<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
--------------------
BIO-VASCULAR, INC.
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------
5) Total fee paid:
---------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
---------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------
3) Filing Party:
---------------------------------------------------------------
4) Date Filed:
---------------------------------------------------------------
<PAGE>
Bio-Vascular, Inc.
January 26, 1999
Dear Shareholder:
You are cordially invited to attend the 1999 Annual Meeting of Shareholders of
Bio-Vascular, Inc. The meeting will be held on Tuesday, February 23, 1999, at
3:45 p.m., at the Minneapolis Marriott City Center Hotel, 30 South 7th Street,
Minneapolis, Minnesota.
The attached Notice of Annual Meeting and Proxy Statement describe the formal
business to be transacted at the meeting. Items requiring shareholder approval
at the meeting are the election of directors and a proposal to increase the
number of shares reserved for issuance under the Company's 1995 Stock Incentive
Plan.
Whether or not you can attend the meeting, please complete, sign, and mail the
enclosed proxy card promptly so that your shares can be voted at the meeting
according to your instructions.
Sincerely,
/s/ M. Karen Gilles
M. Karen Gilles
President and Chief Executive Officer
<PAGE>
BIO-VASCULAR, INC.
2575 University Avenue
St. Paul, Minnesota 55114-1024 USA
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 23, 1999
----------------
The Annual Meeting of Shareholders of Bio-Vascular, Inc. (the "Company") will be
held at 3:45 p.m., local time, on Tuesday, February 23, 1999, at the Minneapolis
Marriott City Center Hotel, 30 South 7th Street, Minneapolis, Minnesota for the
following purposes as described in more detail in the accompanying Proxy
Statement:
1. To elect six (6) directors to hold office until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified;
2. To consider and act upon a proposal to amend the Company's 1995 Stock
Incentive Plan (the "1995 Plan") to increase the number of shares of the
Company's common stock, $.01 per share ("Common Stock"), specifically
reserved for issuance under such plan by 400,000 shares.
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on January 6, 1999, are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
All shareholders are invited to attend the Annual Meeting in person. If you are
unable to do so, please be sure you are represented at the Annual Meeting by
promptly completing and returning the accompanying proxy. Any shareholder who
executes and returns a proxy may revoke it at any time prior to the voting of
the proxies by giving written notice to the Secretary of the Company, by
executing a later-dated proxy, or by attending the Annual Meeting and voting in
person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Connie L. Magnuson
Connie L. Magnuson
Vice President-Finance, Chief Financial Officer
and Corporate Secretary
Dated: January 26, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE DATE AND SIGN THE PROXY
FORM EXACTLY AS YOUR NAME(S) APPEARS ON IT AND RETURN IT IN THE ENCLOSED
ENVELOPE.
<PAGE>
BIO-VASCULAR, INC.
2575 University Avenue
St. Paul, Minnesota 55114-1024 USA
-------------------------
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
FEBRUARY 23, 1999
-------------------------
INTRODUCTION
The Annual Meeting of Shareholders of Bio-Vascular, Inc. (the "Company") will be
held at 3:45 p.m., local time, on Tuesday, February 23, 1999, at the Minneapolis
Marriott City Center Hotel, Minneapolis, Minnesota, or at any adjournment
thereof (the "Annual Meeting"), for the purposes set forth in the Notice of
Meeting.
A proxy card is enclosed for your use. You are solicited on behalf of the Board
of Directors to SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No
postage is required if mailed within the United States. The cost of soliciting
proxies, including the preparation, assembly and mailing of the proxies and
soliciting material, as well as the cost of forwarding such material to the
beneficial owners of the Company's common stock (the "Common Stock"), will be
borne by the Company. Directors, officers and regular employees of the Company
may, without compensation other than their regular compensation, solicit proxies
by telephone, personal conversation, facsimile or other electronic
communication. The Company may reimburse brokerage firms and others for expenses
in forwarding proxy material to the beneficial owners of Common Stock.
Any shareholder giving a proxy may revoke it any time prior to its use at the
Annual Meeting either by giving written notice of such revocation to the
Secretary of the Company, by filing a duly executed proxy bearing a later date
with the Secretary of the Company, or by attending the Annual Meeting and voting
in person. Proxies will be voted as specified by shareholders. Proxies that are
signed by shareholders but that lack any such specification will be voted in
favor of the proposal set forth in the Notice of Meeting and in favor of the
election as directors of the nominees listed in this Proxy Statement.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL
SET FORTH IN THE NOTICE OF MEETING AND FOR EACH OF THE DIRECTOR NOMINEES
NAMED HEREIN.
The Company expects that this Proxy Statement, the Proxy and Notice of Meeting
will first be mailed to shareholders on or about January 26, 1999.
<PAGE>
VOTING OF SHARES
Only holders of record of Common Stock at the close of business on January 6,
1999 will be entitled to vote at the Annual Meeting. On January 6, 1999, the
Company had 9,350,561 shares of Common Stock outstanding, each such share
entitling the holder thereof to one vote on each matter to be voted on at the
Annual Meeting. The holders of 33-1/3% of the shares entitled to vote and
represented in person or by proxy at the Annual Meeting will constitute a quorum
for the transaction of business at the Annual Meeting. In general, shares of
Common Stock represented by a properly signed and returned proxy card will be
counted as shares present and entitled to vote at the meeting for purposes of
determining a quorum, without regard to whether the card reflects abstentions
(or is left blank) or reflects a "broker non-vote" on a matter (i.e., a card
returned by a broker because voting instructions have not been received and the
broker has no discretionary authority to vote). Holders of shares of Common
Stock are not entitled to cumulative voting rights.
The election of a nominee for director requires the approval of a majority of
the shares present and entitled to vote in person or by proxy on that matter
(and at least a majority of the minimum number of votes necessary for a quorum
to transact business at the Annual Meeting). Shares represented by a proxy card
voted as abstaining on any of the proposals will be treated as shares present
and entitled to vote that were not cast in favor of a particular matter, and
thus will be counted as votes against the matter. Shares represented by a proxy
card indicating any broker non-vote on a matter will be treated as shares not
entitled to vote on that matter, and thus will not be counted in determining
whether that matter has been approved.
2
<PAGE>
PRINCIPAL SHAREHOLDERS AND BENEFICIAL
OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Common Stock as of November 30, 1998, unless otherwise noted, (a) by each
shareholder who is known by the Company to own beneficially more than 5% of the
outstanding Common Stock, (b) by each director and each nominee, (c) by each
executive officer named in the Summary Compensation Table below, and (d) by all
executive officers and directors as a group. Unless otherwise noted, each of the
shareholders listed in the table or included within a group listed in the table
possesses sole voting and investment power with respect to the shares indicated.
- -------------------------------------------------------------------------------
Beneficial Owner Number of Shares Percentage Ownership
Beneficially Owned (1)
- -------------------------------------------------------------------------------
Perkins Capital Management, 522,500 5.6%
Inc.(2)
730 East Lake Street
Wayzata, MN 55391-1769
- -------------------------------------------------------------------------------
William G. Kobi -- --
- -------------------------------------------------------------------------------
Richard W. Perkins (3) 172,750 1.8%
- -------------------------------------------------------------------------------
Anton R. Potami (4) 6,500 *
- -------------------------------------------------------------------------------
Timothy M. Scanlan (5) 6,000 *
- -------------------------------------------------------------------------------
Edward E. Strickland (6) 203,000 2.2%
- -------------------------------------------------------------------------------
M. Karen Gilles (7) 106,104 1.1%
- -------------------------------------------------------------------------------
David Buche (8) 19,747 *
- -------------------------------------------------------------------------------
Connie L. Magnuson (9) 8,801 *
- -------------------------------------------------------------------------------
All Executive Officers and 622,369 6.5%
Directors as a Group (11
persons) (10)
- -------------------------------------------------------------------------------
* Less than 1%.
1 Shares not outstanding but deemed beneficially owned by virtue of the right of
a person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percent owned by such person
or group. As of November 30, 1998, there were 9,352,561 shares of Common Stock
outstanding.
2 Excludes shares beneficially owned by Richard W. Perkins, a director of the
Company and the controlling shareholder of Perkins Capital Management, Inc., a
registered investment advisor ("PCM"). PCM disclaims beneficial ownership of
the 522,500 shares (the "PCM Shares") held for the account of its clients. Of
the 522,500 shares, PCM has sole investment power with regard to all such
shares and sole voting power over 91,250 of such shares.
3 Includes 5,000 shares held by the Perkins Foundation, 78,500 shares held by
various trusts of which Mr. Perkins is the sole trustee, and 56,250 shares
held by Quest Venture Partners, of which Mr. Perkins is a 40% partner. Also
includes 33,000 shares Mr. Perkins has the right to acquire within 60 days
upon the exercise or options. Excludes the 522,500 PCM Shares. Mr.
Perkins disclaims beneficial ownership of the PCM Shares.
3
<PAGE>
4 Includes 6,000 shares Mr. Potami has the right to acquire within 60 days upon
the exercise of options.
5 Includes 6,000 shares Mr. Scanlan has the right to acquire within 60 days
upon the exercise of options.
6 Includes 53,000 shares Mr. Strickland has the right to acquire within 60 days
upon the exercise of options.
7 Includes 81,148 shares Ms. Gilles has the right to acquire within 60 days
upon the exercise of options.
8 Includes 15,253 shares Mr. Buche has the right to acquire within 60 days upon
the exercise of options.
9 Includes 5,867 shares Ms. Magnuson has the right to acquire within 60 days
upon the exercise of options.
10 Includes 209,724 shares which may be acquired within 60 days upon the
exercise of options.
ELECTION OF DIRECTORS
Nomination
The Bylaws of the Company provide that the Board of Directors (the "Board")
shall consist of one or more members, with the number of directors determined by
the shareholders at each regular meeting of the shareholders, subject to
adjustment by the Board or the shareholders between such meetings. The number of
directors is currently set at six (6).
The Board has nominated the six (6) individuals named below to serve as
directors of the Company until the next Annual Meeting of Shareholders or until
their respective successors have been elected and qualified. The election of the
six nominees by the shareholders at the Annual Meeting will determine the number
of directors in accordance with the Bylaws. All of the nominees are members of
the current Board.
The election of each nominee requires the affirmative vote of a majority of the
shares of the Common Stock present and entitled to vote in person or by proxy
for the election of directors at the Annual Meeting, and at least a majority of
the minimum number of votes necessary for a quorum to transact business. The
Board recommends a vote FOR the election of each of the nominees listed below.
In the absence of other instructions, the proxies will be voted FOR the election
of the nominees named below. If prior to the Annual Meeting the Board should
learn that any nominee will be unable to serve by reason of death, incapacity or
other unexpected occurrence, the proxies that otherwise would have been voted
for such nominee will be voted for such substitute nominee as selected by the
Board. Alternatively, the proxies, at the Board's discretion, may be voted for
such fewer number of nominees as results from such death, incapacity or other
unexpected occurrence. The Board has no reason to believe that any of the
nominees will be unable to serve.
Information About Nominees
The following information has been furnished to the Company, as of November 30,
1998, by the persons who have been nominated by the Board to serve as directors
for the ensuing year.
4
<PAGE>
Director
Name Age Title Since
---- --- ----- -----
Timothy M. Scanlan 52 Chairman of the Board and Director 1997
M. Karen Gilles 56 President, Chief Executive Officer 1997
and Director
William G. Kobi 54 Director 1998
Richard W. Perkins 67 Director 1987
Anton R. Potami 55 Director 1997
Edward E. Strickland 71 Director 1988
Other Information About Nominees
Timothy M. Scanlan. Mr. Scanlan has served on the Board of the Company since
1997 and as Chairman of the Board since 1998. Mr. Scanlan has served as
President and Chief Executive Officer of the Scanlan Group of Companies since
1976. The Scanlan Group of Companies, a 77 year-old organization consisting of
Scanlan International, Inc., Surgical Technologies, Inc., McLean Medical and
Scientific, Inc., and Scanlan Group BV, designs, manufactures and distributes
medical and surgical products and services worldwide. Mr. Scanlan serves on the
Board of Directors of the Association of Operating Room Nurses Foundation,
Automated Management Technologies and the Lillehei Surgical Society.
M. Karen Gilles. Ms. Gilles has served as President and Chief Executive Officer
of the Company since July 1997 and as a Director of the Company since August
1997. Prior to July 1997, Ms. Gilles held the positions of Chief Financial
Officer of the Company from December 1990, Vice President of Finance from 1989,
and Secretary of the Company from November 1991. Ms. Gilles served as the
Director of Finance and Administration of the Company from April 1989 to
December 1989. Ms. Gilles also serves on the Board of Directors of Reuter
Manufacturing Inc.
William G. Kobi. Mr. Kobi has served as President, Chief Executive Officer and a
director of Acumen Healthcare Solutions, Inc. since May 1997. Acumen is a
medical software systems company, founded in 1997, involved in the electronic
data collection for clinical trials, medical device tracking and managed care.
From 1988 to April 1997, Mr. Kobi was owner of Kobi's Karvings and Log Home
Supply, a non-medical business in Northern Minnesota. From 1976 to 1988, Mr.
Kobi was employed by SCIMED Life Systems Inc., in the positions of Director of
Sales, Director of Marketing, Director of International Sales, and as Vice
President of Worldwide Sales for its cardiovascular division.
Richard W. Perkins. Mr. Perkins has served on the Board of the Company since
1987. He has served as President, Chief Executive Officer and a director of
Perkins Capital Management, Inc., an investment management firm, since 1984. Mr.
Perkins also serves on the Board of Directors of the following public companies:
LifeCore Biomedical, Inc., Children's Broadcasting Corporation, CNS, Inc.,
Nortech Systems, Inc., Eagle Pacific Industries, Inc., Quantech Ltd., Vital
Images, Inc. and Harmony Holdings, Inc.
Anton R. Potami. Mr. Potami has served on the Board of the Company since 1997.
Mr. Potami has served as President and Chief Executive Officer of the William C.
Norris Institute since September 1996. The William C. Norris Institute is a
non-profit organization established to operate as a catalyst to change
educational processes and for the development of small, technology-based
businesses. From 1983 to September 1996, Mr. Potami was Associate Vice President
in the Office of Research and Technology Transfer at the University of
Minnesota. Mr. Potami serves on the Board of Directors of several private
5
<PAGE>
organizations and institutions, including Minnesota Cooperation Office,
International Hearing Foundation, Minnesota Technology Corridor and Advance
Transportation Research Association.
Edward E. Strickland. Mr. Strickland has served on the Board of the Company
since 1988. Mr. Strickland has been an independent financial consultant since
1986. Mr. Strickland serves on the Board of Directors of AVECOR Cardiovascular
Inc., Communications Systems, Inc., Hector Communications, Inc., Quantech Ltd.,
Vital Images, Inc. and Reuter Manufacturing, Inc.
Information About the Board and its Committees
The Board met five times during the fiscal year ended October 31, 1998. Each of
the directors attended, either in person or by telephonic conference, at least
75% of the meetings of the Board and all such committees on which such director
served during the 1998 fiscal year. The committees of the Board during the 1998
fiscal year are listed below:
<TABLE>
<CAPTION>
Audit Compensation Nominating
----- ------------ ----------
<S> <C> <C>
Edward E. Strickland (Chair) Richard W. Perkins(Chair) Timothy M. Scanlan (Chair)
William G. Kobi William G. Kobi William G. Kobi
Anton R. Potami Anton R. Potami Richard W. Perkins
Anton R. Potami
Edward E. Strickland
</TABLE>
The Audit Committee is responsible for the selection of the auditors and the
review of the auditor's engagement letter. The Audit Committee receives the
auditor's report and may recommend changes in the accounting systems of the
Company, if so warranted.
The Compensation Committee's function is to determine compensation for the
officers of the Company, to provide for management continuity and to administer
the Company's stock-based compensation plans. See "Compensation Committee Report
on Executive Compensation" below for a more detailed discussion of the function
of the Compensation Committee.
The Nominating Committee is responsible for the selection and nomination of
qualified candidates to serve on the Board. While the Nominating Committee will
consider nominees recommended by the Company's shareholders, it has neither
actively solicited nominations nor established any procedures for this purpose.
During the 1998 fiscal year, the Audit and Nominating Committees each met once
and the Compensation Committee met twice.
Directors' Compensation
Upon election to the Board and as compensation for their services as directors,
each non-employee director receives options under the Bio-Vascular, Inc. 1992
Directors' Stock Option Plan (the "Director Plan") to purchase 18,000 shares of
Common Stock. These options vest in equal one-third increments on each
successive October 31 beginning one year after the date of grant and are
exercisable at a price equal to the fair market value of one share of Common
Stock on the date of grant. On the third and sixth anniversaries of each
non-employee director's election to the Board, each non-employee director
continuing to serve on the Board will receive options under the Director Plan to
purchase 21,000 and 24,000 shares of Common Stock, respectively, vesting in
one-third increments on each successive October 31 following the date of grant
at an exercise price equal to the fair market value on the date of
6
<PAGE>
grant. Options granted under the Director Plan have a term of eight years and
are exercisable for a period of five years after vesting, but only while the
recipient remains a director of the Company.
The Board currently meets periodically throughout the year and at the annual
meeting of the Company's shareholders. Directors receive compensation of $1,000
per month for being a member of the Board and $500 for each Board meeting
attended. In addition, all members of the Board are reimbursed for out of pocket
expenses in connection with attending a Board meeting. Committee members receive
additional compensation of $250 for each Audit and/or Compensation Committee
meeting attended. No additional compensation is received for service on the
Nominating Committee.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth, for the fiscal years ended October 31, 1998,
1997 and 1996, the cash and non-cash compensation paid to or earned by the Chief
Executive Officer of the Company and the two other most highly compensated
executive officers of the Company whose salary and bonus exceeded $100,000 in
the fiscal year ended October 31, 1998. No other executive officers were paid or
earned in excess of $100,000 in the year ended October 31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
- ----------------------------------------------------------- --------------------------------------
Name and Principal Position Year Annual Compensation Long Term Compensation
--------------------- --------------------------
Salary ($) Bonus ($) Restricted Securities All Other
Stock Underlying Compensation
Award ($)(1) Options (#) ($)
- ----------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
M. Karen Gilles (2) 1998 $ 175,000 $ 12,000 $ - - $ -
President and Chief Executive 1997 135,833 7,500 - 150,000 -
Officer 1996 105,000 0 - - -
- ----------------------------------------------------------- --------------------------------------
David Buche (3) 1998 $ 106,250 $ 4,400 $ 41,251(4) 27,308 $ -
Vice President of Sales and 1997 79,000 23,326 - - -
Marketing 1996 77,552 11,647 - - 8,233(5)
- ----------------------------------------------------------- --------------------------------------
Connie L. Magnuson (6) 1998 $ 107,532 $ 6,400 $ 43,999(7) 30,467 $ -
Vice President of Finance 1997 - - - -
and Chief Financial Officer 1996 - - - - -
- ----------------------------------------------------------- --------------------------------------
</TABLE>
1 Restricted stock grants are valued at the market price on the day of grant
regardless of whether such shares have vested. To date, the Company has not
paid dividends on its Common Stock, including shares of Common Stock subject
to restricted stock grants.
2 Ms. Gilles was named President and Chief Executive Officer of the Company in
July 1997, having served as Vice President of Finance and Chief Financial
Officer up to such time.
3 Mr. Buche was named Vice President of Sales and Marketing of the Company in
January 1998, having served as Marketing Director from November 1997 up to
such time and as International Sales Manager through October 1997.
4 As of October 31, 1998, Mr. Buche had aggregate unearned restricted stock
holdings of 8,123 shares, valued at $28,942 as of such date. Effective January
16, 1998, Mr. Buche was granted a restricted stock award in the amount of
10,154 shares, vesting in one installment of 2,031 shares on October 31, 1998
and two installments of 2,708 shares on October 31, 1999 and 2000. The
remaining 2,707 shares will vest on October 31, 2001.
7
<PAGE>
5 "All Other Compensation" paid to Mr. Buche is comprised entirely of relocation
expense reimbursement.
6 Ms. Magnuson was named Vice President of Finance and Chief Financial Officer
of the Company in November 1997.
7 As of October 31, 1998, Ms. Magnuson had aggregate unearned restricted stock
holdings of 8,799 shares valued at $31,351 as of such date. Effective November
10, 1997, Ms. Magnuson was granted a restricted stock award in the amount of
11,733 shares, vesting in one installment of 2,934 shares on October 31, 1998
and three installments of 2,933 shares on October 31, 1999, 2000 and 2001.
Option Grants and Exercises
The following tables provide information for the year ended October 31, 1998 as
to individual grants and aggregate exercises of options to purchase shares of
the Common Stock by each of the executive officers named in the Summary
Compensation Table and the potential realizable value of the options held by
such persons at October 31, 1998.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
- ---------------------------------------------------------------------------------------------
Individual Grants
--------------------------------------------
Name Number of % of Total Exercise Expiration Potential Realizable Value
Securities Options or Base Date at Assumed Annual Rates
Underlying Granted to Price of Stock Price Appreciation
Options Employees ($/Sh) for Option Term(1)
Granted in Fiscal ----------- ----------------
Year 5% 10%
- ------------------- ---------- ----------- -------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
M. Karen Gilles -- -- -- -- -- --
- ------------------- ---------- ----------- -------- ------------ ----------- ----------------
David Buche 20,308(2) 4.55% $4.06 10/31/06 $44,175 $108,160
7,000(3) 1.57% $5.00 05/06/07 19,296 47,528
- ------------------- ---------- ----------- -------- ------------ ------------ ----------------
Connie L. Magnuson 23,467(4) 5.26% $3.75 10/31/06 $48,335 $118,960
7,000(3) 1.57% $5.00 05/06/07 19,296 47,528
- ------------------- ---------- ----------- -------- ------------ ------------ ----------------
</TABLE>
1 Potential realizable value is calculated based on an assumption that the price
of the Company's Common Stock will appreciate at the assumed annual rates
shown (5% and 10%), compounded annually from the date of grant of the option
until the end of the option term. These assumed annual rates are applied
pursuant to Securities and Exchange Commission rules and therefore are not
intended to forecast possible future appreciation, if any, of the Common
Stock. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
continued employment of the named executive by the Company. There can be no
assurance that the amounts reflected in this table will be realized.
2 Reflects a grant of 20,308 stock options to Mr. Buche on January 16, 1998, at
the fair market value of the underlying stock on that date, under the
Company's 1995 Plan. The options vest in one installment each of 4,062 and
5,416 on October 31, 1998 and 1999, respectively, and two installments of
5,415 on October 31, 2000 and 2001. The options expire five years after the
vest date.
3 Reflects a grant of 7,000 stock options granted to both Mr. Buche and Ms.
Magnuson on May 6, 1998, at the fair market value of the underlying stock on
that date, under the Company's 1995 Plan. The options vest on May 6, 2002 and
expire five years after the date of vest.
4 Reflects a grant of 23,467 stock options to Ms. Magnuson on November 10, 1997,
at the fair market value of the underlying stock on that date, under the
Company's 1995 Plan. The options vest in three installments of 5,867 on
October 31, 1998, 1999 and 2000, and one installment of 5,866 on October 31,
2001. The options expire five years after the vest date.
8
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
- ------------------------------------------------------------------------------------------
Shares Value Number of Securities
Acquired Realized Underlying Unexercised Value of Unexercised
Name on ($) Options at In-the-Money Options at
Exercise October 31, 1998 October 31, 1998 (2)
(#) (1) --------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
M. Karen Gilles -- -- 88,148 90,000 -- --
- ----------------------------------------------- -------------- ----------- -------------
David Buche -- -- 15,253 27,329 -- --
- ----------------------------------------------- -------------- ----------- -------------
Connie L. Magnuson -- -- 5,867 24,600 -- --
- ----------------------------------------------- -------------- ----------- -------------
</TABLE>
1 The Company's option plans generally provide that the exercise price of
options must be paid in cash, except that the Compensation Committee, in its
sole discretion, may allow payment by delivery of shares of Common Stock
having an aggregate fair market value equal to the exercise price or may allow
the exercise price to be financed by the Company upon such terms and
conditions as the Compensation Committee may determine.
2 Based upon the market value of the underlying Common Stock on October 30, 1998
of $3.563, as reported by the Nasdaq National Market, less the exercise price.
Compensation Committee Report on Executive Compensation
Overview and Philosophy
The Compensation Committee is currently composed of three of the Company's
outside directors. The Compensation Committee's responsibilities are to:
* Review and recommend compensation policies and compensation levels for
the Company's executive officers to the Board;
* Review and recommend plans to provide management continuity to the
Board; and
* Administer the Company's stock based compensation plans and the Employee
Stock Purchase Plan. The Compensation Committee determines who will
participate in such plans and the extent and terms of such participation.
The Compensation Committee's objectives in recommending executive compensation
policies and compensation levels for the Company's executive officers are: (i)
to attract and retain qualified executive officers; (ii) to align the interests
of those executive officers with those of the Company's shareholders; and (iii)
to encourage the development of a cohesive management team. The Compensation
Committee believes that base salaries need to be moderately to aggressively
competitive to attract and retain qualified executive officers, that the
executive officers need to be provided with stock ownership opportunities to
align their interests with those of the Company's shareholders and that
incentive compensation should be based primarily on the accomplishment of
Company performance in the interest of building a cohesive management team.
Executive Compensation Program Components
The Company's executive compensation program focuses on Company and individual
performance as measured against goals confirmed by the Compensation Committee.
The Compensation Committee places primary emphasis on Company performance rather
than individual performance in order to inspire
9
<PAGE>
the Company's executives to work as a team to accomplish Company objectives.
Components of the Company's executive officer compensation program include base
salary, annual cash incentive compensation, stock option grants and restricted
stock awards, as well as various benefits which are presently available to all
employees of the Company. Each component of the executive officer compensation
program is discussed in greater detail below.
Base Salary
The Compensation Committee's recommendations regarding the base salary of each
of the Company's executive officers are based on a number of factors, including
the executive officer's experience and past performance, the level of skill and
responsibility required by the executive's position and his or her
qualifications for the position. The Compensation Committee also considers
competitive salary information gathered by outside consultants and through
comparative surveys pertaining specifically to the medical device industry as
well as to companies of similar size in other industries. As a result, the
population of companies for which competitive salary data is obtained is broader
than the industry peer group established to compare shareholder returns in the
Performance Graph set forth below. In general, the Compensation Committee seeks
to set executive officer base salary at moderately to aggressively competitive
levels in relation to the companies with which the Company competes for
executives. Base salaries are determined prior to the beginning of each fiscal
year following a review of the above factors by the Compensation Committee and
may also be adjusted based on Company performance and the executive officer's
impact thereon, cost of living, promotion or merit factors.
The base salary compensation component for each executive officer, other than
Ms. Gilles, was determined by Ms. Gilles and reviewed and approved by the
Compensation Committee based on the factors discussed above. Ms. Gilles'
compensation was increased in July 1997 in conjunction with her appointment as
Chief Executive Officer of the Company. Based on the timing of the increase in
July 1997, the Board of Directors did not increase Ms. Gilles' fiscal 1998 base
salary.
Annual Cash Incentive Compensation
The Company's annual cash incentive compensation program is designed to provide
a direct financial incentive to the Company's executive officers for the
achievement of specific Company and individual performance goals.
Under general guidelines established by the Compensation Committee, each of the
Company's executive officers are eligible to receive up to 20% of their base
salary in annual cash incentive compensation based on certain criteria
established by the Compensation Committee. Of this amount, the Compensation
Committee's guidelines provide that 40% is based on achievement of net revenue
goals, 40% on the achievement of internal segment operating income goals and the
remaining 20% on a subjective evaluation by the Compensation Committee of the
individual executive officer's performance during the period. At the
Compensation Committee's discretion, the amount of annual cash incentive
compensation may be increased to more than 20% of an executive officer's base
salary in the event of performance by that executive above and beyond what is
normally called for by the executive's position. The Compensation Committee may
also pay a cash hiring bonus at the time an executive officer joins the Company.
Incentive compensation for fiscal 1998 was earned by all executive officers in
accordance with the plan discussed above. Net revenue and operating income goals
of the Company were not achieved in 1998, therefore, the Compensation Committee
did not award the 80% component of cash incentive compensation based on those
criteria. Each officer earned all or part of the cash incentive compensation
based on personal goals and achievements. In addition, two executive officers,
Ms. Gilles and Ms.
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Magnuson, received an additional incentive bonus for their significant
contribution to the successful acquisition of Jer-Neen Manufacturing Co., Inc.
Stock Option Program
By granting options to purchase Common Stock to the executive officers of the
Company, the Compensation Committee seeks to align the long-term interests of
the Company's executive officers with those of its shareholders by creating a
strong and direct nexus between executive compensation and shareholder return
and to enable executives to develop and maintain a significant ownership
position in the Company.
The 1995 Plan authorizes the Compensation Committee to issue executive officers
incentive stock options having an exercise price not less than the fair market
value of the Common Stock on the date of grant (or, for an incentive option
granted to a person holding more than 10% of the Company's voting stock, at not
less than 110% of fair market value), and non-statutory options having an
exercise price not less than 85% of the fair market value of the Common Stock on
the date of grant. Options granted under the 1995 Plan have a term fixed by the
Compensation Committee at the time of grant, which term may not exceed 10 years.
All other terms of options granted under the 1995 Plan may be determined by the
Compensation Committee and different restrictions may be established with
respect to different recipients of stock options.
General guidelines established by the Compensation Committee provide for the
grant to each executive officer of options having a value up to 20% of such
executive officer's base salary on the date of grant, calculated on the basis of
the fair market value of the Common Stock underlying the options on the date of
grant. The Compensation Committee determines the number of options and the terms
and conditions of such options based on certain factors, including the past
performance of the executive officer, the executive officer's potential impact
on the achievement of the Company's objectives, past grants or awards of
stock-based compensation and on comparative compensation data regarding option
grants by companies within the medical device industry as well as within a
broader group of companies of comparable size and complexity. Additionally,
options may be granted to an executive officer as an incentive at the time the
executive officer joins the Company.
During fiscal 1998, and in connection with their appointments as executive
officers of the Company, Mr. Buche and Ms. Magnuson received four-year option
grants equal to 20% of their base salary, vesting in installments annually
through October 31, 2001. They also were awarded options to purchase 7,000
shares of stock in recognition of the vital role they play in the long-term
success of the Company and to provide additional incentive to continue
employment with the Company. The Board of Directors desires to grant Ms. Gilles
stock-based incentive compensation on the same basis as that of the other
executive officers of the Company, following a review of the above factors.
These options and restricted stock awards will be reflected as fiscal 1999
grants from the Company's 1995 Plan if the shareholders approve the increase in
the number of authorized plan shares. If the shareholders do not approve the
Board's recommendation regarding the amendment to the 1995 Plan, such awards to
Ms. Gilles may be made in the form of non-plan options and restricted stock. In
fiscal 1997, Ms. Gilles received an award of 150,000 stock options concurrent
with assuming the positions of President and Chief Executive Officer of the
Company and was not awarded additional options in fiscal 1998.
Restricted Stock Awards
The Compensation Committee may also grant stock-based compensation to the
Company's executive officers in the form of restricted stock awards. Under
general guidelines established by the Compensation Committee, executive officers
of the Company are eligible to receive awards of restricted stock having a value
of up to 10% of their base salary in a given year, divided by the market price
of the
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Common Stock on the date of grant. Although each award of restricted stock is
subject to terms and conditions established by the Compensation Committee, such
awards generally consist of four-year grants of the number of shares determined
as provided above, which vest in equal installments over the four year period
conditioned on the executive's continued employment by the Company. In
determining whether to grant shares of restricted stock to an executive officer
of the Company, the Compensation Committee evaluates the past performance of the
executive officer, the executive officer's potential impact on the achievement
of the Company's objectives and past grants or awards of stock-based
compensation to the executive officer. Restricted stock may also be awarded by
the Compensation Committee upon the hiring of executive officers as an incentive
to join the Company.
During fiscal 1998, and in connection with their appointments as executive
officers of the Company, Mr. Buche and Ms. Magnuson each received four-year
awards of restricted stock equal to 10% of their base salary, vesting in annual
installments through October 31, 2001. Ms. Gilles did not receive additional
shares of restricted stock in 1998 as she became fully vested, on October 31,
1998, to her final installment of the four-year award of restricted stock she
received in 1995 in connection with her position as Vice President of Finance.
Benefits
The Company provides medical, dental and life and disability insurance benefits
as well as a 401(k) retirement plan and a stock purchase plan to the executive
officers. The same benefits are available to all Company employees. The amount
of perquisites, as determined in accordance with the rules of the Securities and
Exchange Commission relating to executive compensation, did not exceed 10% of
each executive officer's annual salary for fiscal 1998.
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
limits the deductibility of certain compensation paid to each of the chief
executive officer and the four other most highly compensated executives of a
publicly held corporation to $1,000,000. In fiscal 1998, the Company did not pay
"compensation" within the meaning of Section 162(m) to such executive officers
in excess of $1,000,000 and does not believe it will do so in the near future.
Therefore, the Company does not have a policy at this time regarding qualifying
compensation paid to its executive officers for deductibility under Section
162(m), but will formulate such a policy if compensation levels ever approach $1
million.
Richard W. Perkins (Chair)
William G. Kobi
Anton R. Potami
Members of the Compensation Committee
Management Agreements
Each of the executive officers of the Company named in the Summary Compensation
Table has entered into an agreement providing severance benefits upon
termination resulting from a change of control of the Company. These agreements
provide for certain payments in the event that within twelve months subsequent
to a change in control of the Company or, in certain circumstances, immediately
prior to a change in control of the Company, the officer's employment is
terminated involuntarily by the Company or by the executive officer due to a
material change of position or benefits of the executive officer (a "Qualifying
Termination"). As defined in these agreements, a "change in control" means: (i)
the sale, lease, exchange, or other transfer of all or substantially all of the
assets of the Company (in one transaction or in a series of related
transactions) to any third party; (ii) the approval by the shareholders of the
Company of any plan or proposal for the liquidation or dissolution of the
Company; or (iii) a change
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in control of a nature that would be required to be reported (assuming such
event has not been "previously reported") in response to Item 1(a) of a Current
Report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act, whether
or not the Company is then subject to such reporting requirement; provided that,
without limitation, such a change in control will be deemed to have occurred at
such time as: (A) any third party is or becomes the beneficial owner, directly
or indirectly, of 50% or more of the combined voting power of the Company's
outstanding securities ordinarily having the right to vote for elections of
directors, or (B) individuals who constitute the Board on the date of the
agreement (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date of the agreement whose election, or nomination for
election, by the Company's shareholders, was approved by a vote of at least a
majority of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which such
individual is named as a nominee for director without objection to such
nomination) will, for purposes of this clause (B), be deemed to be a member of
the Incumbent Board.
Upon a Qualifying Termination, in addition to salary and benefits then due and
in addition to any other benefits due under the Company's compensation plans,
the terminated executive officer is entitled to: (a) a lump sum payment equal to
the product of the executive officer's highest monthly compensation for the
previous twelve month period multiplied by thirty-six (36); (b) reimbursement
for all legal fees and expenses incurred by the executive officer as a result of
such termination; and (c) for a thirty-six (36) month period following such
termination, life and health insurance benefits substantially similar to those
the executive officer was receiving at the time of termination.
The severance agreements for the named executive officers provide that in the
event that any payment or benefit received by the executive officer pursuant to
the severance agreement or any other payments the officer has the right to
receive from the Company in connection with a change in control of the Company
would not be deductible by the Company under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), such severance payments will be
reduced so that no portion of such payments is not deductible by reason of
Section 280G of the Code.
Certain Transactions
In 1997, the Company entered into a distribution agreement with Scanlan
International, Inc. ("Scanlan International"), a medical and surgical products
distributor, granting Scanlan International the exclusive right to act as a
sales representative for the Company's products within Latin America. In
exchange for marketing and selling the Company's products, Scanlan International
will be paid a commission of 20% on net sales to Latin America during the term
of the agreement. The agreement has an initial term ending October 31, 2000,
subject to annual renewal thereafter. Mr. Timothy M. Scanlan is the Chairman of
the Board of Directors of the Company and is the President and Chief Executive
Officer of the parent company of Scanlan International. Commissions paid to
Scanlan International totaled $2,000 for fiscal 1998. There was no sales
activity resulting from this agreement in fiscal 1997.
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Performance Graph
In accordance with the rules of the Securities and Exchange Commission, the
following performance graph compares the performance of the Company's Common
Stock on the Nasdaq SmallCap Market prior to September 21, 1995, and on the
Nasdaq National Market thereafter, to an index for the Nasdaq Stock Market (U.S.
Companies) prepared by the Center for Research in Securities Prices and to a
self-determined peer group of seven(1) companies identified at the bottom of the
graph. The graph compares the cumulative total stockholder return as of the last
trading day immediately preceding the end of each of the Company's last five
fiscal years on $100 invested at the beginning of the period and assumes
reinvestment of all dividends.
Date Company Index Market Index Peer Index
10/29/93 100.0 100.0 100.0
10/31/94 151.7 100.5 94.8
10/31/95 393.1 135.4 179.3
10/31/96 175.9 159.8 147.8
10/31/97 134.5 210.3 128.6
10/30/98 127.8 235.8 90.2
The index level for all series was set to 100.0 on 10/29/93.
Companies in Peer Group
ATS Medical Inc. Angeion Corporation
Everest Medical Corporation Minntech Corporation
Possis Medical Inc. Rehabilicare Inc.
Rochester Medical Corporation
1 In prior years, the self-determined peer group of companies included
Medivators Inc., in addition to the seven companies noted above. Because
Medivators Inc. was acquired in 1998 and is no longer publicly traded, it
has been eliminated from the Company's self-determined peer group.
PROPOSAL TO AMEND THE COMPANY'S 1995 STOCK INCENTIVE PLAN
Introduction
The Company's 1995 Stock Incentive Plan was first approved by the Board of
Directors of the Company in December 1995 and adopted by the Company's
shareholders in March 1996. The 1995 Plan was intended to replace the Company's
1988 Stock Option Plan (the "1988 Plan"), as well as the 1990 Management
Incentive Stock Option Plan (the "1990 Plan") and 1992 Stock Option Plan (the
"1992 Plan") adopted by the Company in connection with the acquisition of its
former subsidiary, Vital Images, Inc.
The 1995 Plan currently provides for awards to eligible recipients of: (i)
options to purchase Common Stock that qualify as "incentive stock options"
within the meaning of Section 422 of the Code ("Incentive Options"); (ii)
options to purchase Common Stock that do not qualify as Incentive Options
("Non-Statutory Options"); (iii) restricted stock awards ("Restricted Stock
Awards"); (iv) performance units ("Performance Units"); and (v) stock bonuses
("Stock Bonuses"). Incentive Options and Non-Statutory Options are referred to
as "Options," and Options, Restricted Stock Awards, Performance Units and Stock
Bonuses are collectively referred to as "Incentive Awards."
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On December 31, 1998, the Board amended the 1995 Plan, subject to shareholder
approval, to increase the number of shares of Common Stock specifically reserved
for issuance under the 1995 Plan by 400,000 shares, from 410,000 shares to
810,000 shares. The Company's shareholders are being asked to approve this
amendment at the Annual Meeting.
Reasons for Amendment
The increase in the number of shares of Common Stock specifically reserved for
issuance under the 1995 Plan from 410,000 shares to 810,000 shares is necessary
to permit the Company to continue the operation of the 1995 Plan for the benefit
of new participants, as well as to allow additional awards to current
participants in the 1995 Plan. The Board of Directors initially specifically
reserved 410,000 shares of Common Stock for issuance under the 1995 Plan, plus
the number of shares remaining available under the 1988 Plan or which later
became available under the 1988, 1990 or 1992 Plans as a result of forfeiture or
cancellation. Through December 31, 1998, the Board of Directors has granted
Incentive Awards under the 1995 Plan covering an aggregate of 1,121,276 shares
of Common Stock, and it is anticipated that the Board will grant additional
Incentive Awards with respect to 126,155 shares of Common Stock if the proposed
amendment is approved. See "Awards Under the 1995 Plan" and "New Plan Benefits,"
below. If this proposal is approved and if the Board makes the anticipated
awards, 288,936 shares of Common Stock, plus any shares contributed to the 1995
Plan from the 1988, 1990 or 1992 Plans due to future forfeitures or
cancellations, will be available for future grants under the 1995 Plan.
Summary of the 1995 Stock Incentive Plan, as Amended
The major features of the 1995 Plan are summarized below, which summary is
qualified in its entirety by reference to the actual text of the 1995 Plan. The
Company will furnish without charge a copy of the 1995 Plan to any shareholder
of the Company as of January 6, 1999, upon receipt from any such person of an
oral or written request for the 1995 Plan. Such request should be sent to the
Company at Bio-Vascular, Inc., 2575 University Avenue, Saint Paul, Minnesota
55114, Attn: Shareholder Relations, or made by telephone at (651) 603-3700.
General
The purpose of the 1995 Plan is to advance the interests of the Company and its
shareholders by enabling the Company and its subsidiaries to attract and retain
persons of ability to perform services for the Company and its subsidiaries by
providing an incentive to such individuals through equity participation in the
Company and by rewarding such individuals who contribute to the achievement by
the Company of its economic objectives.
The 1995 Plan is administered by a committee of the Board of Directors (the
"Committee") consisting of not less than two members of the Board who are
"disinterested persons" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee selects the
participants to be granted Incentive Awards under the 1995 Plan (the
"Participants"), determines the nature and extent of the Incentive Awards
granted to the Participants, the time or times when Incentive Awards will be
granted, the duration of each Incentive Award and the discretionary terms and
conditions of each grant not otherwise fixed under the 1995 Plan. In addition,
the Committee will have the authority under the 1995 Plan in its sole discretion
to pay the economic value of any Incentive Award in the form of cash, Common
Stock or any combination of both. The 1995 Plan has been and is expected to
continue to be administered by the Compensation Committee of the Board of
Directors.
Eligible recipients of Incentive Awards under the 1995 Plan include all
full-time or part-time employees of the Company or any subsidiary and any
non-employee directors, consultants and independent contractors of
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the Company or any subsidiary. As of December 31, approximately 174 persons were
eligible to participate in the 1995 Plan. The Company intends that Incentive
Awards be granted under the 1995 Plan to those eligible persons who are
performing vital services in the management, operations and development of the
Company or a subsidiary and significantly contribute to the achievement of
long-term, corporate economic objectives.
The 1995 Plan will terminate on December 18, 2005, unless sooner terminated by
action of the Board of Directors. No Award will be granted after termination of
the 1995 Plan. A maximum of 810,000 shares of Common Stock are specifically
reserved for issuance under the amended 1995 Plan, not including those shares
contributed to the 1995 Plan from the 1988, 1990 and 1992 Plans. In the event of
any reorganization, merger, recapitalization, stock dividend, stock split or
similar change in the corporate structure or shares of the Company, appropriate
adjustments will be made to the number and kind of shares reserved under the
1995 Plan and under outstanding Incentive Awards and to the exercise price of
outstanding Options. The Board of Directors may amend the 1995 Plan in any
respect without stockholder approval, unless stockholder approval is then
required by federal securities or tax laws or the rules of any stock exchange or
Nasdaq. Except pursuant to testamentary will or the laws of descent and
distribution or as otherwise expressly permitted by the 1995 Plan, no right or
interest of any Participant in an Incentive Award prior to the exercise or
vesting of such Incentive Award will be assignable or transferable, or subjected
to any lien, during the lifetime of the Participant, provided that a Participant
may designate a beneficiary to receive an Incentive Award upon such
Participant's death.
Options
The exercise price for Non-Statutory Options may not be less than 85% of the
fair market value of the Common Stock on the date the Non-Statutory Options are
granted. Incentive Options may not be granted with an exercise price that is
less than 100% of the fair market value of the Common Stock on the date the
Incentive Options are granted, except that Incentive Options granted to persons
owning stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary may not be granted with an
exercise price that is less than 110% of the fair market value on the date of
grant. In determining the fair market value of the Company's Common Stock, the
Committee will use the average of the high and low sale prices of the Common
Stock as reported on the Nasdaq National Market as of the date of grant, or, if
no shares were traded on such day, as of the first day preceding such day on
which there was a trade. On January 14, 1999, the last sale price for a share of
Common Stock was $3.875, as reported on the Nasdaq National Market.
Payment of an option exercise price will be made entirely in cash; provided,
however, that the Committee, in its sole discretion and upon terms and
conditions established by the Committee, may allow such payments to be made, in
whole or in part, by tender of a broker exercise notice, a promissory note or
previously acquired shares of Common Stock having an aggregate fair market value
on the date of exercise equal to the payment required, or by a combination of
such methods. The Committee may also, in its sole discretion and upon terms and
conditions established by the Committee, permit or require a Participant to
satisfy, in whole or in part, any withholding or employment-related tax
obligation by tender of a broker exercise notice, a promissory note or
previously acquired shares, or by a combination of such methods.
Options may not be transferred other than by will or the laws of descent and
distribution or to a beneficiary designated by the Participant as provided in
the 1995 Plan, and during the lifetime of a Participant may be exercised only by
the Participant. Options will become exercisable at such times and in such
installments as determined by the Committee and may be exercised in whole or in
part from time to time thereafter, subject to the terms and conditions set forth
in the 1995 Plan; provided, however, that no Option may be exercisable after 10
years from its date of grant. To the extent that any Incentive Option granted
under the 1995 Plan ceases for any reason to qualify as an "incentive stock
option" for purposes of the federal tax laws, such option will continue to be
outstanding for purposes of the 1995 Plan as a Non-Statutory Option.
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Restricted Stock Awards
Restricted Stock Awards are grants to Participants of shares of Common Stock
that are subject to restrictions on transferability and subject to the
possibility of forfeiture under terms and conditions set by the Committee. The
Committee may impose such restrictions or conditions, not inconsistent with the
1995 Plan, as the Committee may deem appropriate, including, without limitation,
that the Participant remain continuously employed by the Company for a period of
time or that the Participant or the Company satisfy certain performance goals or
criteria. Unless provided otherwise by the Committee in the exercise of its sole
discretion, Participants holding Restricted Stock Awards will have voting and
liquidation rights with respect to the number of shares of Common Stock
underlying the Restricted Stock Awards as if the Participant were the holder of
such number of shares of Common Stock, but any dividends and distributions with
respect to such shares of unvested Common Stock will be subject to the same
restrictions as the shares.
Performance Units
Performance Units are rights to receive a payment from the Company in the form
of stock, cash or a combination of both, upon the achievement of established
performance criteria. Such criteria may include achievement by the Participant,
the Company or a specified business unit or subsidiary of predetermined
performance goals approved by the Compensation Committee at the time the
Performance Units are awarded.
Stock Bonuses
Stock Bonuses are awards of Common Stock granted to Participants, subject to
such terms and conditions as may be determined by the Committee. Participants
receiving Stock Bonuses will have all voting, dividend, liquidation and other
rights with respect to, and upon becoming the record holder of, the shares of
Common Stock issued as the Stock Bonus, but the Committee may place such
restrictions on the transfer or assignability of shares received as a Stock
Bonus as it may deem appropriate.
Effect of Termination of Employment
If a Participant ceases to be employed by or render services to the Company and
all subsidiaries due to death, Disability (as defined below) or Retirement (as
defined below), (i) all outstanding Options then held by the Participant will
become immediately exercisable in full and will remain exercisable for a period
of one year in the case of death or Disability and three months in the case of
Retirement (but in no event after the expiration date of the Option), (ii) all
Restricted Stock Awards then held by the Participant will become fully vested,
and (iii) all outstanding Performance Units and Stock Bonuses will vest and/or
continue to vest in the manner set forth in the Award Agreement evidencing such
Performance Units or Stock Bonuses. For purposes of the 1995 Plan, "Disability"
means the disability of the Participant such as would entitle the Participant to
receive disability income benefits pursuant to the long-term disability plan of
the Company or subsidiary of the Company then covering the Participant or, if no
such plan exists or is inapplicable to the Participant, the permanent and total
disability of the Participant within the meaning of Section 22(e)(3) of the
Code. "Retirement" means termination of employment or service pursuant to the
regular retirement/pension plan or practice of the Company or subsidiary of the
Company then covering the Participant, provided that if the Participant is not
covered by any such plan or practice, the Participant will be deemed to be
covered by such plan or practice for the purposes of the 1995 Plan.
If a Participant's employment is terminated for any other reason, all rights of
the Participant under the 1995 Plan and any Incentive Awards will immediately
terminate without notice of any kind, and no Options then held by the
Participant will thereafter be exercisable, all outstanding Restricted Stock
Awards that have not vested as of such termination will be terminated and
forfeited, and all outstanding Performance Units and Stock Bonuses will vest
and/or continue to vest in the manner determined by the
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Committee and set forth in the Award Agreement evidencing such Performance Units
or Stock Bonuses. However, if a Participant's termination is due to any reason
other than termination by the Company or any subsidiary for "cause," all
outstanding Options then held by the Participant will remain exercisable to the
extent exercisable as of such termination for a period of three months
thereafter (but in no event after the expiration date of any such Option).
"Cause" will be determined by the Committee and is as defined in any employment
or other agreement or policy applicable to the Participant or, if no such
agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation,
embezzlement or deliberate injury or attempted injury, (ii) any unlawful or
criminal activity of a serious nature, (iii) any intentional and deliberate
breach of a duty or duties that, individually or in the aggregate, are material
in relation to the Participant's overall duties, or (iv) any material breach of
any employment, service, confidentiality or noncompete agreement.
Change in Control of the Company
Unless otherwise provided in an agreement evidencing an Incentive Award, in the
event of a "Change in Control" of the Company (as defined below), all
outstanding Options will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, all Restricted Stock Awards will
become immediately and fully vested and all Performance Units and Stock Bonuses
will vest and/or continue to vest according to the terms of the agreements
evidencing such awards. In addition, in the event of such a Change in Control,
the Committee, in its sole discretion, may provide that some or all Participants
holding outstanding Options will receive for each share of Common Stock subject
to such Options cash in an amount equal to the excess of the fair market value
of such shares immediately prior to the effective date of a Change in Control
over the exercise price per share of such Options.
For purposes of the 1995 Plan, a "Change in Control" of the Company will be
deemed to have occurred, among other things, upon (i) the sale or other
disposition of substantially all of the assets of the Company, (ii) the
approval by the Company's shareholders of a plan or proposal for the
liquidation or dissolution of the Company, (iii) a merger or consolidation to
which the Company is a party if the Company's shareholders immediately prior
to the merger or consolidation beneficially own, immediately after the merger
or consolidation, securities of the surviving corporation representing (A)
more than 50%, but not more than 80%, of the combined voting power of the
surviving corporation's then outstanding securities having the right to vote
at elections of directors, unless the transaction was approved in advance by
the Incumbent Directors (defined as the directors in office as of the
effective date of the 1995 Plan or any persons who subsequently become
directors and whose election or nomination was approved by at least a
majority of Incumbent Directors), or (B) 50% or less of the combined voting
power of the surviving corporation's then outstanding securities (regardless
of any approval by the Incumbent Directors), (iv) any person becoming, after
the effective date of the 1995 Plan, the beneficial owner of (A) 20% or more,
but not 50% or more, of the combined voting power of the Company's Common
Stock, unless the transaction resulting in such ownership was approved in
advance by the Incumbent Directors, or (B) 50% or more of the combined voting
power of the Company's Common Stock (regardless of any approval by the
Incumbent Directors); (v) the Incumbent Directors cease for any reason to
constitute at least a majority of the Board; or (vi) any other change in
control of the Company of a nature that would be required to be reported
pursuant to Section 13 or 15(d) of the Exchange Act.
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Federal Income Tax Consequences
The following description of federal income tax consequences is based on current
statutes, regulations and interpretations. The description does not include
foreign, state or local income tax consequences. In addition, the description is
not intended to address specific tax consequences applicable to directors,
officers or greater than 10% stockholders of the Company or to any individual
Participant who receives an Incentive Award.
Incentive Options
There will not be any federal income tax consequences to either the Participant
or the Company as a result of the grant to an employee of an Incentive Option
under the Stock Incentive Plan. The exercise by a Participant of an Incentive
Option also will not result in any federal income tax consequences to the
Company or the Participant, except that (i) an amount equal to the excess of the
fair market value of the shares acquired upon exercise of the Incentive Option,
determined at the time of exercise, over the amount paid for the shares by the
Participant will be includable in the Participant's alternative minimum taxable
income for purposes of the alternative minimum tax, and (ii) the Participant may
be subject to an additional excise tax if any amounts are treated as excess
parachute payments (see explanation below). Special rules will apply if
previously acquired shares of Common Stock are permitted to be tendered in
payment of an Option exercise price.
If the Participant disposes of the Incentive Option shares acquired upon
exercise of the Incentive Option, the federal income tax consequences will
depend upon how long the Participant has held the shares. If the Participant
does not dispose of the shares within two years after the Incentive Option was
granted, nor within one year after the Participant exercised the Incentive
Option and the shares were transferred to the Participant, then the Participant
will recognize a long-term capital gain or loss. The amount of the long-term
capital gain or loss will be equal to the difference between (i) the amount the
Participant realized on disposition of the shares, and (ii) the option price at
which the Participant acquired the shares. The Company is not entitled to any
compensation expense deduction under these circumstances.
If the Participant does not satisfy both of the above holding period
requirements (a "disqualifying disposition"), then the Participant will be
required to report as ordinary income, in the year the Participant disposes of
the shares, the amount by which the lesser of (i) the fair market value of the
shares at the time of exercise of the Incentive Option, or (ii) the amount
realized on the disposition of the shares, exceeds the option price for the
shares. The Company will be entitled to a compensation expense deduction in an
amount equal to the ordinary income includable in the taxable income of the
Participant. This compensation income may be subject to withholding. The
remainder of the gain recognized on the disposition, if any, or any loss
recognized on the disposition, will be treated as long-term or short-term
capital gain or loss, depending on the holding period.
Non-Statutory Options
Neither the Participant nor the Company incurs any federal income tax
consequences as a result of the grant of a Non-Statutory Option. Upon exercise
of a Non-Statutory Option, a Participant will recognize ordinary income, subject
to withholding, on the date of exercise in an amount equal to the difference
between (i) the fair market value of the shares purchased, determined on the
date of exercise, and (ii) the consideration paid for the shares. The
Participant may be subject to an additional excise tax if any amounts are
treated as excess parachute payments (see explanation below). Special rules will
apply if previously acquired shares of Common Stock are permitted to be tendered
in payment of an Option exercise price.
At the time of a subsequent sale or disposition of any shares of Common Stock
obtained upon exercise of a Non-Statutory Option, any gain or loss will be a
capital gain or loss. Whether such capital gain or loss will be long-term or
short-term capital gain or loss depends on the holding period.
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In general, the Company will be entitled to a compensation expense deduction in
connection with the exercise of a Non-Statutory Option for any amounts
includable in the taxable income of the Participant as ordinary income, provided
the Company complies with any applicable withholding requirements.
Restricted Stock Awards
With respect to shares issued pursuant to a Restricted Stock Award that are not
subject to a substantial risk of forfeiture, a Participant will include as
ordinary income in the year of receipt an amount equal to the fair market value
of the shares received on the date of receipt. With respect to shares that are
subject to a substantial risk of forfeiture, a Participant may file an election
under Section 83(b) of the Code within 30 days after the shares are received to
include as ordinary income in the year of receipt an amount equal to the fair
market value of the shares received on the date of receipt (determined as if the
shares were not subject to any risk of forfeiture). The Company will receive a
corresponding tax deduction, provided that proper withholding is made. If a
Section 83(b) election is made, the Participant will not recognize any
additional income when the restrictions on the shares issued in connection with
the stock award lapse. At the time any such shares are sold or disposed of, any
gain or loss will be treated as long-term or short-term capital gain or loss,
depending on the holding period from the date of receipt of the Restricted Stock
Award.
A Participant who does not make a Section 83(b) election within 30 days of the
receipt of a Restricted Stock Award that is subject to a substantial risk of
forfeiture will recognize ordinary income at the time of the lapse of the
restrictions in an amount equal to the then fair market value of the shares. The
Company will receive a corresponding tax deduction, provided that proper
withholding is made. At the time of a subsequent sale or disposition of any
shares of Common Stock issued in connection with a Restricted Stock Award as to
which the restrictions have lapsed, any gain or loss will be treated as
long-term or short-term capital gain or loss, depending on the holding period
from the date the restrictions lapse.
Performance Units
A Participant who receives a Performance Unit will not recognize any taxable
income at the time of the grant. Upon settlement of the Performance Unit, the
Participant will realize ordinary income in an amount equal to the cash and the
fair market value of any shares of Common Stock received by the Participant.
Provided that proper withholding is made, the Company would be entitled to a
compensation expense deduction for any amounts includable by the Participants as
ordinary income.
Stock Bonuses
With respect to shares issued pursuant to a Stock Bonus, a Participant will
include as ordinary income in the year of receipt an amount equal to the fair
market value of the shares received as of the date of receipt. The Company will
receive a corresponding tax deduction, provided that proper withholding is made.
At the time of a subsequent sale or disposition of any shares of Common Stock
issued in connection with a Stock Bonus, any gain or loss will be treated as
long-term or short-term capital gain or loss, depending on the holding period
from the date the shares were received.
Excise Tax on Parachute Payments
The Code also imposes a 20% excise tax on the recipient of "excess parachute
payments," as defined in the Code and denies tax deductibility to the Company on
excess parachute payments. Generally, parachute payments are payments in the
nature of compensation to employees of a company who are officers, stockholders,
or highly compensated individuals, which payments are contingent upon a change
in ownership or effective control of the company, or in the ownership of a
substantial portion of the assets of the company. For example, acceleration of
the exercisability of Options, or the vesting of Restricted Stock Awards, upon a
change in control of the Company may constitute parachute payments, and in
certain cases,
20
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"excess parachute payments."
Section 162(m)
Under Section 162(m) of the Code, the deductibility of certain compensation paid
to the chief executive officer and each of the four other most highly
compensated executives of publicly held companies is limited to $1,000,000.
Compensation for this purpose generally includes any items of compensation
expense described above in connection with Incentive Awards under the 1995 Plan.
However, certain types of compensation are excepted from this limit, including
compensation that qualifies as "performance-based compensation." Under Section
162(m), any compensation expense resulting from the exercise of Options under
the 1995 Plan with exercise prices equal to (or greater than) the fair market
value of the Common Stock on the date of grant should qualify as
"performance-based compensation" excepted from the limit of Section 162(m).
However, compensation expense in connection with any other Incentive Awards
under the 1995 Plan will be subject to this limit.
Awards Under the 1995 Plan
As of December 31, 1998, the Company has granted Options under the 1995 Plan as
follows: Ms. Gilles, 150,000 shares; Mr. Buche, 32,658 shares; Ms. Magnuson,
30,467 shares; all executive officers of the Company as a group, 292,365 shares;
and non-executive employees of the Company as a group, 406,303 shares. None of
the non-executive directors of the Company have received awards under the 1995
Plan. As disclosed below under "New Plan Benefits," it is anticipated that the
Board of Directors will grant certain non-executive employees Incentive Awards
covering approximately 59,948 shares of Common Stock and will grant Ms. Gilles
Incentive Awards covering approximately 66,207 shares of Common Stock, if the
proposal is approved. See "Executive Compensation - Compensation Committee
Report on Executive Compensation." As a result of this anticipated grant, Ms.
Gilles may benefit from the approval of the proposal to increase the number of
shares reserved for issuance under the 1995 Plan. Neither the number or types of
any future Incentive Awards to be received by or allocated to any other
participants under the 1995 Plan is presently determinable. See "New Plan
Benefits" below.
Board of Directors Recommendation
The Board of Directors recommends that the shareholders vote FOR approval and
ratification of the proposal to increase the number of shares reserved under the
1995 Stock Incentive Plan. The affirmative vote of the holders of a majority of
the shares of Common Stock present and entitled to vote in person or by proxy on
this matter at the Annual Meeting, and at least a majority of the minimum number
of votes necessary for a quorum, is necessary for approval. Unless a contrary
choice is specified, proxies solicited by the Board of Directors will be voted
FOR approval.
New Plan Benefits
The following table sets forth, to the extent determinable, the benefits under
the 1995 Plan described in the above proposal which may be received by each of
the following upon shareholder approval of such proposal: (a) each of the
executive officers of the Company named in the Summary Compensation Table above;
(b) the executive officers of the Company as a group; (c) directors of the
Company who are not executive officers as a group; and (d) Company employees who
are not executive officers as a group.
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1995 Stock Incentive Plan
Underlying Shares
----------------------------------
Restricted
Stock Options Total
---------- ------- ---------
M. Karen Gilles 22,069 44,138 66,207(1)
President and Chief Executive
Officer
David Buche - - -
Vice President - Sales and
Marketing
Connie L. Magnuson - - -
Vice President - Finance and
Chief Financial Officer
Executive Group 22,069 44,138 66,207
Non-Executive Director Group - - -
Non-Executive Officer Employee 21,139 38,809 59,948(2)
Group
1 Represents the aggregate number of shares covered by Incentive Awards
that may be granted to Ms. Gilles following shareholder approval of
the proposed increase in the number of shares reserved under the 1995
Plan. The anticipated award is based upon a determination by the Board
of Directors to continue to provide Ms. Gilles with stock-based
compensation at the same level as other executive officers. See
"Executive Compensation - Compensation Committee Report on Executive
Compensation."
2 Represents the aggregate number of shares covered by Incentive Awards
that may be granted to other non-executive employees following
shareholder approval of the proposed increase in the number of shares
reserved under the 1995 Plan. The anticipated awards are based upon
the terms of employment offers made to the non-executive employees at
the time that they joined the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Executive officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company during, or with respect to, the period ended October
31, 1998: (1) Mr. James Lyons, a former director of the Company, failed to file
on a timely basis a report on Form 4 required by Section 16 of the Exchange Act,
relating to his exercise of options to purchase 100,000 shares of Common Stock;
(2) Dr. B. Nicholas Oray, Vice President of Research and Development, failed to
file on a timely basis a report on Form 3 required by Section 16 of the Exchange
Act, reporting his appointment as an executive officer of the Company, and the
grant of shares of restricted stock and stock options to Dr. Oray in connection
with his employment; and (3) Mr. William G. Kobi, director, failed to file on a
timely basis a report on Form 3 required by Section 16 of the Exchange Act,
reporting his election to the Company's Board of Directors, and the grant of
stock options to Mr. Kobi in connection with his directorship.
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INDEPENDENT AUDITORS
The Audit Committee has not yet met to select the independent certified public
accountants to audit the Company's financial statements for the year ending
October 31, 1999. PricewaterhouseCoopers LLP was the Company's independent
public accounting firm for fiscal 1998. The Company has requested and expects a
representative of PricewaterhouseCoopers LLP to be present at the Annual Meeting
to make a statement if he or she so desires and to respond to appropriate
questions.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Shareholder proposals intended to be presented in the Company's proxy materials
relating to the next Annual Meeting of Shareholders must be received by the
Company on or before September 28, 1999 and must satisfy the requirements of the
proxy rules promulgated by the Securities and Exchange Commission.
A shareholder who wishes to make a proposal at the next Annual Meeting without
including the proposal in the Company's proxy statement must notify the Company
by December 12, 1999. If a shareholder fails to give notice by this date, then
the persons named as proxies in the proxies solicited by the Company for the
next Annual Meeting will have discretionary authority to vote on the proposal.
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ANNUAL REPORT
THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K
(EXCLUSIVE OF EXHIBITS) FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 TO EACH
PERSON WHO WAS A SHAREHOLDER OF THE COMPANY AS OF JANUARY 6, 1999, UPON RECEIPT
FROM ANY SUCH PERSON OF A WRITTEN REQUEST FOR SUCH AN ANNUAL REPORT. SUCH
REQUEST SHOULD BE SENT TO: BIO-VASCULAR, INC., 2575 UNIVERSITY AVENUE, #180, ST.
PAUL, MINNESOTA, 55114-1024; ATTN: SHAREHOLDER INFORMATION, OR BY ELECTRONIC
MAIL TO [email protected].
BY ORDER OF THE BOARD OF DIRECTORS
/s/ M. Karen Gilles
M. Karen Gilles
President and Chief Executive Officer
January 26, 1999
St. Paul, Minnesota
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Appendix A
BIO-VASCULAR, INC.
1995 STOCK INCENTIVE PLAN
(As Amended March 19, 1997 and December 31, 1998)
Section 1. Purpose of Plan. The purpose of the Bio-Vascular, Inc. 1995 Stock
Incentive Plan (the "Plan") is to advance the interests of Bio-Vascular, Inc.
(the "Company") and its shareholders by enabling the Company and its
Subsidiaries to attract and retain persons of ability to perform services for
the Company and its Subsidiaries by providing an incentive to such individuals
through equity participation in the Company and by rewarding such individuals
who contribute to the achievement by the Company of its economic objectives. In
connection with the Company's distribution of all of the outstanding shares of
the common stock of Vital Images, Inc. ("Vital Images") (the "Spin-Off"),
certain amendments to the Plan have been effected in order to allow awards under
the Plan made to Vital Images employees to continue following the effective date
of the Spin-Off.
Section 2. Definitions. The following terms will have the meanings set forth
below, unless the context clearly otherwise requires:
(a) "Board" means the Board of Directors of the Company.
(b) "Broker Exercise Notice" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
(c) "Change in Control" means an event described in Section 12(a) of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
(f) "Common Stock" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities into
which such Common Stock may be changed in accordance with Section 4(c) of the
Plan.
(g) "Disability" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Employer or Subsidiary of the Employer then
covering the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within the
meaning of Section 22(e)(3) of the Code.
(h) "Eligible Recipients" means all employees, non-employee directors,
consultants and independent contractors of the Company or any Subsidiary of the
Company.
(i) "Employer" means the Company if the Participant renders employment or
other services to the Company or any Subsidiary of the Company and means Vital
Images if the Participant renders employment or other services to Vital Images
or any Subsidiary of Vital Images.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Fair Market Value" means, with respect to the Common Stock, the
following:
<PAGE>
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the Nasdaq
National Market, the closing price of the Common Stock on such exchange or
reported by the Nasdaq National Market as of such date (or, if no shares
were traded on such day, as of the next preceding day on which there was
such a trade).
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market, and bid and
asked prices therefor in the over-the-counter market are reported by the
Nasdaq SmallCap Market or the National Quotation Bureau, Inc. (or any
comparable reporting service), the closing price as of such date, as so
reported by the Nasdaq SmallCap Market, or, if not so reported thereon, as
reported by the National Quotation Bureau, Inc. (or such comparable
reporting service).
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market, and such bid
and asked prices are not so reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion. The
Committee shall not be required to obtain an appraisal within six months of
the adoption of the Plan. The Committee's determination as to the current
value of the Common Stock shall be final, conclusive and binding for all
purposes and on all persons, including, without limitation, the Company,
the shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Board of the Committee shall be
liable for any determination regarding current value of the Common Stock
that is made in good faith.
(l) "Incentive Award" means an Option, Restricted Stock Award, Performance
Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan.
(m) "Incentive Stock Option" means a right to purchase Common Stock granted
to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an
"incentive stock option" within the meaning of Section 422 of the Code.
(n) "Non-Statutory Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not
qualify as an Incentive Stock Option.
(o) "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
(p) "Participant" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
(q) "Performance Unit" means a right granted to an Eligible Recipient
pursuant to Section 8 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established performance or other goals.
(r) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive Award, that
are to be issued upon the grant, exercise or vesting of such Incentive Award.
(s) "Restricted Stock Award" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 7 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 7.
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<PAGE>
(t) "Retirement" means termination of employment or service pursuant to and
in accordance with the regular (or, if approved by the Board of Directors of the
Employer for purposes of the Plan, early) retirement/pension plan or practice of
the Employer or Subsidiary of the Employer then covering the Participant,
provided that if the Participant is not covered by any such plan or practice,
the Participant will be deemed to be covered by the Employer's plan or practice,
for purposes of this determination.
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Stock Bonus" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 9 of the Plan.
(w) "Subsidiary" means (i) when used in reference to the Company, any
entity that is directly or indirectly controlled by the Company or any entity in
which the Company has a significant equity interest, as determined by the
Committee or (ii) when used in reference to Vital Images, any entity that is
directly or indirectly controlled by Vital Images or any entity in which Vital
Images has a significant equity interest, as determined by the Vital Images
Committee.
(x) "Tax Date" means the date any withholding tax obligation arises under
the Code for a Participant with respect to an Incentive Award.
(y) "Vital Images Committee" means the group of individuals administering
the Vital Images, Inc. 1995 Stock Incentive Adjustment Plan.
Section 3. Plan Administration.
(a) The Committee. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will be
administered by a committee (the "Committee") consisting solely of not less than
two members of the Board who are "disinterested persons" within the meaning of
Rule 16b-3 under the Exchange Act. To the extent consistent with corporate law,
the Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of the Plan will be conclusive and binding for all
purposes and on all persons, and no member of the Committee will be liable for
any action or determination made in good faith with respect to the Plan or any
Incentive Award granted under the Plan.
(b) Authority of the Committee.
(i) In accordance with and subject to the provisions of the Plan, the
Committee will have the authority to determine all provisions of Incentive
Awards as the Committee may deem necessary or desirable and as consistent
with the terms of the Plan, including, without limitation, the following:
(A) the Eligible Recipients to be selected as Participants; (B) the nature
and extent of the Incentive Awards to be made to each Participant
(including the number of shares of Common Stock to be subject to each
Incentive Award, any exercise price, the manner in which Incentive Awards
will vest or become exercisable and whether Incentive Awards will be
granted in tandem with other Incentive Awards) and the form of written
agreement, if any, evidencing such Incentive Award; (C) the time or times
when Incentive Awards will be granted; (D) the duration of each Incentive
Award; and (E) the restrictions and other conditions to which the payment
or vesting of Incentive Awards may be subject. In addition, the Committee
will have
3
<PAGE>
the authority under the Plan in its sole discretion to pay the
economic value of any Incentive Award in the form of cash, Common Stock or
any combination of both.
(ii) The Committee will have the authority under the Plan to amend or
modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of shares
or other terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting or otherwise
terminate any restrictions relating to an Incentive Award, accept the
surrender of any outstanding Incentive Award or, to the extent not
previously exercised or vested, authorize the grant of new Incentive Awards
in substitution for surrendered Incentive Awards; provided, however that
the amended or modified terms are permitted by the Plan as then in effect
and that any Participant adversely affected by such amended or modified
terms has consented to such amendment or modification. No amendment or
modification to an Incentive Award, however, whether pursuant to this
Section 3(b) or any other provisions of the Plan, will be deemed to be a
regrant of such Incentive Award for purposes of this Plan.
(iii) In the event of (A) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in corporate
structure or shares, (B) any purchase, acquisition, sale or disposition of
a significant amount of assets or a significant business, (C) any change in
accounting principles or practices, or (D) any other similar change, in
each case with respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, the Committee
(or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) may,
without the consent of any affected Participant, amend or modify the
vesting criteria of any outstanding Incentive Award that is based in whole
or in part on the financial performance of the Company (or any Subsidiary
or division thereof) or such other entity so as equitably to reflect such
event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be
substantially the same (in the sole discretion of the Committee or the
board of directors of the surviving corporation) following such event as
prior to such event; provided, however, that the amended or modified terms
are permitted by the Plan as then in effect.
(c) Cooperation Between Committees. The Committee and the Vital Images
Committee will reasonably cooperate with each other to promote the purposes of
the Plan.
Section 4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as provided
in Section 4(c) of the Plan, the maximum number of shares of Common Stock that
will be available for issuance under the Plan will be 810,000 shares of Common
Stock, plus any shares of Common Stock which, as of the date the Plan is
approved by the shareholders of the Company, are reserved for issuance under the
Company's 1988 Stock Option Plan, the 1990 Management Incentive Stock Option
Plan and the 1992 Stock Option Plan and which are not thereafter issued or which
have been issued but are subsequently forfeited and which would otherwise have
been available for further issuance under such plans. Notwithstanding any other
provisions of the Plan to the contrary, no Participant in the Plan may be
granted any Options, or any other Incentive Awards with a value based solely on
an increase in the value of the Common Stock after the date of grant, relating
to more than 50,000 shares of Common Stock in the aggregate in any fiscal year
of the Company (subject to adjustment as provided in Section 4(c) of the Plan);
provided, however, that a Participant who is first appointed or elected as an
officer, hired as an employee or retained as a consultant by the Company or who
receives a promotion that results in an
4
<PAGE>
increase in responsibilities or duties may be granted, during the fiscal year of
such appointment, election, hiring, retention or promotion, Options or such
other Incentive Awards relating to up to 200,000 shares of Common Stock (subject
to adjustment as provided in Section 4(c) of the Plan).
(b) Accounting for Incentive Awards. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards will
be applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
(c) Adjustments to Shares and Incentive Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities available for issuance under the Plan and, in order to prevent
dilution or enlargement of the rights of Participants, the number, kind and,
where applicable, exercise price of securities subject to outstanding Incentive
Awards.
Section 5. Participation. Participants in the Plan will be those Eligible
Recipients who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of economic
objectives of the Employer or its Subsidiaries; provided, however, that
Participants will also include those individuals employed by Vital Images as of
the effective date of the Spin-Off who held Awards as of such date, whose Awards
will continue thereafter according to the terms and conditions of the Plan.
Eligible Recipients may be granted from time to time one or more Incentive
Awards, singly or in combination or in tandem with other Incentive Awards, as
may be determined by the Committee in its sole discretion. Incentive Awards
will be deemed to be granted as of the date specified in the grant resolution of
the Committee, which date will be the date of any related agreement with the
Participant.
Section 6. Options.
(a) Grant. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the Plan ceases for
any reason to qualify as an "incentive stock option" for purposes of Section 422
of the Code, such Incentive Stock Option will continue to be outstanding for
purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock
Option.
(b) Exercise Price. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion at
the time of the Option grant, provided that (i) such price will not be less than
100% of the Fair Market Value of one share of Common Stock on the date of grant
with respect to an Incentive Stock Option (110% of the Fair Market Value if, at
the time the Incentive Stock Option is granted, the Participant owns, directly
or indirectly, more than 10% of the total combined voting power of all classes
of stock of the Company or any parent or subsidiary corporation of
5
<PAGE>
the Company), and (ii) such price will not be less than 85% of the Fair Market
Value of one share of Common Stock on the date of grant with respect to a Non-
Statutory Stock Option.
(c) Exercisability and Duration. An Option will become exercisable at such
times and in such installments as may be determined by the Committee in its sole
discretion at the time of grant; provided, however, that no Option may be
exercisable after 10 years from its date of grant.
(d) Payment of Exercise Price. The total purchase price of the shares to
be purchased upon exercise of an Option will be paid entirely in cash (including
check, bank draft or money order); provided, however, that the Committee, in its
sole discretion and upon terms and conditions established by the Committee, may
allow such payments to be made, in whole or in part, by tender of a Broker
Exercise Notice, Previously Acquired Shares, a promissory note (on terms
acceptable to the Committee in its sole discretion) or by a combination of such
methods.
(e) Manner of Exercise. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Secretary) at its principal executive
office in St. Paul, Minnesota and by paying in full the total exercise price for
the shares of Common Stock to be purchased in accordance with Section 6(d) of
the Plan.
Section 7. Restricted Stock Awards.
(a) Grant. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Employer or a Subsidiary of the Employer for
a certain period or that the Participant or the Employer (or any Subsidiary or
division thereof) satisfy certain performance goals or criteria.
(b) Rights as a Shareholder; Transferability. Except as provided in
Sections 7(a), 7(c) and 13(c) of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 7 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
(c) Dividends and Distributions. Unless the Committee determines otherwise
in its sole discretion (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any time after the grant of the Restricted
Stock Award), any dividends or distributions (including regular quarterly cash
dividends) paid with respect to shares of Common Stock subject to the unvested
portion of a Restricted Stock Award will be subject to the same restrictions as
the shares to which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions currently, the
Committee will determine in its sole discretion whether any interest will be
paid on such dividends or distributions. In addition, the Committee in its sole
discretion may require such dividends and distributions to be reinvested (and in
such case the Participants consent to such reinvestment) in shares of Common
Stock that will be subject to the same restrictions as the shares to which such
dividends or distributions relate.
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(d) Enforcement of Restrictions. To enforce the restrictions referred to
in this Section 7, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
Section 8. Performance Units. An Eligible Recipient may be granted one or
more Performance Units under the Plan, and such Performance Units will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Committee may impose such restrictions or conditions, not inconsistent with the
provisions of the Plan, to the vesting of such Performance Units as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Employer or any Subsidiary of the Employer
for a certain period or that the Participant or the Employer (or any Subsidiary
or division thereof) satisfy certain performance goals or criteria. The
Committee will have the sole discretion either to determine the form in which
payment of the economic value of vested Performance Units will be made to the
Participant (i.e., cash, Common Stock or any combination thereof) or to consent
to or disapprove the election by the Participant of the form of such payment.
Section 9. Stock Bonuses. An Eligible Recipient may be granted one or more
Stock Bonuses under the Plan, and such Stock Bonuses will be subject to such
terms and conditions, consistent with the other provisions of the Plan, as may
be determined by the Committee. The Participant will have all voting, dividend,
liquidation and other rights with respect to the shares of Common Stock issued
to a Participant as a Stock Bonus under this Section 9 upon the Participant
becoming the holder of record of such shares; provided, however, that the
Committee may impose such restrictions on the assignment or transfer of a Stock
Bonus as it deems appropriate.
Section 10. Effect of Termination of Employment or Other Service. The
transfer by a Participant of employment or other service from one Employer or
its Subsidiaries to the other Employer or its Subsidiaries will not be deemed to
constitute a termination of employment or other service for purposes of this
Plan.
(a) Termination Due to Death, Disability or Retirement. In the event a
Participant's employment or other service with the Employer and all of its
Subsidiaries is terminated by reason of death, Disability or Retirement:
(i) All outstanding Options then held by the Participant will become
immediately exercisable in full and will remain exercisable for a period of
one year (three months in the case of Retirement) after such termination
(but in no event after the expiration date of any such Option);
(ii) All Restricted Stock Awards then held by the Participant will
become fully vested; and
(iii) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined by
the Committee and set forth in the agreement evidencing such Performance
Units or Stock Bonuses.
(b) Termination for Reasons Other than Death, Disability or Retirement.
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(i) In the event a Participant's employment or other service is
terminated with the Employer and all of its Subsidiaries for any reason
other than death, Disability or Retirement, or a Participant is in the
employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Employer (unless the Participant continues in the employ
or service of an Employer or another Subsidiary thereof), all rights of the
Participant under the Plan and any agreements evidencing an Incentive Award
will immediately terminate without notice of any kind, and no Options then
held by the Participant will thereafter be exercisable, all Restricted
Stock Awards then held by the Participant that have not vested will be
terminated and forfeited, and all Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses; provided, however, that if such
termination is due to any reason other than termination by the Employer or
any Subsidiary of the Employer for "cause," all outstanding Options then
held by such Participant will remain exercisable to the extent exercisable
as of such termination for a period of three months after such termination
(but in no event after the expiration date of any such Option).
(ii) For purposes of this Section 10(b), "cause" (as determined by (x)
the Committee if the Employer is the Company or a Subsidiary of the Company
or (y) the Vital Images Committee if the Employer is Vital Images or a
Subsidiary of Vital Images) will be as defined in any employment or other
agreement or policy applicable to the Participant or, if no such agreement
or policy exists, will mean (A) dishonesty, fraud, misrepresentation,
embezzlement or deliberate injury or attempted injury, in each case related
to the Employer or any Subsidiary, (B) any unlawful or criminal activity of
a serious nature, (C) any intentional and deliberate breach of a duty or
duties that, individually or in the aggregate, are material in relation to
the Participant's overall duties, or (D) any material breach of any
employment, service, confidentiality or noncompete agreement entered into
with either Employer or any Subsidiary thereof.
(c) Modification of Rights Upon Termination. Notwithstanding the other
provisions of this Section 10, upon a Participant's termination of employment or
other service with the Employer and all Subsidiaries of the Employer, the
Committee may, in its sole discretion (which may be exercised at any time on or
after the date of grant, including following such termination), cause Options
(or any part thereof) then held by such Participant to become or continue to
become exercisable and/or remain exercisable following such termination of
employment or service and Restricted Stock Awards, Performance Units and Stock
Bonuses then held by such Participant to vest and/or continue to vest or become
free of transfer restrictions, as the case may be, following such termination of
employment or service, in each case in the manner determined by the Committee;
provided, however, that no Option may remain exercisable beyond its expiration
date.
(d) Breach of Confidentiality or Noncompete Agreements. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant materially
breaches the terms of any confidentiality or noncompete agreement entered into
with either Employer or any Subsidiary thereof, whether such breach occurs
before or after termination of such Participant's employment or other service
with the Employer or any Subsidiary of the Employer, the Committee in its sole
discretion may immediately terminate all rights of the Participant under the
Plan and any agreements evidencing an Incentive Award then held by the
Participant without notice of any kind.
(e) Date of Termination of Employment or Other Service. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the
Employer or any Subsidiary of the Employer for which the Participant provides
employment or other
8
<PAGE>
service, as determined by the Committee or the Vital Images Committee, as the
case may be, in its sole discretion based upon such records.
Section 11. Payment of Withholding Taxes.
(a) General Rules. The Employer is entitled to (i) withhold and deduct
from future wages of the Participant (or from other amounts that may be due and
owing to the Participant from the Employer or any Subsidiary of the Employer),
or make other arrangements for the collection of, all legally required amounts
necessary to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or payment of
dividends with respect to, an Incentive Award or a disqualifying disposition of
stock received upon exercise of an Incentive Stock Option, or (ii) require the
Participant promptly to remit the amount of such withholding to the Employer
before taking any action, including issuing any shares of Common Stock, with
respect to an Incentive Award.
(b) Special Rules. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 11(a) of the Plan by electing to
tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note
(on terms acceptable to the Committee in its sole discretion), or by a
combination of such methods.
Section 12. Change in Control.
(a) Change in Control. For purposes of this Section 12, a "Change in
Control" of the Company will mean the following, provided that it occurs after
the date on which the Company distributes (pursuant to that certain Distribution
Agreement, dated as of May 2, 1997, between Vital Images and the Company (the
"Distribution Agreement")) all of the outstanding shares of Vital Images' common
stock to the Company's shareholders of record on the Record Date (as defined in
the Distribution Agreement):
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or entity
that is not controlled by the Company;
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the Company is a party if the
shareholders of the Company immediately prior to effective date of such
merger or consolidation have "beneficial ownership" (as defined in Rule
13d-3 under the Exchange Act), immediately following the effective date of
such merger or consolidation, of securities of the surviving corporation
representing (A) more than 50%, but not more than 80%, of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors, unless such
merger or consolidation has been approved in advance by the Incumbent
Directors (as defined in Section 12(b) below), or (B) 50% or less of the
combined voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of directors
(regardless of any approval by the Incumbent Directors);
(iv) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of the
combined voting power of the Company's outstanding securities
9
<PAGE>
ordinarily having the right to vote at elections of directors, unless the
transaction resulting in such ownership has been approved in advance by the
Incumbent Directors, or (B) 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors (regardless of any approval by the Incumbent
Directors);
(v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(vi) any other change in control of the Company of a nature that would
be required to be reported pursuant to Section 13 or 15(d) of the Exchange
Act, whether or not the Company is then subject to such reporting
requirements.
(b) Incumbent Directors. For purposes of this Section 12, "Incumbent
Directors" of the Company will mean any individuals who are members of the Board
on the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Incumbent
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).
(c) Acceleration of Vesting. Without limiting the authority of the
Committee under Section 3(b) of the Plan, if a Change in Control of the Company
occurs, then, unless otherwise provided by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, (i) all Options will become
immediately exercisable in full and will remain exercisable for the remainder of
their terms, regardless of whether the Participants to whom such Options have
been granted remain in the employ or service of the Employer or any Subsidiary
of the Employer; (ii) all outstanding Restricted Stock Awards will become
immediately fully vested; and (iii) all Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Unit or Stock Bonuses.
(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding outstanding Options will receive, with respect to some or all of the
shares of Common Stock subject to such Options, as of the effective date of any
such Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such
Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything in
Section 12(c) or 12(d) of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as provided
in Section 12(c) or the payment of cash in exchange for all or part of an
Incentive Award as provided in Section 12(d) (which acceleration or payment
could be deemed a "payment" within the meaning of Section 280G(b)(2) of the
Code), together with any other "payments" which such Participant has the right
to receive from the Company or any corporation that is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
"payments" to such Participant pursuant to Section 12(c) or 12(d) of the Plan
will be reduced to the largest amount as will result in no portion of such
"payments" being subject to the excise tax imposed by Section 4999 of the Code;
provided, however, that if a Participant is subject to a separate agreement with
the Company or a Subsidiary that expressly addresses
10
<PAGE>
the potential application of Sections 280G or 4999 of the Code (including,
without limitation, that "payments" under such agreement or otherwise will not
be reduced or that the Participant will have the discretion to determine which
"payments" will be reduced), then the limitations of this Section 12(e) will not
apply, and any "payments" to a Participant pursuant to Section 12(c) or 12(d) of
the Plan will be treated as "payments" arising under such separate agreement.
Section 13. Rights of Eligible Recipients and Participants;
Transferability.
(a) Employment or Service. Nothing in the Plan will interfere with or
limit in any way the right of the Employer or any Subsidiary of the Employer to
terminate the employment or service of any Eligible Recipient or Participant at
any time, nor confer upon any Eligible Recipient or Participant any right to
continue in the employ or service of the Employer or any Subsidiary of the
Employer.
(b) Rights as a Shareholder. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as
a shareholder unless and until such Incentive Awards are exercised for, or paid
in the form of, shares of Common Stock and the Participant becomes the holder of
record of such shares. Except as otherwise provided in the Plan, no adjustment
will be made for dividends or distributions with respect to such Incentive
Awards as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine in its discretion.
(c) Restrictions on Transfer. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, no right or interest of any Participant in an Incentive Award prior to the
exercise or vesting of such Incentive Award will be assignable or transferable,
or subjected to any lien, during the lifetime of the Participant, either
voluntarily or involuntarily, directly or indirectly, by operation of law or
otherwise. A Participant will, however, be entitled to designate a beneficiary
to receive an Incentive Award upon such Participant's death, and in the event of
a Participant's death, payment of any amounts due under the Plan will be made
to, and exercise of any Options (to the extent permitted pursuant to Section 10
of the Plan) may be made by, the Participant's legal representatives, heirs and
legatees.
(d) Non-Exclusivity of the Plan. Nothing contained in the Plan is intended
to modify or rescind any previously approved compensation plans or programs of
either Employer or any Subsidiary thereof or create any limitations on the power
or authority of the Board to adopt such additional or other compensation
arrangements as the Board may deem necessary or desirable.
Section 14. Securities Law and Other Restrictions. Notwithstanding any
other provision of the Plan or any agreements entered into pursuant to the Plan,
the Company will not be required to issue any shares of Common Stock under this
Plan, and a Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to Incentive Awards granted under the
Plan, unless (i) there is in effect with respect to such shares a registration
statement under the Securities Act and any applicable state securities laws or
an exemption from such registration under the Securities Act and applicable
state securities laws, and (ii) there has been obtained any other consent,
approval or permit from any other regulatory body which the Committee, in its
sole discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or agreements
from the parties involved, and the placement of any legends on certificates
representing shares of Common Stock, as may be deemed necessary or advisable by
the Company in order to comply with such securities law or other restrictions.
Section 15. Plan Amendment, Modification and Termination. The Board may
suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such
11
<PAGE>
respects as the Board may deem advisable in order that Incentive Awards under
the Plan will conform to any change in applicable laws or regulations or in any
other respect the Board may deem to be in the best interests of the Company;
provided, however, that no amendments to the Plan will be effective without
approval of the stockholders of the Company if stockholder approval of the
amendment is then required pursuant to Rule 16b-3 under the Exchange Act,
Section 422 of the Code or the rules of any stock exchange or Nasdaq. No
termination, suspension or amendment of the Plan may adversely affect any
outstanding Incentive Award without the consent of the affected Participant;
provided, however, that this sentence will not impair the right of the Committee
to take whatever action it deems appropriate under Sections 4(c) and 12 of the
Plan.
Section 16. Effective Date and Duration of the Plan. The Plan is effective
as of December 18, 1995, the date it was adopted by the Board. The Plan will
terminate at midnight on December 18, 2005, and may be terminated prior to such
time to by Board action, and no Incentive Award will be granted after such
termination. Incentive Awards outstanding upon termination of the Plan may
continue to be exercised, or become free of restrictions, in accordance with
their terms.
Section 17. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Participants.
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BIO-VASCULAR, INC.
This Proxy is solicited by the Board of Directors
The undersigned hereby appoints M. KAREN GILLES and CONNIE L. MAGNUSON, and
each of them, as Proxies, each with full power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all
the shares of Common Stock of Bio-Vascular, Inc. held of record by the
undersigned on January 6, 1999, at the Annual Meeting of Shareholders to be
held on February 23, 1999, or any adjournment thereof.
(To be Signed on Reverse Side)
SEE REVERSE SIDE
<PAGE>
[X] Please mark your votes as in this example.
1. Election of Directors.
[ ] FOR all nominees listed below (except as marked to the contrary below).
[ ] AGAINST all nominees listed below
(Instruction: To vote against any individual nominee, strike a line through the
nominee's name.)
M. KAREN GILLES
ANTON R.POTAMI
WILLIAM G. KOBI
RICHARD W. PERKINS
TIMOTHY M. SCANLAN
EDWARD E. STRICKLAND
2. Proposal to amend the Company's 1995 Stock Incentive Plan to increase the
number of shares of the Company's Common Stock, $.01 per share, reserved for
issuance under such plan by 400,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR all nominees named in Proposal 1 and FOR Proposal 2 above.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: ______, 1999
___________________
Signature
___________________
Signature if held
jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
