<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM 8-K/A
____________________________________
CURRENT REPORT
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
____________________________________
Date of Report (Date of earliest event reported): July 31, 1998
____________________________________
BIO-VASCULAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Minnesota 0-13907 41-1526554
(State of or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
<TABLE>
<S> <C>
2575 University Avenue, St. Paul, Minnesota 55114-1024
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (651) 603-3700
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
-----------------------------------------
The following historical financial statements of Jer-Neen
Manufacturing Co., Inc. are included in this report:
Audited Financial Statements of Jer-Neen Manufacturing Co., Inc.
----------------------------------------------------------------
Independent Auditors' Report
Balance Sheet as of October 31, 1997
Statement of Income and Retained Earnings for the year ended
October 31, 1997
Statement of Cash Flows for the year ended October 31, 1997
Notes to Financial Statements
Unaudited Interim Financial Statements of Jer-Neen Manufacturing
----------------------------------------------------------------
Co., Inc.
---------
Condensed Balance Sheet as of July 31, 1998
Condensed Statements of Operations for the nine month periods ended
July 31, 1998 and 1997
Condensed Statements of Cash Flows for the nine month periods ended
July 31, 1998 and 1997
Notes to Interim Condensed Financial Statements
B. PRO FORMA FINANCIAL INFORMATION.
-------------------------------
The following pro forma financial information is included in this
report:
Introduction to Pro Forma Financial Information
Pro Forma Consolidated Condensed Statement of Operations for the
year ended October 31, 1997
Notes to Pro Forma Consolidated Condensed Financial Information for
the year ended October 31, 1997
Pro Forma Consolidated Condensed Statement of Operations for the
nine month period ended July 31, 1998
Notes to Pro Forma Consolidated Condensed Financial Information for
the nine month period ended July 31, 1998
C. EXHIBITS.
--------
2.1 Acquisition Agreement and Plan of Reorganization by and among Bio-
Vascular, Inc., Jer-Neen Acquisition, Inc., Jer-Neen
Manufacturing Co., Inc., George Nelson, Jr., Ronald Breckner,
James Pfau, Willard Sykes and Catherine Sykes dated July 31, 1998.
10.1 Employment Agreement dated July 31, 1998 among Bio-Vascular,
Inc., Jer-Neen Manufacturing Co., Inc. and James F. Pfau.
2
<PAGE>
10.2 Change in Control Agreement dated July 31, 1998 between Bio-
Vascular, Inc. and James F. Pfau.
23.1 Consent of Simma Flottemesch and Orenstein, Ltd.
99.1 Press Release, dated June 2, 1998.
99.2 Press Release, dated August 3, 1998.
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Jer-Neen Manufacturing Co., Inc.
Forest Lake, Minnesota
We have audited the accompanying balance sheet of Jer-Neen Manufacturing Co.,
Inc. as of October 31, 1997, and the related statements of income and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jer-Neen Manufacturing Co.,
Inc. as of October 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/S/ SIMMA FLOTTEMESCH & ORENSTEIN, LTD.
Minneapolis, Minnesota
December 9, 1997, except for Note 13, as to
which the date is September 18, 1998
4
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
BALANCE SHEET
AS OF OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash..................................................................... $ 10,367
Accounts receivable, less allowance for doubtful
accounts of $8,000.................................................... 576,806
Receivables, related parties............................................. 14,130
Inventory................................................................ 228,543
Prepaid expenses......................................................... 33,540
Deferred income taxes.................................................... 26,000
Net assets of discontinued operations.................................... 1,244,813
----------
TOTAL CURRENT ASSETS................................................. 2,134,199
----------
PROPERTY AND EQUIPMENT................................................... 1,097,371
----------
INTANGIBLE ASSETS........................................................ 1,918,217
----------
TOTAL ASSETS......................................................... $5,149,787
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank................................................... $ 501,158
Accounts payable..................................................... 346,184
Accrued expenses..................................................... 250,363
Income taxes payable................................................. 196,244
Current maturities of long-term debt................................. 560,566
----------
TOTAL CURRENT LIABILITIES....................................... 1,854,515
----------
LONG-TERM DEBT, LESS CURRENT MATURITIES.................................. 2,243,087
----------
DEFERRED INCOME TAXES.................................................... 52,000
----------
STOCKHOLDERS' EQUITY
Common stock - $10 par value; 2,500 shares authorized; 200
shares issued and outstanding...................................... 2,000
Additional paid-in capital........................................... 746,431
Retained earnings.................................................... 251,754
----------
TOTAL STOCKHOLDERS' EQUITY...................................... 1,000,185
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $5,149,787
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
5
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SALES.................................................................... $4,134,175
COST OF SALES............................................................ 2,405,052
----------
GROSS PROFIT FROM OPERATIONS......................................... 1,729,123
OPERATING EXPENSES....................................................... 1,236,060
----------
INCOME FROM OPERATIONS............................................... 493,063
----------
OTHER INCOME (EXPENSE)
Loss on sale of fixed assets........................................... (1,142)
Interest expense....................................................... (454,733)
----------
TOTAL OTHER EXPENSE.................................................. (455,875)
----------
NET INCOME BEFORE INCOME TAXES....................................... 37,188
PROVISION FOR INCOME TAX EXPENSE......................................... 58,600
----------
NET LOSS FROM CONTINUING OPERATIONS.................................. (21,412)
DISCONTINUED OPERATIONS
Income from operations of industrial division
to be disposed of (net of income taxes of $115,640)................... 222,865
----------
NET INCOME...................................................... 201,453
RETAINED EARNINGS, BEGINNING OF YEAR..................................... 50,301
----------
RETAINED EARNINGS, END OF YEAR........................................... $ 251,754
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
6
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net income................................................................... $ 201,453
Items not affecting cash:
Depreciation and amortization........................................ 210,486
Amortization of intangible assets.................................... 184,359
Deferred interest on long-term debt.................................. 135,366
Change in deferred income taxes...................................... (19,300)
Loss on sale of fixed assets......................................... 1,142
Change in current assets and liabilities:
Accounts receivable.................................................. (231,500)
Inventory............................................................ (91,857)
Prepaid expenses..................................................... (25,038)
Net assets of discontinued operations................................ (177,791)
Accounts payable..................................................... 117,475
Accrued expenses..................................................... 24,183
Income taxes payable................................................. 47,385
---------
Cash provided by operating activities............................ 376,363
---------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITES
Decrease in receivable, related party................................ 5,436
Purchase of property and equipment................................... (323,599)
---------
Cash used for investing activities.............................. (318,163)
---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of debt....................................... 484,980
Repayment of debt.................................................... (576,346)
---------
Cash used for financing activities.............................. (91,366)
---------
DECREASE IN CASH................................................ (33,166)
CASH, BEGINNING OF YEAR.................................................. 43,533
---------
CASH, END OF YEAR........................................................ $ 10,367
=========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Debt incurred for property and equipment............................. $ 398,820
Related party receivable exchanged for property and equipment........ 62,419
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................. $ 321,038
Income taxes......................................................... 146,910
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
7
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of business - Jer-Neen Manufacturing Co., Inc. manufactures a variety of
springs and other wire products for use by other manufacturers of medical and
general industrial equipment. Medical equipment is sold to worldwide customers
whereas industrial equipment customers are located primarily in the Upper
Midwest. During the normal course of business, the Company extends credit to
customers primarily engaged in the component manufacturing sector of the
economy.
Basis of presentation - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
Significant accounting policies of the Company are summarized below:
Cash accounts are maintained in one financial institution and are insured by the
Federal Deposit Insurance Corporation up to $100,000.
Inventory is stated at the lower of cost or market. Cost has been determined on
the first-in, first-out basis. Market is based upon realizable value less an
allowance for selling and distribution expenses.
Property and equipment were restated to their fair market value at October 31,
1994, as a result of the Company's recapitalization which is consistent with
accepted accounting practices in a purchase transaction. Acquisitions
subsequent to this date are recorded at cost and include expenditures for new
property and expenditures which substantially increase the useful life of the
existing property. Maintenance, repairs and minor renewals are expensed as
incurred. When properties are disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
reflected in the statement of operations.
Depreciation and amortization are computed by the straight-line method over the
following estimated useful lives:
Estimated Useful
Life of Years
----------------
Machinery and equipment........................ 10
Office furniture and equipment................. 5-7
Vehicles....................................... 5
Leasehold improvements......................... 6-9
Amortization of intangible assets is computed by the straight-line method
over estimated useful lives as follows:
Estimated Useful
Life of Years
----------------
Organizational and loan origination costs..... 5
Non-compete agreement......................... 10
Patents....................................... 3-12
Goodwill...................................... 25
8
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
(2) INVENTORY
---------
Inventory consisted of the following at October 31, 1997:
Raw materials............................... $ 98,838
Work-in process............................. 93,977
Finished goods.............................. 28,482
Packaging supplies.......................... 7,246
--------
$228,543
========
(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment consisted of the following at October 31, 1997:
Owned:
Machinery and equipment....................... $ 517,926
Office furniture and equipment................ 77,955
Vehicles...................................... 59,390
----------
655,271
Less accumulated depreciation................. (156,276)
----------
Total owned................................. 498,995
----------
Leased:
Machinery and equipment....................... 451,518
Equipment and improvements,
not yet placed in service................... 200,306
----------
651,824
Less accumulated amortization................. (53,448)
----------
Total leased.............................. 598,376
----------
$1,097,371
==========
Property and equipment includes amounts paid for certain equipment and
improvements to be leased that have yet to be placed in service.
Depreciation and amortization was $210,486 (including amortization expense
related to capitalized leases of $88,839), for the year ended October 31, 1997.
Depreciation and amortization of $103,613 (including amortization expense
related to capitalized leases of $42,622) relating to the industrial division
are included above.
9
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
(4) INTANGIBLE ASSETS
-----------------
Intangible assets consisted of the following at October 31, 1997:
Goodwill....................................... $1,605,096
Patents........................................ 316,071
Non-compete agreement.......................... 370,549
Organization costs............................. 81,706
Loan origination costs......................... 47,550
----------
2,420,972
Accumulated amortization....................... (502,755)
----------
$1,918,217
==========
(5) NOTE PAYABLE AND LONG-TERM DEBT
-------------------------------
The Company maintains a secured line of credit with a bank for an amount not to
exceed $700,000 at October 31, 1997. Advances against the line bear interest at
prime plus 1.50% (an effective rate of 10.00% at October 31, 1997) Interest is
payable monthly with unpaid principal due March 31, 1998. Borrowings against
the line were $501,158 at October 31, 1997.
In connection with the anticipated move of the medical division after October
31, 1997, a stockholder has indicated that up to $200,000 will be available and
bear interest at prime plus 5.00%. The loan, if utilized, will have a two year
term that will be extended on the condition that it does not violate covenants
between the Company and its primary lender. The availability of this credit
line expires on December 31, 1997. The loan, if any, will be secured by the
guarantees and pledged stock of certain stockholders.
Long-term debt consisted of the following at October 31, 1997:
Note payable to bank- Term No. 1.............. $ 314,799
Note payable to bank- Term No. 2.............. 1,000,000
Deferred interest on Term No. 2............... 471,895
Notes payable, bank Vehicles................. 42,800
Non-compete agreement......................... 296,548
Capital lease obligations..................... 587,611
Subordinated debt............................. 90,000
----------
2,803,653
Current maturities of long-term debt.......... (560,566)
----------
$2,243,087
==========
Term No.1 is payable in monthly installments of $13,500 through October 1999,
including interest at prime plus 2.75% (11.25% at October 31,1997).
Term No. 2 is payable in quarterly principal installments of $50,000 with the
final balance due October 1999. Interest, payable monthly, is at prime plus
3.00% (11.50% at October 31, 1997). In addition, there is a deferred interest
charge calculated at 9% of the outstanding unpaid balance, compounded monthly
which is due October 1999. The agreement also contains a contingent interest
amount equal to 10% of Total Company Value, as defined in the agreement, less
deferred interest; due at the earlier of prepayment in full or maturity at
October 31, 1999.
10
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Vehicle notes are payable in monthly installments of $475 and $827 through
June 1999 and January 2002, including interest at prime plus 2.00% (10.5% at
October 31, 1997) and 9.96%, respectively.
The line of credit, notes payable to bank and deferred interest are secured by
substantially all Company assets, life insurance and personal guarantees of the
major stockholders. In addition, the credit agreement contains various
covenants which include, but are not limited to, restrictions on indebtedness,
various expenditures and require the Company to maintain certain financial
ratios and minimum levels of income and net worth.
The non-compete agreement to a former majority stockholder is payable in monthly
installments of $5,000 through October 2004, including interest at an
incremental borrowing rate of 10.50%.
Subordinated debt consisted of loans totaling $90,000 made by three stockholders
at October 31, 1996; this debt was repaid in December 1996. In June 1997, a new
stockholder advanced $90,000, which bears interest at prime plus 5.00% (13.50%
at October 31, 1997). The new debt matures in June 1998, but can be extended at
the borrower's discretion for an additional six months and is, therefore,
classified as long-term debt. This debt is secured by substantially all Company
assets and the personal guarantees and pledged stock of certain stockholders.
The debt is subordinated to all of the Company's obligations to the bank.
Maturities of long-term debt for the next five fiscal years are as follows:
1998, $560,566; 1999, $1,766,202; 2000, $213,765; 2001 $106,845; and 2002,
$48,460.
(6) CAPITAL LEASE OBLIGATIONS
-------------------------
The Company is the lessee of certain machinery and equipment under capital lease
obligations expiring from 1999 through 2001. The assets and liabilities under
capital leases have been recorded at the fair value of the asset when placed in
service. Interest rates on capitalized leases vary from 10.76% to 14.71% and
are imputed based on the lessor's implicit rate of return. During 1997, the
owner of the primary lessor, acquired common stock of the Company with the
leasing company becoming a related party through common ownership.
In connection with future contemplated equipment acquisitions, the Company has
received a commitment from a lessor to provide an additional $600,000 in
financing, if certain conditions are met. This lease financing commitment
expires in October 1998.
Minimum future lease payments under capital leases as of October 31, 1997, for
each of the next four years and in the aggregate are:
<TABLE>
<CAPTION>
For the years ending October 31: Related Party Other Total
- -------------------------------- ------------- --------- ---------
<S> <C> <C> <C>
1998 $ 188,559 $ 65,477 $ 254,036
1999 188,559 65,079 253,638
2000 153,322 153,322
2001 58,487 58,487
--------- -------- ---------
Total minimum lease payments.............. 588,927 130,556 719,483
Less: Amount representing interest........ (118,352) (13,520) (131,872)
--------- -------- ---------
Present value of net minimum lease
Payments............................... $ 470,575 $117,036 $ 587,611
========= ======== =========
</TABLE>
11
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
(7) COMMITMENTS
-----------
The Company leased its operating facility from a partnership related through
common ownership. Rental payments under this lease totaled $121,000 for the
year ended October 31, 1997. In August 1997, the facility lease was assigned to
a minority stockholder and a new lease was signed which provides for monthly
payments of $8,333 from October 1997 through September 1998. The new lease
contains a one-year renewal option. In connection with these leases, the
Company is responsible for the payment of real estate taxes and other expenses
related to operating and maintaining the facility.
In addition to rent, the Company made payments for tenant improvements of
$62,419 which originally were to be reimbursed by the landlord. The Company has
now recorded these expenditures as leasehold improvements.
The Company also leases certain office equipment under non-cancelable operating
leases expiring in 1998. Equipment rent expense was $5,190 for the year ended
October 31,1997.
In August 1997, the Company entered into a lease agreement for a new facility in
which to relocate the medical manufacturing division. The lease term will
commence following the satisfactory completion of various tenant improvements
and continue for five years. Monthly rental payments will be $16,103 per month
for the initial five year period. The Company will also be responsible for its
pro-rata share of operating expenses which will be $50,000 per year for the
first four years of the lease and computed by an agreed upon formula for the
fifth year. The lease contains an option to renew for an additional five year
period at a base rent of $9,375 per month.
In connection with the tenant improvements, the Company entered into a
construction contract in October 1997. Total budgeted construction costs with
respect to this contract are $769,400. Approximately 50% of the tenant
improvement costs will be paid for by the landlord, financing for the balance
has not been finalized.
In connection with these contracts, the Company also has commitments to pay
approximately $78,000 for brokerage and other fees.
(8) RETIREMENT PLAN
---------------
During 1996, the Company established a 401(k) retirement savings plan which
provides that employees who have completed one year of service and attained the
age of twenty-one are eligible to participate. Employee contributions can be
from 1% to 15% of gross compensation, subject to IRS limitations. The Company
may make discretionary matching and profit sharing contributions. There were no
Company contributions for the year ended October 31, 1997.
12
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
(9) CONSULTING AGREEMENT
--------------------
On October 31, 1994, the Company entered into a consulting agreement with the
former owner. Under the terms of this agreement, the Company is to make 120
monthly payments of $3,333. The expected future minimum payments under this
arrangement are as follows:
For the years ending October 31:
--------------------------------
1998.......................................... $ 40,000
1999.......................................... 40,000
2000.......................................... 40,000
2001.......................................... 40,000
2002.......................................... 40,000
Thereafter.................................... 80,000
--------
$280,000
========
(10) MAJOR CUSTOMER
--------------
The Company has four major customers, that each accounted for more than 10% of
revenues and aggregated 61.5% of total revenues for the year ended October 31,
1997. The amounts receivable from these customers was 65.5% of net accounts
receivable at October 31, 1997.
(11) RELATED PARTY TRANSACTIONS
--------------------------
One of the Company's employees provides part-time secretarial and administrative
services to a company related through common ownership and the Company bills the
related party accordingly. For the year ended October 31, 1997, charges to
this Company were $20,643. At October 31, 1997, the charges for the year then
ended are included in the related party receivable on the balance sheet.
(12) PROVISION FOR INCOME TAX EXPENSE
--------------------------------
The provision for income tax expense consisted of the following for the year
ended October 31, 1997:
Currently payable
Federal....................................... $ 58,950
State......................................... 12,450
--------
Total currently payable..................... 71,400
Change in deferred taxes...................... (16,000)
Prior year underaccrual....................... 700
Estimated underpayment penalty................ 2,500
--------
Provision for income tax expense.............. $ 58,600
========
Deferred taxes result from timing differences in the recognition of revenue and
expense for tax and financial statement purposes. These differences result
principally from depreciation methods used and accruals not currently deductible
for tax purposes.
13
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
The provision for income tax expense varies from the amount expected based
solely on the Federal statutory rate of 34.0% primarily because of the
nondeductibility of certain expenses including officers' life insurance and
amortization of goodwill.
(13) SUBSEQUENT EVENTS
-----------------
On December 11, 1997, the Company received and signed a Letter of Intent from a
party interested in purchasing the assets of the industrial division. On
December 31, 1997, the assets of the industrial division, consisting of certain
accounts receivable, inventories and personal property were sold. For the year
ended October 31, 1997, net sales of the industrial division were $1,758,070 and
are not included in net sales on the accompanying income statement.
Effective July 31, 1998, the remaining business unit of the Company was acquired
by Bio-Vascular, Inc., a publicly traded company. In connection with this
acquisition, the Securities and Exchange Commission (SEC) requires certain
filings that will include historical financial statements previously reported
on. To comply with the requirements of the SEC, these financial statements have
been restated to conform with a current year presentation as it relates to
discontinued industrial division operations, to give effect to SEC rules that
require the capitalization of the non-compete agreement dated October 31, 1994
and to recognize additional goodwill and a deferred tax liability related to
certain assets that were acquired October 31, 1994.
14
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
CONDENSED BALANCE SHEET
AS OF JULY 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................... $ 14,064
Accounts receivable, less allowance for doubtful
accounts of $25,000.............................................. 836,139
Receivables, related parties....................................... 12,364
Inventory, net..................................................... 359,370
Prepaid expenses................................................... 126,328
Deferred income taxes.............................................. 66,580
----------
TOTAL CURRENT ASSETS........................................... 1,414,845
----------
PROPERTY AND EQUIPMENT
less accumulated depreciation.................................... 2,093,895
----------
INTANGIBLE ASSETS, NET............................................. 1,793,910
----------
TOTAL ASSETS................................................... $5,302,650
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, bank............................................ $ 583,100
Accounts payable............................................... 326,082
Accrued expenses............................................... 273,732
Income taxes payable........................................... 114,889
Current maturities of long-term debt........................... 530,273
----------
TOTAL CURRENT LIABILITIES................................... 1,828,076
----------
LONG-TERM DEBT, LESS CURRENT MATURITIES............................ 2,569,650
----------
DEFERRED INCOME TAXES.............................................. 18,946
----------
STOCKHOLDERS' EQUITY
Common stock - $10 par value; 2,500 shares authorized; 200
shares issued and outstanding................................ 2,000
Additional paid-in capital..................................... 746,431
Retained earnings.............................................. 137,547
----------
TOTAL STOCKHOLDERS' EQUITY.................................. 885,978
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $5,302,650
==========
</TABLE>
The accompanying notes are an integral part of the unaudited interim condensed
financial statements.
15
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
SALES................................................................... $4,162,149 $3,052,883
COST OF SALES........................................................... 2,611,237 1,740,064
---------- ----------
GROSS PROFIT FROM OPERATIONS........................................ 1,550,912 1,312,819
OPERATING EXPENSES...................................................... 1,096,556 929,825
---------- ----------
INCOME FROM OPERATIONS.............................................. 454,356 382,994
---------- ----------
OTHER EXPENSE, PRIMARILY INTEREST EXPENSE............................... (351,203) (343,556)
---------- ----------
NET INCOME BEFORE INCOME TAXES...................................... 103,153 39,438
---------- ----------
PROVISION FOR INCOME TAX EXPENSE........................................ 65,499 48,950
---------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 37,654 (9,512)
DISCONTINUED OPERATIONS
Income (loss) from discontinued business,
net of provision for or (benefit from) income taxes of ($1,289) and
$79,287, respectively............................................... (2,393) 155,886
Loss on disposal of discontinued business,
net of provision for income taxes of $80,559........................ (149,468) --
---------- ----------
NET INCOME (LOSS).................................................... $ (114,207) $ 146,374
========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited interim condensed
financial statements.
16
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES......................... $ (225,059) $ 277,485
---------- ---------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVTIES
Purchase of equipment and improvements................................ (403,165) (111,386)
Proceeds from sale of discontinued operations......................... 1,121,613 --
---------- ---------
Cash provided by (used for) investing activities...................... 718,448 (111,386)
---------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES
Borrowing under new long-term debt.................................... 283,000 --
Net borrowings under bank revolving line of credit.................... 81,942 304,908
Repayments of long-term debt.......................................... (484,427) (310,005)
Repayments of capital lease obligations and other financed
equipment and improvement debt..................................... (370,207) (97,493)
---------- ---------
Cash used for financing activities.............................. (489,692) (102,590)
---------- ---------
INCREASE IN CASH................................................ 3,697 63,509
CASH, BEGINNING OF PERIOD............................................... 10,367 43,533
---------- ---------
CASH, END OF PERIOD...................................................... $ 14,064 $ 107,042
========== =========
</TABLE>
The accompanying notes are an integral part of the unaudited interim condensed
financial statements.
17
<PAGE>
JER-NEEN MANUFACTURING CO., INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements of Jer-Neen
Manufacturing Co., Inc. ("Jer-Neen") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
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, the interim financial statements reflect all
adjustments considered necessary, consisting only of items of a normal recurring
nature, for a fair presentation of the financial position, results of operations
and cash flows of Jer-Neen as of July 31, 1998 and for the nine month periods
ended July 31, 1998 and 1997. Interim results are not necessarily indicative of
the results for a full year.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
Nature of Business
Jer-Neen is a value-added manufacturer of precision components used within the
medical device industry. Jer-Neen's product line includes micro coils, wire
forms and spring components used in implantable defibrillation, interventional
medicine and other surgical applications.
<TABLE>
<CAPTION>
As of July 31,
1998
-------------------
<S> <C>
Inventories:
Raw materials and supplies.............................. $219,319
Work-in-process......................................... 92,074
Finished goods.......................................... 62,977
Less reserve for inventory obsolescence................. (15,000)
--------
$359,370
========
</TABLE>
Condensed Statements of Cash Flows:
In conjunction with the December 1997 sale of Jer-Neen's industrial division,
net cash provided by discontinued operations during the nine month period ended
July 31, 1998 represents the proceeds received by Jer-Neen in the transaction,
net of transaction costs and the loss realized on the sale. The Condensed
Statement of Cash Flows for the nine month period ended July 31, 1997 has been
reclassified to conform with the discontinued operations cash flow presentation
for the nine month period ended July 31, 1998.
(3) CAPITAL LEASES AND LEASEHOLD IMPROVEMENTS:
The increase in long-term obligations is primarily related to capital leases of
certain machinery and equipment and landlord-financed leasehold improvements.
Interest rates on capitalized leases vary from 10.76% to 14.71% and are imputed
based on the lessor's implicit rate of return. The capital lease obligations
expire from 1999 through 2001. The interest rates on the financed leasehold
improvements vary from 10% to 12% and require annual payments through 2003.
(4) MAJOR CUSTOMERS:
Jer-Neen has four major customers, that each accounted for more than 10% of
revenues and aggregated 75% and 57% of total revenues for the nine month periods
ended July 31, 1998 and 1997, respectively. The amounts receivable from these
customers was 69% of net accounts receivable at July 31, 1998.
18
<PAGE>
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
On July 31, 1998 Bio-Vascular, Inc ("Bio-Vascular"), a Minnesota corporation
acquired Jer-Neen Manufacturing Co., Inc. ("Jer-Neen"), a Minnesota corporation.
The acquisition was completed pursuant to an Acquisition Agreement and Plan of
Reorganization dated as of such date by and among Bio-Vascular, Jer-Neen and
Jer-Neen Acquisition, Inc., a Minnesota corporation and wholly-owned subsidiary
of Bio-Vascular (the "Acquisition Subsidiary"), and George Nelson, Jr., Ronald
Breckner, James Pfau, Willard Sykes and Catherine Sykes as the shareholders of
Jer-Neen. Under the terms of the Acquisition Agreement, Jer-Neen merged with and
into the Acquisition Subsidiary, with the separate existence of Jer-Neen ceasing
and the Acquisition Subsidiary surviving.
Pursuant to the terms of the Acquisition Agreement, all of the issued and
outstanding shares of common stock of Jer-Neen were converted into the right to
receive an aggregate of $1,750,000 in cash and an aggregate of 585,872 shares of
Bio-Vascular's common stock, $.01 par value per share, with all of such cash
paid and shares issued at the closing of the merger. Bio-Vascular also paid an
additional $950,000 in cash allocated among the Jer-Neen shareholders in
consideration of each shareholder's covenant under the Acquisition Agreement,
for a period of ten years following closing of the merger, not to engage,
directly or indirectly, in certain activities competitive with the business
conducted by Jer-Neen prior to the merger. The acquisition has been accounted
for using the purchase method of accounting.
The following unaudited pro forma consolidated condensed statements of
operations set forth the results of operations for the year ended October 31,
1997 and the nine month period ended July 31, 1998, as if the acquisition of
Jer-Neen by Bio-Vascular had occurred on November 1, 1996. The pro forma
financial data is based upon currently available information and certain
assumptions that Bio-Vascular believes are reasonable. Bio-Vascular does not
expect the receipt of additional information to have a material effect on the
pro forma financial data, including purchase price allocations, included in this
report. The pro forma consolidated condensed statements of operations are not
necessarily indicative of future operations or the actual results that would
have occurred had the acquisition of Jer-Neen been consummated on November 1,
1996. The pro forma consolidated condensed statements of operations of Jer-Neen
should be read in conjunction with the financial statements of Jer-Neen included
elsewhere in this report.
19
<PAGE>
BIO-VASCULAR, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
(Unaudited)
Bio-Vascular(1) Jer-Neen(2) Adjustments Combined
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue................................ $ 9,694,047 $4,134,175 $ -- $13,828,222
Cost of revenue............................ 3,967,460 2,405,052 1,875(3) 6,374,387
----------- ---------- ---------- -----------
Gross margin............................... 5,726,587 1,729,123 (1,875) 7,453,835
Operating expenses:
Selling, general and administrative........ 5,773,918 1,236,060 284,992(4) 7,294,970
Research and development................... 1,257,904 -- -- 1,257,904
----------- ---------- ---------- -----------
Operating income (loss).................... (1,305,235) 493,063 (286,867) (1,099,039)
Other income (expense), net................ 1,066,822 (455,875) 209,493(5) 820,440
----------- ---------- ---------- -----------
Income (loss) from continuing operations
before provision for income taxes........ (238,413) 37,188 (77,374) (278,599)
Provision for income taxes................. 365,200 58,600 66,948(6) 490,748
----------- ---------- ---------- -----------
Loss from continuing operations............ $ (603,613) $ (21,412) $ (144,322) $ (769,347)
=========== ========== ========== ===========
Basic earnings per share:
Continuing operations...................... $(0.06) $(0.08)
=========== ===========
Diluted earnings per share:
Continuing operations...................... $(0.06) $(0.08)
=========== ===========
Weighted average common shares basic...... 9,498,827 585,872(7) 10,084,699
Weighted average common shares diluted.... 9,498,827 585,872(7) 10,084,699
</TABLE>
The accompanying notes are an integral part of the condensed pro forma statement
of operations.
20
<PAGE>
BIO-VASCULAR, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
- -------------------------------------------------------------------------------
(1) Represents the audited historical statement of operations of Bio-Vascular
for the year ended October 31, 1997, exclusive of information related to
discontinued operations, as reported in the Company's October 31, 1997 Form
10-K as filed with the Securities and Exchange Commission.
(2) Represents the audited historical statement of income of Jer-Neen for the
year ended October 31, 1997 exclusive of information related to
discontinued operations.
(3) Represents the additional cost of goods sold related to the fair market
value adjustment to acquired inventories ($3,889) offset by the decrease in
depreciation expense related to the fair market value adjustment to Jer-
Neen manufacturing equipment ($2,014).
(4) Represents the increased salary and benefits of Jer-Neen's president
($52,500); amortization of acquired goodwill (15 year life), patent (9.1
year life) and non-compete agreement (10 year life) ($513,869);
elimination of historical Jer-Neen amortization ($162,821); elimination
of salary, benefits and other expenses related to a selling shareholder
who held the position of president and who was terminated upon the
acquisition of Jer-Neen ($78,556); and the elimination of amounts paid
and expensed by Jer-Neen to a selling shareholder for consulting services
that were terminated upon the acquisition by Bio-Vascular ($40,000).
(5) Represents the elimination of interest expense on Jer-Neen debt that was
retired in connection with the acquisition ($352,996); elimination of
interest income from marketable securities used to finance the acquisition
($124,216); and interest expense related to the capitalization of a
$221,500 contractual obligation ($19,287).
(6) Represents the tax effects of the pro forma adjustments computed at the
applicable statutory federal and state tax rate for Jer-Neen or Bio-
Vascular pursuant to the provisions of SFAS 109.
(7) Represents the number of common shares of the Company issued to Jer-Neen's
shareholders in connection with the acquisition.
21
<PAGE>
BIO-VASCULAR, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
(Unaudited)
Bio-Vascular(1) Jer-Neen(2) Adjustments Combined
--------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenue............................... $ 7,949,516 $4,162,149 $ -- $12,111,665
Cost of revenue........................... 3,256,855 2,611,237 (1,494)(3) 5,866,598
----------- ---------- ---------- -----------
Gross margin.............................. 4,692,661 1,550,912 1,494 6,245,067
Operating expenses:
Selling, general and administrative....... 4,709,853 1,096,556 214,048(4) 6,020,457
Research and development.................. 1,178,294 -- -- 1,178,294
----------- ---------- ---------- -----------
Operating loss............................ (1,195,486) 454,356 (212,554) (953,684)
Other income, net......................... 671,392 (351,203) 138,801(5) 458,990
----------- ---------- ---------- -----------
Income (loss) from continuing operations
before provision for (benefit from)
income taxes............................ (524,094) 103,153 (73,753) (494,694)
Provision for (benefit from) income
taxes.................................. (175,082) 65,499 47,273(6) (62,310)
----------- ---------- ---------- -----------
Income (loss) from continuing operations.. $ (349,012) $ 37,654 $ (121,026) $ (432,384)
=========== ========== ========== ===========
Basic earnings per share:
Continuing operations..................... $(0.04) $(0.04)
=========== ===========
Diluted earnings per share:
Continuing operations..................... $(0.04) $(0.04)
=========== ===========
Weighted average common shares basic..... 9,145,669 585,872(7) 9,729,395
Weighted average common shares diluted... 9,145,669 585,872(7) 9,729,395
</TABLE>
The accompanying notes are an integral part of the condensed pro forma
statements of operations.
22
<PAGE>
BIO-VASCULAR, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
(1) Represents the unaudited historical statement of operations of Bio-
Vascular, Inc. for the nine month period ended July 31, 1998 as reported in
the Company's July 31, 1998 Form 10-Q as filed with the Securities and
Exchange Commission.
(2) Represents the unaudited historical statement of operations of Jer-Neen for
the nine month period ended July 31, 1998 exclusive of information related
to discontinued operations.
(3) Represents the decrease in depreciation expense related to the fair market
value adjustment to Jer-Neen manufacturing equipment.
(4) Represents the increased salary and benefits of Jer-Neen's president
($28,875); amortization of acquired goodwill (15 year life), patent (9.1
year life) and non-compete agreement (10 year life) ($385,402);
elimination of historical Jer-Neen amortization ($111,312); elimination
of salary, benefits and other expenses related to a selling shareholder
who held the position of president and who was terminated upon the
acquisition of Jer-Neen ($58,917); and the elimination of amounts paid
and expensed by Jer-Neen to a selling shareholder for consulting services
that were terminated upon the acquisition by Bio-Vascular ($30,000).
(5) Represents the elimination of interest expense on Jer-Neen debt that was
retired in connection with the acquisition ($246,514); elimination of
interest income from marketable securities used to finance the acquisition
($93,162); and interest expense related to the capitalization of a
$221,500 contractual obligation ($14,551).
(6) Represents the tax effects of the pro forma adjustments computed at the
applicable statutory federal and state tax rate for Jer-Neen or Bio-
Vascular pursuant to the provisions of SFAS 109.
(7) Represents the number of common shares of the Company issued to Jer-Neen's
shareholders in connection with the acquisition.
23
<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.
Dated: November 19, 1998 By: /s/ Connie L. Magnuson
-----------------------------------
Connie L. Magnuson
Vice President Finance and Chief
Financial Officer
(Principal Financial Officer)
24
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Item Method of Filing
- --------- --------------------
<C> <S> <C>
2.1 Acquisition Agreement and Plan of Reorganization by
and among Bio-Vascular, Inc., Jer-Neen Acquisition,
Inc., Jer-Neen Manufacturing Co., Inc., George Nelson,
Jr., Ronald Breckner, James Pfau, Willard Sykes and
Catherine Sykes dated July 31, 1998.................... Filed electronically
herewith.*
10.1 Employment Agreement dated July 31, 1998 among
Bio-Vascular, Inc., Jer-Neen Manufacturing Co., Inc. Filed electronically
and James F. Pfau...................................... herewith.*
10.2 Change in Control Agreement dated July 31, 1998
between Bio-Vascular, Inc. and James F. Pfau........... Filed electronically
herewith.*
23.1 Consent of Simma Flottemesch & Orenstein, Ltd. ........ Filed electronically
herewith.
99.1 Press Release, dated June 2, 1998...................... Filed electronically
herewith.*
99.2 Press Release, dated August 3, 1998.................... Filed electronically
herewith.*
</TABLE>
___________________________
*Indicates item previously filed.
25
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statement of Bio-Vascular, Inc. on Form S-8 (File No. 33-85394), Form S-8 (File
No. 33-22302), Form S-8 (File No. 33-94588), Form S-8 (File No. 333-14093), Form
S-8 (File No. 333-14137), Form S-8 (File No. 333-26783) and Form S-3 (No. 333-
64563) of our report dated December 9, 1997, except for Note 13, as to which the
date is September 18, 1998 relating to the financial statements of Jer-Neen
Manufacturing Co., Inc. as of October 31, 1997 and for the year then ended,
which appears in this Amendment No. 3 to Current Report on Form 8-K/A of Bio-
Vascular, Inc.
/S/ SIMMA FLOTTEMESCH & ORENSTEIN, LTD.
Minneapolis, Minnesota
November 19, 1998
26
