<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 January 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 March 1, 2000, there were 8,979,504 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
<PAGE>
a
ITEM 1. FINANCIAL STATEMENTS
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
January 31, October 31,
2000 1999
--------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 4,860 $ 5,596
Accounts receivable, net..................................................... 2,646 3,123
Inventories, net............................................................. 3,324 2,576
Deferred income taxes........................................................ 287 307
Other........................................................................ 508 398
--------- ---------
Total current assets....................................................... 11,625 12,000
Equipment and leasehold improvements, net.................................... 5,035 4,936
Goodwill and other intangible assets, net.................................... 6,462 6,594
Deferred income taxes........................................................ 678 540
--------- ---------
Total assets............................................................... $ 23,800 $ 24,070
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 818 $ 680
Accrued expenses............................................................. 1,305 1,551
Current maturities of long-term obligations.................................. 379 369
--------- ---------
Total current liabilities.................................................. 2,502 2,600
Capital lease obligations.................................................... 88 159
Other liabilities............................................................ 490 527
--------- ---------
Total liabilities.......................................................... 3,080 3,286
--------- ---------
Contingencies
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at January 31, 2000 and
October 31, 1999........................................................... -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 8,975,383 at January 31, 2000 and
8,960,633 at October 31, 1999.............................................. 90 90
Additional paid-in capital................................................... 27,682 27,661
Unearned compensation........................................................ (557) (601)
Accumulated deficit.......................................................... (6,495) (6,366)
--------- ---------
Total shareholders' equity................................................. 20,720 20,784
--------- ---------
Total liabilities and shareholders' equity................................. $ 23,800 $ 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 PERIODS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended
January 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Net revenue................................................ $ 4,382 $ 3,829
Cost of revenue............................................ 2,024 1,912
--------- ---------
Gross margin............................................... 2,358 1,917
Operating expenses:
Selling, general and administrative........................ 2,039 2,025
Research and development................................... 606 333
--------- ---------
Operating loss............................................. (287) (441)
Other income, net.......................................... 30 60
--------- ---------
Loss before benefit from income taxes...................... (257) (381)
Benefit from income taxes.................................. (128) (63)
--------- ---------
Net loss................................................... $ (129) $ (318)
========= =========
Basic and diluted earnings per share:
Net loss................................................... $ (.01) $ (.03)
========= =========
</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 THREE-MONTH PERIODS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Three Months Ended
January 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES............................... $ (241) $ (119)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements.............................. (281) (328)
Proceeds from disposal of equipment................................. 11
Investments in marketable securities................................ (987)
Proceeds upon maturities of marketable securities................... 2,991
Investments in patents and trademarks............................... (21) (27)
Issuance of note receivable......................................... (106)
Payment of transaction costs related to acquisition of Jerneen...... (51)
-------- -------
Net cash (used in) provided by investing activities................. (397) 1,598
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on bank note............................................. (261)
Net proceeds related to stock-based compensation plans.............. 2
Repurchase of the Company's common stock............................ (6)
Repayment of capital lease obligations.............................. (66) (55)
Repayments of other long-term obligations........................... (32) (33)
-------- -------
Net cash used in financing activities............................... (98) (353)
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................ (736) 1,126
-------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 5,596 4,383
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 4,860 $ 5,509
======== =======
</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 three months ended January 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:
January 31, October 31,
2000 1999
---- ----
(Unaudited)
Inventories, net:
Raw materials and supplies..................... $1,622,000 $1,534,000
Work in process................................ 916,000 549,000
Finished goods................................. 1,372,000 1,071,000
Less reserve for inventory obsolescence........ (586,000) (578,000)
---------- ----------
$3,324,000 $2,576,000
========== ==========
At January 31, 2000, the Company recorded $94,000 in accounts payable for
equipment purchases made during the quarter then ended.
(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:
Three Months Ended
January 31,
2000 1999
---- ----
(Unaudited)
Denominator for basic earnings per share -
weighted-average common shares................... 8,794,261 9,200,611
Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares.......................... 8,794,261 9,200,611
5
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
________________________________________________________________________________
Options outstanding with exercise prices greater
than the average market price of the Company's
common stock..................................... 1,081,053 1,244,669
Restricted stock awards outstanding............... 182,012 151,385
As of January 31,
2000 1999
---- ----
(Unaudited)
Options outstanding......................... 1,351,762 1,387,888
Exercise prices............................. $1.87 - $12.21 $1.87 - $13.03
Expiration dates............................ 2000 - 2009 1999 - 2007
For the three-month periods ended January 31, 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.
(4) 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 revenues by geographic area:
<TABLE>
<CAPTION>
January 31, October 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Percent of accounts receivable by significant customers:
A......................................................... 13% 16%
B......................................................... 11% 15%
C......................................................... 12% 12%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
January 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Percent of net revenues by significant customers:
A......................................................... 13% 25%
B......................................................... 15% 13%
C......................................................... 10% 8%
</TABLE>
6
<PAGE>
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
________________________________________________________________________________
Three Months Ended
January 31,
2000 1999
---- ----
(Unaudited)
International net revenues by geographic area:
Europe............................................ $634,000 $438,000
Asia and Pacific Region........................... 156,000 120,000
Canada............................................ 98,000 63,000
Other............................................. 20,000 28,000
-------- --------
Total............................................. $908,000 $649,000
======== ========
Percent of total net revenue...................... 21% 17%
(5) NEW ACCOUNTING PRONOUNCEMENT:
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.
7
<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 the 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, the risk factors listed from
time to time in the Company's filings with the Securities and Exchange
Commission, such as the year-end 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, neuro, 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 January 31, 2000 with the Three Months
Ended January 31, 1999
For the first quarter of fiscal 2000, consolidated net revenues increased 14
percent to $4,382,000 from $3,829,000 in the first quarter of fiscal 1999. The
branded surgical products segment reported net revenue of $3,114,000 in the
fiscal 2000 quarter, a record increase of $687,000 or 28%, over the segment's
1999 quarterly revenue of $2,427,000. The medical device component segment's
revenues decreased 10% to $1,268,000 during the first quarter of fiscal 2000
from $1,402,000 reported during the same quarter in 1999.
The branded surgical products segment experienced revenue gains from all major
product lines during the quarter. Revenues from Surgical Tools sales increased
to $750,000 during the 2000 quarter, a 48 percent increase over the comparable
1999 quarter, led by sales of the Flo-Thru Intraluminal Shunt(TM), a device used
in minimally invasive "beating heart" surgery. Sales of Peri-Strips(R) increased
$253,000 to $866,000 during the first three months of fiscal 2000, a 41%
increase over the 1999 first quarter sales of $613,000. The Tissue-Guard(TM)
product line, exclusive of Peri-Strips, contributed $208,000 in revenue growth
in 2000 over the same quarter in 1999, driven by sales of Dura-Guard(R) and
Vascu-Guard(R) which had quarterly revenue increases of 21% and 44%,
respectively. The branded segment's international revenues accounted for 28% and
25% of the segment's 2000 and 1999 first quarter revenues, respectively, and 37%
of the segment's net revenue increase during the first quarter of fiscal 2000.
The Company believes that this increase in international sales may be
attributable to the first quarter 2000 European introduction of APEX
Processing(TM), which enhances the clinical performance of the segment's Tissue
Guard products, and an increase in purchases by customers in anticipation of a
planned, comprehensive European product price increase effective February 1,
2000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
The medical device component segment's 10% decrease in revenues to $1,268,000
during the 2000 quarter from the prior year is mainly due to the timing of
customer draws against in house purchase orders and growth related issues,
including the segment's implementation of new internal systems which will
enhance future growth opportunities with significant customers.
The Company's gross margin percentage increased to 54% during the first quarter
of fiscal 2000 from 50% for the comparable 1999 quarter. This decrease is
primarily attributable to a four point percentage improvement in the branded
segment's gross margin to 61% as a result of a steady cost structure leveraged
over higher volumes of production. The component segment's gross margin declined
to 35% during the first three months of fiscal 2000 from 38% during the 1999
quarter, due primarily to lower quarterly revenues and new precious metal
handling agreements with key customers which reduce the segment's gross margin
percentage but add, in absolute dollars, to the gross margin of the component
segment.
Consolidated selling, general and administrative (SG&A) expense during the first
quarter of fiscal 2000 of $2,039,000 was consistent with SG&A expense incurred
during the comparable quarter in 1999 of $2,025,000, and declined as a
percentage of net revenue from 53% in the 1999 quarter to 47% in the 2000
quarter as a result of expense control measures implemented during the quarter,
leveraged over higher revenue levels.
Consolidated research and development (R&D) expense during the first quarter of
fiscal 2000 increased to $606,000, up $273,000 or 82%, over the first quarter of
fiscal 1999 R&D expense of $333,000. The increase in R&D expense represents the
branded segment's investment in animal feasibility studies for new products in
development and the continued implementation of the component segment's
Technology Development Center, intended to expand the solutions-oriented service
provided to its customers. 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 in the 2000 quarter was reduced 35% to $287,000
as compared to an operating loss of $441,000 for the first quarter of 1999. The
operating loss decrease largely reflects the impact of the branded surgical
product segment whose operating loss decreased $426,000 or 87% to $65,000 in the
2000 quarter as compared to an operating loss of $491,000 in the comparable 1999
quarter. The medical device component segment's operating loss was $222,000 for
the first quarter of 2000 as compared to operating income of $50,000 in the
first quarter of 1999.
Other income, primarily net interest income, was $30,000 in the 2000 quarter and
$60,000 in the 1999 quarter. The decrease in net interest income is related to
lower cash and investment balances in 2000, 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 $257,000 in
the 2000 quarter as compared to a loss of $381,000 in the 1999 quarter.
The Company recorded a benefit from income taxes of $128,000 in 2000, an
effective tax rate of 50%, as compared to a benefit from income taxes of $63,000
at an effective tax rate of 16% in 1999. The effective tax rate for the first
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 first quarter 2000 net loss was $129,000, or $0.01 per share, compared to a
net loss of $318,000, or $0.03 per share in 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash and cash equivalents were $4,860,000 at January 31, 2000 as compared to
$5,596,000 at October 31, 1999, a reduction of $736,000.
Operating activities used cash of $241,000 in the first three months of fiscal
2000, as compared to $119,000 during the same period in fiscal 1999. Cash was
used by operations through an increase in inventory levels and by reducing
accrued expenses. These cash uses were offset by non-cash expenses in excess of
the loss from operations and receivable collection efforts which generated a
reduction in receivables.
Investing activities used $397,000 of cash during the first quarter of fiscal
2000, which included $281,000 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 $98,000 of cash during the 2000 quarter, which
consisted of cash repayments of capital equipment lease and other long-term
obligations. The Company has long-term obligations (including current portions)
of $957,000 at January 31, 2000. Payments are required 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 research & development 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.
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 is 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.
10
<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
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 13.
Form 8-K. No reports on Form 8-K were filed by the Company during the
--------
quarter ended January 31, 2000.
11
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BIO-VASCULAR, INC.
Dated: March 8, 2000 /s/ Connie L. Magnuson
--------------------------------------
Connie L. Magnuson
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
12
<PAGE>
BIO-VASCULAR, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule for the three-month period ended January 31, 2000
(filed herewith electronically).
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE PERIOD ENDED JANUARY 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 4,860,000
<SECURITIES> 0
<RECEIVABLES> 2,749,000
<ALLOWANCES> (103,000)
<INVENTORY> 3,324,000
<CURRENT-ASSETS> 11,625,000
<PP&E> 7,643,000
<DEPRECIATION> (2,608,000)
<TOTAL-ASSETS> 23,800,000
<CURRENT-LIABILITIES> 2,502,000
<BONDS> 0
0
0
<COMMON> 90,000
<OTHER-SE> 20,630,000
<TOTAL-LIABILITY-AND-EQUITY> 23,800,000
<SALES> 4,382,000
<TOTAL-REVENUES> 4,382,000
<CGS> 2,024,000
<TOTAL-COSTS> 836,000
<OTHER-EXPENSES> 1,809,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (257,000)
<INCOME-TAX> (128,000)
<INCOME-CONTINUING> (129,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129,000)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
