<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 Quarterly Period Ended April 30, 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 June 12, 1996, there were 9,442,833 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1996 AND OCTOBER 31, 1995
-----------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
April 30, October 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................... $ 7,181,068 $15,424,969
Marketable securities, short-term............ 10,978,734 5,803,223
Accounts receivable, net of an allowance
for doubtful accounts of $66,600 at
April 30, 1996 and $40,000 at October
31, 1995.................................. 1,851,735 2,404,258
Other receivables............................ 246,650 421,170
Inventories:
Raw materials............................. 460,013 440,377
Work in process........................... 403,095 374,495
Finished goods............................ 1,497,073 1,153,354
Prepaid expenses and other current assets.... 491,991 260,831
----------- -----------
Total current assets......................... 23,110,359 26,282,677
----------- -----------
Equipment and leasehold improvements, net..... 1,910,060 1,729,299
Intangible assets, net........................ 1,042,895 640,963
Marketable securities, long-term.............. 10,928,713 9,069,286
----------- -----------
TOTAL ASSETS................................. $36,992,027 $37,722,225
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the consolidated financial
statements.)
2
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1996 AND OCTOBER 31, 1995
------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
April 30, October 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................ $ 396,413 $ 675,759
Accrued expenses............................ 720,924 1,132,750
Accrued income taxes........................ -- 424,870
Deferred revenues........................... 138,933 133,510
----------- -----------
Total current liabilities................... 1,256,270 2,366,889
----------- -----------
COMMITMENTS AND CONTINGENCY
(NOTE 4)
SHAREHOLDERS' EQUITY
Common stock: authorized 20,000,000 shares
of $.01 par value issued and outstanding,
9,438,617 at April 30, 1996 and 9,379,768
at October 31, 1995......................... 94,386 93,798
Additional paid-in capital.................. 38,880,071 38,352,660
Accumulated deficit......................... (2,479,860) (2,660,896)
Unrealized investment holding loss.......... (173,335) --
Unearned compensation....................... (172,546) --
Unearned restricted stock................... (412,959) (430,226)
----------- -----------
Total shareholders' equity................... 35,735,757 35,355,336
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY...................................... $36,992,027 $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 SIX MONTHS ENDED APRIL 30, 1996 AND 1995
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
(unaudited) (unaudited)
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenue............................ $2,786,250 $2,816,628 $5,765,842 $4,942,644
Cost of Revenue........................ 759,065 888,632 1,594,580 1,570,065
---------- ---------- ---------- ----------
Gross margin........................ 2,027,185 1,927,996 4,171,262 3,372,579
Operating Expenses:
Selling, general, and
administrative.................... 1,932,976 1,150,140 3,629,488 2,202,084
Research and development............ 540,356 572,115 1,060,981 1,117,630
---------- ---------- ---------- ----------
Income (loss) from operations.......... (446,147) 205,741 (519,207) 52,865
Other income, net...................... 422,776 33,287 838,227 72,134
---------- ---------- ---------- ----------
Income (loss) before income taxes...... (23,371) 239,028 319,020 124,999
Provision for income taxes............. 984 797 137,984 2,569
---------- ---------- ---------- ----------
Net income (loss)...................... $ (24,355) $ 238,231 $ 181,036 $ 122,430
========== ========== ========== ==========
Net income (loss) per share............ $ .00 $ .03 $ .02 $ .02
========== ========== ========== ==========
Weighted average shares
outstanding......................... 9,439,000 7,962,000 9,903,000 7,951,000
========== ========== ========== ==========
</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 SIX MONTHS ENDED APRIL 30, 1996 AND 1995
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
April 30
(unaudited)
1996 1995
---- ----
<S> <C> <C>
NET CASH USED IN OPERATING
ACTIVITIES...................................... $ (419,690) $ (713,523)
------------ ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and improvements............ (415,794) (352,926)
Disposition of fixed assets........................ 3,330 --
Additions to intangibles........................... (512,773) (24,439)
Investments in marketable securities............... (16,054,599) --
Maturities of marketable securities................ 8,918,471 1,270,841
------------ ----------
Net cash provided by (used in) investing
activities...................................... (8,061,365) 893,476
------------ ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Costs related to sale of stock..................... (87,326) --
Proceeds related to the exercise of stock
options, net of restricted stock repurchased.... 324,480 76,857
------------ ----------
Net cash provided by financing activities.......... 237,154 76,857
------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................. (8,243,901) 256,810
------------ ----------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............................. 15,424,969 2,347,954
------------ ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................................... $ 7,181,068 $2,604,764
============ ==========
</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 nature, for a
fair presentation have been included. Operating results for the six months
ended April 30, 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 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
Company, through its wholly-owned subsidiary, Vital Images, develops, markets
and supports certain software products for interactive visualization and
analysis of three-dimensional medical image data.
(3) MAJOR CUSTOMERS:
In the six months ended April 30, 1996 three distributors accounted for an
aggregate of 40% 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, one distributor accounted for 15% of the
Company's accounts receivable at April 30, 1996. For the six months ended
April 30, 1995 two distributors accounted for an aggregate of 32% 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 35% of the Company's accounts receivable at April
30, 1995, with each accounting for in excess of 10% of the Company's accounts
receivable for the period.
(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. As expected, this action had a material
adverse effect on the Company's business and results of operations in the
first and second fiscal quarters of 1996.
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.
On May 9, 1996 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. 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. The
Veteran's Administration, however, has begun making the procedure available.
The Company believes that domestic revenues from the sale of Peri-Strips
should stabilize, in the near-term, near the current levels. This forward
looking statement is based on the premise that the second quarter of fiscal
1996, a full quarter with no Medicare reimbursement for LVRS, should
constitute a reasonable baseline of Peri-Strips revenue for future quarters.
This forward looking statement is also contingent upon the continuance of
private insurance coverage in the U.S., the continued absence of significant
competition which could be in the form of new products, new procedures, or new
technologies, and the continuance of positive patient outcomes resulting from
the procedure. All of the factors and judgments 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.
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
7
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
(unaudited) (unaudited)
(in thousands) (in thousands)
1996 1995 1996 1995
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net Revenue
Surgical............. $2,494 $2,518 $ 5,331 $4,119
Imaging.............. 292 299 435 824
------ ------ ------- ------
Total 2,786 2,817 5,766 4,943
Gross Margin
Surgical............. 1,778 1,693 3,812 2,686
Imaging.............. 249 235 359 687
------ ------ ------- ------
Total 2,027 1,928 4,171 3,373
Operating Income (Loss)
Surgical............. 103 535 723 574
Imaging.............. (549) (329) (1,242) (521)
------ ------ ------- ------
Total (446) 206 (519) 53
</TABLE>
8
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 1996
WITH THE THREE MONTHS ENDED APRIL 30, 1995
Net Revenue. Net revenue was essentially flat at $2,786,000 for the three
months ended April 30, 1996 (the second quarter of fiscal 1996) compared to
$2,817,000 for the three months ended April 30, 1995.
Net revenue for the Surgical Business was flat at $2,494,000 for the three
months ended April 30, 1996, compared to $2,518,000 for the comparable period
of the previous year. The flat revenue in the Surgical Business is primarily
the result of a 28% decrease in revenue from the sales of Peri-Strips, and
secondarily, a 29% decrease in the revenue from the sales of Biograft
completely offsetting the increases in revenue in all of the other Surgical
Business product lines.
Revenue from the sale of Peri-Strips was $933,000, a decrease of 28% when
compared to second quarter fiscal 1995 Peri-Strips revenue of $1,293,000, and
a decrease of 38% when compared to first quarter fiscal 1996 Peri-Strips
revenue of $1,507,000. Management believes that these decreases are 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.
Domestic Peri-Strips revenue decreased 47% to $653,000 in the three months
ended April 30, 1996 from $1,230,000 in the three months ended April 30, 1995
and decreased 52% from $1,353,000 in the three months ended January 31, 1996.
The Company believes that domestic revenues from the sale of Peri-Strips
should stabilize, in the near-term, near the current levels. This forward
looking statement is based on the premise that the second quarter of fiscal
1996, which was the first full quarter with no Medicare reimbursement for
LVRS, should constitute a reasonable baseline of Peri-Strips revenue for
future quarters. This forward looking statement is also contingent upon the
continuance of private insurance coverage in the U.S., the continued absence
of significant competition which could be in the form of new products, new
procedures, or new technologies, and the continuance of positive patient
outcomes resulting from the procedure. All of the factors and judgments
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.
International Peri-Strips revenues increased 345% to $280,000 in the three
months ended April 30, 1996 from $63,000 in the three months ended April 30,
1995 and increased 82% from $154,000 in the three months ended January 31,
1996.
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 104% to
$829,000 in the second quarter of fiscal 1996 from $406,000 in the second
quarter of fiscal 1995. Eighty-three percent (83%) of this increase was due
to increases in sales of Dura-Guard, the Company's dural repair patch, which
was cleared to market by the Food and Drug Administration ("FDA") in June of
1995.
Net revenues from sales of Biograft decreased 29% when comparing the second
quarter of fiscal 1996 to the second quarter of fiscal 1995. Revenue from
sales of Biograft has been decreasing since late fiscal 1993. The Company
believes that the continuing decrease is the result of the higher price
9
<PAGE>
of Biograft when compared to other synthetic grafts, increasing product
competition, and more frequent use of non-surgical intervention for the
treatment of peripheral vascular disease.
Net revenue resulting from sales of the surgical productivity tools (Flo-
Rester and the Bio-Vascular Probe) was flat comparing the second quarter of
fiscal 1996 to the second quarter of fiscal 1995. The Company believes that
sales of these products will not increase materially from current levels in
the foreseeable future. This forward looking statement is based on the
constancy of historical sales trends for these products, and presumes
constancy of their markets, their competition and continued levels of
historical demand. All of the factors and judgments 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. Pricing was not a factor in the increase
in revenue in any of the Surgical Business' products.
Net revenue of the Medical Imaging Software Business was also essentially flat
at $292,000 in the second quarter of fiscal 1996 when compared to $299,000 in
the second quarter of fiscal 1995. The essentially unchanged revenue should
be viewed in light 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.
Revenue from the sales of medical imaging software are up 99% to $214,000 from
$108,000 comparing the second quarters of fiscal 1996 and 1995, respectively,
and medical revenue from all sources is up 113% to $252,000 from $118,000
comparing the same periods, respectively. In the second quarter of fiscal
1995, Imaging Business revenue came primarily from the three market segments:
geoscience contributed 43%, medical - 40%, and microscopy - 16% with other
sources contributing the difference. In the second quarter of fiscal 1996 the
medical segment was the source of 86% of the Medical Imaging Business'
revenue. The remaining revenue came primarily from microscopy.
Gross Margin. The Company's gross margin percentage increased to 73% of net
revenues for the second quarter of fiscal 1996 from 68% for the second quarter
of fiscal 1995, primarily due to improvements in the gross margin of the
Surgical Business as a result of Peri-Strips manufactured in a period of high
production volume, flowing from inventory through the cost of goods sold.
Beginning in fiscal 1995, the Company established quarterly standard costing
to accommodate the rapidly changing production volumes. The Company uses a
first-in first-out method of expensing inventory (costing sales), therefore,
the improvements 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. The Company expects that when products manufactured during these
periods of reduced production flow into cost of sales, its gross margin
percentages will decrease. 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, impacted by material changes in the Company's
product mix and by 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
10
<PAGE>
differ materially from the expected result. Secondarily, the gross margin of
the Medical Imaging Software Business also increased. This increase is
attributable to reassignment of personnel responsibility resulting from the
focus on medical imaging.
Selling, General and Administrative. Selling, general and administrative
expense increased 68% to $1,933,000 in the second quarter of fiscal 1996 from
$1,150,000 in the second quarter of fiscal 1995. Two-thirds of the increase
is attributable to the Surgical Business and reflects an increased level of
business activity despite, and to some extent because of, the reimbursement
issue. The increase attributable to the Medical Imaging Software Business
arises from the addition of key personnel, both a President, and a Vice
President of Sales, expenses associated with their hire, and an increased
level of business activity as a result.
Research and Development. Research and development expense decreased 6% to
$540,000 in the second quarter of fiscal 1996 from $572,000 in the second
quarter of fiscal 1995. Research and development expense of the Surgical
Business decreased by 2%, while research and development expense of the
Imaging Business decreased 8%. The Surgical Business decrease is project
timing, while the decrease in the Imaging Business is attributable to the
absence of individuals that were focused on the VoxelGeo project in the second
quarter of fiscal 1995, offset by the additional expense of a Chief Technology
Officer in the second quarter of fiscal 1996.
Operating Income/Loss. As a result of the factors described above, the
Company had an operating loss of $446,000 in the second quarter of fiscal
1996. This compares to operating income of $206,000 in the second quarter of
fiscal 1995. The Surgical Business produced an operating profit of $103,000.
This compares to Surgical Business operating profits of $535,000 in the second
quarter of fiscal 1995, and $620,000 in the first quarter of fiscal 1996. The
decline in profit comparing either period is primarily a result of the decline
in actual revenue from the sales of Peri-Strips and the loss of anticipated
revenue growth from sales of Peri-Strips, both 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 $549,000 in the second
quarter of fiscal 1996. This compares to a second quarter fiscal 1995 Imaging
Business operating loss of $329,000 and a first quarter fiscal 1996 operating
loss of $693,000, representing a 21% reduction in consecutive quarter
operating loss.
Other Income and Expense. At April 30, 1996, the Company had cash, cash
equivalents and marketable securities and securities with maturities in excess
of 90 days totaling $29,089,000 compared to $2,605,000 at April 30, 1995. 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 $423,000 in the second quarter of fiscal 1996 compared to net
other income of $33,000 in the second quarter of fiscal 1995. Included in the
$423,000 is $35,000 received as partial settlement on the Company's losses in
the Piper Jaffray Institutional Government Investment Fund. This $35,000
represents approximately one quarter of the expected settlement, which is to
be paid in a series of payments, through August of 1998.
11
<PAGE>
Income Taxes. See Comparison of the Six Months Ended April 30, 1996 With the
Six Months Ended April 30, 1995, Income Taxes, on page 14 of this Report.
Net Income/Loss. The Company reported a net loss of $24,000, or no cents per
share, in the second quarter of fiscal 1996, compared to net income of
$238,000, or $0.03 per share, in the second quarter of fiscal 1995.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 1996
WITH THE SIX MONTHS ENDED APRIL 30, 1995
Net Revenue. Net revenue increased 17% to $5,766,000 in the six months ended
April 30, 1996 (first half of fiscal 1996) compared to $4,943,000 in the six
months ended April 30, 1995.
Net revenue for the Surgical Business increased 29% to $5,331,000 in the six
months ended April 30, 1996, compared to $4,119,000 for the comparable period
of the previous year. This is due to year-to-date fiscal 1996 increase in
revenue from all of the surgical business products or product lines, with the
exception of revenue from Biograft, which decreased 20% when compared to the
six months ended April 30, 1995.
Revenue from the sale of Peri-Strips increased 31% to $2,440,000 in the first
half of fiscal 1996, from $1,859,000 in the first half of fiscal 1995.
However the increase in revenue from the sales of Peri-Strips was considerably
higher at the end of the first quarter of fiscal 1996, up 166%, compared to
the first quarter of fiscal 1995, while revenue from the sale of Peri-Strips
decreased 47% comparing the second quarters of fiscal 1996 and 1995. This
trend is expected to continue as the year progresses, possibly turning into a
comparative year-to-date decrease against 1995, before the fiscal year ends.
This forward looking statement is based on the following factors: the revenue
trend in the first two quarters of fiscal 1996, the presumed domestic revenue
baseline relative to quarterly Peri-Strips revenue in the second half of
fiscal 1995, (see Note 5 in Notes to Consolidated Financial Statements on
page 7 of this Report) and the presumption that Medicare reimbursement will
not resume in this fiscal year. All of these factors and judgements impacting
this forward looking statement are, by their nature, uncertain and thereby
involve risk. 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.
Domestic Peri-Strips revenue increased 13% to $2,006,000 in the six months
ended April 30, 1996 from $1,771,000 in the six months ended April 30, 1995.
International Peri-Strips revenue increased 394% to $434,000 in the six months
ended April 30, 1996 from $88,000 in the six months ended April 30, 1995.
Revenue from international sales of Peri-Strips is expected to increase
throughout the fiscal 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
12
<PAGE>
of competitive products and/or procedures could cause the actual result to
differ materially from the expected result.
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 102% to
$1,403,000 in the first half of fiscal 1996 from $694,000 in the first half of
fiscal 1995. Ninety percent (90%) of this increase was due to increases in
sales of Dura-Guard.
Net revenues from sales of Biograft decreased 20% when comparing the first
half of fiscal 1996 to the first half of fiscal 1995. Net revenue resulting
from sales of the surgical productivity tools (Flo-Rester and the Bio-Vascular
Probe) increased 6% comparing the first half of fiscal 1996 to the first half
of fiscal 1995. Pricing was not a factor in the increase in revenue in any of
the Surgical Business' products.
Net revenue of the Medical Imaging Software Business decreased 47% to $435,000
in the six months ended April 30, 1996 from $824,000 in the six months ended
April 30, 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; the revenue from those combined segments revenue decreasing to
$84,000 in the first half of fiscal 1996 from $555,000 in the first half of
fiscal 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. Revenue from the sales of medical imaging software is up 57% to
$279,000 from $177,000 comparing the first halves of fiscal 1996 and 1995,
respectively. Medical revenue from all sources, which includes maintenance
and training, and only in fiscal 1995, contract development, is up 35% to
$344,000 from $256,000 comparing the first halves of fiscal 1996 and 1995,
respectively.
Gross Margin. The Company's gross margin percentage increased to 72% of net
revenue for the first half of fiscal 1996 from 68% for the first half of
fiscal 1995, primarily due to improvements in the gross margin of the Surgical
Business as a result of Peri-Strips, manufactured in a period of high
production volume, flowing from inventory through the cost of goods sold.
Selling, General and Administrative. Selling, general and administrative
expense increased 65% to $3,629,000 in the first half of fiscal 1996 from
$2,202,000 in the first half of fiscal 1995. Sixty-four percent (64%) of the
increase is attributable to the Surgical Business and represents an increased
level of business activity. The increase attributable to the Medical Imaging
Software Business arises from the addition of key personnel.
Research and Development. Research and development expense decreased 5% to
$1,061,000 in the first half of fiscal 1996 from $1,118,000 in the first half
of fiscal 1995. Research and development expense of the Surgical Business
increased by 21%, while research and development expense of the Imaging
Business decreased 17%.
Operating Income/Loss. As a result of the factors described above, the
Company had an operating loss of $519,000 in the first half of fiscal 1996.
This compares to operating income of $53,000 in
13
<PAGE>
the first half of fiscal 1995. The Surgical Business produced an operating
profit of $723,000 in the first half of fiscal 1996. This compares to a
Surgical Business operating profit of $574,000 in the first half of fiscal
1995. The Medical Imaging Software Business had an operating loss of
$1,242,000 in the first half of fiscal 1996. This compares to a first half
fiscal 1995 Imaging Business operating loss of $522,000.
Other Income and Expense. Net other income, primarily interest on cash and
investments, was $838,000 in the first half of fiscal 1996 compared to net
other income of $72,000 in the first half of fiscal 1995.
Income Taxes. The Company recorded a provision for income taxes of $138,000 in
the six months ended April 30, 1996, an effective tax rate of 43%. Due to net
operating loss carryforwards available in the six months ended April 30, 1995,
the Company had a provision of only $3,000, representing an expected minimum
level of tax liability at the time. 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.
The Company has $1,674,000 of NOL carryforward arising from the pre-merger
losses of Vital Images 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.
Net Income/Loss. The Company reported net income of $181,000, or $0.02 per
share, in the first half of fiscal 1996, compared to net income of $122,000 or
$0.02 per share, in the first half of fiscal 1995. Between April 30, 1995 and
April 30, 1996 shares issued outstanding have increased from 7,357,000 to
9,439,000, and fully diluted shares outstanding from 7,951,000 to 9,903,000,
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, decreased by $1,208,000 to $29,089,000 at April 30,
1996 from $30,297,000 at October 31, 1995. Working capital at January 31,
1996 was $21,854,000 compared to $23,916,000 at October 31, 1995. At January
31, 1996, investments in long-term marketable securities classified as non-
current assets totaled $10,929,000. The current ratios at April 30, 1996 and
October 31, 1995 were 18 : 1 and 11 : 1, respectively.
Operating activities used $420,000, with decreases in accrued expenses and
payables using $1,116,000, additions to inventory using $452,000, prepaids and
other current assets, primarily
14
<PAGE>
annual insurance premiums, using $231,000, accounts receivable providing
$707,000 and net income and the non-cash expenses in the six month period
providing $746,000.
The Company used $416,000 for the purchase of fixed assets, $513,000 for
additions to intangibles primarily to purchase the Peri-Guard patent, and
invested $16,000,000 in marketable securities. Additionally, net financing
activities provided $237,000 and included proceeds of $324,000 from the
exercise of options 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.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.
15
<PAGE>
______________________________________________________________________________
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.
The following is a report of the voting results of the Company's annual
shareholders meeting held on March 14, 1996.
1. Proposal to set the number of members of the Board of Directors at five
was approved. 8,083,926 votes were cast in favor of the proposal, 29,299
votes were cast against the proposal and 15,325 shares abstained from the
vote. There were no broker non-votes.
2. Five directors, John T. Karcanes, James F. Lyons, Richard W. Perkins,
Edward E. Strickland and Lawrence Perlman were elected until the next
annual meeting of shareholders or until their successors are duly elected
and qualified. There were no broker non-votes. The tabulation was as
follows:
Director Votes For Votes Against
-------- -------- -------------
John T. Karcanes 8,109,595 18,995
James F. Lyons 8,107,225 21,325
Richard W. Perkins 8,106,041 22,509
Edward E. Strickland 8,103,495 25,055
Lawrence Perlman 8,084,275 44,275
16
<PAGE>
3. Proposal to adopt the Company's 1995 Stock Incentive Plan was approved.
There were 4,205,688 votes cast in favor of the proposal, 806,261 votes
were cast against the proposal and 52,722 shares abstained from the
vote. Broker non-votes were treated as shares not entitled to vote on
the proposal. There were 3,063,879 broker non-votes.
4. Proposal to adopt the Company's Employee Stock Purchase Plan was
approved. There were 4,912,336 votes cast in favor of the proposal,
108,390 votes were cast against the proposal and 43,945 shares
abstained from the vote. Broker non-votes were treated as shares not
entitled to vote on the proposal. There were 3,063,879 broker non-
votes.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
quarter ended April 30, 1996.
17
<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.
June 12, 1996 /s/ M. Karen Gilles
------------------------------------
M. Karen Gilles
Vice President of Finance/CFO
(Principal Financial Officer)
18
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