<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1995.
REGISTRATION NO. 33-62199
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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PRE-EFFECTIVE AMENDMENT
NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
BIO-VASCULAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
MINNESOTA 41-1526554
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
2575 UNIVERSITY AVENUE, ST. PAUL, MINNESOTA 55114-1024
(612) 603-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
M. KAREN GILLES
2575 UNIVERSITY AVENUE
ST. PAUL, MINNESOTA 55114-1024
(612) 603-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
BRUCE A. MACHMEIER, ESQ. DAVID B. MILLER, ESQ.
OPPENHEIMER WOLFF & DONNELLY FAEGRE & BENSON P.L.L.P.
3400 PLAZA VII 2200 NORWEST CENTER
45 SOUTH SEVENTH STREET 90 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
(612) 344-9300 (612) 336-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 2,070,000 $14.8125 $30,661,875 $10,580
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</TABLE>
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(1) Includes Underwriter's over-allotment option to purchase up to 270,000
shares.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
based upon the average between the high and low reported bid quotations of
the Registrant's Common Stock on the national over-the-counter market on
September 14, 1995, as reported by the Nasdaq SmallCap Market.
(3) Of this amount, the Registrant previously paid $8,405 in connection with
the proposed registration of 1,725,000 shares of Common Stock pursuant to
the Registration Statement originally filed on August 29, 1995.
Accordingly, a fee in the amount of $2,175 is being paid upon the filing
of this Amendment No. 1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 20, 1995
Prospectus
dated , 1995
1,800,000 SHARES
LOGO
COMMON STOCK
All of the 1,800,000 shares of Common Stock offered hereby are being sold by
Bio-Vascular, Inc. (the "Company").
The Common Stock of the Company is quoted on the Nasdaq SmallCap Market under
the symbol "BVAS." On August 31, 1995, the closing bid price of the Common
Stock as reported by the Nasdaq SmallCap Market was $14.25. See "Price Range of
Common Stock." The Common Stock of the Company has been approved for quotation
on the Nasdaq National Market subject to official notice of issuance upon
completion of this Offering.
SEE "RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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<S> <C> <C> <C>
Per Share............... $ $ $
-------------------------------------------------------------
Total(3)................ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. The
Company has also agreed to sell to the Underwriter, for nominal
consideration, warrants to purchase 90,000 shares of Common Stock. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$300,000.
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 270,000 additional shares of Common Stock solely to cover over-
allotments, if any, at the Price to Public shown above less the
Underwriting Discount. If the Underwriter exercises this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriter subject to prior sale
when, as and if delivered to and accepted by the Underwriter and subject to its
right to reject orders in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the
offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about ,
1995.
Piper Jaffray inc.
<PAGE>
LOGO
Bio-Vascular, Inc. develops, manufactures and markets
proprietary specialty medical products for use in thoracic,
cardiac, neuro and vascular surgery. The Company also has a
medical imaging software business which develops, markets
and supports software products for interactive
visualization and analysis of three-dimensional image data.
[picture of Tissue-Guard] [picture of Peri-Strips on Stapler]
The Tissue-Guard product line includes
various configurations of processed Peri-Strips are designed to be applied
bovine pericardium used in a wide va- using surgical staplers to strengthen
riety of surgical procedures designed staple lines in lung volume reduction
to reinforce, reconstruct and repair surgery.
tissue and prevent leaks of air, blood
and other body fluids.
[picture of 3-D volume [picture of
rendered image.] Reapproximation]
Three-dimensional image Peri-Strips are designed
of cranium produced by to reapproximate (close
the Company's VoxelView around) surgical staples
high-speed volume to prevent air leakage
medical imaging in lung volume reduction
software. surgery. [/R]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND CERTAIN SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
-------------
Tissue-Guard(TM), Peri-Strips(R), Dura-Guard(TM), Vascu-Guard(R), Supple
Peri-Guard(TM), Peri-Guard(R), Biograft(R), Flo-Rester(R), Bio-Vascular
Probe(TM), VoxelView(R), VoxelGeo(R) and Voxel Animator(TM) are trademarks of
the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere or incorporated by reference
in this Prospectus. Unless otherwise indicated, all information in this
Prospectus assumes no exercise of the Underwriter's over-allotment option.
THE COMPANY
Bio-Vascular, Inc. (the "Company") develops, manufactures and markets
proprietary specialty medical products for use in thoracic, cardiac, neuro and
vascular surgery (the "Surgical Business"). The Company's products include the
Tissue-Guard product line and the Biograft peripheral vascular graft. The
Tissue-Guard product line includes various configurations of bovine pericardium
(the thin membrane surrounding the heart of cattle) processed using the
Company's proprietary tissue-fixation technologies. These products are used in
a wide variety of surgical procedures and are designed to reinforce,
reconstruct and repair tissue and prevent leaks of air, blood and other body
fluids. Biograft is used to bypass blocked blood vessels and is produced from
modified human umbilical veins. The Surgical Business also markets and sells
two surgical tools used in cardiac and vascular surgery. In addition, the
Company has an early stage medical imaging software business which develops,
markets and supports certain software products for interactive visualization
and analysis of three-dimensional ("3-D") image data (the "Medical Imaging
Software Business").
The Company's Peri-Strips surgical staple line reinforcement product is a
recent addition to the Tissue-Guard product line and has been primarily
responsible for the Company's revenue growth in fiscal 1994 and fiscal 1995.
Peri-Strips are special configurations of tissue produced from bovine
pericardium using proprietary tissue-preservation, sterilization and other
tissue-fixation techniques developed by the Company. Peri-Strips are used
primarily in lung volume reduction ("LVR") surgery and other surgical
procedures on the lung. LVR surgery is performed principally on patients with
late-stage emphysema who have significantly reduced respiratory function.
During the procedure, a portion of each diseased lung is removed from the
patient to provide relief from the symptoms of emphysema. Peri-Strips are
designed to prevent air leakage at the surgical staple line which is essential
to successful LVR surgery. Early data available to the Company suggests that
after undergoing the procedure, patients have improved breathing capacity,
improved exercise tolerance and improved quality of life. However, there
presently does not exist a statistically significant body of clinical data from
which to draw conclusions concerning the efficacy and long-term outcomes
associated with the LVR procedure. The American Lung Association estimates that
in 1992 there were approximately 1.9 million Americans suffering from
emphysema. However, only a small portion of those suffering from emphysema have
late-stage emphysema and meet certain surgical criteria and are therefore
considered candidates for the LVR procedure.
The Company also manufactures and markets a number of other products in its
Tissue-Guard product line. Dura-Guard, a dural patch used in cranial surgery,
is designed to reduce post-surgical adhesions and fluid leakage. Vascu-Guard, a
vascular patch used primarily in carotid endarterectomy procedures, is designed
to improve tissue integration and reduce sutureline bleeding. In addition, the
Company markets Supple Peri-Guard and Peri-Guard as multi-purpose patching
materials for use in specialty surgical procedures.
The Medical Imaging Software Business has developed VoxelView high-speed
volume imaging software which provides complete and accurate 3-D rendering of
data collected by advanced scanning devices such as spiral CT scanners,
magnetic resonance imaging devices ("MRI"), positron emission tomography
scanning devices ("PET") and ultrasound sonagraphic devices ("Ultrasound").
This product has been licensed to approximately 70 medical and research
institutions as a research tool. The Medical Imaging Software Business is
currently focusing its efforts on the development and commercialization of an
improved version of VoxelView which is intended to assist physicians in
clinical diagnosis, surgical planning and patient screening.
3
<PAGE>
The Company was incorporated in Minnesota in July 1985. As used herein, the
term "Company" refers to Bio-Vascular, Inc. and its wholly-owned subsidiary
Vital Images, Incorporated. The Company's principal executive offices are
located at 2575 University Avenue, St. Paul, Minnesota 55114-1024, and its
telephone number is (612) 603-3700.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered................ 1,800,000 shares.
Common Stock to be outstanding after
the Offering....................... 9,246,488 shares (1)
Use of proceeds..................... Working capital and infrastructure
associated with sales and marketing,
research and development and other general
corporate purposes. See "Use of Proceeds."
Nasdaq SmallCap Market symbol....... BVAS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following table sets forth summary consolidated financial data of the
Company and should be read in conjunction with the Consolidated Financial
Statements, related Notes thereto and other financial information included
herein.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER NINE MONTHS
31, ENDED JULY 31,
--------------------- --------------
1992 1993 1994 1994 1995
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue............................... $6,011 $6,144 $ 6,632 $ 4,702 $8,131
Gross margin.............................. 3,605 3,628 4,198 2,879 5,564
Operating income (loss)................... (309) (457) (1,431) (991) 528
Income (loss) before income taxes......... (145) (138) (1,869) (1,371) 629
Net income (loss)......................... (159) (158) (1,880) (1,374) 597
Net income (loss) per share............... $(.02) $(.02) $ (.26) $ (.19) $ .07
Weighted average shares outstanding....... 6,743 7,055 7,277 7,266 8,207
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1995
---------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $5,121 $28,804
Total assets............................................. 9,050 32,733
Long-term debt........................................... -- --
Shareholders' equity..................................... 7,578 31,261
</TABLE>
--------
(1) Excludes, as of July 31, 1995, 795,489 shares of Common Stock issuable upon
exercise of options outstanding under the Company's stock option plans (the
"Stock Option Plans"), which have an average exercise price of $3.10;
266,720 shares of Common Stock issuable upon exercise of other outstanding
options (the "Other Options"), which have an average exercise price of
$4.12; an additional 556,986 shares of Common Stock reserved for future
issuance under the Stock Option Plans; 32,143 shares of Common Stock
issuable upon exercise of certain warrants (the "Warrants"), with an
exercise price of $4.00; and up to 90,000 shares of Common Stock issuable
upon exercise of the warrants to be issued at the completion of this
Offering to the Underwriter (the "Underwriter Warrants"). See Note 6 of
Notes to Consolidated Financial Statements, "Description of Capital Stock--
Warrants" and "Underwriting."
(2) Adjusted to reflect the sale of 1,800,000 shares of Common Stock offered by
the Company at an assumed offering price of $14.25 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following risk factors should be considered carefully.
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY PROSPECTS
The Company has experienced a net loss during each of the three years in the
period ended October 31, 1994, although the Surgical Business has had
operating income for each of these years. The imaging business has incurred
losses since 1990, and the Company does not expect that the Medical Imaging
Software Business will be profitable in the near term. There can be no
assurance that the Company will achieve profitability for the year ended
October 31, 1995, or at any time in the future. Profitability for fiscal 1995
and in the near term thereafter will depend upon the continued success of
Peri-Strips, of which there can be no assurance. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
DEPENDENCE ON LUNG VOLUME REDUCTION PROCEDURE
The growth in revenue and profitability of the Company for the first nine
months of fiscal 1995 as compared to the corresponding period in fiscal 1994
was primarily due to increased sales of Peri-Strips. Peri-Strips accounted for
approximately 43% of the Company's net revenue for the nine months ended July
31, 1995. The Company believes that sales of Peri-Strips will be the primary
factor in revenue growth and profitability in the foreseeable future. This
product is used primarily in lung volume reduction ("LVR") surgery, a
procedure that was abandoned 35 years ago due to unacceptable mortality and
complication rates. The LVR procedure was re-introduced in 1994, modified and
enabled by the use of a surgical stapler in combination with the Company's
Peri-Strips product. Due to the recent re-introduction of the modified
procedure, the number of patients who have undergone the procedure and for
whom a clinically acceptable post-operative period of evaluation has elapsed
is still relatively small. Similarly, the number of physicians performing the
procedure and from whom data is available to the Company is small.
Accordingly, there presently does not exist a statistically meaningful body of
clinical data from which to draw conclusions concerning the efficacy and long-
term outcomes associated with the LVR procedure. The Company believes that
patients who have undergone the LVR procedure may require an additional year
or more of follow-up examination before the procedure can be properly
evaluated by the medical community. If the LVR procedure is ultimately
determined to provide only temporary benefits or otherwise results in
unfavorable or unacceptable outcomes, this would adversely affect sales of the
Company's Peri-Strips product and have a material adverse effect on the
Company's results of operations. The success of Peri-Strips will also depend
on the acceptance of the product by surgeons performing LVR surgery. The
Company estimates that there will be approximately 450 surgeons worldwide
trained to perform the LVR procedure by the end of fiscal 1995. Although
additional surgeons are being trained, the growth in Peri-Strips sales has
been and will continue to be closely related to the number of surgeons trained
in the LVR procedure and the willingness of such surgeons to perform the LVR
procedure. If the number of surgeons trained and effectively performing the
LVR procedure does not grow as rapidly as the Company anticipates, the
Company's business, results of operations and financial condition will be
adversely affected. Growth in the number of LVR procedures performed is also
dependent upon the criteria used by surgeons in selecting patients deemed
appropriate candidates for such surgery. If the selection criteria become too
rigorous, the number of LVR procedures performed and related sales of the
Peri-Strips product may decrease, which would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business--Surgical Business--Markets and Medical Need."
HIGHLY COMPETITIVE INDUSTRIES AND RISK OF TECHNOLOGICAL OBSOLESCENCE
The Company faces intense competition in both its Surgical Business and its
Medical Imaging Software Business. The medical product and imaging industries
are highly competitive and characterized by rapid innovation and technological
change. The Company expects technology to continue to develop rapidly, and the
Company's success will depend to a large extent on its ability to maintain a
competitive position with its technology. There can be no assurance that the
Company will be able to compete effectively in the marketplace
5
<PAGE>
or that products developed by its competitors will not render its products
obsolete or non-competitive. Similarly, there can be no assurance that the
Company's competitors will not succeed in developing or marketing products
that are viewed by physicians as providing superior clinical performance or
are less expensive relative to the Company's products currently marketed or to
be developed. Several established companies manufacture and sell surgical
products which compete with all of the Company's surgical products, other than
Peri-Strips. The Company believes that at least two established companies are
developing products intended to compete with Peri-Strips. The competition in
the imaging industry is also intense and consists largely of established
manufacturers of imaging equipment. The companies with which the Company
competes have greater distribution capabilities, substantially greater capital
resources and larger marketing, research and development staffs and facilities
than the Company. In addition, many of the Company's competitors offer broader
product lines within the Company's specific product markets. Broad product
lines may give the Company's competitors the ability to negotiate exclusive,
long-term medical product supply contracts and the ability to offer
comprehensive pricing for their products, including those that compete with
the Company's products. By offering a broader product line in the general
field of medical products and supplies, competitors may also have a
significant advantage in marketing competing products to group purchasing
organizations and managed care organizations that increasingly seek to reduce
costs. There can be no assurance that the Company will be able to compete
effectively with such manufacturers in either its Surgical Business or its
Medical Imaging Software Business. See "Business--Surgical Business--
Competition" and "--Medical Imaging Software Business--Competition."
ABILITY TO MANAGE GROWTH
To support the anticipated growth due to sales of its Peri-Strips product,
the Company will require additional supply, manufacturing, quality assurance,
inventory management, marketing and sales capabilities. Although the Company
is taking steps to meet these needs, there can be no assurance that the
Company will be able to secure the necessary personnel and systems
capabilities to sustain and support the current rate of growth. See
"Business--Surgical Business--Marketing" and "--Manufacturing."
INTELLECTUAL PROPERTY
The Company protects its technology through trade secrets and proprietary
know-how and through patents, both owned and licensed. The Company seeks to
protect its trade secrets and proprietary know-how through confidentiality
agreements with employees, consultants and other parties. Supple Peri-Guard,
which is used in the manufacture of the majority of the Company's Tissue-Guard
products, is protected exclusively by trade secrets. There can be no assurance
that the Company's trade secrets or confidentiality agreements will provide
meaningful protection of the Company's proprietary information or, in the
event of a breach of any confidentiality agreement, that the Company will have
adequate remedies. There can be no assurance that any pending or future patent
applications will result in issued patents, or that any current or future
patent, regardless of whether the Company is an owner or licensee of such
patent, will not be challenged, invalidated or circumvented or that the rights
granted thereunder or under its licensing agreements will provide a
competitive advantage to the Company. Furthermore, there can be no assurance
that others will not independently develop similar technologies or duplicate
any technology developed by the Company or that the Company's technology will
not infringe patents or other rights owned by others.
The medical product industry is characterized by frequent and substantial
intellectual property litigation, and competitors may resort to intellectual
property litigation as a means of competition. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. Any future litigation, regardless of the outcome, could
result in substantial expense to the Company and significant diversion of the
efforts of the Company's technical and management personnel. Litigation may
also be necessary to enforce patents issued to the Company and license
agreements entered into by the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. An adverse determination in any such
proceeding could subject the Company to significant liabilities to third
parties, or require the Company to seek licenses from third parties or pay
royalties that may be substantial. Furthermore, there can be no assurance that
necessary licenses would be available to the Company
6
<PAGE>
on satisfactory terms, if at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing or selling certain of its
products which in turn would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Intellectual Property."
RISKS ASSOCIATED WITH HUMAN TISSUE PRODUCTS
Both the United States and Europe have recently focused attention on the
safety of tissue banks, spurred by incidents of the transmission of human
disease during tissue transplantation. In the United States, recent
regulations drafted by the U.S. Food and Drug Administration (the "FDA") have
outlined requirements for tissue banks. The regulations have specifically
excluded from regulation medical devices subject to FDA review, including
preserved umbilical cord vein grafts such as Biograft. As a result, the
Company does not expect Biograft to be subject to tissue bank regulations in
the United States and the related expensive donor screening and donor testing
procedures. There can be no assurance, however, that the FDA will not impose
additional regulatory requirements on Biograft at some later date or that
Biograft would be able to meet any such new requirements.
The future regulatory environment for Biograft in Europe is unclear. While
the Medical Device Directive ("MDD") issued by the European Union ("EU")
explicitly excludes medical devices derived from human tissue from regulation,
certain European medical device manufacturers are actively lobbying for the
re-inclusion of such devices in the MDD. If this effort is successful, the
earliest date for applying for CE mark approval for Biograft is expected to be
1998. In addition, if extensive donor screening and donor testing requirements
are imposed, such requirements could make it uneconomical to sell Biograft in
Europe even under the CE mark. Biograft accounted for 12% and 25% of the
Company's net revenue and international net revenue, respectively, for the
nine months ended July 31, 1995.
EARLY STAGE OF THE MEDICAL IMAGING SOFTWARE BUSINESS
The Company's imaging business incurred operating losses of $708,000,
$790,000 and $1,183,000 in fiscal 1992, 1993 and 1994, respectively, and has
incurred an operating loss of $797,000 for the nine months ended July 31,
1995. The Company recently granted a perpetual, exclusive license to its
imaging technology for geoscience applications so that the Medical Imaging
Software Business could focus exclusively on medical applications of its
imaging technology. With this exclusive license, the Company will no longer be
receiving revenue from sales for these geoscience applications. The Company
does not anticipate that expenses of the imaging business will decrease
proportionally to this decrease in revenue. As a result, the imaging business
will likely incur operating losses in the near term. Currently, the Company
has not received FDA 510(k) clearance to market its VoxelView product as a
medical product and does not anticipate significant revenues from its medical
imaging products in the near term even if FDA clearance is received. The
Company expects to continue to invest significant resources in the research
and development of VoxelView. The Company believes that successful
commercialization of VoxelView primarily depends upon the development of an
improved and application specific user interface. In addition, VoxelView
currently can only be used on hardware manufactured by a single manufacturer,
and therefore the VoxelView product will be affected in the short term by the
success or failure of this hardware manufacturer. Furthermore, the success of
the VoxelView software currently under development will depend upon the
ability and willingness of physicians to use such 3-D software in clinical
diagnosis, surgical planning and patient screening, of which there can be no
assurance. See "Business--Medical Imaging Software Business--Products and
Product Development."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company's products are purchased by hospitals and other users, which
bill various third-party payors, such as government health programs, private
health insurance plans, managed care organizations and other similar programs,
for the health care goods and services provided to their patients. Payors may
deny reimbursement if they determine that a product used in a procedure was
not used in accordance with established payor protocol regarding cost-
effective treatment methods or was used for an unapproved indication. Third-
party payors are also increasingly challenging the prices charged for medical
products and services and, in some
7
<PAGE>
instances, have put pressure on medical device suppliers to lower their
prices. The Company is unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. There can be no
assurance that the surgical procedures in which the Company's products are
used will continue to be considered cost effective by third-party payors, that
reimbursement for such surgeries or imaging services will be available or, if
available, that payors' reimbursement levels will not adversely affect the
Company's ability to sell its products on a profitable basis. The Company's
medical imaging products have been purchased to date by a limited number of
medical and research institutions for research applications. Under the current
reimbursement system, end-users of the Company's medical imaging products will
not receive reimbursement for such products until FDA marketing clearance for
such products has been obtained. In addition, the cost of health care has
risen significantly over the past decade, and there have been and may continue
to be proposals by legislators, regulators and third-party payors to curb
these costs. Failure by hospitals and other users of the Company's products to
obtain reimbursement from third-party payors, changes in third-party payors'
policies towards reimbursement for procedures using the Company's products or
legislative action could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Third
Party Reimbursement and Cost Containment."
GOVERNMENTAL REGULATION
The Company's products, development activities and manufacturing processes
are subject to extensive and rigorous regulation by the FDA and by comparable
agencies in foreign countries. In the United States, the FDA regulates the
introduction, manufacturing, labeling and recordkeeping procedures for medical
devices, including medical imaging software. The process of obtaining
marketing clearance from the FDA for new products and new applications for
existing products can be time-consuming and expensive, and there is no
assurance that such clearances will be granted or that FDA review will not
involve delays that would adversely affect the Company's ability to
commercialize additional products or additional applications for existing
products. In addition, certain of the Company's surgical products that are in
the research and development stage may be subject to a lengthy and expensive
pre-market approval ("PMA") process with the FDA. Even if regulatory approvals
to market a product are obtained from the FDA, these approvals may entail
limitations on the indicated uses of the product. Product approvals by the FDA
can also be withdrawn due to failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial approval. The FDA
could also limit or prevent the manufacture or distribution of the Company's
products and has the power to require the recall of such products. FDA
regulations depend heavily on administrative interpretation, and there can be
no assurance that future interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the
Company. The FDA, various state agencies and foreign regulatory agencies
inspect the Company and its facilities from time to time to determine whether
the Company is in compliance with various regulations relating to
manufacturing practices, validation, testing, quality control and product
labeling. A determination that the Company is in violation of such regulations
could lead to imposition of civil penalties, including fines, product recalls
or product seizures and, in extreme cases, criminal sanctions.
Approximately 21% of the Company's net revenue in the first nine months of
fiscal 1995 resulted from sales of its products outside the United States
through independent distributors. International regulatory bodies have
established varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. The Company relies on independent distributors to
comply with these foreign regulatory requirements and communication between
foreign regulatory agencies and the Company is indirect and occurs through the
foreign distributor. The inability or failure of independent distributors to
comply with the varying regulations or the imposition of new regulations could
restrict such distributors' ability to sell the Company's products
internationally and thereby adversely affect the Company's business, financial
condition and results of operations. See "Business--Governmental Regulation."
The new registration scheme in the EU requires that the Company's quality
system conform with the ISO 9001 international quality standard and that its
products conform with the "essential requirements" set forth by
8
<PAGE>
the MDD for the class of products produced by the Company. Compliance with
these requirements will allow the Company to issue a "Declaration of
Conformity" and apply the "CE" mark to products, allowing free sale in the EU.
While the Company is currently undergoing a review procedure to verify
compliance with the ISO 9001 standard and the essential requirements, there
can be no assurance that the Company will obtain the CE mark in a timely
manner, or at all. Failure to obtain the CE mark by 1998 would limit the
Company's ability to sell its products in Europe and would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Governmental Regulation."
EXPOSURE TO PRODUCT LIABILITY CLAIMS; RISK OF PRODUCT RECALL
The medical product industry historically has been litigious, and the
manufacture and sale of the Company's products inherently entails a risk of
product liability claims. Since the Company's principal products are designed
to be permanently placed in the human body, production errors could result in
an unsafe product and injury to the patient. Although the Company maintains
product liability insurance in amounts believed to be adequate based upon the
nature and risks of its business in general and its actual experience to date,
there can be no assurance that one or more liability claims will not exceed
the coverage limits of such policies or that such insurance will continue to
be available on commercially reasonable terms, if at all. Furthermore, the
Company does not expect to be able to obtain insurance covering its costs and
losses as the result of any recall of its products due to alleged defects,
whether such a recall is instituted by the Company or required by a regulatory
agency. On one occasion in 1992, the Company initiated a product recall to
correct the mislabeling of one of its surgical tool products. The mislabeling
did not result in injury to any patient and did not have an adverse effect on
the Company's business, financial condition or results of operations. A
product liability claim, recall or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
DEPENDENCE ON DISTRIBUTOR SALES
Sales to distributors constitute a significant portion of the Company's
current business. In the nine months ended July 31, 1995, three domestic
distributors accounted for an aggregate of 46.6% of the Surgical Business'
gross revenue, with each of such distributors accounting for in excess of 10%
of the Surgical Business' gross revenue for the period. There can be no
assurance that the Company will be able to maintain its relationships with
these significant distributors, or, in the event of termination of any of such
relationships, that a new replacement distributor will be found. The loss of a
significant distributor could materially adversely affect the Company's
business, financial condition and results of operations if a new distributor
or other suitable sales organization could not be found on a timely basis in
the relevant geographic market. See "Business--Surgical Business--Marketing."
POSSIBLE VOLATILITY OF SHARE PRICE
The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to quarterly variations in the Company's
operating results, announcements of technological innovations by the Company
or its competitors, governmental regulation and other events or factors. In
addition, market prices of securities of medical technology companies have
from time to time experienced extreme price and volume fluctuations, which may
have been unrelated to the operating performance of those companies. These
broad market fluctuations may materially adversely effect the market price of
the Company's Common Stock.
DILUTION AND ABSENCE OF DIVIDENDS
Purchasers of the Common Stock in this Offering will incur immediate
dilution in the net tangible book value of their shares. Additional dilution
is likely to occur upon exercise of outstanding warrants and stock options.
The Company has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future. See "Dilution" and
"Dividend Policy."
9
<PAGE>
ANTI-TAKEOVER CONSIDERATIONS
As a Minnesota corporation, the Company is subject to certain anti-takeover
provisions of the Minnesota Business Corporation Act (the "MBCA"). The
provisions of the MBCA could have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the then prevailing market price of
the Common Stock, and may adversely affect the market price of, and the voting
and other rights of the holders of, Common Stock. See "Description of Capital
Stock--Certain Limited Liability, Indemnification and Anti-Takeover
Provisions."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby (at an assumed offering price of $14.25 per share), after
deducting the underwriting discount and estimated expenses of this Offering,
are estimated to be approximately $23,682,750.
The Company intends to use the net proceeds of this Offering for working
capital and infrastructure associated with sales and marketing, research and
development and other general corporate purposes. In addition, the Company may
also use a portion of the net proceeds to finance collaborative arrangements
or to acquire businesses, assets, technologies or product lines that
complement the Company's existing businesses if such transactions could be
effected on terms deemed favorable by the Company. The Company from time to
time considers such transactions, but currently has no definitive plans or
negotiations pending. Pending the use of the net proceeds of this Offering,
the Company will invest the funds in short-term, interest-bearing, investment-
grade securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently quoted on the Nasdaq SmallCap Market
under the symbol BVAS. The Common Stock of the Company has been approved for
quotation on the Nasdaq National Market subject to official notice of issuance
upon completion of this Offering. The following table sets forth, for each of
the quarters indicated, the range of high and low bid quotations per share of
Common Stock as reported on the Nasdaq SmallCap Market. These prices represent
prices between dealers, without mark-up, mark-down or commission, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1993
First Quarter............................................ $ 5.50 $ 3.00
Second Quarter........................................... 4.00 2.75
Third Quarter............................................ 3.00 1.81
Fourth Quarter........................................... 4.06 1.81
FISCAL 1994
First Quarter............................................ $ 3.63 $ 2.63
Second Quarter........................................... 3.81 2.88
Third Quarter............................................ 3.75 2.75
Fourth Quarter........................................... 5.75 3.25
FISCAL 1995
First Quarter............................................ $ 5.75 $ 4.63
Second Quarter........................................... 7.38 5.25
Third Quarter............................................ 14.63 6.88
Fourth Quarter (through August 31, 1995)................. 16.75 11.75
</TABLE>
For a recent closing bid quotation for the Common Stock, see the cover page
of this Prospectus.
DIVIDEND POLICY
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.
10
<PAGE>
DILUTION
As of July 31, 1995, the Company's net tangible book value was $6,913,519,
or $.93 per share. Net tangible book value per share represents the amount of
the Company's total tangible assets less the Company's total liabilities,
divided by the number of shares of Common Stock outstanding. Without taking
into account any other changes in such net tangible book value after July 31,
1995, other than to give effect to the sale of 1,800,000 shares offered by the
Company hereby (at an assumed offering price of $14.25 per share and after
deduction of the estimated underwriting discount and estimated offering
expenses), the net tangible book value of the Company as of July 31, 1995
would have been $30,596,269, or $3.31 per share. This represents an immediate
increase in the net tangible book value of $2.38 per share to the existing
shareholders, and an immediate dilution in net tangible book value of $11.87
per share to purchasers of Common Stock in the Offering. The foregoing assumes
no exercise of outstanding stock options or warrants. As of July 31, 1995, the
Company had 795,489 shares of Common Stock issuable upon exercise of options
outstanding under the Stock Option Plans, which have an average exercise price
of $3.10; 266,720 shares of Common Stock issuable upon exercise of the Other
Options, which have an average exercise price of $4.12; an additional 556,986
shares of Common Stock reserved for future issuance under the Stock Option
Plans; 32,143 shares of Common Stock issuable upon exercise of the Warrants
with an exercise price of $4.00; and 90,000 shares of Common Stock issuable
upon exercise of the Underwriter Warrants to be issued at the completion of
this Offering. See Note 6 of Notes to Consolidated Financial Statements,
"Description of Capital Stock--Warrants" and "Underwriting."
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of July 31, 1995 and as adjusted to give effect to the sale by the
Company of the 1,800,000 shares of Common Stock offered hereby at an assumed
offering price of $14.25 per share and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1995
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................... $ 6 $ 6
======= =======
Long-term debt............................................ -- --
Shareholders' equity:
Common Stock, $.01 par value; 20,000,000 shares
authorized; 7,446,488 shares issued and outstanding,
9,246,488 shares issued and outstanding, as adjusted
(1).................................................... 74 92
Additional paid-in capital.............................. 12,167 35,832
Accumulated deficit..................................... (4,250) (4,250)
Unearned compensation and restricted stock.............. (413) (413)
------- -------
Total shareholders' equity............................ 7,578 31,261
------- -------
Total capitalization.................................. $ 7,578 $31,261
======= =======
</TABLE>
--------
(1) Excludes, as of July 31, 1995, 795,489 shares of Common Stock issuable
upon exercise of options outstanding under the Stock Option Plans, which
have an average exercise price of $3.10; 266,720 shares of Common Stock
issuable upon exercise of the Other Options, which have an average
exercise price of $4.12; an additional 556,986 shares of Common Stock
reserved for future issuance under the Stock Option Plans; 32,143 shares
of Common Stock issuable upon exercise of the Warrants with an exercise
price of $4.00; and 90,000 shares of Common Stock issuable upon exercise
of the Underwriter Warrants to be issued at the completion of this
Offering. See Note 6 of Notes to Consolidated Financial Statements,
"Description of Capital Stock--Warrants" and "Underwriting."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The selected consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended October 31, 1994, are
derived from the financial statements of Bio-Vascular, Inc. and Vital Images,
Incorporated ("Vital Images") after restatement for the 1994 pooling-of-
interests. The consolidated financial statements of Bio-Vascular, Inc. as of
October 31, 1993 and 1994 and for the years then ended and the separate
financial statements of Vital Images as of December 31, 1991 and 1992, and for
the years then ended have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The separate financial statements of Bio-Vascular,
Inc. as of October 31, 1992 and for the year then ended have been audited by
Deloitte & Touche LLP, independent accountants. The separate financial
statements of Bio-Vascular, Inc. as of October 31, 1990 and 1991, and for the
years then ended and the separate financial statements of Vital Images as of
December 31, 1990 and for the year then ended have been audited by independent
accountants. Vital Images financial statements were reported on a calendar
year basis prior to the merger with Bio-Vascular. Vital Images financial
statements have been restated to be on a fiscal year basis for the year ended
October 31, 1993. Vital Images financial statements prior to fiscal 1993 are
combined on a calendar year basis with Bio-Vascular fiscal years ended October
31. Accordingly, results for Vital Images for the months of November and
December 1992 are included in both the 1992 and 1993 amounts below. Vital
Images' revenues were $404 and the net loss was $33 during this two-month
period. The selected financial data presented below for the nine-month periods
ended July 31, 1994 and 1995 are derived from the unaudited consolidated
financial statements of the Company included elsewhere in this Prospectus. In
the opinion of management, the unaudited financial statements reflect all
normal recurring adjustments necessary to present fairly the financial data
for the unaudited periods described above. The results of operations of the
Company for the nine-month period ended July 31, 1995 should not necessarily
be taken as indicative of the results of operations that may be expected for
the entire fiscal year ending October 31, 1995.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED OCTOBER 31, ENDED JULY 31,
------------------------------------ --------------
1990 1991 1992 1993 1994 1994 1995
------ ------ ------ ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenue............... $4,423 $5,086 $6,011 $6,144 $ 6,632 $ 4,702 $8,131
Gross margin.............. 2,165 3,145 3,605 3,628 4,198 2,879 5,564
Operating income (loss)... (280) (294) (309) (457) (1,431) (991) 528
Extraordinary item-gain on
early extinguishment of
debt..................... -- 59 -- -- -- -- --
Net income (loss)......... (345) (278) (159) (158) (1,880) (1,374) 597
Per common share data:
Loss before extraordinary
item.................... (.07) (.05) (.02) (.02) (.26) (.19) .07
Extraordinary item....... -- .01 -- -- -- -- --
Net income (loss) per
share................... $(.07) $(.04) $(.02) $(.02) $ (.26) $ (.19) $ .07
Weighted average shares
outstanding.............. 4,630 6,162 6,743 7,055 7,277 7,266 8,207
BALANCE SHEET DATA:
Working capital........... $1,039 $5,241 $5,535 $6,577 $ 5,236 $ 5,576 $5,121
Total assets.............. 4,359 8,283 8,626 9,469 7,913 8,108 9,050
Long-term debt............ 1,087 167 99 52 -- -- --
Shareholders' equity...... 2,119 7,449 7,643 8,477 6,786 7,217 7,578
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company has two business segments which market products on a worldwide
basis. Its primary business is the Surgical Business, which develops,
manufactures and markets proprietary specialty medical products for use in
thoracic, cardiac, neuro and vascular surgery. The Company, through its
wholly-owned subsidiary, Vital Images, also develops, markets and supports
certain software products for interactive visualization and analysis of three
dimensional image data for medical applications. Net revenue generated by
Vital Images is derived from software licensing and maintenance fees.
The Company has been in a period of significant growth, driven primarily by
the revenue contribution of its Peri-Strips product (part of the Tissue-Guard
product line). Peri-Strips, which enables LVR surgery for late-stage emphysema
patients, received marketing clearance from the FDA in May 1994 but was not
released fully to the market until late October 1994. Net revenue resulting
from sales of Peri-Strips increased from $249,000 for the nine months ended
July 31, 1994 to $3,533,000 for the nine months ended July 31, 1995. The
Company anticipates that sales of Peri-Strips will continue to constitute an
increasing share of the Company's revenue. To accommodate growth in its Peri-
Strips business, the Company, beginning in April 1994, made significant
additional investments in personnel, plant and infrastructure, including
moving to a new and larger manufacturing facility for the Surgical Business in
July 1995. Further increases in all areas, especially marketing and support
personnel additions, are planned to support anticipated Peri-Strips sales
growth. Due to the recent re-introduction of the modified LVR procedure, there
presently does not exist a statistically significant body of clinical data
from which to draw conclusions concerning the efficacy and long-term outcomes
associated with the LVR procedure. Accordingly, the rate and pattern of
growth, if any, of the Peri-Strips business, and its related personnel, plant
and infrastructure support requirements, are especially difficult to predict.
The Company acquired Vital Images on May 24, 1994. The acquisition was a
"pooling-of-interests," and financial results for all reporting periods have
been restated as if Vital Images had been merged into the Company from
inception. Historically, Vital Images was engaged in developing and marketing
3-D volume rendered, imaging software for various disciplines and industries,
but principally for confocal microscopy, other medical research, and gas and
oil exploration (the "Imaging Business"). After the acquisition, the Company
decided to exit the microscopy business due to the limited market opportunity
in microscopy and its relatively low margins. Although the Company continues
to provide support to existing microscopy customers, it does not actively
pursue new microscopy customers. At the time of the acquisition, the largest
near-term market opportunity for the Imaging Business was the VoxelGeo product
for gas and oil exploration applications. The Company funded the research and
development of the second generation of this product, VoxelGeo 2.0, in order
to generate revenue to fund future development of clinical medical
applications of the Company's imaging software. In the process of developing
VoxelGeo 2.0, the Company rewrote the entire code of its core 3-D volume
rendering technology. A significant portion of all of the Company's 3-D volume
rendered imaging software results from certain "core technology," and
therefore improvements or changes to this "core technology" advance all
applications of the software. In order to conserve resources and receive the
benefit of industry expertise, the Company entered into a global marketing
alliance in August 1994 with CogniSeis Development, Inc. ("CogniSeis"), a
company with complementary software technologies for gas and oil exploration
and an established presence in the industry. Under the agreement, CogniSeis
assumed exclusive marketing and customer support responsibilities for VoxelGeo
in exchange for 50% of software license and maintenance fee revenue.
In order to concentrate the Imaging Business on medical applications, the
Company entered into a source code license agreement in August 1995 with
CogniSeis, granting it a worldwide, perpetual, exclusive license for use in
gas and oil exploration applications. Under this agreement, CogniSeis becomes
both the exclusive developer and exclusive marketer of VoxelGeo. Upon
validation of the source code by CogniSeis, the Company will receive a license
fee payment of $1.5 million, subject to adjustment for certain items, which
will be recorded as revenue at that time. The Company anticipates that such
payment will be made in the fourth quarter of fiscal 1995. The agreement
further provides for the payment to the Company on a quarterly basis of
royalties based
13
<PAGE>
upon the receipt of revenues generated by VoxelGeo, which payments, if any,
the Company anticipates will begin in calendar 1997. Royalties will terminate
upon the earlier of March 31, 2001 or the aggregate payment of $2.0 million in
royalties.
The Company's Imaging Business is now dedicated to the development of
medical applications of its imaging technology. Excluding the one-time source
code license fee discussed above, the Company anticipates that its Imaging
Business revenue will continue to decrease in the near term due to declining
microscopy revenue and no additional VoxelGeo revenue until 1997, when
royalties on VoxelGeo are anticipated to begin. Microscopy and gas and oil
exploration revenue accounted for more than 70% of the Imaging Business
revenue during 1993 and 1994. In addition, the Company does not anticipate
that expenses of the Imaging Business will decrease proportionally to the
decrease in revenue as the Company intends to continue to invest in VoxelView.
The Company does not have FDA 510(k) clearance to market its VoxelView product
as a medical product, and does not anticipate significant revenues from its
medical imaging products in the near term even if FDA clearance is received.
RESULTS OF OPERATIONS
The following table sets forth the net revenue, gross margin and operating
income (loss) of the Company and for each business segment for the periods
shown:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED OCTOBER ENDED JULY
31, 31,
----------------------- ---------------
1992 1993 1994 1994 1995
------ ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Revenue
Surgical........................... $4,185 $4,423 $ 4,952 $3,401 $7,046
Imaging............................ 1,826 1,721 1,680 1,301 1,085
------ ------ ------- ------ ------
Total............................ 6,011 6,144 6,632 4,702 8,131
====== ====== ======= ====== ======
Gross Margin
Surgical........................... 2,519 2,586 3,028 1,981 4,667
Imaging............................ 1,086 1,042 1,170 898 897
------ ------ ------- ------ ------
Total............................ 3,605 3,628 4,198 2,879 5,564
====== ====== ======= ====== ======
Operating Income (Loss)
Surgical........................... 399 333 171 24 1,325
Imaging............................ (708) (790) (1,183) (591) (797)
------ ------ ------- ------ ------
Total............................ (309) (457) (1,431)* (991)* 528
====== ====== ======= ====== ======
</TABLE>
--------
*Includes approximately $420 of acquisition costs not allocated to a
business segment.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1995 WITH THE NINE MONTHS ENDED
JULY 31, 1994
Net Revenue. Net revenue increased 73% to $8,131,000 for the nine months
ended July 31, 1995 from $4,702,000 for the nine months ended July 31, 1994.
Net revenue of the Surgical Business increased 107% to $7,046,000 for the nine
months ended July 31, 1995 from $3,401,000 for the comparable period in the
previous year. These increases were substantially due to increases in sales of
Peri-Strips, which increased to $3,533,000 for the nine months ended July 31,
1995 from $249,000 for the nine months ended July 31, 1994.
Net revenue from sales of the other products in the Tissue-Guard product
line, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased by
80% to $1,193,000 for the nine months ended July 31, 1995 from $664,000 for
the nine months ended July 31, 1994. Approximately 10% of this increase was
due to sales of Dura-Guard, which received marketing clearance from the FDA in
June 1995. The Company believes that the increase in sales of the other
Tissue-Guard products was the result of the Company's heightened visibility in
the surgical community.
14
<PAGE>
Net revenue from sales of Biograft decreased 20% for the nine months ended
July 31, 1995 when compared to the nine months ended July 31, 1994. Biograft
revenue has been decreasing since late fiscal 1993. The Company believes that
the revenue decrease is a result of a trend towards non-surgical intervention
for peripheral vascular obstruction and the higher price of Biograft when
compared to synthetic grafts.
Net revenue from sales of surgical productivity tools (Flo-Rester and the
Bio-Vascular Probe) increased 7% for the nine months ended July 31, 1995 when
compared to the nine months ended July 31, 1994. The Company believes that
sales of these products will not increase materially from current levels in
the foreseeable future.
Net revenue of the Imaging Business decreased 17% to $1,085,000 for the nine
months ended July 31, 1995 from $1,301,000 for the nine months ended July 31,
1994 due primarily to the delayed release of VoxelGeo 2.0, the CogniSeis
revenue sharing agreement, and the Company's decision not to actively pursue
new customers in the microscopy market.
Gross Margin. The gross margin percentage increased to 68% of net revenue
for the nine months ended July 31, 1995 from 61% of net revenue for the nine
months ended July 31, 1994. Gross margin percentages of the Surgical Business
were 66% and 58% for the nine months ended July 31, 1995 and 1994,
respectively. The vast majority of gross margin improvement was due to changes
in product mix as a result of the large volume of Peri-Strips sales, the
spreading of overhead costs over a larger volume of production, and, to a
lesser extent, initial improvement in productivity related to the manufacture
of Peri-Strips. The Company believes that gross margin as a percent of net
revenue is likely to decrease in the short term due to increased overhead
associated with the facility and additional operations and quality assurance
personnel.
Selling, General and Administrative. Selling, general and administrative
expense increased 47% to $3,491,000 for the nine months ended July 31, 1995
from $2,378,000 for the nine months ended July 31, 1994, but decreased as a
percent of net revenue between comparable periods to 43% from 51%. The
increase in expense was attributable entirely to the Surgical Business and the
increases in personnel and related overhead required to support the Company's
revenue growth.
Research and Development. Research and development expense increased 45% to
$1,545,000 for the nine months ended July 31, 1995 from $1,068,000 for the
nine months ended July 31, 1994. The Surgical Business and the Imaging
Business accounted for 31% and 69%, respectively, of these expenditures for
the nine months ended July 31, 1995, as compared to 28% and 72%, respectively,
of these expenditures for the nine months ended July 31, 1994. The majority of
the research and development expense for the Imaging Business was attributable
to advancing the core technology associated with the development of VoxelView.
Developing and manufacturing software is expensive and the investment in
product development often involves a long pay-back cycle. The Company's plans
include continued investment in software development for medical applications
for which significant revenue is not anticipated in the near term. The Company
expects that expenditures for research and development in the Surgical
Business will grow, while those for the Imaging Business will remain at the
current level for the foreseeable future.
Operating Income (Loss). Operating income was $528,000 for the nine months
ended July 31, 1995, compared to an operating loss of $991,000 for the nine
months ended July 31, 1994. All of the operating income in the nine months
ended July 31, 1995 was attributable to the Surgical Business, principally due
to the increased revenue from sales of Peri-Strips. The operating loss
incurred in the nine months ended July 31, 1994 includes one-time acquisition
costs of approximately $420,000 related to the Vital Images transaction.
Other Income and Expense. The Company had net other income of $101,000 in
the nine months ended July 31, 1995. In the nine months ended July 31, 1994,
the Company had net other expense of $380,000 primarily due to capital losses
on an investment in mutual fund shares of the Piper Jaffray Institutional
Government Income Portfolio in which the Company invested in 1994 (the
"Fund"). The Fund invested in various bonds and other obligations issued or
guaranteed as to payment of principal and interest by the United States
Government.
15
<PAGE>
Included in the investments of the Fund were mortgage-related securities and
their derivatives, such as interest-only and principal-only securities and
inverse floating rate securities. During the first quarter of calendar 1994,
the Fund's value declined. The Company closely monitored its investment in the
Fund and held discussions with the Fund's management concerning their recovery
strategy. The Company decided to sell its shares in the Fund when it believed
that any meaningful recovery was no longer possible in a reasonable timeframe,
and as concern about the Fund continued to aggravate the immediate downside
potential. The Company liquidated these mutual fund shares late in fiscal
1994.
Affiliates of the Fund have entered into a settlement agreement with
plaintiffs in certain litigation relating to the Fund. The settlement
agreement has received preliminary approval from the United States District
Court where the litigation is venued, but is subject to acceptance by a large
percentage of the Fund shareholders. The Company would be entitled to
participate in the settlement payment if the settlement agreement is accepted
by Fund shareholders and receives final court approval. The amount and timing
of any such settlement payment to the Company is not yet determinable.
Income Taxes. The Company has recorded a provision for income taxes of
$32,000 for the nine months ended July 31, 1995 representing its estimated
effective income tax rate for 1995. The provision for income taxes for the
nine months ended July 31, 1994 represented alternative minimum taxes. As of
October 31, 1994, the Company had net operating loss ("NOL") carryforwards of
approximately $1,000,000 available to offset income from operations which the
Company now expects to fully utilize in fiscal 1995. The Company also has
research and experimentation tax credit carryforwards. It also has
carryforwards of $500,000 available to offset future capital gains and
$2,400,000 of carryforwards arising from pre-merger losses of Vital Images
available to offset post-merger income of Vital Images if it reaches
profitability. A portion of the pre-merger loss carryforwards that may be used
in any year is restricted due to limitations resulting from the significant
change of ownership. These carryforwards begin to expire in 2005. The deferred
tax assets associated with the pre-merger carryforwards and the capital loss
carryforward have been totally offset by a valuation allowance because of
uncertainty that sufficient taxable income will be generated prior to the
expiration of the carryforwards.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1994 WITH THE YEAR ENDED OCTOBER 31,
1993
Net Revenue. Net revenue increased 8% to $6,632,000 for fiscal 1994 from
$6,144,000 for fiscal 1993. The increase was due entirely to a 12% increase in
revenue of the Surgical Business when comparing these periods. Tissue-Guard
net revenue increased 88% to $1,675,000 for fiscal 1994 from $891,000 for
fiscal 1993. Peri-Strips accounted for 88% of the increase in Tissue-Guard
product line net revenue.
Biograft net revenue decreased 14% for fiscal 1994 when compared to fiscal
1993. The Company believes that this decline was strongly influenced by the
changing health care environment, specifically cost containment, which
prompted surgeons to choose drug therapy more frequently than surgical
intervention in the treatment of peripheral vascular disease. Net revenue of
the surgical productivity tools increased 3% between fiscal 1994 and fiscal
1993.
Net revenue of the Imaging Business decreased 2% between fiscal 1994 and
fiscal 1993. The Company believes that the decrease, which was primarily in
software license revenues, arose from the market's anticipation of VoxelGeo
2.0 and customers' decisions to delay software purchases until the delivery of
this version of the VoxelGeo software, offset by maintenance revenue
increases.
Gross Margin. The gross margin percentage increased to 63% of net revenue
for fiscal 1994 from 59% of net revenue for fiscal 1993. Gross margin
percentages of the Surgical Business were 61% and 58% in fiscal 1994 and
fiscal 1993, respectively. This improvement in the Surgical Business gross
margin was primarily due to the lower average cost of labor associated with
the addition of significant numbers of entry-level production personnel in
response to anticipated sales increases of Peri-Strips. Gross margin
percentages of the Imaging Business were 70% and 60% in fiscal 1994 and 1993,
respectively. The increase in the Imaging Business gross margin percentage was
due to product and service mix.
16
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expense increased 13% to $3,541,000 for fiscal 1994 from $3,126,000 for fiscal
1993 and increased slightly as a percentage of sales to 53% for fiscal 1994
from 51% for fiscal 1993. The increase in expense was primarily attributable
to retention of a Chief Operating Officer in April 1994 and the increased
level of business activity of the Surgical Business.
Research and Development. Research and development expense increased 74% to
$1,669,000 for fiscal 1994 from $959,000 for fiscal 1993 and increased as a
percentage of net revenue to 25% for fiscal 1994 from 16% in fiscal 1993. The
majority of the increase was attributable to advancing the core technology of
the Imaging Business concurrent with the development of VoxelGeo 2.0. In both
fiscal 1994 and fiscal 1993, 25% of research and development expenditures were
for the Surgical Business and 75% were for the Imaging Business.
Acquisition Costs. The costs of the acquisition of Vital Images, which were
all incurred in fiscal 1994, were $420,000. These one-time costs, which
accounted for 29% of the operating loss incurred by the Company in fiscal
1994, were for legal, accounting, and other professional fees.
Operating Income (Loss). The Company had operating losses of $1,431,000 and
$457,000 in fiscal 1994 and fiscal 1993, respectively. The Surgical Business
had operating income of $171,000 and $333,000 and the Imaging Business had
operating losses of $1,183,000 and $790,000 for fiscal 1994 and fiscal 1993,
respectively. The increase in the Company's operating loss arose primarily
from the increase in research and development expenditures and the cost of the
acquisition of Vital Images.
Other Income and Expense. During fiscal 1994, the Company invested some of
its excess cash in the Fund. The Company sold its investment in the Fund
during September and October of 1994 and realized a capital loss of $610,000
which resulted in net other expense of $438,000 in that fiscal year.
Income Taxes. The tax provisions recorded in fiscal 1994 and fiscal 1993
represented alternative minimum taxes due to limitations in the use of NOL
carryforwards and state minimum taxes.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1993 WITH THE YEAR ENDED OCTOBER 31,
1992
Net Revenue. Net revenue increased 2% to $6,144,000 for fiscal 1993 from
$6,011,000 for fiscal 1992. All of the increase was attributable to the
Surgical Business, and primarily to increased revenue from Biograft and Supple
Peri-Guard. Net revenue from the Surgical Business increased by 6% and net
revenue from the Imaging Business decreased by 6%. The increase in Surgical
Business net revenue was solely as a result of increases in unit sales
volumes, as average selling prices for all Surgical Business products
effectively decreased due to a greater number of sales made to distributors at
wholesale prices.
Supple Peri-Guard, an alternative soft-tissue patch developed by the
Company, was introduced to international markets at the beginning of fiscal
1992 and to the domestic market at the beginning of fiscal 1993. Net revenue
from this product increased 296% between fiscal 1992 and fiscal 1993.
Net revenue from sales of Biograft increased 23% from fiscal 1992 to fiscal
1993, with large increases in the first part of 1993 relative to 1992, offset
by decreasing revenue and unit sales in the latter half of 1993 as proposed
health care reform and cost concerns accelerated. Net revenue from surgical
productivity tools decreased 7% between fiscal 1992 and fiscal 1993.
The 6% decrease in Imaging Business net revenue between fiscal 1992 and
fiscal 1993 was primarily the result of an increase in maintenance revenue
which was offset by a decrease in software license revenue. The increase in
maintenance revenue was due to maintenance contracts from an increasing
installed base of software.
Gross Margin. Gross margin percentages of both the Surgical Business and
Imaging Business were relatively flat for fiscal 1993 and fiscal 1992.
17
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expense decreased 7% to $3,126,000 for fiscal 1993 from $3,349,000 for fiscal
1992, and decreased as a percentage of net revenue to 51% for fiscal 1993 from
56% for fiscal 1992, due to reduced staffing levels in both business segments.
Research and Development. Research and development expense increased 70% to
$959,000 for fiscal 1993 from $565,000 for fiscal 1992 and was 16% and 9% of
net revenue for those respective years. Research and development expense of
the Surgical Business increased to $240,000 for fiscal 1993 from $46,000 for
fiscal 1992. This increase was the early result of a strategic decision to
develop a full research and development capability for the Surgical Business.
Research and development expense of the Imaging Business increased 39% to
$719,000 for fiscal 1993 from $519,000 for fiscal 1992.
Operating Income (Loss). The Company had operating losses of $457,000 and
$309,000 in fiscal 1993 and fiscal 1992, respectively. The Surgical Business
had operating income of $333,000 and $399,000 and the Imaging Business had
operating losses of $790,000 and $708,000 in fiscal 1993 and fiscal 1992,
respectively.
Other Income and Expense. During fiscal 1993, the Company made its first
investment in the Fund. The Company sold its investment in the Fund in fiscal
1993, realizing a capital gain of $101,000. Dividend and capital gain income
on this investment contributed significantly to the Company's net other income
of $319,000 in fiscal 1993. In fiscal 1992, the Company had net other income
of $165,000.
Income Taxes. The tax provisions recorded in fiscal 1993 and fiscal 1992
represented alternative minimum taxes due to limitations in the use of NOL
carryforwards and state minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities balances
decreased by $1,497,000 to $2,122,000 at July 31, 1995 from $3,619,000 at
October 31, 1994. Working capital at July 31, 1995 was $5,121,000, decreasing
from $5,236,000 at October 31, 1994.
Historically, the cash needs of the Company have been met by cash generated
from operations and investments. During the nine months ended July 31, 1995,
the Company used $1,541,000 to increase levels of inventories and accounts
receivable associated with the growth in Surgical Business revenue. The
Company made capital expenditures during this period primarily for the
Surgical Business totaling $1,297,000, which included $246,000 for
manufacturing equipment and modular workspace, $300,000 for computer hardware
and software, and $948,000 for leasehold improvements, of which $300,000 was
refunded and an additional $300,000 is refundable upon certification of
completion of the new facility construction. The Company anticipates making
capital expenditures of less than $400,000 in the fourth quarter of fiscal
1995. The Company currently has no commitments or plans for material capital
expenditures in fiscal 1996. Investments in marketable securities which
matured provided $1,271,000 during the nine months ended July 31, 1995.
The Company believes its present level of cash and cash equivalents,
together with the proceeds of this Offering, will be sufficient to satisfy the
Company's cash requirements for the foreseeable future.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations or financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates 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.
18
<PAGE>
QUARTERLY OPERATING DATA
The following table sets forth certain unaudited operating data for the four
quarters in fiscal 1993 and 1994 and the first three quarters of fiscal 1995.
In the opinion of management, the data includes all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the information
set forth therein.
<TABLE>
<CAPTION>
1993 1994 1995
------------------------------- ------------------------------- -----------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $1,645 $1,633 $1,478 $1,388 $1,569 $1,574 $1,559 $1,930 $2,126 $2,817 $3,189
Gross margin............ 959 992 871 806 925 1,006 947 1,320 1,445 1,928 2,191
Operating income (loss). (71) (102) (67) (217) (284) (299) (408) (440) (153) 206 475
Net income (loss)....... 17 (51) (28) (96) (243) (250) (881) (506) (115) 238 474
Net income (loss) per
share.................. $ .00 $(.01) $(.00) $(.01) $(.03) $(.03) $(.12) $(.07) $(.02) $ .03 $ .06
</TABLE>
The first through third quarters of 1994 were impacted by acquisition costs
of $420,000, while the third and fourth quarters of 1994 were impacted due to
non-operating losses of $539,000 and $71,000, respectively, arising from the
Company's investment in the Fund. The Company expects to receive a one-time
license fee payment of $1,500,000 in the fourth quarter of fiscal 1995 as a
result of its license of VoxelGeo to CogniSeis for gas and oil exploration
applications. With this exclusive license, the Company will no longer be
receiving revenue from sales of VoxelGeo until royalty payments, if any, under
the licensing agreement begin, which are anticipated to begin in calendar
1997. In addition, the Company does not anticipate that expenses of the
Imaging Business will decrease proportionally to the decrease in revenue as
the Company intends to continue to invest in VoxelView. As a result, operating
data in future consecutive and comparable quarters may not compare favorably
to the fourth quarter of fiscal 1995.
19
<PAGE>
BUSINESS
GENERAL
The Company's operations include a surgical business ("Surgical Business")
and a medical imaging software business ("Medical Imaging Software Business").
The Surgical Business has constituted and is expected to constitute the
majority of the Company's net revenue and earnings, if any, for the
foreseeable future.
In its Surgical Business, the Company develops, manufactures and markets
proprietary specialty medical products for use in thoracic, cardiac, neuro and
vascular surgery. Tissue products offered by the Company include the Tissue-
Guard product line and the Biograft peripheral vascular graft. The Tissue-
Guard product line includes various configurations of bovine pericardium
processed using the Company's proprietary tissue-fixation technologies. These
products are designed to be used in a variety of surgical procedures for
reinforcing, reconstructing and repairing tissue and preventing leaks of air,
blood and other body fluids. Peri-Strips was introduced in 1994 and has been
responsible for the Company's revenue growth in fiscal 1994 and fiscal 1995.
The Biograft peripheral vascular graft is used to bypass blocked blood vessels
and is produced from modified human umbilical veins. The Surgical Business
also markets and sells two surgical productivity tools used in cardiac and
vascular surgery.
In May 1994, the Company acquired Vital Images, a company involved in the
development, marketing and support of certain software products for three-
dimensional ("3-D") visualization and analysis of image data. The Company
recently granted an exclusive, perpetual source code license for its
geoscience imaging technology and is focusing its imaging technology
exclusively on medical applications. The Company developed VoxelView, high
speed volume imaging software, which has been licensed to approximately 70
medical and research institutions as a research tool. The Medical Imaging
Software Business is currently focusing its efforts on developing an improved
version of VoxelView intended to assist physicians in clinical diagnosis,
surgical planning and patient screening.
STRATEGY
The Company's long-term business strategy is to leverage its proprietary
technologies in tissue processing and bio-materials to become a leader in
implantable tissue products used in a wide variety of surgical specialties and
procedures. Additionally, the Company plans to further develop its Medical
Imaging Software Business to provide innovative 3-D visualization software for
the purposes of clinical diagnosis, surgical planning and patient screening.
The following are key elements of the Company's business strategy:
. Broaden Surgical Product Line. The Company will continue to expand its
Tissue-Guard product line by leveraging its proprietary tissue-processing
technologies to create new and unique product configurations for specific
surgical procedures in which tissue must be repaired or the leakage of
air, blood or other body fluids creates patient risk.
. Emphasize Clinical Advantage. The Company focuses on developing products
which enable surgical procedures to be more clinically effective by
reducing patient risk and improving surgical outcomes.
. Develop Physician Relationships. The Company's marketing and sales
strategy emphasizes building strong working relationships with surgeons,
radiologists and other medical personnel in order to assess and satisfy
their needs for products and services. The Company will continue to
sponsor both domestic and international training sessions to educate
physicians in the use of the Company's products. The Company expects that
as these relationships develop and as use of the Company's Tissue-Guard
products becomes more widespread, surgeons will develop additional uses
for these products.
. Commercialize Medical Imaging Technology. The Company intends to use its
research and development capability and its current presence in leading
medical teaching institutions such as Duke University and Stanford
Medical Center to further develop and permit commercialization of its 3-D
visualization software for clinical diagnosis, surgical planning and
patient screening.
20
<PAGE>
. Reduce Production Costs. The Company seeks to design and develop cost
competitive products that have significant clinical advantages. In
addition, the Company will continue to improve its manufacturing
processes to achieve decreases in per unit production cost while
maintaining the highest level of quality assurance and physician
satisfaction.
. Increase International Market Presence. The Company intends to increase
international physician training and marketing activities to promote
acceptance of its core technologies in markets outside the United States.
The Company also expects to expand and strengthen its distribution
network to address additional foreign markets.
SURGICAL BUSINESS
MARKETS AND MEDICAL NEED
While the trend in medicine is toward less invasive surgical procedures,
substantially all surgical procedures, whether invasive or not, involve the
cutting of tissue to access, repair or remove tissue at or from the surgical
site. Tissue which has been cut must either be repaired or replaced so that it
can heal properly. Proper repair of incised tissue is dependent upon a number
of variables, including whether (i) the repair must be leak-proof, either for
air, blood or other body fluids, (ii) the incised tissue is under tension or
subject to shrinkage such that additional tissue is needed to bridge the two
tissue surfaces to be repaired, and (iii) the tissue subject to the repair
must be strengthened to accommodate the natural stresses of the human body. In
certain instances, suturing of two tissue surfaces will be effective. In other
instances, however, a patching material, whether autologous (from the body of
the patient), synthetic (from man-made materials) or tissue-based (from
processed living tissue), may be needed. The Company's tissue-based products
are designed to fulfill the medical need for repairing human tissue and
preventing leaks at the surgical site in certain existing surgical procedures,
as well as offering a potential medium for techniques and procedures currently
being developed.
The Company's core competency is the development and manufacture of tissue-
based implantable medical products for use by surgeons in various surgical
procedures where reinforcing, reconstructing and repairing tissue and
preventing leaks of air, blood or other body fluids is necessary for the
achievement of a favorable outcome. Historically, surgeons primarily used
autologous tissue in situations where tissue repair was necessary. Harvesting
the autologous material, which is still performed in many circumstances,
necessarily requires that the surgeon cut into another part of the patient's
body. The second surgical site increases the cost of the procedure and
lengthens the time the patient is under anesthesia, thereby increasing the
risk of complication and resulting in additional pain and recovery time for
the patient. To the extent a surgeon is confident that the performance of a
readily available medical product, whether tissue-based or synthetic, is equal
to or is better than the patient's own tissue, the Company believes the
surgeon will choose the tissue-based or synthetic product to avoid a second
surgical site as a means of reducing costs and improving outcomes.
Surgical procedures that are enabled or enhanced by the Company's tissue-
based products include lung volume reduction, craniotomy, carotid
endarterectomy and lower limb vascular reconstruction. Sales of the Company's
products used in these procedures accounted for 50% of the Company's net
revenue in fiscal 1994 and 70% of the Company's net revenue in the nine months
ended July 31, 1995.
Lung Volume Reduction (LVR) Surgery. Emphysema, most often caused by
cigarette smoking, is a progressive disease of the lungs characterized by air-
filled expansions or pocket-like blisters in the tissue of the lungs. Because
the air in the lungs cannot be fully expelled, the effort to inhale fresh air
becomes increasingly difficult, pushing the lung walls farther out and causing
the lungs to expand and lose their elasticity. The diaphragm, the major muscle
used for breathing, becomes flattened and loses its ability to function. As
the disease advances and patient health is progressively compromised,
breathing becomes more difficult. Persons with late-stage emphysema eventually
become incapable of even minor physical activity and often become dependent
upon continuous supplemental oxygen even when at rest. As a result, late-stage
emphysema can significantly reduce mobility, leaving individuals with late-
stage emphysema unable to care for themselves or
21
<PAGE>
engage in normal daily activities. Because of the weakened respiratory
condition of these patients, common illnesses involving pulmonary functions
can result in emergency room visits and hospitalization.
Non-surgical therapies for patients suffering from emphysema include (i)
bronchodilators (pills and inhalers), to open up airways to temporarily
relieve wheezing or shortness of breath, (ii) steroids, to reduce inflammation
in the airways, (iii) pulmonary rehabilitation, to increase endurance, and
(iv) oxygen supplements to help decrease the feeling of shortness of breath.
Each of these non-surgical therapies, however, offers only temporary relief
and each becomes less effective as the disease progresses. Data gathered by
the Company indicates that the cost of medication and oxygen supplements for
late-stage emphysema patients can range from $5,000 to $8,000 annually. In
addition, for persons suffering the effects of late-stage emphysema, the need
for periodic emergency room care can increase costs substantially.
Lung transplantation is the only known cure for emphysema. A lung transplant
surgical procedure, however, costs up to $250,000 and is typically used only
as a last resort because of the high degree of risk associated with the
procedure, an inadequate supply of donor lungs, and the requirement that the
patient receive anti-rejection drugs for the remainder of his or her lifetime.
Only 688 lung transplants were performed in the United States in 1994.
In the 1950s, a surgical procedure was developed to treat the symptoms of
late-stage emphysema by removing damaged lung tissue. Due to air leaks around
the suture lines, these experimental LVR procedures resulted in a high
mortality rate and long, painful post-surgical recovery periods. As a result,
the LVR procedure was abandoned. In the late 1980s, various surgeons began to
develop specialized techniques for accessing and resecting the lung. The use
of surgical staples was introduced to perform the LVR procedure more quickly,
a particularly important consideration in light of the debilitated condition
of the patients requiring the surgery. Despite many advances in the LVR
procedure, multiple small air leaks caused by the staples in the lung
continued to limit the effectiveness of the procedure. In 1994, Dr. Joel
Cooper, a pioneer in lung transplant surgery, modified the LVR procedure using
strips of Supple Peri-Guard to reinforce the staple line to prevent air
leakage around the staples.
During LVR surgery, the surgeon collapses one lung, while allowing the
patient to continue breathing with the other lung with supplemental oxygen.
Using a stapling device, the surgeon removes sections of damaged tissue,
typically 20% to 30% of each lung. The Company's Peri-Strips, manufactured
from processed bovine pericardium, are used to strengthen these staple lines
and prevent air leakage. By removing the most diseased tissue, the remaining
lung tissue has room to expand, improving breathing capacity by, among other
things, enabling the muscles used in breathing to regain their function and
allowing the rib cage and diaphragm to return to their normal size. The
Company estimates that the current cost of an LVR surgical procedure ranges
from $30,000 to $45,000 per procedure.
The American Lung Association estimates that in 1992 there were
approximately 1.9 million Americans suffering from emphysema. The LVR
procedure, however, is currently only being performed on a small portion of
these patients who have late-stage emphysema and who meet certain criteria
established by the attending surgeons. Currently, most surgeons require that
an LVR candidate be less than 75 years old, quit smoking at least six months
prior to LVR surgery, have no documented history of heart disease or previous
lung surgery and have no other major diseases. In addition, most surgeons
performing the LVR procedure require that candidates have documented lung
function testing and chest x-rays detailing the severity of the condition. The
Company believes that the patient selection criteria will continue to be
refined as surgeons become more familiar with the LVR procedure and as long-
term clinical results become available.
While LVR surgery is not a cure for emphysema, the results from the
procedure to date are encouraging based on information available to the
Company. Generally, this information suggests that patients undergoing the
procedure have reduced shortness of breath, improved exercise tolerance and
improved quality of life. However, LVR surgery was only recently re-introduced
into the United States. As a result, the number of patients who have undergone
the procedure and for whom a clinically acceptable post-operative period of
evaluation has elapsed is still relatively small. Similarly, the number of
physicians performing the procedure and from whom
22
<PAGE>
data and reporting is available is small. Accordingly, there presently does
not exist a statistically significant body of clinical data from which to draw
conclusions concerning the efficacy and long-term outcomes associated with the
LVR procedure. The Company believes that patients who have received the LVR
procedure may require an additional year or more of follow-up examination
before the procedure can be properly evaluated by the medical community.
Craniotomy. Craniotomies (surgical operations involving the brain and skull)
are typically performed to treat various brain conditions, such as tumors,
aneurysms, blood clots, head injuries and abscesses. To access the brain, the
surgeon is required to cut through several of the protective layers
surrounding the brain. The dura, the fibrous protective layer below the skull,
protects the brain and spinal cord from bacterial infection and trauma and
provides a fluid tight seal. Once the surgeon has cut through the scalp and
the skull, the dura must be cut with a scalpel or scissors and resected to
expose the brain.
After the specific brain condition has been treated by the surgeon, the dura
often must be closed to prevent cerebral spinal fluid leakage. While the dura
is often closed with direct suture, surgeons who consider the prevention of
fluid leakage to be critical to the success of the operation will use a dural
patch. Dural patches currently available are either autologous or are produced
from processed cadaver tissue or bovine pericardium. The Company's Dura-Guard
Dural Repair Patch is designed to be sewn to the dura to close the incision by
fusing to the native dura with little or no adhesion (an abnormal union
between two tissue surfaces not intended to be joined) to the underlying brain
cortex.
The Company estimates that in the United States approximately 100,000
cranial operations were performed in 1994. Whether a dural patch is used in
such operations is subject to surgical conditions and surgeon discretion.
Dural patching is most often used when the dura shrinks after incision such
that sutures alone may not provide adequate closure.
Carotid Endarterectomy. Stroke is the third leading cause of death in the
United States with an estimated 500,000 new cases per year. The build-up of
atherosclerotic plaque (fat deposits with a proliferation of fibrous
connective cells along the artery walls) in the carotid arteries (the
principal arteries located in the neck that supply blood to the brain)
increases the risk of stroke. A substantial portion of strokes is caused by a
fragment of atherosclerotic plaque breaking away from the inner wall of the
carotid artery and becoming lodged in an artery in the brain.
Drug therapy is often prescribed to treat the early indications of
atherosclerotic plaque build-up. If the condition progresses to a point where
drug therapy is not effective, surgical intervention may be required. Carotid
endarterectomy is a surgical procedure used to remove atherosclerotic plaque
build-up in the carotid artery. The endarterectomy procedure begins with an
incision in the internal carotid artery. A temporary shunt may be inserted to
maintain blood flow to the brain during the surgery. Once the artery is
opened, the plaque and inner layer of the artery are carefully removed, and
the incised artery must be repaired. Although the artery often can be closed
without a patch, use of an autologous or prosthetic patch is often suggested
to expand the artery, encouraging greater blood flow. In addition, certain
patients require patching due to the small size of their carotid arteries, or
in some patients with a normal carotid artery diameter, a patch is used to
decrease the incidence of post-operative stenosis or occlusion.
While the Company estimates that in the United States approximately 100,000
carotid endarterectomy procedures were performed in 1994, the use of a
patching material in such procedures is subject to surgeon discretion. Once a
surgeon determines a vascular patch is necessary or desirable, the surgeon has
additional discretion in determining the type of patching material to use.
Characteristics of an effective vascular patch include the ability to imitate
human tissue, to exhibit good blood flow characteristics and to reapproximate
around sutures to prevent blood leaks. The primary patching materials include
autologous tissue, synthetic patches made out of polytetraflurothylene
("PTFE"), silicone fabric or tissue-based patches made out of bovine
pericardium, such as Vascu-Guard.
Lower Limb Vascular Reconstruction. Certain diseases, such as diabetes, can
cause a restriction or occlusion in the arteries which provide blood to the
legs. If left untreated, insufficient blood flow can ultimately result in
23
<PAGE>
the need for amputation. If drug therapy is not deemed an effective treatment
based upon the severity of the restriction or blockage, the use of a graft in
peripheral vascular reconstructive surgery may be needed. In this type of
surgical procedure, the surgeon can bypass the blocked artery to regain blood
circulation, thereby saving the affected limb. Diabetics, in particular, are
often at risk for amputation of a lower limb due to insufficient blood flow in
the femoral artery in the thigh. By implanting a graft from the upper portion
of the femoral artery to either the lower femoral artery or to the popliteal
artery below the knee, the surgeon is able to increase blood flow below the
site of the restriction or blockage. Long-term patency (openness), and a
thrombo-resistant surface that provides smooth blood flow are essential
qualities of an effective graft.
Saphenous veins (autologous veins from the leg) typically provide the most
effective grafting material. In many instances, however, a suitable saphenous
vein may be unavailable in sufficient quantity or quality, and a substitute
graft must be used. The primary alternative substitute grafts involve
synthetic grafts made from PTFE or bio-synthetic materials or tissue-based
grafts, such as Biograft. The Company estimates that in the United States
approximately 55,000 lower limb vascular reconstructions were performed in
1994.
PRODUCTS
The following table summarizes the Company's Surgical Business product lines
and primary products, the procedures in which such products are used and the
type of regulatory clearance obtained for such products:
<TABLE>
<CAPTION>
REPRESENTATIVE REGULATORY
PRODUCT LINE PRODUCT APPLICATION PROCEDURE CLEARANCE
------------ ------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Tissue-Guard
Peri-Strips Staple line reinforcement Lung volume reduction/lung
resection 510(k)
Dura-Guard Dural repair patch Craniotomy 510(k)
Vascu-Guard Peripheral vascular patch Carotid Endarterectomy 510(k)
Supple Peri- General soft tissue patch Various surgical procedures 510(k)
Guard
Peri-Guard General soft tissue patch Various surgical procedures 510(k)
Biograft
Biograft Peripheral vascular bypass Lower limb vascular
graft reconstruction PMA
Surgical
Productivity Tools
Bio-Vascular Locator of arterial
Probe blockages Various surgical bypass procedures 510(k)
Flo-Rester Internal vessel occluder Coronary artery bypass graft surgery 510(k)
</TABLE>
The following table summarizes the net revenue contributed by the Company's
primary Surgical Business products and various product lines for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED JULY
OCTOBER 31, 31,
PRODUCT/ ------------- -------------
PRODUCT LINE 1993 1994 1994 1995
------------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Peri-Strips......................................... $ -- $ 685 $ 249 $3,533
Tissue-Guard Products (excluding Peri-Strips)....... 891 990 664 1,193
Biograft............................................ 1,770 1,525 1,171 943
Surgical Productivity Tools......................... 1,646 1,700 1,276 1,371
</TABLE>
24
<PAGE>
TISSUE-GUARD PRODUCT LINE. The Company's Tissue-Guard products are all
produced from bovine pericardium. Many of the product characteristics and
competitive advantages of this product line are derived from the collagen
configuration of the bovine pericardium. Collagen, which is a fibrous protein
found in all multi-cellular animals, makes the pericardium durable and
provides superior fluid interface properties, similar to autologous tissue.
These characteristics allow for effective host tissue incorporation. Host
cells deposit a collagen matrix on the surface of the pericardial product,
which helps the Tissue-Guard product integrate into the host tissue and which
the Company believes enhances the long-term tensile strength (the maximum
stress a material subjected to a stretching load can withstand without
tearing) of all the products in the Tissue-Guard product line.
The Company processes the bovine pericardium using proprietary tissue-
fixation technologies. The tissue is treated with glutaraldehyde and other
proprietary chemical treatments to prevent degradation of the tissue and to
render it biologically compatible with the host tissue. As a result of the
Company's proprietary tissue-fixation technologies, the Tissue-Guard products
have a shelf life of three years and resist infection, which potentially
reduces hospital recovery time and the need for drugs and future surgical
intervention. In addition, according to studies commissioned by the Company,
the tissue-fixation technologies used by the Company reduce the level of
residual glutaraldehyde remaining in the processed tissue to less than six
parts per million, resulting in a lower incidence of host tissue inflammatory
response and promoting host tissue incorporation similar to the body's natural
healing process.
Surgeons have indicated that different pericardial patch characteristics are
useful in different surgical procedures. Accordingly, depending on the
particular tissue-fixation technology used by the Company, the bovine
pericardium is processed into either Supple Peri-Guard or Peri-Guard. While
the raw material used is the same, Supple Peri-Guard has greater elasticity
and flexibility than Peri-Guard which allows for greater conformity to the
surgical site. The Company's Peri-Guard and Supple Peri-Guard products are
produced in square or rectangular sheets of different sizes, ranging from 4 cm
X 4 cm to 12 cm X 25 cm, for use as a multi-purpose material designed for
reinforcing, reconstructing and repairing tissue and preventing leaks of air,
blood and other body fluids. Each of such products has received 510(k)
clearance from the FDA as a general soft-tissue patch.
The products in the Tissue-Guard product line described below are special
configurations of Supple Peri-Guard designed to enable specific surgical
procedures.
PERI-STRIPS. Peri-Strips, staple line reinforcements, are currently used
primarily in LVR surgery but are also used for lobectomy (removal of a lobe),
excision/destruction of a lesion and segmental resection of the lung. The key
competitive features of Peri-Strips include the following:
. Reapproximation. Due to the elastic-like nature of the collagen fibers in
the tissue, Peri-Strips reapproximate (close around) surgical staples to
prevent pulmonary air leaks at the staple site.
. Prevents Enlargement. The elasticity of Peri-Strips prevents staple holes
from enlarging, which could lead to additional air leaks and require
additional surgery.
. Reinforcement. The use of Peri-Strips strengthens the entire staple line,
which makes it more durable and less likely to tear. Also, Peri-Strips
are thin enough to allow for staple lines to be overlapped, which is
often required during the LVR procedure.
. Sleeve Configuration. The sleeve configuration of Peri-Strips is
customized to fit disposable, reusable and endoscopic staplers of varying
sizes and produced by different manufacturers. The sleeve configuration
allows for greater ease of use and reduced surgical time resulting in
lower costs.
The number of Peri-Strips used in an LVR procedure is dependent upon the
amount of lung resected and the preferred technique of the surgeon performing
the procedure. In the typical LVR procedure in which 20% to 30% of each lung
is removed, the surgeon will have multiple staple firings using one unit of
Peri-Strips per firing. As a result, the Company estimates that net revenue to
the Company is approximately $1,500 per LVR procedure.
25
<PAGE>
DURA-GUARD. Dura-Guard, a dural repair patch, is primarily used in
craniotomy procedures when the dura must be repaired and suturing without a
patch is not deemed sufficient. Dura-Guard offers advantages over competitive
dural patches produced from autologous or cadaver tissue. Harvesting
autologous tissue necessarily involves a second surgical site, thereby
increasing costs and recovery time. Cadaver tissue is subject to rigorous
tissue bank regulations, which could impact upon the availability of such
tissue, and is considered by some to present a greater risk of disease
transmission than bovine pericardium. Certain other competitive advantages of
Dura-Guard relate to the specific benefits produced by the physical properties
of Dura-Guard in connection with the craniotomy procedure. Observations in the
course of subsequent surgical procedures on patients receiving Dura-Guard
patches have shown that there is little or no adhesion formation on the Dura-
Guard surface that faces the cerebral cortex, a complicating factor following
any cranial surgery. In addition, Company commissioned studies have shown that
fibrous bone cells invade the Dura-Guard surface facing the cranium, as they
do the human dura, inviting good host tissue incorporation. The collagen
configuration of the processed bovine pericardium in Dura-Guard reapproximates
around the sutures used to affix the patch, thereby providing a barrier
between the skull and the tissue layers underlying the dura and preventing the
leakage of cerebrospinal fluid. To date, synthetic materials have been unable
to perform as effective dura substitutes and have been associated with late
subdural hematoma formation (bleeding between the dura and the brain).
VASCU-GUARD. Vascu-Guard, a vascular repair patch, is primarily used in
carotid endarterectomy procedures when the carotid artery must be repaired and
closing the vessel without a patch is not deemed sufficient. Vascu-Guard
offers advantages over competitive carotid artery repair patches produced from
autologous tissue or synthetics. The use of autologous tissue necessarily
involves a second surgical site and results in increased costs and additional
recovery time. Synthetic patches, which lack the collagen configuration of
tissue, do not reapproximate around sutures as does the Vascu-Guard product,
thereby increasing the risk of sutureline bleeding and resulting in longer
operating times. In addition, unlike synthetic patches, the physical
attributes of Vascu-Guard imitate human tissue and certain characteristics
associated with human tissue. Specifically, Company commissioned studies have
shown that, once healed, Vascu-Guard supports endothelialization (growth of a
cell layer normally lining the interior of blood vessels) and its non-
thrombogenic blood flow surface imitates the blood flow characteristics of
autologous vessels. In addition, its pulsatility (ability to reflect movement
signifying the rhythmic pumping of the heart) allows the surgeon to readily
verify normal blood flow after implantation.
BIOGRAFT. Biograft, a peripheral vascular graft manufactured from human
umbilical veins, is indicated for use in lower limb vascular reconstructions
when a saphenous vein is not available. Biograft offers advantages over
competitive vein grafts produced from synthetics, like PTFE, due to its
thrombo-resistant surface which provides smooth blood flow and minimizes
turbulence and risk of occlusion. Other competitive advantages of Biograft
include its long-term patency and its similarity to an autologous blood
vessel, minimizing intimal hyperplasia (a build up of cells on the interior of
the blood vessel which results in restricted blood flow). In addition, a
knitted and supportive Dacron mesh is placed around the graft, which allows
for easier handling and promotes tissue integration for strength and
stability.
SURGICAL PRODUCTIVITY TOOLS. The Company's Flo-Rester products are vessel
occluders manufactured from medical grade silicone. The Flo-Rester products
are designed to interrupt blood flow in arteries and to stent (hold open) them
during surgery, thereby facilitating the suturing together of vessels. These
products are primarily used during coronary artery bypass graft surgeries in
which blood is routed past the heart through a heart-lung bypass machine in
order to keep the heart free of blood during surgery. During such procedures,
incidental blood flow obstructs the surgeon's view of the operative site and
interferes with precise suturing. Flo-Rester consists of a flexible shaft with
small bulbs at each end that are inserted into the blood vessel at the point
where the artery bypass is sutured to the artery to stop the blood flow.
Competitive procedures involve external occlusion through the use of clamps,
snares or tapes. The Bio-Vascular Probe is a flexible shaft with varying sizes
of bulbous tips on either end. Surgeons use the Bio-Vascular Probe to locate
occlusions or blockages in arteries and to ascertain the blood flow
characteristics of arteries. The Bio-Vascular Probe is inserted and fed into
an artery. When the tip of the probe meets resistance, the surgeon is able to
identify the exact location of the occlusion. The Bio-Vascular Probe is then
extracted and a bypass is completed below the occlusion. In addition, the
Probe can be
26
<PAGE>
used to atraumatically lift the edge of the incision to assist the surgeon in
accurately placing sutures, which can improve the functioning of bypass
grafts.
RESEARCH AND DEVELOPMENT
The Company generally allocates its research and development resources among
three broad functions in its Surgical Business: supporting current products
through training of Company personnel and writing and publishing research
papers on existing products; developing product line extensions by improving
current products or developing new applications for current products; and
developing new products for surgical uses that utilize the Company's
proprietary technologies and core competencies in tissue processing and bio-
materials.
As an integral part of both its research and development and sales and
marketing strategies, the Company strives to involve its surgeon-customers to
a large extent in its product development activities. The Company consults
with selected surgeons frequently as to market needs and assessments of
products under development. The Company believes that this practice allows it
to receive surgeon assessments of products in development at an early stage.
The Company's Surgical Business research and development staff currently
consists of three scientists and two technicians. The Surgical Business also
expands its research and development activities through the use of external
consultants and research staff and facilities at research centers and
hospitals on an as-needed basis. With a portion of the proceeds of this
Offering, the Company expects to add additional personnel to its Surgical
Business research and development staff.
MARKETING
The sales and marketing strategy of the Surgical Business includes
developing and maintaining a close working relationship with the hospitals and
surgeons which purchase and use the Company's products in order to assess and
satisfy their needs. The Company's current primary marketing focus is
assisting in the education of surgeons in the use of Peri-Strips in LVR
surgery through sponsorship of workshops and training programs. These
workshops and training sessions are being conducted in the United States,
Canada and certain European and Far Eastern countries. The Company estimates
that approximately 450 surgeons will have been trained in LVR surgery by the
end of fiscal 1995. The Company also sponsors surgeon workshops and training
programs in the use of Biograft.
The Company's sales and marketing strategy is also designed to ensure that
the Company has an innovative "first in the mind of the customer" focus that
results in timely and effective marketing programs and new product
introductions. These programs include surgical trade shows, support of the
presentation of clinical data and new product information by key physicians,
limited direct-mail campaigns and the development of strategic physician
alliances and utilization of the Company's scientific advisory boards. The
Company believes these efforts to be cost effective in producing awareness of,
and loyalty to, the Company's products.
The Company's Surgical Business products are sold to hospitals and surgeons
worldwide. For the fiscal years ended October 31, 1992, 1993 and 1994 and the
nine months ended July 31, 1995, approximately 31%, 33%, 30% and 19% of the
Company's Surgical Business net revenue, respectively, were to international
markets. The decrease in the percent of Surgical Business net revenue
attributed to international markets during the first nine months of fiscal
1995 was due to increases of sales of Peri-Strips in the United States. The
majority of the Company's Surgical Business international sales are in Europe.
In the United States, the Company sells its Surgical Business products
through a combination of 14 distributors and independent sales representatives
managed by the Surgical Business' two regional sales managers. To further
strengthen the direct relationship between the Company and the end users of
its products, the Company requires distributors to provide the Company with
the names and addresses of such end users and the Company ships products
directly to end users for a limited period of time when there is a new product
27
<PAGE>
application. In addition to strengthening customer relationships, this
practice provides the Company with some protection in the event a distributor
is terminated and resists providing the Company with customer lists.
Internationally, the Company's Surgical Business products are sold through
29 distributors. In some situations, sales in a country may occur through more
than one distributor due to distributors' varying market strengths and focus.
In the fiscal years 1992 and 1994, the Surgical Business had no single
customer or distributor who accounted for 10% or more of the Surgical
Business' gross revenue. In fiscal 1993, one domestic distributor accounted
for 11% of the Surgical Business' gross revenue. In the nine months ended July
31, 1995 three domestic distributors accounted for an aggregate of 46.6% of
the Surgical Business' gross revenue, with each of such distributors
accounting for in excess of 10% of the Surgical Business' gross revenue for
the period.
The Company currently has written agreements with 19 of its domestic and
international independent sales representatives and distributors. These
agreements generally impose limited geographic exclusivity and minimum
purchase obligations on the Company's independent sales representatives and
distributors. However, significant overlap occurs in many of the Company's
international distribution agreements. These agreements are typically
terminable upon breach of the agreement by the distributor, including breach
of the minimum sales obligations imposed by the agreement, as well as certain
extraordinary events.
The Surgical Business' marketing and sales department and its national and
international distribution network is managed by the Vice President of
Marketing and Sales. The Surgical Business' marketing and sales department
currently consists of 15 employees. These employees include domestic regional
and international sales managers, product managers and customer service
personnel. The Company intends to build the Surgical Business' marketing and
sales staff during fiscal 1996.
COMPETITION
The Company competes primarily on the basis of product performance, service
and price. The Company believes that product performance is the single most
important factor in selling any of its products and develops and produces its
products accordingly. The surgical products market in which the Company
competes is characterized by intense competition. This market is dominated by
established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company.
Many of these competitors offer broader product lines within the Company's
specific product market, particularly in the Company's surgical tool product
markets and/or in the general field of medical devices and supplies. Broad
product lines give many of the Company's competitors the ability to negotiate
exclusive, long-term medical device supply contracts and, consequently, the
ability to offer comprehensive pricing for their products, including those
that compete with the Company's products. By offering a broader product line
in the general field of medical devices and supplies, competitors may also
have a significant advantage in marketing competing products to group
purchasing organizations, health maintenance organizations and other managed
care organizations that increasingly seek to reduce costs through
centralization of purchasing functions.
The Company is not aware of any tissue or synthetic products that are
configured for use with surgical staplers in LVR surgery which compete with
Peri-Strips. To the best of the Company's knowledge, the FDA has not cleared
for marketing any staple line reinforcement product, other than Peri-Strips,
for use in LVR surgery. To the Company's knowledge, the dural patches that are
currently available and compete with Dura-Guard are either autologous or are
produced from processed cadaver tissue, including Tutoplast(TM), a processed
cadaver product manufactured by Biodynamics International, Inc. In addition to
specifically configured patches, there are multi-purpose patches made from
bovine and other types of animal tissue that compete with the Company's Supple
Peri-Guard, Peri-Guard, and Vascu-Guard products, including bovine pericardium
products produced by Medtronic, Inc. and Baxter International Inc. The Company
does not believe that these alternative bovine pericardium products have
specific FDA marketing clearance for use in the lung, although such products
are FDA
28
<PAGE>
cleared for pericardial closure and soft tissue repair. In addition, synthetic
multi-purpose patches made out of PTFE or silicone fabric are currently
available. W. L. Gore & Associates, Inc., manufacturer of Gore-Tex(R), is
believed to have a prominent position in the synthetic patch market. Synthetic
patches are generally cheaper to produce and to the extent that comparable
synthetic patches are available, the Company faces significant price
competition for its Tissue-Guard products. The Company believes, however, that
the collagen characteristics exclusive to tissue, the special configuration of
its Tissue-Guard products and the proprietary tissue-fixation technologies
employed by the Company offer significant product performance advantages over
competing products.
Alternative treatments and competitive products to Biograft include drug
therapies and surgical procedures that use autologous or synthetic grafts.
Once the decision has been made to use surgical intervention, surgeons
generally prefer the patient's own vessels for lower limb vascular
reconstruction. When the patient's own vessels are not available in sufficient
quality or quantity, surgeons choose a prosthesis graft such as Biograft or
synthetic grafts made from expanded PTFE produced by W. L. Gore & Associates,
Inc., IMPRA, Inc. or other grafts made of bio-synthetic materials.
MANUFACTURING
The Company manufactures all of its Surgical Business products except the
Bio-Vascular Probe at its St. Paul, Minnesota facility. In July 1995, the
Company moved to a new 36,000 square foot facility, which more than doubled
its total space and nearly quadrupled its manufacturing capacity. The Company
acquires bovine pericardium for use in the Tissue-Guard product line from a
private independent contractor who obtains the tissue from local United States
Department of Agriculture inspected meat packing facilities. The Company
acquires human umbilical cords for use in Biograft from various hospitals
throughout the United States. Tissue processing using the Company's
glutaraldehyde tissue-fixation technologies typically is begun within one day
of delivery to the Company. The Company has not experienced any product
shortages arising from interruptions in the supply of any raw materials or
components, and has identified alternative sources of supply for such raw
materials and components.
The Bio-Vascular Probe is manufactured to the Company's specifications by a
contract manufacturer, with certain final cleaning, packaging and
sterilization testing procedures performed by the Company at its St. Paul
facility. While the Company has not experienced any interruption in supply of
this product to date, it has not identified any alternative source of supply
and any significant interruption in supply of this product in the future could
have an adverse effect on the Company's sales of the Bio-Vascular Probe.
MEDICAL IMAGING SOFTWARE BUSINESS
General. The Medical Imaging Software Business develops and markets 3-D
volume imaging software products for the visualization and analysis of imaging
data for medical applications. The Medical Imaging Software Business is
conducted through the Company's wholly-owned subsidiary, Vital Images, which
was acquired in May 1994. Prior to its acquisition by the Company, Vital
Images also developed and produced 3-D volume imaging software for use in
geoscience applications. On August 25, 1995, the Company granted an exclusive,
perpetual source code license to CogniSeis for the Company's geoscience
product which will allow the Company to focus exclusively on medical
applications for its software technology. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
The Company's Medical Imaging Software Business is continuing development of
VoxelView, the first product developed by Vital Images for medical
applications. VoxelView provides complete and accurate 3-D rendering of data
collected by advanced medical imaging devices such as spiral CT scanners,
magnetic resonance imaging devices ("MRI"), positron emission tomography
scanning devices ("PET"), and ultrasound sonagraphic devices ("Ultrasound").
The 3-D images rendered by VoxelView are intended to enhance the ability of
radiologists, surgeons and other physicians to screen for specific
pathologies, diagnose pathological conditions and plan surgical procedures.
29
<PAGE>
Industry Background. The use of CT scan, MRI, PET and Ultrasound is
widespread in the U.S. medical community and, to a lesser extent, in other
industrialized countries. CT scan, MRI, PET and Ultrasound capture and record
digital information describing the dimensions and properties of scanned
objects. Historically, these imaging devices produced digital output in a
variety of proprietary formats. The imaging scanner manufacturers have now
adopted an international standard called DICOM3 that will greatly simplify the
process of using a VoxelView-powered workstation in conjunction with the
latest generation of imaging systems. In the United States, the market for CT
and MRI scanners has evolved as scanners with higher resolution and faster
data acquisition have been developed. VoxelView's value to the end-user
increases with the speed and greater sophistication of the imaging equipment
in use.
While the number of imaging devices used in hospitals and clinics is large,
the use of 3-D rendering of imaging data collected by such devices has been
exploited primarily by leading medical institutions. Until now, the
workstations required to run 3-D volume visualization software were very
expensive, limiting the number of institutions which could afford them.
Additionally, the number of images that was able to be captured was low enough
that diagnosis could be done by viewing only 2-D slices. Recent enhancements
in scanner technology yield a greater number of images in much more detail,
which can only be efficiently "read" when rendered in 3-D. The Company
believes that its volume rendering technology will be more effective in
analyzing data than the mathematically modeled "surface rendering" approach
used by others.
Products and Product Development. VoxelView is an interactive, volume
imaging and analysis software system designed to accept large volumes of data
from any medical digital imaging technology, manipulate the data at high
speeds and display it in accurate 3-D images. VoxelView is based upon a high
speed volume renderer, the Voxel Engine, which can image volume data at a
speed which permits "real-time" viewing of data sets. VoxelView has been
designed to enhance the ability of radiologists, surgeons and other physicians
to screen for specific pathologies, diagnose pathological conditions and plan
surgical procedures. The Company has licensed VoxelView software packages to
approximately 70 medical and research institutions as a research tool.
Currently, VoxelView only operates on high-speed graphics-oriented work
stations marketed by Silicon Graphics, Inc. ("Silicon Graphics").
The Company is currently developing VoxelView 2.5, an updated and improved
version of VoxelView. The Company is developing VoxelView 2.5 so that it can
be marketed to a broader group of medical institutions. In order for VoxelView
2.5 to be successfully commercialized, the Company must (i) improve the
product's interface qualities and make it more user-friendly, (ii) receive
marketing clearance from the FDA to permit specific marketing of the product
as a medical device by the Company and enable reimbursement by third party
payors, and (iii) enable the product to operate on work stations manufactured
by companies other than Silicon Graphics. The Company filed a 510(k) pre-
market notification with the FDA on July 9, 1995 seeking market clearance for
VoxelView 2.5 as a software aid to be used in conjunction with CT scan and MRI
data. The Company has also adopted the industry standard graphics language,
OpenGL(R), which should enable the Company's products to operate on hardware
platforms manufactured by companies such as Hewlett-Packard Company and IBM.
There can be no assurance that the Company will be able to successfully
commercialize VoxelView 2.5.
The Company has also developed a modular enhancement to VoxelView called
Voxel Animator, which allows the user to create "fly throughs." A "fly
through," for example, would allow a radiologist to perform virtual
endoscopies by navigating through the 3-D data of patients' blood vessels
and/or organs to detect disease. This technology is designed to assist the
physician in lowering patient risk and diagnostic cost and achieving better
surgical outcomes.
Markets. If and when development of VoxelView 2.5 is completed and FDA
510(k) clearance for such product is obtained, the Company intends to begin
aggressively marketing VoxelView 2.5. The Company will initially target
approximately 250 of the largest academic medical institutions that are
potential users of VoxelView 2.5 and an additional 300 secondary and tertiary
care institutions. Additionally, as the price of high
30
<PAGE>
speed work stations decreases, the Company intends to market VoxelView 2.5 to
a broader audience of medical institutions.
The Medical Imaging Software Business will continue its strategy of direct
marketing within the United States and will use distributors and other
marketing partners to reach international markets. The Company also has an OEM
agreement with Precision Therapy International Inc. ("PTI"), a leading
supplier of 3-D radiation treatment planning systems, under which the Company
has granted an exclusive license for a portion of the VoxelView technology to
PTI as a tool for use in radiation therapy planning. The Company will continue
to seek advantageous OEM and third party relationships that increase its
ability to reach attractive markets.
Research and Development. The majority of the Medical Imaging Software
Business' employees are engaged in research and development. The Company also
collaborates with researchers at several universities and maintains close ties
with lead engineering groups at Silicon Graphics. The Company expects to spend
approximately $1.4 million on research and development in fiscal 1995 and
intends to concentrate its research and development efforts on improving
VoxelView as a medical diagnostic tool, including refinements that will
increase clinical applications of VoxelView by improving human interface
qualities, making the product more user-friendly.
Competition. The medical digital imaging market in which the Company
competes is characterized by intense competition. This market is dominated by
established manufacturers of imaging equipment that have broader product
lines, greater distribution capabilities, substantially greater capital
resources and larger marketing, research and development staffs and facilities
than the Company. The Company competes with major imaging equipment vendors,
such as GE Medical Systems, Picker International Inc. and Siemens AG, who
currently offer 3-D rendering or will do so in the near future. These large
equipment vendors have an entrenched position in major radiology departments
and significantly greater marketing resources than the Company. In addition,
the Company competes with other medical imaging software developers, including
ISG, Inc. and Cemax, Inc., which offer competing after-market software for
medical imaging and these competitors currently have greater marketing and
distribution resources and capabilities than the Company.
The Company competes primarily in two ways. First, the Company specializes
in direct volume rendering technology and has developed a high level of
expertise in the effective implementation of this technology, resulting in
much higher levels of data fidelity than other 3-D methods used in medical
applications. Second, the Company has developed a unique feature of its
imaging software, Voxel Animator, allowing a user to conduct "fly through"
examinations similar to a virtual reality environment. The Company believes
that no competitor has developed this "fly through" capability.
GOVERNMENTAL REGULATION
The manufacture and sale of the Company's surgical and medical imaging
products are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding foreign agencies. In the United States,
the FDA administers the Federal Food, Drug and Cosmetics Act and amendments
thereto contained in the Safe Medical Devices Act of 1990. The Company is
subject to the standards and procedures respecting manufacture and marketing
of medical devices contained in the Federal Food, Drug and Cosmetics Act and
the regulations promulgated thereunder and is subject to inspection by the FDA
for compliance with such standards and procedures.
These regulations classify medical devices as either Class I, II or III
devices, which are subject to general controls, special controls or premarket
approval requirements, respectively. All Class I and II devices as well as
some Class III devices marketed prior to the effective date of the Medical
Device Amendments of 1976 can be cleared for marketing pursuant to a 510(k)
pre-market notification, establishing that the device is "substantially
equivalent" to a device that was legally marketed prior to May 28, 1976, the
date on which the Medical Device Amendments of 1976 became effective. The
510(k) pre-market notification must be supported by data establishing the
claim of substantial equivalence to the satisfaction of the FDA. The process
of obtaining a 510(k)
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<PAGE>
clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established, or if the FDA determines that
the device or the particular application for the device requires a more
rigorous review, the FDA will require that the manufacturer submit a PMA
application that must be carefully reviewed and approved by the FDA prior to
sale and marketing of the device in the United States. The PMA application
must contain the results of clinical trials, the results of all relevant
prototype tests, laboratory and animal studies, a complete description of the
device and its components, and a detailed description of the methods,
facilities and controls used for manufacturing, including the method of
sterilization and its assurance. In addition, the submission must include the
proposed labeling, advertising literature and training methods, if applicable.
Most Class III devices are subject to the PMA requirements rather than the
510(k) pre-market notification procedure. The process of obtaining a PMA can
be expensive, uncertain and lengthy, frequently requiring anywhere from one to
several years from the date of FDA submission, if approval is obtained at all.
Moreover, a PMA, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the marketing of approved medical devices for unapproved
uses. In addition, product approvals can be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing.
Of the Company's current products, Biograft and Peri-Guard (when marketed as
a pericardial patch) are Class III devices. Biograft received marketing
clearance from the FDA pursuant to a PMA, while Peri-Guard received clearance
for use as a pericardial patch as the result of a 510(k) submission. Peri-
Strips (as marketed in both strip and sleeve configurations), Vascu-Guard,
Dura-Guard, Peri-Guard (when marketed as a patch for soft tissue deficiency),
Supple Peri-Guard (when marketed as a patch for soft tissue deficiency and as
a pericardial patch) and both the disposable and reusable Flo-Rester and the
Bio-Vascular Probe have all been classified as Class II medical devices and
have received 510(k) marketing clearance from the FDA. The Company believes
the Medical Imaging Software Business' VoxelView 2.5 product will also be
classified as a Class II medical device. A 510(k) application was submitted
for VoxelView 2.5 in July 1995.
Both the United States and Europe have recently focused attention on the
safety of tissue banks, spurred by incidents of the transmission of human
disease during tissue transplantation. In the United States, recent FDA draft
regulations have outlined requirements for tissue banks. The legislation has
specifically excluded medical devices subject to FDA review, including
preserved umbilical cord vein grafts such as Biograft. As a result, the
Company does not expect Biograft to be subject to tissue bank regulations in
the United States, including the expensive donor screening and donor testing
procedures. In response to the increased scrutiny of umbilical cord vein
grafts, the Company commissioned an independent virology laboratory to test
Biograft for viral inactivation. The results of the testing demonstrated that
Biograft's chemical manufacturing processes inactivate a variety of viruses,
resulting in a sterile product. The Company has informed the FDA of these test
results and does not anticipate that the FDA will impose additional regulatory
requirements on Biograft. There can be no assurance, however, that the FDA
will not impose additional regulatory requirements on Biograft at some later
date or that Biograft would be able to meet any such new requirements.
The Company is also subject to regulation in most of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the
Company's products in such countries are similar to those of the FDA. The
national health or social security organizations of certain of such countries
require the Company's products to be qualified before they can be marketed in
those countries. In Japan, a potentially significant market for the Company's
products, clinical trials of certain of the Company's products are required
before such products can be cleared for sale in the Japanese market. To date,
this has delayed the Company's market entry in some cases, but has not
ultimately prevented sales in Japan of any of the Company's devices sold in
the United States. The Company relies on its independent distributors to
comply with the majority of the foreign regulatory requirements, including
registration of the Company's products with the appropriate governmental
authorities. To date, the Company has been successful in complying with the
regulatory requirements in most foreign countries in which its products are
marketed, although the responsible authorities in France have raised concerns
regarding the Company's products produced from bovine tissue. If
32
<PAGE>
France prohibits sales of Tissue-Guard products, it is not expected to have a
material adverse effect on the Company. Although the Company does not
anticipate that any other EU countries will prohibit the sale of Tissue-Guard
products, such prohibition by certain EU countries could have a material
adverse effect on the Company's business, financial condition and results of
operation.
The Company is subject to periodic inspections by the FDA, whose primary
purpose is to audit the Company's compliance with good manufacturing practices
("GMP") established by the FDA and other applicable government standards.
Before the Company will be allowed to sell Biograft produced at its new
facility, the new facility must undergo FDA GMP inspection. The Company
believes it has sufficient inventory of its Biograft product to meet demand
until notification of a successful GMP inspection. Strict regulatory action
may be initiated in response to audit deficiencies or to product performance
problems. The Company believes that its manufacturing and quality control
procedures are in compliance with the requirements of the FDA regulations.
The Company's new manufacturing facilities and processes are also undergoing
an inspection and audit process by the British Standards Institute ("BSI") in
conjunction with the Company's efforts to achieve compliance with the
requirements of the MDD issued by the EU. The BSI is the "Notified Body" that
the Company has selected to verify that the Company's quality system conforms
with the ISO 9001 international quality standard and that its products conform
with the "essential requirements" set forth by the MDD for the class of
products produced by the Company. Certification by BSI of conformity with both
the ISO 9001 standard and the MDD essential requirements would enable the
Company to prepare a Declaration of Conformity supporting the placement of the
"CE" mark on the Company's products. The CE mark would enable the Company's
products to be marketed, sold and used throughout the EU, subject to limited
"safeguard" powers of member states. Presently, the CE mark is not required to
be affixed to the Company's products (or those of its competitors) sold in the
EU, but may be affixed during a transition period currently in effect and
which began January 1, 1995. This transition period will end on June 15, 1998,
when all of the Company's current products (and those of its competitors) will
be required to comply with the essential requirements in order to be marketed
in the EU. BSI completed a pre-assessment of certain of the Company's
facilities and processes in May 1995, identifying areas requiring a moderate
degree of modification to comply with the essential requirements. A second
pre-assessment focusing on other aspects of the Company's operations is
scheduled for October 1995, and a final assessment has been tentatively
scheduled for February 1996. Authority to prepare a Declaration of Conformity
will require the successful completion of a final audit by BSI and submission
and clearance of a dossier on each of the Company's products, demonstrating
compliance with the essential requirements of the MDD. The Company believes
that these steps will be completed by the summer of 1996, although there can
be no assurance that the Company will be successful in receiving certification
by BSI.
The future regulatory environment for Biograft in Europe is unclear. The MDD
explicitly excludes from coverage medical devices derived from human tissue;
however, certain European medical device manufacturers are actively lobbying
for the re-inclusion of such devices in the MDD. If this effort is successful,
the earliest date for applying for CE mark approval for Biograft is expected
to be 1998. In addition, if extensive donor screening and donor testing
requirements are imposed, such requirements could make it uneconomical to sell
Biograft in Europe even under the CE mark. As a result of significant problems
with their blood supply, France has passed national laws and regulations
requiring extensive donor screening and testing on products derived from human
tissue. Accordingly, Biograft is not being sold in France. It is not known
whether a CE mark for Biograft would override such national requirements or
whether other countries in the EU will adopt regulations similar to those of
France. The Company is seeking Biograft registration in Germany, but cannot
predict when or if it will achieve such registration. Biograft is not marketed
generally in Germany, but rather is prescribed by physicians on a
prescription-by-prescription basis. If the CE mark is unavailable for Biograft
or if the requirements for obtaining a CE mark are too burdensome, the Company
will seek country-by-country registration of the product where such
registration requirements exist. The Company cannot predict when or if it
would obtain such registrations.
33
<PAGE>
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations in the United States with respect to the provision of services or
products to patients who are Medicare or Medicaid beneficiaries. The "fraud
and abuse" laws and regulations prohibit the knowing and willful offer,
payment or receipt of anything of value to induce the referral of Medicare or
Medicaid patients for services or goods. In addition, the physician anti-
referral laws prohibit the referral of Medicare or Medicaid patients for
certain "Designated Health Services" to entities in which the referring
physician has an ownership or compensation interest. Violations of these laws
and regulations may result in civil and criminal penalties, including
substantial fines and imprisonment. In a number of states, the scope of fraud
and abuse or physician anti-referral laws and regulations, or both, have been
extended to include the provision of services or products to all patients,
regardless of the source of payment, although there is variation from state to
state as to the exact provisions of such laws or regulations. In other states,
and, on a national level, several health care reform initiatives have been
proposed which would have a similar impact. The Company believes that its
operations and its marketing, sales and distribution practices currently
comply in all respects with all current fraud and abuse and physician anti-
referral laws and regulations, to the extent they are applicable. Although the
Company does not believe that it will need to undertake any significant
expense or modification to its operations or its marketing, sales and
distribution practices to comply with federal and state fraud and abuse and
physician anti-referral regulations currently in effect or proposed, financial
arrangements between manufacturers of medical devices and other health care
providers may be subject to increasing regulation in the future. Compliance
with such regulation could adversely affect the Company's marketing, sales and
distribution practices, and may affect the Company in other respects not
presently foreseeable, but which could have an adverse impact on the Company's
business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's surgical products are purchased primarily by hospitals which
then bill various third-party payors for the services provided to the
patients. These payors, which include Medicare, Medicaid, private insurance
companies and managed care organizations, reimburse part or all of the costs
and fees associated with the procedures utilizing the Company's products. The
Company's medical imaging products have been purchased to date by a limited
number of medical and research institutions for research applications. End-
users of the Company's medical imaging products will not be eligible to
receive reimbursement for such products until FDA marketing clearance for such
products has been obtained.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount
for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of changes in the resource-based relative value scale method of payment
calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using the Company's products or the eligibility (or the extent or
amount of coverage) of the Company's products could have an adverse impact on
the Company's business, financial condition and results of operations.
In response to the focus of national attention on rising health care costs,
a number of changes to reduce costs have been proposed or have begun to
emerge. There have been, and may continue to be proposals by legislators and
regulators and third-party payors to curb these costs. There has also been a
significant increase in the number of Americans enrolling in some form of
managed care plan, and over 80% of hospitals participate in or have agreements
with HMOs. It has become a typical practice for hospitals to affiliate
themselves with as many managed care plans as possible. Higher managed care
penetration typically drives down the prices of
34
<PAGE>
healthcare procedures, which in turn places pressure on medical supply prices.
This causes hospitals to implement tighter vendor selection and certification
processes, by reducing the number of vendors used, purchasing more products
from fewer vendors and trading discounts on price for guaranteed higher
volumes to vendors. Hospitals have also sought to control and reduce costs
over the last decade by joining group purchasing organizations or purchasing
alliances. The Company cannot predict what continuing or future impact these
practices, the existing or proposed legislation, or such third-party payor
measures may have on its future business, financial condition or results of
operations.
Because the Company's surgical products are primarily used in thoracic,
cardiac, neuro and vascular surgeries, changes in reimbursement policies and
practices of third party payors with respect to these surgeries could have a
substantial and material impact on sales of the Company's products. The
development or increased use of more cost effective treatments for diseases
requiring these surgeries could cause such payors to decrease or deny
reimbursement for such surgeries or to favor these other treatments over
surgical treatment.
INTELLECTUAL PROPERTY
The Company's success will depend in large part on its ability to preserve
its trade secrets, to obtain patent protection for its products and to operate
without infringing the proprietary rights of third parties. While the Company
has obtained or acquired a license to certain patents and applied for
additional United States and foreign patents covering certain aspects of its
products, no assurance can be given that any additional patents will be
issued, that the scope of any patent protection will exclude competitors or
that any of the Company's rights under such patents will be held valid if
subsequently challenged. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions and therefore
may be highly uncertain. Whether or not the Company's patent applications are
granted, others may receive patents which contain claims having a scope that
covers products developed by the Company.
On July 9, 1995, the Company received notice of allowance of a United States
patent which relates to the use of tissue on a removable backing and covers
the sleeve configuration of Peri-Strips. In connection with this same
application, the Company has filed divisional patent applications relating to
the combination of tissue with a surgical stapling gun and methods of
performing a surgical procedure to remove diseased tissue. There can be no
assurance that these divisional patent applications will be granted. Other
than the notice of allowance of a patent on the sleeve configuration of Peri-
Strips, the Company holds no patents and pays no royalties on Supple Peri-
Guard or the configurations of Supple Peri-Guard marketed as Dura-Guard or
Vascu-Guard. In December 1994, the Company entered into an agreement with
Surgical Research, Inc., a company with which Dr. Cooper is affiliated, which
obligates the Company to pay royalties of five percent (5%) on net revenue
from sales of Peri-Strips for the life of any patents, if any are issued, or
for seven years. The Company owns exclusive, worldwide, perpetual licenses to
develop, manufacture and market its Peri-Guard and Flo-Rester products.
In its Surgical Business, the Company also relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties.
Supple Peri-Guard, which is used in the manufacture of the majority of the
Company's Tissue-Guard products, is protected exclusively by trade secrets.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors.
In its Medical Imaging Software Business, the Company relies on a
combination of license agreements, contracts, confidentiality agreements and
trade secrets to establish and protect its proprietary rights in its
technology. The Company distributes its products under software license
agreements that grant customers licenses to use, rather than ownership of, the
software. The Company also employs encryption technology to prevent the use of
its software on work stations that have not been specifically designated by
the Company. Effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. In September 1988, the
Company acquired the exclusive perpetual license to use, further develop and
market the technology underlying VoxelView on a worldwide basis.
35
<PAGE>
The surgical products and medical imaging industries are characterized by
frequent and substantial intellectual property litigation, and competitors may
resort to intellectual property litigation as a means of competition. The
surgical products and medical imaging markets are characterized by extensive
patent and other intellectual property claims that can create greater
potential than in less developed markets for possible allegations of
infringement, particularly with respect to newly developed technology.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict. Any future litigation, regardless of
outcome, could result in substantial expense to the Company and significant
diversion of the efforts of the Company's technical and management personnel.
Litigation may also be necessary to enforce patents issued to and licenses
held by the Company, to protect trade secrets or know-how owned by the Company
or to determine the enforceability, scope and validity of the proprietary
rights of others. An adverse determination in any such proceeding could
subject the Company to significant liabilities to third parties, or require
the Company to seek licenses from third parties or pay royalties that may be
substantial. Furthermore, there can be no assurance that necessary licenses
would be available to the Company on satisfactory terms, if at all.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing or selling certain of its products which in turn would have
a material adverse effect on the Company's business, financial condition or
results of operations.
The Company has registered United States trademarks, including Peri-Strips,
Vascu-Guard, Peri-Guard, Biograft, Flo-Rester, VoxelView and VoxelGeo.
EMPLOYEES
The Company employs 120 persons full-time and 3 persons part-time, including
24 in research and development, 69 in manufacturing, 17 in sales and marketing
and 13 in general and administrative functions. The Company's employees are
not represented by a union, and the Company considers its relationship with
its employees to be good.
FACILITIES
The Company leases 36,027 square feet of office and manufacturing space at
2575 University Avenue, St. Paul, Minnesota for use in its Surgical Business
and approximately 8,800 square feet located in Fairfield, Iowa for use in its
Medical Imaging Software Business. The Company believes that its current space
is adequate for the foreseeable future.
36
<PAGE>
MANAGEMENT
DIRECTORS AND CERTAIN OFFICERS
The directors and certain officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
John T. Karcanes.................... 49 President, Chief Executive Officer
and Director
Vincent Argiro, Ph.D................ 39 Vice President of the Company,
President of Vital Images,
Incorporated and Director
M. Karen Gilles..................... 53 Vice President of Finance, Chief
Financial Officer, and Corporate
Secretary
Bruce A. MacFarlane, Ph.D........... 43 Vice President of Regulatory Affairs
and Quality Assurance
Robert P. Nelson.................... 50 Vice President of Operations
Kemal Schankereli................... 42 Vice President of Research and
Development
Frank A. Stephenson................. 42 Vice President of Marketing and
Sales
James F. Lyons...................... 65 Chairman of the Board and Director
Richard W. Perkins.................. 64 Director
Lawrence Perlman.................... 57 Director
Edward E. Strickland................ 68 Director
</TABLE>
John T. Karcanes. Mr. Karcanes has served as President, Chief Operating
Officer and a director of the Company since May 1994 and as Chief Executive
Officer of the Company since November 1994. From June 1992 to April 1994, Mr.
Karcanes acted as an independent consultant and an interim executive officer,
working primarily with early-stage technology companies. From 1987 to June
1992, Mr. Karcanes served as President and Chief Executive Officer of
Crosfield Lightspeed, Inc., a technology company serving the publishing
industry. Mr. Karcanes served as President of Palladian Software, Inc., a
software development company, from 1984 to 1986, and from 1981 to 1984, he
served in a number of executive positions in international operations and
sales and marketing with Cullinet Software, Inc., a database and application
software company, and Computer Pictures Corporation, a software company
specializing in executive information systems.
Vincent Argiro. Dr. Argiro has served as President of Vital Images and as
Vice President and a director of the Company since joining the Company in May
1994 in connection with the acquisition of Vital Images. Dr. Argiro, the
founder of Vital Images, served as Chairman of the Board of Vital Images from
1988 until May 1994. From 1988 to 1990 and from September 1991 to June 1992,
Dr. Argiro also served as President of Vital Images. In September 1991, Dr.
Argiro became Chief Executive Officer of Vital Images. From 1984 to June 1992,
Dr. Argiro served as an Associate Professor of Physiology at Maharishi
International University where he conducted research in neuroscience and cell
biology.
M. Karen Gilles. Ms. Gilles has served as Chief Financial Officer of the
Company since December 1990, Vice President of Finance since 1989, and
Secretary of the Company since November 1991 after serving as the Director of
Finance and Administration from April 1989 to December 1989. From 1985 to
1989, Ms. Gilles served as Controller for VEE Corporation, a production
company, and Colin Companies, a related concession company. From 1983 to 1985,
Ms. Gilles was an accountant with McGladrey & Pullen, a public accounting
firm.
Bruce A. MacFarlane. Dr. MacFarlane has served as Vice President of
Regulatory Affairs and Quality Assurance since June 1995 after serving as
Director of Regulatory Affairs from November 1991 to June 1995.
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<PAGE>
From 1985 to October 1991, Dr. MacFarlane served as Director of New Product
Development and Regulatory Affairs at Medical Devices, Inc., a medical device
company which manufactures electromedical devices.
Robert P. Nelson. Mr. Nelson has served as Vice President of Operations
since September 1991. From 1988 until August 1991, Mr. Nelson served as
Director of Operations for Rexton, Inc., a hearing aid manufacturer. From 1977
through 1987, he served as Director of Operations for heart valve
manufacturing at Medtronic, Inc., a medical device company.
Kemal Schankereli. Mr. Schankereli has served as Vice President of Research
and Development since December 1993 after serving as Director of Research and
Development from January 1993 to December 1993. From 1991 to December 1992,
Mr. Schankereli served as a private consultant to the bio-medical device
industry. From 1983 to 1991, Mr. Schankereli held the position of Manager of
Vascular Product Research at St. Jude Medical, Inc., a medical device company.
From 1978 to 1983, Mr. Schankereli served as a Senior Research Scientist at
Meadox Medicals, Inc., a medical device company.
Frank A. Stephenson. Mr. Stephenson has served as Vice President of
Marketing and Sales since December 1994. From 1989 to August 1994, Mr.
Stephenson served as Vice President of Marketing and Sales for Spectranetics
Corporation, a medical laser company. From 1985 to 1989, Mr. Stephenson held a
series of marketing management positions with Boston Scientific, Inc., a
manufacturer of medical devices, and served as a senior sales representative
and trainer from 1982 to 1985 with Codman & Shurtleff, a distributor of
neurosurgical products, which is a division of Johnson and Johnson, Inc.
James F. Lyons. Mr. Lyons has served on the Board of the Company since 1990
and has been Chairman since November 1991. Mr. Lyons served as the Company's
Chief Executive Officer from 1993 through October 1994. From 1977 through
1990, Mr. Lyons served as President and Chief Executive Officer of Bio-
Medicus, Inc., a manufacturer of bio-medical products. Mr. Lyons has been
employed in the health care industry for more than 30 years. Mr. Lyons also
serves on the Board of Directors of AVECOR Cardiovascular Inc., ATS Medical,
Inc. and Spine-Tech, Inc.
Edward E. Strickland. Mr. Strickland has served on the Board of the Company
since 1988. Mr. Strickland has been an independent financial consultant since
1986. Mr. Strickland serves on the Board of Directors of Communications
Systems, Inc., Hector Communications, Inc., AVECOR Cardiovascular Inc., and as
Chairman of the Board of Reuter Manufacturing Inc., formerly Green Isle
Environmental Services, Inc.
Richard W. Perkins. Mr. Perkins has served on the Board of the Company since
1987. He has served as President, Chief Executive Officer and a director of
Perkins Capital Management, Inc., an investment management firm, since 1984.
Mr. Perkins also serves on the Board of Directors of LifeCore Biomedical,
Inc., Atrix International, Inc., Celox Corporation, Children's Broadcasting
Corporation, CNS, Inc., Nortech Systems, Inc., Garment Graphics, Inc., Discus
Acquisition Corporation and Eagle Pacific Industries, Inc.
Lawrence Perlman. Mr. Perlman has served on the Board of the Company since
December 1994. He currently serves as Chairman of the Board, President and
Chief Executive Officer of Ceridian Corporation, an information services and
defense electronics company ("Ceridian"). He was named Chairman of the Board
of Ceridian in November 1992, and has been President and Chief Executive
Officer of Ceridian since 1990. Mr. Perlman served as President and Chief
Operating Officer of Ceridian from 1988 to 1990. He also serves on the Board
of Directors of Inter-Regional Financial Group, Inc., Kmart Corporation,
Seagate Technology, Inc., The Valspar Corporation and Computer Network
Technology Corporation. Mr. Perlman is also a member of the National Advisory
Board of the Chemical Banking Corporation.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1995
(except as otherwise indicated below), by each (i) shareholder who is known by
the Company to own beneficially more than five percent of the outstanding
Common Stock, (ii) director of the Company, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
DIRECTORS, PERCENTAGE OWNERSHIP
OFFICERS AND -----------------------------
OTHER BENEFICIAL NUMBER OF SHARES PRIOR TO AFTER THE
OWNERS BENEFICIALLY OWNED (1) THE OFFERING (1) OFFERING (1)
---------------- ---------------------- ---------------- ------------
<S> <C> <C> <C>
Perkins Capital
Management, Inc. (2)... 1,022,575 13.6% 11.0%
730 East Lake Street
Wayzata, MN 55391-1769
John T. Karcanes (3).... 62,500 * *
Vincent Argiro, Ph.D.
(4).................... 511,320 6.8% 5.5%
505 North 4th Street
Fairfield, IA 52556
James F. Lyons (5)...... 191,250 2.5% 2.0%
Richard W. Perkins (6).. 157,750 2.1% 1.7%
Lawrence Perlman (7).... 10,000 * *
Edward E. Strickland
(8).................... 182,000 2.4% 1.9%
All executive officers
and directors
as a group (11 persons)
(9).................... 1,233,836 15.7% 12.8%
</TABLE>
--------
* Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percent owned by such
person or group.
(2) Based upon a Schedule 13G filed as of February 3, 1995 with the Securities
and Exchange Commission. Excludes shares beneficially owned by Richard W.
Perkins, a director of the Company and the controlling shareholder of
Perkins Capital Management, Inc., a registered investment advisor ("PCM").
Of the 1,022,575 shares held for the account of clients of PCM, for which
beneficial ownership has been disclaimed by PCM (the "PCM Shares"), PCM has
sole investment power and no voting power with regard to all such shares.
(3) Includes 50,000 shares Mr. Karcanes has the right to acquire within 60 days
upon the exercise of options. Does not include 150,000 shares subject to
options held by Mr. Karcanes that are not exercisable within the next 60
days.
(4) Includes 7,000 shares Dr. Argiro has the right to acquire within 60 days
upon the exercise of options. Does not include 14,000 shares subject to
options held by Dr. Argiro that are not exercisable within the next 60
days. Does not include 8,640 shares of Restricted Stock granted to Dr.
Argiro which will not vest within the next 60 days.
(5) Includes 132,000 shares Mr. Lyons has the right to acquire within 60 days
upon the exercise of options. Does not include 6,000 shares subject to
options held by Mr. Lyons that are not exercisable within the next 60 days.
(6) Includes 5,000 shares held by the Perkins Foundation, 79,500 shares held by
various trusts of which Mr. Perkins is the sole trustee, and 56,250 shares
held by Quest Venture Partners, of which Mr. Perkins is a 40% partner. Also
includes 17,000 shares Mr. Perkins has the right to acquire within 60 days
upon the exercise of options. Does not include 6,000 shares subject to
options held by Mr. Perkins that are not exercisable within the next 60
days. Excludes the 1,022,575 PCM Shares. Mr. Perkins disclaims beneficial
ownership of the PCM Shares.
39
<PAGE>
(7) Does not include 60,000 shares subject to options held by Mr. Perlman that
are not exercisable within the next 60 days.
(8) Includes 62,000 shares Mr. Strickland has the right to acquire within 60
days upon the exercise of options. Does not include 6,000 shares subject
to options held by Mr. Strickland that are not exercisable within the next
60 days.
(9) Includes 354,794 shares which may be acquired within 60 days upon the
exercise of options. Does not include 329,876 shares subject to options
that are not exercisable within the next 60 days. Does not include 8,640
shares of Restricted Stock which will not vest within the next 60 days.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.01 per share.
COMMON STOCK
As of a recent date, there were 7,492,703 shares of Common Stock issued and
outstanding held by 1,405 shareholders of record. All outstanding shares of
Common Stock are, and the shares offered hereby will be, fully paid and
nonassessable. The holders of Common Stock are entitled to one vote for each
share held of record on all matters voted upon by shareholders and may not
cumulate votes for the election of directors. Accordingly, the owners of a
majority of the shares of Common Stock outstanding have the power to elect all
of the directors. Each share of outstanding Common Stock is entitled to
participate equally in any distribution of net assets made to the shareholders
in liquidation, dissolution or winding up of the Company and is entitled to
participate equally in dividends as and when declared by the Board of
Directors. There are no redemption, sinking fund, conversion or preemptive
rights with respect to the shares of Common Stock. All shares of Common Stock
have equal rights and preferences.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
WARRANTS
Prior to the acquisition of Vital Images by the Company, on September 26,
1991 Vital Images issued a warrant to purchase 32,143 shares of its common
stock at an exercise price of $4.00 per share to John G. Kinnard & Company,
Incorporated ("Kinnard") in connection with the private placement of its
common stock. Subsequently, the warrant was subdivided and warrants to
purchase an aggregate of 3,214 shares of Common Stock were assigned to five
persons affiliated with Kinnard (collectively, the "Warrants"). The Warrants
became exercisable six months after issuance and remain exercisable until
September 26, 1996. The Warrants remained in effect following the acquisition
of Vital Images by the Company, with shares of Common Stock substituted for
the Vital Images common stock on a one-for-one basis. The Warrants provide
that if the Company proposes to register any of its securities under the
Securities Act (except by Form S-4 or Form S-8) within two years after the
initial exercise of the Warrants, 20 days' notice must be given to the holders
of the Warrants or any shares issued thereunder, and such holders will have
the right to demand registration of the shares subject to the Warrants,
subject to certain limitations. The Company has given notice of this Offering
and the filing of the Registration Statement to the holders of the Warrants.
As of the date hereof, Kinnard has entered into a written agreement with the
Company waiving its registration rights. The Company has also entered into
written agreements with all other holders of the Warrants pursuant to which
such holders have waived their registration rights and the Company has agreed
to purchase such warrants from the holders at a cash price equal to the
Offering price per share less the per share set forth on the cover page of
this Prospectus exercise price of such warrants multiplied by the number of
shares issuable pursuant to such warrants.
In conjunction with the closing of this Offering, the Company will grant
Piper Jaffray Inc. the Underwriter Warrants to purchase an aggregate of 90,000
shares of Common Stock. See "Underwriting."
CERTAIN LIMITED LIABILITY, INDEMNIFICATION AND ANTI-TAKEOVER PROVISIONS
Article Five of the Company's Bylaws provides that the Company will
indemnify such persons, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent, as permitted by Minnesota
Statutes Section 302A.521 as enacted and as amended.
Section 302A.521 of the Minnesota Business Corporation Act provides that a
Minnesota business corporation shall indemnify any director, officer, employee
or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity (as defined)
of the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
statutory standards are met. "Proceeding" means a threatened, pending or
41
<PAGE>
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 contains detailed terms regarding such right of indemnification and
reference is made thereto for a complete statement of such indemnification
rights.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Securities Act,
and is therefore unenforceable.
The Company is subject to the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. Sections 302A.671 and 302A.673 of
the Minnesota Business Corporation Act may deny shareholders the receipt of a
premium on their Common Stock and may also have a depressive effect on the
market price of the Company's Common Stock. In general, Section 302A.671
provides that the shares of a corporation acquired in a "control share
acquisition" have no voting rights unless voting rights are approved in a
prescribed manner. A "control share acquisition" is an acquisition, directly
or indirectly, of beneficial ownership of shares that would, when added to all
other shares beneficially owned by the acquiring person, entitle the acquiring
person to have voting power of 20% or more in the election of directors. In
general, Section 302A.673 prohibits a public Minnesota corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of four years after the date of the transaction in which the person
became an interested shareholder, unless the business combination is approved
in a prescribed manner. "Business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who is the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting
stock or who is an affiliate or associate of the corporation and at any time
within four years prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the corporation's voting stock.
UNDERWRITING
Piper Jaffray Inc. (the "Underwriter"), has agreed, subject to the terms and
conditions of the Purchase Agreement, to purchase from the Company 1,800,000
shares of Common Stock. The Underwriter is committed to purchase and pay for
all such shares if any are purchased (excluding shares covered by the over-
allotment option granted therein).
The Underwriter has advised the Company that it proposes to offer the Common
Stock directly to the public initially at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less
a concession of not more than $ per share. Additionally, the Underwriter
may allow, and such dealers may re-allow, a concession not in excess of $
per share to certain other dealers. After the public offering, the public
offering price and other selling terms may be changed by the Underwriter.
In connection with this Offering, the Underwriter may engage in passive
market making transactions in the Common Stock on the Nasdaq SmallCap Market
immediately prior to the commencement of sales in this Offering, in accordance
with Rule 10b-6A under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"). Passive market making consists of displaying bids on the
Nasdaq SmallCap Market limited by the bid prices of independent market makers
and purchases limited by such prices. Net purchases by a passive market maker
on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the Common Stock during a specified
prior period and must be discontinued when such limit is reached. Passive
market making may stabilize the market price of the Common Stock at a level
above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
The Company has granted to the Underwriter an option, exercisable by the
Underwriter within 30 days from the date of this Prospectus, to purchase up to
an additional 270,000 shares of Common Stock at the same price per share to be
paid by the Underwriter for the other shares offered hereby. The Underwriter
may exercise this option only for the purpose of covering over-allotments, if
any, made in connection with the distribution of the Common Stock offered
hereby.
42
<PAGE>
In connection with this Offering, the Company has agreed to issue and sell
to the Underwriter, for nominal consideration, the Underwriter Warrants to
purchase an aggregate of 90,000 shares of Common Stock. These warrants will be
exercisable at the price per share equal to the market price of the Common
Stock on the day prior to the execution of the Purchase Agreement, commencing
one year from the date of this Prospectus, and will continue to be exercisable
for a period of four years after such date. Holders of the Underwriter
Warrants are entitled to certain demand and incidental registration rights
with respect to the shares issuable upon exercise of such warrants. The number
of shares covered by the Underwriter Warrants and the exercise price thereof
are subject to adjustment in certain events to prevent dilution.
The Company and its officers and directors have agreed that they will not
sell, offer to sell, issue, distribute or otherwise dispose of any shares of
Common Stock for a period of 90 days after commencement of this Offering
without the prior written consent of the Underwriter.
The Company has agreed to indemnify the Underwriter and its controlling
persons against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby is being
passed upon for the Company by Oppenheimer Wolff & Donnelly, Minneapolis,
Minnesota. Certain legal matters relating to the Offering will be passed upon
for the Underwriter by Faegre & Benson P.L.L.P., Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Bio-Vascular, Inc. as of October
31, 1993 and 1994 and for the years then ended and the financial statements of
Vital Images, Incorporated for the year ended December 31, 1992 and the
combination of such financial statements with those of Bio-Vascular, Inc. for
the year ended October 31, 1992, after restatement for the 1994 pooling-of-
interests (which consolidated financial statements of the Company are included
herein and incorporated by reference in the Registration Statement) have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon appears herein and is incorporated by reference in the Registration
Statement. The separate statements of operations, changes in shareholders'
equity and cash flows of Bio-Vascular, Inc. for the year ended October 31,
1992 prior to restatement for the merger with Vital Images, Incorporated have
been audited by Deloitte & Touche LLP, independent accountants, whose report
thereon appears herein and is incorporated by reference in the Registration
Statement. All of such consolidated financial statements of the Company are
included herein and are incorporated by reference in the Registration
Statement in reliance on the reports of such firms given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Such reports, proxy and information statements and other
information filed by the Company may be inspected and copied at the
Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington D.C. 20549, as well as at the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained at prescribed rates
from the Commission's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
43
<PAGE>
Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits
thereto filed with the Commission under the Securities Act. For further
information with respect to the Company and the shares, reference is made to
the Registration Statement and the exhibits thereto, copies of which may be
inspected without charge at, or obtained at prescribed rates from, the
Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1994, as amended by its Form 10-K/A dated September 20, 1995 and its
Quarterly Reports on Form 10-Q for the quarters ended January 31, April 30 and
July 31, 1995 are incorporated herein by reference. All documents filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering hereunder shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference in this
Prospectus (except for certain exhibits to such documents). Written requests
for such copies should be directed to M. Karen Gilles, Vice President of
Finance, Chief Financial Officer and Corporate Secretary, Bio-Vascular, Inc.,
2575 University Avenue, St. Paul, Minnesota 55114-1024; telephone number (612)
603-3700.
44
<PAGE>
BIO-VASCULAR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Accountants................................. F-2 and F-3
Consolidated Balance Sheets as of October 31, 1993 and 1994 and
July 31, 1995..................................................... F-4
Consolidated Statements of Operations for the years ended October
31, 1992, 1993 and 1994 and the nine months ended July 31, 1994
and 1995.......................................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1992, 1993 and 1994 and the nine months ended July 31,
1995.............................................................. F-6
Consolidated Statements of Cash Flows for the years ended October
31, 1992, 1993 and 1994 and the nine months ended July 31, 1994
and 1995.......................................................... F-7
Notes to Consolidated Financial Statements......................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Bio-Vascular, Inc.:
We have audited the accompanying consolidated balance sheets of Bio-
Vascular, Inc. as of October 31, 1993 and 1994 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bio-Vascular,
Inc. as of October 31, 1993 and 1994, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
We previously audited and reported on the statements of operations,
stockholders' equity and cash flows of Vital Images, Incorporated for the year
ended December 31, 1992. Such financial statements were audited and reported
on prior to their restatement for the 1994 pooling-of-interests described in
Note 2. The contribution of Vital Images, Incorporated to combined net revenue
represented 30 percent of the 1992 restated total and Vital Images,
Incorporated contributed a net loss of $714,201 to the combined 1992 restated
net loss total of $158,718. Separate financial statements of Bio-Vascular,
Inc. included in the 1992 restated consolidated statements of operations,
shareholders' equity and cash flows were audited and reported on separately by
other auditors. We also audited the combination of the consolidated statements
of operations, shareholders' equity and cash flows for the year ended October
31, 1992, after restatement for the 1994 pooling-of-interests; in our opinion,
such consolidated statements have been properly combined on the basis
described in Note 1 of Notes to Consolidated Financial Statements.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 16, 1994, except for the last
paragraph of Note 6, as to which the
date is January 2, 1995
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Bio-Vascular, Inc.
We have audited the statements of operations, changes in shareholders'
equity, and cash flows of Bio-Vascular, Inc. (the Company) for the year ended
October 31, 1992 prior to restatement for the merger with Vital Images,
Incorporated. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements (not presented herein) present
fairly, in all material respects, the results of operations and cash flows of
the Company for the year ended October 31, 1992 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 11, 1992
F-3
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JULY 31,
ASSETS 1993 1994 1995
------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $5,582,365 $2,347,954 $2,121,697
Marketable securities.................... -- 1,270,841 --
Accounts receivable, net of an allowance
for doubtful accounts of $30,000 in 1993
and $40,000 in 1994 and 1995............ 966,581 1,466,669 2,293,090
Inventories.............................. 890,220 1,132,669 1,814,886
Prepaid expenses and other current as-
sets.................................... 64,717 123,631 349,192
---------- ---------- ----------
Total current assets................... 7,503,883 6,341,764 6,578,865
Equipment and leasehold improvements, net.. 653,794 773,060 1,801,194
Software development costs, net of accumu-
lated amortization of $310,795 at October
31, 1993.................................. 212,653 -- --
Intangibles and other assets, net.......... 1,098,563 797,872 669,559
---------- ---------- ----------
Total assets........................... $9,468,893 $7,912,696 $9,049,618
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt........ $ 83,413 $ 11,968 $ 5,618
Accounts payable......................... 171,409 455,338 438,109
Accrued expenses......................... 375,581 485,020 729,172
Deferred revenues........................ 296,435 153,512 285,155
---------- ---------- ----------
Total current liabilities.............. 926,838 1,105,838 1,458,054
Long-term debt, less current portion....... 52,076 -- --
Deferred revenue, less current portion..... 13,237 21,319 13,668
---------- ---------- ----------
Total liabilities...................... 992,151 1,127,157 1,471,722
---------- ---------- ----------
Commitments (Note 7).......................
Shareholders' equity:
Common stock: authorized 10,000,000
shares in 1993 and 1994 and 20,000,000
shares in 1995 of $.01 par value; issued
and outstanding, 7,232,823 shares and
7,318,125 shares in 1993 and 1994,
respectively, and 7,446,488 shares in
1995.................................... 72,328 73,181 74,465
Additional paid-in capital............... 11,485,997 11,685,163 12,166,913
Accumulated deficit...................... (2,967,840) (4,847,362) (4,249,968)
Unearned compensation.................... (54,420) (12,625) (2,000)
Unearned restricted stock................ (59,323) (112,818) (411,514)
---------- ---------- ----------
Total shareholders' equity............... 8,476,742 6,785,539 7,577,896
---------- ---------- ----------
Total liabilities and shareholders' eq-
uity.................................. $9,468,893 $7,912,696 $9,049,618
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------- -----------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $6,010,899 $6,144,273 $ 6,631,518 $ 4,701,975 $8,131,416
Cost of revenue......... 2,406,038 2,516,691 2,433,368 1,823,360 2,567,365
---------- ---------- ----------- ----------- ----------
Gross margin.......... 3,604,861 3,627,582 4,198,150 2,878,615 5,564,051
Operating expenses:
Selling, general and ad-
ministrative........... 3,349,207 3,125,779 3,540,582 2,378,260 3,491,054
Research and develop-
ment................... 564,874 958,534 1,668,813 1,067,642 1,545,113
Acquisition costs....... -- -- 419,920 423,220 --
---------- ---------- ----------- ----------- ----------
Operating income
(loss)............... (309,220) (456,731) (1,431,165) (990,507) 527,884
Other income (expense),
net.................... 164,597 318,702 (438,007) (380,017) 101,480
---------- ---------- ----------- ----------- ----------
Income (loss) before in-
come taxes............. (144,623) (138,029) (1,869,172) (1,370,524) 629,364
Income tax provision.... 14,095 20,115 10,350 3,180 31,970
---------- ---------- ----------- ----------- ----------
Net income (loss)..... $ (158,718) $ (158,144) $(1,879,522) $(1,373,704) $ 597,394
========== ========== =========== =========== ==========
Net income (loss) per
share.................. $ (.02) $ (.02) $ (.26) $ (.19) $ .07
========== ========== =========== =========== ==========
Weighted average shares
outstanding............ 6,743,000 7,055,000 7,277,000 7,266,000 8,207,000
========== ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL UNEARNED RETAINED
PAR PAID-IN DEFERRED RESTRICTED EARNINGS
SHARES VALUE CAPITAL COMPENSATION STOCK (DEFICIT) TOTAL
--------- ------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31,
1991................... 6,589,801 $65,898 $10,197,262 $(130,220) $(2,650,978) $7,481,962
Issuance of common
stock in connection
with product license
agreement............. 100,000 1,000 199,000 200,000
Stock options granted.. 42,000 (42,000)
Stock options canceled. (42,348) 42,348
Exercise of stock
options............... 34,314 342 72,171 72,513
Restricted stock
granted............... 39,279 393 177,087 $(177,480)
Restricted stock
purchased by the
Company............... (4,029) (40) (18,131) (18,171)
Restricted stock
earned................ 59,905 59,905
Compensation expense... 38,409 38,409
Net loss............... (158,718) (158,718)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1992................... 6,759,365 67,593 10,627,041 (91,463) (117,575) (2,809,696) 7,675,900
Exercise of stock
options............... 85,160 852 167,112 167,964
Issuance of common
stock in connection
with product license
agreement............. 50,000 500 99,500 100,000
Issuance of stock, net
of offering costs of
$58,158............... 297,500 2,975 533,867 536,842
Stock options canceled. (19,203) 19,203
Restricted stock
granted............... 11,246 112 45,968 (46,080)
Restricted stock
purchased by the
Company............... (3,183) (32) (10,712) (10,744)
Restricted stock
earned................ 59,584 59,584
Compensation expense... 17,840 17,840
Restricted stock
forfeited............. (9,944) (99) (44,649) 44,748
Stock issued for
services.............. 42,679 427 87,073 87,500
Net loss............... (158,144) (158,144)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1993................... 7,232,823 72,328 11,485,997 (54,420) (59,323) (2,967,840) 8,476,742
Exercise of stock
options............... 36,115 361 66,882 67,243
Stock options canceled. (18,495) 18,495
Restricted stock
granted............... 58,578 586 198,476 (199,062)
Restricted stock
canceled.............. (10,564) (106) (45,167) 45,273
Restricted stock
purchased by the
Company............... (4,650) (46) (22,848) (22,894)
Restricted stock
earned................ 58,174 58,174
Compensation
expense/compensation
paid in stock......... 12,500 125 43,625 23,300 67,050
Restricted stock
forfeited............. (12,252) (123) (41,997) 42,120
Stock issued for
services.............. 5,575 56 18,690 18,746
Net loss............... (1,879,522) (1,879,522)
--------- ------- ----------- --------- --------- ----------- ----------
Balances at October 31,
1994................... 7,318,125 73,181 11,685,163 (12,625) (112,818) (4,847,362) 6,785,539
Stock options granted.. 15,863 15,863
Exercise of stock
options............... 55,200 552 175,200 175,752
Restricted stock
granted............... 72,452 725 349,486 (350,211)
Restricted stock
purchased by the
Company............... (22,394) (224) (168,318) (168,542)
Restricted stock
earned................ 122,765 122,765
Compensation
expense/compensation
paid in stock......... 2,105 21 9,979 10,625 20,625
Stock issued for
services.............. 21,000 210 99,540 (71,250) 28,500
Net income............. 597,394 597,394
--------- ------- ----------- --------- --------- ----------- ----------
Balances at July 31,
1995 (Unaudited)....... 7,446,488 $74,465 $12,166,913 $ (2,000) $(411,514) $(4,249,968) $7,577,896
========= ======= =========== ========= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------- -----------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (158,718) $ (158,144) $(1,879,522) $(1,373,704) $ 597,394
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........ 725,356 689,488 851,872 536,047 423,042
Provision for
inventory
obsolescence........ -- 10,000 -- -- 33,000
Provision for
uncollectible
accounts............ 5,885 12,890 10,000 -- --
Issuance of common
stock in connection
with product license
agreement........... -- 100,000 -- -- --
Loss on disposal of
fixed assets........ -- -- 40,961 -- --
Non-cash
compensation........ 98,314 164,924 143,970 107,193 187,753
(Gain) loss on sale
of marketable
securities.......... -- (100,555) 609,653 539,149 --
Changes in assets and
liabilities,
exclusive of
investing and
financing
activities:
Accounts
receivable........ 31,219 172,428 (510,088) (203,919) (826,421)
Inventories........ (162,030) 23,265 (242,449) (15,582) (715,217)
Other current
assets............ 90,673 (10,604) (58,914) (88,280) (225,561)
Other assets....... -- (132) -- -- --
Accounts payable... 66,421 37,271 283,929 44,723 (17,229)
Accrued expenses... 216 19,838 86,513 17,768 244,152
Deferred revenues.. 106,231 101,462 (134,841) (42,705) 123,992
---------- ---------- ----------- ----------- ----------
Net cash provided
by (used in)
operating
activities....... 803,567 1,062,131 (798,916) (479,310) (175,095)
---------- ---------- ----------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of equipment
and improvements...... (320,800) (169,908) (504,725) (196,528) (1,296,571)
Additions to
intangibles........... (9,601) (748) (10,190) (11,096) (26,777)
Capitalization of
software development
costs................. (68,991) (173,547) -- (43,654) --
Investments in
marketable securities. (1,559,825) -- (3,301,877) (2,031,170) --
Redemptions of
marketable securities. 1,916,905 2,351,562 1,421,383 -- 1,270,841
Change in other assets. (657) -- 16,192 15,673 485
---------- ---------- ----------- ----------- ----------
Net cash provided
by (used in)
investing
activities....... (42,969) 2,007,359 (2,379,217) (2,266,775) (52,022)
---------- ---------- ----------- ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from the
issuance of debt...... 155,171 -- -- -- --
Payments on debt....... (185,915) (123,680) (123,521) (120,657) (6,350)
Proceeds related to the
sale, issuance and
repurchase of common
stock and exercise of
stock options......... 72,513 704,806 67,243 6,439 7,210
---------- ---------- ----------- ----------- ----------
Net cash provided
by (used in)
financing
activities....... 41,769 581,126 (56,278) (114,218) 860
---------- ---------- ----------- ----------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 802,367 3,650,616 (3,234,411) (2,860,303) (226,257)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 1,224,440 1,931,749 5,582,365 5,582,365 2,347,954
---------- ---------- ----------- ----------- ----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $2,026,807 $5,582,365 $ 2,347,954 $ 2,722,062 $2,121,697
========== ========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest. $ 26,320 $ 21,867 $ 7,617
========== ========== ===========
Cash paid for income
taxes................. $ 12,926 $ 6,635 $ 17,490
========== ========== ===========
Acquisition of
equipment under
capital leases........ $ 6,792 $ 27,162 $ 12,049
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
(1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business Description:
As a result of the acquisition of Vital Images, Incorporated (Vital Images)
in fiscal 1994 (Note 2), Bio-Vascular, Inc. (the Company or Bio-Vascular) has
two businesses, a Surgical Business (the business which existed prior to the
acquisition of Vital Images) and an Imaging Business (the business of Vital
Images prior to the merger). The Surgical Business develops, manufactures and
markets proprietary specialty medical products used in thoracic, cardiac,
neuro and vascular surgery. The Company, through its wholly owned subsidiary,
Vital Images, also develops, markets and supports certain software products
for interactive visualization and analysis of three-dimensional image data.
The end users of the Imaging Business' software have been primarily
researchers and innovators who have adapted the core technology to meet their
needs. During fiscal 1994 and 1995, the primary focus of the Imaging Business
was one of development, directed towards more specific industry applications
of its core technology. Also during fiscal 1994 and 1995, the Imaging Business
has sought to establish marketing and customer support alliances, enabling it
to direct more of its resources to this development process.
Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Periods:
Vital Images financial statements were reported on a calendar year basis
prior to the merger with Bio-Vascular. Vital Images financial statements have
been restated to be on a fiscal year basis for the year ended October 31,
1993. Vital Images financial statements for the year ended 1992 are combined
on a calendar year basis with the Company's financial statements for the
fiscal year ended October 31, 1992. As a result, the Company's restated
consolidated financial statements for the fiscal years ended October 31, 1993
and 1992, both include results of Vital Images for the months of November and
December of 1992. Vital Images revenues were $403,975 and its net loss was
$32,854 for this two-month period.
Cash Equivalents:
The Company considers all highly liquid investments with original maturities
of less than three months to be cash equivalents. The Company's cash and cash
equivalents balances are concentrated in a money market fund with one
financial institution.
Marketable Securities:
Investments with original maturities of three months or more are classified
as marketable securities and generally consist of United States Government or
United States Government backed instruments. Marketable securities are carried
at amortized cost, as the Company has the intention and the ability to hold
these securities to maturity (which maturity is less than one year).
Unrealized holding gains and losses were not significant.
Inventories:
Inventories are valued at the lower of cost or market, utilizing standard
costs which approximate the first-in, first-out method. All inventories are
held by the Surgical Business.
F-8
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using accelerated and straight-line methods over the
estimated useful lives (three to seven years) or lease life. Major
replacements and improvements are capitalized, and maintenance and repairs
which do not improve or extend the lives of the respective assets are charged
to operations. The asset and related accumulated depreciation or amortization
accounts are adjusted for asset retirement or disposal with the resulting gain
or loss shown in non-operating income.
Software Development Costs:
Software development costs incurred in the research and development of new
software products are expensed as incurred until technological and market
feasibility have been established. After technological and market feasibility
are established, any additional development or enhancement costs for these
products are capitalized until the product is available for sale to customers.
Amortization of capitalized costs is computed using the straight-line method
based upon a one to three year estimated economic life of the software
products. If delays in product releases lead to uncertainty concerning the
ultimate recovery of capitalized costs, those costs are expensed at the time
recovery becomes uncertain.
Goodwill, Product Licenses and Other Intangibles:
Goodwill, product licenses and other intangibles of the Surgical Business
are recorded at cost and are being amortized using the straight-line method
over ten years. In 1992, the Imaging Business acquired a license (Note 7)
which is being amortized on a straight-line basis over the estimated period of
realizability of three years. The Company evaluates the net realizability of
goodwill and other intangibles on an ongoing basis based on current and
anticipated undiscounted cash flows.
Revenue Recognition:
The Company recognizes Surgical Business revenue and software revenues of
the Imaging Business upon shipment of the products. Included in the sales
price of the Imaging Business' software products is an initial maintenance
contract varying in length from three to six months. Renewal maintenance
contracts are generally one year in length. Revenue from maintenance
contracts, including those sold as part of its software products and those
sold separately, is deferred and recognized on a straight-line basis over
applicable maintenance contract periods. Costs associated with maintenance
revenues are charged to operations as incurred.
Research and Development:
Research and development costs are expensed as incurred.
Income Taxes:
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences").
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with generally accepting accounting principles requires management
to make estimates and assumptions that affect the reported amounts
F-9
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
of assets and liabilities and disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses during the reporting
periods.
Net Income (Loss) Per Common Share:
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares relate to common stock options and
warrants, when their effect is not antidilutive.
Interim Periods:
The consolidated balance sheet at July 31, 1995 and the consolidated
statements of operations and cash flows for the nine-month periods ended July
31, 1994 and 1995, and the consolidated statement of shareholders' equity for
the nine-month period ended July 31, 1995, together with the related notes,
are unaudited, but, in the opinion of management of the Company, include all
adjustments (which consist only of accruals of a normal recurring nature)
necessary to present fairly, in all material respects, the financial condition
at July 31, 1995 and the results of operations and cash flows for the Company
for the nine-month periods ended July 31, 1994 and 1995.
(2) ACQUISITION:
On May 24, 1994, Bio-Vascular acquired Vital Images. The acquisition was
effected through a "stock for stock" exchange of 1,645,025 shares of Bio-
Vascular common stock for the 1,645,025 shares of Vital Images common and
Series A preferred stock outstanding. The merger was accounted for under the
"pooling-of-interests" method of accounting for financial reporting purposes.
Accordingly, the accompanying consolidated financial statements have been
restated to retroactively include the financial position, results of
operations and cash flows of Vital Images for all periods presented.
Combined and separate results of Bio-Vascular and Vital Images for periods
prior to the acquisition are set forth in the table below. Costs related to
the acquisition of approximately $420,000 were expensed as incurred in the
first through third quarters of fiscal year 1994.
<TABLE>
<CAPTION>
BIO-
VASCULAR VITAL IMAGES COMBINED
---------- ------------ ----------
<S> <C> <C> <C>
Year ended October 31, 1992:
Net revenue...................... $4,185,110 $1,825,789 $6,010,899
Net income (loss)................ 555,483 (714,201) (158,718)
Year ended October 31, 1993:
Net revenue...................... 4,422,775 1,721,498 6,144,273
Net income (loss)................ 650,634 (808,778) (158,144)
Six months ended April 30, 1994
(unaudited):
Net revenue...................... 2,228,152 915,138 3,143,290
Net loss......................... (203,586) (289,565) (493,151)
</TABLE>
F-10
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
(3) CERTAIN CONSOLIDATED FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
OCTOBER
31, OCTOBER 31, JULY 31,
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Inventories consisted of the following:
Raw materials and supplies.............. $ 167,420 $ 224,949 $ 379,120
Work-in-process......................... 80,467 292,746 336,493
Finished goods.......................... 642,333 614,974 1,099,273
---------- ----------- -----------
$ 890,220 $ 1,132,669 $ 1,814,886
========== =========== ===========
Equipment and leasehold improvements
consisted of the following:
Furniture, fixtures and computer
equipment.............................. $1,100,321 $ 1,450,998 $ 1,835,839
Laboratory equipment.................... 72,903 81,686 127,849
Manufacturing equipment................. 281,556 254,480 444,889
Leasehold improvements.................. 145,070 155,242 830,400
---------- ----------- -----------
Less accumulated depreciation and
amortization......................... (946,056) (1,169,346) (1,437,783)
---------- ----------- -----------
$ 653,794 $ 773,060 $ 1,801,194
========== =========== ===========
Intangibles and other assets consisted
of the following:
Goodwill................................ $1,318,499 $ 1,318,499 $ 1,318,499
Less accumulated amortization......... (460,101) (603,167) (710,467)
---------- ----------- -----------
858,398 715,332 608,032
---------- ----------- -----------
Product licenses and other intangibles.. 667,797 679,366 706,143
Less accumulated amortization......... (449,721) (602,491) (649,798)
---------- ----------- -----------
218,076 76,875 56,345
---------- ----------- -----------
Other assets............................ 22,089 5,665 5,182
---------- ----------- -----------
$1,098,563 $ 797,872 $ 669,559
========== =========== ===========
Accrued expenses consisted of the
following:
Payroll and other employee benefits... $ 144,923 $ 215,910 $ 356,123
Royalties............................. 68,040 85,233 116,123
Research reimbursement, shareholder... 91,482 91,482 80,000
Other................................. 71,136 92,395 176,926
---------- ----------- -----------
$ 375,581 $ 485,020 $ 729,172
========== =========== ===========
</TABLE>
F-11
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED OCTOBER MONTHS ENDED JULY
31, 31,
----------------------------- -------------------
1992 1993 1994 1994 1995
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Depreciation and
amortization consisted of
the following:
Depreciation............ $288,291 $327,784 $ 344,496 $ 234,856 $268,437
Amortization of
intangibles............ 223,109 256,501 294,723 192,448 154,605
Amortization of software
development costs...... 213,956 105,203 212,653 108,743 --
-------- -------- --------- --------- --------
$725,356 $689,488 $ 851,872 $ 536,047 $423,042
======== ======== ========= ========= ========
Other income (expense)
net, consisted of the
following:
Interest income......... $176,340 $234,653 $ 221,023 $ 163,479 $100,343
Interest expense........ (27,425) (21,867) (7,617) (7,192) (649)
Capital gain (loss) on
sale of investment (1). -- 100,555 (609,653) (539,149) --
Loss on disposal of
equipment, net......... -- -- (40,961) -- --
Miscellaneous income
(expense).............. 15,682 5,361 (799) 2,845 1,786
-------- -------- --------- --------- --------
$164,597 $318,702 $(438,007) $(380,017) $101,480
======== ======== ========= ========= ========
</TABLE>
--------
(1) Relates entirely to the Company's investment during 1993 and 1994 in
mutual fund shares of the Piper Jaffray Institutional Government Income
Portfolio.
(4) LINE OF CREDIT:
In February 1995, the Company obtained a $250,000 revolving line of credit
which expires January 31, 1996. There were no borrowings under the line of
credit or previous similar lines of credit during the fiscal years ended
October 31, 1993 and 1994 and the nine months ended July 31, 1995. The current
line of credit bears interest at prime plus 1.0% and is collateralized by
primarily all assets. After completion of the merger, the Company paid all
long-term debt of Vital Images.
(5) INCOME TAXES:
The recorded tax provisions for the years ended October 31, 1992, 1993 and
1994 and for the nine-month period ended July 31, 1994, respectively,
represent alternative minimum taxes due to limitations in the use of net
operating loss carryforwards and state minimum taxes. The Company has recorded
a tax provision for the nine-month period ended July 31, 1995 of $32,000 on
expected taxable income after use of net operating loss carryforwards. The
Surgical Business of the Company utilized approximately $717,000 and $740,000
of net operating loss carryforwards in fiscal 1992 and 1993, respectively. The
Company incurred a loss for the year ended October 31, 1994.
As of October 31, 1994, the Company has net operating loss carryforwards of
approximately $1,000,000 available to offset income from operations and
$500,000 to offset future capital gains, as well as
research and experimentation tax credit carryforwards. The net operating loss
carryforwards expire in 2002 to 2009, while the capital loss carryforward
expires in 1999. The Company currently expects to completely utilize the
$1,000,000 of net operating loss carryforwards as well as a portion of the tax
credit carryforwards in fiscal 1995. The Company also has carryforwards
arising from the pre-merger losses of Vital Images totaling approximately
$2,400,000. These pre-merger carryforwards can only be applied to the post-
merger net income
F-12
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
of the Imaging Business and are restricted as to the amount that can be
utilized in any year due to limitations resulting from the significant change
of ownership. These carryforwards begin to expire in 2005.
There are no significant differences between the tax bases of assets and
liabilities and their financial reporting amounts. The deferred tax assets
associated with the pre-merger loss carryforwards and the capital loss
carryforward have been totally offset by a valuation allowance because of
uncertainty that the Company and the Imaging Business will generate sufficient
taxable income of the appropriate type prior to the expiration of the
carryforwards.
(6) SHAREHOLDERS' EQUITY:
Increase in Authorized Shares:
In March 1995, the shareholders approved an increase in authorized shares of
common stock from 10,000,000 shares to 20,000,000 shares.
Warrants:
As a result of the merger, the Company assumed the warrant obligations of
Vital Images which were outstanding at the time of the merger. During 1991, in
connection with the private placement and issuance of common shares, Vital
Images issued stock warrants for the purchase of 32,143 shares of common
stock. The warrants are exercisable through October 1996, at an exercise price
of $4.00 per share. No warrants have been exercised through July 31, 1995.
In connection with a proposed stock offering, the Company has agreed to
issue and sell to the underwriter warrants to purchase 90,000 shares of common
stock, exercisable at a price per share equal to the market price of the
common stock on the day prior to the execution of the Purchase Agreement,
commencing one year from the date of the Prospectus, and will continue to be
exercisable for a period of four years after such date.
Restricted Stock:
Under certain compensation agreements, an arrangement which provides for
awards of restricted common stock to key management was adopted in 1992. These
awards of restricted common stock are subject to forfeiture if employment
terminates prior to the end of the prescribed periods. Vesting periods range
from two to four years. The market value of the shares at the time of grant is
recorded as unearned restricted stock. The unearned amount is amortized to
compensation expense over the periods during which the restrictions lapse.
During the years ended October 31, 1992, 1993, and 1994 and the nine-month
period ended July 31, 1995, 13,093, 13,744, 14,302 and 25,185 restricted
shares, respectively, were earned. At July 31, 1995, 78,250 shares of
restricted stock which were granted at per share prices of $3.25 to $6.0625,
and generally vests over a period of four years remain unearned. 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 restricted
shares.
Deferred Compensation:
Prior to the merger, Vital Images granted stock options at prices different
from the estimated market value of the underlying common stock. The difference
between the estimated market value and the exercise price was recorded as
deferred compensation and is amortized on a straight-line basis over the
vesting periods of the related options.
F-13
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
Stock Option Plans:
The Company has four stock option plans, an Employee Incentive Stock Option
Plan (the "1988 Plan"), a Directors' Stock Option ("DSO") Plan, and two plans,
the obligations of which were assumed by the Company as a result of the
acquisition of Vital Images: the 1990 Management Incentive Stock Option Plan
(the "1990 Plan"), and the 1992 Stock Option Plan (the "1992 Plan"). The
Company does not intend to grant further options under either the 1990 or the
1992 plans.
Under the Company's plans, 556,986 shares of common stock remain reserved
for issuance to directors, officers and employees at July 31, 1995. Options
under the plans are exercisable over periods of up to ten years from the date
of grant. The Company has reserved and granted 266,720 shares of common stock
for issuance in connection with non-plan options which have been granted to
consultants, an officer, and directors of the Company. These options are
exercisable over periods of up to seven years from the date of grant. Option
activity is summarized as follows:
<TABLE>
<CAPTION>
PLANS NON-PLAN PRICE PER SHARE
-------- -------- ---------------
<S> <C> <C> <C>
Balances at October 31, 1991................ 302,450 169,850 $1.00 -$ 5.375
Granted................................... 391,075 5,000 $2.00 -$ 6.875
Exercised................................. (17,550) (16,764) $1.06 -$ 4.250
Canceled.................................. (18,300) (9,236) $1.00 -$ 5.375
-------- --------
Balances at October 31, 1992................ 657,675 148,850 $1.00 -$ 6.875
Granted................................... 101,100 24,000 $1.875-$ 4.750
Exercised................................. (28,600) (56,560) $1.250-$ 2.500
Canceled.................................. (136,000) (9,900) $1.00 -$ 6.500
-------- --------
Balances at October 31, 1993................ 594,175 106,390 $1.00 -$ 6.875
Granted................................... 74,000 226,000 $2.00 -$ 3.4375
Exercised................................. (7,725) (28,390) $1.00 -$ 2.375
Canceled.................................. (45,600) (29,000) $1.00 -$ 5.375
-------- --------
Balances at October 31, 1994................ 614,850 275,000 $1.00 -$ 6.875
Granted................................... 262,438 118,000 $4.75 -$12.125
Exercised................................. (43,200) (12,000) $1.00 -$ 4.75
Canceled.................................. (38,599) (114,280) $2.00 -$ 3.50
-------- --------
Balances at July 31, 1995................... 795,489 266,720 $1.00 -$12.125
======== ========
</TABLE>
Options for the purchase of 630,950 shares of common stock at prices ranging
from $1.00 to $6.875 were exercisable at July 31, 1995.
Subsequent to the end of the 1994 fiscal year, the Company granted options
for 180,442 shares of common stock under various stock option programs,
exercisable over periods beginning October 31, 1995 and ending October 31,
1998. These options were granted at the market value on the date of grant at
prices ranging from $4.75 to $5.125 per share. In addition, the Company
granted to employees 60,252 shares of restricted common stock, vesting over
periods beginning October 31, 1995 and ending October 31, 1998. These
restricted stock shares were granted at the market value on the date of grant
at a price of $4.75 per share.
F-14
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
(7) COMMITMENTS
Operating Leases:
In February 1995, the Company entered into a new noncancelable operating
lease for rental of a combined office and production facility housing their
Surgical Business in St. Paul, Minnesota beginning August 1, 1995 and expiring
July 31, 2005. Total annual base rental expense for this new lease is
$255,441. Total base rental expense for the prior facility operating leases
aggregated $91,308 for each of the years ended October 31, 1992, 1993 and
1994. Base rental expense was $68,481 and $78,753 for the nine months ended
July 31, 1994 and 1995. The Company also pays apportioned real estate taxes
and common costs on its leased facilities.
Vital Images leases office facilities for the Imaging Business in Fairfield,
Iowa, under a non-cancelable operating lease expiring on June 1, 1997. The
lease includes an option to renew for one four-year period. Total base rental
expense for the Iowa facility was $83,074 for the year ended December 31, 1992
and $55,064 and $72,090 for the years ended October 31, 1993 and 1994. Base
rental expense was $67,755 and $55,755 for the nine months ended July 31, 1994
and 1995.
Future minimum payments under all operating leases at both facility
locations (St. Paul, MN and Iowa) at July 31, 1995 as adjusted to also include
the new lease for the Surgical Business are payable as follows: 1995--
$82,445, 1996--$329,781, 1997--$298,806, 1998--$255,441, 1999--$255,441 and
thereafter $1,468,803.
Royalties:
In connection with the acquisition of product licenses and product
manufacturing rights, the Company is obligated for the payment of royalties as
follows:
Surgical Business Royalties:
. 2.5% or 3% of net sales of the Biograft through 1998 (2.5% if Biograft
annual sales are under $2,000,000; 3.0% if annual sales are over
$2,000,000). In addition, a royalty of an additional 5% of net sales was
in place through November 2, 1993 (which coincides with the expiration of
the patent)
. 5% on net sales of Peri-Strips through December 2001, or if a patent
issues, until the expiration of the patent
. 5.5% of net sales of the Flo-Rester occluder under two agreements with 3%
payable through July 1995 and 2.5% payable through September 1996
. 3% of net sales of Peri-Guard Processed Bovine Pericardium and Cardio-
Cool through July of 1995
. 3% of net sales of the Bio-Vascular Probe through 2001
. 5% on the next $1,369,555 of aggregate net sales of the Bioflow(R) Small
Diameter Graft after October 31, 1994, and 7% on all net sales
thereafter, payable through October 1998. The Company no longer actively
markets this product.
Royalty expense for the Surgical Business was approximately $231,000,
$247,000, and $169,000 for the years ended October 31, 1992, 1993, and 1994,
respectively, and $114,000 and $365,000 for the nine months ended July 31,
1994 and 1995, and is included in cost of revenue.
Imaging Business Royalties:
. 5% of net sales of licensed volume visualization software (which
encompasses the core technology) and direct descendant software. The
royalty will terminate on May 24, 1996, two years after the merger of
F-15
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
Vital Images with and into the Company. Prior to June 1992, the royalty
was based on 10% of the net computed value of Vital Images' gross revenue
from all sources, less cost of goods sold, returns, discounts, taxes
(excluding income taxes), allowances, and research and development costs.
In June 1992, Vital Images issued 100,000 shares of common stock to the
licensor in exchange for the modification of the royalty agreement to the
5% of net sales amount. Royalty fee expense under this arrangement totaled
$52,381 for the year ended December 31, 1992, $56,278 for the year ended
October 31, 1993, $58,875 for the year ended October 31, 1994 and $43,150
and $25,141 for the nine months ended July 31, 1994 and 1995 and is
included in cost of revenue.
. Base royalty of 6% on net sales for the period fifteen months from the
first commercial sales of any product using the technology developed
under a licensing/research agreement with the licensor entered into in
January 1993. This agreement provides for exclusive (domestic and
international) rights to make, market, and further develop existing
technology and future improvements relating to certain computer programs
and electronic designs for use in the fields of obstetrics and
gynecology, and nonexclusive rights in all other fields or applications.
Under the research portion of the agreement, which expired in July of
1993, development costs of up to $200,000 were to be paid by Vital
Images. During the year ended October 31, 1993, Vital Images paid
$108,518 and had accrued $91,482, the remaining maximum potential amount
related to the development costs under this agreement, all of which were
included in research and development in the statement of operations. In
exchange for the license agreement, the Company paid an initial licensing
fee of $100,000, which was charged to research and development in the
statement of operations for the year ended October 31, 1993. This initial
licensing fee was concurrently used, by the licensor for the purchase of
50,000 shares of common stock. An additional royalty (in addition to the
6% of net revenues) is payable in the amount of $1,000 for each system
sold by the Imaging Business incorporating the technology. To maintain
the exclusivity of the license agreement, the Company is subject to
minimum annual payments, payable on the first through fifth anniversary
of the date of first commercial sale of a product derived from the
licensed technology. The minimum royalty obligation is $1,600,000 and is
payable as $75,000, $225,000, $500,000, and $800,000 on the successive
anniversary dates. The minimum annual payments can be applied against the
base and additional royalty obligations. Under terms of the agreement,
the royalty will terminate seven years from the first commercial sale of
the product. Commercial sales of this product have not yet commenced at
July 31, 1995. It is not certain that the Imaging Business will ever
develop a product from the technology obtained under this agreement.
(8) EMPLOYEE BENEFIT PLANS:
The Company has a salary reduction plan established on January 1, 1991,
which qualifies under Section 401(k) of the Internal Revenue Code. Employee
contributions are limited to 20% of their annual compensation, subject to
yearly limitations. At the discretion of the Board of Directors, 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
plan since its inception.
(9) BUSINESS SEGMENTS AND MAJOR CUSTOMERS:
The following is information relating to the Company's business segments,
including foreign revenues. A description of these segments appears in Note 1.
Cost allocations are necessary in the determination of operating
F-16
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
results by segment. For this reason, management does not represent that these
segments, if operated as independent businesses, would result in the operating
results shown.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------- ----------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue:
Surgical Business..... $4,185,110 $4,422,775 $ 4,951,743 $3,401,405 $7,046,310
Imaging Business...... 1,825,789 1,721,498 1,679,775 1,300,570 1,085,106
---------- ---------- ----------- ---------- ----------
Total net revenue... 6,010,899 6,144,273 6,631,518 4,701,975 8,131,416
========== ========== =========== ========== ==========
Operating income (loss):
Surgical Business..... 399,046 333,058 171,363 24,137 1,324,773
Imaging Business...... (708,266) (789,789) (1,182,608) (591,424) (796,889)
Corporate............. -- -- (419,920) (423,220) --
---------- ---------- ----------- ---------- ----------
Total operating
income (loss).. (309,220) (456,731) (1,431,165) (990,507) 527,884
========== ========== =========== ========== ==========
Total assets:
Surgical Business..... 7,489,005 8,363,642 7,087,981 7,295,248 8,215,998
Imaging Business...... 1,137,143 1,105,251 824,715 812,769 833,620
---------- ---------- ----------- ---------- ----------
Total assets........ 8,626,148 9,468,893 7,912,696 8,108,017 9,049,618
========== ========== =========== ========== ==========
Depreciation and
amortization expense:
Surgical Business..... 303,509 334,416 407,372 262,076 268,350
Imaging Business...... 421,847 355,072 444,500 273,971 154,692
---------- ---------- ----------- ---------- ----------
Total depreciation
and amortization
expense:........... 725,356 689,488 851,872 536,047 423,042
========== ========== =========== ========== ==========
Capital expenditures:
Surgical Business..... 241,341 59,388 273,908 118,604 1,040,685
Imaging Business...... 79,459 110,520 230,817 77,924 255,886
---------- ---------- ----------- ---------- ----------
Total capital
expenditures....... 320,800 169,908 504,725 196,528 1,296,571
========== ========== =========== ========== ==========
</TABLE>
Foreign Revenues:
All of the Company's foreign revenues are derived from the sale of products
produced in the United States. All of the Company's foreign transactions are
negotiated, invoiced and paid in United States dollars. Foreign sales (primary
to Europe) totaled 28%, 29% and 32% of fiscal 1992, 1993 and 1994 net revenue
and 21% of the nine months ended July 31, 1995 net revenue.
Major Customers:
In the nine months ended July 31, 1995 three domestic distributors accounted
for an aggregate of 46.6% of the Surgical Business' gross revenue, with each
of such distributors accounting for in excess of 10% of the Surgical Business'
gross revenue for the period.
F-17
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF JULY 31, 1995 AND FOR THE
NINE MONTHS ENDED JULY 31, 1994 AND 1995 IS UNAUDITED)
(10) SUBSEQUENT EVENT (UNAUDITED):
In August 1995, the Company signed a source code license agreement with
CogniSeis Development, Inc., granting them a worldwide, perpetual, exclusive
license to VoxelGeo software for gas and oil exploration applications. The
Company, upon CogniSeis' validation of the source code, will receive a license
fee payment of $1.5 million, which is expected to be recorded as revenue in
the fourth quarter of 1995. In addition, the agreement provides for future
royalty payments based upon sales of VoxelGeo software. Such royalties, if
any, will not exceed $2.0 million.
F-18
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriter. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that the affairs
of the Company since the date hereof or the information herein is correct as of
any time subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Price Range of Common Stock............................................... 10
Dividend Policy........................................................... 10
Dilution.................................................................. 11
Capitalization............................................................ 11
Selected Consolidated Financial Data...................................... 12
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 13
Business.................................................................. 20
Management................................................................ 37
Principal Shareholders.................................................... 39
Description of Capital Stock.............................................. 41
Underwriting.............................................................. 42
Legal Matters............................................................. 43
Experts................................................................... 43
Available Information..................................................... 43
Documents Incorporated by Reference....................................... 44
Consolidated Financial Statements......................................... F-1
</TABLE>
1,800,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
Piper Jaffray inc.
, 1995
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth estimated expenses in connection with the
issuance and distribution of the Common Stock being offered hereby. All of
such expenses are estimates, except for the SEC registration fee, the NASD fee
and the Nasdaq fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 10,580
NASD fee........................................................ 3,359
Nasdaq fee...................................................... 40,000
Printing expenses............................................... 57,000
Fees and expenses of counsel for the Company.................... 110,000
Fees and expenses of accountants for the Company................ 65,000
Transfer agent and registrar fees............................... 1,000
Blue Sky fees and expenses...................................... 10,000
Miscellaneous................................................... 3,061
--------
Total....................................................... $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Five of the Company's Bylaws provides that the Company will
indemnify such persons, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent as permitted by Minnesota
Statutes Section 302A.521 as enacted and as amended.
Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason
of the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by
the person in connection with the proceeding if certain statutory standards
are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including
one by or in the right of the corporation. Section 302A.521 contains detailed
terms regarding such right of indemnification and reference is made thereto
for a complete statement of such indemnification rights.
The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.
Pursuant to Section 6 of the Purchase Agreement, the directors and officers
of the Company are indemnified against certain liabilities as they may incur
under the Securities Act of 1933, as amended, in connection with this
Registration Statement and the related Prospectus.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Purchase Agreement (filed herewith).
5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly (filed
herewith).
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith).
23.2 Consent of Deloitte & Touche LLP (filed herewith).
23.3 Consent of Oppenheimer Wolff & Donnelly (filed herewith).
</TABLE>
ITEM 17. UNDERTAKINGS
(a) Incorporation by Reference
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Acceleration of Effectiveness
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(c) Rule 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota,
on September 20, 1995.
BIO-VASCULAR, INC.
/s/ John T. Karcanes
By: _________________________________
John T. Karcanes, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons on
September 20, 1995 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ John T. Karcanes President and Chief
____________________________ Executive Officer
John T. Karcanes (Principal Executive
Officer) and Director
* Vice President of Finance
____________________________ and Chief Financial
M. Karen Gilles Officer (Principal
Financial and Accounting
Officer)
* Chairman of the Board of
____________________________ Directors
James F. Lyons
* Director *By /s/ John T. Karcanes
____________________________ __________________________
Vincent Argiro John T. Karcanes
Pro se and attorney-in-
fact
* Director
____________________________
Richard W. Perkins
* Director
____________________________
Lawrence Perlman
* Director
____________________________
Edward E. Strickland
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Purchase Agreement (filed herewith).
5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly.
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith).
23.2 Consent of Deloitte & Touche LLP (filed herewith).
23.3 Opinion and Consent of Oppenheimer Wolff & Donnelly.
</TABLE>
<PAGE>
EXHIBIT 1.1
DRAFT
-----
9/20/95
1,800,000 SHARES/1/
BIO-VASCULAR, INC.
COMMON STOCK
PURCHASE AGREEMENT
------------------
____________, 1995
PIPER JAFFRAY INC.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Bio-Vascular, Inc., a Minnesota corporation (the "Company"), proposes to
sell to you (the "Underwriter") an aggregate of 1,800,000 shares (the "Firm
Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of the
Company. The Firm Shares consist of 1,800,000 authorized but unissued shares of
Common Stock to be issued and sold by the Company. The Company has also granted
to the Underwriter an option to purchase up to 270,000 additional shares of
Common Stock on the terms and for the purposes set forth in Section 3 hereof
(the "Option Shares"). The Firm Shares and any Option Shares purchased pursuant
to this Purchase Agreement are herein collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of the
Securities to the Underwriter.
1. Registration Statement. A registration statement on Form S-3 (File
No. 33-62199) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations ("Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder and has been filed with the Commission; one or
more amendments to such registration statement have also been so prepared and
have been, or will be, so filed. Copies of such registration statement and
amendments and each related preliminary prospectus have been delivered to you.
------------------------
/1/Plus an option to purchase up to 270,000 additional shares to cover over-
allotments.
<PAGE>
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, including a registration statement (if any) filed pursuant to Rule
462(b) of the Rules and Regulations increasing the size of the offerings
registered under the Act, and, in the event of any amendment thereto after the
effective date and prior to the First Closing Date (as hereinafter defined),
such registration statement as so amended (but only from and after the
effectiveness of such amendment), including the information deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule
430A(b), if applicable, is hereinafter called the "Registration Statement." The
prospectus included in the Registration Statement at the time it is or was
declared effective by the Commission is hereinafter called the "Prospectus,"
except that if any prospectus filed by the Company with the Commission pursuant
to Rule 424(b) of the Rules and Regulations or any other prospectus provided to
the Underwriter by the Company for use in connection with the offering of the
Securities (whether or not required to be filed by the Company with the
Commission pursuant to Rule 424(b) of the Rules and Regulations) differs from
the prospectus on file at the time the Registration Statement is or was declared
effective by the Commission, the term "Prospectus" shall refer to such differing
prospectus from and after the time such prospectus is filed with the Commission
or transmitted to the Commission for filing pursuant to such Rule 424(b) or from
and after the time it is first provided to the Underwriter by the Company for
such use. The term "Preliminary Prospectus" as used herein means any preliminary
prospectus included in the Registration Statement prior to the time it becomes
or became effective under the Act and any prospectus subject to completion as
described in Rule 430A of the Rules and Regulations. Any reference herein to the
Registration Statement, any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the Act, as such documents are modified or
superseded by such Registration Statement, Preliminary Prospectus or Prospectus.
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, the
Underwriter as follows:
(i) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof, did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; except
that the foregoing shall not apply to statements in or omissions from any
Preliminary Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by the Underwriter specifically for
use in the preparation thereof.
-2-
<PAGE>
(ii) As of the time the Registration Statement (or any post-effective
amendment thereto) is or was declared effective by the Commission, upon the
filing or first delivery to the Underwriter of the Prospectus (or any
supplement to the Prospectus) and at the First Closing Date and Second
Closing Date (as hereinafter defined), (A) the Registration Statement and
Prospectus (in each case, as so amended and/or supplemented) will conform
or conformed in all material respects to the requirements of the Act and
the Rules and Regulations, (B) the Registration Statement (as so amended)
will not or did not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (C) the Prospectus (as so
supplemented) will not or did not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they are or were made, not misleading; except that the foregoing
shall not apply to statements in or omissions from any such document in
reliance upon, and in conformity with, written information furnished to the
Company by the Underwriter specifically for use in the preparation thereof.
If the Registration Statement has been declared effective by the
Commission, no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceeding for that purpose has been
initiated or, to the Company's knowledge, threatened by the Commission.
(iii) The consolidated financial statements of the Company,
together with the notes thereto, set forth or incorporated by reference in
the Registration Statement and Prospectus comply in all material respects
with the requirements of the Act and fairly present the consolidated
financial condition of the Company and its consolidated subsidiary as of
the dates indicated and the results of operations and changes in cash flows
for the periods therein specified in conformity with generally accepted
accounting principles consistently applied throughout the periods involved
(subject, in the case of unaudited financial statements, to normal year-end
adjustments which in the opinion of management are not material, and except
as otherwise stated therein); and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be
included in the Registration Statement or Prospectus. Each of Coopers &
Lybrand L.L.P. and Deloitte & Touche LLP, each of which has expressed its
opinion with respect to certain of the financial statements and schedules
filed as a part of the Registration Statement and included in the
Registration Statement and Prospectus, are independent public accountants
as required by the Act and the Rules and Regulations.
(iv) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its subsidiaries
has full corporate power and authority to own its properties and conduct
its business as currently being carried on and as described in the
Registration Statement and Prospectus, and is duly qualified to do business
as a foreign corporation in good standing in each jurisdiction in which it
owns
-3-
<PAGE>
or leases real property or in which the conduct of its business makes such
qualification necessary and in which the failure to so qualify would have a
material adverse effect upon its business, condition (financial or
otherwise) or properties, taken as a whole.
(v) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or material obligations,
direct or contingent, or entered into any material transactions, other than
in the ordinary course of business consistent with past practice, or
declared or paid any dividends or made any distribution of any kind with
respect to its capital stock; and there has not been any change in the
capital stock (other than a change in the number of outstanding shares of
Common Stock due to the issuance of shares upon the exercise of outstanding
options or warrants or pursuant to employee benefit plans referred to or
incorporated by reference in the Registration Statement), or any material
increase in the short-term or long-term debt, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital
stock, of the Company or any of its subsidiaries (other than pursuant to
employee benefit plans referred to or incorporated by reference in the
Registration Statement), or any material adverse change, or any development
involving a prospective material adverse change, in the general affairs,
condition (financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole.
(vi) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company or any of its subsidiaries is a
party before or by any court or governmental agency, authority or body, or
any arbitrator, which might result in any material adverse change in the
condition (financial or otherwise), business, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole.
(vii) There are no contracts or documents of the Company or any of its
subsidiaries that are required to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations that have not been so
filed.
(viii) Each of this Agreement and the Underwriter Warrants (as
hereinafter defined) has been duly authorized, executed and delivered by
the Company, and constitutes a valid, legal and binding obligation of the
Company, enforceable in accordance with its terms, except as rights to
indemnity hereunder may be limited by federal or state securities laws and
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity. The execution, delivery and
performance of this Agreement and the Underwriter Warrants and the
consummation of the transactions herein and thereunder contemplated will
not result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute,
-4-
<PAGE>
any agreement or instrument to which the Company is a party or by which it
is bound or to which any of its property is subject, the Company's charter
or by-laws, or any order, rule, regulation or decree of any court or
governmental agency or body having jurisdiction over the Company or any of
its properties; no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement or the Underwriter
Warrants or for the consummation of the transactions contemplated hereby or
thereby including the issuance or sale of the Securities by the Company and
the issuance of the shares of Common Stock upon exercise of the Underwriter
Warrants, except such as may be required under the Act or state securities
or blue sky laws; and the Company has full power and authority to enter
into this Agreement and the Underwriter Warrants and to authorize, issue
and sell the Securities as contemplated by this Agreement and the shares of
Common Stock as contemplated by the Underwriter Warrants.
(ix) All of the issued and outstanding shares of capital stock of the
Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights
to subscribe for or purchase securities, and the holders thereof are not
subject to personal liability by reason of being such holders; the
Securities which may be sold hereunder by the Company have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms hereof, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders; the shares of Common Stock to be
issued upon exercise of the Underwriter Warrants have been reserved for
issuance and duly authorized and, when issued and paid for pursuant to the
terms of such Underwriter Warrants, will be validly issued and will be
fully paid and nonassessable, and the holders thereof will not be subject
to personal liability by reason of being such holders; and the capital
stock of the Company, including the Common Stock, conforms to the
description thereof in the Registration Statement and Prospectus under the
caption "Description of Capital Stock". Except as set forth in the
Registration Statement or in the Prospectus, there are no preemptive rights
or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to which
the Company is a party or by which the Company is bound. Except as set
forth in the Registration Statement or in the Prospectus, neither the
filing of the Registration Statement nor the offering or sale of the
Securities or the Underwriter Warrants as contemplated by this Agreement or
of the shares of Common Stock as contemplated by the Underwriter Warrants
gives rise to any rights, other than those which have been waived, for or
relating to the registration of any shares of Common Stock or other
securities of the Company and no such rights otherwise exist. All of the
issued and outstanding shares of capital stock of each of the Company's
subsidiaries have been duly and validly authorized and issued and are fully
paid and nonassessable, and the Company owns of record and beneficially,
free and clear of any security interests,
-5-
<PAGE>
claims, liens, proxies, equities or other encumbrances, all of the issued
and outstanding shares of such stock. Except as described in the
Registration Statement and the Prospectus, there are no options, warrants,
agreements, contracts or other rights in existence to purchase or acquire
from the Company or any subsidiary of the Company any shares of the capital
stock of the Company or any subsidiary of the Company. The Company has an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus under the caption "Capitalization".
(x) The Company and each of its subsidiaries holds all franchises,
grants, authorizations, licenses, permits, easements, consents,
certificates and orders of any governmental or self-regulatory body
("Permits") required for the conduct of its business except those Permits
the absence of which would not have a material adverse effect on the
condition (financial or otherwise), business, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole. The Company is operating in compliance in all material respects
with such Permits and all such Permits are valid and in full force and
effect. The Company and each of its subsidiaries is in compliance with all
applicable federal, state, local and foreign laws, regulations, orders and
decrees except where noncompliance would not have a material adverse effect
on the condition (financial or otherwise), business, prospects, net worth
or results of operations of the Company and its subsidiaries, taken as a
whole.
(xi) The Company and its subsidiaries have good and marketable title
to all property described in the Registration Statement and Prospectus as
being owned by them, in each case free and clear of all liens, claims,
security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus; the property held under
lease by the Company and its subsidiaries is held by them under valid,
subsisting and enforceable leases with only such exceptions with respect to
any particular lease as do not interfere in any material respect with the
conduct of the business of the Company or its subsidiaries, taken as a
whole.
(xii) The Company and each of its subsidiaries owns or possesses all
patents, patent applications, trademarks, service marks, tradenames,
trademark registrations, service mark registrations, copyrights, licenses,
inventions, know-how, trade secrets and rights ("Intellectual Property
Rights") necessary for the conduct of the business of the Company and its
subsidiaries as currently carried on or intended to be carried on and as
described in the Registration Statement and Prospectus except where the
failure to possess such Intellectual Property Rights would not in the
aggregate have an adverse effect on the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company and
its subsidiaries, taken as a whole; the expiration of any patents,
trademarks, service marks, tradenames, trademark registrations, copyrights
and licenses would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company except as stated in the Registration Statement and
Prospectus; except as described in the
-6-
<PAGE>
Prospectus, no name which the Company or any of its subsidiaries uses and
no other aspect of the business of the Company or any of its subsidiaries
involves or gives rise to any infringement of or conflict with, or license
or similar fees for, any patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others material to the business or prospects of the Company and neither the
Company nor any of its subsidiaries has received any notice alleging any
such infringement, license or fee.
(xiii) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws, or in breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note, indenture,
loan agreement or any other material contract, lease or other instrument to
which it is subject or by which any of them may be bound, or to which any
of the material property or assets of the Company or any of its
subsidiaries is subject where such breach or default could have a material
adverse effect on the condition (financial or otherwise), business,
prospects, net worth or results of operations of the Company and its
subsidiaries, taken as a whole, which breach or default has not been
waived.
(xiv) The Company and its subsidiaries have filed all federal, state,
local and foreign income and franchise tax returns required to be filed and
are not in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto, other than any
which the Company or any of its subsidiaries is contesting in good faith.
(xv) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act or the Securities
Exchange Act of 1934 to be distributed by the Company.
(xvi) The Securities have been approved for quotation upon notice of
issuance on the Nasdaq National Market.
(xvii) Other than the subsidiaries of the Company listed in Exhibit
21 to the Company's Annual Report on Form 10-K for the year ended October
31, 1994, the Company owns no capital stock or other equity or ownership or
proprietary interest in any corporation, partnership, association, trust or
other entity.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets;
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<PAGE>
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xix) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(xx) Neither the Company nor any of its affiliates is presently doing
business with the government of Cuba or with any person or affiliate
located in Cuba.
(xxi) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts adequate, in its reasonable
opinion, for its business and in line with the insurance maintained by
similar companies and businesses.
(xxii) The documents incorporated by reference in the Prospectus, at
the time they were or hereafter are filed with the Commission, complied or
when so filed will comply, as the case may be, in all material respects
with the requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder, and, when read
together and with the other information in the Prospectus and as such
documents may be modified or superseded by the Prospectus, did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were or are made, not misleading.
(b) Any certificate signed by any officer of the Company and delivered
to you or to counsel for the Underwriter shall be deemed a representation and
warranty by the Company to the Underwriter as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell the Firm Shares to the Underwriter, and the
Underwriter agrees to purchase from the Company the number of Firm Shares set
forth opposite the name the Underwriter in Schedule I hereto. The purchase
price for each Firm Share shall be $____ per share.
The Firm Shares will be delivered by the Company to you for your
account against payment of the purchase price therefor by certified or official
bank check or other next day funds payable to the order of the Company at the
offices of Piper Jaffray Inc., Piper Jaffray
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Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as
may be mutually acceptable, at 9:00 a.m., Minneapolis time, on the third full
business day following the date hereof, or at such other time as you and the
Company determine, such time and date of delivery being herein referred to as
the "First Closing Date." [**The Firm Shares, in definitive form and in such
denominations and registered in such names as you may request upon at least two
business days' prior notice to the Company, will be made available for checking
and packaging at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable, at least one business day prior to the First Closing Date.]
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company with respect to 270,000 Option Shares, hereby grants to the Underwriter
an option to purchase all or any portion of the Option Shares at the same
purchase price as the Firm Shares, for use solely in covering any over-
allotments made by the Underwriter in the sale and distribution of the Firm
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the effective date of this Agreement upon notice
(confirmed in writing) by the Underwriter to the Company setting forth the
aggregate number of Option Shares as to which the Underwriter is exercising the
option, the names and denominations in which the certificates for the Option
Shares are to be registered and the date and time, as determined by the
Underwriter, when the Option Shares are to be delivered, such time and date
being herein referred to as the "Second Closing" and "Second Closing Date",
respectively; provided, however, that the Second Closing Date shall not be
earlier than the First Closing Date nor earlier than the second business day
after the date on which the option shall have been exercised. If the option is
exercised, the obligation of the Underwriter shall be to purchase from the
Company up to an aggregate of 270,000 Option Shares. No Option Shares shall be
sold and delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for your
account against payment of the purchase price therefor by certified or official
bank check or other next day funds payable to the order of the Company at the
offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable at
9:00 a.m., Minneapolis time, on the Second Closing Date. [**The Option Shares
in definitive form and in such denominations and registered in such names as you
have set forth in your notice of option exercise, will be made available for
checking and packaging at the office of Piper Jaffray Inc., Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable, at least one business day prior to the Second Closing
Date.]
(c) On the First Closing Date, the Company will issue and sell to the
Underwriter or its designees, consistent with all applicable state and federal
securities laws and regulations and all applicable regulations of the National
Association of Securities
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<PAGE>
Dealers, Inc. ("NASD"), warrants, substantially in the form attached hereto as
Exhibit A, for the purchase of an aggregate of 90,000 shares of Common Stock, at
a price equal to $.001 per share of Common Stock covered thereby (the
"Underwriter Warrants"). The Underwriter Warrants shall have an exercise price
per share equal to the market price of the Common Stock on the date immediately
preceding the date hereof (the "Pricing Date"), provided, however, that if the
market price on the Pricing Date is less than the purchase price for each Firm
Share hereunder, then the exercise price per share shall be the purchase price
of the Firm Share. The Underwriter Warrants shall be exercisable over a four-
year period commencing one-year from the date of this Agreement. "Market price"
for purposes of this paragraph 4(c) shall mean, if the Common Stock is traded on
the Nasdaq National Market, the closing price of the Common Stock on the Nasdaq
National Market, or, if the Common Stock is otherwise traded in the over-the-
counter market, the closing bid price. The Underwriter Warrants shall be
dated, executed and delivered as of the First Closing Date.
4. Covenants. The Company covenants and agrees with the Underwriter as
follows:
(i) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause
the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify you
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed and of any request by the
Commission for any amendment or supplement to the Registration Statement or
Prospectus or additional information; if the Company has elected to rely on
Rule 430A of the Rules and Regulations, the Company will file a Prospectus
containing the information omitted therefrom pursuant to such Rule 430A
with the Commission within the time period required by, and otherwise in
accordance with the provisions of, Rules 424(b) and 430A of the Rules and
Regulations; the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus that, in your opinion, may be
necessary or advisable in connection with the distribution of the
Securities by you; and the Company will not file any amendment or
supplement to the Registration Statement or Prospectus to which you shall
reasonably object by notice to the Company after having been furnished a
copy a reasonable time prior to the filing.
(ii) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement,
of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceeding for any such purpose; and the Company will promptly
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use its best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such a stop order should be issued.
(iii) Within the time during which a prospectus relating to the
Securities is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Securities as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act,
the Company will promptly notify you and will amend the Registration
Statement or supplement the Prospectus (at the expense of the Company) so
as to correct such statement or omission or effect such compliance.
(iv) The Company will cooperate with you and your counsel in
qualifying the Securities for sale under the securities laws of such
jurisdictions as you reasonably designate and to continue such
qualifications in effect so long as required for the distribution of the
Securities, except that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute a general
consent to service of process in any state.
(v) The Company will furnish to you copies of the Registration
Statement (two of which will be signed and will include all exhibits), each
Preliminary Prospectus, the Prospectus, and all amendments and supplements
to such documents, in each case as soon as available and in such quantities
as you may from time to time reasonably request.
(vi) During a period of five years commencing with the date hereof,
the Company will furnish to you copies of all periodic and special reports
furnished to the stockholders of the Company and all information, documents
and reports filed with the Commission, the NASD, the Nasdaq National Market
or any securities exchange.
(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning
after the effective date of the Registration Statement that shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
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<PAGE>
(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 8(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses incurred in connection with
the delivery to the Underwriter of the Securities, (B) all expenses and
fees (including, without limitation, fees and expenses of the Company's
accountants and counsel but, except as otherwise provided below, not
including fees of the Underwriter's counsel) in connection with the
preparation, printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all amendments,
schedules, and exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or supplement
thereto, and the printing, delivery, and shipping of this Agreement and
other underwriting documents, including Blue Sky Memoranda, (C) all filing
fees and fees and disbursements of the Underwriter's counsel incurred in
connection with the qualification of the Securities for offering and sale
by the Underwriter or by dealers under the securities or blue sky laws of
the states and other jurisdictions which the Underwriter shall designate in
accordance with Section 4(a)(iv) hereof, (D) the fees and expenses of any
transfer agent or registrar, (E) the filing fees incident to any required
review by the NASD of the terms of the sale of the Securities, (F) listing
fees, if any, and (G) all other costs and expenses incident to the
performance of its obligations hereunder that are not otherwise
specifically provided for herein. If the sale of the Securities provided
for herein is not consummated by reason of action by the Company pursuant
to Section 8(a) hereof which prevents this Agreement from becoming
effective, or by reason of any failure, refusal or inability on the part of
the Company to perform any agreement on its part to be performed, or
because any other condition of the Underwriter's obligations hereunder
required to be fulfilled by the Company is not fulfilled, the Company will
reimburse the Underwriter for all out-of-pocket disbursements (including
fees and disbursements of counsel) incurred by the Underwriter in
connection with its investigation, preparing to market and marketing the
Securities or in contemplation of performing their obligations hereunder.
The Company shall not in any event be liable to the Underwriter for loss of
anticipated profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder substantially in accordance with the
purposes set forth in the Prospectus under the caption "Use of Proceeds".
(x) The Company will not, without the prior written consent of the
Underwriter, offer for sale, sell, contract to sell, grant any option for
the sale of or otherwise issue or dispose of any Common Stock or any
securities convertible into or exchangeable for, or any options or rights
to purchase or acquire, Common Stock, except to the Underwriter pursuant to
this Agreement and pursuant to the Company's 1988 Employee Incentive Stock
Option Plan and the Directors Stock Option Plan, for a
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<PAGE>
period of 90 days after the commencement of the public offering of the
Securities by the Underwriter.
(xi) The Company either has caused to be delivered to you or will
cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each of the Company's directors and
officers stating that such person agrees that he or she will not, without
the prior written consent of the Underwriter, offer for sale, sell,
contract to sell or otherwise dispose of any shares of Common Stock or
rights to purchase Common Stock for a period of 90 days after commencement
of the public offering of the Securities by the Underwriter.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(xiii) Other than as contemplated by this Agreement, the Company will
not incur any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(xiv) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriter if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof
or after a change occurs with respect to previously reported information.
5. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder are subject to the accuracy, as of the date hereof and at
each of the First Closing Date and the Second Closing Date (as if made at such
Closing Date), of and compliance with all representations, warranties and
agreements of the Company contained herein, to the performance by the Company of
its respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such later
time and date as you shall approve and all filings required by Rule 424 and Rule
430A of the Rules and Regulations shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereof shall have been issued; no proceedings for the issuance of such an order
shall have been initiated or threatened; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to your satisfaction.
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<PAGE>
(b) The Underwriter shall not have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto, contains an untrue statement of fact which, in your opinion, is
material, or omits to state a fact which, in your opinion, is material and is
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or material obligations, direct or contingent,
or entered into any material transactions, other than in the ordinary course of
business consistent with past practice, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a change in the
number of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants or pursuant to employee benefit
plans referred to or incorporated by reference in the Registration Statement),
or any material increase in the short-term or long-term debt of the Company, or
any issuance of options, warrants, convertible securities or other rights to
purchase the capital stock of the Company or any of its subsidiaries other than
pursuant to employee benefit plans referred to or incorporated by reference in
the Registration Statement, or any material adverse change or any development
involving a prospective material adverse change (whether or not arising in the
ordinary course of business), in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or results
of operations of the Company and its subsidiaries, taken as a whole, that, in
your judgment, makes it impractical or inadvisable to offer or deliver the
Securities on the terms and in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished to you the
opinion of Oppenheimer Wolff & Donnelly, counsel for the Company, dated such
Closing Date and addressed to you, to the effect that:
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its
subsidiaries has full corporate power and authority to own its properties
and conduct its business as currently being carried on and as described in
the Registration Statement and Prospectus, and is not qualified to do
business as a foreign corporation in any state, and the failure to so
qualify, considering all such cases in the aggregate, would not have a
material adverse effect upon the business, condition (financial or
otherwise) or properties of the Company and its subsidiaries, taken as a
whole.
(ii) The capital stock of the Company conforms as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Capital
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Stock." All of the issued and outstanding shares of the capital stock of
the Company have been duly authorized and validly issued and are fully paid
and nonassessable, and the holders thereof are not subject to personal
liability by reason of being such holders. The Securities to be issued and
sold by the Company hereunder have been duly authorized and, when issued,
delivered and paid for in accordance with the terms of this Agreement, will
have been validly issued and will be fully paid and nonassessable, and the
holders thereof will not be subject to personal liability by reason of
being such holders. Except as set forth in the Registration Statement or in
the Prospectus, there are no preemptive rights or other rights to subscribe
for or to purchase, or any restriction upon the voting or transfer of, any
shares of Common Stock pursuant to the Company's charter, by-laws or any
agreement or other instrument known to such counsel to which the Company is
a party or by which the Company is bound. To the best of such counsel's
knowledge, except as set forth in the Prospectus, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived, for or relating to the registration of any shares
of Common Stock or other securities of the Company and no such rights
otherwise exist.
(iii) All of the issued and outstanding shares of capital stock of
each of the Company's subsidiaries have been duly and validly authorized
and issued and are fully paid and nonassessable, and, to the best of such
counsel's knowledge, the Company owns of record and beneficially, free and
clear of any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of such stock. To
the best of such counsel's knowledge, except as described in the
Registration Statement and Prospectus, there are no options, warrants,
agreements, contracts or other rights in existence to purchase or acquire
from the Company or any subsidiary any shares of the capital stock of the
Company or any subsidiary of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission.
(v) The descriptions in the Registration Statement and Prospectus of
statutes, legal and governmental proceedings, contracts and other documents
under the captions "Risk Factors-Governmental Regulation" "-Limitations on
Third Party Reimbursement", "-Risks Associated with Human Tissue Products"
and "-Anti-Takeover Considerations", "Management's Discussion and Analysis
of Results of Operations-Overview", "Business-General", "Business-Surgical
Business-Marketing", "-Governmental Regulation", and "-Third Party
Reimbursement and Cost Containment" and "Description of Capital Stock" are
accurate in all material respects; and such counsel does not know of any
statutes or legal or governmental proceedings required to be described in
the Prospectus that are not described as required, or of any contracts or
documents of a character required to be described in the Registration
Statement or
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<PAGE>
Prospectus or included as exhibits to the Registration Statement that are
not described or included as required.
(vi) The Company has full corporate power and authority to enter into
this Agreement and the Underwriter Warrants, and this Agreement has been
duly authorized, executed and delivered by the Company and constitutes a
valid, legal and binding obligation of the Company enforceable in
accordance with its terms (except as rights to indemnity hereunder may be
limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity); the execution, delivery and performance of
this Agreement and the Underwriter Warrants and the consummation of the
transactions herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, rule or regulation, any agreement or instrument
required to be disclosed pursuant to Item 601 of Regulation S-K under the
Act as a material contract, the Company's charter or by-laws, or any order
or decree known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its respective properties;
and no consent, approval, authorization or order of, or filing with, any
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement or the Underwriter Warrants or
for the consummation of the transactions contemplated hereby and thereby,
including the issuance or sale of the Securities by the Company and the
shares of Common Stock issuable upon exercise of the Underwriter Warrants,
except such as may be required under the Act or state securities laws.
(vii) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries is in violation of its respective charter or
by-laws.
(viii) The Registration Statement and the Prospectus, and any
amendment thereof or supplement thereto, comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations
(except for the financial statements, schedules and other financial and
statistical data, as to which such counsel need express no opinion). On the
basis of conferences with officers of the Company, examination of documents
referred to in the Registration Statement and Prospectus and such other
procedures as such counsel deemed appropriate, nothing has come to the
attention of such counsel that causes such counsel to believe that the
Registration Statement or any amendment thereof, at the time the
Registration Statement became effective and as of such Closing Date
(including any Registration Statement Filed under Rule 462(b) of the Rules
and Regulations, if any), contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (as of its date and as of such Closing Date), as amended or
supplemented, includes any untrue statement of material fact or omits to
state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; it being
understood that
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such counsel need express no opinion as to the financial statements,
schedules or other financial or statistical data included in any of the
documents mentioned in this clause.
(ix) The Company has the full corporate power and authority to
authorize, issue and sell the shares of Common Stock issuable upon exercise
of the Underwriter Warrants. The Underwriter Warrants have been duly
authorized and when issued pursuant to the terms of this Agreement will be
duly executed and delivered by the Company and will constitute valid and
binding obligations of the Company enforceable in accordance with their
terms (except as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity). The
shares of Common Stock issuable upon exercise of the Underwriter Warrants
have been duly authorized and reserved for issuance upon exercise of the
Underwriter Warrants, and upon exercise thereof and receipt by the Company
of the consideration for such shares in accordance with the terms thereof,
such shares will be validly issued, fully paid and nonassessable and the
issuance of such shares are not, and to the best of such counsel's
knowledge will not be subject to any pre-emptive rights or other rights to
subscribe for or purchase securities of the Company.
(x) Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to matters of
law other than Minnesota and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company and its subsidiaries
provided that the extent of such reliance is specified in such opinion.
(e) On each Closing Date, there shall be furnished to you the opinion
of [**Haugen and Nickolai], patent counsel for the Company, dated such Closing
Date and addressed to you, covering the matters set forth on Exhibit B hereto.
(f) On each Closing Date, there shall have been furnished to you such
opinion or opinions from Faegre & Benson P.L.L.P., counsel for the Underwriter,
dated such Closing Date and addressed to you, with respect to the formation of
the Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as you reasonably may request, and such
counsel shall have received such papers and information as they request to
enable them to pass upon such matters.
(g) On each Closing Date you shall have received letters of each of
Coopers & Lybrand L.L.P. and Deloitte & Touche LLP, dated such Closing Date and
addressed to you, confirming that they are independent public accountants within
the meaning of
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the Act and are in compliance with the applicable requirements relating to the
qualifications of accountants under Rule 2-01 of Regulation S-X of the
Commission, and stating, as of the date of such letter (or, with respect to
matters involving changes or developments since the respective dates as of which
specified financial information is given in the Prospectus, as of a date not
more than five days prior to the date of such letter), the conclusions and
findings of said firm with respect to the financial information and other
matters covered by its letter delivered to you concurrently with the execution
of this Agreement, and the effect of the letter so to be delivered on such
Closing Date shall be to confirm the conclusions and findings set forth in such
prior letter.
(h) On each Closing Date, there shall have been furnished to you a
certificate, dated such Closing Date and addressed to you, signed by the chief
executive officer and by the chief financial officer of the Company, to the
effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at and
as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness of the
Registration Statement or any amendment thereof or the qualification of the
Securities for offering or sale has been issued, and no proceeding for that
purpose has been instituted or, to the best of their knowledge, is
contemplated by the Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus, and any amendments thereof or
supplements thereto, and (A) such documents contain all statements and
information required to be included therein, the Registration Statement, or
any amendment thereof, does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, does not include any untrue
statement of material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, (B) since the effective date of the Registration
Statement there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth, (C)
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has incurred any material liabilities or material
obligations, direct or contingent, or entered into any material
transactions, not in the ordinary course of business consistent with past
practice, or declared or paid any dividends or made any distribution of any
kind with respect to its capital stock, and except as disclosed in the
Prospectus, there has not been any change in the capital stock (other than
a change in the number of outstanding shares of Common
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Stock due to the issuance of shares upon the exercise of outstanding
options or warrants or pursuant to employee benefit plans referred to or
incorporated by reference in the Registration Statement), or any material
increase in the short-term or long-term debt, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital
stock, of the Company, or any of its subsidiaries other than pursuant to
employee benefit plans referred to or incorporated by reference in the
Registration Statement, or any material adverse change or any development
involving a prospective material adverse change (whether or not arising in
the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken
as a whole, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the
Company or any of its subsidiaries is a party before or by any court or
governmental agency, authority or body, or any arbitrator, which might
result in any material adverse change in the condition (financial or
otherwise), business, prospects or results of operations of the Company and
its subsidiaries, taken as a whole.
(i) The Company shall have furnished to you and your counsel such
additional documents, certificates and evidence as you or they may have
reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and your counsel. The Company will furnish you with such
conformed copies of such opinions, certificates, letters and other documents as
you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise (including in
settlement of any litigation if such settlement is effected with the written
consent of the Company), insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, including the information deemed to be a part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A, if
applicable, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending against such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged
-19-
<PAGE>
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof; and further provided, however,
that the Company shall not be liable to the Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from the Underwriter but was not
sent or given a copy of the Prospectus (as amended or supplemented) at or prior
to the written confirmation of the sale of such Securities to such person in any
case where such delivery of the Prospectus (as amended or supplemented) is
required by the Act, unless such failure to deliver the Prospectus (as amended
or supplemented) was a result of noncompliance by the Company with Section 4(v)
of this Agreement.
In addition to its other obligations under this Section 6(a), the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 6(a), it will reimburse the Underwriter on a monthly basis for all
reasonable legal fees or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter shall promptly return it to the party or parties that
made such payment, together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Norwest Bank Minnesota,
N.A. (the "Prime Rate"). Any such interim reimbursement payments which are not
made to the Underwriter within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue
-20-
<PAGE>
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by the Underwriter specifically for
use in the preparation thereof, and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending against any such loss, claim, damage, liability or
action. This indemnity agreement shall be in addition to any liabilities which
the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if the defendants in any such action include both the indemnified party or
parties and the indemnifying party, and the indemnified party or parties shall
have reasonably concluded that there may be legal defenses or claims available
to it or them which are different from or additional to those available to the
indemnifying party, or if there is a conflict of interest which would prevent
counsel for the indemnifying party or parties from also representing the
indemnified party or parties, and that it is advisable for the indemnified party
or parties to be represented by separate counsel, then the indemnified party or
parties shall have the right to employ a single counsel to represent the
indemnified party or the indemnified parties as a group, in which event the
reasonable fees and expenses of the separate counsel shall be borne by the
indemnifying party or parties. An indemnifying party shall not be obligated
under any settlement agreement relating to any action under this Section 6 to
which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above, (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriter on the other from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable
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<PAGE>
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and the Underwriter on the other in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriter on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriter, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriter and the parties' relevant intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriter agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were to be determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this subsection (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
against any action or claim which is the subject of this subsection (d).
Notwithstanding the provisions of this subsection (d), the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the
Underwriter within the meaning of the Act; and the obligations of the
Underwriter under this Section 6 shall be in addition to any liability that the
Underwriter may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company (including any person who, with his
consent, is named in the Registration Statement as about to become a director of
the Company), to each officer of the Company who has signed the Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the Underwriter
and the Company contained in Section 6 hereof, shall
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<PAGE>
remain operative and in full force and effect regardless of any investigation
made by or on behalf of the Underwriter or any controlling person thereof, or
the Company or any of its officers, directors, or controlling persons, and shall
survive delivery of, and payment for, the Securities to and by the Underwriter
hereunder.
8. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at 10:00 a.m., Minneapolis
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you or the Company may prevent
this Agreement from becoming effective without liability of any party to any
other party, except that the provisions of Section 4(viii) and Section 6 hereof
shall at all times be effective.
(b) You shall have the right to terminate this Agreement by giving
notice as hereinafter specified at any time at or prior to the First Closing
Date, and the option referred to in Section 3(b), if exercised, may be canceled
at any time prior to the Second Closing Date, if (i) the Company shall have
failed, refused or been unable, at or prior to such Closing Date, to perform any
agreement on its part to be performed hereunder, (ii) any other condition of the
Underwriter's obligations hereunder is not fulfilled, (iii) trading on the New
York Stock Exchange or the American Stock Exchange shall have been wholly
suspended, (iv) minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the New
York Stock Exchange or the American Stock Exchange, by such Exchange or by order
of the Commission or any other governmental authority having jurisdiction, (v) a
banking moratorium shall have been declared by Federal, New York or Minnesota
authorities, or (vi) there has occurred any material adverse change in the
financial markets in the United States or an outbreak of major hostilities (or
an escalation thereof) in which the United States is involved, a declaration of
war by Congress, any other substantial national or international calamity or any
other event or occurrence of a similar character shall have occurred since the
execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(viii) and Section 6 hereof
shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
notified promptly by
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<PAGE>
you by telephone or telegram, confirmed by letter. If the Company elects to
prevent this Agreement from becoming effective, you shall be notified by the
Company by telephone or telegram, confirmed by letter.
9. Default by the Company. If the Company shall fail at the First
Closing Date to sell and deliver the number of Securities which it is obligated
to sell hereunder, then this Agreement shall terminate without any liability on
the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company so
defaulting from liability, if any, in respect of such default.
10. Information Furnished by Underwriter. The statements set forth in
the last paragraph of the cover page, in the first two full paragraphs on the
bottom of the inside first cover page and under the caption "Underwriting" in
any Preliminary Prospectus and in the Prospectus constitute the written
information furnished by or on behalf of the Underwriter referred to in Section
2 and Section 6 hereof.
11. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriter, shall
be mailed, telegraphed or delivered to Piper Jaffray Inc., Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402; if to the Company, shall
be mailed, telegraphed or delivered to it at 2575 University Avenue, St. Paul,
Minnesota 55114 Attention: President. All notices given by telegram shall be
promptly confirmed by letter. Any party to this Agreement may change such
address for notices by sending to the parties to this Agreement written notice
of a new address for such purpose.
12. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Except as set forth in Section 6(e),
nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the Securities from any of the several Underwriter.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
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<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the Company
and you in accordance with its terms.
Very truly yours,
BIO-VASCULAR, INC.
By____________________________________
[Title]
Confirmed as of the date first
above mentioned.
PIPER JAFFRAY INC.
By___________________________________
Managing Director
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<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares(1)
----------- --------------
<S> <C>
Piper Jaffray Inc. 1,800,000
</TABLE>
_________________
(1) The Underwriter may purchase up to an additional 270,000 Option Shares, to
the extent the option described in Section 3 of the Agreement is exercised,
in the manner described in the Agreement.
<PAGE>
EXHIBIT A
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
BIO-VASCULAR, INC.
THIS CERTIFIES THAT, for value received, Piper Jaffray Inc. (herein
called "Purchaser") or its registered assigns is entitled to subscribe for and
purchase from Bio-Vascular, Inc. (herein called the "Company"), a corporation
organized and existing under the laws of the State of Minnesota, at the price
specified below (subject to adjustment as noted below) at any time from and
after the first anniversary of this Warrant (the "Effective Date") to and
including the fourth anniversary date of the Effective Date, __________________
__________ (__________) fully paid and nonassessable shares of the Company's
Common Stock, par value $.01 per share (subject to adjustment as noted below).
The warrant purchase price (subject to adjustment as noted below)
shall be $_________ per share.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise. The rights represented by this Warrant may be exercised
by the holder hereof, in whole or in part, by written notice of exercise
delivered to the Company prior to the intended date of exercise and by the
surrender of this Warrant (properly endorsed if required) at the principal
office of the Company and upon payment to it by check of the purchase price for
such shares. The Company agrees that the shares so purchased shall be and are
deemed to be issued to the holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. Subject to the
provisions of the next succeeding paragraph, certificates for the shares of
stock so purchased shall be delivered to the holder hereof within a reasonable
time, not exceeding 7 days, after the rights represented by this Warrant shall
have been so exercised, and, unless this Warrant has expired, a new Warrant
representing the number of shares, if any, with respect to which this Warrant
shall not then have been exercised shall also be delivered to the holder hereof
within such time.
2. Restriction on Transferability. Notwithstanding the foregoing,
however, the Company shall not be required to deliver any certificate for shares
of stock upon exercise of this Warrant except in accordance with the provisions,
and subject to the limitations, of paragraph 7 hereof and the restrictive legend
under the heading "Restriction
1
<PAGE>
on Transfer" below. This Warrant shall not be sold, transferred, assigned or
hypothecated prior to the Effective Date except to persons who are officers of
the Purchaser, to a partnership comprised of such persons and the Purchaser, or
by operation of law.
3. Covenants of the Company. The Company covenants and agrees that
all shares which may be issued upon the exercise of the rights represented by
this Warrant will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
4. Anti-Dilution Adjustments. The above provisions are however,
subject to the following:
(a) The warrant purchase price from and after the date of issuance of
this Warrant, shall be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the warrant purchase price,
the holder of this Warrant shall thereafter be entitled to purchase, at the
warrant purchase price resulting from such adjustment, the number of shares
obtained by multiplying the warrant purchase price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the warrant purchase price resulting from such adjustment.
(b) In case the Company shall (i) declare a dividend upon the Common
Stock payable in Common Stock or in any obligations or any securities of
the Company which are convertible into or exchangeable for Common Stock
(any of such obligations or securities being hereinafter called
"Convertible Securities"), or in any rights or options to purchase Common
Stock or Convertible Securities, or (ii) declare any other dividend or make
any other distribution upon the Common Stock other than out of earnings or
earned surplus, then thereafter the holder of this Warrant upon the
exercise hereof will be entitled to receive the number of shares of Common
Stock to which such holder shall be entitled upon such exercise, and, in
addition and without further payment therefor, each dividend described in
clause (i) above and each dividend or distribution described in clause (ii)
above which such holder would have received by way of dividends or
distributions if continuously since such holder became the record holder of
this Warrant such holder (i) had been the record holder of the number of
shares of Common Stock then received, and (ii) had retained all dividends
or distributions in stock or securities (including Common Stock or
Convertible Securities, or in any rights or options to purchase any Common
Stock or Convertible Securities) payable in respect of such
2
<PAGE>
Common Stock or in respect of any stock or securities paid as dividends or
distributions and originating directly or indirectly from such Common
Stock.
(c) In case the Company shall at any time after the issuance of this
Warrant subdivide its outstanding shares of Common Stock into a greater
number of shares, the warrant purchase price in effect immediately prior to
such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined
into a smaller number of shares, the warrant purchase price in effect
immediately prior to such combination shall be proportionately increased.
(d) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially of its assets to
another corporation shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect
to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holder hereof shall thereafter
have the right to purchase and receive, upon the basis and upon the terms
and conditions specified in this Warrant and in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby, such shares
of stock, securities or assets as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby had such reorganization, reclassification, consolidation, merger or
sale not taken place, and in any such case appropriate provision shall be
made with respect to the rights and interests of the holder of this Warrant
to the end that the provisions hereof (including without limitation
provisions for adjustments of the warrant purchase price and of the number
of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless
prior to the consummation thereof the successor corporation (if other than
the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument executed and
mailed to the registered holder hereof at the last address of such holder
appearing on the books of the Company, the obligation to deliver to such
holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to purchase.
(e) Upon any adjustment of the warrant purchase price, then and in
each such case the Company shall give written notice thereof, by first-
class mail, postage
3
<PAGE>
prepaid, addressed to the registered holder of this Warrant, at the address
of such holder as shown on the books of the Company, which notice shall
state the warrant purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
(f) In case at any time prior to the expiration or exercise of this
Warrant:
(i) the Company shall declare any cash dividend on its Common
Stock or any cash dividends at a rate in excess of the rate of the
last cash dividend theretofore paid;
(ii) the Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any
class or other rights;
(iv) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with, or sale of all or substantially all of
its assets to, another corporation; or
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written
notice, by first-class mail, postage prepaid, addressed to the registered
holder of this Warrant at the address of such holder as shown on the books
of the Company, of the date on which (A) the books of the Company shall
close or a record shall be taken for such dividend, distribution or
subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall
take place, as the case may be. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 30 days prior to the action in question and
not less than 30 days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
4
<PAGE>
(g) If any event occurs as to which the other provisions of this
paragraph 4 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Warrant or of
Common Stock in accordance with the essential intent and principles of such
provisions, then this Warrant shall be adjusted in the application of such
provisions, in accordance with such essential intent and principles, so as
to protect such purchase rights as aforesaid.
(h) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash adjustment (which
may be effected as a reduction of the amount to be paid by the holder
hereof upon such exercise) in respect of such fraction in an amount equal
to the same fraction of the market price per share of Common Stock as of
the close of business on the date of the notice required by paragraph 1
above. "Market price" for purposes of this paragraph 4(h) shall mean, if
the Common Stock is traded on a securities exchange or on the Nasdaq
National Market, the closing price of the Common Stock on such exchange or
the Nasdaq National Market, or, if the Common Stock is otherwise traded in
the over-the-counter market, the closing bid price, in each case averaged
over a period of 5 consecutive business days prior to the date as of which
"market price" is being determined. If at any time the Common Stock is not
traded on an exchange or the Nasdaq National Market, or otherwise traded in
the over-the-counter market, the "market price" shall be deemed to be the
higher of (i) the book value thereof as determined by any firm of
independent public accountants of recognized standing selected by the Board
of Directors of the Company as of the last day of any month ending within
60 days preceding the date as of which the determination is to be made, or
(ii) the fair value thereof determined in good faith by the Board of
Directors of the Company as of a date which is within 15 days of the date
as of which the determination is to be made.
5. Common Stock. As used herein, the term "Common Stock" shall mean
and include the Company's presently authorized Common Stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of original
issue of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph 4(d)
above.
6. No Voting Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company.
5
<PAGE>
7. Notice of Transfer of Warrant or Resale of Shares. The holder of
this Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant, in whole or in part, or transferring any
Common Stock issuable or issued upon the exercise hereof of such holder's
intention to do so, describing briefly the manner of any proposed transfer of
this Warrant or such holder's intention as to the disposition to be made of
shares of Common Stock issuable or issued upon the exercise hereof. Such holder
shall also provide the Company with an opinion of counsel satisfactory to the
Company to the effect that the proposed transfer of this Warrant or disposition
of shares may be effected without registration or qualification (under any
Federal or State law) of this Warrant or the shares of Common Stock issuable
upon the exercise hereof. Upon receipt of such written notice and opinion by
the Company, such holder shall be entitled to transfer this Warrant, or to
exercise this Warrant in accordance with its terms and dispose of the shares
received upon such exercise or to dispose of shares of Common Stock received
upon the previous exercise of this Warrant, all in accordance with the terms of
the notice delivered by such holder to the Company, provided that an appropriate
legend, if any, respecting the aforesaid restrictions on transfer and
disposition may be endorsed on this Warrant or the certificates for such shares.
8. Transferability. Subject to the provisions of paragraph 2 and
paragraph 7 hereof, this Warrant and all rights hereunder are transferable, in
whole or in part, at the principal office of the Company by the holder hereof in
person or by duly authorized attorney, upon surrender of this Warrant properly
endorsed. Each taker and holder of this Warrant, by taking or holding the same,
consents and agrees that the bearer of this Warrant, when endorsed, may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented by this Warrant, or to the transfer hereof on the books of
the Company, any notice to the contrary notwithstanding; but until such transfer
on such books, the Company may treat the registered holder hereof as the owner
for all purposes.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
9. Registration Rights.
9.1 Required Registration. If Form S-3 or any successor form ("Form
S-3") promulgated by the Securities and Exchange Commission (the "Commission")
is available for use by the Company and any record holder of holders of
Purchased Stock (as
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<PAGE>
defined in Section 9.6) and the Company shall receive a written request therefor
from any such record holder or holders of an aggregate of at least a majority of
the shares of Purchased Stock not theretofore registered under the Securities
Act of 1933, as amended (the "Securities Act"), and sold, the Company shall
prepare and file a registration statement on Form S-3 under the Securities Act
covering the shares of Purchased Stock which are the subject of such request and
shall use its best efforts to cause such registration statement to become
effective. In addition, upon the receipt of such request, the Company shall
promptly give written notice to all other record holders of shares of Purchased
Stock not theretofore registered under the Securities Act and sold that such
registration is to be effected. The Company shall include in such registration
statement such shares of Purchased Stock for which it has received written
requests and for which Form S-3 is available to register by such other record
holders within 30 days after the delivery of the Company's written notice to
such other record holders. The Company shall be obligated to prepare, file and
cause to become effective only one such registration statement pursuant to this
Section 9.1, and to pay the expenses associated with such registration
statement. In the event that the holders of a majority of the Purchased Stock
for which registration has been requested pursuant to this Section 9.1 determine
for any reason not to proceed with a registration at any time before a
registration statement has been declared effective by the Commission, and such
registration statement, if theretofore filed with the Commission, is withdrawn
with respect to the Purchased Stock covered thereby, and the holders of such
Purchased Stock agree to bear their own expenses incurred in connection
therewith and to reimburse the Company for the expenses incurred by it
attributable to the registration of such Purchased Stock, then the holders of
such Purchased Stock shall not be deemed to have exercised their right to
require the Company to register Purchased Stock pursuant to this Section 9.1.
If, at the time any written request for registration is received by
the Company pursuant to this Section 9.1, the Company has determined to proceed
with the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to Section 9.2 hereof rather than this
Section 9.1, and the rights of the holders of Purchased Stock covered by such
written request shall be governed by Section 9.2 hereof.
Notwithstanding the foregoing, the Company shall have the right to
defer the filing of the registration statement pursuant to this Section 9.1 or,
if such registration statement has been declared effective, the Company shall
have the right to suspend the ability of such holders to sell Purchased Stock
pursuant to such registration statement, in either case for up to no more than
90 days, if (i) in the written opinion of counsel for the Company, the Company
would thereby be required to disclose nonpublic information relating to pending
corporate developments or business transactions involving the Company or its
subsidiaries not otherwise then required by law to be publicly disclosed and
(ii) in the good faith judgment of the Company's Board of Directors, such
disclosure at such time
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<PAGE>
would adversely affect the Company or such corporate development or business
transaction contemplated by the Company or its subsidiaries; provided, however,
that the Company may not use this right of deferral or suspension during the
last six months of the term of this Warrant or on more than one occasion in any
12-month period; and provided, further, that the holders making a written
request to effect a registration that the Company defers pursuant hereto may, at
any time, during such deferral, withdraw such request for such registration and
thereby preserve the right provided in this Section 1 to again request such
registration.
Notwithstanding the foregoing, the Company shall not be required to
include in any registration requested pursuant to this Section 9.1 any shares of
Common Stock (or any other securities) issued upon exercise or conversion of the
Warrant and then held by any holder who is able at such time to sell all such
shares or other securities pursuant to Rule 144(k) under the Securities Act.
Without the written consent of the holders of a majority of the
Purchased Stock for which registration has been requested pursuant to this
Section 9.1, neither the Company nor any other holder of securities of the
Company may include securities in such registration if in the good faith
judgment of the managing underwriter of such public offering the inclusion of
such securities would interfere with the successful marketing of the Purchased
Stock or require the exclusion of any portion of the Purchased Stock to be
registered.
The rights granted by this Section 9.1 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.2 Incidental Registration. Each time the Company shall determine
to proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for cash
of any of its securities by it or any of its security holders (other than a
registration statement on a form that does not permit the inclusion of shares by
its security holders), the Company will give written notice of its determination
to all record holders of Purchased Stock not theretofore registered under the
Securities Act and sold no later than 30 days prior to the filing of a
registration statement with the Commission. Upon the written request of a
record holder of any shares of Purchased Stock given within 30 days after
receipt of any such notice from the Company, the Company will, except as herein
provided, cause all such shares of Purchased Stock, the record holders of which
have so requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other disposition
by the prospective seller or sellers of the Purchased Stock to be so registered;
provided, however, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any registration. If any registration pursuant to
this Section 9.2 shall be underwritten in whole or in part, the Company may
require that the Purchased
8
<PAGE>
Stock requested for inclusion pursuant to this Section 9.2 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. If in the reasonable judgment of the managing
underwriter of such public offering the inclusion of all of the Purchased Stock
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful marketing
of the shares of stock offered by the Company, the number of shares of Purchased
Stock otherwise to be included in the underwritten public offering may be
reduced pro rata (by number of shares) among the holders thereof requesting such
registration, provided, however, that after any such required reduction, the
Purchased Stock to be included in such offering shall constitute at least 25% of
the total number of shares to be included in such offering.
The rights granted by this Section 9.2 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.3 Registration Procedures. If and whenever the Company is
required by the provisions of Sections 9.1 or 9.2 hereof to effect the
registration of shares of Purchased Stock under the Securities Act, the Company
will:
(a) prepare and file with the Commission a registration statement with
respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed nine months;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such
securities, not to exceed nine months;
(c) furnish to the security holders participating in such registration
and to the underwriters of the securities being registered such number of
copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably
request in order to facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws
of such jurisdictions as such participating holders may reasonably request
in writing within 20 days following the original filing of such
registration statement, except that the Company shall not for any purpose
be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction wherein
it is not so qualified;
9
<PAGE>
(e) notify the security holders participating in such registration,
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the Commission, promptly upon the request of
any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders
(and concurred in by counsel for the Company), is required under the
Securities Act or the rules and regulations thereunder in connection with
the distribution of the Purchased Stock by such holder;
(h) prepare and promptly file with the Commission and promptly notify
such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading;
(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements
of the Securities Act or the rules and regulations thereunder, after having
been furnished with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for the Company the filing
of such amendment or supplement is reasonably necessary to protect the
Company from any liabilities under any applicable federal or state law and
such filing will not violate applicable law; and
10
<PAGE>
(k) at the request of any such holder, furnish (i) an opinion, dated
as of the closing date, of the counsel representing the Company for the
purposes of such registration, addressed to the underwriters, if any, and
to the holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii) letters
dated as of the effective date of the registration statement and as of the
closing date, from the independent certified public accountants of the
Company, addressed to the underwriters, if any, and to the holder or
holders making such request, covering such matters as such underwriters and
holder or holders may reasonably request.
9.4 Expenses. With respect to Sections 9.1 and 9.2 hereof (except
as otherwise provided in Sections 9.1 and 9.2), the Company shall bear the
following fees, costs and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the Company and/or selling security holders are required
to bear such fees and disbursements), all internal Company expenses, all legal
fees and disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be offered are to
be registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering. Fees
and disbursements of counsel and accountants for the selling security holders,
underwriting discounts and commissions and transfer taxes relating to the shares
included in the offering by the selling security holders, and any other expenses
incurred by the selling security holders not expressly included above, shall be
borne pro rata by the selling security holders.
9.5 Indemnification.
(a) The Company will indemnify and hold harmless each holder of shares
of Purchased Stock which are included in a registration statement pursuant
to the provisions hereof, its directors and officers, and any underwriter
(as defined in the Securities Act) for such holder and each person, if any,
who controls such holder or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse such holder and each
such underwriter and controlling person with respect to, any and all loss,
claim, damage, liability, cost and expense to which such holder or any such
underwriter or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages, liabilities,
costs or expenses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances in which they were made; provided, however, that the
Company will not be liable in any such case to the extent that any
11
<PAGE>
such loss, damage, liability, cost or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by such holder,
such underwriter or such controlling person in writing specifically for use
in the preparation thereof.
(b) Each holder of shares of Purchased Stock which are included in a
registration statement pursuant to the provisions hereof will indemnify and
hold harmless the Company, its directors and officers, any controlling
person and any underwriter from and against, and will reimburse the
Company, its directors and officers, any controlling person and any
underwriter with respect to, any and all loss, claim, damage, liability,
cost or expense to which the Company or any controlling person and/or any
underwriter may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities, costs or expenses
arise out of or are based upon any untrue or alleged untrue statement of
any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which
they were made, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity with written
information furnished by such holder specifically for use in the
preparation thereof; provided, however that in no event shall any holder of
shares of Purchased Stock be liable under any such indemnity for any amount
in excess of the aggregate amount of proceeds such holder received from the
sale of shares of Purchased Stock pursuant to such registration statement.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 9.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying part of the commencement
thereof, the indemnifying party shall have the right to participate in,
and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying
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<PAGE>
party or if there is a conflict of interest which would prevent counsel for
the indemnifying party from also representing the indemnified party, the
indemnified party or parties shall have the right to select separate
counsel to participate in the defense of such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
pursuant to the provisions of said paragraph (a) or (b) for any legal or
other expense subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation,
unless (i) the indemnified party shall have employed counsel in accordance
with the proviso of the preceding sentence, (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice
of the commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. Notwithstanding the foregoing, nothing
in this Section 9.5 will obligate any indemnifying party, with respect to
any proceeding or related proceedings in the same jurisdiction to be liable
for the fees and expenses of more than one separate law firm at any one
time for all such indemnified parties.
9.6 Purchased Stock Special Definition. "Purchased Stock" shall
mean this Warrant, and the shares of Common Stock of the Company issuable upon
exercise of this Warrant and all shares of such Common Stock issued in exchange
or substitution therefor, whether or not such securities (other than this
Warrant) have in fact been issued, and the stock or other securities of the
Company issued in a stock split or reclassification of, or a stock dividend or
other distribution on or in substitution or exchange for, or otherwise in
connection with, any of the foregoing securities, or in a merger or
consolidation involving the Company or a sale of all or substantially all of the
Company's assets. For purposes hereof, the record holder of this Warrant shall
be treated as the record holder of the related Common Stock then issuable upon
the exercise thereof. Nothing in this Section 9.6 shall, however, be deemed to
require the Company to register this Warrant, it being understood that the
registration rights granted hereby relate only to shares of Common Stock of the
Company and securities issued in substitution or exchange therefor.
9.7 Availability of Registration Rights. The right to registration
pursuant hereto shall commence on the Effective Date shall terminate with
respect to the provisions of Section 9.1 and Section 9.2 hereof on the fourth
and sixth anniversaries, respectively, of the Effective Date.
10. Optional Conversion.
(a) In addition to and without limiting the rights of the holder of
this Warrant under the terms of this Warrant, the holder of this Warrant
shall have the
13
<PAGE>
right (the "Conversion Right") to convert this Warrant or any portion
thereof into shares of Common Stock as provided in this paragraph 10 at any
time or from time to time after the first anniversary of the date hereof
and prior to its expiration, subject to the restrictions set forth in
paragraph (c) below. Upon exercise of the Conversion Right with respect to
a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the holder of this Warrant,
without payment by the holder of any exercise price or any cash or other
consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the
Converted Warrant Shares by the fair market value (as defined in paragraph
(d) below) of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The
"Net Value" of the Converted Warrant shares shall be determined by
subtracting the aggregate warrant purchase price of the Converted Warrant
Shares from the aggregate fair market value of the Converted Warrant
Shares. Notwithstanding anything in this paragraph 10 to the contrary, the
Conversion Right cannot be exercised with respect to a number of Converted
Warrant Shares having a Net Value below $100. No fractional shares shall be
issuable upon exercise of the Conversion Right, and if the number of shares
to be issued in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder of this Warrant an amount in
cash equal to the fair market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this
Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder
thereby intends to exercise the Conversion Right and indicating the number
of shares subject to this Warrant which are being surrendered (referred to
in paragraph (a) above as the Converted Warrant Shares) in exercise of the
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Warrant together with the aforesaid written statement, or
on such later date as is specified therein (the "Conversion Date"), but not
later than the expiration date of this Warrant. Certificates for the
shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the case
of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and
shall be delivered to the holder of this Warrant within 15 days following
the Conversion Date.
(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified
public accountants to give rise to a material charge to the Company's
earnings for financial reporting purposes, then the Conversion Right shall
automatically terminate upon the Company's written notice to the holder of
this Warrant of such adverse accounting treatment.
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<PAGE>
(d) For purposes of this paragraph 10, the "fair market value" of a
share of Common Stock as of a particular date shall be its "market price",
calculated as described in paragraph 4(h) hereof.
11. Governing Law. All questions concerning this Warrant will be
governed and interpreted and enforced in accordance with the internal law of the
State of Minnesota without regard to the principles of conflicts of law thereof.
15
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer and this Warrant to be dated as of
__________________, 1995.
BIO-VASCULAR, INC.
_______________________________________
Name:
Title:
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without
compliance with the provisions of paragraph 7 hereof or registration under the
Securities Act of 1933, as amended.
16
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________________________________________ this Warrant, and
appoints _________________________________________________________________ to
transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
________________________________________________
(Signature must conform in all respects to the
name of the holder as specified on the face of
this Warrant without alteration, enlargement or
any change whatsoever, and the signature must be
guaranteed in the usual manner)
17
<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
TO: Bio-Vascular, Inc. (the "Company")
The undersigned _______________________________________
Please insert Social Security or other identifying number of Subscriber:
____________________________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, ______________ shares of the Common
Stock provided for therein and tenders payment herewith to the order of the
Company in the amount of $________________, such payment being made as provided
on the face of this Warrant.
The undersigned requests that certificates for such shares of Common Stock be
issued as follows:
Name:_________________________________________________
Address:______________________________________________
Deliver to:___________________________________________
Address:______________________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
Signature:_____________________________________
Note: The signature on this Subscription Form
must correspond with the name as written upon the
face of this Warrant in every particular, without
alteration or enlargement or any change whatever.
18
<PAGE>
EXHIBIT 5.1
September 20, 1995
Bio-Vascular, Inc.
2575 University Avenue
St. Paul, MN 55114-1024
Re: Bio-Vascular, Inc.
Amendment No. 1 to Registration Statement on Form S-3
Ladies and Gentlemen:
We are acting as counsel for Bio-Vascular, Inc., a Minnesota corporation (the
"Company"), in connection with the registration by the Company of 2,070,000
shares of the Company's Common Stock, par value $.01 per share (the "Shares"),
which includes 270,000 Shares subject to the Underwriter's over-allotment
option, pursuant to the Company's Amendment No. 1 to Registration Statement on
Form S-3 to be filed with the Securities and Exchange Commission on September
20, 1995 (the "Registration Statement").
In connection with rendering this opinion, we have examined and relied upon
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements and other instruments, certificates of
officers, certificates of public officials and other documents as we have deemed
necessary or appropriate as a basis for the opinions expressed herein. In
connection with our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of all natural persons and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing, and subject to the qualifications and limitations stated
herein, it is our opinion that:
1. The Company has the corporate authority to issue the Shares in the
manner and under the terms set forth in the Registration Statement.
2. The Shares have been duly authorized and, when issued, delivered to
and paid for by the Underwriter referred to in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We express no opinion with respect to laws other than those of the State of
Minnesota and the federal law of the United States of America, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement to its use as part of the Registration Statement, and to
the use of our name under the caption "Legal Matters" in the Prospectus
constituting a part of the Registration Statement.
<PAGE>
Bio-Vascular, Inc.
September 20, 1995
Page 2
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement as described above. It is not to be
used, circulated, quoted or otherwise referred to for any other purpose. Other
than the Company, no one is entitled to rely on this opinion.
Very truly yours,
/s/ Oppenheimer Wolff & Donnelly
--------------------------------
OPPENHEIMER WOLFF & DONNELLY
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in this
registration statement on Form S-3 (File No. 33-62199) of our report dated
December 16, 1994, except for the last paragraph of Note 6, as to which the
date is January 2, 1995, on our audits of the consolidated financial
statements of Bio-Vascular, Inc. as of October 31, 1993 and 1994, and for
the years then ended and on our audit of the financial statements of Vital
Images, Incorporated for the year ended December 31, 1992 and the
combination of such financial statements with those of Bio-Vascular, Inc.
for the year ended October 31, 1992, after restatement for the 1994
pooling-of-interest. We also consent to the reference to our Firm under the
captions "Selected Consolidated Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
September 20, 1995
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Bio-Vascular, Inc.
on Form S-3 (File No. 33-62199) of our report dated December 11, 1992,
included in and incorporated by reference in the Annual Report on Form 10-K
of Bio-Vascular, Inc. for the year ended October 31, 1994, and to the use
of our report dated December 11, 1992, appearing in the Prospectus, which
is part of this Registration Statement. We also consent to the reference to
us under the headings "Selected Consolidated Financial Data" and "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 20, 1995
