<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period July 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-13907
___________________________________________________
BIO-VASCULAR, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Avenue
St. Paul, Minnesota 55114
Telephone Number: (651) 603-3700
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
-----
On September 1, 2000, there were 8,909,919 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JULY 31, 2000 AND OCTOBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except share and per share data)
July 31, October 31,
2000 1999
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 4,631 $ 5,596
Accounts receivable, net................................................. 3,662 3,123
Inventories, net......................................................... 3,758 2,576
Deferred income taxes.................................................... 267 307
Other.................................................................... 638 398
------------- -------------
Total current assets................................................ 12,956 12,000
Equipment and leasehold improvements, net................................ 4,757 4,936
Goodwill and other intangible assets, net................................ 6,171 6,594
Deferred income taxes.................................................... 398 540
------------- -------------
Total assets........................................................ $ 24,282 $ 24,070
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 714 $ 680
Accrued expenses......................................................... 1,386 1,551
Current maturities of long-term obligations.............................. 465 369
------------- -------------
Total current liabilities........................................... 2,565 2,600
Capital lease obligations................................................ 35 159
Other liabilities........................................................ 419 527
------------- -------------
Total liabilities................................................... 3,019 3,286
------------- -------------
Contingencies
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at July 31, 2000 and
October 31, 1999.................................................... - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 8,924,248 at July 31, 2000 and
8,960,633 at October 31, 1999....................................... 89 90
Additional paid-in capital............................................... 27,506 27,661
Unearned compensation.................................................... (201) (601)
Accumulated deficit...................................................... (6,131) (6,366)
------------- -------------
Total shareholders' equity.......................................... 21,263 20,784
------------- -------------
Total liabilities and shareholders' equity.......................... $ 24,282 $ 24,070
============= =============
</TABLE>
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
2
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
------- ------- ------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue..................................... $6,354 $5,169 $16,079 $13,892
Cost of revenue................................. 3,148 2,585 7,878 6,894
------ ------ ------- -------
Gross margin.................................... 3,206 2,584 8,201 6,998
Operating expenses:
Selling, general and administrative............. 2,058 2,100 6,276 6,467
Research and development........................ 456 461 1,629 1,240
------ ------ ------- -------
Operating income (loss)......................... 692 23 296 (709)
Other income, net............................... 39 36 102 144
------ ------ ------- -------
Income (loss) before provision for (benefit
from) income taxes 731 59 398 (565)
Provision for (benefit from) income taxes 329 17 163 (87)
------ ------ ------- -------
Net income (loss)............................... $ 402 $ 42 $ 235 $ (478)
====== ====== ======= =======
Basic earnings per share:
Net income (loss)............................... $ 0.05 $ 0.00 $ 0.03 $ (0.05)
====== ====== ======= =======
Diluted earnings per share:
Net income (loss)............................... $ 0.04 $ 0.00 $ 0.03 $ (0.05)
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
3
<PAGE>
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended
July 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. $ 42 $ 639
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements..................................... (614) (1,056)
Investments in marketable securities....................................... (987)
Proceeds upon maturities of marketable securities.......................... 4,978
Investments in patents and trademarks...................................... (41) (81)
Issuance of note receivable................................................ (106)
Payment of transaction costs related to acquisition of Jerneen............. (59)
-------- --------
Net cash (used in) provided by investing activities........................ (761) 2,795
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on bank note.................................................... ( 261)
Net proceeds related to stock-based compensation plans..................... 83 9
Repurchase of the Company's common stock................................... (1,404)
Repayment of capital lease obligations..................................... (178) (170)
Repayments of other long-term obligations.................................. (151) (93)
-------- --------
Net cash used in financing activities...................................... (246) (1,919)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................................................ (965) 1,515
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD..................................................................... 5,596 4,383
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 4,631 $ 5,898
======== ========
</TABLE>
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.
4
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements of Bio-
Vascular, Inc. ("Bio-Vascular" or "the Company") have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report to
Shareholders and incorporated by reference in the Company's Form 10-K for the
year ended October 31, 1999.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
financial position, results of operations and cash flows of the Company as of
and for the interim periods presented have been included. Operating results and
cash flows for the nine months ended July 31, 2000 are not necessarily
indicative of the results of operations and cash flows of the Company that may
be expected for the year ending October 31, 2000.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Inventories, net:
Raw materials and supplies................................................... $ 1,050,000 $ 912,000
Work in process.............................................................. 1,928,000 1,171,000
Finished goods............................................................... 1,084,000 1,071,000
Less reserve for inventory obsolescence...................................... (304,000) (578,000)
------------- -------------
$ 3,758,000 $ 2,576,000
============= =============
</TABLE>
5
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
(3) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Denominator for basic earnings per share -
weighted-average common shares.............. 8,827,985 8,861,073 8,871,841 9,053,779
Effect of dilutive securities:
Shares associated with deferred
compensation................................ 98,930 186,018 97,146 -
Shares associated with option plans......... 143,879 12,461 130,668 -
--------- --------- --------- ---------
Dilutive potential common shares............ 242,809 198,479 227,814 -
--------- --------- --------- ---------
Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares..................... 9,070,794 9,059,552 9,099,655 9,053,779
Options outstanding with exercise prices
greater than the average market price of the
Company's common stock...................... 514,817 1,275,285 535,250 1,247,765
</TABLE>
<TABLE>
<CAPTION>
As of July 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Options outstanding......................................................... 1,380,071 1,442,889
Exercise prices............................................................. $1.87 - $12.21 $1.87 - $13.03
Expiration dates............................................................ 2000 - 2008 1999 - 2008
Non-vested stock awards..................................................... 98,930 232,219
</TABLE>
6
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
(4) SEGMENT INFORMATION:
The following table presents certain financial information by business segment
for the three and nine month periods ended July 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue
Branded medical devices $ 3,505,000 $ 3,071,000 $ 9,920,000 $ 8,596,000
Contract manufacturing 2,849,000 2,098,000 6,159,000 5,296,000
----------- ----------- ------------ ------------
Total $ 6,354,000 $ 5,169,000 $ 16,079,000 $ 13,892,000
=========== =========== ============ ============
Operating income (loss)
Branded medical devices $ 355,000 $ (275,000) $ 453,000 $ (1,266,000)
Contract manufacturing 337,000 298,000 (157,000) 557,000
----------- ----------- ------------ ------------
Total $ 692,000 $ 23,000 $ 296,000 $ (709,000)
=========== =========== ============ ============
</TABLE>
(5) MAJOR CUSTOMERS AND NET REVENUE BY GEOGRAPHIC AREA:
Substantially all of the Company's international net revenues are negotiated,
invoiced and paid in U.S. dollars. The following tables summarize significant
customer information and international net revenue by geographic area:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Percent of accounts receivable by significant customers:
A.................................................................... 24% 16%
B.................................................................... 14% 15%
C.................................................................... 8% 12%
D.................................................................... 10% 9%
</TABLE>
7
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Percent of net revenue by significant
customers:
A................................. 28% 31% 22% 26%
B................................. 11% 11% 12% 12%
C................................. 7% 9% 9% 8%
D................................. 8% 8% 8% 8%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
International net revenue
by geographic area:
Europe........................ $ 538,000 $ 496,000 $ 1,751,000 $ 1,484,000
Asia and Pacific Region....... 209,000 161,000 615,000 397,000
Canada........................ 72,000 77,000 231,000 227,000
Other......................... 34,000 51,000 88,000 154,000
---------- ---------- ------------ ------------
Total......................... $ 853,000 $ 785,000 $ 2,685,000 $ 2,262,000
========== ========== ============ ============
Percent of total net
revenue....................... 13% 15% 17% 16%
</TABLE>
(6) NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is required to be adopted by the Company during the quarter ended January 31,
2001. The Company's management has not yet fully evaluated the potential impact
of adopting SFAS No. 133 on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ended October 31, 2001. The Company has
preliminarily evaluated the guidance outlined in SAB Nos. 101 and 101B, and does
not believe the adoption of SAB Nos. 101 and 101B will impact the Company's
revenue recognition practices or consolidated financial statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Forward-Looking Statements:
Certain statements contained in this Form 10-Q include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward-looking statements in this document are based upon
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may include, among others, factors included from time
to time in the Company's filings with the Securities and Exchange Commission,
such as the "Important Factors" included in its Annual Report on Form 10-K for
the year ended October 31, 1999.
Overview
Bio-Vascular, Inc. (the Company) is a diversified medical device company,
engaged in the pursuit of innovative product solutions to significantly improve
the quality of human life. The Company operates through two business units: a
Branded Medical Device unit and a Contract Manufacturing and Custom Engineering
unit. The Branded Device unit develops, manufactures and markets implantable
biomaterials and other devices for use in critical surgeries, including
bariatric, thoracic, cardiac, neurological, vascular and ophthalmic surgeries.
Branded Medical Devices are manufactured using the Company's patented and
proprietary technologies. The Contract Manufacturing and Custom Engineering unit
specializes in custom designed engineering and manufacturing of complex micro-
precision wire forms, including guidewires, micro coils, stylets and delivery
device components for use in interventional cardiovascular and neurological
medicine and operates through the Company's wholly owned subsidiary, Jerneen.
Results of Operations
Comparison of the Three Months Ended July 31, 2000 with the Three Months Ended
July 31, 1999
For the third quarter of fiscal 2000, consolidated net revenue increased
$1,185,000, or 23% to $6,354,000 from $5,169,000 in the third quarter of fiscal
1999. Consolidated operating income increased significantly from $23,000 in the
third quarter of fiscal 1999 to $692,000 in the same quarter of fiscal 2000. The
Company's consolidated net income for the fiscal 2000 quarter increased more
than 850% to $402,000, or four cents per diluted share, as compared to the
fiscal 1999 quarter net income of $42,000, or zero cents per diluted share.
Branded Medical Devices net revenue of $3,505,000 for the third quarter of
fiscal 2000 was an all-time record for this business segment, and reflects a 14%
increase over third quarter fiscal 1999 revenue of $3,071,000. The Branded
Devices unit experienced revenue increases in each of the Peri-Strips(R),
Surgical Tools and the Tissue-Guard(TM) product groups in the fiscal 2000
quarter over the fiscal 1999 quarter. Peri-Strips product revenue increased 17%
in the fiscal 2000 quarter from the comparable fiscal 1999 quarter, which is
believed to be due to the timing of the Company's market penetration into
gastric bypass and gastric banding, which are surgical procedures for the
treatment of morbid obesity. Management believes the demonstrated efficacy and
increased public awareness of these procedures will generate rapid growth in
these treatments. Additionally, the first sales of the Neuro Dissection sets,
which are used in neuro surgical procedures, generated $63,000 in net revenue
during the third quarter of fiscal 2000. The Company distributes these precision
instruments under an exclusive U.S. distribution agreement with the
manufacturer, Feather Safety Razor Co. in Japan.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
The Contract Manufacturing and Custom Engineering unit's net revenue increased
36% to a record $2,849,000 for the third quarter of fiscal 2000 from $2,098,000
in the comparable 1999 quarter, due primarily to the implementation of improved
operating systems required to handle higher production volumes and the new
precious metals handling agreements entered into with key customers in late
fiscal 1999. Under these precious metals handling agreements, the Contract
Manufacturing unit agreed to purchase critical precious metals on behalf of
certain customers for use in the manufacturing of products for which the unit is
paid a handling fee for the incremental personnel and working capital resource
commitments it is undertaking.
The Company's consolidated quarterly gross margin percentage of 50% did not
change from fiscal 1999 to 2000, while the gross margin dollars contributed
increased $622,000 due to the incremental revenues during the quarter. The
branded device unit experienced a nine percentage point improvement in the gross
margin, increasing from 57% in the 1999 quarter to 66% in the 2000 quarter. The
fiscal 2000 quarter's incremental sales volume combined with favorable
operations administration spending trends are believed to have contributed to
the increase in the Branded Device's gross margin during the quarter. The
Branded Device unit's third quarter gross margin percentage of 66% was one
percentage point less than the second quarter of fiscal 2000, mainly due to
sales of its distributed product, the Neuro Dissection set, which provides for a
lower margin as compared to the segment's average gross margin. The Contract
Manufacturing's gross margin percentage of 31% in the third quarter of fiscal
2000 is less than the comparable fiscal 1999 quarter of 40%, but reflects an
improvement from the fiscal 2000 second quarter gross margin of 22%. The decline
in the Contract Manufacturing unit's gross margin percentage from the third
quarter of fiscal 1999 to the comparable quarter of fiscal 2000 is mainly
attributable to the assumption of the precious metal component of product
production in fiscal 2000. The nine percentage point improvement in the unit's
gross margin percentage from the second to third quarters of fiscal 2000 is
primarily due to incremental revenue of more than $800,000 in the third quarter
combined with operating improvements which increased the efficiency of product
production.
Consolidated selling, general and administrative (SG&A) expense for the third
quarter of fiscal 2000 of $2,058,000 was 2% less than the same quarter of fiscal
1999 of $2,100,000, which was consistent with the SG&A spending trends at each
business unit from fiscal 1999 to 2000.
Consolidated research and development (R&D) expense during the third quarter of
fiscal 2000 of $456,000 was consistent with the same quarter of fiscal 1999 of
$461,000, as each business unit's fiscal 2000 third quarter R&D spending levels
approximated the same quarter of the prior year. During the fiscal 2000 quarter,
the Branded Device unit completed the pre-clinical animal studies for a urethral
sling, an implantable product for the treatment of stress urinary incontinence.
The favorable results obtained from these studies led to the filing of a 510(k)
submission with the U.S. Food and Drug Administration (FDA) requesting market
clearance for this product. R&D expense is expected to fluctuate as projects
continue under development. This forward-looking statement will be influenced
primarily by the number of projects and the related R&D personnel requirements,
development and regulatory approval path, expected costs and the timing of those
costs for each project.
Consolidated operating income for the third quarter of fiscal 2000 increased
over 2900% to $692,000 from $23,000 during the same quarter of 1999, as both
business units increased operating income in the 2000 quarter over the 1999
quarter. The Branded Device unit's operating income increased $630,000, from an
operating loss of $275,000 in the third quarter of fiscal 1999 to operating
income of $355,000 in the current fiscal quarter. The Contract Manufacturing
unit completed the 2000 quarter with operating income of $337,000, an increase
of $39,000 or 13% from operating income of $298,000 in the 1999 quarter.
The Company recorded a provision for income taxes of $329,000 in the third
quarter of fiscal 2000, an effective tax rate of 45%, as compared to a provision
for income taxes of $17,000 at an effective tax rate of 29% in the comparable
1999 quarter. The effective tax rate for the third quarter of fiscal 2000 is
higher than the statutory rates primarily due to the impact of permanent
differences, including nondeductible goodwill acquired in the acquisition of
Jerneen, partially offset by the impact of research and experimentation credits.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
The Company's consolidated third quarter 2000 net income increased 850% to
$402,000, or four cents per diluted share, from net income of $42,000, or zero
cents per diluted share, in the same quarter of 1999.
Comparison of the Nine Months Ended July 31, 2000 with the Nine Months Ended
July 31, 1999
For the first nine months of fiscal 2000, consolidated net revenue increased
$2,187,000 or 16% to $16,079,000 from $13,892,000 reported for the comparable
period of fiscal 1999. The Company's consolidated operating income increased by
more than $1 million, changing from an operating loss of $709,000 for the first
three quarters of fiscal 1999 to $296,000 for the same period in 2000. The
Company's consolidated net income during the fiscal 2000 period was $235,000, or
three cents per diluted share, as compared to a net loss of $478,000, or five
cents per share in fiscal 1999.
The Branded Medical Device unit's net revenue for the nine month period ended
July 31, 2000 increased $1,324,000 or 15% to $9,920,000 from $8,596,000 for the
same period of fiscal 1999. The Branded Device unit experienced revenue gains
from all major product lines on a year to date basis. Revenue from the Tissue-
Guard product line increased to $4,359,000 during the first three quarters of
fiscal 2000, reflecting a 13% increase over the comparable prior year period,
led by revenues from Dura-Guard(R) and Vascu-Guard(R). Sales of Surgical Tools,
including the new Neuro Dissection set, for the first nine months of fiscal 2000
increased $457,000 or 24% to $2,322,000 from $1,865,000. The Neuro Dissection
sets, which are used in neuro surgical procedures, generated $63,000 in net
revenue during the year to date fiscal 2000 period. The Company distributes
these precision instruments under an exclusive U.S. distribution agreement with
the manufacturer, Feather Safety Razor Co. in Japan.
For the nine months ended July 31, 2000, the Contract Manufacturing's net
revenue was $6,159,000, an increase of $863,000 or 16% from net revenue of
$5,296,000 during the comparable 1999 period. The increase in the unit's net
revenue is primarily due to the new precious metals handling agreements entered
into with key customers in late fiscal 1999.
The Company's consolidated gross margin for the first nine months of fiscal 2000
of 51% is slightly higher than the fiscal 1999 period to date margin of 50%,
primarily due to gross margin improvements at the Branded Device unit. The
Branded Device unit's gross margin percentage on a year to date basis increased
eight percentage points to 65% as a result of the incremental sales volume
combined with the effective management of spending levels. The Contract
Manufacturing unit's gross margin percentage decreased to 29% for the first nine
months of fiscal 2000 from 40% in the prior year period due mainly to the
assumption of the precious metal component of product production in fiscal 2000.
The consolidated SG&A expense for the first three quarters of fiscal 2000
decreased $191,000, or 3% to $6,276,000 from $6,467,000 in 1999, primarily as a
result of expense control measures implemented at the Branded Medical Device
unit. Decreased spending on external costs to assert a reversal of HCFA's LVRS
non coverage decision and direct marketing materials presenting the branded
segment's new corporate logo and image (introduced in fiscal 1999), in addition
to the full amortization of goodwill associated with product rights as of
October 31, 1999, contributed to an overall decrease in the branded segment's
SG&A expense of $438,000 or 8% to $4,719,000 in fiscal 2000 from $5,157,000 in
fiscal 1999. The Contract Manufacturing unit's SG&A expense for the first nine
months of fiscal 2000 increased $247,000 or 19% to $1,557,000 from $1,310,000,
due primarily to a termination charge associated with an employment contract.
Consolidated R&D expense during the first three quarters of fiscal 2000
increased to $1,629,000, up $389,000 or 31% from $1,240,000 for the same period
of fiscal 1999. The increase in R&D expense in fiscal 2000 over 1999 reflects
the Branded segment's continued investment in pre-clinical feasibility studies
for new products in
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
development, and the Contract Manufacturing segment's implementation of the
Technology Development Center. R&D expense is expected to fluctuate as projects
continue under development. This forward-looking statement will be influenced
primarily by the number of projects and the related R&D personnel requirements,
development and regulatory approval path, expected costs and the timing of those
costs for each project.
The Company's consolidated operating income increased by more than $1 million,
changing from an operating loss of $709,000 for the first three quarters of
fiscal 1999 to $296,000 for the same period in fiscal 2000. This change to
operating income reflects an increase of more than $1.7 million in operating
income of the Branded Device unit, which improved from an operating loss of
$1,266,000 in fiscal 1999 to operating income of $453,000 in fiscal 2000.
Offsetting this positive operating income change, the Contract Manufacturing
unit incurred a year to date operating loss of $157,000 in fiscal 2000 as
compared to operating income of $557,000 for the same period of 1999.
Other income, primarily net interest income, was $102,000 for the first nine
months of fiscal 2000 and $144,000 in the comparable 1999 period. The decrease
in net interest income is related to lower average cash and investment balances
in fiscal 2000 as compared to fiscal 1999, due primarily to cash expenditures
for the Company's stock repurchase program (which was completed as of October
31, 1999), purchases of equipment and leasehold improvements and repayments of
long-term obligations. The Company's income before income taxes was $398,000
during the first three quarters of fiscal 2000 as compared to a loss of $565,000
in the comparable period of fiscal 1999.
The Company recorded a provision for income taxes of $163,000 during the first
nine months of fiscal 2000, an effective tax rate of 41%, as compared to a
benefit from income taxes of $87,000 at an effective tax rate of 15% in the
comparable 1999 period. The effective tax rate for the first three quarters of
fiscal 2000 is higher than the statutory rates primarily due to the impact of
permanent differences, including nondeductible goodwill acquired in the
acquisition of Jerneen, partially offset by the impact of research and
experimentation credits.
The consolidated net income for the first nine months of fiscal 2000 was
$235,000, or three cents per diluted share, as compared to a net loss of
$478,000, or five cents per share, in the same period of fiscal 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $4,631,000 at July 31, 2000 as compared to
$5,596,000 at October 31, 1999, a reduction of $965,000.
Operating activities provided cash of $42,000 for the nine months ended July 31,
2000, as compared to providing cash of $639,000 during the same period in fiscal
1999. Cash was provided by operations during fiscal 2000 through the combination
of net income and non-cash expenses for the period, substantially offset by an
increase in working capital primarily used for inventory and accounts
receivable.
Investing activities used $761,000 of cash during the first nine months of
fiscal 2000, which included $614,000 in net purchases of equipment and leasehold
improvements and the issuance of a collateralized note receivable of $106,000 to
an unrelated party due in November 2000.
Financing activities used $246,000 of cash during the 2000 period, including
cash repayments of $329,000 for capital equipment lease and other long-term
obligations, offset by proceeds received of $83,000 related to stock-based
compensation plans. The Company has short and long-term obligations of $919,000
at July 31, 2000, which require payments through 2004.
The Company believes existing cash and investments will be sufficient to satisfy
its cash requirements for the foreseeable future. This forward-looking
statement, as well as the Company's long-term cash requirements, will be
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
a function of a number of variables, including R&D priorities, acquisition
opportunities and the growth and profitability of the business.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is
required to be adopted by the Company during the quarter ended January 31, 2001.
The Company's management has not yet fully evaluated the potential impact of
adopting SFAS No. 133 on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ended October 31, 2001. The Company has preliminarily
evaluated the guidance outlined in SAB Nos. 101 and 101B, and does not believe
the adoption of SAB Nos. 101 and 101B will impact the Company's revenue
recognition practices or consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts are not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies.
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PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation which is ordinary and incidental
to its business. In the opinion of management, the ultimate resolution of the
pending legal proceeding will not have a material adverse effect on the
Company's future business, financial condition, results of operations or cash
flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are
--------
listed in the exhibit index beginning on page 16.
Form 8-K. No reports on Form 8-K were filed by the Company during the
--------
quarter ended July 31, 2000.
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SIGNATURES
-------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BIO-VASCULAR, INC.
Dated: September 8, 2000 /s/ Connie L. Magnuson
-------------------------------------
Connie L. Magnuson
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
15
<PAGE>
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
--------------------------------------------------------------------------------
10.1 Amendment to form of change in control agreement between the Company and
M. Karen Gilles, Connie L. Magnuson, David A. Buche, B. Nicholas Oray and
Fariborz Boor Boor (filed herewith electronically).
27.1 Financial Data Schedule for the nine-month period ended July 31, 2000
(filed herewith electronically).
16
