<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 July 31, 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 August 22, 1997, there were 9,543,200 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
CONDENSED BALANCE SHEETS
AS OF JULY 31, 1997 AND OCTOBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
July 31, October 31,
1997 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,206,698 $ 5,736,650
Marketable securities, short-term........................ 7,728,521 13,761,050
Accounts receivable, net................................. 1,770,689 1,465,809
Other receivables........................................ 470,273 632,386
Inventories.............................................. 1,577,465 1,972,728
Prepaid expenses......................................... 347,067 284,811
Deferred income taxes.................................... 162,050 914,300
----------- -----------
Total current assets..................................... 16,262,763 24,767,734
----------- -----------
Equipment and leasehold improvements, net................... 1,635,937 1,370,256
Intangible assets, net...................................... 1,058,146 1,213,600
Marketable securities, long-term............................ 6,239,649 10,173,086
Deferred income taxes....................................... 191,843 182,200
Net assets of discontinued operations....................... -- 174,403
----------- -----------
TOTAL ASSETS............................................. $25,388,338 $37,881,279
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited financial
statements.)
2
<PAGE>
<TABLE>
<CAPTION>
BIO-VASCULAR, INC.
CONDENSED BALANCE SHEETS
AS OF JULY 31, 1997 AND OCTOBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, October 31,
1997 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................... $ 456,417 $ 306,376
Accrued expenses.......................................... 493,788 554,368
Accrued loss on disposal of discontinued operations....... 26,967 1,800,000
----------- -----------
Total current liabilities.................................
977,172 2,660,744
COMMITMENTS AND CONTINGENCY (NOTE 5) ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock: authorized 20,000,000 shares of $.01
par value issued and outstanding, 9,543,200 at
July 31, 1997 and 9,484,898 at October 31, 1996........... 95,432 94,849
Additional paid-in capital................................ 29,593,140 39,500,239
Accumulated deficit....................................... (5,028,063) (3,838,537)
Unrealized marketable securities holding loss............. (3,289) (51,107)
Unearned compensation..................................... (246,054) (484,909)
----------- -----------
Total shareholders' equity................................... 24,411,166 35,220,535
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY....................................................... $25,388,338 $37,881,279
=========== ===========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited
financial statements.)
3
<PAGE>
BIO-VASCULAR, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
(unaudited) (unaudited)
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net Revenue..................................... $2,408,686 $2,527,896 $ 7,215,165 $7,858,317
Cost of Revenue................................. 952,370 1,057,944 2,974,365 2,576,020
---------- ---------- ----------- ----------
Gross margin................................. 1,456,316 1,469,952 4,240,800 5,282,297
Operating Expenses:
Selling, general, and administrative......... 1,628,820 1,294,859 4,141,616 4,023,957
Research and development..................... 325,155 237,998 788,042 654,472
---------- ---------- ----------- ----------
Income (loss) from operations................... (497,659) (62,905) (688,858) 603,868
Other income, net............................... 305,961 255,663 882,032 820,541
---------- ---------- ----------- ----------
Income (loss) from continuing operations
before income taxes............................ (191,698) 192,758 193,174 1,424,409
Provision for income taxes...................... 299,700 81,500 462,700 526,500
---------- ---------- ----------- ----------
Income (loss) from continuing operations........ (491,398) 111,258 (269,526) 897,909
Loss from discontinued operations, net of
income taxes................................... -- 287,926 920,000 893,540
---------- ---------- ----------- ----------
Net income (loss)............................... $ (491,398) $ (176,668) $(1,189,526) $ 4,369
========== ========== =========== ==========
Per share amounts
Continuing operations........................ (.05) .01 (.03) .09
Discontinued operations...................... -- (.03) (.10) (.09)
---------- ---------- ----------- ----------
Net income (loss)............................ $ (.05) $ (.02) $ (.13) $ -
========== ========== =========== ==========
Weighted average shares outstanding............. 9,545,000 9,440,000 9,512,000 9,870,000
========== ========== =========== ==========
</TABLE>
(The accompanying notes are an integral part of the interim unaudited
financial statements.)
4
<PAGE>
BIO-VASCULAR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
NET CASH PROVIDED BY CONTINUING OPERATIONS.................... $ 51,615 $ 11,229
NET CASH USED IN DISCONTINUED OPERATIONS...................... - (694,237)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......... 51,615 (683,008)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............................... 10,030 -
Purchases of equipment and improvements....................... (544,492) (282,203)
Additions to intangibles...................................... (32,845) (553,742)
Investments in marketable securities.......................... (7,000,000) (21,000,000)
Maturities of marketable securities........................... 9,000,000 13,795,921
Cash investment in discontinued subsidiary.................... (3,733,489) -
Discontinued operations, net.................................. 449,033 (267,783)
----------- ------------
Net cash used in investing activities......................... (1,851,763) (8,307,807)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to sale of stock................................ - (87,326)
Proceeds related to the exercise of stock options, net of
restricted stock repurchased.................................. 270,196 653,712
----------- ------------
Net cash provided by financing activities..................... 270,196 566,386
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (1,529,952) (8,424,429)
----------- ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 5,736,650 15,424,969
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 4,206,698 $ 7,000,540
=========== ============
</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 nine months ended July 31, 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 May 12, 1997, the Company completed the spin-off distribution of all of the
shares of Vital Images, Inc. (Vital Images) to shareholders of Bio-Vascular,
with Vital Images thereafter operating as an independent public company. All
Bio-Vascular shareholders of record received one share of Vital Images common
stock for each two shares of Bio-Vascular stock held, with cash issued in lieu
of fractional shares. The Company attempted to structure the transaction as tax-
free, but since no revenue ruling was sought, no assurance can be made about the
final tax treatment of the transaction.
At the date of distribution, Bio-Vascular made a final contribution of cash to
Vital Images of $1,845,000 to bring Vital Images' cash and investment balances
to $10,000,000, as required by the terms of the Distribution Agreement between
the companies. Bio-Vascular's total contribution to Vital Images in conjunction
with the distribution was $11,845,000. 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 $10,000,000 cash and investment balance, plus the carrying value
of Vital Images' net assets. The accompanying unaudited financial statements of
the Company as of July 31, 1997 reflect all of these transactions. 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 discontinued operations for the three and nine months ended July
31, 1996 was $194,000 and $629,000, respectively. Because the completion of the
spin-off extended six weeks beyond the estimated date, the Company reported an
additional loss on discontinued operations of $920,000 in the second quarter.
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) INCOME TAXES:
When the Company finalized its accounting for the spin-off of Vital Images in
May 1997, the Company
6
<PAGE>
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
expected to utilize a significant portion of Vital Images' net operating loss
carry forwards against the Company's fiscal 1997 taxable income. As a result of
events occurring during the third quarter, the Company determined that the
expected tax benefit will not be realized. Thus, the Company wrote-off the
associated tax asset and recorded a net income tax expense of $299,700.
The deferred tax asset of $353,893 at July 31, 1997, is principally related to
research and experimental tax credits, which expire between 2009 and 2012.
(4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
---------- ------------
<S> <C> <C>
Accounts Receivable............................ $1,796,789 $1,487,209
Allowance for doubtful accounts................ (26,100) (21,400)
---------- ----------
$1,770,689 $1,465,809
========== ==========
Inventories:
Raw materials and supplies..................... $ 539,163 $ 511,683
Work-in-process................................ 466,968 544,278
Finished goods................................. 571,334 916,767
---------- ----------
$1,577,465 $1,972,728
========== ==========
</TABLE>
Condensed Statements of Cash Flows:
During the nine months ended July 31, 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.
(5) 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.
7
<PAGE>
BIO-VASCULAR, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
(6) MAJOR CUSTOMERS:
<TABLE>
<CAPTION>
Percentage of
Significant Gross Percentage of Accounts
Customer Sales Gross Sales Receivable
-------- ----- ----------- ----------
<S> <C> <C> <C> <C>
Nine months ended July 31, 1997....... Futuretech 1,476,722 20% 11%
Life Systems 1,032,235 14% 12%
CardioMedical 879,437 12% 15%
Pacific West 502,951 7% 12%
Nine months ended July 31, 1996....... Futuretech 1,471,780 18% 16%
Life Systems 1,225,894 15% 15%
CardioMedical 956,964 12% 15%
</TABLE>
Net export sales amounted to 23%, and 21% for the nine month period ended July
31, 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>
Nine Months Ended
July 31,
1997 1996
--------- ---------
<S> <C> <C>
Europe and Middle East.................................. 1,044,776 1,097,381
Asia and Pacific Region................................. 504,869 485,563
Canada.................................................. 165,186 147,823
Latin America and Others................................ 9,825 48,408
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Although net revenue for the quarter was down 5% over the same quarter in 1996
due largely to a decline in revenue from sales of Peri-Strips, the Company
continues to see impressive revenue growth from its core Tissue Guard product
line, excluding Peri-Strips. The Tissue Guard product line was up 46% over the
third quarter of 1996 and up 17% over the second quarter of 1997. All products
in the Tissue Guard product line, Dura-Guard, Vascu-Guard, Supple Peri-Guard
and Peri-Guard had significant sales increases in the quarter.
Domestic revenue from Peri-Strips continues to be significantly affected by
the Health Care Financing Administration's ("HCFA") non-coverage decision in
January 1996 for lung volume reduction ("LVR") surgery. Revenue from Peri-
Strips was down 42% from the third quarter of 1996 and down 24% from the
second quarter of 1997. The Company believes that some hospitals in the U.S.
are no longer promoting LVR cases. However, the Company is encouraged that
surgeons and other medical professionals continue to seek training on the LVR
surgical procedure. Peri-Strips revenue was also down in the quarter from the
Company's original expectations due to a delay in the start date for a study
of LVR surgery sponsored jointly by HCFA and the National Institute of Health.
The start date is subject to the completion of organizational and procedural
activities. The Company had originally received indications that the study
would commence in June 1997. The Company accordingly anticipated demand for
the Peri-Strip product associated with the HCFA study and corresponding Peri-
Strips revenue in the second half of fiscal 1997. The Company now believes
that the earliest surgeries under the study will begin is January 1998.
Peri-Strips Dry, an advanced version of Peri-Strips was launched in mid-July
1997. The Company believes the Peri-Strips Dry design provides significant
advantages for thorascopic surgical procedures over the original Peri-Strips
"sleeve" design. Peri-Strips Dry eliminates the need to extract the sutured
sleeve backing that was part of the original design. A specially formulated
PSD Gel enables the Peri-Strips Dry strip to adhere to the surgical stapler.
Thorascopic procedures are currently estimated to comprise 75% of the total
LVR surgeries performed in Europe. The majority of surgeons in Europe have
performed LVR surgery without the benefit of a staple-line buttress. The
Company was successful in convincing a leading European thoracic surgeon to
evaluate Peri-Strips Dry. This surgeon is now the lead investigator for the
Company's marketing clinical trials currently underway at three European
sites. The Company expects European revenue growth from Peri-Strips Dry and
Peri-Strips will be gradual as reimbursement is obtained on a country-by-
country basis. Currently, European patients pay directly for the product. In
the U.S., Peri-Strips Dry is expected to replace the original Peri-Strips
sleeve configuration for thorascopic procedures.
The Spin-off of Vital Images
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
received one share of Vital Images common stock for each two shares of Bio-
Vascular stock held.
Both organizations should benefit from a tighter focus on their respective
markets, be able to invest in
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
research and development at levels appropriate to their respective stages of
development and be able to evolve unique organizational and marketing
structures to better serve their substantially different markets. 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.
Medicare Non-Coverage Decision
Effective January 1, 1996, HCFA made a non-coverage decision with respect to LVR
surgery, a surgical treatment for late-stage emphysema. This decision
significantly impacted the Company's revenue from sales of Peri-Strips. At the
time that this non-coverage decision was put into effect, the Company estimates
that approximately 70% of the patients undergoing LVR surgery were Medicare
patients. While the Company understands that several private insurance companies
and managed care organizations continue to reimburse LVR surgery based 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 or if
more private payers will begin to cover the procedure.
The National Institute of Health (NIH), in collaboration with HCFA, has outlined
and is in the process of organizing a prospective, randomized study of LVR
surgery to determine whether it is safe and efficacious. The study, as it is
currently designed, is limited to a small number of patients relative to the
number of Medicare dependent patients who would be otherwise eligible for the
procedure. Congress, responding to the concerns of their constituents and in
light of a significant number of favorable peer-reviewed published medical
articles bearing out the safety and efficacy of LVR, requested HCFA to present
to Congress updated information on the LVR procedure by January 1997. HCFA
requested an extension until April 1997 and as of the date of this report had
not yet complied with Congress' request. Because HCFA and the 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, will
continue to work for restoration of coverage of LVR surgery for Medicare
dependent patients.
Results of Continuing Operations
Comparison of the Three Months Ended July 31, 1997 with
the Three Months Ended July 31, 1996
Net revenue was $2,409,000 for the 1997 quarter compared to $2,528,000 for the
1996 quarter, primarily as a result of the decrease in revenue from sales of
Peri-Strips. Peri-Strips revenue decreased $423,000, or 42% to $594,000 in the
1997 quarter from $1,017,000 in the 1996 quarter. Revenue from sales of other
Tissue-Guard products, Dura-Guard, Vascu-Guard, Supple Peri-Guard and Peri-
Guard, increased $348,000, or 46% to $1,105,000 from $757,000. All Tissue Guard
products showed significant increases. Biograft revenue decreased by $56,000, or
23%, 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 3% to
$518,000 from $505,000.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
The gross margin percentage was 60% in the 1997 quarter and 58% 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 fourth quarter of 1997 from its third quarter level
due to increasing production volume. This forward-looking statement will be
influenced primarily by the accuracy of the Company's current estimates of
production volume for the fourth quarter of 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 product costs.
Selling, general and administrative expense increased $334,000, or 26% to
$1,629,000 from $1,295,000. General and administrative expense increased
$243,000, or 36%, The increase is primarily due to one time costs related to the
resignation in the period of the Company's former president and CEO and
increases in regulatory and other costs. Selling expense increased $91,000, or
15% primarily due to the Peri-Strips Dry market launch.
Research and development ("R&D") expense increased $87,000, or 37% to $325,000
from $238,000 in the 1996 quarter. The Company has several projects under
development including the Company's small diameter graft. R&D expense is
expected to increase as these and other projects continue to progress. This
forward-looking statement will be influenced primarily by the number of
projects, the related R&D personnel requirements, the development path and
success of each project, the expected costs, and the timing of these costs.
R&D efforts have recently resulted in two new product opportunities. The Company
filed a 510(k) application in May with the U.S. Food and Drug Administration
(the "FDA") for CV Peri-Guard. The intended uses for CV Peri-Guard include
intra-cardiac patching and vessel repair. The Company currently expects FDA
clearance for CV Peri-Guard during the first quarter of 1998. This forward-
looking statement is subject to the length of time required for FDA review of
the Company's application, any FDA requests for further data regarding CV Peri-
Guard, and the FDA's determination that CV Peri-Guard meets the criteria for
510(k) marketing clearance. CV Peri-Guard will be the newest addition to the
Tissue Guard product line.
The Company also intends to file a 510(k) application to obtain FDA clearance
for a new ophthalmic indication of its Supple tissue before the end of calendar
1997. This product will be another extension of the Tissue Guard product line
and will have indications for use in enucleation surgery. Enucleation removes a
patient's damaged eye and supporting tissue and replaces it with an implant. The
Company's tissue would be used in the procedure as an orbital implant wrap
instead of using cadaver sclera to encase the orbital prosthesis. The Company
estimates that 25,000 to 30,000 enucleation procedures are performed worldwide
each year. The foregoing forward-looking information regarding the Company's
intent to file for 510(k) marketing clearance for these applications will depend
upon the Company's assessment of the development
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
and potential market opportunities for these products compared to the expected
costs of applying for, and the likelihood of receiving, such clearance.
Continuing operations had an operating loss in the 1997 quarter of $498,000
compared to an operating loss of $63,000 in the 1996 quarter. Other income,
primarily interest income, was $306,000 and $256,000 in the 1997 and 1996
quarters, respectively. As a result, continuing operations had loss before
income taxes in the 1997 quarter of $192,000 as compared to income before
income taxes in the 1996 quarter of $193,000.
The Company recorded a provision for income taxes of $300,000 for the 1997
quarter. The provision includes a write-off of an income tax asset. When the
Company finalized its accounting for the spin-off of Vital Images in May 1997,
the Company expected to utilize a significant portion of Vital Images' net
operating loss carry forwards against the Company's anticipated fiscal 1997
taxable income. These net operating losses were generated by Vital Images
prior to its spin-off and are only available to the Company in the 1997 fiscal
year, reverting solely to Vital Images thereafter. Because the Company now
expects fiscal 1997 taxable income to fall short of the Company's original
expectations the tax asset had no further value to Bio-Vascular, and
accordingly, was written-off in the quarter ended July 31, 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 $81,500.
The net loss was $491,000, or $.05 per share for the 1997 quarter. The 1996
quarter had income from continuing operations of $111,000, or $.01 per share
and a loss from discontinued operations of $288,000, or $.03 per share,
resulting in a net loss for the 1996 quarter of $177,000, or $.02 per share.
The 1997 quarter had no discontinued operations activity.
Comparison of the Nine Months Ended July 31, 1997 with
the Nine Months Ended July 31, 1996
Net revenue decreased $643,000, or 8% to $7,215,000 from $7,858,000, primarily
as a result of the decrease in revenue from Peri-Strips. Peri-Strips revenue
decreased $1,320,000, or 38% to $2,136,000 from $3,456,000. The decrease in
revenue from Peri-Strips is primarily due to the Medicare LVR non-coverage
decision which affects all of the 1997 period as compared to three quarters of
the 1996 period. Revenue from sales of other Tissue-Guard products, Dura-
Guard, Vascu-Guard, Supple Peri-Guard and Peri-Guard, increased $692,000, or
32% to $2,852,000 from $2,160,000, primarily due to increases in revenue from
the sales of Dura-Guard and Vascu-Guard, arising from market share gains.
Biograft revenue decreased by $148,000, or 20%, comparing the first three
fiscal quarters 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 $133,000, or 9% to $1,622,000 from $1,489,000, with
the majority of the increase in revenue from sales of
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
Flo-Rester. The Company believes that the growth in revenue from Flo-Rester is
due primarily to its use in minimally invasive coronary bypass surgery, a
procedure which is increasing.
The gross margin percentage was 59% in 1997 and 67% 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
60% in the third quarter of 1997. It is expected that the gross margin
percentage will continue to increase slightly during the last fiscal quarter
of 1997 as production volume continues to increase. This forward-looking
statement will be influenced primarily by the accuracy of the Company's
current estimates of production volume for the fourth quarter of 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 increased $118,000, or 29% to
$4,142,000 from $4,024,000. General and administrative expense increased
$135,000, or 6%, while selling expense decreased $18,000, or 1%. The relative
low increase in expenses is due to the Company overall management of
discretionary expenditures.
Research and development ("R&D") expense increased $134,000, or 20% to
$788,000 from $654,000 in 1996. 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 earlier in the year, continuing operations had an operating loss
in the first nine months of fiscal 1997 of $689,000 compared to operating
income from continuing operations of $604,000 in the first nine months of
fiscal 1996. Other income, primarily interest income, was $882,000 and
$821,000 in 1997 and 1996, respectively. As a result, continuing operations
had income before income taxes in 1997 and 1996 of $193,000 and $1,424,000,
respectively.
The Company's recorded provision for income taxes for the first nine months of
1997 is $463,000 and is based on the Company's estimate of its annual
effective rate for fiscal 1997 and a write-off of an income tax asset in the
third quarter as described above. In the first nine months 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
continuing operations in the first nine months of 1996 was $526,500.
Net loss from continuing operations was $270,000, or $.03 per share for 1997
as compared to net income of $898,000, or $.09 per share for 1996. The loss
from discontinued operations for 1997 was $920,000, or $.10 per share,
resulting in a net loss for 1997 of $1,190,000, or $.13 per share. The loss
from discontinued
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
operations in 1996 was $894,000, or $.09 per share, resulting in net income
for 1996 of $4,000, or $.00 per share.
Liquidity and Capital Resources
For the nine months ended July 31, 1997, operating activities provided $51,600
as compared to $149,000 (excluding $694,000 used by discontinued operations)
of net cash provided by operating activities in the same period in 1996. Cash
was provided by continuing operations, in the current nine month period, by
non-cash expenses and decreases in inventories. These cash increases were
partially offset by increases in accounts receivable and slight decreases in
accrued expenses.
The Company invested $544,000 in equipment and leasehold improvements
primarily related to new manufacturing processes related to Peri-Strips Dry
and the Bio-Vascular Probe. Financing activities provided $270,000 and
represents stock option exercises, net of restricted stock repurchased and a
tax benefit associated with the option exercises. Finally, the Company made a
final investment in Vital Images, using $1,845,000 to bring Vital Images' cash
and investment balances to $10,000,000 as required by the terms of the
Distribution Agreement between the companies. At July 31, 1997, the Company
has cash and investments totaling $18,200,000.
The Company announced in August 1997 its intention to repurchase up to 500,000
shares of its common stock. Such purchases will be made in the open market
from time-to-time as price opportunities arise.
The Company believes its existing cash and investments 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 based
on both common shares outstanding and consideration of the dilutive effects of
common stock equivalents. The Company expects that earnings per share computed
under the new standard will approximate earnings per share currently reported.
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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
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.
15
<PAGE>
------------------------------------------------------------------------------
PART II. OTHER INFORMATION
------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed
in the exhibit index beginning on page 18.
(b) Form 8-K. No reports on Form 8-K were filed by the Company during the
quarter ended July 31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIO-VASCULAR, INC.
September 2, 1997 /s/ M. Karen Gilles
------------------------------------
M. Karen Gilles
President and Chief Executive Officer
(Principal Financial Officer)
17
<PAGE>
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
10.1 1990 Management Incentive Stock Option Adjustment Plan (filed herewith
electronically).
10.2 1992 Stock Option Adjustment Plan (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 July 31, 1997
(filed herewith electronically).
27.2 Restated Financial Data Schedule for the three month period ended July
31, 1996 (filed herewith electronically).
18
<PAGE>
Exhibit 10.1
BIO-VASCULAR, INC.
1990 MANAGEMENT INCENTIVE STOCK OPTION ADJUSTMENT PLAN
1. Background; Purpose of Plan.
-----------------------------
a. In or about 1990, Vital Images, Incorporated, an Iowa corporation
("VII"), adopted the Vital Images, Incorporated 1990 Management
Incentive Stock Option Plan (the "1990 Plan") for the purposes of
(i) attracting and retaining the best available officers,
directors and key employees for VII and (ii) providing additional
incentive to the officers, directors and key employees of VII.
b. In Section 1(k) of that certain Agreement and Plan of Merger by
and between VII and Bio-Vascular, Inc., a Minnesota corporation
("the Company") dated December 31, 1993 (the "Merger Agreement"),
the Company agreed to assume the rights and obligations of VII
with respect to options issued under the 1990 Plan which were
outstanding at the Effective Time, as defined in the Merger
Agreement. Pursuant to the Company's assumption of VII's
obligations under the 1990 Plan, each optionee under the 1990
Plan became entitled to purchase from the Company shares of the
Company's Common Stock (a "Company Option"), in an amount
determined under the provisions of the Merger Agreement, on the
same terms and conditions as set forth in the 1990 Plan, except
that shares of Company Common Stock were substituted for VII
Common Stock.
c. VII, the corporate name of which has been changed to Vital
Images, Inc. ("Vital Images") has entered into that certain
Distribution Agreement, dated as of May 2, 1997 (the
"Distribution Agreement"), between Vital Images and the Company,
pursuant to which the Company will distribute (the
"Distribution") all of the outstanding shares of Vital Images's
Common Stock to the Company's shareholders of record on the
Record Date (as defined in the Distribution Agreement). In
connection with the Distribution, each holder of a Company Option
as of the Record Date will be entitled to retain such Company
Option, provided that such Company Option will be adjusted to
reflect the Distribution (an "Adjusted Company Option"). In
addition, as of the Record Date, each holder of a Company Option
will also be entitled to receive an option to purchase Vital
Images Common Stock that will be adjusted to reflect the
Distribution (an "Adjusted Vital Images Option").
d. The sole purpose of this the Bio-Vascular, Inc. 1990 Management
Incentive Stock Option Adjustment Plan (the "Plan") is to provide
for the grant of such Adjusted Company Options, and no additional
option grants of any kind will be granted under this Plan.
2. Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors (the "Committee"), as hereinafter provided.
The Committee shall be appointed from time to time by the Board of
Directors and shall consist of not fewer than three of its members. However, if
the Board of Directors shall at any time
<PAGE>
consist of three members or less, then such committee shall consist of the
entire Board of Directors. Members of the Board of Directors who serve on the
Committee shall be eligible to participate in the Plan. The Board of Directors
shall designate one of the members of the Committee as its Chairman. The
Committee shall hold its meetings at such times and places as it may determine.
A majority of its members shall constitute a quorum. All determinations of the
Committee shall be made by a majority of its members and the Committee's
determinations shall constitute recommendations to the Board of Directors which
the Board shall have discretion to act upon. Any decision or determination
reduced to writing and signed by all members of the Committee shall be as
effective as if it had been made by a majority vote at a meeting duly called and
held. The Committee may appoint a secretary (who need not be a member of the
Committee).
For purposes of administration, the Committee, subject to the terms of
the Plan, shall have authority to establish such rules and regulations, make
such determinations and interpretations, as it deems necessary or advisable, and
all determinations and interpretations approved by the Board shall be final,
conclusive and binding on all persons, including persons granted options
hereunder ("Optionees") and their legal representatives and beneficiaries.
No member of the Committee or the Board of Directors shall be liable
for any act or omission with respect to his service on the Committee or with
respect to the Plan, if he acts in good faith and in a manner he reasonably
believes to be in or not opposed to the best interests of the Company.
The Committee and the name of the individuals administering the 1990 Plan
(the "Vital Images Committee") shall reasonably cooperate and communicate with
each other to promote the purposes of the Plan.
3. Stock Available for Options. There shall be available for options under
the Plan a total of 300,000 shares of Common Stock, subject to any adjustments
which may be made pursuant to Section 5(g). Shares of Stock with respect to
which options are granted pursuant to the Plan may be either authorized and
unissued shares, or previously issued shares held in the treasury of the
Company, or both. Shares of Stock covered by options which have terminated or
expired prior to exercise shall not be available for further options hereunder.
4. Eligibility. Options under the Plan shall be granted to officers,
directors or key employees of Employer ("Management") who hold outstanding
Company Options on the Record Date. For purposes of the Plan, "Employer" means
the Company if the participant renders services to the Company or any subsidiary
of the Company and means Vital Images if the participant renders services to
Vital Images or any subsidiary of Vital Images.
5. Terms and Conditions of Options. The Committee shall, in its
discretion, prescribe (for approval or rejection by the Board of Directors) the
terms and conditions of the options to be granted hereunder which shall be
evidenced by an option agreement, which terms and conditions need not be the
same in each case, subject to the following:
a. Number of Shares. Each option shall state the number of shares of
Common Stock to which it pertains.
b. Option Price. Each option shall state the price at which each
share of Stock covered by an option granted under the Plan shall
be purchased, which may be more or less than the then fair market
value of the Company's stock.
2
<PAGE>
c. Option Period. The period for exercise of an option (the "Option
Period") shall in no event be more than ten years from the date
on which the option is granted. With respect to each person who
is granted options under this Plan, the Committee and the Board
shall have the right, among other things, to determine that his
right to exercise such options shall vest, ratably, monthly or
annually, or otherwise, over a determined period (the "Vesting
Period"), except as provided in Section 5(e), commencing on the
date of grant. Any shares of Stock not purchased as the right to
exercise ratably accrues may be purchased thereafter at any time
before the expiration of the Option Period except as provided in
Section 5(e).
d. Exercise of Options. In order to exercise an option, the holder
thereof (the "Optionee") shall deliver to Company written notice
specifying the number of shares of Common Stock to be purchased,
and unless otherwise determined, together with a certified or
bank cashier's check payable to the order of the Company in the
full amount of the purchase price therefor. An Optionee shall
not have any rights of a stockholder until the shares of Stock
are issued to him. An option may not be exercised for less than
the lessor of (i) ten shares of Stock, or (ii) the number of
shares of Stock remaining subject to such option.
e. Effect of Termination of Employment or Directorship. The transfer
by a participant in the Plan of employment or other service from
one Employer or its subsidiaries to the other Employer and its
subsidiaries will not be deemed to constitute a termination of
employment or other service for purposes of the Plan.
Notwithstanding anything to the contrary in this Plan or any
option agreement issued hereunder, for employees of the Employer
whose positions of employment terminate within two years of the
commencement of such employment with the Employer, and for
directors of the Employer serving solely as a director (where
such persons are not employees of the Employer) whose position as
a director terminates within two years of the commencement of
such position, after such Optionee has ceased (for any reason) to
be in the employ of the Employer, or ceased (for any reason) to
be a director of the Employer if he is serving solely as a
director, options may only be exercised within a period of 90
days after such termination and only by payment of the purchase
price for all stock under option in cash or by certified check.
Nothing in the Plan or in any option granted pursuant to the
Plan shall be construed to confer on any individual any right to
continue in the employ of the Employer or interfere in any way
with the right of the Employer to terminate his employment at any
time.
f. Nontransferability of Options. During the lifetime of an
Optionee, options held by such Optionee shall be exercisable only
by him. No option shall be transferable other than by will or the
laws of descent and distribution.
g. Adjustments for Change in Stock Subject to Plan and Other Events.
Except as otherwise may be provided in the Option Agreement in
the event any of the following occurs after the Distribution
Date: a reorganization, recapitalization, stock split, stock
dividend, combination of shares, consolidation, merger (other
3
<PAGE>
than a merger or consolidation which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares), any sale or transfer by the Company of all
or substantially all of its assets or any tender offer or
exchange offer for or the acquisition, directly or indirectly, by
any person or group of all or a majority of the then outstanding
voting securities of the Company, rights offering, or any other
change in the corporate structure or rights with respect to any
shares of the Company, the Committee shall make such adjustments,
if any, in the number and kind of shares of Stock subject to the
Plan, in the number and kind of shares covered by outstanding
options, and/or in the option price per share to provide that the
Optionee shall have the right following such event, during the
period that such options shall be exercisable, to exercise such
options for the kind and amount of securities, cash and other
property receivable upon such event by a holder of the number and
kind of shares of Stock for which such options might have been
exercised immediately prior to such event.
The provisions of this paragraph (g) shall apply to any
outstanding options but in no event shall any option be
exercisable after the date of termination of the exercise period
of such option specified in Sections 5(c).
h. Registration, Listing and Qualification of Shares of
Stock/Shareholders Agreement. Each option shall be subject to
the requirements that if at any time the Stock covered thereby is
not registered, listed or qualified upon any securities exchange
or under any federal or state law, and (1) if the Board of
Directors shall determine that such registration, listing or
qualification or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or
in connection with, the granting of such option or the purchase
of shares of Stock thereunder, no such option may be exercised
unless and until such registration, listing, qualification,
consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors, or (2)
if the Board of Directors shall determine that such registration,
listing or qualification or the consent or approval of any
governmental regulatory body is not necessary and/or not
desirable as a condition of, or in connection with, the granting
of such option or the purchase of shares of Stock thereunder, the
Board of Directors may impose any conditions upon the exercise of
such options as it shall deem necessary or desirable in view of
such determination and no such option may be exercised unless and
until such conditions have been satisfied. Without limiting the
foregoing, the Company may require that any person exercising an
option shall make such representations and agreements and furnish
such information as the Company deems appropriate to assure
compliance with the foregoing or any other applicable legal
requirement.
Each option shall also be subject to the Optionee, on
exercise of such option, being required to execute a
Shareholders' Agreement in form and substance satisfactory to the
Board of Directors, providing for a right of first refusal in
favor of the Company and/or certain of its shareholders in
connection with the transfer of Stock and such other provisions
as shall be determined by the Board.
4
<PAGE>
i. Withholding of Taxes. No option may be exercised unless the
Optionee has paid, or has made provision satisfactory to the
Committee for payment of, Federal, state and local income taxes,
or any other taxes (other than stock transfer taxes) which the
Company or Vital Images may be obligated to collect as a result
of the issue or transfer of shares of Stock upon the exercise of
an option.
j. Other Terms and Conditions. The Committee may impose such other
terms and conditions, not inconsistent with the terms hereof, on
the grant or exercise of options, as it deems advisable.
6. Amendment and Termination. Unless the Plan shall theretofore have been
terminated as hereinafter provided, the Plan shall terminate on, and no option
shall be granted hereunder after, January 1, 2000; provided, however, that the
Board of Directors may at any time prior to that date terminate the Plan. The
Board of Directors may at any time amend the Plan. No termination or amendment
of the Plan may, without the consent of an Optionee, adversely affect the rights
of such Optionee with respect to any option held by such Optionee.
7. Other Actions. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including but not limited to, the right of the Company to grant options for
proper corporate purposes other than under the Plan to any officer, director,
employee or other person, firm, corporation or association.
5
<PAGE>
Exhibit 10.2
BIO-VASCULAR, INC.
1992 STOCK OPTION ADJUSTMENT PLAN
1. Background; Purpose of Plan.
a) In or about 1992, Vital Images, Incorporated, an Iowa corporation
("VII"), adopted the Vital Images, Incorporated 1992 Stock Option Plan (the
"1992 Plan") for the purposes of (i) attracting and retaining the best available
personnel for positions of substantial responsibility at VII, (ii) providing
additional incentive to the "Employees" and "Consultants" of VII and (iii)
promoting the success of VII's business.
b) In Section 1(k) of that certain Agreement and Plan of Merger by
and between VII and Bio-Vascular, Inc., a Minnesota corporation ("the Company")
dated December 31, 1993 (the "Merger Agreement"), the Company agreed to assume
the rights and obligations of VII with respect to options issued under the 1992
Plan which were outstanding at the Effective Time, as defined in the Merger
Agreement. Pursuant to the Company's assumption of VII's obligations under the
1992 Plan, each optionee under the 1992 Plan became entitled to purchase from
the Company shares of the Company's Common Stock (a "Company Option"), in an
amount determined under the provisions of the Merger Agreement, on the same
terms and conditions as set forth in the 1992 Plan, except that shares of
Company Common Stock were substituted for VII Common Stock.
c) VII, the corporate name of which has been changed to Vital Images,
Inc. ("Vital Images"), has entered into that certain Distribution Agreement,
dated as of May 2, 1997 (the "Distribution Agreement"), between Vital Images and
the Company, pursuant to which the Company will distribute (the "Distribution")
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). In connection with the Distribution, each holder of a Company Option
as of the Record Date will be entitled to retain such Company Option, provided
that such Company Option will be adjusted to reflect the Distribution (an
"Adjusted Company Option"). In addition, as of the Record Date, each holder of a
Company Option will also be entitled to receive an option to purchase Vital
Images Common Stock that will be adjusted to reflect the Distribution (an
"Adjusted Vital Images Option").
d) The sole purpose of this Bio-Vascular, Inc. 1992 Stock Option
Adjustment Plan (the "Plan") is to provide for the grant of such Adjusted
Company Options, and no additional option grants of any kind will be granted
under this Plan.
2. Definitions. Except as otherwise set forth herein, the following
terms will have the meanings set forth below, unless the context clearly
requires otherwise:
a) "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.
b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
c) "Committee" shall mean the Committee appointed by the Board of
Directors of the Company in accordance with paragraph (a) of Section 4 of the
Plan, if one is appointed.
d) "Common Stock" shall mean the Common Stock of the Company.
<PAGE>
e) "Consultant" shall mean any person who is engaged by Vital Images
or any Parent or Subsidiary of Vital Images to render consulting services and is
compensated for such consulting services, and any director of Vital Images
whether compensated for such services or not; provided that if and in the event
Vital Images registers any class of any equity security pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
term Consultant shall thereafter not include directors who are not compensated
for their services or are paid only a director's fee by Vital Images.
f) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board of Directors of Vital Images; provided
that such leave is for a period of not more than 90 days or reemployment upon
the expiration of such leave is guaranteed by contract or statute.
g) "Employee" shall mean any person, including officers and
directors, employed by Vital Images or any Parent or Subsidiary of Vital Images.
The payment of a director's fee by Vital Images shall not be sufficient to
constitute "employment" by Vital Images.
h) "Incentive Stock Option" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422A of the Code.
i) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
j) "Option" shall mean a stock option granted pursuant to the Plan.
k) "Optioned Stock" shall mean the Common Stock subject to an
Option.
l) "Optionee" shall mean an Employee or Consultant who receives an
Option.
m) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Code.
n) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
o) "Subsidiary" shall mean a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 425(f) of the Code.
p) "Vital Images Committee" means, with respect to Vital Images
Options and Vital Images Adjusted Options, the group of individuals
administering the 1992 Plan.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 500,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision
<PAGE>
of the Plan, Shares issued under the Plan and later repurchased by the Company
shall not become available for future grant or sale under the Plan.
4. Administration of the Plan.
a) Procedure. The Plan shall be administered by the Board of
Directors of the Company.
(i) Subject to subparagraph (ii), the Board of Directors (by
action of a majority of the Directors in office when the Committee is appointed)
may appoint a Committee consisting of not less than two members of the Board of
Directors, subject to such terms and conditions as the Board of Directors may
prescribe. Subject to the conditions otherwise herein stated, the Committee
shall have the authority to administer the Plan on behalf of the Board of
Directors, except as prohibited by law under Iowa Code 490.825. Specifically,
among other matters enumerated in Iowa Code 490.825, the Committee, pursuant to
section 490.825.5.h., shall not authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except that the
Board of Directors may authorize the Committee to do so within limits as may be
specifically prescribed by the Board of Directors. Rather, the Board itself
shall have authority for and exercise approval of all such matters contemplated
in section 490.825.5.h. Once appointed, the Committee shall continue to serve
until otherwise directed by the Board of Directors. Members of the Board who are
either eligible for Options or have been granted Options may vote on any matters
affecting the administration of the Plan or the grant of any Options pursuant to
the Plan, except that no such member shall act upon the granting of an Option to
himself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board during which action is taken with respect to
the granting of Options to him.
(ii) Notwithstanding the foregoing subparagraph (i), if and in
any event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, from the effective date of such registration
until six months after the termination of such registration, any grants of
Options to officers or directors shall only be made by the Board of Directors
provided, however, that if a majority of the Board of Directors is eligible to
participate in this Plan or any other stock option or other stock plan of the
Company or any of its affiliates, or has been eligible at any time within the
preceding year, any grants of Options to directors must be made by, or only in
accordance with the recommendation of, a Committee consisting of three or more
persons, who may but need not be directors or employees of the Company,
appointed by the Board of Directors and having full authority to act in the
matter, none of whom is eligible to participate in this Plan or any other stock
option or other stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. Any Committee administering the
Plan with respect to grants to officers who are not also directors shall conform
to the requirements of the preceding sentence. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
(iii) Subject to the foregoing subparagraphs (i) and (ii), from
time to time the Board of Directors may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer the Plan.
<PAGE>
b) Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options or Nonstatutory Stock Options; (ii) upon review of relevant information
and in accordance with Section 8(b) of the Plan, to determine the fair market
value of the Common Stock; (iii) to determine the exercise price per share of
Options to be granted, which exercise price shall be determined in accordance
with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to
whom, and the time or times at which, Options shall be granted and the number of
shares to be represented by each Option; (v) to interpret the Plan; (vi) to
determine the terms and provisions of each Option granted (which need not be
identical) and, with the consent of the holder thereof, modify or amend each
Option; (viii) to accelerate or defer (with the consent of the Optionee) the
exercise date of any Option, consistent with the provisions of Section 5 of the
Plan; (ix) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted by
the Board; and (x) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
d) Cooperation Between Committees. The Committee and the Vital
Images Committee will reasonably cooperate and communicate with each other to
promote the purposes of the Plan.
5. Eligibility.
a) Nonstatutory Stock Options may be granted only to Employees and
Consultants who hold outstanding Company Options under the 1992 Plan as of the
Record Date. Incentive Stock Options may be granted only to Employees who hold
outstanding Company Options under the 1992 Plan as of the Record Date.
b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options granted to such Employee
by the Company or any Parent or Subsidiary of the Company, would result in
Shares having an aggregate fair market value (determined for each Share as of
the date of grant of the Option covering such Share) in excess of $100,000
becoming first available for purchase upon exercise of one or more incentive
stock Options during any calendar year.
c) Section 5(b) of the Plan shall apply only to an Incentive Stock
Option evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as an
incentive stock option. Section 5(b) of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
Nonstatutory Stock Option.
d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with Vital
Images, nor shall it interfere in any way with his right or the right of Vital
Images to terminate his or her employment or consulting relationship at any
time, with or without cause.
<PAGE>
6. Term of Plan. The Plan shall become effective as of the Distribution
Date. It shall continue in effect for a term of ten (10) years after the
effective date of the 1992 Plan, unless sooner terminated under Section 13 of
the Plan.
7. Term of Option. The term of each Incentive Stock Option shall be ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Incentive Stock Option Agreement. The term of each Nonstatutory
Stock Option shall be ten (10) years and one (1) day from the date of grant
thereof or such shorter term as may be provided in the Nonstatutory Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company, (a) if the Option is an Incentive Stock Option, the
term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Incentive Stock Option Agreement, or
(b) if the Option is a Nonstatutory Stock Option, the term of the Option shall
be five (5) years and one (1) day from the date of grant thereof or such shorter
term as may be provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company, the per Share exercise price shall be no less than
110% of the fair market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary of the
Company, the per Share exercise price shall be no less than 110% of the fair
market value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the fair market value per Share on the date of
grant.
(iii) In the case of an Option granted on or after the effective
date of registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the termination of
such registration, the per Share exercise price shall be no less than 100% of
the fair market value per Share on the date of grant.
b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per share shall be the mean of the bid and
asked prices (or the closing price per share if the Common Stock is listed on
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
National
<PAGE>
Market System) or, in the event the Common Stock is listed on a stock exchange,
the fair market value per Share shall be the closing price on such exchange on
the date of grant of the Option, as reported in the Wall Street Journal.
c) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Board and may consist entirely of cash, check, promissory note, other Shares
of Common Stock having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under the Iowa Business Corporation Act. In making its determination
as to the type of consideration to accept, the Board shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
9. Exercise of Option.
a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
b) Termination of Status as an Employee or Consultant. In the event
of termination of an Optionee's Continuous Status as an Employee of Vital Images
or Consultant of Vital Images (as the case may be), such Optionee may, but only
within thirty (30) days (or such other period of time, not exceeding three (3)
months in the case of an Incentive Stock Option or six (6) months in the case of
a Nonstatutory Stock Option, as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the date of such termination (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), exercise such Optionee's Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that the Optionee was not entitled to exercise the Option at the date of
such termination, or if the Optionee does not exercise such Option (which the
Optionee was entitled to exercise) within the time specified herein, the Option
shall terminate.
<PAGE>
c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of the Optionee's total and permanent
disability (as defined in Section 22(e) (3) of the Internal Revenue Code), the
Optionee may, but only within six (6) months (or such other period of time not
exceeding twelve (12) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) from the date of such termination (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), exercise the Optionee's Option to the extent the Optionee was
entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of termination, or
if the Optionee does not exercise such Option (which the Optionee was entitled
to exercise) within the time specified herein, the Option shall terminate.
d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of the
Optionee's death an Employee or Consultant and who shall have been in Continuous
Status as an Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within three (3) months following the date
of death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant three (3) months after the date of death, subject to the limitation
set forth in Section 5(b); or
(ii) within thirty (30) days (or such period of time not
exceeding three (3) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Status as an Employee
or Consultant, the Option may be exercised, at any time within three (3) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination.
10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from any of the following if it occurs after the Distribution
Date: a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of
<PAGE>
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to the number or prices of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days prior to
such proposed action. To the extent it has not been previously exercised, the
Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Board determines, in the exercise of its sole
discretion and in lieu of such assumption or substitution, that the Optionee
shall have the right to exercise the Option as to all of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable. If
the Board makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, the Board shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
date of such notice, and the Option will terminate upon the expiration of such
period.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. Amendment and Termination of the Plan.
a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 17 of the
Plan:
(i) any increase in the number of shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) if the Company has a class of equity securities registered
under Section 12 of the Exchange Act at the time of such revision or amendment,
any material increase in the benefits accruing to the participants under the
Plan.
b) Shareholder Approval. If any amendment requiring shareholder
approval under Section 13 (a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 17 of the Plan.
c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
<PAGE>
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval.
a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. If such shareholder approval is obtained at a duly held
shareholders' meeting, it must be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company or if such
shareholder approval is obtained by written consent, it must be obtained by the
unanimous written consent of all shareholders of the Company; provided, however,
that approval at a meeting or by written consent may be obtained by a lesser
degree of shareholder approval if the Board determines, in its discretion after
consultation with the Company's legal counsel, that such a lesser degree of
shareholder approval will comply with all applicable laws and will not adversely
affect the qualification of the Plan under Section 422A of the Code.
b) If and in the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approvals of
the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
c) If any required approval by the shareholders of the Plan itself or
of any amendment thereto is solicited at any time otherwise than in the manner
described in Section 17(b) hereof, then the Company shall, at or prior to the
first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
<PAGE>
(i) furnish in writing to the holders entitled to vote for the
plan substantially the same information which would be required (if proxies to
be voted with respect to approval or disapproval of the Plan or amendment were
then being solicited) by the rules and regulations in effect under Section 14(a)
of the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date of which such information is first
sent or given to shareholders.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
<PAGE>
EXHIBIT 11.1
BIO-VASCULAR, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
(unaudited) (unaudited)
------------- ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) data:
Income from continuing operations.................... $ (491) $ 111 $ (270) $ 898
Loss from discontinued operations.................... -- (288) (920) (894)
---------- ---------- ---------- ----------
Net income (loss).................................... $ (491) $ (177) $ (1,190) $ 4
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share, primary:
Continuing operations................................ $ (.05) $ .01 $ (.03) $ (.09)
Discontinued operations.............................. -- (.03) (.10) (.09)
---------- ---------- ---------- ----------
Net income (loss).................................... $ (.05) $ (.02) $ (.13) $ --
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share, fully diluted:
Continuing operations................................ $ (.05) $ .01 $ (.03) $ .09
Discontinued operations.............................. -- (.03) (.10) (.09)
---------- ---------- ---------- ----------
Net income (loss).................................... $ (.05) $ (.02) $ (.13) $ --
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES
Primary:
Weighted average number of common shares
outstanding......................................... 9,544,748 9,439,783 9,511,990 9,386,040
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method............................. -- -- -- 473,869
---------- ---------- ---------- ----------
9,544,748 9,439,783 9,511,990 9,859,909
========== ========== ========== ==========
Fully diluted:
Weighted average number of common shares
outstanding......................................... 9,544,748 9,439,783 9,511,990 9,386,040
Common equivalent shares:
Dilutive stock options and warrants, using
Treasury Stock Method............................. -- -- -- 483,529
---------- ---------- ---------- ----------
9,544,748 9,439,783 9,511,990 9,869,569
========== ========== ========== ==========
</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 July 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 4,206,698
<SECURITIES> 13,968,170
<RECEIVABLES> 1,796,789
<ALLOWANCES> 26,100
<INVENTORY> 1,577,465
<CURRENT-ASSETS> 16,262,763
<PP&E> 2,760,573
<DEPRECIATION> 1,124,636
<TOTAL-ASSETS> 25,388,338
<CURRENT-LIABILITIES> 977,172
<BONDS> 0
0
0
<COMMON> 95,432
<OTHER-SE> 24,315,734
<TOTAL-LIABILITY-AND-EQUITY> 25,388,338
<SALES> 7,215,165
<TOTAL-REVENUES> 7,215,165
<CGS> 2,974,365
<TOTAL-COSTS> 1,202,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 193,174
<INCOME-TAX> 462,700
<INCOME-CONTINUING> (269,526)
<DISCONTINUED> (920,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,189,526)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</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 July 31, 1996
and the financial statements and related notes for the period ended July 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 7,000,540
<SECURITIES> 12,956,600
<RECEIVABLES> 1,920,177
<ALLOWANCES> 60,000
<INVENTORY> 2,075,074
<CURRENT-ASSETS> 25,223,388
<PP&E> 3,653,285
<DEPRECIATION> 1,727,531
<TOTAL-ASSETS> 37,044,004
<CURRENT-LIABILITIES> 1,128,748
<BONDS> 0
0
0
<COMMON> 94,572
<OTHER-SE> 35,820,684
<TOTAL-LIABILITY-AND-EQUITY> 37,044,004
<SALES> 7,858,317
<TOTAL-REVENUES> 7,858,317
<CGS> 2,576,020
<TOTAL-COSTS> 4,678,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,424,409
<INCOME-TAX> 526,500
<INCOME-CONTINUING> 897,909
<DISCONTINUED> (893,540)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,369
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
