<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended July 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___ to ____
Commission File Number 0-13907
___________________________________________________
BIO-VASCULAR, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (612) 603-3700
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ______
___________________________________________________
On September 6, 1996, there were 9,457,347 shares of the registrant's common
stock, par value $.01 per share, outstanding.
<PAGE>
<TABLE>
<CAPTION>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1996 AND OCTOBER 31, 1995
- ------------------------------------------------------------------------------------
ASSETS
July 31, October 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 7,000,540 $15,424,969
Marketable securities, short-term................ 12,956,600 5,803,223
Accounts receivable, net of an allowance
for doubtful accounts of $60,000 at
July 31, 1996 and $40,000 at October
31, 1995........................................ 1,860,177 2,404,258
Other receivables................................ 759,232 421,170
Inventories:
Raw materials................................... 437,965 440,377
Work in process................................. 621,908 374,495
Finished goods.................................. 1,015,201 1,153,354
Prepaid expenses and other current assets........ 571,765 260,831
----------- -----------
Total current assets............................. 25,223,388 26,282,677
----------- -----------
Equipment and leasehold improvements, net......... 1,925,754 1,729,299
Intangible assets, net............................ 1,024,712 640,963
Marketable securities, long-term.................. 8,870,150 9,069,286
----------- -----------
TOTAL ASSETS..................................... $37,044,004 $37,722,225
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the consolidated financial
statements.)
2
<PAGE>
<TABLE>
<CAPTION>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1996 AND OCTOBER 31, 1995
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, October 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 268,094 $ 675,759
Accrued expenses................................... 716,489 1,132,750
Accrued income taxes............................... -- 424,870
Deferred revenues.................................. 144,165 133,510
----------- -----------
Total current liabilities.......................... 1,128,748 2,366,889
----------- -----------
COMMITMENTS AND CONTINGENCY
(NOTE 4)
SHAREHOLDERS' EQUITY:
Common stock: authorized 20,000,000 shares
of $.01 par value issued and outstanding,
9,457,247 at July 31, 1996 and 9,379,768
at October 31, 1995................................ 94,572 93,798
Additional paid-in capital......................... 39,232,915 38,352,660
Accumulated deficit................................ (2,656,527) (2,660,896)
Unrealized marketable securities holding loss...... (208,640) --
Unearned compensation.............................. (161,414) --
Unearned restricted stock.......................... (385,650) (430,226)
----------- -----------
Total shareholders' equity........................... 35,915,256 35,355,336
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................................... $37,044,004 $37,722,225
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the consolidated financial
statements.)
3
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
(unaudited) (unaudited)
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net Revenue ................................ $2,721,853 $3,188,771 $ 8,487,695 $8,131,416
Cost of Revenue ............................ 1,105,337 997,300 2,699,917 2,567,365
---------- ---------- ----------- ----------
Gross margin ........................... 1,616,516 2,191,471 5,787,778 5,564,051
Operating Expenses:
Selling, general, and administrative ... 1,677,242 1,288,970 5,306,730 3,491,054
Research and development ............... 604,224 427,482 1,665,204 1,545,113
---------- ---------- ----------- ----------
Income (loss) from operations .............. (664,950) 475,019 (1,184,156) 527,884
Other income, net .......................... 391,798 29,346 1,230,025 101,480
---------- ---------- ----------- ----------
Income (loss) before income taxes .......... (273,152) 504,365 45,869 629,364
Provision (benefit) for income taxes ....... (96,484) 29,402 41,500 31,970
---------- ---------- ----------- ----------
Net income (loss) .......................... $ (176,668) $ 474,963 $ 4,369 $ 597,394
========== ========== =========== ==========
Net income (loss) per share ................ $ (.02) $ .06 $ .00 $ .07
========== ========== =========== ==========
Weighted average shares outstanding ........ 9,440,000 8,373,000 9,870,000 8,207,000
========== ========== =========== ==========
</TABLE>
(The accompanying notes are an integral part of the consolidated financial
statements.)
4
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
July 31
(unaudited)
1996 1995
---- ----
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES .............. $ (683,008) $ (175,095)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements ............ (556,816) (1,296,571)
Disposition of fixed assets ........................ 6,830 --
Additions to intangibles ........................... (553,742) (26,777)
Investments in marketable securities ............... (21,000,000) --
Maturities of marketable securities ................ 13,795,921 1,270,841
Other assets ....................................... -- 485
------------ -----------
Net cash used in investing activities .............. (8,307,807) (52,022)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt ................................... -- (6,350)
Costs related to sale of stock ..................... (87,326) --
Stock option and restricted stock transactions ..... 653,712 7,210
------------ -----------
Net cash provided by financing activities .......... 566,386 860
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......... (8,424,429) (226,257)
------------ -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 15,424,969 2,347,954
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 7,000,540 $ 2,121,697
============ ===========
</TABLE>
(The accompanying notes are an integral part of the consolidated financial
statements.)
5
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements for Bio-Vascular
and its wholly-owned subsidiary, Vital Images, Incorporated ("Vital Images"),
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary, including items of a normal recurring nature, for a fair
presentation have been included. Operating results for the nine months ended
July 31, 1996 are not necessarily indicative of the results that may be expected
for the year ending October 31, 1996. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report to Shareholders and in the Form 10-K for the year ended October 31, 1995.
(2) BUSINESS SEGMENTS:
The Company has two business segments, a Surgical Business and a Medical Imaging
Software Business, which market products on a worldwide basis. The Surgical
Business develops, manufactures and markets proprietary specialty medical
products used in thoracic, cardiac, neuro and vascular surgery. The Medical
Imaging Software Business develops, markets and supports certain software
products for interactive visualization and analysis of three-dimensional medical
image data.
(3) MAJOR CUSTOMERS:
In the nine months ended July 31, 1996 three distributors accounted for an
aggregate of 41% of the Company's gross revenue, with each of such distributors
accounting for in excess of 10% of the Company's gross revenue for the period.
In addition, four distributors accounted for 51% of the Company's accounts
receivable at July 31, 1996. For the nine months ended July 31, 1995 two
distributors accounted for an aggregate of 31% of the Company's gross revenue
with each of such distributors accounting for in excess of 10% of the Company's
gross revenue for the period. Three distributors accounted for 38% of the
Company's accounts receivable at July 31, 1995.
(4) CONTINGENCY:
In May 1995, the Company terminated a distribution arrangement with a Japanese
distributor. The distributor has claimed that the termination was without cause
and caused economic damage. The distributor has threatened to commence legal
action, although to date, has not done so. The Company believes the
distributor's claim is without merit and intends to defend itself vigorously
should a legal claim be filed.
6
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
- ---------------------------------------------------------------------------
(5) UNCERTAINTY:
In January of 1996, the Health Care Financing Administration ("HCFA"), the
agency of the Federal Government that administers Medicare, ceased reimbursement
for lung volume reduction surgery ("LVRS") which uses the Company's Peri-Strips
product. In April, HCFA announced its intention to collaborate with the National
Institute of Health ("NIH") on a joint study to determine the safety and
effectiveness of LVRS on the basis that the patient follow-up data it received
was too inconclusive to substantiate the safety and efficacy of the procedure.
In May, NIH officially gave advance notice of its intent to solicit hospitals to
apply to be part of a seven-year, prospective, randomized study of 2,580
patients suffering from late-stage emphysema. Due to the randomization, however,
only 1,390 would be eligible for the surgery. During the seven year course of
the study, only the patients in the study who are randomized to LVRS would be
the beneficiaries of Medicare reimbursement for the procedure. This number
represents only about 1.5% of those individuals currently estimated to benefit
from the surgery. The position taken by HCFA and NIH severely limits the growth
potential for sales of Peri-Strips in the United States and associated revenues
and earnings resulting from those sales. In the fiscal year ended October 31,
1995, Peri-Strips revenue, which was $5,550,000, accounted for 53% of the
Surgical Business revenue and 42% of the Company's revenue. In the nine months
ended July 31, 1996, Peri-Strips revenue, which was $3,456,000, accounted for
44% of the Surgical Business revenue and 41% of the Company's revenue. The
Company currently believes that Medicare beneficiaries account for up to 70% of
the U.S. patient population that would qualify for LVRS.
While the Company understands that a number of private insurers and managed care
organizations continue to pay for LVRS based on their own evaluation of the
procedure and its outcomes, it is unknown whether these private payors will
change their reimbursement practices in light of HCFA's decision. LVRS is also
available at Veteran's Administration hospitals.
While patients, surgeons, pulmonologists and several members of Congress have
written or called for HCFA and NIH to completely re-evaluate their position on
what is seen as severely restrictive access to LVRS with an unduly prolonged
time frame, there is no basis to predict if HCFA and NIH will modify their
study, or if they do modify their study, what the modification would be and how
any modification would affect the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the net revenue, gross margin and operating
income (loss) of the Company, and each business segment for the periods shown:
7
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
(unaudited) (unaudited)
(in thousands) (in thousands)
1996 1995 1996 1995
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net Revenue
Surgical .............. $2,528 $2,927 $ 7,858 $7,046
Imaging ............... 194 262 630 1,085
------ ------ ------- ------
Total ............. 2,722 3,189 8,488 8,131
Gross Margin
Surgical .............. 1,470 1,981 5,282 4,667
Imaging ............... 147 210 506 897
------ ------ ------- ------
Total ............. 1,617 2,191 5,788 5,564
Operating Income (Loss)
Surgical .............. (35) 750 687 1,272
Imaging ............... (630) (275) (1,871) (744)
------ ------ ------- ------
Total ............. (665) 475 (1,184) 528
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 1996
WITH THE THREE MONTHS ENDED JULY 31, 1995
Net Revenue. Net revenue was $2,722,000, down 15% for the three months ended
July 31, 1996 (the third quarter of fiscal 1996) compared to $3,189,000 for the
three months ended July 31, 1995.
Net revenue for the Surgical Business was $2,528,000, down 14% for the three
months ended July 31, 1996, compared to net revenue of $2,927,000 for the
comparable period of the previous year. The decrease in revenue in the Surgical
Business is primarily the result of the decrease in revenue from the sale of
Peri-Strips.
Revenue from the sale of Peri-Strips was $1,017,000, a decrease of 39% when
compared to third quarter fiscal 1995 Peri-Strips revenue of $1,674,000, but an
increase of 9% when compared to second quarter fiscal 1996 Peri-Strips revenue
of $933,000. Management believes that the decrease, comparing the third fiscal
quarters of 1996 and 1995, is the result of HCFA's January 1996 decision to
cease reimbursement for lung volume reduction. See Note 5 to Notes to
Consolidated Financial Statements on page 7 of this Report.
8
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
------------------------------------------------------------------------------
Domestic Peri-Strips revenue decreased 49% to $804,000 in the three months
ended July 31, 1996 from $1,579,000 in the three months ended July 31, 1995,
but increased 23% from $653,000 in the three months ended April 30, 1996. The
consecutive quarter increase in domestic revenue from the sale of Peri-Strips
is the likely result of multiple factors. These factors are believed to
include: an increase in the number of private patients undergoing LVRS (they
no longer have to compete with Medicare patients on the surgery schedule);
hospitals doing more LVRS on a charitable basis; reordering by distributors to
maintain inventories to meet post-HCFA decision demand following the drawing
down in the second fiscal quarter of 1996 of inventories established at pre-
HCFA decision levels of demand; and an increase in the number of bi-lateral
LVRS procedures (when both lungs are reduced in the same surgery) vs uni-
lateral procedures (only one lung is operated on and reduced). International
Peri-Strips revenues increased 123% to $212,000 in the three months ended July
31, 1996 from $95,000 in the three months ended July 31, 1995 and decreased
24% from $280,000 in the three months ended April 30, 1996. The Company
believes the consecutive quarter decrease is the result of the timing of
orders among the large number of international distributors, not a change in
demand for the product.
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 52% to
$757,000 in the third quarter of fiscal 1996 from $499,000 in the third
quarter of fiscal 1995. Revenue from the sales of Dura-Guard and Vascu-Guard,
the Company's dural repair patch and vascular patch, respectively, were
responsible for the increase in Tissue-Guard revenue between these periods.
Net revenue from sales of Biograft decreased 19% when comparing the third
quarter of fiscal 1996 to the third quarter of fiscal 1995. Revenue from
sales of Biograft has been decreasing since late fiscal 1993.
Net revenue resulting from sales of the surgical productivity tools (Flo-
Rester and the Bio-Vascular Probe) increased 13% comparing the third quarter
of fiscal 1996 to the third quarter of fiscal 1995. Although the 13% increase
is greater than the growth shown in recent periods, it is too soon to tell if
this is just a matter of the timing of orders between quarters or if a broader
market has been reached.
Net revenue of the Medical Imaging Software Business was $194,000 in the third
quarter of fiscal 1996, down 26% when compared to $262,000 in the third
quarter of fiscal 1995. The decrease in revenue is the result of strategic
decisions which the Company had executed by the end of fiscal 1995, including
the decisions to leave the Microscopy business, supporting existing customers
but not actively pursuing new customers, and to license the source code for
VoxelGeo, thereby focusing and redefining the Imaging Business as the Medical
Imaging Software Business. In the third fiscal quarter of 1996, revenue from
medical imaging products and services increased 59% to $124,000 compared to
$78,000 in the third quarter of fiscal 1995.
9
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
------------------------------------------------------------------------------
Gross Margin. The Company's gross margin percentage decreased to 59% of net
revenue for the third quarter of fiscal 1996 from 69% for the third quarter of
fiscal 1995, primarily due to the Company's decision in the period to increase
its reserve associated with Peri-Strips inventory levels by $228,000, based on
the introduction of new staplers which displaced staplers for which the
Surgical Business held product. The Company's inventory reserve at July 31,
1996 was $365,000. Excluding the additional $228,000 recorded in the third
quarter of 1996, gross margin calculation yields a gross margin percentage of
68%, one percentage point lower than in the third quarter of fiscal 1995.
Beginning in fiscal 1995, the Company established quarterly standard costing
in the Surgical Business to accommodate the rapidly changing production
volumes. The Company uses a first-in first-out method of expensing inventory
(costing sales), therefore, the changes in the gross margin are not
necessarily a reflection of the current activity in production. Due to the
reimbursement issue, in January 1996 and again in May, the Company reduced the
level of its production of Peri-Strips. When products manufactured during
these periods of reduced production flow into cost of sales, the Company
believes that its gross margin percentage will decrease. The Company expects
the gross margin percentage to continue to be further impacted by higher cost
(lower production) product. This forward looking statement is influenced
primarily by the Company's current estimates of standard costs in periods
where the production volume of Peri-Strips has been reduced and would be
impacted by significant increases or decreases in production volumes of the
Company's other products, by material changes in the Company's product mix and
the accuracy of the Company's estimates of standard costs. All of the factors
and judgements impacting this forward looking statement are, by their nature,
uncertain and thereby involve risk. A change in any or all of these factors
could cause the actual result to differ materially from the expected result.
The gross margin percentage of the Medical Imaging Software Business also
decreased. The decrease in the gross margin of the Medical Imaging Software
Business is primarily the result of isolated, low margin hardware sales which
were sold as an accommodation to customers. This decrease was not material to
the Company's overall gross margin percentage.
Selling, General and Administrative. Selling general and administrative
expense increased 30% to $1,677,000 in the third quarter of fiscal 1996 from
$1,289,000 in the third quarter of fiscal 1995. Of the increase, $169,000 is
attributable to the Surgical Business and reflects a more complete infra-
structure and an increased level of business activity between comparable
periods unrelated to current revenue, and $219,000 is attributable to the
Medical Imaging Software Business and arises from the addition of key
personnel, both a President, and a Vice President of Sales, expenses
associated with their hire.
Research and Development. Research and development expense increased 41% to
$604,000 in the third quarter of fiscal 1996 from $427,000 in the third
quarter of fiscal 1995. Research and development expense of the Surgical
Business increased by 78% to $238,000 from $134,000, while
10
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
------------------------------------------------------------------------------
research and development expense of the Imaging Business increased 25%, to
$366,000 from $294,000 comparing the third fiscal quarters of 1996 and 1995,
respectively. The Surgical Business has accelerated its research and
development time lines and the increase in its research and development
expense reflects this, along with some project timing effect which will always
be a variable factor. The increase in the Imaging Business is the result of
technology upgrades, such as Internet access, and increased development
activity.
Operating Income/Loss. As a result of the factors described above, the
Company had an operating loss of $665,000 in the third quarter of fiscal 1996.
This compares to operating income of $475,000 in the third quarter of fiscal
1995. Due to the addition in the 1996 third fiscal quarter of $228,000 to the
inventory reserve, the Surgical Business had an operating loss of $35,000.
This compares to Surgical Business operating profits of $750,000 in the third
quarter of fiscal 1995. Aside from the addition to the inventory reserve, the
decline in operating income in the Surgical Business, comparing the periods is
primarily a result of the decline in revenue from the sales of Peri-Strips, a
direct result of HCFA's decision to cease reimbursement for LVRS. See
Footnote 5 to Notes to Consolidated Financial Statements on page 7 of this
Report. The Medical Imaging Software Business had an operating loss of
$630,000 in the third quarter of fiscal 1996. This compares to a third
quarter fiscal 1995 Imaging Business operating loss of $275,000 and is due to
both the lower revenue and greater expense as explained in the foregoing
discussion.
Other Income and Expense. At July 31, 1996, the Company had cash, cash
equivalents and short and long-term marketable securities totaling
$28,827,000. In September of 1995, the Company completed a secondary public
offering which provided approximately $26,000,000 net of offering costs. As a
result, net other income, primarily interest on cash and investments,
increased significantly to $392,000 in the third quarter of fiscal 1996
compared to net other income of $29,000 in the third quarter of fiscal 1995.
Income Taxes. In the third quarter of fiscal 1996, the Company recognized a
deferred tax asset of $164,000 related to its temporary tax differences, due
to management's expectations that such differences will be realized during
their carryforward period. The Company continues to provide a full valuation
allowance for its restricted pre-merger loss carryforwards. The Company has
an NOL carryforward arising from the pre-merger losses of Vital Images of
$1,674,000 that are usable only against taxable income from the Medical
Imaging Software Business and, in addition, are limited in the amount that can
be used in any one year. These carryforwards begin to expire in 2005. The
Company also has $500,000 of capital loss carryforward available for use
against capital gain income. This carryforward expires in fiscal year 1999.
The deferred tax assets associated with the pre-merger NOL carryforward of
Vital Images and the capital loss carryforward have been totally offset by a
valuation allowance because of uncertainty that sufficient taxable income of
the appropriate character will be generated prior to their expiration.
11
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
------------------------------------------------------------------------------
Net Income/Loss. The Company reported a net loss of $177,000, or $0.02 cents
per share, in the third quarter of fiscal 1996, compared to net income of
$475,000, or $0.06 per share, in the third quarter of fiscal 1995. The
$228,000 increase in the inventory reserve recorded in the third quarter of
fiscal 1996 contributed to the net loss for the period.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1996
WITH THE NINE MONTHS ENDED JULY 31, 1995
Net Revenue. Net revenue increased 4% to $8,488,000 in the nine months ended
July 31, 1996 compared to $8,131,000 in the nine months ended July 31, 1995.
Net revenue for the Surgical Business increased 12% to $7,858,000 in the nine
months ended July 31, 1996, compared to $7,046,000 for the comparable period
of the previous year.
Revenue from the sale of Peri-Strips decreased 2% to $3,456,000 in the first
nine months of fiscal 1996, from $3,533,000 in the first nine months of fiscal
1995. This trend is expected to continue as the year progresses, with the
comparative year-to-date decrease becoming larger in the fourth quarter and
year-ended October 31, 1996. This forward looking statement is based on the
level of fourth quarter fiscal 1995 Peri-Strips revenue which was $2,017,000
contrasted with the most recent fiscal quarter Peri-Strips revenue (third
quarter 1996) of $1,017,000, and the presumption that Medicare reimbursement
will not resume in this fiscal year (see Note 5 of Notes to Consolidated
Financial Statements on page 7 of this Report). All of these factors and
judgements impacting this forward looking statement are, by their nature,
uncertain and thereby involve risk. A change in any or all of these factors
could cause the actual result to differ materially from the expected result.
Domestic Peri-Strips revenue decreased 16% to $2,811,000 in the nine months
ended July 31, 1996 from $3,350,000 in the nine months ended July 31, 1995.
International Peri-Strips revenue increased 253% to $646,000 in the nine
months ended July 31, 1996 from $183,000 in the nine months ended July 31,
1995. Revenue from international sales of Peri-Strips is expected to continue
to increase when compared to the same period of the previous year. This
forward looking statement is based on the continued absence of significant
competition, which could be in the form of new products, new procedures, or
new technologies, the continuance of positive patient outcomes resulting from
the procedure and the absence of significant regulatory barriers. A change in
product performance, results associated with it, or the introduction of
competitive products and/or procedures or regulatory requirements could cause
the actual result to differ materially from the expected result.
12
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
------------------------------------------------------------------------------
Net revenue from sales of other products in the Tissue-Guard product line
increased 81% to $2,160,000 in the first nine months of fiscal 1996 from
$1,193,000 in the first nine months of fiscal 1995, with the Dura-Guard and
Vascu-Guard products showing particular strength.
Net revenues from sales of Biograft decreased 20% when comparing the first
nine months of fiscal 1996 to the first nine months of fiscal 1995. Net
revenue from sales of the surgical productivity tools (Flo-Rester and the Bio-
Vascular Probe) increased 8% comparing the same nine month periods.
Net revenue of the Medical Imaging Software Business decreased 42% to $630,000
in the nine months ended July 31, 1996 from $1,085,000 in the nine months
ended July 31, 1995. This decrease in revenue is the short-term result of the
Company's decision to focus on the Medical Imaging Software Business and
represents decreases primarily in revenue from the geoscience and microscopy
segments, as revenue from sales into the medical market are up 40% comparing
the first nine months of fiscal 1996 with the same period of 1995. In the
fourth quarter of fiscal 1995, the Company licensed the source code for its
geoscience software for $1.5 million and a future royalty stream expected to
begin in calendar 1997 and capped cumulatively at $2,000,000.
Gross Margin. The Company's gross margin percentage was flat, at 68% of net
revenue for the first nine months of fiscal 1996 compared to the first nine
months of fiscal 1995. The previously discussed third quarter charge of
$228,000 associated with Peri-Strips inventory levels affected the year-to-
date gross margin by three percentage points. Excluding the $228,000 added to
the reserve, the gross margin percentage would have been 71% still
significantly benefitted by the first and second 1996 fiscal quarter gross
margin percentages which were 72% and 73% of net revenue, respectively. The
gross margin percentage for the third quarter of fiscal 1996 is consecutively
lower due to the flow of Surgical Business products, from periods of lower
production volume, into cost of goods sold.
Selling, General and Administrative. Selling, general and administrative
expense increased 52% to $5,307,000 in the first nine months of fiscal 1996
from $3,491,000 in the first nine months of fiscal 1995. Fifty-six percent
(56%) of the increase is attributable to the Surgical Business and represents
a more complete infra-structure and an increased level of business activity
unrelated to current revenue. The increase attributable to the Medical
Imaging Software Business arises from the addition of key personnel.
Research and Development. Research and development expense increased 8% to
$1,665,000 in the first nine months of fiscal 1996 from $1,545,000 in the
first nine months of fiscal 1995. Research and development expense of the
Surgical Business increased by 37%, while research and development expense of
the Imaging Business decreased 5%.
13
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
- --------------------------------------------------------------------------------
Operating Income/Loss. As a result of the factors described above, the
Company had an operating loss of $1,184,000 in the first nine months of fiscal
1996. This compares to operating income of $528,000 in the first nine months
of fiscal 1995. The Surgical Business produced an operating profit of
$687,000 in the first nine months of fiscal 1996. This compares to a Surgical
Business operating profit of $1,272,000 in the first nine months of fiscal
1995. The Medical Imaging Software Business had an operating loss of
$1,872,000 in the first nine months of fiscal 1996. This compares to an
Imaging Business operating loss of $744,000 for the first nine months fiscal
1995.
Other Income and Expense. Net other income, primarily interest on cash and
investments, was $1,230,000 in the first nine months of fiscal 1996 compared
to net other income of $101,000 in the first nine months of fiscal 1995.
Income Taxes. The Company recorded a provision for income taxes of $41,500
for the nine months ended July 31, 1996, an effective tax rate approaching
100%. While the tax provision for the nine months ended July 31, 1996 has
been positively affected by the recording of a deferred tax asset related to
temporary tax differences, the Company has permanent book tax difference that
will result in a varying effective tax rate, with the variation decreasing as
earnings before taxes increase.
Net Income/Loss. The Company reported net income of $4,000, or no cents per
share, in the first nine months of fiscal 1996, compared to net income of
$597,000 or $0.07 per share, in the first nine months of fiscal 1995. Between
July 31, 1995 and July 31, 1996 shares issued outstanding have increased from
7,446,000 to 9,457,000, primarily as a result of the Company's secondary
offering of 1,800,000 shares of common stock in September of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance of cash, cash equivalents, and short-term and long-term
marketable securities, valued at market, decreased by $1,470,000 to
$28,827,000 at July 31, 1996 from $30,297,000 at October 31, 1995. Working
capital at July 31, 1996 was $24,095,000 compared to $23,916,000 at October
31, 1995. The current ratios at July 31, 1996 and October 31, 1995 were 22 :
1 and 11 : 1, respectively.
In the nine months ended July 31, 1996, operating activities used $683,000,
with net decreases in current liabilities using $1,238,000, additions to
inventory using $426,000, prepaids and other current assets, primarily annual
insurance premiums, using $311,000, and include $174,000 recorded as a
deferred tax asset with the balance primarily annual insurance premiums.
Receivables provided $186,000. Net income and non-cash expenses in the nine
month period provided $1,106,000.
14
<PAGE>
BIO-VASCULAR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS--CONTINUED
- --------------------------------------------------------------------------------
In the nine months ended July 31, 1996, the Company used $557,000 for the
purchase of fixed assets, $554,000 for additions to intangibles primarily to
purchase the Peri-Guard patent and net investment activity in marketable
securities used $7,204,000. Net financing activities provided $566,000 and
included proceeds of $654,000 from the exercise of options net of restricted
stock repurchased and additional costs of $87,000 related to the secondary
offering. The Company currently has no commitments for material capital
expenditures in fiscal 1996, but continually reviews internal and external
growth opportunities that may result in material commitments.
The Company believes its present level of cash, cash equivalents, and
marketable securities will be sufficient to satisfy the Company's cash
requirements for the foreseeable future.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.
15
<PAGE>
BIO-VASCULAR, INC.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
the exhibit index beginning on page 18 of this report.
(b) Form 8-K. During the quarter ended July 31, 1996, the Company filed one
Current Report on Form 8-K, dated June 12, 1996, reporting Item 5 - Other
Information.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIO-VASCULAR, INC.
September 11, 1996
/s/ M. Karen Gilles
-----------------------------------------
M. Karen Gilles
Vice President of Finance
Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.2 to the Company's registration statement on Form
10 (File No. 0-13907)).
3.2 Amendment to Restated Articles of Incorporation of the Company dated June
21, 1995 (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 33-62199)).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-4 (File
No.33-74750)).
4.1 Form of common stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Company's registration statement on Form
10 (File No. 0-13907)).
4.2 Form of Rights Agreement, dated as of June 12, 1996, between Bio-
Vascular, Inc. and American Stock Transfer & Trust Company, which
includes as Exhibit A the form of Rights Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated June 12, 1996 (File No. 0-13907)).
4.3 Restated Articles of Incorporation of the Company (see Exhibit 3.1).
4.4 Amendment to Restated Articles of Incorporation of the Company dated June
21, 1995 (see Exhibit 3.2).
4.5 Amended and Restated Bylaws of the Company (see Exhibit 3.3).
11.1 Computation of income (loss) per share. Filed herewith electronically.
27.1 Financial Data Schedule. Filed herewith electronically.
<PAGE>
EXHIBIT 11.1
BIO-VASCULAR, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
1996 1995 1996 1995
--------- --------- --------- ---------
Per share data:
Net income (loss)........................ $ (177) $ 475 $ 4 $ 597
========= ========= ========= =========
Net income (loss) per common and
common equivalent share, primary:
Net income (loss)........................ $ (.02) $ .06 $ .00 $ .07
========= ========= ========= =========
Net income (loss) per common and
common equivalent share, fully diluted:
Net income (loss)........................ $ (.02) $ .06 $ .00 $ .07
========= ========= ========= ==========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
Primary:
Weighted average number of
common shares outstanding............... 9,439,783 7,434,855 9,386,040 7,998,155
Common equivalent shares:
Dilutive stock options and warrants,
using Treasury Stock Method............ -- 719,775 473,869 601,373
--------- --------- --------- ---------
9,439,783 8,154,630 9,859,909 7,998,155
========= ========= ========== =========
Fully diluted:
Weighted average number of common
shares outstanding..................... 9,439,783 7,436,355 9,386,040 7,396,783
Common equivalent shares:
Dilutive stock options and warrants,
using Treasury Stock Method............ -- 936,572 483,529 810,551
--------- --------- --------- ---------
9,439,783 8,372,927 9,869,569 8,207,334
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 7,000,540
<SECURITIES> 12,956,600
<RECEIVABLES> 1,920,177
<ALLOWANCES> 60,000
<INVENTORY> 2,075,074
<CURRENT-ASSETS> 25,223,388
<PP&E> 3,653,285
<DEPRECIATION> 1,727,531
<TOTAL-ASSETS> 37,044,004
<CURRENT-LIABILITIES> 1,128,748
<BONDS> 0
<COMMON> 94,572
0
0
<OTHER-SE> 35,820,684
<TOTAL-LIABILITY-AND-EQUITY> 37,044,004
<SALES> 8,487,695
<TOTAL-REVENUES> 8,487,695
<CGS> 2,699,917
<TOTAL-COSTS> 2,699,917
<OTHER-EXPENSES> 6,971,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 45,869
<INCOME-TAX> 41,500
<INCOME-CONTINUING> 4,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,369
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
