<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission File Number 0-13907
---------------------------------------------------
BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (612) 603-3700
---------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
---------------------------------------------------
On May 19, 1997, there were 9,543,394 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
BALANCE SHEETS
AS OF APRIL 30, 1997 AND OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
April 30, October 31,
1997 1997
--------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 5,638,409 $ 5,736,650
Marketable securities, short-term............................. 8,694,825 13,761,050
Accounts receivable, net of an allowance for doubtful
accounts of $24,500 at April 30, 1997 and $21,400
at October 31, 1996......................................... 1,656,035 1,465,809
Other receivables............................................. 602,255 632,386
Inventories................................................... 1,516,027 1,972,728
Prepaid expenses.............................................. 379,728 284,811
Deferred income taxes......................................... 157,750 914,300
---------- ----------
Total current assests......................................... 18,645,029 24,767,734
----------- -----------
Equipment and leasehold improvements, net....................... 1,614,051 1,370,256
Intangible assets, net.......................................... 1,123,366 1,213,600
Marketable securities, long-term................................ 4,219,062 10,173,086
Deferred income taxes........................................... 177,643 182,200
Net assets of discontinued operations........................... -- 174,403
---------- ----------
TOTAL ASSETS.............................................. $25,779,151 $37,881,279
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
2
<PAGE>
BIO-VASCULAR, INC.
BALANCE SHEETS
AS OF APRIL 30, 1997 AND OCTOBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, October 31,
1997 1996
--------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................ $ 383,881 $ 306,376
Accrued expenses............................................ 424,229 554,368
Accrued loss on disposal of discontinued operations......... 204,612 1,800,000
----------- -----------
Total current liabilities............................... 1,012,722 2,660,744
----------- -----------
COMMITMENTS AND CONTINGENCY (NOTE 4)
SHAREHOLDERS' EQUITY:
Common stock: authorized 20,000,000 shares of $.01
Par value issued and outstanding, 9,543,394 at
April 30, 1997 and 9,484,898 at October 31, 1996........... 95,434 94,849
Additional paid-in capital.................................. 29,546,360 39,500,239
Accumulated deficit......................................... (4,536,665) (3,838,537)
Unrealized marketable securities holding loss............... (61,495) (51,107)
Unearned compensation....................................... (277,205) (484,909)
----------- -----------
Total shareholders' equity.................................... 24,766,429 35,220,535
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $25,779,151 $37,881,279
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
3
<PAGE>
BIO-VASCULAR, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
(unaudited) (unaudited)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenue............................................... $2,481,038 $2,493,696 $4,806,479 $5,330,421
Cost of Revenue........................................... 1,017,955 715,785 2,021,994 1,518,076
---------- ---------- ---------- ----------
Gross margin............................................ 1,463,083 1,777,911 2,784,485 3,812,345
Operating Expenses:
Selling, general, and administrative.................... 1,336,616 1,500,282 2,512,796 2,729,098
Research and development................................ 249,203 202,641 462,887 416,474
---------- ---------- ---------- ----------
Income (loss) from operations............................. (122,736) 74,988 (191,198) 666,773
Other income, net......................................... 294,050 291,636 576,070 564,879
---------- ---------- ---------- ----------
Income from continuing operations before income taxes..... 171,314 366,624 384,872 1,231,652
Provision for income taxes................................ 74,000 104,000 163,000 445,000
---------- ---------- ---------- ----------
Income from continuing operations......................... 97,314 262,624 221,872 786,652
Loss from discontinued operations, net of income taxes.... (920,000) (286,979) (920,000) (605,615)
---------- ---------- ---------- ----------
Net income (loss)......................................... $ (822,686) $ (24,355) $ (698,128) $ 181,037
========== ========== ========== ==========
Per share amounts
Continuing operations................................... 0.01 0.03 0.02 0.08
Discontinued operations................................. (0.10) (0.03) (0.10) (0.06)
---------- ---------- ---------- ----------
Net income (loss)....................................... $ (0.09) $ 0.00 $ (0.07) $ 0.02
========== ========== ========== ==========
Weighted average shares outstanding....................... 9,511,000 9,439,000 9,501,000 9,903,000
========== ========== ========== ==========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
4
<PAGE>
BIO-VASCULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
April 30
(unaudited)
1997 1996
---- ----
<S> <C> <C>
NET CASH PROVIDED BY CONTINUING OPERATIONS............................................... $ 273,253 $ 258,960
NET CASH USED IN DISCONTINUED OPERATIONS................................................. -- (591,760)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...................................... 273,253 (332,800)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of equipment................................................................. 10,000 --
Purchases of equipment and improvements.................................................. (435,583) (229,663)
Additions to intangibles................................................................. (32,845) (512,773)
Investments in marketable securities..................................................... (3,000,000) (10,034,938)
Maturities of marketable securities...................................................... 6,000,000 3,000,000
Cash investment in discontinued subsidiary............................................... (3,733,489) --
Discontinued operations, net............................................................. 586,677 (182,800)
----------- ------------
Net cash used in investing activities.................................................... (605,240) (7,960,174)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to sale of stock........................................................... -- (87,327)
Proceeds related to the exercise of stock options, net of restricted stock repurchased... 233,746 324,480
----------- ------------
Net cash provided by financing activities................................................ 233,746 237,153
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................ (98,241) (8,055,821)
----------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 5,736,650 15,424,969
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 5,638,409 $ 7,369,148
=========== ============
</TABLE>
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
5
<PAGE>
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Bio-Vascular ("Bio-Vascular"
or "the Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary, including items of a normal
recurring nature, for a fair presentation have been included. Operating results
for the six months ended April 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending October 31, 1997. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report to Shareholders and in Form 10-K for the year ended
October 31, 1996.
(2) DISCONTINUED OPERATIONS:
On October 28, 1996, the Bio-Vascular Board of Directors approved the spin-off
("the Distribution") of Vital Images, Inc. ("Vital Images") to the shareholders
of Bio-Vascular. On May 12, 1997, the Company distributed all of the shares of
Vital Images to Bio-Vascular shareholders and on that date Vital Images began
operating as an independent public company. All Bio-Vascular shareholders of
record as of May 5, 1997 received one share of Vital Images common stock for
each two shares of Bio-Vascular stock held on that date. Cash will be issued in
lieu of fractional shares. The Company has attempted to structure the
transaction as tax-free, but since no revenue ruling will be sought, no
assurance can be made about the final tax treatment of the transaction.
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. At the date of Distribution, Bio-Vascular contributed to Vital
Images an additional $1,845,000 of cash equivalents, bringing Vital Images cash,
cash equivalents and marketable securities balances on that date, again to
$10,000,000. Additionally, Bio-Vascular made capital contributions to Vital
Images of $3,079,000 representing net advances of cash made to Vital Images over
the period beginning May 24, 1994, the date on which Vital Images was acquired
by the Company, and ending May 11, 1997, the last date on which Vital Images was
a part of the Company. The accompanying unaudited financial statements of the
Company as of April 30, 1997 reflect all of these transactions. The Company
recorded the distribution of Vital Images common stock to its shareholders as of
March 19, 1997, the date the Board of Directors of the Company gave final
approval for the transaction. The distribution was recorded by reducing
shareholders' equity by $10,183,000, which represents the $10 million
contribution and the carrying value of Vital Images' net assets. The
accompanying unaudited financial statements of the Company as of April 30, 1997
reflect all of these transactions.
As a result of the Company's spin-off of Vital Images, the Company's financial
statements and notes report Vital Images as discontinued operations. Prior
years' financial statements and notes have been restated accordingly.
Net revenue of the discontinued business for the three and six months ended
April 30, 1996 was $293,000 and $435,000, respectively. Because an additional
six weeks were required to complete the spin-off, the
6
<PAGE>
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
Company reported an additional loss on discontinued operations of $920,000. This
amount relates entirely to Vital Images' net losses and spin-off related costs
that exceeded those estimated and accrued on October 31, 1996, the end of the
previous fiscal year.
(3) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
---------- -----------
<S> <C> <C>
Inventories:
Raw materials and supplies.................. $ 461,763 $ 511,683
Work-in-process............................. 389,260 544,278
Finished goods.............................. 665,004 916,767
---------- ----------
$1,516,027 $1,972,728
========== ==========
</TABLE>
Condensed Statements of Cash Flows:
During the six months ended April 30, 1997, the Company contributed
approximately $8,000,000 of marketable securities to Vital Images, along with
cash and cash equivalents of approximately $3,733,000 and related accrued
interest receivable.
(4) CONTINGENCY:
In late 1996, the Company received notice of a suit brought against it in Japan
by a former Japanese distributor, claiming wrongful termination and economic
damage of $500,000. The Company believes the claim to be completely without
merit and intends to pursue this matter vigorously.
(5) MAJOR CUSTOMERS:
<TABLE>
<CAPTION>
Percentage
Significant Gross Percentage of of Accounts
Customer Sales Gross Sales Receivable
-------- ----- ----------- ----------
<S> <C> <C> <C> <C>
Period ended April 30, 1997...... Futuretech $1,014,066 20% 17%
Life Systems 749,084 15% 14%
CardioMedical 507,300 10% 11%
Pacific West 364,425 7% 10%
Period ended April 30, 1996...... Futuretech $ 982,693 17% 11%
Life Systems 837,823 15% 18%
CardioMedical 629,082 11% 11%
</TABLE>
7
<PAGE>
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
Net export sales amounted to 22%, and 21% for the six month period ended April
30, 1997 and 1996, respectively. Substantially all of the Company's export sales
are negotiated, invoiced and paid in U.S. dollars. Gross export sales by
geographic area are summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
April 30,
1997 1996
---- ----
<S> <C> <C>
Europe and Middle East................................. $650,966 $719,023
Asia and Pacific Region................................ 337,057 312,150
Canada................................................. 99,080 122,639
Latin America and Others............................... 6,461 30,516
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Spin-off of Vital Images
On October 28, 1996, the Bio-Vascular Board of Directors approved the spin-off
("the Distribution") of Vital Images, Inc. ("Vital Images") to the shareholders
of Bio-Vascular, believing that strategically and financially, the timing and
circumstances were right to separate the Company's Surgical and Medical
Visualization Businesses for the long-term benefit of the shareholders. Both
organizations, it is believed, will benefit from a tighter focus on their
respective markets, will be able to invest in research and development at levels
appropriate to their respective stages of development and will be able to evolve
unique organizational and marketing structures to better serve their
substantially different markets.
On May 12, 1997, the Company distributed all of the shares of Vital Images to
shareholders of Bio-Vascular and on that date, Vital Images began operating as
an independent public company. Vital Images is currently traded on the OTC
Bulletin Board under the symbol VTAL. All Bio-Vascular shareholders of record as
of May 5, 1997 received one share of Vital Images common stock for each two
shares of Bio-Vascular stock held on that date. Cash will be issued in lieu of
fractional shares. As a result of the Company's spin-off of Vital Images, the
Company's financial statements and notes thereto report the business of Vital
Images as discontinued operations.
Based on the Company's original estimate that the Distribution would be
effective on or about March 31, 1997, the Company recorded a Loss on Disposal at
October 31, 1996 of $1,348,000, which included estimates of Vital Images net
losses from November 1, 1996 through March 31, 1997, along with the estimated
transaction costs related to the spin-off, net of an estimated tax benefit.
Because an additional six weeks were required to complete the spin-off, the
Company reported an additional loss on discontinued operations of $920,000. This
amount relates entirely to Vital Images' net losses and spin-off related costs
that exceeded those estimated and accrued on October 31, 1996, the end of the
previous fiscal year.
The Company's continuing business develops, manufactures and markets proprietary
specialty medical products for use in thoracic, cardiac, neuro and vascular
surgery.
Medicare Non-Coverage Decision
The Health Care Financing Administration ("HCFA"), the agency of the Federal
Government that administers Medicare, made a non-coverage decision for lung
volume reduction surgery ("LVRS"), a surgical treatment for late-stage
emphysema, that was effective January 1, 1996. This decision significantly
impacted the Company's revenue from sales of Peri-Strips. Peri-Strips, which
were cleared to market by the Food and Drug Administration in April of 1994, are
used to enable LVRS. At the time that this non-coverage decision was put into
effect, the Company estimates that approximately 70% of the patients undergoing
LVRS were Medicare patients. There has been no Medicare reimbursement for this
procedure since the January 1, 1996 effective date of the non-coverage decision.
While the Company understands that several private insurance companies and
managed care organizations are currently reimbursing LVRS based
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
on their own evaluation of the procedure and its outcomes, it is unknown whether
these private payers will change their reimbursement practices in the future.
The National Institute of Health (NIH), in collaboration with HCFA, has outlined
and is in the process of organizing a seven year, prospective, randomized study
of LVRS to determine whether it is safe and efficacious. The study, as it is
currently designed, is limited to 2,580 patients, of which 1,380 would be
eligible to have the LVRS procedure. Members of Congress, responding to the
concerns of their constituents and supported by a significant number of
favorable peer-reviewed published medical articles bearing out the safety and
efficacy of LVRS, are questioning HCFA's study as it is currently planned.
Because HCFA and NIH appear intent on proceeding with the study, no assumption
can be made as to whether the efforts of Congress or the mounting evidence
regarding the benefits of this procedure will cause them to alter the study. The
Company, however, continues to work for restoration of coverage of LVRS for
Medicare dependent patients.
Results of Continuing Operations
Comparison of the Three Months Ended April 30, 1997 with
the Three Months Ended April 30, 1996
Net revenue was essentially flat at $2,481,000 for the 1997 quarter compared to
$2,494,000 for the 1996 quarter, primarily as a result of the decrease in
revenue from Peri-Strips. Peri-Strips revenue decreased $152,000, or 16% to
$780,000 in the 1997 quarter from $932,000 in the 1996 quarter, however, Peri-
Strips revenue increased slightly over the 1997 first quarter level of $762,000.
The Company believes that the higher Peri-Strip revenue in the second quarter of
1996 was largely due to the number of cases being performed at no charge for
selected Medicare patients that were awaiting LVRS when HCFA made its non-
coverage decision. Revenue from sales of other Tissue-Guard products, Dura-
Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased $117,000, or 14%
to $946,000 from $829,000. Growing market share for the Dura-Guard and Vascu-
Guard products were responsible for the increase. Biograft revenue decreased by
$18,000, or 8%, comparing the 1997 and 1996 quarters, continuing a trend
representative of the late stage of this product's life cycle.
Revenue from sales of surgical productivity tools (Flo-Rester and the Bio-
Vascular Probe) increased $39,000, or 8% to $543,000 from $504,000. The Company
believes that the growth in revenue, which is attributable to Flo-Rester, is due
to its use in minimally invasive coronary bypass surgery, a procedure which is
increasing.
The gross margin percentage was 59% in the 1997 quarter and 71% in the 1996
quarter. During fiscal 1996, the gross margin percentages declined through the
quarters, primarily due to decreases in the production volume in response to
decreases in expected demand for Peri-Strips as a result of the HCFA decision.
The gross margin percentage was 62% by the fourth quarter of 1996 and was 57% in
the first quarter of 1997. It is expected that the gross margin percentage will
increase slightly during the year from the first quarter
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
level due to anticipated increases in production volume. This forward-looking
statement will be influenced primarily by the accuracy of the Company's current
estimates of production volume for 1997, and would be impacted by significant
increases or decreases in actual production volume as compared to the estimate,
by material changes in the Company's product mix and by the accuracy of the
Company's estimates of standard costs.
Selling, general and administrative expense decreased $164,000, or 11% to
$1,337,000 from $1,500,000. The decrease is primarily due to the management of
discretionary expenses. General and administrative expense decreased $136,000,
or 16%, while selling expense decreased $28,000, or 4%.
Research and development ("R&D") expense increased $47,000, or 23% to $249,000
from $203,000 in the 1996 quarter. The Company has several projects under
development and R&D expense is expected to increase as these projects progress.
This forward-looking statement will be influenced primarily by the number of
projects, the related R&D personnel requirements, the development path of each
project, the expected costs, and the timing of these costs.
Primarily due to lower gross margins, continuing operations had an operating
loss in the 1997 quarter of $123,000 compared to operating income from
continuing operations of $75,000 in the 1996 quarter. Other income, primarily
interest income, was $294,000 and $292,000 in the 1997 and 1996 quarters,
respectively. As a result, continuing operations had income before income taxes
in the 1997 and 1996 quarters of $171,000 and $367,000, respectively.
The Company recorded a provision for income taxes of $74,000 for the 1997
quarter, which is based on the Company's estimate of its annual effective rate
for fiscal 1997. In the 1996 quarter, the Company allocated its provision for
income taxes to continuing and discontinued operations based on their respective
pretax income contribution and tax attributes. As a result, the amount of the
provision allocated to continuing operations in the 1996 quarter was $104,000.
Income from continuing operations was $97,000, or $0.01 per share for the 1997
quarter, and $263,000, or $0.03 per share for the 1996 quarter. The loss from
discontinued operations in the 1997 quarter was $920,000, or $0.10 per share,
resulting in a net loss for the 1997 quarter of $823,000, or $0.09 per share.
The loss from discontinued operations in the 1996 quarter was $287,000, or $0.03
per share, resulting in a net loss for the 1996 quarter of $24,000, or no cents
per share.
Comparison of the Six Months Ended April 30, 1997 with
the Six Months Ended April 30, 1996
Net revenue decreased $524,000, or 10% to $4,806,000 from $5,330,000, primarily
as a result of the decrease in revenue from Peri-Strips. Peri-Strips revenue
decreased $898,000, or 37% to $1,542,000 from $2,440,000. The decrease in
revenue from Peri-Strips is primarily due to the Medicare LVRS non-coverage
decision which affects all of the 1997 period and only part of the 1996 period.
Revenue from sales of other
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
Tissue-Guard products, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-
Guard, increased $345,000, or 25% to $1,748,000 from $1,403,000, primarily due
to increases in revenue from the sales of Dura-Guard and Vascu-Guard, arising
from market share gains. Biograft revenue decreased by $92,000, or 18%,
comparing the first halves of 1997 and 1996, continuing a trend representative
of the late stage of this product's life cycle.
Revenue from sales of surgical productivity tools (Flo-Rester and the Bio-
Vascular Probe) increased $119,000, or 12% to $1,099,000 from $980,000, with the
majority of the increase in revenue from sales of Flo-Rester. The Company
believes that the growth in revenue from Flo-Rester is due to its use in
minimally invasive coronary bypass surgery, a procedure which is increasing.
The gross margin percentage was 58% in 1997 and 72% in 1996. In fiscal 1996, the
gross margin percentages declined through the quarters, primarily due to
decreases in the production volume in response to decreases in expected demand
for Peri-Strips as a result of the HCFA decision. The gross margin percentage
was 62% by the fourth quarter of 1996, 57% in the first quarter of 1997, and 59%
in the second quarter of 1997. It is expected that the gross margin percentage
will continue to increase slightly during the year from the first quarter level
due to anticipated increases in production volume. This forward-looking
statement will be influenced primarily by the accuracy of the Company's current
estimates of production volume for 1997, and would be impacted by significant
increases or decreases in actual production volume as compared to the estimate,
by material changes in the Company's product mix and by the accuracy of the
Company's estimates of standard costs.
Selling, general and administrative expense decreased $216,000, or 8% to
$2,513,000 from $2,729,000. The decrease is primarily due to the management of
discretionary expenses. General and administrative expense decreased $107,000,
or 7%, while selling expense decreased $109,000, or 9%.
R&D expense increased $46,000, or 11% to $463,000 from $416,000. The Company has
several projects under development and R&D expense is expected to increase as
these projects progress. This forward-looking statement will be influenced
primarily by the number of projects, the related R&D personnel requirements, the
development path of each project, the expected costs, and the timing of these
costs.
Primarily due to the decrease in revenue from Peri-Strips, compounded by lower
gross margins, continuing operations had an operating loss in the first six
months of 1997 of $191,000 compared to operating income from continuing
operations of $667,000 in the first six months of 1996. Other income, primarily
interest income, was $576,000 and $565,000 in the 1997 and 1996 quarters,
respectively. As a result, continuing operations had income before income taxes
in the 1997 and 1996 quarters of $384,000 and $1,232,000, respectively.
The Company's recorded provision for income taxes for the first half of 1997 is
$163,000 and is based on the Company's estimate of its annual effective rate for
fiscal 1997. In the first half of 1996, the Company allocated its provision for
income taxes to continuing and discontinued operations based on their respective
pretax income contribution and tax attributes. As a result, the amount of the
provision allocated to
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
continuing operations in the first half of 1996 quarter was $445,000.
Income from continuing operations was $222,000, or $0.02 for 1997 and $787,000,
or $0.08 per share for 1996. The loss from discontinued operations for 1997 was
$920,000, or $0.10 per share, resulting in a net loss for 1997 of $698,000, or
$0.07 per share (difference due to rounding). The loss from discontinued
operations in 1996 was $606,000, or $0.06 per share, resulting in net income for
1996 of $181,000, or $0.02 per share.
Liquidity and Capital Resources
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. At the date of Distribution, May 12, 1997, Bio-Vascular
contributed an additional $1,845,000, bringing Vital Images' cash, cash
equivalents and marketable securities balances on that date, again to
$10,000,000. Additionally, Bio-Vascular made capital contributions of $3,079,000
representing net advances of cash made to Vital Images over the period beginning
May 24, 1994, the date on which Vital Images was acquired by the Company, to May
11, 1997, the last date on which Vital Images was a part of the Company. These
transactions are all included in the April 30, 1997 financial statements of Bio-
Vascular.
At April 30, 1997, after accounting for all the transactions of the
Distribution, the Company has cash, cash equivalents and marketable securities
totaling $18,553,000. At April 30, 1997, working capital was $17,632,000 and the
current ratio is 18 to 1.
Operating activities provided $276,000. The Company invested $436,000 in
equipment and leasehold improvements primarily related to new manufacturing
processes related to both an existing and a new product. Financing activities
provided $234,000 and represents stock option exercises, net of restricted stock
repurchased and a tax benefit associated with the option exercises. Finally, the
Company made the final investment in Vital Images, using $1,845,000 to bring
their cash balances to $10,000,000 at the date of Distribution.
Historically, the cash needs of the Company have been met by cash generated from
operations and investments. The Company believes its cash, cash equivalents and
marketable securities of $18,552,000, which is fully adjusted for the
Distribution, along with cash provided by continuing operations, will be
sufficient to satisfy its cash requirements for the foreseeable future.
New Accounting Standard
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS No.
128), Earnings per Share (EPS) was issued by the Financial Accounting Standards
Board. This standard, which the Company must adopt effective with its first
quarter of fiscal 1998, requires dual presentation of basic and diluted EPS on
the face of the statement of operations. Net income per common share currently
presented by the Company is comparable to the basic EPS required under SFAS 128.
Diluted EPS for the Company would be calculated
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
based on both common shares outstanding and consideration of the dilutive
effects of common stock equivalents.
Certain Important Factors
This Form 10-Q contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", or "continue" or comparable terminology are intended forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors, including the availability of third party reimbursement, the extent
to which the Company's products gain market acceptance, litigation regarding
patent and other intellectual property rights, the introduction of competitive
products by others, the progress of product development and clinical studies,
and the receipt and timing of regulatory approvals, among others.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is a report of the voting results of the Company's annual
shareholders meeting held on March 19, 1997.
1. Proposal to elect six directors was approved. John T. Karcanes, James F.
Lyons, Richard W. Perkins, Edward E. Strickland, Timothy M. Scanlan and
Anton R. Potami were elected until the next annual meeting of shareholders
or until their successors are duly elected and qualified. There were no
broker non-votes. The tabulation was as follows:
<TABLE>
<CAPTION>
Director Votes For Votes Against
-------- --------- -------------
<S> <C> <C>
John T. Karcanes 8,766,185 54,373
James F. Lyons 8,764,125 56,430
Richard W. Perkins 8,764,108 56,447
Anton R. Potami 8,763,952 56,603
Timothy M. Scanlan 8,764,632 55,923
Edward E. Strickland 8,761,955 58,600
</TABLE>
2. Proposal to amend the Corporation's Restated Articles of Incorporation, as
amended, to create a class of Preferred Stock, issuable in series, was
approved. There were 3,471,740 votes cast in favor and 1,036,122 votes cast
against the proposal, with 62,225 shares abstaining. There were 4,250,468
broker non-votes, which were treated as shares not entitled to vote on the
proposal.
15
<PAGE>
ITEM 5. OTHER INFORMATION
Effective as of May 12, 1997 (the "Distribution Date") the Company completed the
spin-off distribution (the "Distribution") of all of the issued and outstanding
shares of common stock, $.01 par value per share, together with certain
preferred stock purchase rights attached thereto ("Vital Images Common Stock"),
of Vital Images, Inc. ("Vital Images"). Prior to the Distribution, Vital Images
was a wholly-owned subsidiary of the Company engaged in the Company's Medical
Visualization Business.
The Distribution was made to holders of record of the Company's common stock,
$.01 par value per share ("Bio-Vascular Common Stock"), as of May 5, 1997, on
the basis of one share of Vital Images Common Stock for each two shares of Bio-
Vascular Common Stock held as of that date. No holder of Bio-Vascular Common
Stock was required to pay any cash or other consideration for the shares of
Vital Images Common Stock received in the Distribution, to surrender or exchange
any shares of Bio-Vascular Common Stock, or to take any other action in order to
receive the shares of Vital Images Common Stock to which they were entitled in
the Distribution. No certificates or scrip representing fractional shares of
Vital Images Common Stock were issued to the Company's shareholders in the
Distribution. Pursuant to an agreement among the Company, Vital Images and
American Stock Transfer & Trust Company as distribution agent (the "Distribution
Agent") the Distribution Agent was directed to aggregate all fractional shares
of Vital Images Common Stock otherwise issuable in the Distribution into whole
shares and sell them in the open market at then-prevailing prices on behalf of
shareholders who would have otherwise been entitled to receive such fractional
share interests. Cash payments in the amount of the pro rata share of such total
sale proceeds, net of any commissions incurred in connection with such sales,
will be made in lieu of such fractional interests.
In anticipation of the Distribution, the Company agreed to assign to Vital
Images $10,000,000 in cash, cash equivalents and marketable securities,
effective November 1, 1996. Subsequently, the Company's Board of Directors
determined, effective as of the Distribution Date, to make such additional
capital contributions to Vital Images as necessary to bring Vital Images' cash,
cash equivalents and marketable securities balances to a combined $10,000,000,
resulting in an additional $1,845,000 contribution by Bio-Vascular as of that
date.
Upon completion of the Distribution, Vital Images became an independent public
company, separate from the Company. However, in order to provide for an orderly
transition of Vital Images to an independent company, the Company and Vital
Images entered into certain agreements regarding corporate matters relating to
the Distribution, transition services to be provided to Vital Images by the
Company for a limited period following the Distribution, employee benefit
matters and tax and indemnification matters. Each of these agreements is
intended to set forth, on an arms-length basis, the agreement of the parties
with respect to the subject matter thereof.
Following the Distribution, the Company and Vital Images have separate
management and Boards of Directors. Two individuals, Messrs. Richard W. Perkins
and Edward E. Strickland, currently serve as directors of both the Company and
Vital Images, although it is expected that Mr. Perkins will only serve as a
director of Vital Images for a transitional period of approximately 12 to 18
months and will not seek reelection as a director of Vital Images thereafter.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
the exhibit index beginning on page 19.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
quarter ended April 30, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIO-VASCULAR, INC.
May 27, 1997 /s/ M. Karen Gilles
-----------------------------
M. Karen Gilles
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company, as amended (filed
herewith electronically).
3.2 Amendment to Restated Articles of Incorporation, as amended, dated March
20, 1997 (filed herewith electronically).
4.1 Restated Articles of Incorporation of the Company, as amended (see Exhibit
3.1).
4.2 Amendment to Restated Articles of Incorporation, as amended, dated March
20, 1997 (see Exhibit 3.2).
10.1 1988 Stock Option Plan, as amended (filed herewith electronically).
10.2 1995 Stock Incentive Plan, as amended (filed herewith electronically).
11.1 Computation of income (loss) per share (filed herewith electronically).
27.1 Financial Data Schedule for the three month period ended April 30, 1997
(filed herewith electronically).
27.2 Restated Financial Data Schedule for the three month period ended April
30, 1996 (filed herewith electronically).
<PAGE>
Exhibit 3.1
COMPOSITE COPY REFLECTING AMENDMENTS FILED
JUNE 21, 1995, AUGUST 12, 1996 AND MARCH 20, 1997
RESTATED ARTICLES OF INCORPORATION
OF
BIO-VASCULAR, INC.
ARTICLE 1 - NAME
----------------
1.1 The name of the corporation shall be Bio-Vascular, Inc.
ARTICLE 2 - REGISTERED OFFICE
-----------------------------
2.1 The location and office address of the registered office of the
corporation in this state shall be 2575 University Avenue, St. Paul, Minnesota
55114-1024.
ARTICLE 3 - CAPITAL STOCK
-------------------------
3.1 Authorized Shares. The aggregate number of shares of stock which the
corporation shall have authority to issue is twenty-five million (25,000,000)
shares, twenty million (20,000,000) of which shall be designated common stock,
$0.01 par value (hereinafter referred to as "Common Stock") and five million
(5,000,000) of which shall be designated preferred stock, $0.01 par value
(hereinafter referred to as "Preferred Stock"). The Board of Directors is
authorized to establish, from the authorized shares of Preferred Stock, one or
more classes or series of shares, to designate each such class and series, and
to fix the rights and preferences of each such class and series. Without
limiting the authority of the Board of Directors granted hereby, each such class
or series of Preferred Stock shall have such voting powers, full or limited, or
no voting powers, such preferences and relative, participating, optional or
other special rights, and such qualifications, limitations or restrictions as
shall be stated and expressed in the resolution or resolutions providing for the
issue of such class or series of Preferred Stock as may be adopted from time to
time by the Board of Directors prior to the issuance of any shares thereof.
Except as provided in the resolution or resolutions of the Board of Directors
creating any class or series of Preferred Stock, the shares of Common Stock
shall have the
1
<PAGE>
exclusive right to vote for the election and removal of directors and for all
other purposes. Each holder of Common Stock shall be entitled to one vote for
each share held.
3.2 Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscription for, issue, sell and deliver
shares of stock of any class or series of the corporation, and rights to
purchase any such shares of the corporation, to such persons, at such time, for
such consideration, and upon such terms and conditions as the Board shall
determine.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
----------------------------------
4.1 No Pre-emptive Rights. No shareholder of the corporation shall have
any pre-emptive right to subscribe for, purchase or acquire any shares of stock
of any class or series of the corporation now or hereafter authorized or issued.
4.2 No Cumulative Voting Rights. No shareholder shall have the right to
cumulate votes for the election of directors.
ARTICLE 5 - WRITTEN ACTION BY DIRECTORS
---------------------------------------
5.1 Any action required or permitted to be taken at a Board meeting may be
taken by written action signed by all of the directors or, in cases where the
action need not be approved by the shareholders, by written action signed by the
number of directors that would be required to take the same action at a meeting
of the Board at which all directors were present.
ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
6.1 Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its good will, or (iv) to commence voluntary dissolution.
2
<PAGE>
ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION
--------------------------------------------------
7.1 Any provision contained in these Articles of Incorporation may be
amended, altered, changed or repealed by the affirmative vote of the holders of
at least a majority of the voting power of the shares present and entitled to
vote at a duly held meeting or such greater percentage as may be otherwise
prescribed by the laws of the State of Minnesota.
3
<PAGE>
Exhibit 3.2
AMENDMENT TO ARTICLES OF INCORPORATION
OF BIO-VASCULAR, INC.
Filed March 20, 1997
--------------------
RESOLVED, that Article 3.1 of the Company's Restated Articles of Incorporation,
as amended, is hereby amended in its entirety to read as follows:
3.1 Authorized Shares. The aggregate number of shares of stock which
the corporation shall have authority to issue is twenty-five million
(25,000,000) shares, twenty million (20,000,000) of which shall be
designated common stock, $0.01 par value (hereinafter referred to as
"Common Stock") and five million (5,000,000) of which shall be designated
preferred stock, $0.01 par value (hereinafter referred to as "Preferred
Stock"). The Board of Directors is authorized to establish, from the
authorized shares of Preferred Stock, one or more classes or series of
shares, to designate each such class and series, and to fix the rights and
preferences of each such class and series. Without limiting the authority
of the Board of Directors granted hereby, each such class or series of
Preferred Stock shall have such voting powers, full or limited, or no
voting powers, such preferences and relative, participating, optional or
other special rights, and such qualifications, limitations or restrictions
as shall be stated and expressed in the resolution or resolutions providing
for the issue of such class or series of Preferred Stock as may be adopted
from time to time by the Board of Directors prior to the issuance of any
shares thereof. Except as provided in the resolution or resolutions of the
Board of Directors creating any class or series of Preferred Stock, the
shares of Common Stock shall have the exclusive right to vote for the
election and removal of directors and for all other purposes. Each holder
of Common Stock shall be entitled to one vote for each share held.
RESOLVED FURTHER, that, appropriate officers of the Company are hereby
authorized and directed to make, execute, acknowledge and file such certificates
and documents as may be required by law with respect to the foregoing
resolution.
<PAGE>
BIO-VASCULAR, INC.
1988 STOCK OPTION PLAN
(As amended as of March 19, 1997)
1. PURPOSE
The purpose of this 1988 Stock Option Plan (the "Plan") is to promote the
interests of Bio-Vascular Inc., a Minnesota corporation (the "Company"), by
providing employees of the Company with an opportunity to acquire a proprietary
interest in the Company, and thereby develop a stronger incentive to contribute
to the Company's continued success and growth. In addition, the opportunity to
acquire a proprietary interest in the Company by the offering and availability
of stock options will assist the Company in attracting and retaining key
personnel of outstanding ability. In connection with the Company's distribution
of all of the outstanding shares of the common stock of Vital Images, Inc.
("Vital Images") (the "Spin-Off"), certain amendments to the Plan have been
effected in order to allow awards under the Plan made to Vital Images employees
to continue following the effective date of the Spin-Off.
2. DEFINITIONS
Wherever used in the Plan, the following terms have the meanings set forth
below:
2.1. "Board" means the Board of Directors of the Company.
2.2. "Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
2.3. "Committee" means the Committee which may be designated from time to
time by the Board pursuant to Section 3.5 of the Plan.
2.4. "Employer" means the Company if the Participant renders employment or
other services to the Company or any Subsidiary of the Company, and
means Vital Images if the Participant renders employment or other
services to Vital Images or any Subsidiary of Vital Images.
2.5. "Incentive Stock Option" or "ISO" means a stock option which is
intended to qualify as an incentive stock option as defined in
Section 422A of the Code.
2.6. "Non-Statutory Stock Option" or "NSO" means a stock option to
purchase stock that does not qualify as an incentive stock option as
defined in Section 422A of the Code.
2.7. "Option" means, where required by the context of the Plan, an ISO
and/or NSO granted pursuant to the Plan.
<PAGE>
2.8. "Optionee" means a Participant in the Plan who has been granted one
or more Options under the Plan.
2.9. "Participant" means an individual described in Section 5 of this Plan
who may be granted Options under the Plan.
2.10. "Stock" means the Common Stock, $.01 par value, of the Company.
2.11. "Subsidiary" means (i) when used in reference to the Company, any
corporation or entity, other than the Company, in an unbroken chain
of corporations beginning with the Company if each of the
corporations other than the last corporation or entity in the
unbroken chain owns 50% or more of the voting stock in one of the
other corporations or entities in such chain or (ii) when used in
reference to Vital Images, any corporation or entity, other than
Vital Images, in an unbroken chain of corporations beginning with
Vital Images if each of the corporations or entities other than the
last corporation or entity in the unbroken chain owns 50% or more of
the voting stock in one of the other corporations or entities in such
chain.
2.12. "Vital Images Committee" means the group of individuals administering
the Vital Images, Inc. Incentive Stock Option Adjustment Plan.
3. ADMINISTRATION
3.1. The Plan shall be administered by the Board, which shall have full
power, subject to the provisions of the Plan, to grant Options,
construe and interpret the Plan, establish rules and regulations with
respect to the Plan and Options granted hereunder, and perform all
other acts, including the delegation of administrative
responsibilities, that it believes reasonable and necessary.
3.2. The Board shall have the sole discretion, subject to the provisions
of the Plan, to determine the Participants eligible to receive
Options pursuant to the Plan and the amount, type, and terms of any
Options and the terms and conditions of option agreements relating to
any Option.
3.3. The Board may correct any defect, supply any omission, or reconcile
any inconsistency in the Plan or in any Option granted hereunder in
the manner and to the extent it shall deem necessary to carry out the
terms of the Plan.
3.4. Any decision made, or action taken, by the Board arising out of or in
connection with the interpretation and administration of the Plan
shall be final, conclusive and binding upon Optionee.
3.5. The Board may designate a Committee from time to time to administer
the Plan. If designated, the Committee shall be composed of not less
than three persons (who shall be members of the Board) who are
appointed from time to time by the Board. If the Board has appointed
a Committee pursuant to this Section 3.5, then the
2
<PAGE>
Committee pursuant to this Section 3.5, then the Committee may
administer the Plan and exercise all of the rights and powers granted
to the Board in this Plan, including without limitation the right to
grant Options pursuant to the Plan and to establish the Option price
as provided in the Plan.
3.6. The Committee and the Vital Images Committee will reasonably cooperate
with each other to promote the purposes of the Plan.
4. SHARES SUBJECT TO THE PLAN
4.1. Number. The total number of shares of Stock reserved for issuance upon
exercise of Options under the Plan is 850,000. Such shares shall
consist of authorized but unissued Stock. If any Option granted under
the Plan lapses or terminates for any reason before being completely
exercised, the shares covered by the unexercised portion of such
Option may again be made subject to Options under the Plan.
4.2. Changes in Capitalization. Subject to the provisions of paragraphs
4.2(a-c), in the event of any change in the outstanding shares of
Stock of the Company by reason of any stock dividend, split,
recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, or rights offering to purchase stock at a price
substantially below fair market value, or other similar corporate
change, the aggregate number of shares which may be subject to Options
under the Plan and the terms of any outstanding Option, including the
number and kind of shares subject to such Options and the purchase
price per share thereof, shall be appropriately adjusted by the Board,
in its sole discretion, may deem equitable to prevent substantial
dilution or enlargement of the rights granted to or available for
Optionees. Notwithstanding the preceding sentence, in no event shall
any fraction of a share of Stock be issued upon the exercise of an
Option.
(a) Change in Control. In the event of a "Change in Control" of the
Company, as defined in paragraph (b) below, then the following
acceleration and valuation provisions shall apply:
(i) Except as otherwise determined by the Board, in its
discretion, prior to the occurrence of a Change in Control,
any Options outstanding on the date such Change in Control
is determined to have occurred that are not yet exercisable
and vested on such date shall become fully exercisable and
vested;
(ii) Except as otherwise determined by the Board, in its
discretion, prior to the occurrence of a Change in Control,
the value of all outstanding Options, to the extent they
are exercisable and vested (including Options that shall
become exercisable and vested pursuant to subparagraph (i)
above), shall be cashed out at the Change in Control Price,
(reduced by the exercise price applicable to such Options).
The cash out proceeds shall be paid to the Optionee
3
<PAGE>
or, in the event of an Optionee prior to payment, to the
estate of the Optionee or to a person who acquired the
right to exercise the Option by bequest or inheritance.
(b) Definition of "Change in Control". For purposes of this Section
4.2, a "Change in Control" means the happening of any of the
following, provided that it occurs after the date on which the
Company distributes (pursuant to that certain Distribution
Agreement, dated as of May 2, 1997, between Vital Images and the
Company (the "Distribution Agreement")) all of the outstanding
shares of Vital Images' common stock to the Company's
shareholders of record on the Record Date (as defined in the
Distribution Agreement):
(i) When any "person", as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a
Subsidiary or a Company employee benefit plan, including
any trustee of such plan acting as trustee) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the
combined voting power of the Company's then outstanding
securities; or
(ii) The occurrence of a transaction requiring shareholder
approval, and involving the sale of all or substantially
all of the assets of the Company or the merger of the
Company with or into another corporation.
(c) Change in Control Price. For purposes of this Section 4.2,
"Change in Control Price" shall be, as determined by the Board,
(i) the highest Fair Market Value of a Share within the 60 day
period immediately preceding the date of determination of the
Change in Control Price by the Board (the "60-Day Period"), or
(ii) the highest price paid or offered per Share, as determined
by the Board, in any bona fide transaction or bona fide offer
related to the Change in Control of the Company, at any time
within the 60-Day Period, or (iii) some lower price as the
Board, in its discretion, determines to be a reasonable estimate
of the fair market value of a Share.
5. ELIGIBLE PARTICIPANTS
The following persons are eligible to participate in the Plan:
5.1. Participation Generally. Participants in the Plan will be (a) those
employees of the Company or any Subsidiary, including officers and
directors who are also employees of the Company or any Subsidiary,
who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of
economic objectives of the Company or any Subsidiaries; and (b)
4
<PAGE>
those individuals employed by Vital Images as of the effective date
of the Spin-Off who held Options as of such date, whose Options will
continue thereafter according to the terms and conditions of the
Plan.
5.2. Incentive Stock Options. Incentive Stock Options may be granted only
to employees of the Employer or any Subsidiary of the Employer,
including officers and directors who are also employees of the
Employer or any Subsidiary of the Employer.
5.3. Non-Statutory Stock Options. Non-statutory stock options may be
granted to (i) any employee of the Employer or any Subsidiary of the
Employer, including any officer or director who is also an employee
of the Employer or any Subsidiary of the Employer; (ii) any non-
employee director of the Employer or any Subsidiary of the Employer;
and (iii) any consultant to, or other independent contractor of, the
Employer.
6. GRANT OF OPTIONS
Subject to the terms, conditions, and limitations set forth in this Plan,
the Company, by action of its Board, may from time to time grant Options to
purchase shares of the Company's Stock to those eligible Participants as
may be selected by the Board, in such amounts and on such other terms as
the Board in its sole discretion shall determine. Such Options may be (i)
"Incentive Stock Options" so designated by the Board and which, when
granted, are intended to qualify as incentive stock options as defined in
Section 422A of the Code; (ii) "Non-Statutory Stock Options" so designated
by the Board and which, when granted, do not qualify as incentive stock
options under Section 422A of the Code; or (iii) a combination of both. The
date on which the Board approves the granting of an Option shall be the
date of grant of such Option. Notwithstanding the foregoing, with respect
to the grant of any Incentive Stock Option under the Plan, the aggregate
fair market value of Stock (determined as of the date the Option is
granted) with respect to which such Options are exercisable for the first
time by an Optionee in any calendar year (under all such stock option plans
of the Company or Subsidiaries) shall not exceed $100,000. Each grant of an
Option under the Plan shall be evidenced by a written stock option
agreement between the Company and the Optionee setting forth the terms and
conditions, not inconsistent with the Plan, under which the Option so
granted may be exercised pursuant to the Plan and containing such other
terms with respect to the Option as the Board in its sole discretion may
determine.
7. OPTION PRICE AND FORM OF PAYMENT
The purchase price for a share of Stock subject to an Option granted
hereunder shall not be less than 100% of the fair market value of the
Stock. For purposes of this Section 7, the "fair market value" of the Stock
shall be determined as follows:
5
<PAGE>
(a) if the Stock of the Company is listed or admitted to
unlisted trading privileges on a national securities
exchange, the fair market value on any given day
shall be the closing sale price for the Stock, or if
no sale is made on such day, the closing bid price
for such day on such exchange;
(b) if the Stock is not listed or admitted to unlisted trading
privileges on a national securities exchange, the fair market
value on any given day shall be the closing sale price for the
Stock as reported on the NASDAQ National Market System on such
day, or if no sale is made on such day, the closing bid price
for such day as entered by a market maker for the Stock;
(c) if the Stock is not listed on a national securities exchange, is
not admitted to unlisted trading privileges on any such
exchange, and is not eligible for inclusion in the NASDAQ
National Market System, the fair market value on any given day
shall be the closing price of the stock as reported by the
NASDAQ SmallCap Market, OTC Electronic Bulletin Board or the
National Quotation Bureau, Inc. or, if the Stock is so not
quoted, then the closing price or average of bid and asked
prices of the Stock as reported in any publicly available
compilation of prices of the Stock in any over-the-counter
market on which the Stock is traded; or
(d) if there exists no public trading market for the Stock, the fair
market value on any given day shall be an amount determined in
good faith by the Board in such manner as it may reasonably
determine in its discretion, provided that such amount shall not
be less than the book value per share, as reasonably determined
by the Board as of the date of determination, or less than the
par value of the Stock.
Notwithstanding the foregoing, in the case of an Incentive Stock Option
granted to any Optionee then owning more than 10% of the voting power of
all classes of the Company's stock, the purchase price per share of the
Stock subject to such Option shall not be less than 110% of the fair market
value of the Stock on the date of grant of the Incentive Stock Option,
determined as provided above.
Except as provided herein, the purchase price of each share of Stock
purchased upon the exercise of any Option shall be paid:
(a) in United States dollars in cash or by check, bank draft or
money order payable to the order of the Company; or
(b) at the discretion of the Board, through the delivery of shares
of Stock, having initially or as a result of successive
exchanges of shares, an aggregate fair market value (as
determined in the manner provided under this Plan) equal to the
Option price; or
6
<PAGE>
(c) at the discretion of the Board, by a combination of both (a) and
(b) above; or
(d) by such other method as may be permitted in the written stock
option agreement between the Company and the Optionee.
If such form of payment is permitted, the Board shall determine procedures for
tendering Stock as payment upon exercise of an Option and may impose such
additional limitations and prohibitions on the use of Stock as payment upon the
exercise of an Option as it deems appropriate.
If the Board in its sole discretion so agrees, the Company may finance the
amount payable by an Optionee upon exercise of any Option upon such terms and
conditions as the Board may determine at the time such Option is granted under
this Plan, provided, however, that the amount financed shall not exceed the
"good faith loan value" (as that term is defined in Section 207.2(e) of
Regulation G of the Federal Reserve Board) of the shares of Stock to be acquired
upon exercise of an Option.
8. EXERCISE OF OPTIONS
8.1. Manner of Exercise. An Option, or any portion thereof, shall be
exercised by delivering a written notice of exercise to the Board and
paying to the Company the full purchase price of the Stock acquired
upon the exercise of the Option. Until certificates for the Stock
acquired upon the exercise of an Option are issued to an Optionee,
such Optionee shall not have any rights as a shareholder of the
Company.
8.2. The Limitations and Conditions on Exercise of Options. In addition to
any other limitations or conditions contained in this Plan or that
may be imposed by the Board from time to time or in the stock option
agreement to be entered into with respect to Options granted
hereunder, the following limitations and conditions shall apply to
the exercise of Options granted under this Plan:
(a) No Incentive Stock Option may be exercisable by its terms after
the expiration of 10 years from the date of the grant thereof.
(b) No Incentive Stock Option granted to an eligible Participant
then owning more than 10% of the voting power of all classes of
the Company's stock may be exercisable by its terms after the
expiration of five years from the date of the grant thereof.
9. INVESTMENT PURPOSES
Unless a registration statement under the Securities Act of 1933 is in
effect with respect to Stock to be purchased upon exercise of Options to be
granted under the Plan, the Company shall require that an Optionee agree
with and represent to the Company in writing that he or she is acquiring
such shares of Stock for the purpose of investment and with no present
intention to transfer, sell or otherwise dispose of such shares of Stock
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other than by transfers which may occur by will or by the laws of descent
and distribution, and no shares of Stock may be transferred unless, in the
opinion of counsel to the Company, such transfer would be in compliance
with applicable securities laws. In addition, unless a registration
statement under the Securities Act of 1933 is in effect with respect to the
Stock to be purchased under the Plan, each certificate representing any
shares of Stock issued to an Optionee hereunder shall have endorsed thereon
a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND
WITHOUT REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS, IN
RELIANCE UPON EXEMPTION(S) CONTAINED THEREIN. NO TRANSFER OF THESE SHARES
OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO EFFECTIVE
REGISTRATION STATEMENTS UNDER SAID LAWS UNLESS THE CORPORATION HAS RECEIVED
AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER OR DISPOSITION
DOES NOT REQUIRE REGISTRATION UNDER SAID LAWS AND, FOR ANY SALES UNDER RULE
144 OF THE ACT, SUCH EVIDENCE AS IT SHALL REQUEST FOR COMPLIANCE WITH THAT
RULE, OR APPLICABLE STATE SECURITIES LAWS."
10. TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be transferable by an Option
(whether by sale, assignment, hypothecation or otherwise) other than by
will or the laws of descent and distribution, and Options shall be
exercisable during the Optionee's lifetime only by the Optionee.
11. TERMINATION OF EMPLOYMENT
11.1. Generally. The transfer by a Participant of employment or other
service from one Employer or its Subsidiaries to the other Employer
or its Subsidiaries will not be deemed to constitute a termination
of employment or other service for purposes of this Plan. Except as
otherwise provided in this Section 11, if an Optionee's employment
with the Employer and all of its Subsidiaries is terminated
(hereinafter "Termination") other than by death or Disability (as
hereinafter defined), the Optionee may exercise any Option granted
under the Plan, to the extent the Optionee was entitled to exercise
the Option at the date of Termination, for a period of 3 months
after the date of Termination or until the term of the Option has
expired, whichever date is earlier.
11.2. Death or Disability of Optionee. In the event of the death or
Disability of an Optionee prior to expiration of an Option held by
him or her, the following provisions shall apply:
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(a) If the Optionee is at the time of his or her Disability employed
by the Employer or a Subsidiary of the Employer and has been in
continuous employment (as determined by (x) the Committee if the
Employer is the Company or a Subsidiary of the Company or (y)
the Vital Images Committee if the Employer is Vital Images or a
Subsidiary of Vital Images) since the date of grant of the
Option, then the Option may be exercised by the Optionee until
the earlier of one year following the date of such Disability or
the expiration date of the Option, but only to the extent the
Optionee was entitled to exercise such Option at the time of his
or her Disability. For the purpose of this Section, the term
"Disability" shall have the meaning given to it in Section 22(e)
(3) of the Code. The determination of whether an Optionee has a
Disability within the meaning of Section 22(e) (3) shall be made
by (x) the Board, in its sole discretion, if the Employer is the
Company or a Subsidiary of the Company or (y) the Vital Images
Committee, in its sole discretion, if the Employer is Vital
Images or a Subsidiary of Vital Images.
(b) If the Optionee is at the time of his or her death employed by
the Employer or a Subsidiary of the Employer and has been in
continuous employment (as determined by (x) the Committee if the
Employer is the Company or a Subsidiary of the Company or (y)
the Vital Images Committee if the Employer is Vital Images or a
Subsidiary of Vital Images) since the date of grant of the
Option, then the Option may be exercised by the Optionee's
estate or by a person who acquired the right to exercise the
Option by will or the laws of descent and distribution, until
the earlier of one year from the date of the Optionee's death or
the expiration date of the Option, but only to the extent the
Optionee was entitled to exercise the Option at the time of
death.
(c) If the Optionee dies within three months after Termination, the
Option may be exercised until the earlier of nine months
following the date of death or the expiration date of the
Option, by the Optionee's estate or by a person who acquires the
right to exercise the Option by will or the laws of descent or
distribution, but only to the extent the Optionee was entitled
to exercise the Option at the time of Termination.
11.3. Termination for Cause. If the employment of an is terminated by the
Employer or a Subsidiary of the Employer for cause (as determined by
(x) the Committee if the Employer is the Company or a Subsidiary of
the Company or (y) the Vital Images Committee if the Employer is
Vital Images or a Subsidiary of Vital Images), then the Board shall
have the right to cancel any Options granted to the Optionee under
the Plan.
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12. AMENDMENT AND TERMINATION OF PLAN
12.1. The Board, without approval by the shareholders of the Company, may
at any time and from time to time suspend or terminate the Plan in
whole or in part or amend it from time to time in such respects as
may be in the best interests of the Company; provided, however, that
no such amendment shall be made without approval of the shareholders
if it would: (a) materially modify the eligibility requirements for
Participants; (b) increase the total number of shares of Stock which
may be issued pursuant to Options, except in accordance with Section
4.2 of the Plan; (c) reduce the minimum Option price per share as
set forth in Section 7 of the Plan, except in accordance with
Section 4.2 of the Plan; (d) extend the period of granting Options;
or (e) materially increase in any other way the benefits accruing to
Optionees.
12.2. No amendment, suspension or termination of this Plan shall, without
the Optionee's consent, alter or impair any of the rights or
obligations under any Option theretofore granted to the Optionee
under the Plan.
12.3. The Board may amend the Plan, subject to the limitations cited
above, in such manner as it deems necessary to permit the granting
of Incentive Stock Options meeting the requirements of future
amendments to the Code or regulations promulgated thereunder.
13. MISCELLANEOUS PROVISIONS
13.1. Right to Continued Employment. No person shall have any claim or
right to be granted an Option under the Plan, and the grant of an
Option under the Plan shall not be construed as giving an Optionee
the right to continued employment with the Employer or any
Subsidiary of the Employer. The Employer further expressly reserves
the right at any time to dismiss an Optionee or reduce an Optionee's
compensation with or without cause, free from any liability, or any
claim under the Plan, except as provided herein or in a stock option
agreement.
13.2. Withholding Taxes. The Employer shall have the right to require that
payment or provision for payment of any and all withholding taxes due
upon the grant or exercise of an Option hereunder or the disposition
of any Stock or other property acquired upon exercise of an Option be
made by an Optionee. In connection therewith, the Employer shall have
the right to establish such rules and regulations or impose such
terms and conditions in any agreement relating to an Option granted
hereunder with respect to such withholding as the Employer may deem
necessary and appropriate.
13.3. Governing Law. The Plan shall be administered in the State of
Minnesota, and the validity, construction, interpretation, and
administration of the Plan and all rights relating to the Plan shall
be determined solely in accordance with the laws of such state,
unless controlled by applicable federal law, if any.
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14. EFFECTIVE DATE
The effective date of the Plan is November 13, 1987. No Option may be
granted after November 13, 1997, provided, however, that the Plan and all
outstanding Options shall remain in effect until such outstanding Options
have expired or been canceled.
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Exhibit 10.2
BIO-VASCULAR, INC.
1995 STOCK INCENTIVE PLAN
(As Amended Effective March 19, 1997)
Section 1. Purpose of Plan. The purpose of the Bio-Vascular, Inc. 1995
Stock Incentive Plan (the "Plan") is to advance the interests of Bio-Vascular,
Inc. (the "Company") and its shareholders by enabling the Company and its
Subsidiaries to attract and retain persons of ability to perform services for
the Company and its Subsidiaries by providing an incentive to such individuals
through equity participation in the Company and by rewarding such individuals
who contribute to the achievement by the Company of its economic objectives. In
connection with the Company's distribution of all of the outstanding shares of
the common stock of Vital Images, Inc. ("Vital Images") (the "Spin-Off"),
certain amendments to the Plan have been effected in order to allow awards under
the Plan made to Vital Images employees to continue following the effective date
of the Spin-Off.
Section 2. Definitions. The following terms will have the meanings set
forth below, unless the context clearly otherwise requires:
(a) "Board" means the Board of Directors of the Company.
(b) "Broker Exercise Notice" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
(c) "Change in Control" means an event described in Section 12(a) of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
(f) "Common Stock" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities into
which such Common Stock may be changed in accordance with Section 4(c) of the
Plan.
(g) "Disability" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Employer or Subsidiary of the Employer then
covering the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within the
meaning of Section 22(e)(3) of the Code.
(h) "Eligible Recipients" means all employees, non-employee directors,
consultants and independent contractors of the Company or any Subsidiary of the
Company.
(i) "Employer" means the Company if the Participant renders employment or
other services to the Company or any Subsidiary of the Company and means Vital
Images if the Participant renders employment or other services to Vital Images
or any Subsidiary of Vital Images.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>
(k) "Fair Market Value" means, with respect to the Common Stock, the
following:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the Nasdaq
National Market, the closing price of the Common Stock on such exchange or
reported by the Nasdaq National Market as of such date (or, if no shares
were traded on such day, as of the next preceding day on which there was
such a trade).
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market, and prices
therefor in the over-the-counter market are reported by the Nasdaq SmallCap
Market or the National Quotation Bureau, Inc. (or any comparable reporting
service), the closing price as of such date, as so reported by the Nasdaq
SmallCap Market, or, if not so reported thereon, as reported by the
National Quotation Bureau, Inc. (or such comparable reporting service).
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market, and such bid
and asked prices are not so reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion. The
Committee shall not be required to obtain an appraisal within six months of
the adoption of the Plan. The Committee's determination as to the current
value of the Common Stock shall be final, conclusive and binding for all
purposes and on all persons, including, without limitation, the Company,
the shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Board of the Committee shall be
liable for any determination regarding current value of the Common Stock
that is made in good faith.
(l) "Incentive Award" means an Option, Restricted Stock Award, Performance
Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan.
(m) "Incentive Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
(n) "Non-Statutory Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not
qualify as an Incentive Stock Option.
(o) "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
(p) "Participant" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
(q) "Performance Unit" means a right granted to an Eligible Recipient
pursuant to Section 8 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established performance or other goals.
(r) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive Award, that
are to be issued upon the grant, exercise or vesting of such Incentive Award.
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(s) "Restricted Stock Award" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 7 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 7.
(t) "Retirement" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board of Directors of
the Employer for purposes of the Plan, early) retirement/pension plan or
practice of the Employer or Subsidiary of the Employer then covering the
Participant, provided that if the Participant is not covered by any such plan or
practice, the Participant will be deemed to be covered by the Employer's plan or
practice, for purposes of this determination.
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Stock Bonus" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 9 of the Plan.
(w) "Subsidiary" means (i) when used in reference to the Company, any
entity that is directly or indirectly controlled by the Company or any entity in
which the Company has a significant equity interest, as determined by the
Committee or (ii) when used in reference to Vital Images, any entity that is
directly or indirectly controlled by Vital Images or any entity in which Vital
Images has a significant equity interest, as determined by the Vital Images
Committee.
(x) "Tax Date" means the date any withholding tax obligation arises under
the Code for a Participant with respect to an Incentive Award.
(y) "Vital Images Committee" means the group of individuals administering
the Vital Images, Inc. 1995 Stock Incentive Adjustment Plan.
Section 3. Plan Administration.
(a) The Committee. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will be
administered by a committee (the "Committee") consisting solely of not less than
two members of the Board who are "disinterested persons" within the meaning of
Rule 16b-3 under the Exchange Act. To the extent consistent with corporate law,
the Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of the Plan will be conclusive and binding for all
purposes and on all persons, and no member of the Committee will be liable for
any action or determination made in good faith with respect to the Plan or any
Incentive Award granted under the Plan.
(b) Authority of the Committee.
(i) In accordance with and subject to the provisions of the Plan, the
Committee will have the authority to determine all provisions of Incentive
Awards as the Committee may deem necessary or desirable and as consistent
with the terms of the Plan, including, without limitation, the following:
(A) the Eligible Recipients to be selected as Participants; (B) the nature
and extent of the Incentive Awards to be made to each Participant
(including the number of shares of Common Stock to be subject to each
Incentive Award, any exercise price, the manner in which
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Incentive Awards will vest or become exercisable and whether Incentive
Awards will be granted in tandem with other Incentive Awards) and the form
of written agreement, if any, evidencing such Incentive Award; (C) the time
or times when Incentive Awards will be granted; (D) the duration of each
Incentive Award; and (E) the restrictions and other conditions to which the
payment or vesting of Incentive Awards may be subject. In addition, the
Committee will have the authority under the Plan in its sole discretion to
pay the economic value of any Incentive Award in the form of cash, Common
Stock or any combination of both.
(ii) The Committee will have the authority under the Plan to amend
or modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of shares
or other terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting or otherwise
terminate any restrictions relating to an Incentive Award, accept the
surrender of any outstanding Incentive Award or, to the extent not
previously exercised or vested, authorize the grant of new Incentive Awards
in substitution for surrendered Incentive Awards; provided, however that
the amended or modified terms are permitted by the Plan as then in effect
and that any Participant adversely affected by such amended or modified
terms has consented to such amendment or modification. No amendment or
modification to an Incentive Award, however, whether pursuant to this
Section 3(b) or any other provisions of the Plan, will be deemed to be a
regrant of such Incentive Award for purposes of this Plan.
(iii) In the event of (A) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in corporate
structure or shares, (B) any purchase, acquisition, sale or disposition of
a significant amount of assets or a significant business, (C) any change in
accounting principles or practices, or (D) any other similar change, in
each case with respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, the Committee
(or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) may,
without the consent of any affected Participant, amend or modify the
vesting criteria of any outstanding Incentive Award that is based in whole
or in part on the financial performance of the Company (or any Subsidiary
or division thereof) or such other entity so as equitably to reflect such
event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be
substantially the same (in the sole discretion of the Committee or the
board of directors of the surviving corporation) following such event as
prior to such event; provided, however, that the amended or modified terms
are permitted by the Plan as then in effect.
(c) Cooperation Between Committees. The Committee and the Vital Images
Committee will reasonably cooperate with each other to promote the purposes of
the Plan.
Section 4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as provided
in Section 4(c) of the Plan, the maximum number of shares of Common Stock that
will be available for issuance under the Plan will be 410,000 shares of Common
Stock, plus any shares of Common Stock which, as of the date the Plan is
approved by the shareholders of the Company, are reserved for issuance under the
Company's 1988 Stock Option Plan, the 1990 Management Incentive Stock Option
Plan and the 1992 Stock Option Plan and which are not thereafter issued or which
have been issued but are subsequently
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forfeited and which would otherwise have been available for further issuance
under such plans. Notwithstanding any other provisions of the Plan to the
contrary, no Participant in the Plan may be granted any Options, or any other
Incentive Awards with a value based solely on an increase in the value of the
Common Stock after the date of grant, relating to more than 50,000 shares of
Common Stock in the aggregate in any fiscal year of the Company (subject to
adjustment as provided in Section 4(c) of the Plan); provided, however, that a
Participant who is first appointed or elected as an officer, hired as an
employee or retained as a consultant by the Company or who receives a promotion
that results in an increase in responsibilities or duties may be granted, during
the fiscal year of such appointment, election, hiring, retention or promotion,
Options or such other Incentive Awards relating to up to 200,000 shares of
Common Stock (subject to adjustment as provided in Section 4(c) of the Plan).
(b) Accounting for Incentive Awards. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards will
be applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
(c) Adjustments to Shares and Incentive Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities available for issuance under the Plan and, in order to prevent
dilution or enlargement of the rights of Participants, the number, kind and,
where applicable, exercise price of securities subject to outstanding Incentive
Awards.
Section 5. Participation. Participants in the Plan will be those Eligible
Recipients who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of economic
objectives of the Employer or its Subsidiaries; provided, however, that
Participants will also include those individuals employed by Vital Images as of
the effective date of the Spin-Off who held Awards as of such date, whose Awards
will continue thereafter according to the terms and conditions of the Plan.
Eligible Recipients may be granted from time to time one or more Incentive
Awards, singly or in combination or in tandem with other Incentive Awards, as
may be determined by the Committee in its sole discretion. Incentive Awards will
be deemed to be granted as of the date specified in the grant resolution of the
Committee, which date will be the date of any related agreement with the
Participant.
Section 6. Options.
(a) Grant. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the Plan ceases for
any reason to qualify as an "incentive
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stock option" for purposes of Section 422 of the Code, such Incentive Stock
Option will continue to be outstanding for purposes of the Plan but will
thereafter be deemed to be a Non-Statutory Stock Option.
(b) Exercise Price. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion at
the time of the Option grant, provided that (i) such price will not be less than
100% of the Fair Market Value of one share of Common Stock on the date of grant
with respect to an Incentive Stock Option (110% of the Fair Market Value if, at
the time the Incentive Stock Option is granted, the Participant owns, directly
or indirectly, more than 10% of the total combined voting power of all classes
of stock of the Company or any parent or subsidiary corporation of the Company),
and (ii) such price will not be less than 85% of the Fair Market Value of one
share of Common Stock on the date of grant with respect to a Non-Statutory Stock
Option.
(c) Exercisability and Duration. An Option will become exercisable at such
times and in such installments as may be determined by the Committee in its sole
discretion at the time of grant; provided, however, that no Option may be
exercisable after 10 years from its date of grant.
(d) Payment of Exercise Price. The total purchase price of the shares to
be purchased upon exercise of an Option will be paid entirely in cash (including
check, bank draft or money order); provided, however, that the Committee, in its
sole discretion and upon terms and conditions established by the Committee, may
allow such payments to be made, in whole or in part, by tender of a Broker
Exercise Notice, Previously Acquired Shares, a promissory note (on terms
acceptable to the Committee in its sole discretion) or by a combination of such
methods.
(e) Manner of Exercise. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Secretary) at its principal executive office
in St. Paul, Minnesota and by paying in full the total exercise price for the
shares of Common Stock to be purchased in accordance with Section 6(d) of the
Plan.
Section 7. Restricted Stock Awards.
(a) Grant. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Employer or a Subsidiary of the Employer for
a certain period or that the Participant or the Employer (or any Subsidiary or
division thereof) satisfy certain performance goals or criteria.
(b) Rights as a Shareholder; Transferability. Except as provided in
Sections 7(a), 7(c) and 13(c) of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 7 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
(c) Dividends and Distributions. Unless the Committee determines otherwise
in its sole discretion (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any
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time after the grant of the Restricted Stock Award), any dividends or
distributions (including regular quarterly cash dividends) paid with respect to
shares of Common Stock subject to the unvested portion of a Restricted Stock
Award will be subject to the same restrictions as the shares to which such
dividends or distributions relate. In the event the Committee determines not to
pay such dividends or distributions currently, the Committee will determine in
its sole discretion whether any interest will be paid on such dividends or
distributions. In addition, the Committee in its sole discretion may require
such dividends and distributions to be reinvested (and in such case the
Participants consent to such reinvestment) in shares of Common Stock that will
be subject to the same restrictions as the shares to which such dividends or
distributions relate.
(d) Enforcement of Restrictions. To enforce the restrictions referred to
in this Section 7, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
Section 8. Performance Units. An Eligible Recipient may be granted one or
more Performance Units under the Plan, and such Performance Units will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Committee may impose such restrictions or conditions, not inconsistent with the
provisions of the Plan, to the vesting of such Performance Units as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Employer or any Subsidiary of the Employer
for a certain period or that the Participant or the Employer (or any Subsidiary
or division thereof) satisfy certain performance goals or criteria. The
Committee will have the sole discretion either to determine the form in which
payment of the economic value of vested Performance Units will be made to the
Participant (i.e., cash, Common Stock or any combination thereof) or to consent
to or disapprove the election by the Participant of the form of such payment.
Section 9. Stock Bonuses. An Eligible Recipient may be granted one or more
Stock Bonuses under the Plan, and such Stock Bonuses will be subject to such
terms and conditions, consistent with the other provisions of the Plan, as may
be determined by the Committee. The Participant will have all voting, dividend,
liquidation and other rights with respect to the shares of Common Stock issued
to a Participant as a Stock Bonus under this Section 9 upon the Participant
becoming the holder of record of such shares; provided, however, that the
Committee may impose such restrictions on the assignment or transfer of a Stock
Bonus as it deems appropriate.
Section 10. Effect of Termination of Employment or Other Service. The
transfer by a Participant of employment or other service from one Employer or
its Subsidiaries to the other Employer or its Subsidiaries will not be deemed to
constitute a termination of employment or other service for purposes of this
Plan.
(a) Termination Due to Death, Disability or Retirement. In the event a
Participant's employment or other service with the Employer and all of its
Subsidiaries is terminated by reason of death, Disability or Retirement:
(i) All outstanding Options then held by the Participant will become
immediately exercisable in full and will remain exercisable for a period of
one year (three months in the case
7
<PAGE>
of Retirement) after such termination (but in no event after the expiration
date of any such Option);
(ii) All Restricted Stock Awards then held by the Participant will
become fully vested; and
(iii) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined by
the Committee and set forth in the agreement evidencing such Performance
Units or Stock Bonuses.
(b) Termination for Reasons Other than Death, Disability or Retirement.
(i) In the event a Participant's employment or other service is
terminated with the Employer and all of its Subsidiaries for any reason
other than death, Disability or Retirement, or a Participant is in the
employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Employer (unless the Participant continues in the employ
or service of an Employer or another Subsidiary thereof), all rights of the
Participant under the Plan and any agreements evidencing an Incentive Award
will immediately terminate without notice of any kind, and no Options then
held by the Participant will thereafter be exercisable, all Restricted
Stock Awards then held by the Participant that have not vested will be
terminated and forfeited, and all Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses; provided, however, that if such
termination is due to any reason other than termination by the Employer or
any Subsidiary of the Employer for "cause," all outstanding Options then
held by such Participant will remain exercisable to the extent exercisable
as of such termination for a period of three months after such termination
(but in no event after the expiration date of any such Option).
(ii) For purposes of this Section 10(b), "cause" (as determined by
(x) the Committee if the Employer is the Company or a Subsidiary of the
Company or (y) the Vital Images Committee if the Employer is Vital Images
or a Subsidiary of Vital Images) will be as defined in any employment or
other agreement or policy applicable to the Participant or, if no such
agreement or policy exists, will mean (A) dishonesty, fraud,
misrepresentation, embezzlement or deliberate injury or attempted injury,
in each case related to the Employer or any Subsidiary, (B) any unlawful or
criminal activity of a serious nature, (C) any intentional and deliberate
breach of a duty or duties that, individually or in the aggregate, are
material in relation to the Participant's overall duties, or (D) any
material breach of any employment, service, confidentiality or noncompete
agreement entered into with either Employer or any Subsidiary thereof.
(c) Modification of Rights Upon Termination. Notwithstanding the other
provisions of this Section 10, upon a Participant's termination of employment or
other service with the Employer and all Subsidiaries of the Employer, the
Committee may, in its sole discretion (which may be exercised at any time on or
after the date of grant, including following such termination), cause Options
(or any part thereof) then held by such Participant to become or continue to
become exercisable and/or remain exercisable following such termination of
employment or service and Restricted Stock Awards, Performance Units and Stock
Bonuses then held by such Participant to vest and/or continue to vest or become
free of transfer restrictions, as the case may be, following such termination of
employment or service, in each case in the manner determined by the Committee;
provided, however, that no Option may remain exercisable beyond its expiration
date.
8
<PAGE>
(d) Breach of Confidentiality or Noncompete Agreements. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant materially
breaches the terms of any confidentiality or noncompete agreement entered into
with either Employer or any Subsidiary thereof, whether such breach occurs
before or after termination of such Participant's employment or other service
with the Employer or any Subsidiary of the Employer, the Committee in its sole
discretion may immediately terminate all rights of the Participant under the
Plan and any agreements evidencing an Incentive Award then held by the
Participant without notice of any kind.
(e) Date of Termination of Employment or Other Service. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the
Employer or any Subsidiary of the Employer for which the Participant provides
employment or other service, as determined by the Committee or the Vital Images
Committee, as the case may be, in its sole discretion based upon such records.
Section 11. Payment of Withholding Taxes.
(a) General Rules. The Employer is entitled to (i) withhold and deduct
from future wages of the Participant (or from other amounts that may be due and
owing to the Participant from the Employer or any Subsidiary of the Employer),
or make other arrangements for the collection of, all legally required amounts
necessary to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or payment of
dividends with respect to, an Incentive Award or a disqualifying disposition of
stock received upon exercise of an Incentive Stock Option, or (ii) require the
Participant promptly to remit the amount of such withholding to the Employer
before taking any action, including issuing any shares of Common Stock, with
respect to an Incentive Award.
(b) Special Rules. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 11(a) of the Plan by electing to
tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note
(on terms acceptable to the Committee in its sole discretion), or by a
combination of such methods.
Section 12. Change in Control.
(a) Change in Control. For purposes of this Section 12, a "Change in
Control" of the Company will mean the following, provided that it occurs after
the date on which the Company distributes (pursuant to that certain Distribution
Agreement, dated as of May 2, 1997, between Vital Images and the Company (the
"Distribution Agreement")) all of the outstanding shares of Vital Images' common
stock to the Company's shareholders of record on the Record Date (as defined in
the Distribution Agreement):
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or entity
that is not controlled by the Company;
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
9
<PAGE>
(iii) a merger or consolidation to which the Company is a party if
the shareholders of the Company immediately prior to effective date of such
merger or consolidation have "beneficial ownership" (as defined in Rule
13d-3 under the Exchange Act), immediately following the effective date of
such merger or consolidation, of securities of the surviving corporation
representing (A) more than 50%, but not more than 80%, of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors, unless such
merger or consolidation has been approved in advance by the Incumbent
Directors (as defined in Section 12(b) below), or (B) 50% or less of the
combined voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of directors
(regardless of any approval by the Incumbent Directors);
(iv) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of the
combined voting power of the Company's outstanding securities ordinarily
having the right to vote at elections of directors, unless the transaction
resulting in such ownership has been approved in advance by the Incumbent
Directors, or (B) 50% or more of the combined voting power of the Company's
outstanding securities ordinarily having the right to vote at elections of
directors (regardless of any approval by the Incumbent Directors);
(v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(vi) any other change in control of the Company of a nature that
would be required to be reported pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the Company is then subject to such reporting
requirements.
(b) Incumbent Directors. For purposes of this Section 12, "Incumbent
Directors" of the Company will mean any individuals who are members of the Board
on the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Incumbent
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).
(c) Acceleration of Vesting. Without limiting the authority of the
Committee under Section 3(b) of the Plan, if a Change in Control of the Company
occurs, then, unless otherwise provided by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, (i) all Options will become
immediately exercisable in full and will remain exercisable for the remainder of
their terms, regardless of whether the Participants to whom such Options have
been granted remain in the employ or service of the Employer or any Subsidiary
of the Employer; (ii) all outstanding Restricted Stock Awards will become
immediately fully vested; and (iii) all Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Unit or Stock Bonuses.
(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding
10
<PAGE>
outstanding Options will receive, with respect to some or all of the shares of
Common Stock subject to such Options, as of the effective date of any such
Change in Control of the Company, cash in an amount equal to the excess of the
Fair Market Value of such shares immediately prior to the effective date of such
Change in Control of the Company over the exercise price per share of such
Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything in
Section 12(c) or 12(d) of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as provided
in Section 12(c) or the payment of cash in exchange for all or part of an
Incentive Award as provided in Section 12(d) (which acceleration or payment
could be deemed a "payment" within the meaning of Section 280G(b)(2) of the
Code), together with any other "payments" which such Participant has the right
to receive from the Company or any corporation that is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
"payments" to such Participant pursuant to Section 12(c) or 12(d) of the Plan
will be reduced to the largest amount as will result in no portion of such
"payments" being subject to the excise tax imposed by Section 4999 of the Code;
provided, however, that if a Participant is subject to a separate agreement with
the Company or a Subsidiary that expressly addresses the potential application
of Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will not be reduced or that the
Participant will have the discretion to determine which "payments" will be
reduced), then the limitations of this Section 12(e) will not apply, and any
"payments" to a Participant pursuant to Section 12(c) or 12(d) of the Plan will
be treated as "payments" arising under such separate agreement.
Section 13. Rights of Eligible Recipients and Participants;
Transferability.
(a) Employment or Service. Nothing in the Plan will interfere with or
limit in any way the right of the Employer or any Subsidiary of the Employer to
terminate the employment or service of any Eligible Recipient or Participant at
any time, nor confer upon any Eligible Recipient or Participant any right to
continue in the employ or service of the Employer or any Subsidiary of the
Employer.
(b) Rights as a Shareholder. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as
a shareholder unless and until such Incentive Awards are exercised for, or paid
in the form of, shares of Common Stock and the Participant becomes the holder of
record of such shares. Except as otherwise provided in the Plan, no adjustment
will be made for dividends or distributions with respect to such Incentive
Awards as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine in its discretion.
(c) Restrictions on Transfer. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, no right or interest of any Participant in an Incentive Award prior to the
exercise or vesting of such Incentive Award will be assignable or transferable,
or subjected to any lien, during the lifetime of the Participant, either
voluntarily or involuntarily, directly or indirectly, by operation of law or
otherwise. A Participant will, however, be entitled to designate a beneficiary
to receive an Incentive Award upon such Participant's death, and in the event of
a Participant's death, payment of any amounts due under the Plan will be made
to, and exercise of any Options (to the extent permitted pursuant to Section 10
of the Plan) may be made by, the Participant's legal representatives, heirs and
legatees.
11
<PAGE>
(d) Non-Exclusivity of the Plan. Nothing contained in the Plan is intended
to modify or rescind any previously approved compensation plans or programs of
either Employer or any Subsidiary thereof or create any limitations on the power
or authority of the Board to adopt such additional or other compensation
arrangements as the Board may deem necessary or desirable.
Section 14. Securities Law and Other Restrictions. Notwithstanding any
other provision of the Plan or any agreements entered into pursuant to the Plan,
the Company will not be required to issue any shares of Common Stock under this
Plan, and a Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to Incentive Awards granted under the
Plan, unless (i) there is in effect with respect to such shares a registration
statement under the Securities Act and any applicable state securities laws or
an exemption from such registration under the Securities Act and applicable
state securities laws, and (ii) there has been obtained any other consent,
approval or permit from any other regulatory body which the Committee, in its
sole discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or agreements
from the parties involved, and the placement of any legends on certificates
representing shares of Common Stock, as may be deemed necessary or advisable by
the Company in order to comply with such securities law or other restrictions.
Section 15. Plan Amendment, Modification and Termination. The Board may
suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such respects as the Board may deem advisable in
order that Incentive Awards under the Plan will conform to any change in
applicable laws or regulations or in any other respect the Board may deem to be
in the best interests of the Company; provided, however, that no amendments to
the Plan will be effective without approval of the stockholders of the Company
if stockholder approval of the amendment is then required pursuant to Rule 16b-3
under the Exchange Act, Section 422 of the Code or the rules of any stock
exchange or Nasdaq. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Incentive Award without the consent of the
affected Participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate under
Sections 4(c) and 12 of the Plan.
Section 16. Effective Date and Duration of the Plan. The Plan is effective
as of December 18, 1995, the date it was adopted by the Board. The Plan will
terminate at midnight on December 18, 2005, and may be terminated prior to such
time to by Board action, and no Incentive Award will be granted after such
termination. Incentive Awards outstanding upon termination of the Plan may
continue to be exercised, or become free of restrictions, in accordance with
their terms.
Section 17. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Participants.
12
<PAGE>
EXHIBIT 11.1
BIO-VASCULAR, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
(unaudited) (unaudited)
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) data:
Income from continuing operations........................................ $ 97 $ 263 $ 222 $ 787
Income from discontinued operations...................................... (920) (287) (920) (606)
--------- --------- --------- ---------
Net income............................................................... $ (823) $ (24) $ (698) $ 181
========= ========= ========= =========
Net income (loss) per common and common equivalent share, primary:
Continuing operations.................................................... $ .01 $ .03 $ .02 $ .08
Discontinued operations.................................................. (.10) (.03) (.10) (.06)
--------- --------- --------- ---------
Net income............................................................... $ (.09) $ .00 $ (.07) $ .02
========= ========= ========= =========
Net income (loss) per common and common equivalent share, fully diluted:
Continuing operations.................................................... $ .01 $ .03 $ .02 $ .08
Discontinued operations.................................................. (.10) (.03) (.10) (.06)
--------- --------- --------- ---------
Net income............................................................... $ (.09) $ .00 $ (.07) $ .02
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
Primary:
Weighted average number of common shares outstanding..................... 9,511,389 9,438,617 9,501,050 9,383,526
Common equivalent shares:
Dilutive stock options and warrants, using Treasury Stock Method....... -- -- -- 515,321
--------- --------- --------- ---------
9,511,389 9,438,617 9,501,050 9,898,847
========= ========= ========= =========
Fully diluted:
Weighted average number of common shares outstanding..................... 9,511,389 9,438,617 9,501,050 9,383,526
Common equivalent shares:
Dilutive stock options and warrants, using Treasury Stock Method....... -- -- -- 519,473
--------- --------- --------- ---------
9,511,389 9,438,617 9,501,050 9,902,999
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements and related notes for the period ended April 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 5,638,409
<SECURITIES> 12,913,887
<RECEIVABLES> 1,680,535
<ALLOWANCES> 24,500
<INVENTORY> 1,516,027
<CURRENT-ASSETS> 18,645,029
<PP&E> 2,652,159
<DEPRECIATION> 1,038,108
<TOTAL-ASSETS> 25,779,151
<CURRENT-LIABILITIES> 1,012,722
<BONDS> 0
0
0
<COMMON> 95,434
<OTHER-SE> 24,670,995
<TOTAL-LIABILITY-AND-EQUITY> 25,779,151
<SALES> 4,806,479
<TOTAL-REVENUES> 4,806,479
<CGS> 2,021,994
<TOTAL-COSTS> 2,975,683
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 384,872
<INCOME-TAX> 163,000
<INCOME-CONTINUING> 221,872
<DISCONTINUED> (920,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (698,128)
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements and related notes for the period ended April 30, 1996
and the financial statements and related notes for the period ended April 30,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<CASH> 7,181,068
<SECURITIES> 21,907,447
<RECEIVABLES> 2,164,985
<ALLOWANCES> 66,600
<INVENTORY> 2,360,181
<CURRENT-ASSETS> 23,110,359
<PP&E> 3,519,150
<DEPRECIATION> 1,609,090
<TOTAL-ASSETS> 36,992,027
<CURRENT-LIABILITIES> 1,256,270
<BONDS> 0
0
0
<COMMON> 94,386
<OTHER-SE> 35,641,371
<TOTAL-LIABILITY-AND-EQUITY> 36,992,027
<SALES> 5,330,421
<TOTAL-REVENUES> 5,330,421
<CGS> 1,518,076
<TOTAL-COSTS> 3,145,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,231,652
<INCOME-TAX> 445,000
<INCOME-CONTINUING> 786,652
<DISCONTINUED> (605,615)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,037
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
