (41,582) (50,243) (104,182) (152,809)
----------- ---------- ---------- ----------
Net loss........................................ $ (201,948) $ (101,477) $ (520,077) $ (306,393)
=========== ========== ========== ==========
Basic and diluted earnings per share:
Net loss........................................ $ (0.02) $ (0.01) $ (0.06) $ (0.03)
=========== ========== ========== ==========
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 SIX-MONTH PERIODS ENDED APRIL 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Six Months Ended
April 30,
1999 1998
---- ----
(Unaudited)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......................................... $ 140,322 $ (303,553)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements....................................................... (555,664) (450,296)
Investments in marketable securities......................................................... (986,806) (7,689,168)
Proceeds upon maturities of marketable securities............................................ 4,977,657 5,980,000
Investments in patents and trademarks........................................................ (42,590) (34,594)
Payment of transaction costs related to acquisition of Jer-Neen.............................. (58,859) -
----------- -----------
Net cash provided by (used in) investing activities.......................................... 3,333,738 (2,194,058)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds related to stock options, Employee Stock Purchase
Plan and restricted stock.................................................................... 9,444 144,936
Repurchase of the Company's common stock..................................................... (755,612) (2,994,102)
Repayments of capital lease obligations...................................................... (105,283) -
Repayments of other long-term obligations.................................................... (323,410) -
----------- -----------
Net cash used in financing activities........................................................ (1,174,861) (2,849,166)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... 2,299,199 (5,346,777)
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................................................................... 4,383,366 6,766,687
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................... $ 6,682,565 $ 1,419,910
=========== ===========
The accompanying are note are an intergral part of the interim unaudited
consolidated financial statements.
4
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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. The October 31, 1998 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. For further information, refer to the
financial statements and footnotes thereto included in the Company's 1998 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 six month period ended April 30, 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 for the three and six-month periods ended April 30,
1998, and the cash flows for the six-month period ended April 30, 1998 do not
include Jer-Neen's results of operations and cash flows for those periods.
(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
April 30, October 31,
1999 1998
---- ----
(Unaudited)
Inventories, net:
Raw materials and supplies..................................... $1,473,497 $1,304,031
Work in process................................................ 490,713 457,396
Finished goods................................................. 1,026,061 1,024,317
Less reserve for inventory obsolescence........................ (539,162) (479,820)
---------- ----------
$2,451,109 $2,305,924
========== ==========
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 April 30, 1999, the Company has
repurchased 1,274,766 shares of its common stock totaling $5,000,000 since the
inception of the Plan.
5
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
(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 Six Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Denominator for basic earnings per share -
weighted-average common shares............................. 9,113,831 9,112,768 9,159,853 9,264,916
Effect of dilutive securities:
Shares associated with nonvested stock awards................. - - - -
Shares associated with option plans........................... - - - -
--------- --------- --------- ---------
Dilutive potential common shares.............................. - - - -
--------- --------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted-average common shares and
dilutive potential common shares........................... 9,113,831 9,112,768 9,159,853 9,264,916
========= ========= ========= =========
Options outstanding with exercise prices greater than the
average market price of the Company's common stock
for the respective period.................................. 1,270,350 508,577 1,241,044 884,734
As of April 30,
1999 1998
---- ----
(Unaudited)
Options outstanding........................................... 1,403,426 1,128,436
Exercise prices............................................... $1.87 - $13.03 $1.87 - $13.03
Expiration dates.............................................. 1999 - 2007 1998 - 2006
Nonvested stock awards........................................ 147,622 138,479
For the three and six-month periods ended April 30, 1999 and 1998, none of the
options outstanding or nonvested stock awards 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
- --------------------------------------------------------------------------------
(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:
April 30, October 31,
1999 1998
---- ----
(Unaudited)
Percent of accounts receivable by significant
customers:
A............................................... 10% 9%
B............................................... 9% 11%
C............................................... 7% 11%
D............................................... 20% 13%
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Percent of net revenues by significant
customers:
A............................................... 13% 20% 13% 20%
B............................................... 9% 14% 8% 14%
C............................................... 7% 8% 7% 11%
D............................................... 23% - 24% -
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
International net revenues by geographic area:
Europe.......................................... $602,630 $419,360 $1,039,720 $ 745,059
Asia and Pacific Region......................... 113,002 295,326 232,499 402,541
Canada.......................................... 87,913 34,471 151,255 108,900
Other........................................... 75,287 13,558 103,529 25,179
-------- -------- ---------- ----------
Total........................................... $878,832 $762,715 $1,527,003 $1,281,679
======== ======== ========== ==========
Percent of total net revenues................... 18% 28% 18% 25%
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 the adoption of this standard will have on its financial reporting.
7
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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. 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 April 30, 1999 with
the Three Months Ended April 30, 1998
Revenue increased $2,166,000, or 79%, to $4,893,000 from $2,727,000. The Jer-
Neen component business contributed net revenues of $1,795,000, and continued to
exceed management's expectations. The branded products business reported
revenues of $3,098,000, up $371,000 from the 1998 revenue level of $2,727,000.
This was the second-highest quarterly revenue amount recorded by the Company's
branded business since the third quarter of 1995 when sales of the Company's
Peri-Strips(R) product were at their peak. The branded products business
experienced 21% revenue growth from its Tissue-Guard product line, exclusive of
Peri-Strips. Dura-Guard(R) and Vascu-Guard(R), both products within the Tissue-
Guard family, continued their strong momentum. Dura-Guard revenue increased 19%
over second quarter 1998 to $650,000 from $545,000. Vascu-Guard revenues were up
44% to $237,000 from $164,000 in the prior year quarter. Peri-Strips second-
quarter revenue of $900,000, while a minor increase over fiscal 1998 second
quarter revenue of $897,000, represented a substantial increase of 47% over the
first quarter of 1999, a quarter in which competitive pricing conditions had
accelerated. The Company believes that its 1999 second quarter increase over
first quarter was due to the Company successfully utilizing non price driven
sales strategies to respond in this competitive environment. Biograft revenue
experienced a 3% increase to $192,000 from $186,000 as a result of the Company's
efforts to reverse the downward trend previously experienced in this market.
Revenue from sales of surgical productivity tools increased 25% to $654,000 from
$524,000.
The Company's gross margin percentage was 51% for the 1999 quarter as compared
to 61% for the 1998 quarter. In the 1999 quarter, the component product line
margin was 40%, 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 primarily
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
due to the inclusion of the component product business in the consolidated
operating results for the full year in 1999 rather than one quarter as in 1998.
Selling, general and administrative (SG&A) expense increased $687,000, or 42%,
between the 1999 and 1998 second quarters. The inclusion of the component
business accounts for approximately 64% of the overall quarter to quarter
increase in SG&A expense. The remaining SG&A increase is primarily due to
increased sales and marketing costs within the branded products segment, which
were incurred in connection with the Company's revenue growth initiatives.
Increased sales and marketing costs were primarily related to increased
personnel costs, convention costs (including the related employee travel) and
marketing materials with the new Bio-Vascular corporate logo and image. Since
Jer-Neen has a lower SG&A cost structure than does the branded products
business, SG&A as a percentage of net revenues decreased from 61% for the 1998
quarter to 48% for the 1999 quarter.
Research and development (R&D) expense for the second quarter increased $85,000,
or 24%, between 1999 and 1998. The inclusion of the component business accounts
for approximately 88% of the overall quarter to quarter increase in R&D expense.
Product development activities in the second 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 that 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 $291,000 as compared to an operating
loss of $366,000 for the second quarter of 1998. The component business
contributed $209,000 in operating income to the fiscal 1999 second quarter.
Second quarter other income, primarily net interest income, was $48,000 in 1999
and $214,000 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 liabilities acquired in the
purchase of Jer-Neen and capital equipment leases. Operations had a loss before
income taxes of $243,000 in 1999 as compared to a loss of $152,000 in 1998.
The Company recorded a benefit from income taxes of $42,000 in 1999, an
effective tax rate of 17%, as compared to an 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 acquired
in the acquisition of Jer-Neen, partially offset by the impact of research and
experimental credits.
The first quarter 1999 net loss from operations was $202,000, or $0.02 per
share, compared to a net loss of $101,000, or $0.01 per share in 1998.
Comparison of the Six Months Ended April 30, 1999 with
the Six Months Ended April 30, 1998
Revenue increased $3,532,000, or 68%, to $8,722,000 from $5,190,000. The Jer-
Neen component business contributed net revenues of $3,197,000. The branded
products business reported revenues of $5,525,000, up $335,000 from the 1998
revenue level of $5,190,000. The branded products business experienced 19%
revenue growth from its Tissue-Guard product line, exclusive of Peri-Strips(R).
Peri-Strips revenue decreased 10% when comparing 1999 and 1998 period revenue of
$1,512,000 and $1,676,000, respectively. Peri-Strips revenue
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
decreased in the first quarter of fiscal 1999 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. In the second quarter of 1999, the Company
believes it was successful in utilizing non price driven sales strategies to
respond in this competitive environment. Biograft revenue experienced a 2%
decrease in revenue to $354,000 from $362,000. Revenue from sales of surgical
productivity tools increased 10% to $1,159,000 from $1,051,000 when comparing
the 1999 and 1998 periods.
The Company's gross margin percentage was 51% in the 1999 period as compared to
59% in the 1998 period. In the 1999 period, the component product line margin
was 39%, 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 quarter as in 1998.
Selling, general and administrative (SG&A) expense increased $1,200,000, or 38%,
between the 1999 and 1998 periods. The inclusion of the component business
accounts for approximately 71% of the overall period to period increase in SG&A
expense. 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, convention
costs (including the related employee travel) and marketing materials with the
new Bio-Vascular corporate logo and image. Since Jer-Neen has a lower SG&A cost
structure than does the branded products business, SG&A as a percentage of net
revenues decreased from 61% for the 1998 quarter to 50% for the 1999 period.
Research and development (R&D) expense for the period decreased $47,000, or 6%,
between 1999 and 1998. This decrease is due to the timing of clinical study
activity between the comparative periods. The Company expects to invest
approximately $2,000,000 in R&D in fiscal year 1999 on projects and products
where the potential exists for significant return on investment. 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 period was $732,000 as compared to an operating
loss of $919,000 for the same period in 1998. The component business contributed
$258,000 in operating income to the fiscal 1999 period.
Other income, primarily net interest income, was $108,000 in 1999 and $460,000
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 liabilities acquired in the purchase of Jer-Neen and capital
equipment leases. Operations had a loss before income taxes of $624,000 in 1999
as compared to a loss of $459,000 in 1998.
The Company recorded a benefit from income taxes of $104,000 in 1999, an
effective tax rate of 17%, as compared to an 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 acquired
in the acquisition of Jer-Neen, partially offset by the impact of research and
experimental credits.
The 1999 six-month period had a net loss from operations of $520,000, or $0.06
per share, compared to a net loss of $306,000, or $0.03 per share in 1998.
Liquidity and Capital Resources
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities were $6,683,000 at April 30,
1999 as compared to $8,374,000 at October 31, 1998, a reduction of $1,691,000.
Operating activities provided cash of $140,000 in the first half of 1999, as
compared to using cash of $304,000 in the same period of fiscal 1998. Cash was
provided by continuing operations through non-cash expenses in excess of the
loss from operations and increases in accounts payable, partially offset by
increases in working capital used for inventory and accounts receivable.
Investing activities included $556,000 used for the purchase of equipment and
leasehold improvements, primarily related to manufacturing processes. Other
investing activities included $43,000 invested in intangible assets and $59,000
used for acquisition costs related to Jer-Neen.
Financing activities used $1,175,000 of cash in the first half of fiscal 1999,
including $756,000 used to repurchase 259,600 shares of Company common stock in
accordance with its ongoing stock repurchase program. Additional uses of cash
included $429,000 to repay long-term obligations of Jer-Neen. The Company has
long-term obligations of $869,000 at April 30, 1999. Payments are required
through 2004.
The Company believes existing cash and cash equivalents 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 the adoption of this standard will have 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
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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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 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.
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 completed its assessment of its current IT and non-IT
hardware for Y2K compliance. Substantially all of the Company's 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. The Company has
completed preliminary tests of its upgraded and/or certified IT and non-IT
hardware to ensure for Y2K compliance and will continue to monitor and test the
systems on an ongoing basis. The Company expects that the remaining non-
compliant systems will be upgraded or certified as Y2K compliant by September
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 installed the Microsoft NT software
upgrade in the second quarter of fiscal 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 completed
the process of assessing whether or not its secondary systems are dependent upon
date/time accuracy and if they need to be replaced. For the systems that have
been determined as dependent upon date/time accuracy, the Company has obtained
from its vendors certification that each secondary software package is compliant
or intends to replace the system by September 30, 1999. None of these secondary
software programs are critical to the Company's ability to accurately and timely
process transactions.
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. 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 has substantially completed the process of
communicating with these parties in order to determine their Y2K compliant
status and is currently waiting to receive responses from a small number of
parties. 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 September 30, 1999.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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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 is not
expected to 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 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. The Company is in the process of developing contingency
plans to address Year 2000 compliance deficiencies. However, the plans will not
be completed until Company has received responses from its customers, vendors
and other business partners regarding their Year 2000 compliance. 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
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. The Company does not enter into hedging or derivative instruments.
14
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
The following is a report of the voting results of the Company's annual
shareholders meeting held on February 23, 1999.
1. The proposal to elect six directors was approved. M. Karen Gilles, William
G. Kobi, Richard W. Perkins, Anton R. Potami, Timothy M. Scanlan and Edward
E. Strickland were elected until the next annual meeting of shareholders or
until their successors are duly elected and qualified. There were no broker
non-votes. The tabulation was as follows:
Director Votes For Votes Against
------- --------- -------------
M. Karen Gilles 7,894,222 89,470
William G. Kobi 7,804,660 179,032
Richard W. Perkins 7,802,222 181,470
Anton R. Potami 7,898,660 85,032
Timothy M. Scanlan 7,898,257 85,435
Edward E. Strickland 7,894,052 89,640
2. The proposal to amend the Company's 1995 Stock Incentive Plan to increase the
number of shares reserved for issuance under this plan by 400,000 shares was
approved. There were 7,203,527 votes cast in favor and 713,773 votes cast
against the proposal, with 66,392 shares abstaining.
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 17.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
--------
quarter ended April 30, 1999.
15
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: June 9, 1999. /s/ Connie L. Magnuson
-----------------------------------
Connie L. Magnuson
Vice-President of Finance and Chief
Financial Officer
(Principal Financial Officer)
16
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
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27.1 Financial Data Schedule for the six-month period ended April 30, 1999
(filed herewith electronically).