<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 ended April 30, 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 June 1, 2000, there were 8,951,121 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 APRIL 30, 2000 AND OCTOBER 31, 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except share and per share data)
April 30, October 31,
2000 1999
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 4,481 $ 5,596
Accounts receivable, net.................................................. 3,455 3,123
Inventories, net.......................................................... 3,491 2,576
Deferred income taxes..................................................... 267 307
Other..................................................................... 523 398
------- -------
Total current assets.................................................... 12,217 12,000
Equipment and leasehold improvements, net................................. 4,857 4,936
Goodwill and other intangible assets, net................................. 6,320 6,594
Deferred income taxes..................................................... 727 540
------- -------
Total assets............................................................ $24,121 $24,070
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 853 $ 680
Accrued expenses.......................................................... 1,403 1,551
Current maturities of long-term obligations............................... 500 369
------- -------
Total current liabilities............................................... 2,756 2,600
Capital lease obligations................................................. 50 159
Other liabilities......................................................... 493 527
------- -------
Total liabilities....................................................... 3,299 3,286
------- -------
Contingencies
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at April 30, 2000 and
October 31, 1999........................................................ - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 8,999,547 at April 30, 2000 and
8,960,633 at October 31, 1999........................................... 90 90
Additional paid-in capital............................................... 27,729 27,661
Unearned compensation..................................................... (464) (601)
Accumulated deficit....................................................... (6,533) (6,366)
------- -------
Total shareholders' equity................................................ 20,822 20,784
------- -------
Total liabilities and shareholders' equity................................ $24,121 $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 SIX MONTH PERIODS ENDED APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
-------- -------- -------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue........................................ $ 5,343 $ 4,893 $ 9,725 $ 8,722
Cost of revenue.................................... 2,703 2,396 4,728 4,308
-------- -------- -------- ---------
Gross margin....................................... 2,640 2,497 4,997 4,414
Operating expenses:
Selling, general and administrative................ 2,178 2,342 4,217 4,367
Research and development........................... 570 446 1,176 779
-------- -------- -------- ---------
Operating loss..................................... (108) (291) (396) (732)
Other income, net.................................. 32 47 63 108
-------- -------- -------- ---------
Loss before benefit from income taxes.............. (76) (244) (333) (624)
Benefit from income taxes.......................... (38) (42) (166) (104)
-------- -------- -------- ---------
Net loss........................................... $ (38) $ (202) $ (167) $ (520)
======== ======== ======== =========
Basic and diluted earnings per share:
Net loss........................................... $ (0.00) $ (0.02) $ (0.02) $ (0.06)
======== ======== ======== =========
</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 SIX MONTH PERIODS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(in thousands) Six Months Ended
April 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES........................................................................ $ (400) $ 140
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements............................................ (467) (556)
Proceeds from disposal of equipment............................................... 11
Investments in marketable securities.............................................. (987)
Proceeds upon maturities of marketable securities................................. 4,978
Investments in patents and trademarks............................................. (32) (42)
Issuance of note receivable....................................................... (106)
Payment of transaction costs related to acquisition of Jerneen.................... (59)
---------- --------
Net cash (used in) provided by investing activities............................... (594) 3,334
---------- --------
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.......................................... (756)
Repayment of capital lease obligations............................................ (120) (105)
Repayments of other long-term obligations......................................... (84) (62)
---------- --------
Net cash used in financing activities............................................. (121) (1,175)
---------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS....................................................................... (1,115) 2,299
---------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD............................................................................ 5,596 4,383
---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 4,481 $ 6,682
========== ========
</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 six months ended April 30, 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>
April 30, October 31,
2000 1999
----- ----
(Unaudited)
<S> <C> <C>
Inventories, net:
Raw materials and supplies....................................... $ 895,000 $ 912,000
Work in process.................................................. 1,758,000 1,171,000
Finished goods................................................... 1,138,000 1,071,000
Less reserve for inventory obsolescence.......................... (300,000) (578,000)
---------- ----------
$3,491,000 $2,576,000
========== ==========
</TABLE>
Consolidated condensed statement of cash flows:
At April 30, 2000, the Company recorded $33,000 in accounts payable for
equipment purchases made during the quarter then ended. Additionally, during
the current quarter, the Company incurred a net charge of $165,000 pertaining to
the termination of an employment contract, which is recorded as a long-term
obligation at April 30, 2000. Also, during the quarter ended April 30, 2000,
the Company disposed of fully reserved obsolete product inventory totaling
$291,000.
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 Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Denominator for basic earnings per share -
weighted-average common shares.............. 8,810,063 9,113,831 8,808,094 9,159,853
Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares..................... 8,810,063 9,113,831 8,808,094 9,159,853
Options outstanding with exercise prices
greater than the average market price of the
Company's common stock...................... 702,945 1,270,350 1,054,701 1,241,044
</TABLE>
<TABLE>
<CAPTION>
As of April 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Options outstanding.................................................... 1,293,627 1,403,426
Exercise prices........................................................ $1.87 - $12.21 $1.87 - $13.03
Expiration dates....................................................... 2000-2008 1999 - 2007
Non-vested stock awards................................................ 174,229 147,622
</TABLE>
For the three and six month periods ended April 30, 2000 and 1999, none of the
options outstanding or unearned restricted stock awards were included in the
computation of diluted earnings per share for those periods because the Company
had incurred net losses, and the inclusion of stock options and awards would
have been anti-dilutive.
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 six month periods ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue
Branded surgical products $3,301,000 $3,098,000 $6,414,000 $5,525,000
Medical device components 2,042,000 1,795,000 3,311,000 3,197,000
---------- ---------- ---------- ----------
Total 5,343,000 4,893,000 9,725,000 8,722,000
========== ========== ========== ==========
Operating income (loss)
Branded surgical products 162,000 (500,000) 97,000 (990,000)
Medical device components (270,000) 209,000 (493,000) 258,000
---------- ---------- ---------- ----------
Total (108,000) (291,000) (396,000) (732,000)
========== ========== ========== ==========
</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>
April 30, October 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Percent of accounts receivable by significant customers:
A............................................................ 16% 16%
B............................................................ 9% 15%
C............................................................ 13% 12%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Percent of net revenue by significant
customers:
A..................................... 21% 23% 18% 24%
B..................................... 12% 13% 13% 13%
C..................................... 10% 9% 10% 8%
</TABLE>
7
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
-------- -------- ---------- ----------
(Unaudited) (Unaudited)
International net revenue
by geographic area:
Europe......................... $578,000 $603,000 $1,212,000 $1,040,000
Asia and Pacific Region........ 251,000 113,000 407,000 232,000
Canada......................... 62,000 88,000 159,000 151,000
Other.......................... 33,000 75,000 54,000 104,000
-------- -------- ---------- ----------
Total.......................... $924,000 $879,000 $1,832,000 $1,527,000
======== ======== ========== ==========
Percent of total net revenue... 17% 18% 19% 18%
(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. 101A, will be effective for the
Company during the quarter ended January 31, 2001. The Company has
preliminarily evaluated the guidance outlined in SAB Nos. 101 and 101A, and does
not believe the adoption of SAB Nos. 101 and 101A 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 an innovative medical products company that
operates through two segments. The Company's branded surgical products segment
develops, manufactures and markets proprietary and patented specialty medical
products for use in thoracic, cardiac, neurological, vascular and ophthalmic
surgery. The Company's medical device components segment, operating through its
wholly-owned subsidiary Jer-Neen Manufacturing Co., Inc. (Jerneen Micro Medical
Technologies or Jerneen), is a value-added original equipment manufacturer of
micro-precision wire-based component products, including precision coils,
stylets and guidewire components and sub-assemblies used in the medical
industry.
Results of Operations
Comparison of the Three Months Ended April 30, 2000 with the Three Months Ended
April 30, 1999
For the second quarter of fiscal 2000, consolidated net revenue increased
$450,000, or 9% to $5,343,000 from $4,893,000 in the second quarter of fiscal
1999. The consolidated operating loss was reduced to $108,000 in 2000 from
$291,000 in 1999, a reduction of 63% during the comparable quarters. The
Company's consolidated net loss incurred during the fiscal 2000 quarter was
reduced 81% to $38,000, or zero cents per diluted share, as compared to the
fiscal 1999 net loss of $202,000, or two cents per diluted share.
The branded surgical products segment's net revenue during the second quarter of
fiscal 2000 increased 7% to $3,301,000 from $3,098,000 in the same quarter of
fiscal 1999, primarily driven by increased sales of Surgical Tools and the
Tissue-Guard(TM) products. Surgical Tools product revenue during the 2000
quarter increased $113,000, or 17% to $767,000, led by the Flo-Thru Intraluminal
Shunt(TM). Net revenue from the Tissue-Guard product line increased 10% to
$1,482,000 during the fiscal 2000 quarter from $1,352,000 in the comparable
quarter of fiscal 1999. Peri-Strips(R) revenue during the 2000 quarter decreased
8% to $832,000 from $900,000 in the 1999 quarter, despite a 5% increase in
domestic sales of Peri-Strips. Management believes that the decrease is due
primarily to a decrease in the number of lung volume reduction surgeries
performed in foreign markets. International sales of Peri-Strips totaled
$173,000 and $274,000 in the second quarters of fiscal 2000 and 1999,
respectively. Biograft(R) revenue increased 15% to $220,000 during the second
quarter of fiscal 2000 from $192,000 during the prior year quarter, largely
driven by a 40% increase in international sales of Biograft.
The medical device component segment's net revenue increased 14% to $2,042,000
during the second quarter of fiscal 2000 from $1,795,000 in the comparable 1999
quarter, due in part to new precious metals handling agreements entered into
with key customers in late fiscal 1999. Through these agreements, the component
segment
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
agreed to purchase critical precious metals on behalf of certain
customers for use in the manufacturing of products for which the segment is paid
a handling fee for the incremental personnel and working capital resource
commitments it is undertaking.
The Company's consolidated gross margin percentage decreased to 49% during the
second quarter of fiscal 2000 quarter from 51% for the same quarter of 1999.
The branded products segment experienced a nine percentage point improvement in
the gross margin, increasing from 57% in the 1999 quarter to 66% in the 2000
quarter. Effective management of operations and incremental sales volume
combined with favorable operations administration spending trends are believed
to have collectively contributed to the increase in the branded segment's gross
margin during the quarter. Conversely, the component segment's gross margin
percentage declined to 22% during the second quarter of fiscal 2000 from 40%
during the 1999 quarter, due mainly to product sales mix and the assumption of
the precious metal component of product production in fiscal 2000.
Consolidated selling, general and administrative (SG&A) expense for the second
quarter decreased $164,000, or 7%, to $2,178,000 from $2,342,000, between the
fiscal 2000 and 1999 quarters. The overall decrease in SG&A expense represents
expense control measures implemented in the branded products segment, offset
slightly by the net incremental expense of $165,000 as a result of the
termination of an employment contract within the component segment.
Consolidated research and development (R&D) expense during the second quarter of
fiscal 2000 increased to $570,000, up $124,000 or 28% from the same quarter in
fiscal 1999. The branded products segment increased R&D spending 17% to
$435,000 during the second quarter, reflecting the Company's continued
investment in pre-clinical feasibility studies for new products in development.
The quarterly R&D expense of the component segment increased $61,000, or 82%
over the comparable 1999 quarter, to $135,000 as a result of the full
implementation of the Technology Development Center at Jerneen. 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 consolidated operating loss for the second quarter of fiscal 2000 was
reduced to $108,000, an improvement of $183,000 or 63% from the operating loss
of $291,000 incurred during the same quarter of 1999. The branded products
segment increased operating income $662,000, from an operating loss of $500,000
in the second quarter of fiscal 1999 to operating income of $162,000 in the
current fiscal quarter. The component segment completed the 2000 quarter with
an operating loss of $270,000, including the $165,000 termination charge,
compared to operating income of $209,000 in the 1999 quarter.
The Company recorded a benefit from income taxes of $38,000 in the second
quarter of fiscal 2000, an effective tax rate of 50%, as compared to a benefit
from income taxes of $42,000 at an effective tax rate of 17% in the comparable
1999 quarter. The effective tax rate for the second quarter of fiscal 2000 is
more 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 second quarter 2000 net loss was $38,000, or zero cents per share, compared
to a net loss of $202,000, or two cents per share, in the same quarter of 1999.
Comparison of the Six Months Ended April 30, 2000 with
the Six Months Ended April 30, 1999
For the first six months of fiscal 2000, consolidated net revenue increased 12%
to $9,725,000 from $8,722,000 reported for the comparable period of fiscal 1999.
The Company reduced the first-half year consolidated operating
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
loss by 46% to $396,000 in 2000 from $732,000 in 1999. The consolidated net loss
incurred during the fiscal 2000 period was $167,000, or two cents per share,
compared to a loss of $520,000, or six cents per share in 1999.
The branded surgical products segment's net revenue for the first-half of fiscal
2000 increased $890,000 or 16% to $6,415,000 from $5,525,000 in the prior year,
with April 2000 representing the eleventh consecutive month of gross revenue in
excess of $1 million, a record for this segment. The branded products segment
experienced revenue gains from all major product lines on a year to date basis.
Sales of Surgical Tools for the first two quarters of fiscal 2000 increased
$358,000 or 31% to $1,517,000, led by sales of the Flo-Thru Intraluminal Shunt.
Revenue from the Tissue-Guard product line increased to $2,837,000 during the
fiscal 2000 first-half, reflecting a 14% increase over the comparable prior year
period, led by sales increases of Dura-Guard(R), Vascu-Guard and Supple Peri-
Guard(R).
On a year to date basis, the medical device component segment's net revenue
increased to $3,310,000, a 4% increase over prior year revenue of $3,197,000 for
the same period of 1999 reflecting the new precious metals handling agreements
entered into with key customers in late fiscal 1999.
The Company's consolidated gross margin for the first six months of fiscal 2000
of 51% remains unchanged from the prior year period, despite significant
fluctuations in the gross margin percentages of the business segments. The
branded surgical products segment gross margin percentage on a year to date
basis increased seven percentage points to 64% as a result of the incremental
sales volume combined with management's efforts to effectively manage operations
activities and spending levels. The factors which significantly increased the
branded segment's gross margin for the second quarter of 2000 contributed to the
increase in the year to date margin as well. The medical device component
segment's gross margin percentage decreased to 27% for the first-half of fiscal
2000 from 39% in the prior year period due mainly to product sales mix and the
assumption of the precious metal component of product production in fiscal 2000.
The consolidated SG&A expense for the first two quarters of fiscal 2000
decreased $150,000, or 3% to $4,217,000 from $4,367,000 in 1999, primarily as a
result of expense control measures implemented at the branded products segment.
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 $395,000 or 11% to $3,117,000 in fiscal 2000 from $3,512,000 in
fiscal 1999. The component segment's SG&A expense for the first six months of
fiscal 2000 increased $245,000 to $1,100,000 from $855,000, due primarily to the
termination charge associated with an employment contract.
Consolidated R&D expense during the first two quarters of fiscal 2000 increased
to $1,176,000, up $397,000 or 51% from $779,000 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 development, and the component segment's full 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 consolidated operating loss for the first-half of fiscal 2000 has been
reduced to $396,000, an improvement of $336,000 or 46% from the operating loss
of $732,000 incurred during the comparable period of 1999. This operating loss
reduction reflects a change of more than $1 million in operating income of the
branded products segment, which improved from an operating loss of $990,000 in
1999 to operating income of $97,000 in 2000. Offsetting the positive operating
income change of the branded products segment, the component segment incurred a
year to date operating loss of $493,000 as compared to operating income of
$258,000 for the same period in 1999.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
Other income, primarily net interest income, was $63,000 in the first-half of
fiscal 2000 and $108,000 in the comparable 1999 period. The decrease in net
interest income is related to lower average cash and investment balances in 2000
as compared to 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 loss before income taxes was $333,000 during the first six months
of fiscal 2000 as compared to a loss of $624,000 in the same period of fiscal
1999.
The Company recorded a benefit from income taxes of $166,000 during the first
two quarters of fiscal 2000, an effective tax rate of 50%, as compared to a
benefit from income taxes of $104,000 at an effective tax rate of 17% in the
comparable 1999 period. The effective tax rate for the first two quarters of
fiscal 2000 is more 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 loss for the first six months of fiscal 2000 was $167,000,
or two cents per share, as compared to a net loss of $520,000, or six cents per
share, in the same period of fiscal 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $4,481,000 at April 30, 2000 as compared to
$5,596,000 at October 31, 1999, a reduction of $1,115,000.
Operating activities used cash of $400,000 during the first six months of fiscal
2000, as compared to providing cash of $140,000 during the same period in fiscal
1999. Cash was used by operations through an increase in working capital
primarily used for inventory and accounts receivable. These cash uses were
partially offset by non-cash expenses in excess of the loss from operations
combined with an increase in accounts payable and accrued expenses during the
period.
Investing activities used $594,000 of cash during the first-half of fiscal 2000,
which included $467,000 in 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 $121,000 of cash during the 2000 period, including
cash repayments of $204,000 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
$1,043,000 at April 30, 2000, including the component segment's employment
contract termination charge which requires monthly payments through July 2001.
Payments on all other long-term obligations extend 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 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.
12
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
--------------------------------------------------------------------------------
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. 101A, will be effective for the
Company during the quarter ended January 31, 2001. The Company has
preliminarily evaluated the guidance outlined in SAB Nos. 101 and 101A, and does
not believe the adoption of SAB Nos. 101 and 101A 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.
13
<PAGE>
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
The following is a report of the voting results of the Company's annual
shareholders meeting held on February 22, 2000.
The proposal to elect six directors was approved. M. Karen Gilles, William G.
Kobi, Richard W. Perkins, Anton R. Potami, Timothy M. Scanlon and Edward E.
Strickland were elected until the next annual meeting of shareholders or until
their successors are duly elected and qualified. There were no broker non-votes.
The tabulation was as follows:
Director Votes For Votes Against
-------- --------- -------------
M. Karen Gilles 8,069,612 68,778
William G. Kobi 8,071,052 67,338
Richard W. Perkins 8,069,562 68,828
Anton R. Potami 8,071,052 67,338
Timothy M. Scanlon 8,071,052 67,338
Edward E. Strickland 8,069,392 68,998
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 April 30, 2000.
14
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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: June 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 Change in control agreement dated March 1, 2000 between the Company and
Fariborz Boor Boor (filed herewith electronically).
27.1 Financial Data Schedule for the six-month period ended April 30, 2000
(filed herewith electronically).
