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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended October 31, 1995
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___ to ____
Commission file number: 0-13907
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BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
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Minnesota 41-1526554
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(State of Incorporation) (I.R.S. Employer Identification No.)
2575 UNIVERSITY AVENUE, ST. PAUL, MINNESOTA 55114-1024
(Address of principal executive offices)
TELEPHONE NUMBER: (612) 603-3700
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of January 3, 1996, 9,391,175 shares of Common Stock of the Registrant were
outstanding, and the aggregate market value of the Common Stock of the
Registrant (based upon the last reported sale price of the Common Stock on that
date by the Nasdaq National Market), excluding shares owned beneficially by
executive officers and directors, was approximately $104,476,822.
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held
March 14, 1996 (the "1996 Proxy Statement").
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Tissue-Guard-TM-, Peri-Strips-Registered Trademark-, Dura-Guard-TM-, Vascu-
Guard-Registered Trademark-, Supple Peri-Guard-TM-, Peri-Guard-Registered
Trademark-, Biograft-Registered Trademark-, Flo-Rester-Registered Trademark-,
Bio-Vascular Probe-TM-, VoxelView-Registered Trademark-, VoxelGeo-Registered
Trademark-, and Voxel Animator-TM- are trademarks of the Company.
PART I
ITEM 1 - BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Bio-Vascular, Inc. 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. The Tissue-Guard 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 was
added to the Tissue-Guard product line in 1994 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 suture line
bleeding. In addition, the Company markets SUPPLE PERI-GUARD and PERI-GUARD
as a general soft-tissue patching material for use in specialty surgical
procedures.
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. In
August 1995 the Company granted an exclusive, perpetual, world-wide source
code license for its GeoScience imaging technology to a third party and is
now focused solely on medical applications of its imaging technology. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Overview" on page 28 of this Annual Report on Form 10-K. The
Company initially developed its VOXELVIEW high- speed, volume imaging
software as a research tool. The Medical Imaging Software Business has
further developed VOXELVIEW to provide complete and accurate 3-D rendering of
data collected by advanced scanning devices such as spiral computed
tomography ("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 80 medical and research institutions as a research tool. In
December 1995, the Company
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received notice of clearance from the U.S. Food and Drug Administration ("FDA")
to market VOXELVIEW as a clinical diagnostic and surgical planning device
when used in conjunction with CT and MRI image data. The Medical Imaging
Software Business is continuing development and commercialization of an
improved version of VOXELVIEW, which is intended to assist physicians in
clinical diagnosis, surgical planning and patient screening.
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, an Iowa corporation. 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. Vital Images'
offices are located at 505 North Fourth Street, Fairfield, Iowa 52556, and
its telephone number is (515) 472-7726.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's operations are divided into two business segments: the
Surgical Business and the Medical Imaging Software Business. Financial
information about these segments is contained on page 51 of this Annual Report
on Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
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 leakproof,
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 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 54% of the Company's net revenue in
fiscal 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
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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 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 1950's, 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 1980's, 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
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shortness of breath, improved exercise tolerance and improved quality of
life. However, LVR surgery was only re-introduced into the United States in
late calendar 1993. 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, while growing, is still relatively small. Similarly,
the number of physicians performing the procedure and from whom 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 form the 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.
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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 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 blow 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.
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>
REGULATORY
PRODUCT LINE PRODUCT APPLICATION REPRESENTATIVE PROCEDURE CLEARANCE
- ------------ ------------ ------------------------- ----------------------------- ----------
<S> <C> <C> <C> <C>
Tissue-Guard
PERI-STRIPS Staple line reinforcement Lung volume reduction/lung 510(k)
resection
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 Pericardial patch Various cardiovascular 510(k)
procedures
Biograft
BIOGRAFT Peripheral vascular Lower limb vascular
bypass graft reconstruction PMA
Surgical
Productivity Tools
BIO-VASCULAR Locator of arterial Various surgical bypass
PROBE blockages procedures 510(k)
FLO-RESTER Internal vessel occluder Coronary artery bypass 510(k)
graft surgery
</TABLE>
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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>
YEARS ENDED OCTOBER 31,
PRODUCT/ -----------------------------
PRODUCT LINE 1993 1994 1995
- ------------ ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Peri-Strips. . . . . . . . . . . . . . $ -- $ 685 $5,550
Tissue-Guard Product (excluding
Peri-Strips) . . . . . . . . . . . . . 891 990 1,845
Biograft . . . . . . . . . . . . . . . 1,770 1,525 1,198
Surgical Productivity Tools. . . . . . 1,646 1,700 1,825
</TABLE>
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. SUPPLE PERI-GUARD is produced 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:
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- - 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 Company estimates its net revenue per LVR procedure to be approximately
$1,500.
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 suture line 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
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for easier handling and promotes tissue integration for strength and stability.
SURGICAL PRODUCTIVITY TOOLS. FLO-RESTER AND BIO-VASCULAR PROBE. 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 them (hold them open) 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 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. The Company spent approximately $643,000, $414,000 and
$240,000 on research and development for the Surgical Business in fiscal 1995,
1994 and 1993, respectively. For information about Company-wide research and
development expenses, see the Consolidated Financial Statements on page 39 of
this Report.
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 500 surgeons
have been trained in LVR surgery as of 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
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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, 1995, 1994 and 1993,
approximately 17%, 30% and 33% 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 fiscal
1995 was primarily 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 13 distributors and independent sales representatives managed by
the Surgical Business' 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 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 31
distributors. In some situations, sales in a country may occur through more than
one distributor due to distributors' varying market strengths and focus.
In fiscal 1995, three domestic distributors accounted for the following
percentages of the Surgical Business' gross revenue: Futuretech, Inc., (21%);
Cardio Medical Products, (12%); and Life Systems, Inc., (17%). In fiscal 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.
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 and international
sales managers, domestic regional sales managers, product managers and customer
service personnel.
COMPETITION
The Company's Surgical Business 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
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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 TutoplastTM, 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 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-Registered Trademark-, 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 and effective in procedures, 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 technology (SUPPLE PERI-GUARD, PERI-STRIPS, DURA-GUARD and
VASCU-GUARD) and patented (PERI-GUARD) tissue-fixation technology 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. 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. In August 1995, the Company granted an
exclusive, perpetual source code license to CogniSeis for the
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Company's geoscience product which focused the Company exclusively on
medical applications for its software technology. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Overview" on page 28 of this Report.
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, MRI
imaging devices, PET scanning devices, and ultrasound devices. 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.
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 greatly simplifies 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 80 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 recently completed development of 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. Versions
of VOXELVIEW will (i) improve the product's interface qualities and make it
more user-friendly, and (ii) enable the product to operate on work stations
manufactured by companies other than Silicon Graphics, and be directed
towards specific applications. In December 1995, the Company received notice
of clearance from the Food and Drug Administration ("FDA") to market
VOXELVIEW as a clinical diagnostic and surgical planning device when used in
conjunction with CT and MRI image data. The Company has also adopted the
industry standard graphics language, OpenGL-Registered Trademark-, 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.
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MARKETS. Having received notice of FDA clearance to market VOXELVIEW in
December 1995, the Company is currently finalizing the marketing plan for
this product. The Company intends initially to target 250 of the largest
academic medical institutions and an additional 300 tertiary care
institutions. As the price of high speed workstations decrease, the
marketing focus will be expanded to a broader audience of medical
institutions.
The Medical Imaging Software Business plans to continue its strategy of
direct marketing within the United States while using distributors and other
marketing partners internationally. The Company also has an OEM agreement
with Precision Therapy, Inc. (""PTI"), a leading supplier of radiation
treatment planning systems, under which the Company has granted PTI an
exclusive license for the use of a portion of VOXELVIEW technology for use as
a tool in radiation planning therapy. To date, revenue from this agreement
has not been material. The Company intends to seek other advantageous OEM
and third party relationships that will 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 is
currently concentrating its research and development efforts on improving
VOXELVIEW as a medical diagnostic tool, including working on refinements that
will increase clinical applications of VOXELVIEW by improving human interface
qualities, making the product more user-friendly. The Company spent
$1,357,000, $1,255,000 and $719,000 on research and development in the
Medical Imaging Software Business in fiscal 1995, 1994 and 1993,
respectively. In addition, the Company recognized revenues of $115,220,
$105,050 and $122,250 in fiscal 1995, 1994 and 1993 with regard to customer
sponsored research and development. For information about Company-wide
research and development expenses, see the Consolidated Financial Statements
on page 39 of this Report.
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
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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) 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's Medical Imaging Software VOXELVIEW 2.5 is also a Class II
medical device which received notice of market clearance in December 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 France
prohibits sales of Tissue-Guard products, it is not expected
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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. 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 was completed in October 1995, and a
final assessment has been tentatively scheduled for April 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.
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
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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 and
other users which then bill various third-party payors for the services
provided to the patients. These payors, which include Medicare, Medicaid,
private health insurance plans and managed care organizations, reimburse part
or all of the costs and fees associated with the procedures utilizing the
Company's products. Through fiscal 1995, the Company's medical imaging
products have been purchased by a limited number of medical and research
institutions for research applications and have, therefore, not been subject
to reimbursement issues.
The availability and level of reimbursement from third-party payers is
significant to the Company's business. For Medicare carriers, the United
States Healthcare Finance Administration ("HCFA"), an agency of the federal
government, establishes a national coverage policy, including the amount to
be reimbursed, for coverage of claims submitted for reimbursement related to
a specific procedure. Private health insurance plans and managed care
organizations make their own determinations regarding coverage and
reimbursement based either upon ""usual and customary" fees or,
increasingly, upon a similar prospective payment system.
During the past several years, the major third party payers have
substantially revised their reimbursement methodologies in an attempt to
contain their healthcare reimbursement costs. Medicare and Medicaid
reimbursement for inpatient hospital services is based on a fixed amount per
admission based on the patient's specific diagnosis. As a result, any
illness to be treated or procedure to be performed will be reimbursed only at
a prescribed rate set by the government that is known in advance to the
healthcare provider. If the treatment costs less, the provider keeps the
difference. If it costs more, the provider cannot bill the patient for the
rest. 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. No separate payment is made in most cases for products such as
the Company's when they are furnished or used in connection with inpatient
care. Any amendments to existing 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 health care
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
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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.
Recent developments concerning reimbursement of LVR surgery are likely to
have a material adverse effect on the Company's business and results of
operations. Generally, Medicare had been reimbursing hospitals and surgeons
for LVR surgery since the procedure was re-introduced in 1994. LVR surgery
uses PERI-STRIPS, the product which has been primarily responsible for the
Company's growth in net revenue and net income in recent periods (see
"Surgical Business--Markets and Medical Need, Lung Volume Reduction Surgery"
on page 3 of this report). Recently, HCFA decided that it did not have enough
patient follow-up data to substantiate the safety and efficacy of LVR
surgery. On that basis, HCFA decided to cease reimbursement of LVR surgery
until its technical assessment committee ("TAC") could complete an evaluation
of the safety and efficacy of the procedure. TAC has set February 13, 1996
as the final date for surgeons to submit patient data. It is reasonably
expected that once the data is received by TAC any decision regarding
reimbursement will take, at a minimum, two months and possibly a year or
more. HCFA's decision to deny reimbursement for LVR surgery is expected to
have a material adverse effect on the Company's net revenue and net income at
a minimum in the first and second quarters of fiscal 1996, and may continue
to have such an effect in future periods. While the Company believes, based
on reported outcomes, that HCFA will eventually approve reimbursement for LVR
surgery, the Company cannot say with any certainty when, or if, the
reimbursement of LVR surgery will be approved. The Company believes that LVR
procedures reimbursed by Medicare constitute over 50% of total LVR
procedures. While the Company understands that private insurance companies
and managed care organizations (which the Company believes have been the
third-party payors responsible for a significant percentage of reimbursed LVR
procedures) are currently reimbursing LVR surgery 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Comparison of the Year Ended October 31, 1995 with
the Year Ended October 31, 1994, Net Revenue" on page 30 of this Report.)
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.
In July 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., which obligates the Company to pay royalties of
five percent (5%) on net revenue from sales of PERI-STRIPS for the life of
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any patents, if any are issued, or for seven years. In December 1995, the
Company purchased the patent for PERI-GUARD. Previously, the Company had an
exclusive, worldwide, perpetual license to make, use and sell its PERI-GUARD
product for use in connection with the cardiovascular system. The Company
also has an exclusive, worldwide, perpetual license to make, use and sell its
FLO-RESTER product. The last of the patents related to the Company's
BIOGRAFT product expired in November 1993.
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.
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
At January 3, 1996, the Company, including its wholly-owned subsidiary,
employed 123 full-time and two part-time individuals, including 18 in
research and development, 61 in manufacturing, 18 in sales and marketing, 25
in general and administrative functions and three in regulatory affairs. The
Company's employees are not represented by a union, and the Company considers
its relationship with its employees to be good.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
For information with respect to the Company's revenue attributable to
international markets, see page 52 of this Annual Report on Form 10-K.
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ITEM 1A - IMPORTANT FACTORS
The following factors are important and should be considered carefully in
connection with any evaluation of the Company's business, financial
condition, results of operations and prospects.
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. While the Company was
profitable in the year ended October 31, 1995, there can be no assurance that
the Company will continue to be profitable in the near term or at any time in
the future. The Company's profitability in the near term and the foreseeable
future will depend upon the continued success of PERI-STRIPS, of which there
can be no assurance. See "Important Factors - Limitations on Third-Party
Reimbursement" below.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company's products are purchased primarily 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 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 will
continue, or 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. 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.
For Medicare carriers, the U.S. Healthcare Finance Administration ("HCFA")
establishes a national coverage policy, including the amount to be
reimbursed, for coverage of claims submitted for reimbursement related to a
specific procedure. Recent developments concerning reimbursement of LVR
surgery are likely to have a material adverse effect on the Company's
business and results of operations. Generally, Medicare had been reimbursing
hospitals and surgeons for LVR surgery since the procedure was re-introduced
in 1994. LVR surgery uses PERI-STRIPS, the product which has been primarily
responsible for the Company's growth in net revenue and net income in recent
periods (see "Surgical Business--Markets and Medical Need, Lung Volume
Reduction Surgery" on page 3 of this report). Recently, HCFA decided that it
did not have enough patient follow-up data to substantiate the safety and
efficacy of LVR surgery. On that basis, HCFA decided to cease reimbursement
of LVR surgery until its technical assessment committee ("TAC") could
complete an evaluation of the safety and efficacy of the procedure. TAC has
set February 13, 1996 as the final date for surgeons to submit patient data.
It is reasonably expected that once the data is received by TAC any decision
regarding reimbursement will take, at a minimum, two months and possibly a
year or more. HCFA's decision to deny reimbursement for LVR surgery is
expected to have a material adverse effect on the Company's net revenue and
net income at a minimum in the first and second quarters of fiscal 1996, and
may continue to have such an effect in future periods. While the Company
believes, based on reported outcomes, that HCFA will eventually approve
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reimbursement for LVR surgery, the Company cannot say with any certainty
when, or if, the reimbursement of LVR will be approved. The Company believes
that LVR procedures reimbursed by Medicare constitute over 50% of total LVR
procedures. While the Company understands that private insurance companies
and managed care organizations (which the Company believes have been the
third-party payors responsible for a significant percentage of reimbursed LVR
procedures) are currently reimbursing LVR surgery 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Comparison of the Year Ended October 31, 1995 with
the Year Ended October 31, 1994, Net Revenue" on page 30 of this Report and
"Third Party Reimbursement and Cost Containment" on page 16 of this report.
DEPENDENCE ON LUNG VOLUME REDUCTION PROCEDURE
The growth in revenue and profitability of the Company in fiscal 1995 as
compared to fiscal 1994 was primarily due to increased sales of PERI-STRIPS.
PERI-STRIPS accounted for approximately 41% of the Company's net revenue for
the year ended October 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 and 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 were approximately
700 surgeons worldwide trained to perform the LVR procedure by the end of
calendar 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 "Surgical Business--Markets and
Medical Need" on page 3 of this Report.
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 or that products developed by its competitors will not render its
products obsolete or non-competitive. Similarily, 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
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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 "Surgical Business--Competition" and "Medical
Imaging Software Business--Competition" on pages 10 and 13, respectively, of
this Report.
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
"Surgical Business--Marketing" and "Manufacturing" on pages 9
and 11, respectively, of this Report.
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 does not or 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 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 "Intellectual
Property" on page 17 of this Report.
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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 11% and 30% of the Company's net revenue and international net
revenue, respectively, for the year ended October 31, 1995.
EARLY STAGE OF THE MEDICAL IMAGING SOFTWARE BUSINESS
The Company's imaging business incurred operating losses of $790,000,
$1,183,000 in fiscal 1993 and 1994, respectively, and had operating income
of $252,000 for the year ended October 31, 1995, entirely due to the
$1,500,000 one-time source code license fee for VOXELGEO, its imaging
technology for geoscience applications, which contributed $1,322,000 to
operating income (See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations --Effect of One-Time Source Code
License" on page 32 of this Report). The grant of this perpetual, exclusive
license to VOXELGEO allows the Medical Imaging Software Business to 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. Although the Company has received FDA
510(k) clearance to market its VOXELVIEW product as a medical product, it
does not anticipate significant revenues from its medical imaging products in
the near term as it develops its business plan for this new clinical product.
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 "Medical Imaging Software Business--Products and Product
Development" on page 12 of this Report.
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 record keeping 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
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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 17% of the Company's net revenue in 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.
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 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
"Governmental Regulation" on page 13 of this report.
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 on a small
number 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.
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DEPENDENCE ON DISTRIBUTOR SALES
Sales to distributors constitute a significant portion of the Company's
current business. In the year ended October 31, 1995, three domestic
distributors accounted for an aggregate of 39% of the Surgical Business'
gross revenue, with each of such distributors accounting for in excess of 10%
of the Company's 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 "Surgical Business--Marketing" on
page 9 of this Report.
ITEM 2 - PROPERTIES
The Company leases approximately 36,000 square feet of office and
manufacturing space at 2575 University Avenue, St. Paul, Minnesota for use in
its Surgical Business. The base rent of this lease, which commenced August 1,
1995 and expires July 31, 2005, is approximately $255,000 annually. The
Company also pays apportioned real estate taxes and common costs on this
lease.
Additionally, the Company leases approximately 8,800 square feet located in
Fairfield, Iowa for use in its Medical Imaging Software Business, under a
non-cancelable operating lease which expires on June 1, 1997 and includes an
option to renew for one four-year period. The base rent for this facility is
approximately $75,000 annually.
The Company believes that its current space is adequate for the foreseeable
future.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers, their ages, and their offices held as of
January 3, 1996 are as follows:
NAME AGE TITLE
- ---- --- -----
John T. Karcanes ............. 49 President, Chief Executive Officer and
Director
Andrew M. Weiss .............. 38 President, Vital Images, Incorporated
Vice President of Bio-Vascular, Inc.
24
<PAGE>
Vincent Argiro, Ph.D ......... 39 Vice President of the Company,
Executive Vice President and Chief
Technology Officer 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 ............ 43 Vice President of Research and
Development
Frank A. Stephenson .......... 42 Vice President of Marketing and Sales
JOHN T. KARCANES. Mr. Karcanes has served as President, Chief Operating
Officer and a director of the Company since April 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.
ANDREW M. WEISS. Mr. Weiss was appointed President of Vital Images and a
Vice President of the Company in October 1995. From July 1994 until October
1995, Mr. Weiss served as Vice President of Sales and Marketing for Marquette
Electronics, a medical device manufacturer. From January 1986 through June
1994, Mr. Weiss was employed by General Electric Corporation, a
multi-national corporation with operations including medical device and
medical imaging equipment manufacturing, serving as Marketing Manager of GE
Capital Vendor Financial Services from January 1994 through June 1994, as
Marketing Programs Manager for GE Medical Systems - Americas from April 1992
through December 1993 and as Marketing Programs Manager for GE Medical
Systems - Europe from January 1990 through March 1992.
VINCENT ARGIRO. Dr. Argiro was appointed Executive Vice President and
Chief Technology Officer of Vital Images in October 1995 and serves as a Vice
President and Director of the Company. Dr. Argiro was elected a Vice
President and Director of the Company in May 1994 in connection with the
acquisition of Vital Images. Following the acquisition, Dr. Argiro served as
President of Vital Images from May 1994 to October 1995. 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.
25
<PAGE>
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. 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.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol "BVAS". Prior to September 21, 1995, the Company's common
stock was quoted on the Nasdaq SmallCap Market. The following table sets forth,
for each of the fiscal periods indicated, the range of high and low bid
quotations per share of Common Stock as reported on the Nasdaq SmallCap Market
through September 20, 1995, and the range of high and low closing sale prices
per share since September 21, 1995 as reported by the Nasdaq National Market.
These prices do not include adjustments for retail mark-ups, mark-downs or
commissions, and prior to September 21, 1995, represent inter-dealer quotations
and do not necessarily represent actual transactions).
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
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. . . . . . . . . . . . 18.00 11.63
</TABLE>
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. As of January 3,
1996 there were approximately 6,700 beneficial owners of the Company's Common
Stock.
26
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended October 31,
1991 through October 31, 1995 has been derived from the audited consolidated
financial statements of the Company as restated for the pooling-of-interests due
to the merger with Vital Images, Incorporated and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to the Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-K.
SUMMARY STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
1995 1994 1993 1992 1991
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net revenue $13,319,730(1) $ 6,631,518 $6,144,273 $6,010,899 $5,086,249
Gross margin 9,452,739(1) 4,198,150 3,627,582 3,604,861 3,349
Operating income (loss) 2,439,300(1) (1,431,165) (456,731) (309,220) (293,701)
Extraordinary item - -- -- -- -- 59,031
gain on early
extinguishment of debt
Net income (loss) 2,186,466 (1,879,522) (158,144) (158,718) (278,006)
Per common share data:
Loss before extraordinary item $0.27 $(0.26) $(0.02) $(0.02) $(0.05)
Extraordinary item -- -- -- -- 0.01
----------- ----------- ---------- ---------- ----------
Net income (loss) per share $0.27 $(0.26) $(0.02) $(.02) $(.04)
Weighted average shares
outstanding 8,172,000 7,277,000 7,055,000 6,743,000 6,162,000
SUMMARY BALANCE SHEET DATA:
<CAPTION>
OCTOBER 31,
1995 1994 1993 1992 1991
======================================================================================================
<S> <C> <C> <C> <C> <C>
Working capital $23,915,788 $5,214,607 $6,577,045 $5,534,654 $5,240,806
Total assets 37,722,225 7,912,696 9,468,893 8,626,148 8,283,015
Long-term debt -- -- 52,076 99,335 167,345
Shareholders' equity 35,355,336 6,785,539 8,476,742 7,643,046 7,449,108
</TABLE>
(1) Includes $1,500,000 of one-time license fee revenue, which contributed
$1,322,000 to the reported gross margin and operating income.
27
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 primarily 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 $685,000 for fiscal 1994 to $5,550,000 for
fiscal 1995 and comprised approximately 42% of the Company's net revenues (or
47% excluding the one-time license fee for VOXELGEO). The Company anticipated
that sales of PERI-STRIPS would continue to constitute an increasing share of
the Company's revenue.
Recent developments concerning reimbursement of LVR surgery are likely to
have a material adverse effect on the Company's business and results of
operations. Generally, Medicare had been reimbursing hospitals and surgeons
for LVR surgery since the procedure was re-introduced in 1994. LVR surgery
uses PERI-STRIPS, the product which has been primarily responsible for the
Company's growth in net revenue and net income in recent periods (see
"Surgical Business--Markets and Medical Need, Lung Volume Reduction Surgery"
on page 3 of this report). Recently, HCFA decided that it did not have
enough patient follow-up data to substantiate the safety and efficacy of LVR
surgery. On that basis, HCFA decided to cease reimbursement of LVR surgery
until its technical assessment committee ("TAC") could complete an evaluation
of the safety and efficacy of the procedure. TAC has set February 13, 1996
as the final date for surgeons to submit patient data. It is reasonably
expected that once the data is received by TAC any decision regarding
reimbursement will take, at a minimum, two months and possibly a year or
more. HCFA's decision to deny reimbursement for LVR surgery is expected to
have a material adverse effect on the Company's net revenue and net income at
a minimum in the first and second quarters of fiscal 1996, and may continue
to have such an effect in future periods. While the Company believes, based
on reported outcomes, that HCFA will eventually approve reimbursement for LVR
surgery, the Company cannot say with any certainty when, or if, the
reimbursement of LVR will be approved. The Company believes that LVR
procedures reimbursed by Medicare constitute over 50% of total LVR
procedures. While the Company understands that private insurance companies
and managed care organizations (which the Company believes have been the
third-party payors responsible for a significant percentage of reimbursed LVR
procedures) are currently reimbursing LVR surgery 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.
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, were planned to support
anticipated PERI-STRIPS sales growth. 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 and additional year or more of follow-up examination before the
procedure can be properly evaluated by the medical community. In addition,
the recent HCFA decision has delayed any expected growth from PERI-STRIPS.
If LVR surgery reimbursement is not approved in the future, growth of the
proportions anticipated will not be forthcoming. 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
28
<PAGE>
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 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.
Subsequently, 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 became both the exclusive developer and exclusive
marketer of VOXELGEO. Pursuant to this agreement, the Company received a
license fee payment of $1.5 million in September 1995, which was recorded as
revenue in the fourth quarter of fiscal 1995. The agreement further provides
for the payment to the Company on a quarterly basis of royalties based 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 and, including the license fee payment of $1.5
million, approximately 82% of such revenue in fiscal 1995. In addition, the
Company does not anticipate that expenses of the Imaging Business will
decrease, as the Company intends to continue to invest in VOXELVIEW. The
Company recently received FDA 510(k) clearance to market its VOXELVIEW
product as a medical product. The Company is currently finalizing the
marketing plan for this product, and does not anticipate significant revenues
from its medical imaging products in the near term.
29
<PAGE>
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>
YEARS ENDED OCTOBER 31,
-----------------------------
1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenue
Surgical . . . . . . . . $10,426 $4,952 $4,423
Imaging. . . . . . . . . 2,894(1) 1,680 1,721
------- ------ ------
Total . . . . . . . 13,320 6,632 6,144
------- ------ ------
------- ------ ------
Gross Margin
Surgical . . . . . . . . 6,964 3,028 2,586
Imaging. . . . . . . . . 2,489(1) 1,170 1,042
------- ------ ------
Total . . . . . . . 9,453 4,198 3,628
------- ------ ------
------- ------ ------
Operating Income (Loss)
Surgical . . . . . . . . 2,187 171 333
Imaging. . . . . . . . . 252(1) (1,183) (790)
------- ------ ------
Total . . . . . . . 2,439 (1,431)(2) (457)
------- ------ ------
------- ------ ------
</TABLE>
- ---------------
(1) Includes $1,500 of one-time license fee revenue, which contributed $1,322
to the reported gross margin and operating income.
(2) Includes approximately $419 of acquisition costs not allocated to a
business segment.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1995 WITH THE YEAR ENDED OCTOBER 31,
1994
NET REVENUE
Net revenue increased 101% to $13,320,000 for fiscal 1995 from $6,632,000 for
fiscal 1994. Net revenue of the Surgical Business increased 111% to $10,426,000
in fiscal 1995 from $4,952,000 for fiscal 1994, substantially due to increases
in sales of PERI-STRIPS, which increased to $5,550,000 in fiscal 1995 from
$685,000 for fiscal 1994 and accounted for 53% and 14% of the Surgical Business'
net revenue in fiscal 1995 and 1994, respectively.
HCFA's recent decision to deny Medicare reimbursement for LVR surgery, which
uses PERI-STRIPS to prevent air leaks, is expected to have a material adverse
effect on the Company's net revenue and net income at a minimum in the first
and second quarters of fiscal 1996, and may continue to have such an effect
in future periods. While the Company believes, based on reported outcomes,
that HCFA will eventually approve reimbursement for LVR surgery, the Company
cannot say with any certainty when, or if, the reimbursement of LVR will be
approved. While the Company understands that private insurance companies and
managed care organizations are currently reimbursing LVR surgery 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. See "Third Party Reimbursement and Cost Containment" on
Page 16 of this Report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" on page 28 of this Report.
30
<PAGE>
Net revenue from sales of other products of the Tissue-Guard product line,
DURA-GUARD, VASCU-GUARD, SUPPLE PERI-GUARD and PERI-GUARD, increased by 86%
to $1,846,000 for fiscal 1995 from $990,000 for fiscal 1994. DURA-GUARD,
which was cleared to market by the FDA in June 1995, accounted for 42% of
this increase. The Company believes that heightened visibility in the
surgical community was the other significant factor in the increase in
revenues from sales of the other products in the Tissue-Guard product line.
Net revenues from sales of BIOGRAFT decreased by 21% to $1,198,000 for
fiscal 1995 from $1,525,000 for fiscal 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. The Company has implemented a BIOGRAFT training
program for surgeons in an effort to improve sales of this product.
Net revenue from sales of surgical productivity tools (FLO-RESTER and the
BIO-VASCULAR PROBE) increased 7% for fiscal 1995 when compared to fiscal
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 increased 72% to $2,894,000 for fiscal
1995 from $1,680,000 for fiscal 1994, due almost entirely to the one-time
$1,500,000 VOXELGEO source code license fee received in the fourth quarter of
fiscal 1995. It is expected that revenues from the Medical Imaging Software
Business will decrease in the near-term as a result of the Company's
decision not to actively pursue new customers in the microscopy market and
the loss of revenue from VOXELGEO until 1997, when payment of royalties is
anticipated to begin.
GROSS MARGIN
The gross margin percentage increased to 71% of net revenue for fiscal 1995
from 63% of net revenue for fiscal 1994. Gross margin percentages of the
Surgical Business were 67% and 61% for fiscal 1995 and 1994, respectively.
The vast majority of gross margin improvement in the Surgical Business was
due to changes in product mix as a result of the large volume of PERI-STRIPS
sales and the spreading of overhead costs over a larger volume of production.
Improvement in productivity related to the manufacture of PERI-STRIPS also
contributed to the improvement. Gross margin percentages of the Imaging
Business were 87% and 70% for fiscal 1995 and 1994, respectively. The gross
margin percentage of the Imaging Business was positively impacted by the
VOXELGEO source code license transaction, which contributed $1,322,000 to the
gross margin. The Company believes that future gross margin percentages for
the Medical Imaging Software Business will be a function of the developing
business model for the Medical Imaging Software Business, but are currently
expected to remain above 80%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased 42% to $5,013,000 for
fiscal 1995 from $3,541,000 for fiscal 1994, but decreased as a percent of
net revenue between comparable periods to 38% from 53%. The increase in
expense was attributable entirely to the Surgical Business and the increases
in personnel and related overhead required to support the revenue growth.
The Surgical Business and the Imaging Business accounted for 83% and 17%,
respectively, of these expenditures for fiscal 1995, as compared to 69% and
31%, respectively, of these expenditures for fiscal 1994.
RESEARCH AND DEVELOPMENT
Research and development expense increased 20% to $2,000,000 for fiscal 1995
from $1,669,000 for fiscal 1994. The Surgical Business and the Imaging
Business accounted for 32% and 68%, respectively, of these expenditures for
fiscal 1995, as compared to 25% and 75%, respectively, of these expenditures
for fiscal 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 VOXELGEO and 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
31
<PAGE>
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 substantially,
while those for the Imaging Business will grow modestly for the foreseeable
future.
OPERATING INCOME (LOSS)
Operating income was $2,439,000 for fiscal 1995, compared to an operating
loss of $1,431,000 for fiscal 1994. The Surgical Business accounted for
$2,187,000 of the operating profit, principally due to the increased revenue
from sales of PERI-STRIPS. The Imaging Business accounted for $252,000 to
operating income, which was entirely due to revenue from the VOXELGEO source
code license (which contributed $1,322,000 to operating income in fiscal
1995). The operating loss incurred in fiscal 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 $266,000 in fiscal 1995. In fiscal 1994,
the Company had net other expense of $438,000 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. 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 time frame, 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 approval from the United States District Court where
the litigation is venued and from the affected Fund shareholders. The
Company is entitled to participate in the settlement and its loss, for
purposes of determining payment under the settlement, has been fixed at
$315,000, but only a portion of this will actually be received by the
Company. The amount and timing of any such settlement payment to the Company
is not yet determinable.
INCOME TAXES
As of October 31, 1995, the Company had used all of its remaining
unrestricted net operating loss ("NOL") carryforwards available to offset
income from operations. The 1995 effective tax rate varies from the
statutory tax rate primarily due to the utilization of these carryforwards.
The Company has research and experimentation (R&E) tax credit carryforwards
available to offset income from operations, although the Company has not
finalized its estimation of such carryforwards. It also has carryforwards of
$500,000 available to offset future capital gains and approximately $1.5
million of carryforwards arising from pre-merger losses of Vital Images
available to offset post-merger income of Vital Images during years in which
it is profitable. 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. The deferred tax assets associated with the
carryforwards have been totally offset by a valuation allowance because of
uncertainty that sufficient taxable income of the appropriate type will be
generated prior to the expiration of the carryforwards. The tax provisions
for fiscal 1994 and 1993 represent alternative minimum taxes.
EFFECT OF ONE-TIME SOURCE CODE LICENSE
A one-time license fee for the VOXELGEO source code recorded in the fourth
quarter of fiscal 1995 contributed $1,500,000 to net revenue and $1,322,000
to operating income in both the quarter and the year. After resulting income
taxes, the licensing transaction contributed 11 cents to fourth quarter net
income and 12 cents to the net income for the year.
32
<PAGE>
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.
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.
33
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources increased significantly during fiscal 1995 as
the result of the completion of a public offering of 1,800,000 shares of
Common Stock during September 1995, which provided approximately $26,000,000
to the Company, net of offering costs. Primarily as a result of this
offering, the Company's cash, cash equivalents and marketable securities
balances increased by $26,678,000 from $3,619,000 at October 31, 1994 to
$30,297,000 at October 31, 1995. Nine million dollars of the increase is
invested long-term (two years or less from date of investment) in obligations
of the U.S. government. Working capital at October 31, 1995 was $23,916,000,
increasing $18,701,000 from $5,215,000 at October 31, 1994.
Historically, the cash needs of the Company have been met by cash generated
from operations and investments. Cash flow from operating activities was
$1,922,000 during fiscal 1995. Of the $1,922,000, approximately $950,000
after income tax can be attributed to the one-time license fee for VOXELGEO.
Primary cash usage resulted from increased levels of inventories and accounts
receivable associated with the growth in Surgical Business revenue, which
used $2,000,000 of cash, while increases in accounts payable and accrued
liabilities generated $1,281,000 in cash. The Company used approximately
$800,000 in operating activities during 1994, largely due to surgical
business growth. The Company made capital expenditures during fiscal 1995
totaling $1,353,000; $1,045,000 for the Surgical Business, which included
$235,000 for manufacturing equipment, $176,000 for computer hardware and
software, and $442,000 for leasehold improvements to its new facility; and,
$308,000 for the Imaging Business, primarily for computer hardware and
software. Additionally, the exercise of stock options provided $413,000. On
December 1, 1995, the Company used $500,000 to acquire the PERI-GUARD patent.
The Company currently has no other commitments for material capital
expenditures in fiscal 1996, but continually reviews external growth
opportunities that may result in material commitments.
The Company believes its present level of cash and 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 TRANSACTIONS
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. Fluctuations in currency exchange rates
in other countries 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.
34
<PAGE>
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) has issued Statement No. 123,
"Accounting for Stock-Based Compensation." The Company plans to adopt this
Statement in fiscal year 1996. Although it has not made a definitive
determination of its impact, the Company does not expect the adoption of
Statement No. 123 to have a materially adverse effect on its financial
position.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and the reports of its
independent accountants are included herein on pages 38 through 52 of this
Annual Report on Form 10-K. The index to such items is included on page 36
of this Report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE REGISTRANT
The information under the caption "Election of Directors" in the
Registrant's 1996 Proxy Statement is incorporated by reference herein.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Executive Officers of the Company is included
in this Report under Item 4A, "Executive Officers of the Registrant".
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information under the caption "Section 16 Reporting" in the
Registrant's 1996 Proxy Statement is incorporated by reference herein.
ITEM 11 - EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" and "Election of
Directors--Directors' Compensation" in the Registrant's 1996 Proxy Statement
is incorporated by reference herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Registrant's 1996 Proxy Statement is
incorporated by reference herein.
35
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report
1) Financial Statements:
The following Financial Statements are included herein (page numbers
refer to pages in this Annual Report on Form 10-K):
PAGE
----
- Report of Independent Accountants 38
- Consolidated Balance Sheets - as of October 31, 1995 and 1994 39
- Consolidated Statements of Operations for the Years Ended
October 31, 1995, 1994 and 1993 40
- Consolidated Statements of Shareholders' Equity for the
Years Ended October 31, 1995, 1994 and 1993 41
- Consolidated Statements of Cash Flows for the Years Ended
October 31, 1995,1994 and 1993 42
- Notes to Consolidated Financial Statements 43
2) Consolidated Financial Statement Schedules
The following financial statement schedule and independent
accountants' report theron are included herein and should be read in
conjunction with the Financial Statements referred to above (page
numbers refer to pages in this Annual Report on Form 10-K):
PAGE
----
Report of Independent Accountants' on Financial Statement Schedule 53
Schedule II - Valuation and Qualifying Accounts 54
All other financial statement schedules not listed have been omitted
because the required information is included in the Consolidated
Financial Statements or the Notes thereto, or is not applicable.
3) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index hereinafter contained on pages E-1 through E-3 of this
Report.
The Company will furnish a copy of any exhibit to a shareholder who
requests a copy in writing upon payment to the Company of a fee of
$5.00 per exhibit. Requests should be sent to: M. Karen Gilles, Chief
Financial Officer, Vice President of Finance and Secretary, Bio-
Vascular, Inc., 2575 University Avenue, St. Paul, Minnesota 55114-
1024.
36
<PAGE>
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14 (c):
A. The Company's 1988 Stock Option Plan (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended October 31, 1988 (File No. 0-13907)).
B. Vital Images, Incorporated 1990 Management Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1994
(File No. 0-13907)).
C. Vital Images, Incorporated 1992 Stock Option Plan (incorporated
by reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994 (File No. 0-
13907)).
D. Employment letter agreement dated April 7, 1994 between the
Company and Mr. Karcanes (incorporated by reference to Exhibit
10.26 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1994 (File No. 0-13907)).
E. Employment agreement dated May 24, 1994 between the Company and
Dr. Argiro (incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the year ended
October 31, 1994 (File No. 0-13907)).
F. Employment letter agreement dated November 28, 1994, as amended
January 2, 1995, between the Company and Mr. Stephenson (as
filed herewith).
G. Employment letter agreement dated October 19, 1995 between the
Company and Mr. Weiss (as filed herewith).
H. Form of Change in Control Agreement dated November 16, 1994
entered into between the Company and each of Mr. Karcanes, Ms.
Gilles, Mr. Weiss, Mr. Nelson, Dr. MacFarlane, Mr. Schankereli
and Mr. Stephenson (incorporated by reference to Exhibit 10.28 to
the Company's Annual Report on Form 10-K for the year ended
October 31, 1994 (File No. 0-13907)).
I. Form of Change in Control Agreement dated November 16, 1994
entered into between the Company and Dr. Argiro (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended October 31, 1994 (File No. 0-13907)).
b) Reports on Form 8-K
None.
(c) Exhibits:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on Form 10-K.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is included as a separate section
of this Annual Report on Form 10-K.
37
<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, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1995. 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, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended October 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 8, 1995, except as to the last paragraph of Note 9,
for which the date is January 15, 1996
38
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 15,424,969 $ 2,347,954
Marketable securities, short-term.............................................. 5,803,223 1,270,841
Accounts receivable, net of an allowance for doubtful accounts of $40,000...... 2,404,258 1,447,570
Other receivables.............................................................. 421,170 48,142
Inventories.................................................................... 1,968,226 1,132,669
Prepaid expenses and other current assets...................................... 260,831 94,588
-------------- --------------
Total current assets......................................................... 26,282,677 6,341,764
Equipment and leasehold improvements, net........................................ 1,729,299 773,060
Intangible assets, net........................................................... 640,963 797,872
Marketable securities, long-term................................................. 9,069,286 --
-------------- --------------
Total assets................................................................. $ 37,722,225 $ 7,912,696
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 675,759 $ 467,306
Accrued expenses............................................................... 1,132,750 485,020
Accrued income taxes........................................................... 424,870 --
Deferred revenues.............................................................. 133,510 174,831
-------------- --------------
Total current liabilities.................................................... 2,366,889 1,127,157
-------------- --------------
Commitments and Contingency (Note 6).............................................
Shareholders' equity:
Common stock: authorized 20,000,000 shares in 1995 and 10,000,000 shares in
1994 of $.01 par value; issued and outstanding, 9,379,768 in 1995 and
7,318,125 shares in 1994...................................................... 93,798 73,181
Additional paid-in capital..................................................... 38,352,660 11,685,163
Accumulated deficit............................................................ (2,660,896) (4,847,362)
Unearned compensation.......................................................... -- (12,625)
Unearned restricted stock...................................................... (430,226) (112,818)
-------------- --------------
Total shareholders' equity..................................................... 35,355,336 6,785,539
-------------- --------------
Total liabilities and shareholders' equity................................... $ 37,722,225 $ 7,912,696
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993
________________________________________________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -------------
<S> <C> <C> <C>
Net revenue....................................................... $ 11,819,730 $ 6,631,518 $ 6,144,273
License fee revenue............................................... 1,500,000 -- --
-------------- -------------- -------------
Total net revenue............................................. 13,319,730 6,631,518 6,144,273
Cost of revenue................................................... 3,689,117 2,433,368 2,516,691
Cost of license fee revenue....................................... 177,874 -- --
-------------- -------------- -------------
Total cost of revenue......................................... 3,866,991 2,433,368 2,516,691
Gross margin.................................................. 9,452,739 4,198,150 3,627,582
Operating expenses:
Selling, general and administrative............................... 5,013,370 3,540,582 3,125,779
Research and development.......................................... 2,000,069 1,668,813 958,534
Acquisition costs................................................. -- 419,920 --
-------------- -------------- -------------
Operating income (loss)....................................... 2,439,300 (1,431,165) (456,731)
Other income (expense), net....................................... 266,189 (438,007) 318,702
-------------- -------------- -------------
Income (loss) before income taxes................................. 2,705,489 (1,869,172) (138,029)
Income tax provision.............................................. 519,023 10,350 20,115
-------------- -------------- -------------
Net income (loss)............................................. $ 2,186,466 $ (1,879,522) $ (158,144)
-------------- -------------- -------------
-------------- -------------- -------------
Net income (loss) per share....................................... $ .27 $ (.26) $ (.02)
-------------- -------------- -------------
-------------- -------------- -------------
Weighted average shares outstanding............................... 8,172,000 7,277,000 7,055,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
40
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED
PAID-IN DEFERRED RESTRICTED ACCUMULATED
COMMON STOCK CAPITAL COMPENSATION STOCK DEFICIT TOTAL
--------------------- ------- ------------ ----- ------- -----
PAR
SHARES VALUE
-------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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. . . . . . . . 13,863 4,250 18,113
Exercise of stock
options. . . . . . . . 197,400 1,974 410,956 412,930
Restricted stock
granted. . . . . . . . 78,748 788 430,021 (430,809)
Restricted stock
purchased by the
Company. . . . . . . . (34,073) (341) (334,627) (334,968)
Restricted stock
earned . . . . . . . . 167,851 167,851
Compensation
expense/compensation
paid in stock . . . . 2,105 21 9,979 8,375 18,375
Restricted stock
forfeited. . . . . . . (3,537) (35) (16,765) 16,800
Stock issued for
services . . . . . . . 21,000 210 99,540 (71,250) 28,500
Issuance of stock, net
of offering costs of
$2,277,460 . . . . . . 1,800,000 18,000 26,054,530 26,072,530
Net income . . . . . . . 2,186,446 2,186,466
--------- ------- ------------ --------- -------- ----------- ----------
Balances at October
31, 1995 . . . . . . . . . 9,379,768 $93,798 $38,352,660 $ 0 $(430,226) $(2,660,896) $35,355,336
--------- ------- ------------ --------- -------- ----------- ----------
--------- ------- ------------ --------- -------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
41
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,186,466 $(1,879,522) $ (158,144)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization . . . . . 581,059 851,872 689,488
Provision for inventory obsolescence. . 176,568 -- 10,000
Provision for uncollectible accounts. . 30,962 10,000 12,890
Issuance of common stock in connection
with product license agreement. . . . -- -- 100,000
Loss on disposal of assets. . . . . . . 7,287 40,961 --
Non-cash compensation . . . . . . . . . 232,839 143,970 164,924
Loss (gain) on sale of marketable
securities. . . . . . . . . . . . . . -- 609,653 (100,555)
Changes in assets and liabilities,
exclusive of investing and financing
activities:
Accounts receivable . . . . . . . . (987,651) (510,088) 172,428
Inventories . . . . . . . . . . . . (1,012,125) (242,449) 23,265
Other current assets. . . . . . . . (539,271) (58,914) (10,604)
Other assets. . . . . . . . . . . . 5,665 -- (132)
Accounts payable. . . . . . . . . . 208,453 283,929 37,271
Accrued expenses. . . . . . . . . . 647,730 86,513 19,838
Accrued income taxes. . . . . . . . 424,870 -- --
Deferred revenues . . . . . . . . . (41,321) (134,841) 101,462
------------ ------------ ------------
Net cash provided by (used in)
operating activities. . . . . 1,921,531 (798,916) 1,062,131
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements. . . (1,353,330) (504,725) (169,908)
Disposition of fixed assets . . . . . . . . 2,788
Additions to intangibles. . . . . . . . . . (42,798) (10,190) (748)
Capitalization of software development
costs . . . . . . . . . . . . . . . . . . -- -- (173,547)
Investments in marketable securities. . . . (14,872,509) (3,301,877) --
Maturities of marketable securities . . . . 1,270,841 1,421,383 2,351,562
Change in other assets. . . . . . . . . . . 16,192 --
------------ ------------ ------------
Net cash provided by (used in)
investing activities. . . . . (14,995,008) (2,379,217) 2,007,359
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt. . . . . . . . . . . . . . -- (123,521) (123,680)
Proceeds related to the sale of common
stock . . . . . . . . . . . . . . . . . . 26,072,530 -- --
Proceeds related to the exercise of stock
options, net of restricted stock
repurchased . . . . . . . . . . . . . . . 77,962 67,243 704,806
------------ ------------ ------------
Net cash provided by (used in)
financing activities. . . . . 26,150,492 (56,278) 581,126
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS: 13,077,015 (3,234,411) 3,650,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR. . . . . . . . . . . . . . . . . . . . . 2,347,954 5,582,365 1,931,749
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . $15,424,969 $ 2,347,954 $ 5,582,365
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest. . . . . . . . . . . $ 984 $ 7,617 $ 21,867
------------ ------------ ------------
------------ ------------ ------------
Cash paid for income taxes. . . . . . . . . $ 77,152 $ 17,490 $ 6,635
------------ ------------ ------------
------------ ------------ ------------
Acquisition of equipment under capital
leases. . . . . . . . . . . . . . . . . . $ -- $ 12,049 $ 27,162
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(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 Surgical Business markets its products
through a worldwide network of distributors and independent sales
representatives. 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. The end users of the Imaging Business' software have been primarily
researchers and innovators who have adapted the core technology to meet their
needs. The Company, as a result of the November 1995 510(k) clearance of
VOXELVIEW, will aggressively pursue clinical customers for its Medical
Imaging software. The Company will also consider OEM arrangements. During
fiscal 1994 and 1995, the primary focus of the Imaging Business was one of
development, directed toward 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
increased resources toward the 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.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are concentrated in a commercial paper at
October 31, 1995.
MARKETABLE SECURITIES:
Investments having original maturities in excess of three months are
classified as marketable securities and generally consist of U.S.
Government or U.S. Government-backed obligations. Investments are classified
as short-term or long-term in the balance sheet based on their maturity date.
At October 31, 1995 all of the Company's marketable securities are classified
as available-for-sale and all mature in two years or less. At October 31,
1995, the estimated fair value of the securities approximated their cost.
Unrealized gains and losses were not significant. The Company's marketable
securities at October 31, 1994 were classified as held-to-maturity and
matured during 1995.
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.
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 useful 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.
43
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
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 is 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 6) which
was being amortized on a straight-line basis over the estimated period of
realizability of three years and is fully amortized as of October 31, 1995.
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"). Temporary differences relate primarily to the
allowance for doubtful accounts, obsolete inventory reserves, vacation
accruals and depreciation.
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 of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates. The most significant areas which require the use of
management's estimates relate to the determination of the allowance for
obsolete inventory and uncollectable accounts receivable, the evaluation of
realizability of intangible and deferred tax assets, and capitalization of
software development costs.
44
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
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.
(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, 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>
45
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------------------------------------------------------------------------------
(3) CERTAIN CONSOLIDATED FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1995 1994
---- ----
<S> <C> <C>
Inventories consisted of the following:
Raw materials and supplies ......................... $ 440,377 $ 224,949
Work-in-process .................................... 374,495 292,746
Finished goods ..................................... 1,153,354 614,974
---------- ----------
$ 1,968,226 $ 1,132,669
----------- -----------
----------- -----------
Equipment and leasehold improvements consisted
of the following:
Furniture, fixtures and computer equipment ........ $ 2,034,043 $ 1,450,998
Laboratory equipment .............................. 147,365 81,686
Manufacturing equipment ........................... 462,846 254,480
Leasehold improvements ............................ 465,438 155,242
----------- -----------
Less accumulated depreciation and amortization .. (1,380,393) (1,169,346)
----------- -----------
$ 1,729,299 $ 773,060
----------- -----------
----------- -----------
Intangible assets consisted of the following:
Goodwill .......................................... $ 1,318,499 $ 1,318,499
Less accumulated amortization ................... (746,234) (603,167)
----------- -----------
572,265 715,332
----------- -----------
Product licenses and other intangibles ............ 282,173 679,366
Less accumulated amortization ................... (213,475) (602,491)
----------- -----------
68,698 76,875
----------- -----------
Other ............................................. -- 5,665
----------- -----------
$ 640,963 $ 797,872
----------- -----------
----------- -----------
Accrued expenses consisted of the following:
Payroll, other employee benefits and related
taxes ......................................... $ 649,244 $ 215,910
Royalties ....................................... 215,865 85,233
Research reimbursement, shareholder ............. 40,000 91,482
Other ........................................... 227,641 92,395
----------- -----------
$ 1,132,750 $ 485,020
----------- -----------
----------- -----------
</TABLE>
46
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and amortization
expense consisted of the following:
Depreciation ............................ $389,417 $ 344,496 $327,784
Amortization of intangibles ............. 191,642 294,723 256,501
Amortization of software development
costs ................................ -- 212,653 105,203
-------- --------- --------
$581,059 $ 851,872 $689,488
-------- --------- --------
-------- -------- --------
Other income (expense) net, consisted of
the following:
Interest income ......................... $272,567 $ 221,023 $234,653
Interest expense ........................ (984) (7,617) (21,867)
Capital (loss) gain on sale
of investment (1) ..................... -- (609,653) 100,555
Loss on disposal of assets, net ......... (7,287) (40,961) --
Miscellaneous income (expense) .......... 1,893 (799) 5,361
-------- --------- --------
$266,189 $(438,007) $318,702
-------- --------- --------
-------- --------- --------
</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. The Company liquidated its investment in the fund as of
October 31, 1994.
(4) INCOME TAXES:
The recorded tax provisions for the years ended October 31, 1993 and 1994
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 October 31, 1995 of $519,000 after utilization
of $1,518,000 net operating loss carryforwards. The 1995 effective tax rate
varies from the statutory tax rate primarily due to the utilization of these
carryforwards. The Surgical Business of the Company utilized approximately
$740,000 of net operating loss carryforwards in fiscal 1993. The Company
incurred a loss for the year ended October 31, 1994.
As of October 31, 1995, the Company has a capital loss carryforward of
$500,000 available to offset future capital gain income, and research and
experimentation tax credit carryforwards. The capital loss carryforward
expires in 1999. The Company also has carryforwards arising from the
pre-merger losses of Vital Images totaling approximately $1,500,000. These
pre-merger carryforwards can only be applied to the post-merger net income of
the Imaging Business and are restricted as to the amount that can be utilized
in any year due to limitations resulting from a significant change of
ownership. These carryforwards begin to expire in 2005.
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. The Company has not finalized its
estimation of research and experimentation (R&E) credit carryforwards and,
accordingly the deferred tax asset estimated to date associated with R&E
credits continues to be offset by a valuation allowance.
47
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------------------------------------------------------------------------------
(5) 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:
During 1995, in connection with a stock offering and issuance of common
shares, the Company issued to the underwriter warrants to purchase 90,000
shares of common stock, at an exercise price of $16.375 per share, commencing
on September 21, 1996. These warrants will continue to be exercisable for a
period of four years.
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. A total of 3,214 warrants were repurchased by the Company concurrent
with the 1995 stock offering. The remaining 28,929 warrants are exercisable
through October 1996, at an exercise price of $4.00 per share.
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, 1995, 1994, and 1993,
29,567, 14,302 and 13,744 restricted shares, respectively, were earned. At
October 31, 1995, 86,528 shares of restricted stock, which were granted at
per share prices of $3.25 to $14.50 and generally vest 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 was amortized on a straight-line basis
over the vesting periods of the related options. There is no remaining
deferred compensation as of October 31, 1995.
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, 478,332 shares of common stock remain reserved for
issuance to directors, officers and employees at October 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 261,720 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:
48
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PLANS NON-PLAN PRICE PER SHARE
---------- ----------- ------------------
<S> <C> <C> <C>
Balances at October 31, 1992 ...... 657,675 148,850 $1.0000 -- $6.8750
Granted ....................... 101,100 24,000 $1.8750 -- $4.7500
Exercised ..................... (28,600) (56,560) $1.2500 -- $2.5000
Canceled ...................... (136,000) (9,900) $1.0000 -- $6.5000
-------- --------
Balances at October 31, 1993 ...... 594,175 106,390 $1.0000 -- $6.8750
Granted ....................... 74,000 226,000 $2.0000 -- $3.4375
Exercised ..................... (7,725) (28,390) $1.0000 -- $2.3750
Canceled ...................... (45,600) (29,000) $1.0000 -- $5.3750
-------- --------
Balances at October 31, 1994 ...... 614,850 275,000 $1.0000 -- $6.8750
Granted ....................... 346,297 139,000 $3.2500 --$14.5000
Exercised ..................... (159,400) (38,000) $1.0000 -- $6.2500
Canceled ...................... (49,204) (114,280) $1.0000 -- $4.7500
-------- --------
Balances at October 31, 1995 ...... 752,543 261,720 $1.0000 --$14.5000
-------- --------
-------- --------
</TABLE>
Options for the purchase of 589,803 shares of common stock at prices ranging
from $1.00 to $14.50 were exercisable at October 31, 1995.
Subsequent to the end of the 1995 fiscal year, the Company granted non-plan
options for the purchase of 200,000 shares of common stock to an officer of
the Company as part of his employment package. These options vest equally
over five years. The difference between the market price at the date of
grant and the exercise price will be amortized to operations over the vesting
period. In addition, the Board of Directors approved and adopted the 1995
Stock Incentive Plan, subject to shareholder approval of the Plan, under
which 410,000 shares of the Company's common stock were reserved for
issuance. Upon shareholder approval of the Plan, all of the Company's
existing Stock Option Plans, with the exception of the Director's Stock
Option Plan, will be terminated and no additional options are to be granted
thereunder, with any remaining shares reserved for issuance under these
previous plans now being reserved for issuance under the 1995 Plan. The
Board of Directors also approved and adopted the Employee Stock Purchase
Plan, subject to shareholder approval of the Plan, under which 300,000 shares
of common stock were reserved for issuance, and also approved the
establishment of a wholly-owned foreign sales corporation subsidiary.
(6) COMMITMENTS AND CONTINGENCY
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. 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 rent expense was $219,290, $167,260 and $148,964 for
the years ended October 31, 1995, 1994 and 1993, respectively.
Future minimum payments under all operating leases at both facility
locations (St. Paul, MN and Iowa) at October 31, 1995 are payable as follows:
1996--$329,781, 1997--$298,806, 1998--$255,441, 1999--$255,441,
2000--$255,441 and thereafter $1,213,362.
49
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------------------------------------------------------------------------------
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:
- - 5% on net sales of PERI-STRIPS through December 2001, or if a patent is
issued, until the expiration of the patent
- - 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 coincided with 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-Registered
Trademark- 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 $393,000,
$169,000, and $247,000 for the years ended October 31, 1995, 1994, and 1993,
respectively, 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
Vital Images with and into the Company. Royalty fee expense under
this arrangement totaled $152,857 for the year ended October 31, 1995,
$58,875 for the year ended October 31, 1994 and $56,278 for the year ended
October 31, 1993 and is included in cost of revenue.
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.
(7) 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.
50
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(8) 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 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 YEARS ENDED OCTOBER 31,
------------------------------------
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Net revenue:
Surgical Business ................ $10,426,076 $4,951,743 $4,422,775
Imaging Business (1).............. 2,893,654 1,679,775 1,721,498
----------- ---------- -----------
Total net revenue ............. 13,319,730 6,631,518 6,144,273
----------- ---------- -----------
----------- ---------- -----------
Operating income (loss):
Surgical Business ................ 2,186,871 171,363 333,058
Imaging Business (1).............. 252,429 (1,182,608) (789,789)
Corporate ........................ -- (419,920) --
----------- ---------- -----------
Total operating income (loss).. 2,439,300 (1,431,165) (456,731)
----------- ---------- -----------
----------- ---------- -----------
Total assets:
Surgical Business ............... 13,204,972 3,741,285 3,382,927
Imaging Business ................ 754,532 824,715 1,105,251
Corporate ....................... 23,762,721 3,346,696 4,980,715
----------- ---------- -----------
Total assets.................. 37,722,225 7,912,696 9,468,893
----------- ---------- -----------
----------- ---------- -----------
Depreciation and amortization expense:
Surgical Business ............... 376,423 407,372 334,416
Imaging Business................. 204,636 444,500 355,072
----------- ---------- -----------
Total depreciation and
amortization expense:....... 581,059 851,872 689,488
----------- ---------- -----------
----------- ---------- -----------
Capital expenditures:
Surgical Business ............... 1,045,612 273,908 59,388
Imaging Business................. 307,718 230,817 110,520
----------- ---------- -----------
Total capital expenditures.... 1,353,330 504,725 169,908
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
(1) A one-time license fee for VoxelGeo source code recorded in the fourth
quarter of fiscal 1995 contributed $1,500,000 to net revenue and $1,322,000
to operating income.
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 15%, 32%, and 29% of fiscal 1995, 1994 and 1993
net revenue.
MAJOR CUSTOMERS:
For the year ended October 31, 1995 three domestic distributors accounted for
an aggregate of 39% 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. For 1994 and 1993 there were no greater than 10%
51
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
customers. In addition, three domestic distributors account for an aggregate
of 47% of the Company's accounts receivable balance at October 31, 1995.
(9) SUBSEQUENT EVENTS:
PATENT PURCHASE:
On December 1, 1995, the Company purchased the patent for PERI-GUARD.
PERI-GUARD is one of the Company's TISSUE-GUARD line of products. The
purchase gives the Company all rights, title, and interest to the PERI-GUARD
process. Prior to December 1, 1995, the Company's field of use was limited to
cardiovascular applications. In connection with this transaction, the Company
granted a non-exclusive license with respect to the development and sale of
products for urological and related applications utilizing the PERI-GUARD
process and the SUPPLE PERI-GUARD process.
UNCERTAINTY:
Recent developments concerning reimbursement of LVR surgery are likely to
have a material adverse effect on the Company's business and results of
operations. Generally, Medicare had been reimbursing hospitals and surgeons
for LVR surgery since the procedure was re-introduced in 1994. LVR surgery
uses PERI-STRIPS, the product which has been primarily responsible for the
Company's growth in net revenue and net income in recent periods (see
"Surgical Business--Markets and Medical Need, Lung Volume Reduction Surgery"
on page 3 of this report). Recently, HCFA decided that it did not have enough
patient follow-up data to substantiate the safety and efficacy of LVR
surgery. On that basis, HCFA decided to cease reimbursement of LVR surgery
until its technical assessment committee ("TAC") could complete an evaluation
of the safety and efficacy of the procedure. TAC has set February 13, 1996 as
the final date for surgeons to submit patient data. It is reasonably expected
that once the data is received by TAC any decision regarding reimbursement
will take, at a minimum, two months and possibly a year or more. HCFA's
decision to deny reimbursement for LVR surgery is expected to have a material
adverse effect on the Company's net revenue and net income at a minimum in
the first and second quarters of fiscal 1996, and may continue to have such
an effect in future periods. While the Company believes, based on reported
outcomes, that HCFA will eventually approve reimbursement for LVR surgery,
the Company cannot say with any certainty when, or if, the reimbursement of
LVR will be approved. The Company believes that LVR procedures reimbursed by
Medicare constitute over 50% of total LVR procedures. While the Company
understands that private insurance companies and managed care organizations
(which the Company believes have been the third-party payors responsible for
a significant percentage of reimbursed LVR procedures) are currently
reimbursing LVR surgery 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.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Bio-Vascular, Inc. is
included on page 38 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 36 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 8, 1995, except as to the last
paragraph of Note 9, for which the date
is January 15, 1996
53
<PAGE>
SCHEDULE II
- -------------------------------------------------------------------------------
BIO-VASCULAR, INC.
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning cost and at end of
Description of period expenses Deductions period
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1995 $40,000 $30,962 $30,962 $40,000
Year ended October 31, 1994 $30,000 $10,000 $ -- $40,000
Year ended October 31, 1993 $20,000 $12,890 $ 2,890 $30,000
- -------------------------------------------------------------------------------
Balance at Charged to Balance
beginning cost and at end of
Description of period expenses Deductions period
- -------------------------------------------------------------------------------
Reserve for obsolete inventory:
Year ended October 31, 1995 $10,000 $176,568 $140,568 $46,000
Year ended October 31, 1994 $10,000 $ 45,145 $ 45,145 $10,000
Year ended October 31, 1993 -- $ 17,040 $ 7,040 $10,000
- -------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ John T. Karcanes
--------------------------------------
John T. Karcanes, President and Chief
Executive Officer
Dated: January 17, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on January 17, 1996 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ John T. Karcanes
- -------------------------------------------------------------------------------
John T. Karcanes, Chief Executive Officer, (Principal Executive Officer)
and Director
/s/ M. Karen Gilles
- -------------------------------------------------------------------------------
M. Karen Gilles, Vice President of Finance and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ James F. Lyons
- -------------------------------------------------------------------------------
James F. Lyons
Chairman of the Board of Directors
/s/ Vincent Argiro
- -------------------------------------------------------------------------------
Vincent Argiro, Director
/s/ Richard W. Perkins
- -------------------------------------------------------------------------------
Richard W. Perkins, Director
/s/ Lawrence Perlman
- -------------------------------------------------------------------------------
Lawrence Perlman, Director
/s/ Edward E. Strickland
- -------------------------------------------------------------------------------
Edward E. Strickland, Director
55
<PAGE>
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
For the Fiscal Year Ended October 31, 1995
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 Restated Articles of Incorporation of the Company (see Exhibit 3.1).
4.3 Amendment to Restated Articles of Incorporation of the Company dated
June 21, 1995 (see Exhibit 3.2).
4.4 Amended and Restated Bylaws of the Company (see Exhibit 3.3).
10.1 Agreement dated as of July 31, 1985 among Genetic Laboratories,
Inc., Vascular Services Diversified, Inc., and the Company, including
first amendment thereto, dated September 25, 1985 (incorporated by
reference to Exhibit 2.1 to the Company's registration statement on
Form 10 (File No. 0-13907)).
10.2 Amendment No. 2 to the Agreement referred to in Exhibit 2.1,
effective July 31, 1985 (incorporated by reference to Exhibit 19.1 to
the Company's Quarterly Report on Form 10-Q for the period ended
April 30, 1986 (File No. 0-13907)).
10.3 License Agreement dated September 25, 1985 between the Company and
Genetic Laboratories, Inc. (incorporated by reference to Exhibit 10.1
to the Company's registration statement on Form 10 (File No. 0-13907)).
10.4 Amendment to License Agreement dated June 13, 1986 between the
Company and Genetic Laboratories, Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K dated
June 15, 1986 (File No. 0-13907)).
10.5 Debt and Royalty Restatement Agreement dated June 16, 1986
among Genetic Laboratories, Inc., Vascular Services Diversified, Inc.
and the Company (incorporated by reference to Exhibit 19.3 to the
Company's Quarterly Report on Form 10-Q for the period ended
April 30, 1986 (File No. 0-13907)).
10.6 Purchase Agreement dated February 17, 1986, between the Company
and Genetic Laboratories, Inc. including Bill of Sale and Assignment
(incorporated by reference to Exhibit 19.4 to the Company's Quarterly
Report on Form 10-Q (File No. 0-13907)).
10.7 Purchase and sale agreement dated October 30, 1989 and closed
December 28, 1989 between the Company and Meadox Medicals, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated January 11, 1990 (File No. 0-13907)).
10.8 Assignment and Assumption Agreement dated July 31, 1985 between
the Company and Genetic Laboratories, Inc., including the Purchase
Agreement dated June 4, 1984 between Genetic Laboratories, Inc. and
Xomed, Inc. (incorporated by reference to Exhibit 19.5 to the
Company's Quarterly Report on Form 10-Q for the period ended April 30,
1986 (File No. 0-13907)).
E-1
<PAGE>
10.9 Assignment dated June 13, 1986 by Genetic Laboratories, Inc. to
the Company (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 15, 1986 (File No. 0-13907)).
10.10 Confirmatory Assignment dated June 13, 1986 by Genetic
Laboratories, Inc., to the Company (incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated June 15, 1986 (File No. 0-13907)).
10.11 Confirmatory Assignment dated June 13, 1986 by Genetic
Laboratories, Inc., to the Company (incorporated by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K
dated June 15, 1986 (File No. 0-13907)).
10.12 Trademark Assignment Agreement dated June 19, 1986 between the
Company and Genetic Laboratories, Inc. (incorporated by
reference to Exhibit 19.10 to the Company's Quarterly Report
on Form 10-Q for the period ended April 30, 1986 (File No. 0-13907)).
10.13 Assignment dated June 26, 1986 between the Company and Genetic
Laboratories, Inc. (incorporated by reference to Exhibit 19.11
to the Company's Quarterly Report on Form 10-Q for the period
ended April 30, 1986 (File No. 0-13907)).
10.14 1988 Stock Option Plan (incorporated by reference to Exhibit 10.21
to the Company's Annual Report on Form 10-K for the year ended
October 31, 1988 (File No. 0-13907)).
10.15 Agreement and Plan of Merger dated as of December 31, 1993
between the Company and Vital Images, Incorporated
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1993
(File No. 0-13907)).
10.16 Vital Images, Incorporated 1990 Management Incentive Stock
Option Plan (incorporated by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
October 31, 1994 (File No. 0-13907)).
10.17 Vital Images, Incorporated 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1994
(File No. 0-13907)).
10.18 Employment letter dated April 7, 1994 between the Company and
Mr. Karcanes (incorporated by reference to Exhibit 10.26 to
the Company's Annual Report on Form 10-K for the year ended
October 31, 1994 (File No. 0-13907)).
10.19 Employment agreement dated May 24, 1994 between the Company
and Dr. Argiro (incorporated by reference to Exhibit 10.27
to the Company's Annual Report on Form 10-K for the year
ended October 31, 1994 (File No. 0-13907)).
10.20 Employment letter dated November 28, 1994, as amended January 2,
1995, between the Company and Mr. Stephenson. Filed herewith,
page ____.
10.21 Employment letter dated October 19, 1995 between the Company
and Mr. Weiss. Filed herewith, page _____.
10.22 Change in Control Agreement dated November 16, 1994 between
the Company and Mr. Karcanes, which form of Change in Control
Agreement has been entered into between the Company and each
of Ms. Gilles, Mr. Weiss, Mr. Nelson, Dr. MacFarlane, Mr.
Schankereli and Mr. Stephenson (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for
the year ended October 31, 1994 (File No. 0-13907)).
10.23 Form of Change in Control Agreement dated November 16, 1994
entered into between the Company and Dr. Argiro (incorporated
by reference to Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the year ended October 31, 1994 (File No. 0-13907)).
10.24 Lease Agreement dated May 11, 1993 between the Company and
Douglas Green IRA Trust. Filed herewith, page _____.
10.25 Lease Agreement effective August 1, 1995 between the Company
and CMS Investors, Inc. Filed herewith, page____.
E-2
<PAGE>
10.26 License Agreement dated August 25, 1995 between the Company
and CogniSeis Development, Inc. Filed herewith, page ____.
10.27 Purchase and Sale Agreement dated December 1, 1995 among the
Company, Bioplasty, Inc. and Uroplasty, Inc. Filed herewith,
page ____.
10.28 License Agreement dated December 1, 1995 between the Company
and Uroplasty, Inc. Filed herewith, page ____.
10.29 Assignment of U.S. Patent dated December 1, 1995 among the
Company, Bioplasty, Inc. and Uroplasty, Inc. Filed herewith,
page ____.
11.1 Computation of income (loss) per share. Filed herewith,
page ____.
21.1 List of Subsidiaries of the Company. (incorporated by reference
to Exhibit 21.1 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the year ended October 31, 1994 (File
No. 0-13907)).
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith, page ___.
27.1 Financial Data Schedule. Filed herewith, page ____.
E-3
<PAGE>
November 28, 1994 AMENDED JANUARY 1995
Frank Stephenson
6578 Foxdale Circle
Colorado Springs, CO 80919
Dear Frank:
It is a great pleasure to formalize our offer for you to join the Bio-Vascular
team.
Position: Vice President of Marketing & Sales.
Base Salary: $100,000. Your base will be reviewed annually.
Bonus Compensation: You will participate in an incentive bonus plan
in which you can earn up to 50% of your base
compensation (20% cash, 10% restricted stock
and 20% in stock options). These are earned
annually commensurate with the Company's fiscal
year. The objectives upon which the bonus
compensation is paid (financial and personal
objectives) will be established as a collaborate
effort between you and I.
Signing Bonus: Restricted stock worth $10,000. You may elect
to receive the shares on your start date or on
January 2, 1995. The number of shares will be
determined by the low bid price on the date you
elect.
AMENDMENT: FURTHER, A LUMP SUM CASH BONUS OF
$10,000 WILL BE PAID IN JANUARY 1995.
Stock Option Program: Grant of 32,000 shares upon commencement of
employment.
AMENDMENT: GRANTED ON JANUARY 2, 1995.
- Vesting - 25% per year vesting on your
anniversary date.
AMENDMENT: 25% VESTING PER YEAR STARTING
OCTOBER 31, 1995.
- Exercise period - 7 years from the option
date.
- The price of the options will be the low
bid price at the close of the market the
day you join the Company.
<PAGE>
Frank Stephenson AMENDED JANUARY 1995
November 28, 1994
Page 2
401K Plan: Eligible to participate November 1, 1995.
Benefits Program: You will be eligible to participate in the
Company's health, vacation, and other insurance
programs. A benefits summary is attached.
"Change of Control": An agreement will be provided that will include
provisions for a "Change of Control" to include
accelerated vesting of stock options and
severance pay of at least one year of base
salary under certain conditions.
Relocation: - Closing costs on a new home in the Twin Cities
area.
- Reimbursement of moving expenses.
- Interim living expenses up to 90 days. This
time frame can be extended as necessary.
- Two house hunting trips for your wife.
- Interim travel home for you as necessary.
Frank, I sincerely believe you and I will work extremely well together. I hope
you decide to join us.
Yours truly, (Signed as Amended)
/s/ John T. Karcanes
John T. Karcanes
President & Chief Executive Officer
JTK:cf
Acknowledged and Accepted:
/s/ Frank Stephenson
-------------------------------------
Frank Stephenson
<PAGE>
October 19, 1995
Andrew M. Weiss
6115 North Lake Drive Court
Whitefish Bay, WI 53217
Dear Andy:
It gives me great pleasure to revise our offer to you to join the Bio-Vascular &
Vital Images team. The details of the offer are as follows:
TITLE: President, Vital Images, Inc., which is a wholly-owned
subsidiary of Bio-Vascular. This position reports to the
President & CEO of Bio-Vascular. You will also become a
corporate officer (Vice President) of Bio-Vascular.
BASE SALARY: $150,000 annually, which is paid bimonthly.
CASH BONUS: Up to 50% of your base salary, paid once annually, based on
fiscal year achievement of net revenue, operating income and
individual goals. Two-thirds of the 1996 fiscal year bonus
(your first year) is guaranteed.
STOCK OPTIONS: A grant of non-qualified stock options for 200,000 shares
will be made on December 22, 1995 in order to conform with
certain terms and conditions of our recent secondary
offering. The exercise price will be $10.00 and the options
will vest equally over a five year period.
A one time grant of incentive stock options will also be made
on this date to the maximum extent possible under the
incentive stock option plan, for a grant in one year. These
options will vest equally over four years.
SIGNING BONUS: A one time cash payment of $50,000 will be paid to you in the
November 15th payroll run.
<PAGE>
Andrew M. Weiss
October 19, 1995
Page Two
RELOCATION
EXPENSES: Please see attached for details, which will be "grossed up"
for tax purposes as necessary.
EMPLOYEE
BENEFITS: Please see "Summary of Benefits", also attached.
CHANGE OF
CONTROL: Effective on your date-of-hire, the Company will enter into a
change of control agreement with you. If Bio-Vascular's or
Vital Images' ownership were to change by 50% or more and
certain other conditions apply, a lump sum cash payment will
be made to you in an amount equal to the product of (a) your
"highest monthly compensation" multiplied by (b) thirty-six.
"Highest monthly compensation" means one-twelfth (1/12) of
the highest amount of your compensation for any twelve (12)
consecutive calendar month period during the thirty-six (36)
consecutive months prior to the date of termination.
SEVERANCE: A lump sum payment of 12 months of base salary and
acceleration of unvested stock options will occur under any
of the following conditions:
1) You are terminated for any reason other than cause.
Cause is hereby defined as the commission of a
fraudulent act, conviction of a felony or the willful
disclosure of any trade secret or confidential corporate
information to persons not authorized to know same.
2) John Karcanes resigns or is terminated during your first
24 months of employment and you choose to resign.
3) Vincent Argiro resigns or is terminated during your
first 24 months of employment and you choose to resign.
<PAGE>
Andrew M. Weiss
October 19, 1995
Page Three
I look forward to your official acceptance by signing below and returning a copy
of the signature page to me.
Yours truly,
/s/ John T. Karcanes
John T. Karcanes
President & Chief Executive Officer
ACCEPTED:
/s/ Andrew M. Weiss
-----------------------------
Andrew M. Weiss
Date: _______________________
<PAGE>
RELOCATION EXPENSES
Bio-Vascular will pay or reimburse you for the following relocation expenses:
1. Real estate fees and closing costs on your present home.
2. Closing costs of a new home in the Twin Cities area, which will include an
origination fee of up to two points.
3. Interim living expenses for 90 days. This time frame can be extended if
necessary.
4. Two house hunting trips for your wife as appropriate.
5. Interim travel home for you as necessary.
6. Moving of household goods.
7. Miscellaneous expenses, such as license fees, etc.
<PAGE>
COMMERCIAL LEASE
THIS AGREEMENT, made this 14th day of May, 1993 by and between the Douglas
Greenfield IRA Trust, as Landlord, and Vital Images, Inc., as Tenant:
WITNESSETH: That the said Landlord does hereby demise and lease to Tenant
and Tenant does hereby hire for Landlord the following described premises:
The South Eighty-two (82) feet of Lots Nine (9) and Ten (10) in Block
Eighteen (18), Henn, Williams, and Company's Addition to the City of
Fairfield, Jefferson County, Iowa (located at 505 North Fourth Street).
TENANT WILL BE LEASING THE ENTIRE BUILDING.
together with all appurtenances thereto and with easements of ingress and
egress necessary and adequate for the conduct of Tenant's business as
hereinafter described, for the term of FORTY-EIGHT (48) months, running and
including the 1ST day of JUNE, 1993, for the use in Tenant's regular business
of computer software development and marketing or in any other legitimate
business, subject to the terms and conditions of this lease.
AMOUNT OF RENTAL Tenant covenants to pay Landlord at Landlord's address at
808 North 'B' Street, Fairfield, Iowa 52556, or such other place as Landlord
shall designate in writing as rent for said premises, the sum of $5,695 per
month, payable in advance commencing on JUNE 1, 1993. Commencing on JANUARY
1, 1994, Tenant shall pay $5,945 per month, payable in advance. Commencing on
JUNE 1, 1994, Tenant shall pay $6,195 for remainder of lease period.
COST OF LIVING ADJUSTMENT The aforementioned rent shall increase at 7
percent per lease period at the time of renewal if Tenant exercises option to
renew lease.
OPTION OF RENEWAL Tenant shall have the option to extend this lease for one
lease period (four years) by giving Landlord written notice of this option to
extend 60 days prior to the termination of any lease period.
SECURITY DEPOSIT A security deposit of $1,500 shall be held by the Landlord
as security against rent due, damage, failure to fulfill rental obligations,
and abandonment by Tenant, and the excess will be returned within 14 days
after tenant terminates their tenancy, moves out, and demands its return.
In addition to the above, Landlord and Tenant mutually covenant and
agree as follows:
TENANT'S MAINTENANCE AND REPAIR OF PREMISES Except as hereinafter provided,
Tenant shall maintain and keep the interior of the premises in good repair,
free of refuse and rubbish, and be responsible for all janitorial services,
including trash removal, and shall return the same at the expiration or
termination of this lease in as good condition as received by Tenant,
ordinary wear and tear excepted. LANDLORD REQUIRES TENANT TO USE CHAIR MATS
WITH ALL DESK CHAIRS. Tenant is required to turn lights off after business
hours with the exception of necessary
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<PAGE>
security lights. If alterations, additions, and/or installations have been
made by Tenant as provided for in this lease, Tenant shall not be required to
restore the premises to the condition in which they were prior to such
alterations, additions, and/or installations except as hereinafter provided.
TENANT SHALL KEEP SIDEWALKS AND STEPS FREE OF SNOW AND ICE FOR SAFE USAGE FOR
TENANT'S PERSONNEL, GUESTS, AND CUSTOMERS.
TENANT'S ALTERATIONS, ADDITIONS, INSTALLATIONS, AND REMOVAL THEREOF Tenant
may, at its own expense, either at the commencement of or during the term of
this lease, make such alterations in and/or additions to the leased premises
including alterations as may be necessary to fit the same for its business,
only upon first obtaining the written approval of Landlord as to the
additions and/or alterations as well as the materials to be used and the
manner of making such alterations and/or additions. Landlord has the right to
withhold approval, without cause, of alterations and/or additions proposed to
be made by Tenant.
All alterations, additions, or installations shall become the property
of Landlord without liability on Landlord's part to pay for the same,
excluding equipment.
LANDLORD'S MAINTENANCE AND REPAIR OF PREMISES Landlord shall, without
expense to Tenant, maintain and make all necessary repairs to the
foundations, load bearing walls, furnace, water heater, air conditioner,
roof, gutter, downspouts, water mains, gas and sewer lines, sidewalks, and
parking lot, on or appurtenant to the leased premises, upon Landlord
reasonably determining the necessity therefore.
UTILITIES Tenant shall pay all charges for water, gas and electricity, and
all other utilities consumed by Tenant upon the leased premises.
PARKING The tenants in the top two floors are assigned the parking area on
the west side of the building only. The tenants in the ground floor are
assigned the parking on the south side of the building only.
OBSERVANCE OF LAWS Tenant shall duly obey and comply with all public laws,
ordinances, rules or regulations related to the use of the leased premises,
and shall maintain its business in such a manner as will increase insurance
rates of Landlord on premises.
DAMAGE BY FIRE, ETC. DAMAGE REPAIRABLE WITHIN ONE HUNDRED EIGHTY (180) DAYS.
In the event the said premises shall be damaged by fire, storm, water, or
other unavoidable cause to an extent repairable in the reasonable judgment of
Landlord within one hundred eighty (180) days from the date of such damage,
Landlord shall forthwith proceed to repair such damage. During the period of
repair, Tenant's rent shall abate in whole or in part depending upon the use
of said premises for the normal purposes of Tenant's business. In the event
that Landlord shall fail to promptly commence repair of such damage, or
having commenced the same shall fail to prosecute such repair to completion
with due diligence after notice from Tenant, Tenant may at Tenant's
option upon fifteen (15) days written notice to Landlord, make or complete
such repair and deduct
COMMERCIAL LEASE
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<PAGE>
the cost thereof from the next ensuing installment or installments of rent
payable under this lease.
DAMAGE NOT REPAIRABLE WITHIN ONE HUNDRED EIGHTY (180) DAYS. In the event
the said premises shall be damaged by fire, storm, water, or other
unavoidable cause, to an extent not reasonably repairable within one hundred
eighty (180) days from the date of such damage in the judgment of the
Landlord this lease shall terminate as of the date of such damage.
SIDEWALK ENCUMBRANCES Tenant shall neither encumber nor obstruct the
sidewalk in front of, or any entrance to, the building on the leased premises.
SIGNS Tenant shall have the right to erect, affix, or display such sign or
sign advertising the business as Tenant may consider necessary or desirable,
SUBJECT TO APPROVAL BY LANDLORD, and that same is in conformity with other
signs of tenants of neighboring property, subject to all applicable municipal
ordinances and regulations with respect thereto.
TERMINATION BY REASON OF DEFAULT In the event that either of the parties
hereto shall fail to perform any covenant required to be performed by such
party under the terms and provisions of this lease, including Tenant's
covenant to pay rent, and such failure shall continue unremedied or
uncorrected for a period of fifteen (15) days after the service of written
notice upon such party by the other party hereto, specifying such failure,
this lease may be terminated, at the option of the party serving such notice,
at the expiration of such period of fifteen (15) days; provided, however,
that such termination shall not relieve the party so failing from liability
to the other party for such damages as may be suffered by reason of such
failure.
CONDEMNATION In the event that the leased premises shall be taken for public
use by the city, state, federal government, public authority or other
corporation having the power of eminent domain, then this lease shall
terminate as of the date on which possession thereof shall be taken for such
public use, or, at the option of the Tenant, as of the date on which the
premises shall become unsuitable for Tenant's regular business by reason of
such taking. If only a part of the lease premises shall be taken and Tenant
shall remain a tenant of the building, the rent shall be abated
proportionately.
ASSIGNMENT Tenant may not assign this lease or sublet the premises or any
part thereof without the written consent of Landlord which shall not be
unreasonably withheld. If any assignment or sublease is made by Tenant with
Landlord's consent, Tenant shall remain liable as surety under the terms
hereof notwithstanding such assignment or sublease. Landlord has granted
consent to allow Tenant to sublease the ground floor of the building for the
initial year of the lease or part thereof. Sublease may be to any one or more
persons. Landlord shall be permitted to assign this lease.
TAXES Landlord shall pay all taxes, assessments, and charges which shall be
assessed and levied upon the leased premises or any part thereof during the
said term as they become due.
COMMERCIAL LEASE
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<PAGE>
TENANT'S LIABILITY INSURANCE During the term of this lease, Tenant at his
own expense shall carry public liability insurance reasonably sufficient to
protect Tenant from liability.
DISPUTE BY ARBITRATION With the exception of actions seeking injunctive
relief which may also be brought in any court of competent jurisdiction, any
disputes hereunder shall be settled by arbitration in Fairfield, Iowa in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment thereon may be entered in any court of competent
jurisdiction.
LANDLORD'S RIGHT TO ENTER PREMISES Tenant shall permit Landlord and
Landlord's agents to enter at all reasonable times to view the state and
condition of the premises or to make such alterations or repairs therein as
may be necessary for the safety and preservation thereof, or for any other
reasonable purposes. Tenant shall also permit Landlord or Landlord's agents,
on or after sixty (60) days next preceding the expiration of the term of this
lease, to show the premises to prospective tenants at reasonable times, and
to place notices on the front of said premises, or on any part thereof,
offering the premises for lease or for sale.
TERMINATION OF LEASE Signing of this lease terminates any previous lease
between Landlord and Tenant as of June 1, 1993.
QUIET ENJOYMENT Upon the Tenant performing its obligations under this lease,
Tenant shall peaceably hold and enjoy the determined premises for the term of
this lease free from molestation, eviction, or disturbance by the Landlord.
ATTORNMENT AGREEMENT If any mortgages presently exist on the property,
Landlord will obtain an attornment agreement from the mortgagee within 45
days whereby the mortgagee agrees to recognize this lease if it succeeds to
possession of the property. Tenant will have the right to record a short form
of the lease if Tenant deems it necessary to protect its lease as against
failed mortgages.
AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and agreement
herein contained shall inure to the benefit of and be equally binding upon
the respective executors, administrators, heirs, successors and assigns of
the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this lease the day and
year first above written.
TENANT LANDLORD
------ --------
VITAL IMAGES, INC.
/s/ ELIZABETH KOEHLER /s/ DOUGLAS W. GREENFIELD
- ------------------------------------- -------------------------------------
AUTHORIZED OFFICER WITH POWER AND DOUGLAS W. GREENFIELD
AUTHORITY TO BIND ABOVE COMPANY
COMMERCIAL LEASE
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<PAGE>
L E A S E
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This lease ("Lease") is entered into this 28th day
of February, 1995 by and between CSM INVESTORS, INC., a Minnesota
corporation, ("Landlord") and BIO-VASCULAR, INC., a Minnesota corporation,
("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to Tenant the
following described property ("Premises") as illustrated on the site plan
attached hereto as EXHIBIT A: 36,027 square feet of warehouse space in
WESTGATE BUSINESS CENTER PHASE IV located at University Avenue and Eustis
Street in St. Paul, Minnesota, and consisting of approximately 101,000 square
feet ("Building").
1.3 IMPROVEMENTS. A floor plan of the Premises is attached hereto as EXHIBIT
B. The improvements to be constructed in and upon the Premises by Landlord
are set forth and described in EXHIBIT C ("Landlord Improvements"). The
improvements to be constructed in and upon the Premises by Tenant are set
forth and described in EXHIBIT D ("Tenant Improvements").
Landlord shall reimburse Tenant for the Tenant Improvements up to a maximum
sum of Six Hundred Thousand and no/100 Dollars ($600,000.00) (the "Tenant
Improvement Allowance"). The Tenant Improvement Allowance shall be
disbursed by Landlord to Tenant in two installments, the first upon fifty
percent (50%) completion of the Tenant Improvements and the second on full
completion of the Tenant Improvements. Disbursements shall be made subject
and pursuant to pay application and disbursement procedures typically
utilized by construction lenders. Tenant shall be solely responsible for and
shall pay all Tenant Improvement costs in excess of $600,000.00.
In connection with the Tenant Improvements to be constructed and installed by
Tenant, it is specifically agreed, as follows:
A. Tenant shall contract only with a union contractor for construction of
the Tenant Improvements, who in turn shall agree to utilize only union
subcontractors on the project.
B. Tenant shall be responsible for compliance of all work with the approved
plans and all applicable codes, laws, regulations and the like.
C. Landlord shall have no responsibility for the quality, maintenance,
repair or replacement of the Tenant Improvements, except as otherwise
provided in Section 7 of this Lease.
D. Tenant shall indemnify and hold Landlord harmless from and against any
and all claims, causes of action, damages or expenses (including liens)
arising out of, by reason of or as a result of, Tenant's construction and
installation of the Tenant Improvements.
1.4 LEASE TERM. The term of this Lease shall commence on one hundred five
(105) days after delivery of Premises to Tenant pursuant to Section 1.5
hereof ("Commencement Date") and shall terminate one hundred twenty (120)
months thereafter, unless sooner terminated as hereinafter provided. In the
event that Tenant does not vacate the Premises upon the expiration or
termination of this Lease, Tenant shall be a tenant at will for the holdover
period and all of the terms and provisions of this Lease shall be applicable
during that period, except that Tenant shall pay Landlord as base rental for
the period of such holdover an amount equal to one and one-half (1) times the
base rent which would have been payable by Tenant had the holdover period
been a part of the original term of this Lease, together with all additional
rent as provided in this Lease. Tenant agrees to vacate and deliver the
Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate.
The rental payable during the holdover period shall be payable to Landlord
on demand. No holding over by Tenant, whether with or without the consent of
Landlord, shall operate to extend the term of this Lease.
1.5 EARLY POSSESSION AND OCCUPANCY. Landlord agrees to permit Tenant to
enter into the Premises prior to the Commencement Date for the purpose of
constructing and installing in and upon the Premises the Tenant Improvements
as described in attached EXHIBIT D, and Tenant's equipment and business
fixtures. Landlord agrees to use its best efforts to deliver the Premises to
Tenant for such purposes, on or before April 15, 1995 (the "Delivery
Date"), in a condition that will permit Tenant to proceed with its work of
improving the Premises. The condition of the Premises as of the Delivery
Date will be as described in attached EXHIBIT E. The parties agree that if
the Premises are not delivered to Tenant for the foregoing purposes on or
before April 15, 1995, then Landlord shall pay to Tenant, as and for
liquidated damages, the sum of Five Hundred and no/100 Dollars ($500.00) per
day for each day after the Delivery Date that the Premises are delivered.
Notwithstanding anything herein to the contrary, if Landlord fails to deliver
the Premises to Tenant, as above provided, on or before July 1, 1995, then
Tenant may, upon written notice to Landlord, terminate this Lease and the
parties shall have no further obligations hereunder, except that Landlord
shall remain liable for payment of liquidated damages, as set forth above, to
the date of termination. To be effective, Tenant must exercise its right of
termination within five (5) days of the date established for Landlord's
performance (i.e., July 1, 1995).
Following completion of Tenant's work, Tenant shall be entitled to occupy the
Premises and conduct its business therein. Additionally, Landlord agrees to
allow Tenant and Tenant's general contractor to have access to the Premises
prior to April 15, 1995, provided that such access will not interfere with
Landlord's completion of Landlord's work.
Tenant's early possession and/or occupancy of the Premises as above described
shall be subject and pursuant to all of the terms and conditions of the
Lease, except for Tenant's obligation of payment of rent and operating
expenses, which obligation shall commence on the Commencement Date of the
Lease.
The deadlines established above for commencement of construction and delivery
of the Premises are subject to force majeure and Tenant caused delays, and
shall be appropriately extended to reflect any such delays.
1.6 BASE RENT. Base Rent is: Months Monthly Base Rent Per Sq. Ft.
1-120 $21,286.76 $7.09
<PAGE>
1.7 PERMITTED USE: Office, warehouse, manufacturing, research and
development, laboratory, and sales and service.
1.8 SECURITY DEPOSIT: Not applicable.
1.9 PRO-RATA SHARE: Thirty-five and 67/100 percent (35.67%) subject to
adjustment as provided in Section 2.2 hereof.
1.10 ADDRESSES. LANDLORD'S ADDRESS: TENANT'S ADDRESS:
CSM INVESTORS, INC. BIO-VASCULAR, INC.
2561 TERRITORIAL ROAD 2670 PATTON ROAD
ST. PAUL, MN 55114-1500 ROSEVILLE, MN 55113
(612) 646-1717 (612) 631-3529
(until Commencement Date -
thereafter to Premises)
ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of
this Lease the sum of money set forth in Section 1.6 of this Lease, which
amount shall be payable to Landlord at the address shown above. One monthly
installment shall be due and payable on or before the first day of each
calendar month succeeding the Commencement Date during the term of this
Lease; provided, if the Commencement Date should be a date other than the
first day of a calendar month, the monthly rental set forth above shall be
prorated to the end of that calendar month, and all succeeding installments
of rent shall be payable on or before the first day of each succeeding
calendar month during the term of this Lease. Tenant shall pay, as
additional rent, all other sums due under this Lease.
2.2 OPERATING EXPENSES.Tenant shall also pay as additional rent Tenant's pro
rata share of the operating expenses of Landlord for the Building. Landlord
may invoice Tenant monthly for Tenant's pro rata share of the estimated
operating expenses for each calendar year, which amount shall be adjusted
from time-to-time by Landlord based upon anticipated operating expenses.
Within six (6) months following the close of each calendar year, Landlord
shall provide Tenant an accounting showing in reasonable detail the
computations of additional rent due under this Section. In the event the
accounting shows that the total of the monthly payments made by Tenant
exceeds the amount of additional rent due by Tenant under this Section, the
accounting shall be accompanied by evidence of a credit to Tenant's account.
In any event the accounting shows that the total of the monthly payments made
by Tenant is less than the amount of additional rent due by Tenant under this
Section, the accounting shall be accompanied by an invoice for the additional
rent. Notwithstanding any other provisions in this Lease, during the year in
which this Lease terminates, Landlord, prior to the termination date, shall
have the option to invoice Tenant for Tenant's pro rata share of the
operating expenses based upon the previous year's operating expenses. If
this Lease shall terminate on a day other than the last day of a calendar
year, the amount of any additional rent payable by Tenant applicable to the
year in which the termination shall occur shall be prorated on the ratio that
the number of days from the commencement of the calendar year to and
including such termination date bears to 365. Tenant agrees to pay any
additional rent due under this Section within ten (10) days following receipt
of the invoice or accounting showing additional rent due. Tenant's pro rata
share set forth in Section 1.9 shall be equal to a percentage based upon a
fraction, the numerator of which is the net rentable area of the Premises as
set forth in Article 1 and the denominator of which shall be the net rentable
area of the Building, as the same may change from time to time.
2.3 DEFINITION OF OPERATING EXPENSES.The term "operating expenses" includes
all expenses incurred by Landlord with respect to the maintenance and
operation of the Building, including, but not limited to, the following:
maintenance, repair and replacement costs; electricity, fuel, water, sewer,
gas and other common Building utility charges for the common areas;
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equipment used for maintenance and operation of the Building; operational
expenses; exterior window washing and janitorial services (for common areas);
trash and snow removal; landscaping and pest control; reasonable management
fees, wages and benefits payable to employees of Landlord whose duties are
directly connected with the operation and maintenance of the Building; all
services, supplies, repairs, replacements or other expenses for maintaining
and operating the Building and appurtenant improvements, including parking
and common areas; improvements made to the Building which are required under
any governmental law or regulation that was not applicable to the Building at
the time it was constructed; installation of any device or other equipment
which improves the operating efficiency of any system within the Premises and
thereby reduces operating expenses; all other expenses which would generally
be regarded as operating, repair, replacement and maintenance expenses; all
real property taxes and installments of special assessments (excluding
special assessments levied prior to the Commencement Date) and legal fees
incurred in connection with actions to reduce the same; and all insurance
premiums Landlord is required to pay or reasonably deems necessary to pay,
including fire and extended coverage, and rent loss and public liability
insurance, with respect to the Building.
The following items shall not constitute nor be included in operating
expenses: debt service, leasing commissions, executive salaries and
overhead, non-cash charges or reserves, costs to correct defects in design or
original construction, or costs which are reimbursed by others (except tenant
payments of pro rata shares of operating expenses). For the years 1995, 1996
and 1997, the Tenant's pro rata share of operating expenses shall be capped
at One and no/100 Dollars ($1.00) per square foot per year, and One and
20/100 Dollars ($1.20) per square foot per year, and Three and 75/100 Dollars
($3.75) per square foot per year, respectively.
2.4 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Building is caused by Tenant's particular use of the
Premises or if Tenant vacates the Premises and causes an increase in such
premiums, then Tenant shall pay as additional rent the amount of such
increase to Landlord.
2.5 SECURITY DEPOSIT. Intentionally omitted.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall
be used and occupied only for the purpose as set forth in Section 1.7.
Tenant shall occupy the Premises, conduct its business and control its
agents, employees, invitees and visitors in such a manner as is lawful,
reputable and will not create a nuisance. Tenant shall not permit any
operation which emits any odor or matter which intrudes into other portions
of the Building or otherwise interfere with, annoy or disturb any other
lessee in its normal business operations or Landlord in its management of the
Building. Tenant shall not permit any waste on the Premises to be used in
any way which would, in the opinion of Landlord, be extra hazardous on
account of fire or which would, in any way, increase or render void the fire
insurance on the Building.
Tenant shall be responsible for proper disposal of all biological or medical
waste and all other material utilized in the conduct of Tenant's business,
strictly in accordance with all applicable local, state and federal laws and
regulations.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Premises or Building which are visible from the
exterior of the Premises, except those signs depicted or described on
attached EXHIBIT F, or those signs submitted to Landlord in writing, and
which signs are in conformance with Landlord's sign criteria, if any,
established for the Building.
3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole
cost and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the Premises. Tenant
will comply with the reasonable, nondiscriminatory rules and regulations of
the Building adopted by Landlord. Landlord shall have the right at all times
to change and amend the rules and regulations in any reasonable manner as may
be deemed advisable for the safety, care, cleanliness, preservation of good
order and operation or use of the Building or the Premises. All rules and
regulations of the Building will be sent by Landlord to Tenant in writing and
shall thereafter be carried out and observed by Tenant.
Landlord warrants that on the Commencement Date the Building and Landlord's
work within the Premises will be in compliance with all applicable laws,
regulations and ordinances, and that the use of the Premises, as described in
Section 1.7 is permitted under applicable ordinances.
3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required
rents and subject to the terms, conditions, covenants and agreements
contained in this Lease, shall have possession of the Premises during the
full term of this Lease as well as any extension or renewal thereof.
Landlord shall not be responsible for the acts or omissions of any other
lessee or third party beyond its control that may interfere with Tenant's use
and enjoyment of the Premises.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall, at any and all
reasonable times, upon reasonable notice and with reasonable precautions,
have the right to enter the Premises to inspect the same, to show the
Premises to prospective purchasers, lessees (during the last six (6) months
of the lease term), mortgagees, insurers or other interested parties, and to
alter, improve or repair the Premises or any other portion of the Building.
Tenant hereby waives any claim for damages for injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or use of the
Premises, and any other loss occasioned thereby. Tenant shall not change
Landlord's lock system or in any other manner prohibit Landlord from entering
the Premises. Landlord shall have the right to use any and all reasonable
means which Landlord may deem proper to open any door in an emergency without
liability therefor. Tenant shall permit Landlord to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires in, to and through
the Premises as often and to the extent that Landlord may now or hereafter
deem to be necessary or appropriate for the proper use, operation and
maintenance of the Building. Landlord will exercise its best efforts to
minimize disruption to Tenant's business in connection with the foregoing.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant
shall have no claim for rebate of rent on account of any interruption in
service, but Landlord shall exercise its best efforts to promptly restore
interrupted services.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building, except where caused
by the sole negligence of Landlord.
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<PAGE>
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1. LANDLORD REPAIRS. Landlord shall not be required to make any
improvements, replacements or repairs of any kind or character to the
Premises or the Building during the term of this Lease except as are set
forth in this Section. Landlord shall maintain only the roof, foundation,
parking and common areas, the structural soundness of the exterior walls,
doors, corridors, and other structures serving the Premises, provided, that
Landlord's cost of maintaining, replacing and repairing the items set forth
in this Section are operating expenses subject to the additional rent
provisions in Section 2.2 and 2.3. Landlord shall not be liable to Tenant,
except as expressly provided in this Lease, for any damage or inconvenience,
and Tenant shall not be entitled to any abatement or reduction of rent by
reason of any repairs, alterations or additions made by Landlord under this
Lease.
5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe, sanitary and first class condition
and in compliance with all applicable laws, codes, ordinances, rules and
regulations. Tenant's obligations hereunder shall include, but not be
limited to, the maintenance, repair and replacement, if necessary, of all
heating, ventilation, air conditioning, lighting and plumbing fixtures and
equipment, fixtures, motors and machinery, all interior walls, partitions,
doors and windows, including the regular painting thereof, all exterior
entrances, windows, doors and docks and the replacement of all broken glass.
When used in this provision, the term "repairs" shall include replacements
or renewals when necessary, and all such repairs made by the Tenant shall be
equal in quality and class to the original work. The Tenant shall keep and
maintain all portions of the Premises and the sidewalk and areas adjoining
the same in a clean and orderly condition, free of accumulation of dirt,
rubbish, snow and ice. If Tenant fails, refuses or neglects to maintain or
repair the Premises as required in this Lease after notice shall have been
given Tenant, in accordance with this Lease, Landlord may make such repairs
without liability to Tenant for any loss or damage that may accrue to
Tenant's merchandise, fixtures or other property or to Tenant's business by
reason thereof, and upon completion thereof, Tenant shall pay to Landlord all
costs plus fifteen percent (15%) for overhead incurred by Landlord in making
such repairs upon presentation to Tenant of bill therefor.
5.3. TENANT DAMAGES. Tenant shall not allow any damage to be committed on
any portion of the Premises or Building or common areas, and at the
termination of this lease, by lapse of time or otherwise, Tenant shall
deliver the Premises to Landlord in as good condition as existed at the
Commencement Date of this Lease, ordinary wear and tear excepted. The cost
and expense of repairs necessary to restore the condition of the Premises
shall be borne by Tenant.
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any
alterations or physical additions in or to the Premises without first
obtaining the written consent of Landlord, which consent shall not be
unreasonably withheld. Any alterations, physical additions or improvements
to the Premises made by Tenant shall at once become the property of Landlord
and shall be surrendered to Landlord upon the termination of this Lease;
provided, however, Landlord may, at the time of and as a condition to
granting consent, require Tenant to remove any physical additions and/or
repair any alterations in order to restore the Premises to the conditions
existing at the time Tenant took possession, all costs of removal and/or
alterations to be borne by Tenant. This clause shall not apply to moveable
equipment or furniture owned by Tenant, which may be removed by Tenant at the
end of the term of this Lease if Tenant is not then in default and if such
equipment and furniture are not subject to any other rights, liens and
interests of Landlord.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises
or the Building should be totally destroyed by fire or other casualty and the
Building is not being restored, or if the Premises or the Building should be
damaged so that rebuilding cannot reasonably be completed within one hundred
eighty (180) working days after the date of written notification by Tenant to
Landlord of the destruction, or if insurance proceeds are not made available
to Landlord, or are inadequate, for restoration, this Lease shall terminate
at the option of Landlord by written notice to Tenant within sixty (60) days
following the occurrence, and the rent shall be abated for the unexpired
portion of the Lease effective as of the date of the written notification.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire
or other casualty, and rebuilding or repairs can reasonably be completed
within one hundred eighty (180) working days from the date of written
notification by Tenant to Landlord of the destruction, and insurance proceeds
are adequate and available to Landlord for restoration, this Lease shall not
terminate, and Landlord shall at its sole risk and expense proceed with
reasonable diligence to rebuild or repair the Building or other improvements
to substantially the same condition in which they existed prior to the
damage. If the Premises are to be rebuilt or repaired and are untenantable
in whole or in part following the damage, the rent payable under this Lease
during the period for which the Premises are untenantable shall be adjusted
to such an extent as may be fair and reasonable under the circumstances. In
the event that Landlord fails to complete the necessary repairs or rebuilding
within one hundred eighty (180) working days from the date of written
notification by Tenant to Landlord of the destruction, Tenant may at its
option terminate this Lease by delivering written notice of termination to
Landlord, whereupon all rights and obligations under this Lease shall cease
to exist.
7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner
to insure any personal property (including, but not limited to, any
furniture, machinery, goods or supplies) of Tenant upon or within the
Premises, any fixtures installed or paid for by Tenant upon or within the
Premises, or any improvements which Tenant may construct on the Premises
(except the initial Tenant Improvements). Tenant shall maintain property
insurance on its personal property and shall also maintain plate glass
insurance. Tenant shall have no right in or claim to the proceeds of any
policy of insurance maintained by Landlord even if the cost of such insurance
is borne by Tenant as set forth in Article 2.
7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant hereby waive and release each other of
and from, to the extent normally insurable, any and all right of recovery,
claim, action or cause of action, against each other, their agents, officers
and employees, for any loss or damage that may occur to the Premises, the
Building or personal property within the Building, by reason of fire or the
elements, regardless of cause or origin, including negligence of Landlord or
Tenant and their agents, officers and employees. Landlord and Tenant agree
immediately to give their respective insurance companies which have issued
policies of insurance covering all risk of direct physical loss, written
notice of the terms of the mutual waivers contained in this Section.
7.5 HOLD HARMLESS. Landlord shall not be liable to Tenant's employees,
agents, invitees, licensees or visitors, or to any other person, for an
injury to person or damage to property on or about the Premises caused by any
act or omission of Tenant, its agents, servants or employees, or of any other
person entering upon the Premises under express or implied invitation by
Tenant, or caused by the improvements located on the Premises becoming out of
repair, the failure or cessation of any service provided by Landlord
(including security service and devices), or caused by leakage of gas, oil,
water or steam or by electricity emanating from the Premises, unless caused
by the sole negligence or willful misconduct of Landlord. Tenant agrees to
indemnify and hold harmless Landlord of and from any loss, attorney's fees,
expenses or claims arising out of any such damage or injury.
7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in
full force and effect at its expense a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms
and with companies approved in writing by Landlord, in which both Tenant and
Landlord shall be covered by being named as insured parties under reasonable
limits of liability not less than $1,000,000, or such greater coverage as
Landlord may reasonably require, combined single limit coverage for injury or
death. Such policy or policies shall provide that thirty (30) days' written
notice must be given to Landlord prior to cancellation thereof. Tenant shall
furnish evidence satisfactory to Landlord at the time this Lease is executed
that such coverage is in full force and effect.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are
taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain or by purchase in lieu
thereof, and the taking would prevent or materially interfere with the use of
the Premises for the purpose for which it is then being used, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease effective on the date physical possession is taken by the
condemning authority. Tenant shall have no claim to the condemnation award
or proceeds in lieu thereof, except that Tenant shall be entitled to a
separate award for the cost of relocating its business, and damage to and
removing and moving of its personal property.
8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, the rent
payable under this Lease during the unexpired portion of the term shall be
adjusted to such an extent as may be fair and reasonable under the
circumstances. Tenant shall have no claim to the condemnation award or
proceeds in lieu thereof, except that Tenant shall be entitled to a separate
award for the cost of relocating its business, and damage to and removing and
moving its personal property.
ARTICLE 9. ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and
in the Building. Any such sale, transfer or assignment shall operate to
release Landlord from any and all liabilities under this Lease arising after
the date of such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law
or otherwise (including without limitation by transfer of a majority interest
of stock, merger, or dissolution, which transfer of majority interest of
stock, merger or dissolution shall be deemed an assignment) or mortgage or
pledge the same, or sublet the Premises, in whole or in part, without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, and in no event shall said such assignment or sublease ever release
Tenant or any guarantor from any obligation or liability hereunder.
Notwithstanding anything in this Lease to the contrary, in the event of any
assignment
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or sublease, any option or right of first refusal granted to Tenant shall not
be assignable by Tenant to any assignee or sublessee. No assignee or
sublessee of the Premises or any portion thereof may assign or sublet the
Premises or any portion thereof.
9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or
any part of the Premises, it shall so notify Landlord at least thirty (30)
days in advance of the date on which Tenant desires to make such assignment
or sublease. Tenant shall provide Landlord with a copy of the proposed
assignment or sublease and such information as Landlord might request
concerning the proposed sublessee or assignee to allow Landlord to make
informed judgments as to the financial condition, reputation, operations and
general desirability of the proposed sublessee or assignee. Within fifteen
(15) days after Landlord's receipt of Tenant's proposed assignment or
sublease and all required information concerning the proposed sublease or
assignee, Landlord shall have the following options: (1) cancel this Lease
as to the Premises or portion thereof proposed to be assigned or sublet; (2)
consent to the proposed assignment or sublease, and, if the rent due and
payable by any assignee or sublessee under any such permitted assignment or
sublease (or a combination of the rent payable under such assignment or
sublease plus any bonus or any other consideration or any payment incident
thereto) exceeds the rent payable under this Lease for such space, Tenant
shall pay to Landlord all such excess rent and other excess consideration
within ten (10) days following receipt thereof by Tenant; or (3) refuse to
consent to the proposed assignment or sublease, which refusal shall be deemed
to have been exercised unless Landlord gives Tenant written notice providing
otherwise. Upon the occurrence of an event of default, if all or any part of
the Premises are then assigned or sublet, Landlord, in addition to any other
remedies provided by this Lease or provided by law, may, at its option,
collect directly from the assignee or sublessee all rents becoming due to
Tenant by reason of the assignment or sublease. Any collection directly by
Landlord from the assignee or sublessee shall not be construed to constitute
a novation or a release of Tenant or any guarantor from the further
performance of its obligations under this Lease.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to
any recorded mortgage presently existing or hereafter created upon the
Building and to all existing recorded restrictions, covenants, easements and
agreements with respect to the Building. Landlord is hereby irrevocably
vested with full power and authority to subordinate Tenant's interest under
this Lease to any first mortgage lien hereafter placed on the Premises, and
Tenant agrees upon demand to execute additional instruments subordinating
this Lease as Landlord may require. If the interests of Landlord under this
Lease shall be transferred by reason of foreclosure or other proceedings for
enforcement of any first mortgage or deed of trust on the Premises, Tenant
shall be bound to the transferee (sometimes called the "Purchaser") at the
option of the Purchaser, under the terms, covenants and conditions of this
Lease for the balance of the term remaining, including any extensions or
renewals, with the same force and effect as if the Purchaser were Landlord
under this Lease, and, if requested by the Purchaser, Tenant agrees to attorn
to the Purchaser, including the first mortgagee under any such mortgage if it
be the Purchaser, as its Landlord. Notwithstanding the foregoing, Tenant
shall not be disturbed in its possession of the Premises so long as Tenant is
not in default hereunder.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, from time to time, within
ten (10) days after receipt of a request from Landlord or Landlord's
mortgagee, a statement certifying, if applicable, the following: Tenant is
in possession of the Premises; the Premises are acceptable; the Lease is in
full force and effect; the Lease is unmodified; Tenant claims no present
charge, lien, or claim or offset against rent; the rent is paid for the
current month, but is not prepaid for more than one month and will not be
prepaid for more than one month in advance; there is no existing default by
reason of some act or omission by Landlord; and such other matters as may be
reasonably required by Landlord or Landlord's mortgagee. Tenant's failure to
deliver such statement, in addition to being a default under this Lease,
shall be deemed to establish conclusively that this Lease is in full force
and effect except as declared by Landlord, that Landlord is not in default of
any of its obligations under this Lease, and that Landlord has not received
more than one month's rent in advance. Tenant agrees to furnish, from time
to time, within ten (10) days after receipt of a request from Landlord, a
current financial statement (10-Q or 10-K) of Tenant, certified as true and
correct by Tenant.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT (Intentionally omitted)
ARTICLE 11. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of
default ("Default") by Tenant under this Lease: (1) Tenant shall fail to
pay when due any installment of rent or any other payment required pursuant
to this Lease and such failure is not cured within three (3) days following
written notice to Tenant; (2) Tenant shall abandon any substantial portion
of the Premises; (3) Tenant shall fail to comply with any term, provision or
covenant of this Lease, other than the payment of rent, and the failure is
not cured within twenty (20) days after written notice to Tenant or such
longer period as is reasonably required to cure, provided that Tenant is
diligently pursuing the same; (4) Tenant shall file a petition or if an
involuntary petition is filed against Tenant and is not discharged within
thirty (30) days, or becomes insolvent, under any applicable federal or state
bankruptcy or insolvency law or admit that it cannot meet its financial
obligations as they become due; or a receiver or trustee shall be appointed
for all or substantially all of the assets of Tenant; or Tenant shall make a
transfer in fraud of creditors or shall make an assignment for the benefit of
creditors; or (5) Tenant shall do or permit to be done any act which results
in a lien being filed against the Premises or the Building and/or project of
which the Premises are a part, which is not discharged within ten (10) days
following written notice to Tenant.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A)
Tenant as debtor-in-possession, or any trustee who may be appointed in the
case (the "Trustee") seeks to assume the lease, then Tenant, or Trustee if
applicable, in addition to providing adequate assurance described in
applicable provisions of the Bankruptcy Code, shall provide adequate
assurance to Landlord of Tenant's future performance under the Lease by
depositing with Landlord a sum equal to the lesser of twenty-five percent
(25%) of the rental and other charges due for the balance of the Lease term
or six (6) months' rent ("Security"), to be held (without any allowance for
interest thereon) to secure Tenant's obligation under the Lease, and (B)
Tenant, or Trustee if applicable, seeks to assign the Lease after assumption
of the same, then Tenant, in addition to providing adequate assurance
described in applicable provisions of the Bankruptcy Code, shall provide
adequate assurance to Landlord of the proposed assignee's future performance
under the Lease by depositing with Landlord a sum equal to the Security to be
held (without any allowance or interest thereon) to secure performance under
the Lease. Nothing contained herein expresses or implies, or shall be
construed to express or imply, that Landlord is consenting to assumption
and/or assignment of the Lease by Tenant, and Landlord expressly reserves all
of its rights to object to any assumption and/or assignment of the Lease.
Neither Tenant nor any Trustee shall conduct or permit the conduct of any
"fire", "bankruptcy", "going out of business" or auction sale in or
from the Premises.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as
defined above, Landlord may elect either (i) to cancel and terminate this
Lease and this Lease shall not be treated as an asset of Tenant's bankruptcy
estate, or (ii) to terminate Tenant's right to possession only without
cancelling and terminating Tenant's continued liability under this Lease.
Notwithstanding the fact that initially Landlord elects under (ii) to
terminate Tenant's right to possession only, Landlord shall have the
continuing right to cancel and terminate this Lease by giving three (3) days'
written notice to Tenant of such further election, and shall have the right
to pursue any remedy at law or in equity that may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and
hold possession thereof, without such entry into possession terminating this
Lease or releasing Tenant in whole or in part from Tenant's obligation to pay
all amounts hereunder for the full stated term. Upon such reentry, Landlord
may remove all persons and property from the Premises and such property may
be removed and stored in a public warehouse or elsewhere at the cost and for
the account of Tenant, without becoming liable for any loss or damage which
may be occasioned thereby. Such reentry shall be conducted in the following
manner: without resort to judicial process or notice of any kind if Tenant
has abandoned or voluntarily surrendered possession of the Premises; and,
otherwise, by resort to judicial process. Upon and after entry into
possession without termination of the Lease, Landlord may exercise reasonable
efforts to relet the Premises, or any part thereof, to any one other than the
Tenant, for such time and upon such terms as Landlord, in Landlord's sole
discretion, shall determine. Landlord may make alterations and repairs to
the Premises to the extent deemed by Landlord necessary or desirable to relet
the Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
A. For all attorneys' fees incurred by Landlord in connection with
exercising any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or other
unpaid sums which were due prior to such reentry, including interest
and late payment fees, which sums shall be payable immediately.
C. For the installments of base rent, additional rent, and other sums
falling due pursuant to the provisions of this Lease for the period
after reentry during which the Premises remain vacant, including late
payment charges and interest, which sums shall be payable as they
become due hereunder.
D. For all expenses incurred in releasing the Premises, including leasing
commissions, attorneys' fees, and costs of alteration or repairs, which
shall be payable by Tenant as they are incurred by Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less than
the monthly installment for all charges payable pursuant to this
Lease, which deficiencies shall be payable monthly.
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu
of the amounts which would thereafter be payable pursuant to the foregoing,
but not in diminution of the amounts payable as provided above before
termination), as damages for loss of bargain and not as a penalty, an
aggregate sum equal to the present value of the amount by which the rental
value of the portion of the term unexpired at the time of such election is
less than an amount equal to the unpaid base rent, percentage rent, and
additional rent and all other charges which would have been payable by Tenant
for the unexpired portion of the term of this Lease, which deficiency and all
expenses incident thereto, including commissions, attorneys' fees, expenses
of alterations and repairs, shall be due to Landlord as of the time Landlord
exercises said election, notwithstanding that the term had not expired. If
Landlord, after such reentry, leases the Premises, then the rent payable
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under such new lease shall be conclusive evidence of the rental value during
that part of the unexpired portion of the term of this Lease.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate,
as liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be
in Default under this Lease, Landlord may cure the Default at any time for
the account and at the expense of Tenant. If Landlord cures a Default on the
part of Tenant, Tenant shall reimburse Landlord upon demand for any amount
expended by Landlord in connection with the cure, including, without
limitation, attorneys' fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHARGE. In the event of a Default by
Tenant: (1) if a monetary default, interest shall accrue on any sum due and
unpaid at the rate of the lesser of Prime plus 4% per annum or the highest
rate permitted by law and, if Landlord places in the hands of an attorney the
enforcement of all or any part of this Lease, the collection of any rent due
or to become due or recovery of the possession of the Premises, Tenant agrees
to pay Landlord's costs of collection, including reasonable attorney's fees
for the services of the attorney, as awarded by a court of competent
jurisdiction. Other remedies for nonpayment of rent notwithstanding, if the
monthly rental payment or any other payment due from Tenant to Landlord is
not received by Landlord on or before the third (3rd) day after written
notice that the rent is unpaid, a late payment charge of five percent (5%) of
such past due amount shall become due and payable in addition to such amounts
owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
A. The rights and remedies of Landlord set forth herein shall be in
addition to any other right and remedy now and hereafter provided by
law. All rights and remedies shall be cumulative and not exclusive of
each other. Landlord may exercise its rights and remedies at any
times, in any order, to any extent, and as often as Landlord deems
advisable without regard to whether the exercise of one right or
remedy precedes, concurs with or succeeds the exercise of another.
B. A single or partial exercise of a right or remedy shall not preclude
a further exercise thereof, or the exercise of another right or remedy
from time to time.
C. No delay or omission by Landlord in exercising a right or remedy
shall exhaust or impair the same or constitute a waiver of, or
acquiesce to, a Default.
D. No waiver of Default shall extend to or affect any other Default or
impair any right or remedy with respect thereto.
E. No action or inaction by Landlord shall constitute a waiver of
Default.
F. No waiver of a Default shall be effective unless it is in writing and
signed by Landlord.
ARTICLE 12. RELOCATION (Intentionally omitted)
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT
OF THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS,
WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING
TO THIS LEASE OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT
INCORPORATED IN WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT
THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY,
HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING
OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE
EXPRESSLY SET FORTH IN THIS LEASE.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to
the benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed
that should Landlord's interest in the Premises cease to exist for any reason
during this Lease, then notwithstanding the happening of such event this
Lease nevertheless shall remain unimpaired and in full force and effect, and
Tenant hereunder agrees to attorn to the then owner of the Premises.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises
are located, Tenant shall pay and be liable for all rental, sales and use
taxes or other similar taxes, if any, levied or imposed by any city, state,
county or other governmental body having authority, such payments to be in
addition to all other payments required to be paid to Landlord under the
terms of this Lease. Any such payment shall be paid concurrently with the
payment of the rent, additional rent, operating expenses or other charge upon
which the tax is based as set forth above.
14.3 ACT OF GOD. Landlord or Tenant shall not be required to perform any
covenant or obligation in this Lease, or be liable in damages to the other,
so long as the performance or non-performance of the covenant or obligation
is delayed, caused or prevented by an act of God, force majeure or by the
other.
14.4 HEADINGS. The section headings appearing in this Lease are inserted
only as a matter of convenience and in no way define, limit, construe or
describe the scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall
be payable to Landlord at the address set forth in Section 1.10. All
payments required to be made by Landlord to Tenant shall be payable at the
address set forth in Section 1.10, or at any other address within the United
States as Tenant may specify from time to time by written notice. Any notice
or document required or permitted to be delivered by the terms of this Lease
shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set
forth in Section 1.10.
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation,
each of the persons executing this Lease on behalf of Tenant does hereby
personally represent and warrant that Tenant is a duly authorized and
existing corporation, that Tenant is qualified to do business in the state in
which the Premises are located, that the corporation has full right and
authority to enter into this Lease, and that each person signing on behalf of
the corporation is authorized to do so. In the event any representation or
warranty is false, all persons who execute this lease shall be liable,
individually, as Tenant.
14.7 HAZARDOUS SUBSTANCES. Except in the normal course of Tenant's business
and in strict compliance with all applicable laws and regulations, Tenant,
its agents or employees, shall not bring or permit to remain on the Premises
or Building any asbestos, petroleum or petroleum products, explosives, toxic
materials, or substances defined as hazardous wastes, hazardous materials, or
hazardous substances under any federal, state, or local law or regulation
("Hazardous Materials"). Tenant's violation of the foregoing prohibition
shall constitute a material breach and default hereunder and Tenant shall
indemnify, hold harmless and defend Landlord from and against any claims,
damages, penalties, liabilities, and costs (including reasonable attorney
fees and court costs) caused by or arising out of (i) a violation of the
foregoing prohibition by Tenant or (ii) the presence of any Hazardous
Materials on, under, or about the Premises or the Building during the term of
the Lease caused by or arising, in whole or in part, out of the actions of
Tenant, its agents or employees. Tenant shall clean up, remove, remediate
and repair any soil or ground water contamination and damage caused by the
presence and any release of any Hazardous Materials in, on, under or about
the Premises or the Building during the term of the Lease caused by or
arising, in whole or in part, out of the actions of Tenant, its agents or
employees, in conformance with the requirements of applicable law. Tenant
shall immediately give Landlord written notice of any suspected breach of
this paragraph; upon learning of the presence of any release of any Hazardous
Materials, and upon receiving any notices from governmental agencies
pertaining to Hazardous Materials which may affect the Premises or the
Building. The obligations of Tenant hereunder shall survive the expiration
of earlier termination, for any reason, of this Lease.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof
to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
14.9 LANDLORD'S LIABILITY. Provided that Landlord's equity in the Building
is not less than ten percent (10%) of the market value thereof, if Landlord
shall be in default under this Lease and, if as a consequence of such
default, Tenant shall recover a money judgment against Landlord, such
judgment shall be satisfied only out of the right, title and interest of
Landlord in the Building as the same may then be encumbered and neither
Landlord nor any person or entity comprising Landlord shall be liable for any
deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the
other that there is no obligation to pay any brokerage fee, commission,
finder's fee or other similar charge in connection with this Lease, other
than fees due to GARFIELD CLARK & ASSOCIATES which are the responsibility of
Landlord. Each party covenants that it will defend, indemnify and hold
harmless the other party from and against any loss or liability by reason of
brokerage or similar services alleged to have been rendered to, at the
instance of, or agreed upon by said indemnifying party. Notwithstanding
anything herein to the contrary,
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Landlord and Tenant agree that there shall be no brokerage fee or commission
due on expansions, options or renewals by Tenant, except as may be otherwise
agreed to by Landlord with the above named broker.
14.11 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation,
a Minnesota corporation, which has been appointed to act as the agent in
leasing management and operation of the Building for owner and is authorized
to accept service of process and receive or give receipts for notices and
demands on behalf of Landlord. Landlord reserves the right to change the
identity and status of its duly authorized agent upon written notice to
Tenant.
14.12 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature
does not constitute a reservation of space or an option to lease. This Lease
is not effective until execution by and delivery to both Landlord and Tenant.
14.13 PARKING. Landlord agrees to provide Tenant with five (5) underground
parking spaces, at no cost, and one hundred ten (110) surface parking spaces
in the above-ground parking area shown on the site plan attached as EXHIBIT A.
14.14 OPTION TO EXTEND. Tenant shall have the option to extend the term of
this Lease for two (2) additional thirty-six (36) month terms ("Renewal
Term") under the same terms and conditions contained herein, except that
base rent shall be adjusted as set forth below. Tenant may exercise the
foregoing options by delivering written notice to Landlord stating Tenant's
exercise of said option to extend, which notice shall be delivered not less
than one hundred eighty (180) days prior to the expiration of the lease term
then in effect. It shall be a condition of the exercise of the foregoing
options that Tenant not be in material default in the performance of its
obligations under this Lease, and that Tenant's exercise of the second option
shall be conditioned upon Tenant's timely exercise of the first option. In
the event Tenant fails to exercise its options strictly in accordance with
the foregoing, then said options shall be deemed null and void. Base rent
for each Renewal Term shall equal the market base rent for the Building,
established from time to time by the Landlord, in effect at the commencement
date of the Renewal Term.
14.15 RIGHT OF FIRST NOTICE. Landlord agrees to provide written notice to
Tenant within five (5) days of receipt of any information that any tenant
within the Building intends to vacate or abandon any portion of the Building
adjacent to the Premises. Landlord shall not offer said portion of the
Building to the public until at least ten (10) days after the giving of such
notice to Tenant.
14.16 EXPANSION OPTION. The Landlord hereby grants Tenant an option to
expand the Premises into adjacent premises subject and pursuant to the
following terms and conditions:
A. If Tenant exercises this option, Landlord shall be obligated to
deliver not less than 6,800 square feet nor more than 9,000 square
feet, with the exact square footage to be determined by Landlord.
B. This option may be exercised in writing, provided Tenant is not in
default in performance of its obligations under the Lease, at
anytime prior to the expiration of lease month forty-two (42). If
not timely and properly exercised, this option will automatically
be null and void and of no further force and effect.
C. The expanded premises will be leased to Tenant under the same terms
and conditions as are contained in this Lease, except for base rent,
which shall be adjusted as hereinafter provided, and Tenant's pro
rata share, which shall be adjusted to reflect Tenant's increased
square footage.
D. Base rent for the expansion space (which shall be in addition to the
base rent for the original Premises) shall equal the sum of the
following:
i. Four and 25/100 Dollars ($4.25) per square foot; plus
ii. The amortized cost per square foot of the leasehold improvement
allowance provided to Tenant by Landlord for the expansion
premises (up to a maximum of Fifteen and no/100 Dollars ($15.00)
per square foot), which amortization shall be at a rate of nine
percent (9%) over the remaining term of the Lease; and
iii. The amortized cost per square foot of unamortized tenant
improvements located in the expansion premises prior to tenant's
occupancy, based upon a nine percent (9%) rate and a useful life
of eight (8) years; the amortization of these costs shall be at
a rate of nine percent (9%) over the remaining term of the Lease.
E. The expansion premises shall be delivered to Tenant no earlier than
the commencement of lease month forty-nine (49) and no later than the
expiration of lease month sixty (60), with the timing of said delivery
to be determined by Landlord. Landlord shall provide at least thirty
(30) days advance written notice of the delivery date.
F. Upon exercise of this option by Tenant, Landlord and Tenant shall
execute an addendum to lease adding the expansion space to the
Premises pursuant to the foregoing terms and conditions.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective
the day and year first above written.
LANDLORD: TENANT:
CSM INVESTORS, INC. BIO-VASCULAR, INC.
BY: /s/ MURRAY KORBERG BY: /s/ JOHN T. KARCANES
------------------------------- ----------------------------
ITS: Vice President ITS: President and CEO
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EXHIBIT F
Pg 1 of 3
WESTGATE BUSINESS CENTER PHASE IV
PERMITTED SIGNAGE
BIO-VASCULAR, INC.
I. Territorial Road Monument Sign (see attached elevation)
Landlord will provide one (1) free-standing monument sign on Territorial
Road on which Tenant will have signage area allocated. Signage type and
color to be determined by Landlord.
Maximum Letter Size:4"
Maximum Logo Size:8"
II. East and North Building Facades (see attached elevations)
All exterior signage is Tenant's responsibility. Signage on building to
be painted channel type lettering and logo. Paint color to be determined
by Landlord. "Halo-Lit" neon is optional. Tenant to provide signage shop
drawings for approval by Landlord prior to fabrication and installation.
Maximum Letter Size:18" high
Maximum Logo Size:24" high
III. Signage will be allowed on glass curtain wall at entrance.
<PAGE>
VOXELGEO-Registered Trademark- LICENSE AGREEMENT
THIS LICENSE AGREEMENT, made and entered into this 25th day of August, 1995, by
and between VITAL IMAGES, INC., an Iowa corporation with its principal office
located at 505 North 4th Street, Fairfield, Iowa 52556 (hereinafter referred to
as the "Licensor"), and COGNISEIS DEVELOPMENT, INC., a Delaware corporation with
its principal office located at 2401 Portsmouth, Houston, Texas 77098-3903
(hereinafter referred to as the "Licensee").
BACKGROUND
FIRST. Licensor has developed and owns all right, title and interest in and to
certain 3D volume interpretation software commonly referred to as the
VOXELGEO-Registered Trademark- software (hereinafter more fully described and
defined as the "Software").
SECOND. Licensor is the owner of the VOXELGEO-Registered Trademark- trademark
and the corresponding federal trademark registration (hereinafter more fully
described and defined as the "Licensed Trademark").
THIRD. Subject to the terms and upon conditions herein contained, Licensee
desires to obtain the exclusive right to use the Software and the Licensed
Trademark in the Licensed Field of Use (as that term is hereinafter defined),
and Licensor desires to grant such right to Licensee.
FOURTH. Licensor has entered into certain license agreements, maintenance
contracts and CDDI Agreements (as that term is hereinafter defined) relating to
the use, maintenance and development of the Software in connection with the
Licensed Field of Use and Licensee desires to obtain all of Licensor's rights
and assume all of Licensor's obligations under such contracts, and Licensor
desires to assign such rights to Licensee, all subject to the terms and
conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing recitals and further in
consideration of the mutual covenants, conditions and agreements contained in
this Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree and undertake as follows:
I
DEFINITIONS
1. DEFINITIONS. As used herein, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
a. ACCEPTANCE PERIOD. "Acceptance Period" shall have the meaning set
forth in Article III, Section 3 hereof.
<PAGE>
b. AGREEMENT. "Agreement" shall mean this License Agreement (together
with all exhibits, schedules, attachments and addenda) as the same may be
amended, modified or supplemented from time to time.
c. CDDI. "CDDI" shall have the meaning set forth in Article VIII,
Section 3.a. hereof.
d. CDDI AGREEMENTS. "CDDI Agreements" shall have the meaning set forth
in Article VIII, Section 3.a. hereof.
e. DELIVERABLES. "Deliverables" shall have the meaning set forth in
Article III, Section 1 hereof.
f. DERIVATIVE SOFTWARE PRODUCTS. "Derivative Software Products" shall
mean any and all software products subsequently developed by Licensee that
incorporate the Source Code or any portion thereof other than the
following existing software products currently offered by Licensee (even
if such software products subsequently incorporate the Source Code or
source code from software derived from the Source Code as an upgrade): the
2D and 3D versions of each of the following applications: FOCUS; DISCO;
GEOSEC; GEOSTRAT; and well log interpretation software products based upon
DLPS.
g. EFFECTIVE DATE. "Effective Date" shall mean the date first written
above.
h. EXISTING LICENSES. "Existing Licenses" shall have the meaning set
forth in Article VIII, Section 2.a. hereof.
i. EXISTING MAINTENANCE CONTRACTS. "Existing Maintenance Contracts"
shall have the meaning set forth in Article VIII, Section 2.a. hereof.
j. FUNCTIONAL SPECIFICATIONS. "Functional Specifications" shall have
the meaning set forth in Article IX, Section 1.e. hereof.
k. INITIAL LICENSE PERIOD. "Initial License Period" shall mean the time
period ending on the earlier of (i) January 1, 2001; or (ii) such time as
the aggregate royalties actually paid by Licensee to Licensor (exclusive
of the up-front license fee payable by Licensee pursuant to Section 1 of
Article IV) equals Two Million and no/100 Dollars ($2,000,000.00).
l. LICENSED FIELD OF USE. "Licensed Field of Use" shall mean use of the
Software and the Licensed Trademark in connection with visualizing and
interpreting seismic and other subsurface (earth and water) information.
m. LICENSED TRADEMARK. "Licensed Trademark" shall mean the
VOXELGEO-Registred Trademark- trademark and corresponding
U.S. Registration No. 1,793,534 covering the VOXELGEO-Registered
Trademark- trademark.
n. MAINTENANCE SERVICES. "Maintenance Services" shall have the meaning
set forth in Article VII, Section 2 hereof.
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o. MARKETING AGREEMENT. "Marketing Agreement" shall have the meaning
set forth in Article VIII, Section 1 hereof.
p. NET RECEIPTS. "Net Receipts" shall mean all gross revenues received
by Licensee in connection with the licensing, sale, use or other
exploitation of the Software and/or Derivative Software Products less
(i) all normal trade discounts actually allowed by Licensee; (ii) all
sales, use and similar taxes included in such gross revenues; (iii) all
freight charges, agent's fees and other third party charges included in
such gross revenues; and (iv) royalties on such gross revenues actually
paid by Licensee to a third party.
q. SOFTWARE. "Software" shall mean the 3D volume interpretation
software commonly referred to as the VOXELGEO-Registered Trademark-
software that is owned by Licensor and all documentation related thereto,
including, without limitation, the object code for such software and the
Source Code, all as they exist as of the Effective Date.
r. SOURCE CODE. Source Code shall mean the high level code that forms
the source program for the Software, which, when completed, becomes the
machine language object program for the Software.
s. WARRANTY PERIOD. "Warranty Period" shall have the meaning set forth
in Article IX, Section 1.e. hereof.
2. RELATED DOCUMENTS. All of the terms defined in this Agreement shall have
the defined meanings when used in any exhibit, schedule, attachment or addendum
hereto or in any document made or otherwise delivered pursuant to this
Agreement, unless the context otherwise requires.
II
GRANT OF LICENSE
1. LICENSE. Upon the terms and conditions set forth herein, Licensor hereby
grants to Licensee, and Licensee hereby accepts, a worldwide, perpetual,
exclusive license to use the Licensed Trademark in connection with the Software
in the Licensed Field of Use and to use, modify and sublicense the Software in
the Licensed Field of Use.
2. SUBLICENSES.
a. Licensee shall not grant any sublicenses with respect to the Licensed
Trademark, the Software and/or Derivative Software Products except upon
terms and conditions that are consistent with the licenses granted to
Licensee by Licensor pursuant to this Agreement.
b. During the five (5) year period immediately following the Effective
Date, all sublicenses to end-users by Licensee for the Software and/or
Derivative Software Products
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<PAGE>
shall be in object-code-form only, except (i) Licensee may, at its
discretion, agree to an escrow arrangement whereby the end-user may
obtain the Source Code in the event of a bankruptcy proceeding involving
Licensee or other events of default by Licensee as are customary in
source code escrow agreements used in the software industry; and
(ii) Licensee may provide the Source Code to end-users upon the prior
written consent of Licensor, which consent will not be unreasonably
withheld, subject to use restrictions, security procedures and
confidentiality obligations reasonably acceptable to Licensor.
3. USE OUTSIDE OF LICENSED FIELD OF USE. Licensee shall not use the Licensed
Trademark and/or the Software (or any portion thereof) outside of the Licensed
Field of Use, and any and all uses by Licensee of the Licensed Trademark and/or
the Software outside of the Licensed Field of Use are strictly prohibited.
Licensee acknowledges and agrees that Licensor has and will continue to use the
Source Code and/or grant licenses for the use of the Source Code outside of the
Licensed Field of Use.
III
DELIVERY AND ACCEPTANCE
1. DELIVERABLES. Upon execution of this Agreement by both parties hereto,
Licensor shall promptly deliver to Licensee a copy of the Source Code and all
existing user and programmer documentation relating to the Software, as more
fully described on EXHIBIT A attached hereto (collectively, the "Deliverables").
2. SHIPMENT AND RISK OF LOSS. The Deliverables shall be shipped to Licensee
F.O.B. Licensee's receiving point, and thereupon Licensee shall assume the risk
of loss therefor.
3. ACCEPTANCE. Licensee shall have thirty (30) days after receipt of all
Deliverables (the "Acceptance Period") to accept or reject the Software.
Licensee agrees to accept the Software upon the successful (i) loading of
VOXELGEO-Registered Trademark- 2.0 code; (ii) compiling of VOXELGEO-Registered
Trademark- 2.0 software; and (iii) execution of mutually acceptable standard
reliability demonstrations on the hardware of Licensee at Licensee's location
using the compiled object code. Licensee hereby represents to Licensor that
Licensee currently possesses the hardware and software environment necessary to
build and run the Software, as more fully described on EXHIBIT B attached
hereto. Licensee shall notify Licensor in writing of acceptance or rejection
within the Acceptance Period. In the event the Software is rejected by
Licensee, all Deliverables shall be returned by Licensee to Licensor, at
Licensee's expense, and this Agreement shall be automatically terminated and of
no further force and effect except as provided in Article XI, Section 2 hereof.
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IV
LICENSE FEE; ROYALTIES
1. LICENSE FEE. Licensee shall pay to Licensor a license fee in the amount
of One Million Five Hundred Thousand and no/100 Dollars ($1,500,000.00), which
shall be paid in full by wire transfer, pursuant to wire transfer instructions
provided to Licensee by Licensor, within two (2) business days following
acceptance of the Software by Licensee in accordance with the terms and
conditions set forth in Article III, Section 3 above. Such license fee shall
NOT be deemed an advance of royalties and shall NOT be recoupable from royalty
payments due to Licensor pursuant to this Article IV.
2. ROYALTY AMOUNT. Subject to Section 3 of this Article IV, Licensee shall
pay Licensor a royalty on all Net Receipts received by Licensee in connection
with the licensing or use of the Software or any Derivative Software Products in
accordance with the following schedule:
<TABLE>
<CAPTION>
Royalty as a Percentage of Net
Receipts Received by Licensee
Calendar Year During the Applicable Calendar Year
------------- ---------- -------------
<S> <C>
1995 None
1996 15% on all Net Receipts in excess
of $2,000,000.00
1997 15% on all Net Receipts
1998 15% on all Net Receipts
1999 10% on all Net Receipts
2000 5% on all Net Receipts
</TABLE>
3. LIMITATION ON ROYALTY OBLIGATION. The obligation of Licensee to pay
royalties to Licensor in accordance with Section 2 of this Article IV shall
cease on the earlier of (i) January 1, 2001, or (ii) such time as the aggregate
royalties actually paid by Licensee to Licensor (exclusive of the up-front
license fee payable by Licensee pursuant to Section 1 of this Article IV)
equals Two Million and no/100 Dollars ($2,000,000.00), and thereafter the
licenses granted to Licensee hereunder shall be deemed to be fully paid.
Licensor agrees that Licensee shall not be obligated to make royalty payments
with respect to any revenues received by Licensee in connection with the
following existing software products currently offered by Licensee (even if such
software products subsequently incorporate the Source Code or source code from
software derived from the Source Code as an upgrade): the 2D and 3D versions
of each of the following applications: FOCUS; DISCO; GEOSEC; GEOSTRAT and well
log interpretation software products based upon DLPS.
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<PAGE>
4. MARKETING OF SOFTWARE BY LICENSEE. Licensee shall use its good faith best
efforts to promote, market and sublicense the Software worldwide at all times
during which Licensee is obligated to make royalty payments to Licensor
hereunder.
5. ACCOUNTING. Until the earlier of (i) March 31, 2001, or (ii) such time as
the aggregate royalties actually paid by Licensee to Licensor (exclusive of the
up-front license fee payable by Licensee pursuant to section 1 of this
Article IV) equals Two Million and no/100 Dollars ($2,000,000.00), Licensee
shall provide Licensor within thirty (30) days following the end of each
calendar quarter with an accounting of all Net Receipts during the immediately
preceding calendar quarter.
6. TERMS OF PAYMENT. All royalties under this Agreement shall be paid in
United States currency. Royalty payments due to Licensor pursuant to Section 2
of this Article IV shall be paid by Licensee within thirty (30) days following
the end of each calendar quarter based upon the total Net Receipts during the
immediately preceding calendar quarter.
7. MAINTENANCE AND INSPECTION OF RECORDS. Until the earlier of (i) March 31,
2001, or (ii) such time as the aggregate royalties actually paid by Licensee to
Licensor (exclusive of the up-front license fee payable by Licensee pursuant to
section 1 of this Article IV) equals Two Million and no/100 Dollars
($2,000,000.00), Licensee will maintain records of all Net Receipts. Licensor
shall have the right, through a certified public accountant, to inspect all the
books and records of Licensee relating to all Net Receipts subject to this
Agreement, but such inspection may not be made more frequently than annually.
The cost of such inspection shall be borne by Licensor; provided, however, that
Licensee shall reimburse Licensor for the reasonable costs of such inspection in
the event there is a discrepancy between the amount of royalties due Licensor
under the terms of this Agreement and the amount of royalties actually paid by
Licensee to Licensor for the time period corresponding to such inspection of
records that exceeds five percent (5%) of the amount of royalties actually due.
V
MODIFICATIONS OF SOFTWARE
1. MODIFICATION. Licensee may modify the Software and merge it into existing
software; provided, however, that (i) such modified Software and resulting
merged software shall be deemed to be Software under this Agreement and shall be
subject to all of the terms and conditions hereof; and (ii) Licensor agrees that
Licensee shall not be obligated to make royalty payments with respect to any
revenues received by Licensee in connection with the following existing software
products currently offered by Licensee (even if such software products
subsequently incorporate the Source Code or source code from software derived
from the Source Code as an upgrade): the 2D and 3D versions of each of the
following applications: FOCUS; DISCO; GEOSEC; GEOSTRAT and well log
interpretation software products based upon DLPS.
2. FUTURE ENHANCEMENTS. All future modifications and enhancements to the
Software by Licensee shall be owned by Licensee. Likewise, any future
enhancements or modifications to
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<PAGE>
the Software made by Licensor shall be the sole property of Licensor and shall
not be subject to this Agreement except as otherwise provided under Article VII,
Section 6 hereof.
VI
PROPRIETARY RIGHTS
1. PROPRIETARY RIGHTS. Licensee acknowledges that Licensor claims the
Licensed Trademark and the Software are the exclusive property of Licensor and
that the Source Code constitutes a valuable trade secret of Licensor. Licensee
shall take all reasonable security measures to protect the Source Code and,
except as otherwise provided in clause (i) of Section 2 of Article II of this
Agreement, Licensee shall not disclose or make available the Source Code to
third parties without Licensor's prior written consent. In any event, prior to
delivery of the Source Code by Licensee to any third party in accordance with
the terms and conditions of this Agreement, for any purpose whatsoever, Licensee
shall obtain a written confidentiality and nondisclosure agreement from such
third party and a license agreement from such third party upon terms and
conditions that are no less restrictive than the terms and conditions of this
Agreement. Licensee shall enforce any and all terms and conditions of all
confidentiality and non-disclosure agreements and license agreements that are
entered into by Licensee pursuant to the preceding sentence, at its own expense,
and shall notify Licensor of any knowledge of infringement of Licensor's
intellectual property rights by any third party. Licensee understands that any
unauthorized use by it of the Licensed Trademark, the Software and/or the
Source Code may constitute an infringement of copyright, trademark, trade secret
or patent rights of Licensor.
2. RIGHTS RESERVED. All rights in the Licensed Trademark and the Software,
other than those granted by this Agreement, are hereby reserved by Licensor.
3. PROTECTION OF PROPRIETARY RIGHTS. Licensee shall insure that Licensor's
copyright notice is replicated on all copies of the Software and/or Derivative
Software Products produced by Licensee or its sublicensees, including any and
all copies of modifications made in accordance with Article V, Section 1 hereof.
Licensee shall assist Licensor, to the extent reasonably requested by Licensor,
in the procurement of any protection or defense of any of Licensor's rights to
(i) trademarks; (ii) copyright(s); or (iii) patents owned by Licensor that
relate to the subject matter of this Agreement.
4. PROPRIETARY RIGHTS INDEMNITY. Licensor shall indemnify, hold harmless and
defend Licensee, its agents, officers and employees against any and all claims
made against Licensee that use of the Licensed Trademark and/or the Software
infringes any license, patent, copyright, trademark, trade secret or other
proprietary right, and hold Licensee harmless against any and all damages,
judgments and attorneys' fees arising out of the foregoing; provided, however,
that Licensee shall give Licensor prompt written notice of such claims and that
such indemnity shall not extend to modifications of the Software made by
Licensee or its sublicensees.
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VII
MAINTENANCE
1. LICENSEE'S OPTION. Licensee shall have the option to receive from
Licensor maintenance services relating to the Rendering Engine portion only
of the Software (hereinafter more fully described and defined as the
"Maintenance Services") upon the terms and conditions set forth in this
Article VII. Such option shall be exercised by Licensee by the giving of
prior written notice to Licensor specifying that Licensee wishes to receive
Maintenance Services. Licensee's option to receive Maintenance Services
pursuant to this Article VII shall expire and become null and void thirty
(30) days following expiration of the Warranty Period if such right had not
previously been exercised by Licensee.
2. MAINTENANCE SERVICES. Licensor shall provide Maintenance Services to
Licensee only if Licensee has exercised its option to receive Maintenance
Services in accordance with Section 1 of this Article VII. Such Maintenance
Services shall consist of consulting services and error correction services.
Such services are referred to herein as the "Maintenance Services." Solely
for the purposes of Sections 2 and 3 of this Article VII, the term "Software"
shall mean only the Rendering Engine portion of the Software. Error
correction services provided by Licensor shall consist of any necessary
changes made to the Source Code, as originally delivered to Licensee, in
order to correct or remove any bug, malfunction or other defect that prevents
the Software from performing in accordance with the Functional
Specifications. In the event Licensee detects any error, defect or
nonconformity in the Software, Licensor shall furnish off-site telephone
support, in the form of consultations, assistance and advice on the use or
maintenance of the Software, within twenty-four (24) hours of Licensee's
request therefor. In the event that such problem in the Software is not
corrected within seventy-two (72) hours of initiation of such off-site
telephone support, Licensee shall submit to Licensor a listing of the output
and all such other data that Licensor may reasonably request in order to
reproduce operating conditions similar to those present when the error,
defect or nonconformity was discovered. In the event that such problem is
not corrected within five (5) business days after Licensor receives from
Licensee a listing of output and other data, Licensor shall within the next
seventy-two (72) hours provide on-site service.
3. RESPONSIBILITIES OF LICENSEE. Licensee shall notify Licensor
immediately following the discovery of any error, defect or nonconformity in
the Software. The periods within which Licensor is obligated herein to
provide support shall not commence until such time as Licensor receives
notification of such error, defect or nonconformity from Licensee. Licensee,
upon detection of any error, defect or nonconformity in the Software shall,
if requested to do so by Licensor, submit to Licensor a listing of output and
any such other data that Licensor may reasonably request in order to
reproduce operating conditions similar to those present when the error
occurred or the defect or nonconformity was discovered, as the case may be.
4. MAINTENANCE FEES. In consideration for the Maintenance Services,
Licensee shall pay Licensor a monthly fee of $5,000.00 (payable on or before
the 15th of each calendar month during which services are to be rendered to
Licensee by Licensor).
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<PAGE>
5. TERM. Subject to Article XI hereof, in the event Licensee exercises
its option to receive Maintenance Services with respect to the Rendering
Engine, Licensor will render Maintenance Services for the Rendering Engine
for a period of one year. Thereafter, Licensor's obligations to render
Maintenance Services for the Rendering Engine, and Licensee's obligations to
pay for such services, shall automatically be renewed for an additional
period of one year; provided, however, that either party may prevent the
automatic renewal of such obligations by written notice to the other given at
least thirty (30) days prior to expiration of the initial one-year term set
forth in the preceding sentence.
6. ENHANCEMENTS. Licensor may from time to time make enhancements to the
Software. Any such enhancements shall be owned by Licensor, but any
enhancements made by Licensor during such time as Licensee is paying Licensor
a maintenance fee under this Article VII shall be made available to Licensee,
at no additional cost, and shall be subject to the terms and conditions of
this Agreement; provided, however, that Licensee has fully complied with all
the terms and conditions of this Agreement.
VIII
RELATED AGREEMENTS
1. EXISTING MARKETING AGREEMENT. Upon the Effective Date, that certain
Marketing Agreement dated as of August 1, 1994, between Licensor and
Licensee, as amended to date (the "Marketing Agreement"), shall be deemed
terminated and of no further force and effect. Notwithstanding termination
of the Marketing Agreement upon the Effective Date, (i) all provisions
therein relating to confidentiality, proprietary property, copyrights,
trademarks and patents shall remain in full force and effect; (ii) each of
the parties shall be required to carry out any provision thereof that
contemplates performance subsequent to termination of the Marketing
Agreement; and (iii) such termination shall not affect any liability or other
obligation that shall have accrued prior to such termination, including, but
not limited to, any liability for loss or damage on account of a prior
default or claims for compensation for any period prior to such termination.
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<PAGE>
2. EXISTING LICENSES AND MAINTENANCE AGREEMENTS.
a. COPIES; OFFSET AGAINST LICENSE FEE. Set forth on EXHIBIT C attached
hereto is a listing of all existing License Agreements between Licensor
and/or Licensee and end-users for use of the Software ("Existing
Licenses") and set forth on EXHIBIT D attached hereto is a listing of all
end-users that have agreements with Licensor for maintenance of the
Software (the "Existing Maintenance Contracts"). Licensor shall supply
Licensee with copies of all Existing Licenses that have been initiated by
Licensor and copies of purchase orders from end-users relating to the
Existing Maintenance Contracts. Licensee shall be entitled to offset the
license fee payable by Licensee to Licensor pursuant to Article IV,
Section 1 hereof by an amount equal to Licensor's portion of unearned
maintenance fees under Existing Maintenance Contracts (for example, if an
annual Maintenance Contract has three months left on its term, then
Licensee will be entitled to a credit for 25% of Licensor's share of such
maintenance fees as such share is determined pursuant to the Marketing
Agreement).
b. ASSIGNMENT AND ASSUMPTION. Licensor hereby assigns to Licensee all of
Licensor's right, title and interest in and to the Existing Licenses and
the Existing Maintenance Contracts and Licensee hereby accepts such
assignment. Licensee hereby further assumes and agrees to be bound by all
the remaining terms of the Existing Licenses and the Existing Maintenance
Contracts as if Licensee was an original party thereto. To the extent
that any Existing License or Existing Maintenance Contract for which
assignment to Licensee is provided herein is not assignable without the
consent of another party, this Agreement shall not constitute an
assignment or an attempted assignment thereof if such assignment of
attempted assignment would constitute a breach thereof. Licensor and
Licensee agree to use their reasonable best efforts to obtain the consent
of such other party to the assignment of any such Existing License and/or
Existing Maintenance Contract to Licensee in all cases in which such
consent is or may be required for such assignment. If any such consent
shall not be obtained, Licensor agrees to cooperate with Licensee in any
reasonable arrangement designed to provide for Licensee the benefits
intended to be assigned to Licensee under the relevant Existing License or
Existing Maintenance Contract, including enforcement, at the cost and for
the account of Licensee, of any and all rights of Licensor against the
other party thereto arising out of the breach or cancellation thereof by
such other party or otherwise. If and to the extent that such arrangement
cannot be made, Licensee, upon notice to Licensor, shall have no
obligation with respect to any such Existing License and/or Existing
Maintenance Contract, as the case may be, and any such Existing License
and/or Existing Maintenance Contract shall not be deemed to have been
assigned hereunder.
3. CUSTOMER DIRECTED DEVELOPMENT INITIATIVE.
a. COPIES; OFFSET AGAINST LICENSE FEE. Set forth on EXHIBIT E attached
hereto is a listing of all Customer Directed Development Initiative
("CDDI") Agreements between certain oil companies and Licensor (the
"CDDI Agreements"). Prior to expiration of the Acceptance Period,
Licensor shall supply Licensee with copies of all the CDDI
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Agreements. Licensee shall be entitled to offset the license fee payable
by Licensee to Licensor pursuant to Article IV, Section 1 hereof by an
amount equal to the unearned portion of fees previously collected by
Licensor from CDDI members.
b. ASSIGNMENT AND ASSUMPTION. Licensor hereby assigns to Licensee all of
Licensor's right, title and interest in and to the CDDI Agreements and
Licensee hereby accepts such assignment. Licensee hereby further assumes
and agrees to be bound by all the remaining terms of the CDDI Agreements
as if Licensee was an original party thereto. To the extent that any CDDI
Agreement for which assignment to Licensee is provided herein is not
assignable without the consent of another party, this Agreement shall not
constitute an assignment or an attempted assignment thereof if such
assignment of attempted assignment would constitute a breach thereof.
Licensor and Licensee agree to use their reasonable best efforts to
obtain the consent of such other party to the assignment of any such CDDI
Agreement to Licensee in all cases in which such consent is or may be
required for such assignment. If any such consent shall not be obtained,
Licensor agrees to cooperate with Licensee in any reasonable arrangement
designed to provide for Licensee the benefits intended to be assigned to
Licensee under the relevant CDDI Agreement, including enforcement, at the
cost and for the account of Licensee, of any and all rights of Licensor
against the other party thereto arising out of the breach or cancellation
thereof by such other party or otherwise. If and to the extent that such
arrangement cannot be made, Licensee, upon notice to Licensor, shall have
no obligation with respect to any such CDDI Agreement, as the case may be,
and any such CDDI Agreement shall not be deemed to have been assigned
hereunder.
IX
WARRANTIES
1. WARRANTIES OF LICENSOR. Licensor hereby represents and warrants only to
Licensee that:
a. Neither the Licensed Trademark nor the Software infringe any patent,
copyright, trade secret or other proprietary right of any third party;
b. Licensor has the sole right to grant licenses for use of the Licensed
Trademark and the Software and has not heretofore granted any rights in
the Licensed Trademark or the Software that would interfere with any
rights granted Licensee under this Agreement;
c. Licensor has the right to enter into this Agreement, to grant to
Licensee the rights and licenses set forth herein, and to perform all
obligations of this Agreement;
d. Execution, delivery and performance of this Agreement by Licensor will
not constitute a breach of any agreement, judgment, award, law, rule or
regulation to which Licensor is bound; and
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e. During the sixty (60) day period following the Effective Date (the
"Warranty Period"), Licensor will provide consulting services to Licensee
relating to the Software free of charge (other than reimbursement for
pre-approved out-of-pocket expenses), and Licensor warrants that during
the Warranty Period the Software will conform to the performance
capabilities, characteristics, specifications, functions and other
descriptions and standards applicable thereto as set forth in the
functional specifications set forth in the VOXELGEO-Registered
Trademark- 2.0 USER GUIDE, copyright July 1995 (the "Functional
Specifications").
2. LIMITATION OF WARRANTIES. Licensor shall not be liable to Licensee for
the warranty provisions of this Agreement to the extent of modifications made to
the Software by Licensee or sublicensees of Licensee or to the extent the media
for the Software is subject to misuse, abuse or abnormal use by Licensee or
sublicensees of Licensee. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 1 OF THIS
ARTICLE IX, LICENSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES RELATING TO THE
SOFTWARE OR ITS USE OR FUNCTIONALITY, AND SPECIFICALLY DISCLAIMS THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
3. REMEDIES. Licensee's sole remedy for any breach of the warranties
contained in Article IX, Section 1.e. is repair or correction of any programming
deficiencies that result in documented errors or obvious Software malfunctions.
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, LICENSOR SHALL UNDER
NO CIRCUMSTANCES BE LIABLE TO LICENSEE OR ANY THIRD PARTY FOR SPECIAL
INCIDENTAL, CONSEQUENTIAL, OR EXEMPLARY DAMAGES OF ANY NATURE WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO, COMMERCIAL LOSS FROM ANY CAUSE, BUSINESS
INTERRUPTION OF ANY NATURE, LOSS OF PROFITS, OR PERSONAL INJURY ARISING OUT OF
LICENSOR'S ALLEGED OR ACTUAL FAILURE TO COMPLY WITH ALL OR ANY OF THE PROVISIONS
OF THIS AGREEMENT AND/OR THE FAILURE OF THE SOFTWARE TO PERFORM AS SPECIFIED OR
WARRANTED, EVEN IF LICENSOR SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
4. WARRANTIES OF LICENSEE. Licensee hereby represents and warrants that:
a. Licensee has the full right, power and authority to enter into and
perform its obligations under this Agreement;
b. Execution, deliver and performance of this Agreement by Licensee will
not constitute a breach of any agreement, judgment, award, law, rule or
regulation to which Licensee is bound; and
c. To the best of Licensee's knowledge, neither the Licensed Trademark
nor the Software infringe any patent, copyright, trade secret or other
proprietary right of any third party.
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X
NONCOMPETE OBLIGATIONS
1. LICENSEE'S COVENANT NOT TO COMPETE. From the Effective Date and for a
period of five (5) years thereafter, Licensee shall not, either directly or
indirectly, grant any licenses under, or provide any services relating to,
the Software or any other software that is based upon the Voxel technology to
any corporation, partnership, person, firm or other business that is selling
goods or rendering services that is engaged in the medical market. Licensee
agrees that any breach of the covenant set forth in the preceding sentence
will cause Licensor irreparable harm for which there is no adequate remedy at
law, and, without limiting whatever other rights and remedies Licensor may
have under this Agreement, Licensee consents to the issuance of an injunction
in favor of Licensor enjoining the breach of any of the aforesaid covenants
by any court of competent jurisdiction. If the aforesaid covenant is held to
be unenforceable because of the scope or duration of such covenant or the
area covered thereby, the parties agree that the court making such
determination shall have the power to reduce the scope, duration and/or area
of such covenant to the extent that allows the maximum scope, duration and/or
area permitted by applicable law.
2. LICENSOR'S COVENANT NOT TO COMPETE. From the Effective Date and for a
period of five (5) years thereafter and so long as Licensee is in full and
timely compliance with this Agreement, Licensor shall not, either directly or
indirectly:
a. own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be employed by, or act as
consultant or adviser to, or be connected in any manner with, any
corporation, partnership, person, firm or other business that is engaged
in the gas, oil or mineral exploration industries; or
b. call upon, solicit, divert, attempt to take away or continue any
business relationship with any of the present customers or present or
future customers or business of Licensee in the gas, oil or exploration
industries; or
c. employ or offer employment to any person who was employed by Licensee
unless such person shall have ceased to be employed by Licensee for a
period of at least six (6) months.
Licensor agrees that any breach of covenants (a), (b) or (c) above will cause
Licensee irreparable harm for which there is no adequate remedy at law, and,
without limiting whatever other rights and remedies Licensee may have under
this Agreement, Licensor consents to the issuance of an injunction in favor
of Licensee enjoining the breach of any of the aforesaid covenants by any
court of competent jurisdiction. If any or all of the aforesaid covenants
are held to be unenforceable because of the scope or duration of such
covenant or the area covered thereby, the parties agree that the court making
such determination shall have the power to reduce the scope, duration and/or
area of such covenant to the extent that allows the maximum scope, duration
and/or area permitted by applicable law.
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XI
TERMINATION
1. TERMINATION. This Agreement may be terminated upon the occurrence of
one or more of the following events, and the terminating party shall not be
liable to the other party for the proper exercise of such right:
a. REJECTION OF SOFTWARE. This Agreement shall automatically terminate
and be of no further force and effect in the event the Software is
rejected by Licensee in accordance with Article III, Section 3 hereof.
b. OPTION TO TERMINATE. This Agreement may be terminated at the option
of the non-defaulting party upon the material breach of one of the parties
of their obligation to perform or comply with the terms and conditions of
this Agreement, or on the mutual written consent of both parties hereto,
or as otherwise hereinafter set forth. In the event of the parties finds
the other in material breach of this Agreement, notice of such breach
shall be sent to the defaulting party in writing. If the breach continues
for thirty (30) days after receipt by the defaulting party of the notice,
the Agreement shall be automatically terminated.
c. EVENTS OF AUTOMATIC TERMINATION. This Agreement shall terminate
immediately and automatically upon the filing of a petition in bankruptcy
under the United States Bankruptcy Code (or any future federal bankruptcy
act) by or against Licensee and such petition shall not be discharged or
denied within thirty (30) days after the filing thereof.
2. EFFECT OF TERMINATION. Upon termination of this Agreement for whatever
reason, all provisions relating to confidentiality, proprietary property,
copyrights, trademarks and patents shall remain in full force and effect, and
Licensee shall return the Software and all copies in Licensee's possession
and control to Licensor. Notwithstanding the termination or expiration of
this Agreement, each of the parties hereto shall be required to carry out any
provision hereof that contemplates performance subsequent to such
termination; and such termination shall not affect any liability or other
obligation that shall have accrued prior to such termination, including, but
not limited to, any liability for loss of damage on account of a prior
default. Any rights and remedies herein provided shall be cumulative and in
addition to all rights and remedies available at law and in equity.
XII
MISCELLANEOUS PROVISIONS
1. BENEFIT. Except as otherwise provided herein, this Agreement shall
inure to the benefit of and shall be binding upon the parties hereto and
their respective heirs, executors, administrators, representatives,
successors and assigns.
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2. NO ASSIGNMENT. During the Initial License Period, except as otherwise
expressly provided in this Agreement, this Agreement and all rights and
licenses granted or obligations incurred hereunder may not be assigned or
transferred by either party without the prior written consent of the other
party, and any such attempted assignment or transfer shall be void and of no
force or effect. Nothing contained in this Section 2 of Article XII
prohibits Licensee from merging with an affiliated entity or prevents
Licensee from selling substantially all of its business assets to an
affiliated entity and such events shall not constitute a breach of this
Section 2 of Article XII.
3. EQUITABLE RELIEF. The parties hereto agree that any breach of any of
the terms or covenants of this Agreement will cause the non-breaching party
irreparable harm for which there is no adequate remedy at law, and the
parties hereto consent to the issuance of any injunction or other equitable
relief in favor of the non-breaching party enjoining the breach of any such
covenant or term. In no manner or affect shall this provision of this
Agreement preclude the non-breaching party from exercising any right or
remedy to which the non-breaching party may be entitled, at law or in equity,
by reason of a breach of any term or covenant of this Agreement.
4. ARBITRATION. Except for claims for equitable relief in accordance with
Section 3 of this Article XII, any dispute, controversy or claim arising out
of or relating to this Agreement, or the breach, termination or invalidity
thereof, shall be finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in
effect on the date of the Agreement, and judgment upon the award rendered by
the Arbitrator(s) may be entered in any court having jurisdiction thereof.
The place of arbitration shall be Minneapolis, Minnesota.
5. ATTORNEYS' FEES AND COSTS. The party prevailing in any legal action
(including arbitration) arising under or relating to this Agreement, shall be
entitled to recover from the other party all of its costs and expenses,
including, without limitation, reasonable attorneys' fees.
6. WAIVER, MODIFICATION OR AMENDMENT. Unless otherwise expressly provided
in this Agreement and any documents expressly referred to herein, no waiver,
modification or amendment of any term, condition or provision of this
Agreement shall be valid, binding or of any effect unless made in writing,
expressly referring to this Agreement, signed by or on behalf of the parties
hereto, and specifying with particularity the nature and extent of such
waiver, modification or amendment. Any waiver by any party of any provision
hereof shall not affect or impair any other provision hereof. The failure of
either party to enforce at any time any of the provisions of this Agreement
shall not be construed to be a waiver of the right of such party to
subsequently enforce any such provisions.
7. NOTICES. All notices or other communications given under or in
connection with this Agreement shall be in writing and shall be considered to
be delivered when personally delivered or five (5) days after delivery to a
company or governmental entity providing delivery services in the ordinary
course of business which guarantees delivery within such five-(5) day period,
with the delivery charge prepaid, addressed to the proper party at its
principal office as set forth above, or to such other address as such party
may hereafter designate by written notice to the other party given pursuant
to this paragraph.
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<PAGE>
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but together which
shall constitute one and the same instrument.
9. LEGAL RELATIONSHIP. Licensee and Licensor hereby acknowledge and agree
that nothing contained in this Agreement shall be deemed to create an
employment, agency, franchise, or other relationship between Licensee and
Licensor for any purpose whatsoever and that no relationship is intended or
created hereby other than the relationship of independent contractors.
Neither party shall have the right or authority to assume or create any
obligation or responsibility, express or implied, on behalf of, on account
of, or in the name of the other party, or to legally bind the other party in
any manner whatsoever.
10. HEADINGS. Section headings used herein are for convenience only and
shall not be construed to be a part of this Agreement or as a limitation of
the scope of the particular sections to which such headings refer.
11. INTERPRETATION AND SEVERANCE. The provisions of this Agreement shall
be applied and interpreted in a manner consistent with each other so as to
carry out the purposes and intent of the parties hereto, but if for any
reason any provision hereof is determined to be unenforceable or invalid,
such provision or such part hereof as may be unenforceable or invalid shall
be deemed severed from this Agreement, and the remaining provisions shall be
carried out with the same force and effect as if the provision or part
thereof had not been a part of this Agreement.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Iowa, and any proceedings for
enforcement hereof shall be brought in federal or state courts located in
Iowa. Licensor and Licensee consent and submit to the jurisdiction of said
courts and agree that service of process may be made by publication, by
registered or certified mail or in any manner provided under Iowa or
applicable federal law. Nothing herein shall prevent a party hereto from
joining the other party as additional defendants or third-party defendants in
any suit brought by or against such party in another forum if any issue in
said suit relates to the matters referred to herein.
13. ENTIRE AGREEMENT. This Agreement, including any exhibits attached
hereto or documents expressly referred to herein, contains the entire
agreement between Licensee and Licensor and supersedes and cancels any and
all other agreements, whether oral or in writing, between Licensee and
Licensor with respect to the matters referred to herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
LICENSOR: LICENSEE:
VITAL IMAGES, INC. COGNISEIS DEVELOPMENT, INC.
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<PAGE>
By: /s/ Vincent Argiro By: /s/ Patrick H. Poe
------------------------------- -------------------------------
Vincent Argiro, President Patrick H. Poe, President
-17-
<PAGE>
EXHIBIT A
---------
DELIVERABLES
- All source code, user documentation, programmer documentation and supporting
files necessary to build VoxelGeo 2.0 on magnetic tape.
- Product Definition Statements and draft Software Requirement Specifications
for VoxelGeo 2.1 (planned release October 1995), and VoxelGeo 2.5 (planned
release March 1996).
- Copies of Existing Licenses that have been initiated by Licensor,
- Copies of CDDI Agreements.
- Copies of purchase orders from end-users relating to Existing Maintenance
Contracts.
<PAGE>
EXHIBIT B
---------
SUPPORTED ENVIRONMENT
The hardware/software environment necessary for Licensee to BUILD VoxelGeo 2.0
consists of:
- Silicon Graphics Indy, Indigo2 or Onyx workstation with at least 64MB
of RAM and 200MB of free disk space running the IRIX 5.3 operating
system.
- Silicon Graphics development tools and libraries as follows:
- IRIS Development Option for IRIX 5.3
- C++ 4.0 for IRIX 5.3
- OpenInventor 3D Toolkit Development Option for IRIX 5.3
- Digital Media Development Software Libraries
- Quick Time 1.0 Compressor Library
The hardware/software environment necessary for Licensee to RUN VoxelGeo 2.0
consists of:
- Silicon Graphics Indy XZ, Indigo2 XZ or EX, Crimson RE or Onyx VTX or
RE2 workstation with at least 96MB of RAM and 200MB of free disk
space.
- For Indy XZ and Indigo2 XZ or EX, SGI patch 158 to IRIX 5.3 is
required
- For Crimson RE or Onyx VTX or RE2, SGI patch 154 to IRIX 5.3 is
required
<PAGE>
EXHIBIT C
---------
LISTING OF EXISTING LICENSES
(ATTACHED)
<PAGE>
EXHIBIT D
---------
LISTING OF EXISTING MAINTENANCE CONTRACTS
(ATTACHED)
<PAGE>
EXHIBIT E
---------
LISTING OF CDDI AGREEMENTS
(ATTACHED)
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of December, 1995, by and
among BIO-VASCULAR, INC., a Minnesota corporation (hereinafter referred to as
the "Buyer"), BIOPLASTY, INC., a Minnesota corporation formerly known as
Genetic Laboratories, Inc. (hereinafter referred to as "Bioplasty"), and
UROPLASTY, INC., a Minnesota corporation (hereinafter referred to as
"Uroplasty") (Bioplasty and Uroplasty are sometimes collectively referred to
herein as the "Sellers").
BACKGROUND
FIRST. Pursuant to that certain Assignment dated June 23, 1995 (the "Patent
Assignment"), Bioplasty assigned to Uroplasty all right, title and interest
in and to United States Patent No. 4,456,589 (hereinafter more fully
described and defined as the "589 Patent") covering a process for treating
animal tissue used in connection with various medical products, including,
but not limited to, the Buyer's PERI-GUARD product and the Sellers'
CHONDROPLAST product. The Patent Assignment has not yet been filed with the
United States Patent and Trademark Office. The records of the United States
Patent and Trademark Office reflect that Genetic Laboratories, Inc. is the
owner of the 589 Patent.
SECOND. Bioplasty, Vascular Services Diversified, Inc., a Minnesota
corporation ("VSD"), and the Buyer previously entered into that certain
Agreement dated as of July 31, 1985, regarding the rights of the various
parties with respect to certain tangible and intangible assets, including,
certain bio-synthetic surgical implant products marketed under the trade
names PERI-GUARD, BIOFLOW, FLO-RESTER, CRYOGUARD/CARDIO-COOL, and BIOCOR
(collectively the "Subject Products"), which Agreement was amended by that
certain Amendment effective as of September 25, 1985, and also amended by
that certain Amendment No. 2 effective as of July 31, 1985 (such Agreement as
amended is referred to hereafter as the "Acquisition Agreement").
THIRD. Bioplasty and the Buyer entered into that certain License Agreement
dated as of September 25, 1985, which restated and clarified the grant of an
exclusive license to the Buyer to use, manufacture, apply, sell, market and
commercialize the Subject Products in consideration for payment by the Buyer
to Bioplasty of a 3% royalty for sales of the Subject Products by the Buyer
during the 10-year term of the License Agreement, which Agreement was amended
by that certain Amendment to License Agreement between Bioplasty and the
Buyer dated as of June 13, 1986 (such Agreement as amended is referred to
hereafter as the "License Agreement").
FOURTH. Bioplasty and the Buyer entered into that certain Purchase Agreement
dated as of February 17, 1986 (the "Purchase Agreement") (the Acquisition
Agreement, the License Agreement and the Purchase Agreement are referred to
herein, collectively, as the "Prior Agreements").
FIFTH. Bioplasty, VSD and the Buyer entered into that certain Debt and
Royalty Restatement Agreement dated as of June 16, 1986, which Agreement was
amended by that certain Agreement dated as of September 1, 1986, by and
between Bioplasty and the Buyer (such Debt and Royalty Restated Agreement as
amended is referred to hereafter as the "Royalty Agreement"), which Agreement
superseded the Prior Agreements to the extent it conflicts with the Prior
Agreements.
<PAGE>
SIXTH. Subject to the terms and conditions set forth herein, the Sellers
desire to sell, and the Buyer desires to purchase, all right, title and
interest in and to the 589 Patent.
NOW, THEREFORE, in consideration of the foregoing premises and further in
consideration of the mutual covenants, conditions, and agreements contained
in this Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties to this
Agreement hereby agree as follows:
ARTICLE I
PURCHASE OF UNITED STATES PATENT
1. PURCHASE AND SALE OF UNITED STATES PATENT. Subject to the further terms of
this Agreement, the Sellers agree to sell to the Buyer, and the Buyer agrees
to purchase from the Sellers, all right, title and interest in and to United
States Patent No. 4,456,589, dated June 26, 1984, together with any
corresponding patents or patent applications filed in other countries, any
reissue applications, continuation applications and continuation-in-part
applications filed thereon in the United States or any foreign country and
any patents issuing thereon (collectively, such rights are hereinafter
referred to as the "589 Patent").
2. CLOSING; TITLE. The purchase and sale referred to in Section 1 of this
Article I shall take place concurrently with the execution of this Agreement
by all parties hereto, which is the date first written above (such date is
hereinafter referred to as the "Closing" or the "Closing Date"). Title to
the 589 Patent shall pass to the Buyer on the Closing Date. At Closing, the
Sellers shall execute and deliver to the Buyer an Assignment of U.S. Patent
in the form attached hereto as EXHIBIT A (the "Assignment of Patent").
Additionally, at Closing, the Sellers shall deliver to the Buyer (i)
certified copies of the Amendment to the Articles of Incorporation of
Bioplasty evidencing the change of name from Genetic Laboratories, Inc. to
Bioplasty, Inc. (which document must be filed with the United States Patent
and Trademark Office for purposes of clarifying the chain of title to the 589
Patent); (ii) an original of the executed Patent Assignment from Bioplasty to
Uroplasty; and (iii) all other documents, notices and correspondence relating
to the 589 Patent.
ARTICLE II
PURCHASE PRICE AND PAYMENT
1. PURCHASE PRICE. In consideration for the sale of the 589 Patent by the
Sellers to the Buyer pursuant to the terms of this Agreement, the Buyer shall
pay to Uroplasty the amount of Five Hundred Thousand and no/100 Dollars
($500,000.00) (the "Purchase Price") by cashier's check at Closing.
2. LIABILITIES OF THE SELLERS NOT ASSUMED. The Sellers and the Buyer each
acknowledge and agree that none of the Sellers' liabilities of any kind
whatsoever are being assumed, directly or indirectly, by the Buyer. The
Sellers warrant and represent, jointly and severally, that the Buyer shall
not, as a result of the transactions contemplated by this Agreement,
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<PAGE>
acquire or be responsible for any liabilities of or claims against the
Sellers; and the Sellers hereby agree, jointly and severally, to defend, hold
harmless, and indemnify the Buyer with respect to all such liabilities and/or
claims, including, without limitation, liabilities to creditors due to
failure to comply with any and all applicable fraudulent conveyance, bulk
transfer, or similar laws.
3. LIABILITIES OF THE BUYER NOT ASSUMED. The Buyer and the Sellers each
acknowledge and agree that none of the Buyer's liabilities of any kind are
being assumed, directly or indirectly, by the Sellers. The Buyer warrants
and represents that the Sellers shall not, as a result of the transactions
contemplated by this Agreement, acquire or become responsible for any
liabilities of or claims against the Buyer; and the Buyer hereby agrees to
defend, hold harmless and indemnify the Sellers with respect to all such
liabilities and/or claims, including, without limitation, liabilities to
creditors due to failure to comply with any and all applicable fraudulent
conveyance, bulk transfer or similar laws.
ARTICLE III
MUTUAL RELEASE
The Sellers, on the one hand, and the Buyer, on the other hand, hereby
release and forever discharge the other, and their respective subsidiaries,
affiliates, insurers and their current and former officers, directors,
employees, agents and assigns, from any and all existing claims, demands,
obligations, interests, suits, actions or causes of action, at law or in
equity, whether arising by contract, statute, common law or otherwise, both
direct and indirect, of whatsoever kind or nature, existing as of Closing.
ARTICLE IV
LICENSE AGREEMENT
Concurrently with the execution of this Agreement by all parties hereto, the
Buyer and Uroplasty shall enter into a License Agreement in the form attached
hereto as EXHIBIT B (the "License Agreement").
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS
1. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE SELLERS. The Sellers
hereby, jointly and severally, represent, warrant, and covenant to the Buyer
as follows:
(a) ORGANIZATION. Both Bioplasty and Uroplasty have been duly
organized and are validly existing and in good standing under the laws
of the State of Minnesota.
(b) EXECUTION AND AUTHORITY; ABSENCE OF CONFLICTS. This Agreement
and all other documents executed or to be executed by or on behalf of
the Sellers under or in connection with this Agreement have been or
will be duly executed and delivered, and constitute or
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<PAGE>
will constitute valid and binding obligations of the Sellers,
enforceable (subject to usual equity principles) in accordance with
their terms (subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium, or other laws affecting creditors'
rights generally). The sale by the Sellers of the 589 Patent
hereunder and the performance of the transactions contemplated hereby
will not conflict with or result in the breach of any of the terms or
provisions of any note, mortgage, loan agreement, or other agreement
or instrument to which either of the Sellers is a party or by which
either of the Sellers may be bound or any statute or order, rule, or
regulation applicable to either of the Sellers. No consent, approval,
authorization, registration, or qualification of or with any court,
regulatory agency, governmental body, or third person is required for
the sale of the 589 Patent and the performance of the transactions
contemplated by this Agreement.
(c) LITIGATION. As of the Closing Date, the Sellers have no actual
knowledge of (and do not undertake any obligation to determine the
existence of) any litigation or proceeding, pending or threatened,
contemplated against or relating to either of the Sellers or the 589
Patent by or before any court, arbitrator, or federal, state or other
governmental commission, board, or other agency, that would have a
material adverse affect on the 589 Patent.
(d) 589 PATENT. As of the Closing Date, Uroplasty has good and
marketable title to the 589 Patent (except to the extent that neither
the Patent Assignment nor the name change of Bioplasty have been filed
with the United States Patent and Trademark Office) and shall transfer
title to the 589 Patent to the Buyer free and clear of all mortgages,
pledges, liens, conditional sales agreements, or other encumbrances of
any kind or nature whatsoever. The Sellers, collectively, have the
sole right to sell the 589 Patent and have not, jointly or severally,
heretofore sold or granted any rights in the 589 Patent to any third
party.
(e) INFRINGEMENT. As of the Closing Date, the Sellers have no actual
knowledge of (and do not undertake any obligation to determine the
existence of) any facts or circumstances from which it could be
reasonably concluded that the 589 Patent materially infringes on any
patent, copyright, trademark, trade secret or other proprietary right
of any third party, nor any facts or circumstances from which it could
reasonably conclude that a third party is infringing the 589 Patent.
(f) FOREIGN PATENTS. With respect to the 589 Patent, as of the
Closing Date, the Sellers have no actual knowledge of (and do not
undertake any obligation to determine the existence of) any facts or
circumstances from which it could reasonably conclude that there are
any corresponding equivalent foreign patents, related foreign patents,
or any continuation or reissue foreign patents, or other variations to
or of the subject invention (collectively, "Foreign Patents"). The
Sellers shall, to the extent reasonably requested by the Buyer and at
Buyer's sole expense, assist the Buyer in the procurement of any
Foreign Patents.
(g) RELIANCE. The foregoing representations, warranties, and
covenants are made by the Sellers with the knowledge and expectation
that the Buyer is relying thereon.
-4-
<PAGE>
2. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE BUYER. The Buyer
represents, warrants, and covenants to the Sellers as follows:
(a) ORGANIZATION. The Buyer has been duly organized and is validly
existing and in good standing under the laws of the State of Minnesota.
(b) EXECUTION AND AUTHORITY. This Agreement and all other documents
executed or to be executed by or on behalf of the Buyer under or in
connection with this Agreement have been or will be duly executed and
delivered and constitute or will constitute valid and binding
obligations of the Buyer, enforceable (subject to usual equity
principles) in accordance with their terms (subject, as to enforcement
of remedies, to applicable bankruptcy, insolvency, moratorium, or
other laws affecting creditors' rights generally). The purchase by
the Buyer of the 589 Patent hereunder and the performance of the
transactions contemplated hereby will not conflict with or result in
the breach of any of the terms or provisions of any note, mortgage,
loan agreement or other agreement or instrument to which the Buyer is
a party or to which the Buyer may be bound or any statute or order,
rule or regulation applicable to the Buyer. No consent, approval,
authorization, registration or qualification of or with any court,
regulatory agency, governmental body or third person is required for
the purchase of the 589 Patent by Buyer and the performance of the
transactions contemplated by this Agreement.
(c) LITIGATION. As of the Closing Date, the Buyer has no actual
knowledge of (and does not undertake any obligation to determine the
existence of) any litigation or proceeding pending, threatened or
contemplated relating to the Buyer or the 589 Patent by or before any
court, arbitrator or federal, state or other governmental commission,
board or agency, that would have a material adverse effect on the 589
Patent.
(d) INFRINGEMENT. As of the Closing Date, the Buyer has no actual
knowledge of (and does not undertake any obligation to determine the
existence of) any facts or circumstances from which it could be
reasonably concluded that the 589 Patent materially infringes on any
patent, copyright, trademark, trade secret or other proprietary right
of any third party, nor any facts or circumstances from which it could
reasonably conclude that a third party is infringing the 589 Patent.
(e) FOREIGN PATENTS. With respect to the 589 Patent, as of the
Closing Date, the Buyer has no actual knowledge of (and does not
undertake any obligation to determine the existence of) any facts or
circumstances from which it could reasonably conclude that there are
any corresponding equivalent foreign patents, related foreign patents
or any continuation or reissue foreign patents or any other variations
to or of the subject invention.
(f) VALIDITY OF THE 589 PATENT. The Buyer waives any claim it may
have against either of the Sellers relating to the validity of the 589
Patent under United States Patent Law.
(g) RELIANCE. The foregoing representations, warranties, and
covenants are made by the Buyer with the knowledge and expectation
that the Sellers are relying thereon.
-5-
<PAGE>
3. SURVIVAL OF REPRESENTATIONS. The representations, warranties and
covenants of all parties to this Agreement contained in or made pursuant to
this Agreement shall survive the consummation of the purchase and sale
contemplated hereby, and shall continue in full force and effect until
expiration of the 589 Patent and any continuations thereof.
4. INDEMNIFICATION. In addition to the indemnification set forth in Article
II, Section 3, the Sellers, jointly and severally, agree to indemnify and
hold harmless the Buyer from and against any and all (i) liabilities,
obligations, damages, or deficiencies, for which the Buyer has not received
reimbursement from any other source, resulting from any misrepresentation,
breach of warranty, or nonfulfillment of any covenant or agreement on the
part of either of the Sellers under this Agreement; and (ii) actions, suits,
proceedings, demands, assessments, judgments, costs and expenses (including,
without limitation, attorneys' fees and court costs) incident to any of the
foregoing, for which the Buyer has not received reimbursement from any other
source. The Sellers shall reimburse the Buyer, on demand, for any payment
made by the Buyer at any time in respect of any liability, obligation, or
claim to which the foregoing indemnity by the Sellers relates.
ARTICLE VI
MISCELLANEOUS PROVISIONS
1. LEGAL RELATIONSHIP. The Sellers and the Buyer hereby acknowledge and
agree that nothing contained in this Agreement shall be deemed to create an
employment, agency, franchise, or other relationship between either of the
Sellers and the Buyer for any purpose whatsoever and that no relationship is
intended or created hereby other than the relationship of independent
contractors. No party to this Agreement shall have the right or authority to
assume or create any obligation or responsibility, express or implied, on
behalf of, on account of or in the name of any other party to this Agreement,
or to legally bind such party in any manner whatsoever.
2. BENEFIT. Except as otherwise provided herein, this Agreement shall
inure to the benefit of and shall be binding upon the parties hereto and
their respective successors and assigns.
3. SURVIVING RIGHTS. Notwithstanding the termination of this Agreement,
the parties hereto shall be required to carry out any provision hereof that
contemplates performance subsequent to such termination, and such termination
shall not affect any liability or other obligation that shall have accrued
prior to such termination, including, but not limited to, any liability for
loss or damage on account of a prior default.
4. FURTHER ASSURANCES. The parties hereto agree to cooperate with the
other parties to effectuate this Agreement and to execute any and all
additional documents or take any additional action as may be reasonable,
necessary or appropriate to carry out the transactions contemplated hereby.
5. WAIVER, MODIFICATION OR AMENDMENT. Unless otherwise expressly provided
in this Agreement and any documents expressly referred to herein, no waiver,
modification, or amendment of any term, condition, or provision of this
Agreement shall be valid, binding, or of any effect unless made in writing,
signed by the parties hereto or their duly authorized representatives
-6-
<PAGE>
and specifying with particularity the nature and extent of such waiver,
modification, or amendment. Any waiver by any party of any provision hereof
shall not affect or impair any other provision hereof. The failure of any
party to enforce at any time any of the provisions of this Agreement shall
not be construed to be a waiver of the right of such party to subsequently
enforce any such provisions.
6. NOTICES. All notices, requests, or other communications from one party
to the other shall be in writing and shall be considered to be delivered or
served if sent by first class certified or registered mail, return receipt
requested, postage prepaid to the party at its address as set forth below, or
to such other address as such party may hereafter designate by written notice
to the other party:
If to the Buyer, to:
Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota 55114
Attn: John T. Karcanes
If to the Sellers, to:
Uroplasty, Inc.
2718 Summer Street, N.E.
Minneapolis, Minnesota 55413
Attn: Donald A. Major
7. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but together which
shall constitute one and the same instrument.
8. HEADINGS. Section headings used herein are for convenience purposes
only and shall in no way be construed to be a part of this Agreement or as a
limitation of the scope of the particular sections to which such headings
refer.
9. INTERPRETATION AND SEVERANCE. The provisions of this Agreement shall be
applied and interpreted in a manner consistent with each other so as to carry
out the purposes and intent of the parties hereto, but if for any reason any
provision hereof, except those related to the payment of monies, is
determined to be unenforceable or invalid, such provision or such part hereof
as may be unenforceable or invalid shall be deemed severed from this
Agreement, and the remaining provisions shall be carried out with the same
force and effect as if the provision or part thereof had not been a part of
this Agreement.
10. ARBITRATION. Any dispute, controversy or claim arising out of or in
connection with this Agreement shall be settled by binding arbitration in
accordance with the then-existing Commercial Rules of the American
Arbitration Association, which arbitration shall take place in the
Minneapolis/St. Paul, Minnesota metropolitan area. Each party shall select
an arbitrator within thirty (30) days of the receipt of any demand for
arbitration and each shall be responsible for
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<PAGE>
compensation of its own arbitrator. The two arbitrators shall confer and
select by mutual agreement (and at the parties' joint expense) a neutral
third arbitrator within sixty (60) days of the filing of the demand for
arbitration. If the parties fail to appoint their own arbitrator or if the
party-appointed arbitrators are unable to agree upon the neutral arbitrator,
the vacancies in the arbitration panel will be appointed in accordance with
the rules of the American Arbitration Association. The party-appointed
arbitrators (but not the neutral arbitrator) shall have the right to consult
with the party appointing them in advance of the arbitration hearing. It is
the intention of the parties that the arbitration be speedily conducted with
the hearing to take place and awards to be made if possible within ninety
(90) days of the filing of the demand for arbitration. Judgement upon the
award of all or a majority of the arbitrators shall be binding upon the
parties hereto and may be entered in any court having jurisdiction. Specific
performance and injunctive relief may be ordered by the award. Costs and
attorneys' fees shall be paid in accordance with the arbitration award.
11. GOVERNING LAW; ENFORCEMENT. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota.
ARTICLE VII
ENTIRE AGREEMENT
This Agreement, including any exhibits attached hereto or documents expressly
referred to herein, contains the entire agreement among the Sellers and the
Buyer and supersedes and cancels any and all other agreements, whether oral
or in writing, among the Sellers and the Buyer with respect to the matters
referred to herein, including, without limitation, the Royalty Agreement, the
Prior Agreements and any other agreements or dealings related to or arising
out of the 589 Patent.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the date and year first above written.
BUYER: SELLERS:
BIO-VASCULAR, INC. BIOPLASTY, INC.
By: /s/ John T. Karcanes By: /s/ Donald A. Major
------------------------------------- --------------------------------
John T. Karcanes, President and Chief Donald A. Major, Chief Financial
Executive Officer Officer
UROPLASTY, INC.
By: /s/ Donald A. Major
--------------------------------
Donald A. Major, Chief Financial
Officer
<PAGE>
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, made and entered into this 1st day of December, 1995, by
and between BIO-VASCULAR, INC., a Minnesota corporation ("Bio-Vascular"), and
UROPLASTY, INC., a Minnesota corporation ("Licensee").
BACKGROUND
FIRST. Bio-Vascular is the owner of certain proprietary rights under and
related to United States Patent No. 4,456,589 (hereinafter more fully described
and defined as the "Patent Rights"), which Patent Rights were acquired by
Bio-Vascular from Licensee in accordance with that certain Purchase and Sale
Agreement of even date herewith by and among Bio-Vascular, Bioplasty, Inc.
and Licensee.
SECOND. Uroplasty has been and continues to be in possession of certain
proprietary rights of Bio-Vascular relating to Bio-Vascular's SUPPLE PERI-GUARD
product (hereinafter more fully described and defined as the "Licensed
Know-How").
THIRD. Subject to the terms and upon conditions herein contained, Licensee
desires to make, have made, use, market, and sell certain proprietary products,
and Bio-Vascular is willing to grant Licensee a license under the Patent
Rights and the Licensed Know-How for such purposes.
NOW, THEREFORE, in consideration of the foregoing premises and further in
consideration of the mutual covenants, conditions and agreements contained in
this Agreement and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree and undertake as follows:
ARTICLE I
DEFINITIONS
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
(a.) AGREEMENT. "Agreement" shall mean this Agreement (together with
all exhibits, schedules, attachments, appendices and addenda) as the
same may be amended, modified or supplemented from time to time.
(b.) EFFECTIVE DATE. "Effective Date" shall mean the date first
written above.
(c.) LICENSED KNOW-HOW. "Licensed Know-How" shall mean the
specialized, novel and unique techniques, practices, knowledge,
expertise and other proprietary information
<PAGE>
relating to Bio-Vascular's SUPPLE PERI-GUARD product that is in the
possession of Uroplasty as of the Effective Date, together with any
future improvements, enhancements, updates or other variations of such
know-how developed or acquired by Uroplasty.
(d.) PATENT RIGHTS. "Patent Rights" shall mean the United States
Patent No. 4,456,589, dated June 26, 1984, any corresponding patents
or patent applications filed in other countries, any reissue
applications, continuation applications, and continuation-in-part
applications filed thereon in the United States or any foreign country
and any patents issuing thereon.
(e.) PERMITTED USES. "Permitted Uses" shall mean use of the Patent
Rights and/or the Licensed Know-How by Licensee to make, have made, use,
market and sell (i) proprietary products used in connection with
urology, gynecology or uro-gynecology; and (ii) Licensee's CHONDROPLAST
product, all subject to the terms and conditions set forth herein.
2. RELATED DOCUMENTS. All of the terms defined in this Agreement shall have
the defined meanings when used in any exhibit, schedule, attachment, appendix or
addendum hereto or in any document made or otherwise delivered pursuant to this
Agreement, unless the context otherwise requires.
ARTICLE II
GRANT OF LICENSE
1. LICENSE. Upon the terms and conditions set forth herein, Bio-Vascular
hereby grants to Licensee, and Licensee hereby accepts, a nonexclusive,
worldwide, royalty-free, nontransferable (subject only to assignment in
accordance with Article VII, Section 1 hereof), perpetual (subject only to
termination in accordance with Article VI hereof) license to use the
Patent Rights and the Licensed Know-How for Permitted Uses.
2. USES OTHER THAN PERMITTED USES. Licensee acknowledges and agrees that
any and all uses of the Patent Rights and/or the Licensed Know-How other than
Permitted Uses are strictly prohibited.
3. NONEXCLUSIVITY. Licensee acknowledges that Licensee is not the exclusive
licensee of the Patent Rights or the Licensed Know-How and that Bio-Vascular
may use the Patent Rights and/or the Licensed Know-How for Permitted Uses
or otherwise and grant licenses for the use of the Patent Rights and/or the
Licensed Know-How to third parties for Permitted Uses or otherwise.
4. NO FURTHER DISCLOSURE OBLIGATION. Notwithstanding anything contained
herein to the contrary, Licensee acknowledges and agrees that Bio-Vascular has
no obligation to disclose to Licensee or any third party any information,
technology or know-how relating to its SUPPLE PERI-GUARD product, nor shall
Bio-Vascular have any obligation to train any employees or other representatives
of Uroplasty relating to use of the Patent Rights or the Licensed Know-How.
B-2
<PAGE>
ARTICLE III
OBLIGATIONS OF LICENSEE
1. PATENT MARKING. Licensee shall mark every product produced or sold by
it under this Agreement in accordance with the statutes of the United States (or
foreign countries, if applicable) relating to the marking of patented articles,
if applicable.
2. PRODUCT INDEMNITY BY LICENSEE. Licensee shall be solely responsible for
the production of its proprietary products under this Agreement. Licensee shall
indemnify, defend and hold Bio-Vascular, its agents, officers, and employees
harmless from and against any and all liability, damages, cost and expenses,
including attorneys' fees, incurred by Bio-Vascular, its agents, officers, and
employees, as a result of Licensee's production of proprietary products under
the Patent Rights and/or the Licensed Know-How, including specifically,
without limitation, liability, damages, costs and expenses, including attorneys'
fees, incurred by Bio-Vascular, its agents, officers, and employees, by reason
of any claim, alleged or actual defects in the proprietary products produced by
Licensee under the Patent Rights and/or the Licensed Know-How, directly or
indirectly, or by reason of any damage to any person or property resulting from
any claim, alleged or actual defect or insufficient design, materials or
workmanship in the production of proprietary products by Licensee.
3. PRODUCT INDEMNITY BY BIO-VASCULAR. Bio-Vascular shall indemnify, defend
and hold Licensee, its agents, officers and employees, harmless from and
against any and all liability, damages, costs and expenses, including
attorneys' fees incurred by Licensee, its agents, officers, and employees,
as a result of Bio-Vascular's production of proprietary products, including
specifically, without limitation, liability, damages, costs and expenses,
including attorneys' fees, incurred by Licensee, its agents, officers and
employees, by reason of any claim, alleged or actual defects in the proprietary
products produced by Bio-Vascular or by reason of any damage to any person or
property resulting from any claim alleged or actual defect or insufficient
design, materials or workmanship in production of proprietary products
produced by Bio-Vascular.
ARTICLE IV
PROPRIETARY RIGHTS
1. RIGHTS RESERVED. All rights in the Patent Rights and the Licensed
Know-How, other than those granted to Licensee by this Agreement, are hereby
reserved by Bio-Vascular.
2. PROTECTION OF PROPRIETARY RIGHTS. Licensee shall assist Bio-Vascular,
to the extent reasonably requested by Bio-Vascular, in the procurement of any
protection or defense of any of Bio-Vascular's rights to the Patent Rights
and/or the Licensed Know-How. Licensee shall immediately disclose to
Bio-Vascular any facts or circumstances from which it could be reasonably
concluded that a third party is infringing on the Patent Rights and/or the
Licensed Know-How. Bio-Vascular shall have the right, at its own expense and
in its sole and absolute discretion, to
B-3
<PAGE>
prosecute all infringements of the Patent Rights and/or the Licensed Know-How.
If the infringement claim is one that cannot by its nature be prosecuted
solely by Bio-Vascular, Licensee shall make available, or cause to be made
available, all information and assistance that Bio-Vascular may reasonably
request. Bio-Vascular shall be entitled to retain any and all recoveries or
settlements realized in connection with its defense of the Patent Rights and/or
Licensed Know-How. In the event Bio-Vascular fails, for whatever reason, to
commence prosecution of all claims of infringement of the Patent Rights and/or
the Licensed Know-How within ninety (90) days following receipt of written
notice of such infringement from Licensee, then Licensee shall be entitled to
prosecute such claims in its own name, at its own expenses and License shall be
entitled to retain all recoveries from said prosecution, whether by judgment,
settlement or otherwise.
3. TRADEMARK. Notwithstanding anything contained herein to the contrary,
Licensee acknowledges and agrees that Bio-Vascular is the sole and absolute
owner of the PERI-GUARD and SUPPLE PERI-GUARD trademarks and that Licensee has
no right whatsoever to use such trademarks or any other trademarks currently
owned by Bio-Vascular for any purpose whatsoever without the prior written
consent of Bio-Vascular.
4. RIGHTS ARE "INTELLECTUAL PROPERTY" UNDER BANKRUPTCY CODE. All
rights and licenses granted by Bio-Vascular to Licensee under or pursuant to
this Agreement are, and shall otherwise be deemed to be, for purposes of
Section 365(n) of the United States Bankruptcy Code (the "Code"), or any
replacement provision therefor, licenses to rights to "intellectual property"
as defined by the Code. The parties further agree that, in the event of the
commencement of bankruptcy proceedings by or against Bio-Vascular under the
Code, that Licensee, as licensee of such rights under this Agreement, shall
retain and may fully exercise all of its rights and elections under the Code.
ARTICLE V
WARRANTIES
1. WARRANTIES OF BIO-VASCULAR. Bio-Vascular hereby represents and warrants
to Licensee that:
(a.) Bio-Vascular has the right to enter into this Agreement, to grant
to Licensee the rights and licenses set forth herein, and to perform all
obligations of this Agreement;
(b.) Execution, delivery, and performance of this Agreement by
Bio-Vascular will not constitute a breach of any agreement, judgment,
award, law, rule, or regulation to which Bio-Vascular is bound; and
(c.) Bio-Vascular has not previously granted any rights under the
Patent Rights that would interfere with any rights granted Licensee
under this Agreement.
2. WARRANTIES OF LICENSEE. Licensee hereby represents and warrants to
Bio-Vascular that:
B-4
<PAGE>
(a.) Licensee has the full right, power and authority to enter into and
perform its obligations under this Agreement; and
(b.) Execution, delivery, and performance of this Agreement by Licensee
will not constitute a breach of any agreement, judgment, award, law,
rule, or regulation to which Licensee is bound.
ARTICLE VI
TERMINATION
1. TERMINATION. This Agreement and the licenses granted hereunder may be
terminated upon the occurrence of one or more of the following events, and the
terminating party shall not be liable to the other party for the proper
exercise of such right:
(a.) OPTION TO TERMINATE. This Agreement shall be terminated at the
option of the non-defaulting party upon the material breach of one of
the parties of their obligation to perform or comply with the terms and
conditions of this Agreement and/or that certain Purchase and Sale
Agreement of even date herewith among Licensee, Bioplasty, Inc. and
Bio-Vascular, Inc. (the "Purchase Agreement"). In the event one of the
parties finds the other in material breach of this Agreement and/or
the Purchase Agreement, notice of such breach shall be sent to the
defaulting party in writing. If the breach continues for twenty
(20) days after receipt by the defaulting party of the notice, this
Agreement shall be automatically terminated.
(b.) EVENTS OF AUTOMATIC TERMINATION. This Agreement and the licenses
granted hereunder shall terminate immediately and automatically upon the
happening of any of the following events:
(i) any proceeding under any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution, liquidation or any
similar law or statute of any jurisdictions commenced by or against
the Licensee; or
(ii) a temporary or permanent receiver is appointed for all or any
portion of the Licensee's business and/or property.
2. EFFECT OF TERMINATION. Upon termination or expiration of this Agreement,
for whatever reason, all provisions relating to proprietary property, patents
or other intellectual property rights shall remain in full force and effect.
Notwithstanding the termination or expiration of this Agreement, each of the
parties hereto shall be required to carry out any provision hereof that
contemplates performance subsequent to such termination; and such termination
shall not affect any liability or other obligation that shall have accrued prior
to such termination, including, but not limited to, any liability for loss or
damage on account of a prior default. Any rights and remedies
B-5
<PAGE>
provided in this Agreement shall be cumulative and in addition to all rights and
remedies available at law and in equity.
ARTICLE VII
MISCELLANEOUS PROVISIONS
1. NO ASSIGNMENT OR SUBLICENSE. This Agreement and all rights and licenses
granted or obligations incurred hereunder may not be assigned, sublicensed or
transferred by either party without the prior written consent of the other
party; provided, however, that either party shall have the right to assign its
rights and licenses granted or obligations incurred hereunder to wholly
owned subsidiaries or any third party purchasing all or substantially all of
the business assets of the applicable party hereto or to any third party
through merger with the applicable party hereto.
2. BENEFIT. Except as otherwise provided herein, this Agreement shall
inure to the benefit of and shall be binding upon the parties hereto and
their respective successors and assigns.
3. EQUITABLE RELIEF. The parties agree that any breach of the terms or
covenants of this Agreement will cause the other party irreparable harm for
which there is no adequate remedy at law, and the parties consent to the
issuance of any injunction or other equitable relief in favor of the other
party enjoining the breach of any such covenant or term. In no manner or
effect shall this provision of this Agreement preclude either party from
exercising any right or remedy to which such party may be entitled, at law
or in equity, by reason of a breach by the other party of any term or covenant
of this Agreement.
4. ARBITRATION. Except for any claim by either party for equitable relief
in accordance with Article VII, Section 3 above, any dispute, controversy or
claim arising out of or in connection with this Agreement shall be settled by
binding arbitration in accordance with the then-existing Commercial Rules of
the American Arbitration Association, which arbitration shall take place in
the Minneapolis/St. Paul, Minnesota metropolitan area. Each party shall select
an arbitrator within thirty (30) days of the receipt of any demand for
arbitration and each shall be responsible for compensation of its own
arbitrator. The two arbitrators shall confer and select by mutual agreement
(and at the parties' joint expense) a neutral third arbitrator within sixty
(60) days of the filing of the demand for arbitration. If the parties fail to
appoint their own arbitrator or if the party-appointed arbitrators are unable
to agree upon the neutral arbitrator, the vacancies in the arbitration panel
will be appointed in accordance with the rules of the American Arbitration
Association. The party-appointed arbitrators (but not the neutral arbitrator)
shall have the right to consult with the party appointing them in advance of
the arbitration hearing. It is the intention of the parties that the
arbitration be speedily conducted with the hearing to take place and awards to
be made if possible within ninety (90) days of the filing of the demand for
arbitration. Judgement upon the award of all or a majority of the arbitrators
shall be binding upon the parties hereto and may be entered in any court having
jurisdiction. Specific performance and injunctive relief may be ordered by
the award. Costs and attorneys' fees shall be paid in accordance with the
arbitration award.
B-6
<PAGE>
5. WAIVER, MODIFICATION OR AMENDMENT. Unless otherwise expressly provided
in this Agreement and any documents expressly referred to herein, no waiver,
modification or amendment of any term, condition or provision of this Agreement
shall be valid, binding or of any effect unless made in writing, signed by the
parties hereto or their duly authorized representatives and specifying with
particularity the nature and extent of such waiver, modification, or amendment.
Any waiver by any party of any provision hereof shall not affect or impair any
other provision hereof. The failure of any party to enforce at any time any
of the provisions of this Agreement shall not be construed to be a waiver of the
right of such party to subsequently enforce any such provisions.
6. NOTICES. All notices, requests or other communications from either party
hereto to the other shall be in writing and shall be considered to be
delivered or served if sent by a nationally recognized express delivery service
or by first class certified or registered mail, return receipt requested,
postage prepaid to the party at its address as set forth on the signature page
hereto, or to such other address as such party may hereafter designate by
written notice to the other party.
7. LEGAL RELATIONSHIP. Licensee and Bio-Vascular hereby acknowledge and
agree that nothing contained in this Agreement shall be deemed to create an
employment, agency, franchise, or other relationship between Licensee and
Bio-Vascular for any purpose whatsoever and that no relationship is intended
or created hereby other than the relationship of independent contractors.
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but together which
shall constitute one and the same instrument.
9. HEADINGS. Section headings used herein are for convenience purposes
only and shall in no way be construed to be a part of this Agreement or as a
limitation of the scope of the particular sections to which such headings refer.
10. INTERPRETATION AND SEVERANCE. The provisions of this Agreement shall
be applied and interpreted in a manner consistent with each other so as to
carry out the purposes and intent of the parties hereto, but if for any
reason any provision hereof is determined to be unenforceable or invalid,
such provision or such part hereof as may be unenforceable or invalid shall
be deemed severed from this Agreement, and the remaining provisions shall be
carried out with the same force and effect as if the provision or part
thereof had not been a part of this Agreement.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
12. ENTIRE AGREEMENT. This Agreement, including any appendices or exhibits
attached hereto or documents expressly referred to herein, contains the
entire agreement between Licensee and Bio-Vascular and supersedes and cancels
any and all other agreements, whether oral or in writing, between Licensee
and Bio-Vascular with respect to the matters referred to herein.
B-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
LICENSOR: LICENSEE:
BIO-VASCULAR, INC. UROPLASTY, INC.
By: By:
-------------------------------- -------------------------------------
John T. Karcanes, Donald A. Major,
President and Chief Chief Financial Officer
Executive Officer
Address: Address:
Bio-Vascular, Inc. Uroplasty, Inc.
2575 University Avenue 2718 Summer Street, N.E.
St. Paul, Minnesota 55114 Minneapolis, Minnesota 55413
Attn: John T. Karcanes Attn: Donald A. Major
B-8
<PAGE>
ASSIGNMENT OF U.S. PATENT
THIS ASSIGNMENT, made this 1st day of December, 1995, by BIOPLASTY, INC., a
Minnesota corporation formerly known as Genetic Laboratories, Inc., and
UROPLASTY, INC., a Minnesota corporation (collectively, the "Sellers") in
favor of BIO-VASCULAR, INC., a Minnesota corporation (the "Buyer").
W I T N E S S E T H :
WHEREAS, Collectively, the Sellers hold all right, title and interest in U.S.
Patent No. 4,456,589; and
WHEREAS, pursuant to that certain Purchase and Sale Agreement of even date
herewith by and among the Sellers and the Buyer, the Sellers have assigned to
the Buyer all right, title and interest in and to U.S. Patent No. 4,456,589.
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Sellers hereby agree as follows:
1. The Sellers hereby sell, conveys transfer, and assign to the Buyer
all right, title, and interest in and to U.S. Patent No. 4,456,589 and
the inventive subject matter therein contained (collectively, the
"Patent"), without limitation or reserve.
2. The Sellers hereby warrant and represent that the Sellers,
collectively, are the sole owners of the Patent, that the Sellers have
the right to sell and convey the Patent to the Buyer and that the Patent
is transferred to the Buyer hereunder free from and clear of all
encumbrances of any type or nature whatsoever.
IN WITNESS WHEREOF, the Sellers have executed and delivered this Agreement as
of the day and year first above written.
SELLERS:
BIOPLASTY, INC.
By:
----------------------------------------
Donald A. Major, Chief Financial Officer
UROPLASTY, INC.
<PAGE>
By:
----------------------------------------
Donald A. Major, Chief Financial Officer
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 1st day of December,
1995, by Donald A. Major, the Chief Financial Officer of Bioplasty, Inc., a
Minnesota corporation, for and on behalf of said corporation.
----------------------------------------
Notary Public
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 1st day of December,
1995, by Donald A. Major, the Chief Financial Officer of Uroplasty, Inc., a
Minnesota corporation, for and on behalf of said corporation.
----------------------------------------
Notary Public
A-2
<PAGE>
BIO-VASCULAR, INC.
EXHIBIT 11.1 - COMPUTATION OF INCOME (LOSS) PER SHARE
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Per share data:
Net income (loss) $ 2,186 $ (1,880) $ (158)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common and
common equivalent share, primary:
Net income (loss) $ 0.27 $ (.26) $ (.02)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common and common
equivalent share, fully diluted:
Net income (loss) $ 0.27 $ (.26) $ (.02)
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
Primary:
Weighted average number of common shares
outstanding 7,571,369 7,276,581 7,055,254
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method 490,463 -- --
---------- ---------- ----------
8,061,832 7,276,581 7,055,254
---------- ---------- ----------
---------- ---------- ----------
Fully diluted:
Weighted average number of common shares
outstanding 7,571,369 7,276,581 7,055,254
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method 601,057 -- --
---------- ---------- ----------
8,172,426 7,276,581 7,055,254
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Bio-Vascular, Inc. on Form S-8 (File No. 33-85394), Form S-8 (File No.
33-22302), and Form S-8 (File No. 33-94588) of our reports dated December 8,
1995, except as to the last paragraph of Note 9, for which the date is
January 15, 1996, on our audits of the consolidated financial statements and
financial statement schedule of Bio-Vascular, Inc. as of October 31, 1995 and
1994, and for each of the three years in the period then ended, which reports
are included in this Annual Report on Form 10-K. We also consent to the
reference to our firm under the caption "Experts" and "Incorporation of
Documents by Reference" in the Form S-8 (File No. 33-94588).
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 16, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<CASH> 15,424,969
<SECURITIES> 14,872,509
<RECEIVABLES> 2,444,258
<ALLOWANCES> 40,000
<INVENTORY> 1,968,226
<CURRENT-ASSETS> 26,282,677
<PP&E> 3,109,692
<DEPRECIATION> 1,380,393
<TOTAL-ASSETS> 37,722,225
<CURRENT-LIABILITIES> 2,366,889
<BONDS> 0
0
0
<COMMON> 93,798
<OTHER-SE> 35,261,538
<TOTAL-LIABILITY-AND-EQUITY> 37,722,225
<SALES> 13,319,730
<TOTAL-REVENUES> 13,585,919
<CGS> 3,866,991
<TOTAL-COSTS> 7,013,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,705,489
<INCOME-TAX> 519,023
<INCOME-CONTINUING> 2,186,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,186,466
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
