<PAGE>
As filed with the Securities and Exchange Commission on March 12, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
_____________________________
VITAL IMAGES, INC.
(Exact name of registrant as specified in its charter)
IOWA* 42-1321776
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 WEST LAKE STREET, SUITE 100 55416
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal
executive offices)
(612) 915-8000
(Registrant's telephone number, including area code)
_____________________________
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
================================================================================
* It is expected that the Registrant will be reincorporated in Minnesota prior
to the effectiveness of this Registration Statement on Form 10, and the
information contained in the Information Statement forming a part hereof
reflects such reincorporation.
<PAGE>
VITAL IMAGES, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
- --- ------- ---------------------------------
<S> <C> <C>
1. Business................. Summary; Vital Images, Inc.; Introduction;
Risk Factors; The Distribution; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Index to Financial Statements
2. Financial Information.... Selected Financial Data; Unaudited Pro Forma
Statements of Operations; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
3. Properties............... Business -- Facilities
4. Security Ownership of
Certain Beneficial
Owners and Management.... Security Ownership of Certain Beneficial
Owners; Beneficial Ownership of Management
5. Directors and Executive
Officers................. Management; Description of Capital Stock --
Certain Limited Liability, Indemnification
and Anti-Takeover Provisions
6. Executive Compensation... Management; Security Ownership of Certain
Beneficial Owners
7. Certain Relationships.... Summary; The Distribution; Relationship
and Related Transactions. Between Bio-Vascular and Vital Images After
the Distribution; Certain Relationships and
Related Transactions
8. Legal Proceedings........ Business -- Legal Proceedings
9. Market Price of and Dividends
on the Registrant's Common
Equity and Related
Stockholder Matters...... Summary; Risk Factors; The Distribution;
Management; Security Ownership of Certain
Beneficial Owners; Beneficial Ownership of
Management; Description of Capital Stock
10. Recent Sales of Unregistered
Securities............... Not Applicable
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
- --- ------- ---------------------------------
<S> <C> <C>
11. Description of Registrant's
Securities to be Registered... Description of Capital Stock;
Rights Agreement
12. Indemnification of Directors
and Officers.................. Description of Capital Stock -- Certain
Limited Liability, Indemnification and
Anti-Takeover Provisions
13. Financial Statements and
Supplementary Data............ Summary; Summary Financial Data;
Capitalization; Selected Financial Data;
Unaudited Pro Forma Statements of
Operations; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Index to Financial
Statements
14. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure...... Not Applicable
</TABLE>
ii
<PAGE>
[LETTER ON BIO-VASCULAR LETTERHEAD]
Dear Shareholder:
The attached Information Statement sets forth information regarding Vital
Images, Inc. ("Vital Images") and the distribution of all of the issued and
outstanding shares of Vital Images' common stock, as well as certain preferred
stock purchase rights, to shareholders of Bio-Vascular, Inc. ("Bio-Vascular").
Bio-Vascular's Board of Directors authorized the distribution at a meeting of
the entire Board on October 28, 1996. it is expected that the distribution of
shares of Vital Images will occur on or about April ___, 1997.
Vital Images was incorporated in Iowa in September 1988 and was reincorporated
in Minnesota in March 1997. Vital Images was acquired by Bio-Vascular through a
tax-free merger on May 24, 1994 and has operated as a wholly-owned subsidiary of
Bio-Vascular since that date. The acquisition by Bio-Vascular provided
financial resources and management capabilities to Vital Images and enabled
Vital Images to leverage these resources and focus its efforts on medical
applications for its technologies.
The decision to spin-off Vital Images was made because, strategically and
financially, the timing and circumstances were right to separate Bio-Vascular's
Surgical and Medical Visualization Businesses for the long-term benefit of its
shareholders, and because of the belief that each business would benefit by
being able to adopt strategies and pursue objectives appropriate to its specific
business, focus on its distinct distribution and marketing channels, be
recognized and evaluated by the financial community as a separate and distinct
business, and implement more focused incentive compensation arrangements that
are tied more directly to the results of operations of its respective business.
The attached Information Statement provides important information regarding
Vital Images and the distribution of Vital Images common stock to the
shareholders of Bio-Vascular. It also contains information about Vital Images'
organization, business, properties, management and operations, including
financial information. We encourage you to read this material carefully.
If you are a Bio-Vascular shareholder at the close of business on April ___,
1997, the record date for the distribution, you will receive one share of Vital
Images common stock for every two shares of Bio-Vascular common stock you own on
that date, with cash to be paid in lieu of any fractional interest in a share to
any holder who would be entitled to less than one whole share of Vital Images
common stock.
Sincerely,
/s/ John T. Karcanes
John T. Karcanes
President and Chief Executive Officer
SHAREHOLDERS OF BIO-VASCULAR COMMON STOCK ON THE RECORD DATE FOR THE
DISTRIBUTION ARE NOT REQUIRED TO TAKE ANY ACTION TO PARTICIPATE IN THE
---
DISTRIBUTION. BIO-VASCULAR IS NOT SOLICITING YOUR PROXY BECAUSE SHAREHOLDER
---
APPROVAL OF THE DISTRIBUTION IS NOT REQUIRED.
<PAGE>
[LETTER ON VITAL IMAGES LETTERHEAD]
Dear Shareholder of Bio-Vascular, Inc.:
Attached you will find an Information Statement providing you with considerable
detail about the business and operations of Vital Images, Inc. ("Vital Images"),
the company in which you will become a shareholder if you own shares of common
stock of Bio-Vascular, Inc. on April __, 1997.
Vital Images is engaged in the business of developing, marketing and supporting
medical visualization software and systems for use in clinical diagnosis and
surgical planning. Vital Images' VoxelView(R) and Vitrea(TM) products are
designed for use by primary care physicians, radiologists, surgeons and medical
researchers, and apply computer graphics and image processing technologies to
data from standard medical scanning and imaging devices such as computed
tomography and magnetic resonance imaging scanners. By applying these
technologies, Vital Images' products provide clinicians with both two- and
three-dimensional views inside the human body for use in a variety of clinical
and research settings.
VoxelView(R), Vital Images' first medical visualization product, received
510(k) marketing clearance from the U.S. Food and Drug Administration (the
"FDA") in November 1995 and currently has approximately 350 user sites around
the world. Vitrea(TM), an advanced version of Vital Images' technology designed
to bring medical visualization into routine clinical use, received 510(k)
marketing clearance from the FDA in December 1996 and is expected to be
commercially released in the second quarter of calendar 1997. Vital Images
intends to offer Vitrea(TM) both as a software package and as a part of an
integrated software and hardware system to radiologists, surgeons and other care
providers. Vitrea(TM) and the integrated Vitrea(TM) system are both designed for
ready integration into hospital radiology networks.
Vital Images' business strategy is to continue to develop and sell medical
visualization software and systems to end users and to seek opportunities to
integrate its technologies into medical imaging equipment developed and marketed
by other medical device manufacturers.
We at Vital Images are excited about our opportunities for growth. We hope you
share our enthusiasm about Vital Images' business and prospects, and we welcome
your participation in our future.
Sincerely,
/s/ Andrew M. Weiss
Andrew M. Weiss
President and Chief Executive Officer
<PAGE>
INFORMATION STATEMENT
[VITAL IMAGES, INC. LOGO]
COMMON STOCK, PAR VALUE $.01 PER SHARE
This Information Statement is being furnished by Bio-Vascular, Inc. ("Bio-
Vascular") in connection with the distribution (the "Distribution") to holders
of record of Bio-Vascular Common Stock ("Bio-Vascular Common Stock") on
________________, 1997 (the "Record Date") of one share of common stock, par
value $.01 per share ("Vital Images Common Stock"), including certain preferred
stock purchase rights, of Vital Images, Inc. ("Vital Images") for every two
shares of Bio-Vascular Common Stock owned on that date. The Distribution will
result in 100% of the outstanding shares of Vital Images Common Stock being
distributed to holders of Bio-Vascular Common Stock on a pro-rata basis. The
Distribution will be effective on April __, 1997 (the "Distribution Date"), and
it is expected that certificates representing Vital Images Common Stock will be
mailed on or about April __, 1997 (the "Mailing Date").
No consideration will be paid by Bio-Vascular's shareholders for the shares of
Vital Images Common Stock to be received by them in the distribution nor will
they be required to surrender or exchange shares of Bio-Vascular Common Stock in
order to receive Vital Images Common Stock.
There is no current public trading market for the shares of Vital Images Common
Stock, although it is expected that a "when issued" trading market will develop
on or about the Distribution Date. Application has been made to list Vital
Images Common Stock, and it is expected that the Vital Images Common Stock will
be listed, on the Nasdaq SmallCap Market under the symbol "VTAL."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" ON PAGE ___.
______________________
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
________________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE
MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS __________, 1997.
<PAGE>
CLINICAL STUDIES VISUALIZED WITH VITREA(TM)
[Photo of three-dimensional medical image]
CIRCLE OF WILLIS
Three-dimensional view of an aneurysm in the
carotid artery in the brain.
[Photo of three-dimensional medical image]
CAROTID
Three-dimensional view of the carotid artery,
facial and cranial bones, muscular structure and
external vasculature of the neck.
[Photo of three-dimensional medical image]
COLON
Three-dimensional, perspective view of the colon.
[Photo of three-dimensional medical image]
BRONCHUS
Three dimensional, endoscopic view of
the bronchus.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY........................................................................... 5
The Distribution................................................................ 5
Vital Images, Inc............................................................... 8
Summary Financial Data.......................................................... 10
INTRODUCTION...................................................................... 11
RISK FACTORS...................................................................... 11
THE DISTRIBUTION.................................................................. 19
Reasons for the Distribution.................................................... 19
Manner of Effecting the Distribution............................................ 20
Certain Federal Income Tax Consequences......................................... 20
Listing and Trading of Vital Images Common Stock................................ 23
RELATIONSHIP BETWEEN BIO-VASCULAR AND VITAL IMAGES AFTER THE DISTRIBUTION......... 23
Distribution Agreement.......................................................... 24
Employee Benefits Agreement..................................................... 25
Tax Sharing Agreement........................................................... 28
Transition Services Agreement................................................... 28
FINANCING......................................................................... 29
Initial Capital Contribution by Bio-Vascular.................................... 29
Need for Additional Financing................................................... 29
CAPITALIZATION.................................................................... 30
DIVIDEND POLICY................................................................... 31
SELECTED FINANCIAL DATA........................................................... 32
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS...................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 36
BUSINESS.......................................................................... 41
General......................................................................... 41
Technology...................................................................... 41
Strategy........................................................................ 42
Industry Background............................................................. 43
Markets......................................................................... 44
Products & Product Development.................................................. 45
Competition..................................................................... 47
Marketing, Distribution and Customer Support.................................... 48
Intellectual Property........................................................... 48
Manufacturing and Service....................................................... 49
Governmental Regulation......................................................... 49
Third Party Reimbursement and Cost Containment.................................. 51
Facilities...................................................................... 52
Employees....................................................................... 52
Legal Proceedings............................................................... 52
MANAGEMENT........................................................................ 53
Directors and Executive Officers................................................ 53
Committees of the Board of Directors............................................ 55
Compensation of Directors....................................................... 56
Director Stock Option Plan...................................................... 56
Executive Compensation.......................................................... 57
Grants of Options to Purchase Bio-Vascular Common Stock......................... 58
Exercises and Year-End Values of Options to Purchase Bio-Vascular Common Stock.. 59
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Change in Control Agreements.................................................... 59
1997 Stock Option and Incentive Plan............................................ 60
Stock Purchase Plan............................................................. 61
Other Stock Option Plans........................................................ 61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................................... 62
BENEFICIAL OWNERSHIP OF MANAGEMENT................................................ 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................... 64
DESCRIPTION OF CAPITAL STOCK...................................................... 65
Common Stock.................................................................... 65
Preferred Stock................................................................. 65
Certain Limited Liability, Indemnification and Anti-Takeover Provisions......... 65
Transfer Agent and Registrar.................................................... 66
RIGHTS AGREEMENT.................................................................. 67
ADDITIONAL INFORMATION............................................................ 70
INDEX TO FINANCIAL STATEMENTS..................................................... F-1
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. The information contained herein reflects the
reincorporation of Vital Images, Inc. in Minnesota, effective in March 1997.
THE DISTRIBUTION
Distributing Corporation.......... Bio-Vascular, Inc., a Minnesota corporation
("Bio-Vascular").
Distributed Corporation and
Business.......................... Vital Images, Inc., a Minnesota corporation
("Vital Images"), currently a wholly-owned
subsidiary of Bio-Vascular. The Medical
Visualization Business of Bio-Vascular
(formerly called the "Medical Imaging
Software Business"), involving the
development, marketing and support of
medical visualization software and systems
for the interactive, two- and three-
dimensional visualization and analysis of
data collected by medical scanning and
imaging devices, has been conducted solely
by Vital Images since its acquisition by
Bio-Vascular in a tax-free merger in May
1994. See "Business."
Principal Business to be Retained
by Bio-Vascular................... Bio-Vascular will retain its Surgical
Business, involving the development,
manufacturing and marketing of proprietary,
specialty medical products for use in
thoracic, cardiac, neuro and vascular
surgery (the "Surgical Business").
Primary Purposes of the
Distribution...................... To separate the Surgical Business, conducted
solely by Bio-Vascular, from the Medical
Visualization Business, conducted solely by
Vital Images, so that each company can (i)
adopt strategies and pursue objectives
appropriate to its specific business; (ii)
focus on its distinct distribution and
marketing channels; (iii) be recognized and
evaluated by the financial community as a
separate and distinct business; and (iv)
implement more focused incentive
compensation arrangements that are tied more
directly to results of operations of its
respective business. See "The Distribution
-- Reasons for the Distribution."
Distribution Ratio................ Each Bio-Vascular shareholder will receive
one share of Vital Images Common Stock,
including certain preferred stock purchase
rights, for every two shares of Bio-Vascular
Common Stock held on the Record Date.
Shares to be Distributed.......... Approximately ________ shares of Vital
Images Common Stock, based on ___________
shares of Bio-Vascular Common
5
<PAGE>
Stock outstanding as of ___________. The
shares of Vital Images Common Stock to be
distributed will constitute 100% of the
outstanding shares of Vital Images Common
Stock on the Distribution Date.
Distribution Agent................ American Stock Transfer & Trust Company.
Fractional Share Interests........ Fractional share interests will be sold by
the Distribution Agent and the cash proceeds
distributed to those Bio-Vascular
shareholders entitled to a fractional
interest by reason of the Distribution. See
"The Distribution -- Manner of Effecting the
Distribution."
Listing and Trading Market........ Application has been made to list the Vital
Images Common Stock, and it is expected that
the Vital Images Common Stock will be
listed, on the Nasdaq SmallCap Market under
the symbol "VTAL." See "The Distribution --
Listing and Trading of Vital Images Common
Stock."
Record Date....................... Close of business on April __, 1997.
Distribution Date................. April __, 1997.
Mailing Date...................... Certificates representing the shares of
Vital Images Common Stock and certain
attached preferred stock purchase rights
will be mailed to Bio-Vascular shareholders
on or about April __, 1997.
Tax Consequences.................. Bio-Vascular has received an opinion of its
tax advisor to the effect that there appears
to be substantial authority for viewing the
Distribution as a non-taxable transaction
for Bio-Vascular and its shareholders. Bio-
Vascular has not applied, and does not
intend to apply, for a ruling from the
Internal Revenue Service to such effect. See
"The Distribution -- Certain Federal Income
Tax Consequences."
Relationship with Bio-Vascular
After the Distribution............ Following the Distribution, Bio-Vascular and
Vital Images will be operated as independent
public companies. Bio-Vascular and Vital
Images will, however, continue to have a
relationship as a result of the agreements
being entered into between Bio-Vascular and
Vital Images in connection with the
Distribution, which include a Distribution
Agreement, an Employee Benefits Agreement, a
Tax Sharing Agreement and a Transition
Services Agreement. In addition, two
individuals will continue to serve as
directors of both Bio-Vascular and Vital
Images after the Distribution, with one of
these individuals serving for a transition
period not to exceed 18 months. Except as
referred to above or as otherwise described
herein, Bio-Vascular and Vital
6
<PAGE>
Images will cease to have any material
relationship with each other following the
Distribution. See "Relationship Between Bio-
Vascular and Vital Images After the
Distribution," "Financing," "Capitalization"
and "Management --Directors and Executive
Officers."
Risk Factors...................... Shareholders should carefully consider the
matters discussed in the section entitled
"Risk Factors."
Certain Anti-Takeover
Considerations.................... Certain provisions of Vital Images' Articles
of Incorporation (the "Articles") and Bylaws
(the "Bylaws"), as each will be in effect as
of the Distribution, as well as applicable
Minnesota corporate law and Vital Images'
preferred stock purchase rights, may have
the effect, following the Distribution, of
making an acquisition of control of Vital
Images in a transaction not approved by
Vital Images' Board of Directors more
difficult. See "Description of Capital
Stock" and "Rights Agreement."
7
<PAGE>
VITAL IMAGES, INC.
Vital Images, currently a wholly-owned subsidiary of Bio-Vascular, will,
upon completion of the Distribution, be an independent, publicly-owned company
that will continue to operate the Medical Visualization Business of Bio-
Vascular. The Medical Visualization Business of Bio-Vascular has been conducted
solely by Vital Images since Bio-Vascular's acquisition of Vital Images in a
tax-free merger in May 1994.
Vital Images is engaged in the business of developing, marketing and
supporting medical visualization software and systems for use in clinical
diagnosis and surgical planning. Since its incorporation in 1988, Vital Images
has pioneered the use of computer-based visualization software, and, in
particular, three-dimensional visualization software. Initially, Vital Images
focused on developing powerful visualization software tools for use by engineers
and researchers in a variety of imaging applications, including gas and oil
exploration, microscopy and medical research. Since its acquisition in 1994,
Vital Images has consolidated its focus and now dedicates its efforts to
developing and marketing high performance visualization software for medical
applications, designed for routine clinical use in clinical diagnosis and
surgical planning.
Vital Images' products are based on proprietary visualization algorithms
and display techniques involving "volume rendering" of imaging data. Volume
rendering is an advanced technique for displaying two- or three-dimensional
images on a computer monitor which has significant advantages over the
alternative technique, known as "surface rendering." Traditionally, volume
rendering has been largely overlooked by visualization companies because the
computer power necessary to perform volume rendering is, in general,
significantly more intensive than the requirements for surface rendering.
However, Vital Images proprietary technologies offer volume rendering-based
systems which operate on standard computer workstations manufactured by Silicon
Graphics, Inc. ("Silicon Graphics").
Vital Images currently has two software products, VoxelView(R) and
Vitrea(TM), which provide clinicians with both two- and three-dimensional views
inside the human body for use in clinical diagnosis and surgical planning.
VoxelView(R), Vital Images' first medical visualization product, received
510(k) marketing clearance from the U.S. Food and Drug Administration (the
"FDA") in November 1995 and currently has approximately 350 user sites around
the world. Vitrea(TM), an advanced version of Vital Images' technology for
medical visualization applications, received 510(k) marketing clearance from the
FDA in December 1996, and is currently expected to be commercially released in
the second quarter of calendar 1997.
Vital Images intends to offer Vitrea(TM) both as a software package and as
an integrated software and hardware system to radiologists, surgeons and other
care providers. Vitrea(TM) and the integrated Vitrea(TM) system are both
designed for ready integration into hospital radiology networks. Vitrea(TM)'s
primary advantage is that it provides two- and three-dimensional viewing for
routine diagnosis and surgical planning, without requiring the user to be
trained in computer graphics techniques. A Vitrea(TM) user can view the image
data in two or three dimensions using visualization settings stored within the
system, and optimized for their specific clinical application. The user can
interactively navigate around, or "fly through," the image, allowing the user to
view clinically relevant anatomies and pathologies. Vital Images believes that
no competitor has developed this interactive "fly through" capability based on
volume rendering operating on a low-cost computer workstation. Vitrea(TM) also
allows the user to capture views by taking "snapshots," which can be downloaded
into customized reports for electronic transmission and archiving.
8
<PAGE>
Vital Images' business strategy is to continue to develop and sell medical
visualization software and systems to end users and to seek opportunities to
integrate its technologies into medical imaging equipment developed and marketed
by other medical equipment manufacturers.
Vital Images' principal offices are located at 3100 West Lake Street, Suite
100, Minneapolis, MN 55416. See "Business -- Facilities."
VoxelView(R), VoxelGeo(R), Voxel Animator(TM) and Vitrea(TM) are
trademarks of Vital Images. O2(R) and OpenGL(TM) are trademarks of Silicon
Graphics.
9
<PAGE>
SUMMARY FINANCIAL DATAa
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summary financial data of Vital Images. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Information Statement. The summary financial data relates to Vital Images as it
was operated as a wholly-owned subsidiary of Bio-Vascular, and is derived from
the financial statements of Vital Images, including an allocation of certain
general corporate overhead expenses of Bio-Vascular.
The summary financial data set forth below may not be indicative of Vital
Images' future performance, and does not necessarily reflect the financial
position and results of operations of Vital Images had Vital Images operated as
a separate, stand-alone entity during each of the periods presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED JANUARY 31, ENDED OCTOBER 31,
-------------------- ------------------------
1997 1996 1996 1995(1) 1994
------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................... $ 152 $ 143 $ 882 $ 2,894 $ 1,680
Gross margin................ 132 110 720 2,488 1,170
Operating income (loss)..... (882) (704) (2,545) 252 (1,254)
Net income (loss)........... (754) (705) (2,546) 253 (1,261)
Pro forma net loss per
share (unaudited) (2)....... $ (.16) $ (.54)
Pro forma average number of
common shares outstanding
(unaudited) (2)............... 4,750 4,742
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1997 (3) 1996 1995
-------- ------- ------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ 5,886 $(258) $(144)
Total assets 10,153 943 739
Total equity 9,460 174 321
</TABLE>
_________________________
(1) Includes $1,500 of one-time license fee revenue, which contributed $1,322
to gross margin and operating income.
(2) The unaudited pro forma net loss per share is calculated for the three
months ended January 31, 1997, and for the year ended October 31, 1996
based on the number of shares of Bio-Vascular Common Stock outstanding,
adjusted for the one-for-two distribution ratio. Adjusted unaudited pro
forma net loss per share for the three months ended January 31, 1997 and
for the year ended October 31, 1996 is $(.21) and $(.73), respectively, and
is based on the unaudited pro forma net losses of $979 for the three months
ended January 31, 1997 and $3,446 for the year ended October 31, 1996. See
" Unaudited Pro Forma Statements of Operations."
(3) See "Capitalization" for the as adjusted equity as of the Distribution
Date.
10
<PAGE>
INTRODUCTION
On October 28, 1996, the Board of Directors of Bio-Vascular approved the
Distribution, payable to holders of record of Bio-Vascular Common Stock at the
close of business on the Record Date, of one share of Vital Images Common Stock
for every two shares of Bio-Vascular Common Stock outstanding on the Record
Date. As a result of the Distribution, 100% of the outstanding shares of Vital
Images Common Stock will be distributed to holders of Bio-Vascular Common Stock
on a pro-rata basis. Certificates representing shares of Vital Images Common
Stock will be mailed to Bio-Vascular shareholders on the Mailing Date. Holders
of Bio-Vascular Common Stock will receive cash in lieu of any fractional share
of Vital Images Common Stock.
Vital Images was incorporated in Iowa in September 1988 and was
reincorporated in Minnesota in March 1997. In May 1994, Vital Images was
acquired by Bio-Vascular in a tax-free merger and has been a wholly-owned
subsidiary of Bio-Vascular since that time.
Following the Distribution, the business of Bio-Vascular will consist of
the Surgical Business, which has historically been conducted solely by Bio-
Vascular and involves the development, manufacturing and marketing of
proprietary specialty medical products for use in thoracic, cardiac, neuro and
vascular surgery.
Shareholders of Bio-Vascular with inquiries relating to the Distribution
should contact Bio-Vascular's Vice President of Finance and Chief Financial
Officer, M. Karen Gilles, at 2575 University Avenue, St. Paul, Minnesota 55114,
telephone (612) 603-3700. After the Distribution Date, shareholders of Vital
Images with inquiries relating to the Distribution or Vital Images should
contact Vital Images' Vice President, Finance and Chief Financial Officer,
Gregory S. Furness, at 3100 West Lake Street, Suite 100, Minneapolis MN 55416,
telephone (612) 915-8000.
RISK FACTORS
Shareholders of Bio-Vascular should carefully consider and evaluate all of
the information set forth in this Information Statement, including the risk
factors listed below. Vital Images also cautions readers that, in addition to
the historical information included herein, this Information Statement includes
certain forward-looking statements and information that are based on
management's beliefs as well as on assumptions made by, and upon information
currently available to, management. When used in this Information Statement,
the words "expect," "anticipate," "intend," "plan," "believe," "seek" and
"estimate" or similar expressions are intended to identify such forward-looking
statements. However, this Information Statement also contains other forward-
looking statements. Forward-looking statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions,
including, but not limited to, the following risk factors, which could cause
Vital Images' future results and shareholder values to differ materially from
those expressed in any forward-looking statements made by or on behalf of Vital
Images. Many of such factors are beyond Vital Images' ability to control or
predict. Readers are cautioned not to put undue reliance on forward-looking
statements. Vital Images disclaims any intent or obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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HISTORICAL OPERATING LOSSES; UNCERTAIN PROFITABILITY PROSPECTS
Vital Images had operating losses of $882,000 for the three months ended
January 31, 1997, and $2,545,000 for the year ended October 31, 1996, and, with
the exception of the fiscal year ended October 31, 1995, has incurred operating
losses each year since 1990. While Vital Images had operating income of
$252,000 for the year ended October 31, 1995, this income was entirely
attributable to a one-time license fee payment of $1,500,000 received by Vital
Images during that fiscal year as a result of granting a perpetual source code
license for its gas and oil exploration software product, VoxelGeo. At January
31, 1997, Vital Images' accumulated deficit was $6,261,000. Vital Images will
likely continue to incur operating losses in the near term given the early stage
of the market for its medical visualization products, and there can be no
assurance that Vital Images will be profitable at any time in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TRANSITION TO MEDICAL VISUALIZATION BUSINESS; EARLY STAGE OF INDUSTRY AND
BUSINESS
From its incorporation in 1988 until its acquisition by Bio-Vascular in
1994, Vital Images was focused on developing and supporting visualization
software tools for use by engineers and researchers in a variety of imaging
applications, including gas and oil exploration, microscopy and medical
research. Since its acquisition in 1994, Vital Images has consolidated its
focus and is now focused solely on developing, marketing and supporting
visualization software packages and systems for routine clinical use in medical
applications. While Vital Images has designed its Vitrea product in keeping
with this refined focus, there can be no assurance that Vital Images will be
successful in marketing Vitrea or any other product or that Vital Images will be
successful in making the transition from developing software tools for a variety
of technical applications to developing, marketing and supporting software
packages or integrated solutions for direct clinical application by medical
personnel.
Additionally, the medical visualization industry in which Vital Images
markets its products is still in an early stage. The early stage of the
industry is attributable to the fairly recent availability of high performance
computers at reduced prices, the recent adoption of industry standards for the
generation, transmission and storage of medical imaging data, and changing
medical practices. Although Vital Images believes that the recent advances in
the affordability of high performance computers and in the development of
industry standards for imaging data will provide opportunities for growth in the
medical visualization industry, given the uncertainties associated with the
early stage of the industry, there can be no assurance that the industry will
continue to develop in the manner anticipated by Vital Images. Accordingly,
there can be no assurance that the medical visualization industry will provide
growth opportunities for Vital Images and its volume rendering software products
or that Vital Images' business strategies and focus on volume rendering
technology will be successful as the medical visualization industry continues to
evolve.
Although Vital Images has received FDA clearance to market VoxelView and
Vitrea for use as clinical diagnostic and surgical planning tools, there can be
no assurance of meaningful revenue from these early stage products in the near
term. The success of Vital Images' products will depend on its ability to
successfully commercialize and market its products, the ability and willingness
of physicians to use two- and three-dimensional imaging software in clinical
diagnosis, surgical planning, patient screening, and other diagnosis and
treatment protocols, and the ability of Vital Images to differentiate its volume
rendering software from competing products employing surface rendering or other
technologies. There can be no assurance that Vital Images will be able to
succeed in its efforts to further develop, commercialize, and achieve market
acceptance for VoxelView or Vitrea, or for any other product. See "Business--
General," "--Technology," "--Industry Background," "--Markets" and "--
Competition."
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ABSENCE OF CONTINUING BIO-VASCULAR FUNDING; NEED FOR ADDITIONAL CAPITAL
Prior to the Distribution, Vital Images participated in Bio-Vascular's
centralized funding and cash management, and cash requirements of Vital Images
were provided by Bio-Vascular. Following the Distribution, Bio-Vascular will no
longer provide such funds to finance Vital Images' operations or for any other
purposes. Accordingly, in anticipation of the Distribution, Bio-Vascular agreed
to assign to Vital Images $10,000,000 in cash, cash equivalents and marketable
securities, effective November 1, 1996, and to contribute all intercompany debt
owed by Vital Images as of that date to the capital of Vital Images.
Subsequently, Bio-Vascular's Board of Directors determined, effective as of the
Distribution Date, to make such additional capital contributions to Vital Images
as necessary to bring Vital Images' cash, cash equivalents and marketable
securities balances to a combined $10,000,000 and to contribute any additional
intercompany debt owed by Vital Images on the Distribution Date. If Vital
Images' operations progress as anticipated, of which there can be no assurance,
Vital Images believes that the capital contribution made by Bio-Vascular,
together with cash flows from operations, should be sufficient to satisfy its
cash requirements for at least the next two years. The timing of Vital Images'
future capital requirements, however, will depend on a number of factors,
including the ability of Vital Images to successfully commercialize and market
its products; the ability and willingness of physicians to use two- and three-
dimensional imaging software in clinical diagnosis, surgical planning, patient
screening and other diagnosis and treatment protocols; the impact of competition
in the medical visualization business; the ability of Vital Images to
differentiate its volume rendering software from competing products employing
surface rendering or other technologies; and the ability to enhance existing
products and develop new products on a timely basis. To the extent that Vital
Images' operations do not progress as anticipated, additional capital will be
required sooner. There can be no assurance that any required additional capital
will be available on acceptable terms, or at all, and the failure to obtain any
such required capital would have a material adverse effect on Vital Images'
business. See "Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE
Vital Images faces intense competition in its Medical Visualization
Business. While the industry is in a relatively early stage, its development to
date has been characterized by rapid innovation and technological change. Vital
Images expects technology to continue to develop rapidly, and Vital Images'
success will depend to a large extent on its ability to maintain a competitive
position with its volume rendering technology. There can be no assurance that
Vital Images will be able to compete effectively in the marketplace or that
products developed by its competitors will not render its products obsolete or
non-competitive. Similarly, there can be no assurance that Vital Images'
competitors will not succeed in developing or marketing products that are viewed
as providing superior clinical performance or are less expensive relative to
Vital Images' products currently marketed or to be developed. Companies
competing with Vital Images in the medical visualization industry include large,
established manufacturers of medical imaging equipment. In addition to having
significantly greater capital and staff resources for research and development
that are critical to success in the rapidly changing medical visualization
industry, such companies also have well-established marketing and distribution
networks and may have a competitive advantage in marketing visualization tools
as an integrated part of their imaging products. Additionally, Vital Images
faces competition from other entities, such as picture archive and communication
systems ("PACS") vendors, hospital, radiology and clinical systems suppliers and
internal development projects sponsored by hospital radiology departments. There
can be
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no assurance that Vital Images will be able to compete effectively with such
manufacturers or competing entities. See "Business--Technology," "--Industry
Background" and "--Competition."
DEPENDENCE ON SINGLE PLATFORM
Vital Images' primary product offerings, VoxelView and Vitrea, are designed
to run on workstations manufactured and sold by Silicon Graphics. Additionally,
Vital Images' strategy includes the sale of its Vitrea software as part of an
integrated system including Silicon Graphics' hardware. Although Vital Images
has entered into a reseller agreement with Silicon Graphics for purchase and
resale of Silicon Graphics workstations, this agreement is terminable by either
party at will on 30 days' notice. While Vitrea is also capable of running on
other types of hardware, Vitrea's performance on other hardware is currently
reduced relative to its performance when operated on Silicon Graphics
workstations. In addition, other workstations capable of running Vitrea may be
significantly more expensive than those manufactured and sold by Silicon
Graphics. Accordingly, Vital Images' ability to market its products is
dependent to a significant degree on the availability of Silicon Graphics
workstations and their use and acceptance by Vital Images' customers. To the
extent that Silicon Graphics workstations become unavailable to Vital Images or
that end-users of Vital Images' products utilize platforms manufactured by other
companies, Vital Images may encounter difficulty in marketing its products. In
any such event, Vital Images may be required to engage in substantial research
and development and sales and marketing efforts, at potentially significant
expense, to reconfigure and remarket its products to run at optimal performance
levels on workstations other than those manufactured by Silicon Graphics. There
can be no assurance that end-users of Vital Images' products will not determine
to use platforms other than those currently compatible with Vital Images'
products, and any such use could have a material adverse effect on Vital Images'
business, financial condition and results of operations. See "Business--
Products and Product Development."
UNCERTAIN PROTECTION FOR INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS
Although Vital Images has filed a patent application with respect to
certain aspects of its technology, it generally does not rely on patent
protection with respect to its products and technologies. Instead, Vital Images
relies primarily on a combination of trade secret and copyright law, employee
and third-party nondisclosure agreements and other protective measures to
protect intellectual property rights pertaining to its products and
technologies. There can be no assurance, however, that these measures will
provide meaningful protection of Vital Images' trade secrets, know-how or other
intellectual property in the event of any unauthorized use, misappropriation or
disclosure or that others will not independently develop similar technologies or
duplicate any technology developed by Vital Images. In addition, to the extent
that any patents are applied for, there can be no assurance that such
applications will result in issued patents or, if issued, that such patents will
be held to be valid or will otherwise be of value. While Vital Images does not
believe that its products and technologies infringe any existing patents or
intellectual property rights of third parties, there can be no assurance that
such infringement does not exist. The costs of defending an intellectual
property claim could be substantial and could adversely affect Vital Images,
even if it were ultimately successful in defending any such claims. If Vital
Images' products or technologies were found to infringe the rights of a third
party, Vital Images could be required to pay significant damages or license
fees or cease production, which could have a material adverse effect on Vital
Images' business. See "Business--Intellectual Property."
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PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of products used in the practice of medicine
entail significant risk of product liability claims. While Vital Images
currently maintains $2,000,000 of product liability insurance, there can be no
assurance that these coverage limits will be adequate to protect Vital Images
from any liabilities it might incur in connection with sales of its products or
that Vital Images will be able to maintain this level of coverage in the future.
In addition, in order to compete in the medical visualization industry, Vital
Images will have to maintain a steady pace of new product rollouts and updates
or enhancements of existing products. Accordingly, Vital Images may require
increased product liability coverage as additional products and updates come to
the marketplace. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability claim
or series of such claims against Vital Images in excess of Vital Images'
insurance coverage could have a material adverse effect on its business.
DEPENDENCE ON KEY EMPLOYEES
Vital Images will depend upon the active participation of Dr. Vincent
Argiro, its founder and Executive Vice President and Chief Technology Officer,
and Andrew M. Weiss, its President and Chief Executive Officer. Loss of the
services of either of these individuals could have a material adverse effect on
Vital Images' future business. Furthermore, Vital Images' success as an
independent company will depend on its ability to enhance and develop markets
for its current products as well as to introduce new products to the
marketplace. This success will depend largely on its ability to attract and
retain other qualified scientific and management personnel. Vital Images
competes for such personnel with other companies, academic institutions,
government entities and organizations, many of which have substantially greater
capital resources and research and development capabilities than Vital Images.
There can be no assurance that Vital Images will be successful in recruiting or
retaining such personnel, and the inability of Vital Images to recruit and
retain such personnel would have a material adverse effect on Vital Images'
business. See "Management."
TRANSITION TO INDEPENDENT COMPANY
Vital Images has not operated as a stand-alone company since its
acquisition by Bio-Vascular in May 1994 and, following the Distribution, Bio-
Vascular will be under no duty to provide assistance to Vital Images except as
described in the Distribution Agreement and Transition Services Agreement.
There can be no assurance that Vital Images will be able successfully to manage
its transition to an independent company or to operate and develop its business
and manage its growth opportunities without the financial and managerial
assistance provided by Bio-Vascular since the acquisition. See "Relationship
Between Bio-Vascular and Vital Images After the Distribution" and "Business."
GOVERNMENT REGULATION
Vital Images' products are subject to regulation by the FDA and by
comparable agencies in foreign countries. In the United States, the FDA
regulates the development, introduction, manufacturing, labeling and
recordkeeping procedures for medical devices, including medical visualization
software and systems. The process of obtaining marketing clearance from the FDA
for new products and new applications for existing products can be time-
consuming and expensive. All of the products currently marketed by Vital Images
have received marketing clearance from the FDA pursuant to 510(k) pre-market
notifications filed with the assistance of Bio-Vascular. There can be no
assurance, however, that clearance will be granted with respect to future
products or enhancements or that FDA review will not
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involve delays that would adversely affect Vital Images' ability to market such
future products or enhancements. In addition, there can be no assurance that
future products or enhancements will not be subject to the more lengthy and
expensive pre-market approval ("PMA") process with the FDA.
Even if regulatory approvals to market a product are obtained from the FDA,
these approvals may entail limitations on the indicated uses of the product.
Product approvals by the FDA can also be withdrawn due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
approval. The FDA could also limit or prevent the distribution of Vital Images'
products and has the power to require the recall of such products. FDA
regulations depend heavily on administrative interpretation, and there can be no
assurance that future interpretations made by the FDA or other regulatory bodies
will not adversely affect Vital Images. The FDA, various state agencies or
foreign regulatory agencies may inspect Vital Images and its facilities from
time to time to determine whether Vital Images is in compliance with various
regulations relating to specification, development, documentation, validation,
testing, quality control and product labeling. A determination that Vital
Images is in violation of such regulations could lead to imposition of civil
penalties, including fines, product recalls or product seizures and, in extreme
cases, criminal sanctions.
Vital Images intends to market its products both domestically and
internationally. International regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. The inability or failure of Vital Images to comply with the
varying regulations or the imposition of new regulations could restrict its
ability to sell its products internationally and could thereby adversely affect
Vital Images' business. See "Business--Governmental Regulation."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
Vital Images' products are purchased by hospitals, clinics and other users,
which bill various third party payors, such as government health programs,
private health insurance plans, managed care organizations and other similar
programs, for the health care goods and services provided to their patients.
Payors may deny reimbursement if they determine that a product used in a
procedure was not used in accordance with established payor protocol regarding
cost-effective treatment methods or was used for an unapproved indication.
Third party payors are increasingly challenging the prices charged for medical
services and, in some instances, have put pressure on service providers to lower
their prices or reduce their services. Vital Images is unable to predict what
changes will be made in the reimbursement methods used by third party healthcare
payors. There can be no assurance that procedures in which Vital Images'
products are used will be considered cost effective by third party payors, that
reimbursement for such procedures will be available or, if available, that
payors' reimbursement levels will not adversely affect Vital Images' ability to
sell its products on a profitable basis. In addition, there have been and may
continue to be proposals by legislators, regulators and third party payors to
curb further these costs in the future. Failure by hospitals and other users of
Vital Images' products to obtain reimbursement from third party payors, changes
in third party payors' policies towards reimbursement for procedures using Vital
Images' products or legislative action could have a material adverse effect on
Vital Images' business. See "Business--Third Party Reimbursement and Cost
Containment."
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INTERNATIONAL OPERATIONS
Vital Images sells its products to international customers as well as
domestic customers. Because foreign markets may be influenced by factors that
are different from those prevailing in the United States, there can be no
assurance that Vital Images' products will be accepted in international markets
or that Vital Images will be able to compete successfully in such markets.
International sales are also subject to certain political and economic risks,
including political instability, currency controls, trade restrictions,
regulatory requirements, exchange rate fluctuations and changes in import and
export regulations, any of which could have a material adverse effect on Vital
Images' business. See "Business --Marketing, Distribution and Customer Support"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Currency Transactions."
ABSENCE OF PUBLIC MARKET FOR THE VITAL IMAGES COMMON STOCK
There has never been a public market for Vital Images Common Stock. While
it is expected that a "when-issued" trading market will develop on or about the
Record Date, until the Vital Images Common Stock is fully distributed and an
orderly trading market develops, the prices at which trading in Vital Images
Common Stock occurs may fluctuate significantly. In addition, there can be no
assurance that an active trading market in Vital Images Common Stock will
develop or be sustained in the future. In the event trading does occur, the
prices at which shares of the Vital Images Common Stock trade will be determined
by the marketplace and may be influenced by many factors, including, among
others, Vital Images' performance and prospects, the depth and liquidity of the
market for Vital Images Common Stock, investor perception of Vital Images, its
business and the medical visualization industry, Vital Images' dividend policy,
general financial and other market conditions, and domestic and international
economic conditions. In addition, financial markets, including the Nasdaq
SmallCap Market, have experienced extreme price and volume fluctuations that
have affected the market price of many stocks and that, at times, could be
viewed as unrelated or disproportionate to the operating performance of such
companies. Such fluctuations have also affected the share prices of many newly
public issues and of medical technology companies. Such volatility and other
factors may have a materially adverse effect on the market price for shares of
Vital Images Common Stock.
POSSIBILITY OF SUBSTANTIAL SALES OF VITAL IMAGES COMMON STOCK
The planned Distribution will involve the distribution on the Distribution
Date of an aggregate of approximately _______ shares of Vital Images Common
Stock to the shareholders of Bio-Vascular as of the Record Date, representing
all of the issued and outstanding shares of Vital Images Common Stock as of that
date. Substantially all of such shares of Vital Images Common Stock will be
eligible for immediate resale in the public market. Neither Bio-Vascular nor
Vital Images is able to predict whether substantial amounts of Vital Images
Common Stock will be sold in the open market following the Distribution. Any
sales of substantial amounts of Vital Images Common Stock in the public market,
or the perception that such sales might occur, whether as a result of the
Distribution or otherwise, could materially adversely affect the market price of
Vital Images Common Stock. See "The Distribution--Listing and Trading of Vital
Images Common Stock."
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CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Vital Images' Articles authorize the Board of Directors, without any action
by shareholders, to establish the rights and preferences of up to 5,000,000
shares of undesignated preferred stock. Vital Images is also subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. In
addition, Vital Images has adopted a Shareholder Rights Plan (the "Rights
Agreement") designed to protect Vital Images and its shareholders from
unsolicited attempts or inequitable offers to acquire Vital Images. These
measures may, in certain circumstances, deter or discourage takeover attempts
and other changes in control of Vital Images not approved by its Board of
Directors. As a result, Vital Images' shareholders may lose opportunities to
dispose of their shares at the higher prices typically available in takeover
attempts or that may be available under a merger proposal. In addition, these
measures may have the effect of permitting Vital Images' current directors to
retain their positions and place them in a better position to resist changes
that shareholders may wish to make if they are dissatisfied with the conduct of
Vital Images' business. See "Description of Capital Stock -- Preferred Stock"
and "-- Certain Limited Liability, Indemnification and Anti-Takeover Provisions"
and "Rights Agreement."
DIVIDEND POLICY
The payment and amount of cash dividends on Vital Images Common Stock after
the Distribution will be subject to the discretion of Vital Images' Board of
Directors. It is currently contemplated that Vital Images will not pay cash
dividends on the Vital Images Common Stock in the foreseeable future. Vital
Images' dividend policy will be reviewed by Vital Images' Board of Directors at
such future times as may be appropriate, and payment of dividends on Vital
Images Common Stock will depend upon Vital Images' financial position, capital
requirements, profitability and such other factors as Vital Images' Board of
Directors deems relevant.
TAX CONSEQUENCES
Bio-Vascular has received an opinion from its tax advisor to the effect
that it appears that there is substantial authority for viewing the Distribution
as a non-taxable transaction for Bio-Vascular and its shareholders for federal
income tax purposes. Bio-Vascular has not requested, and does not anticipate
requesting, a ruling from the Internal Revenue Service with respect to the
federal income tax consequences of the Distribution. Because no ruling will be
received, and because the opinion of Bio-Vascular's tax advisor is based only on
a "substantial authority" standard, there can be no assurance that the
Distribution will qualify as a tax-free transaction. See "The Distribution--
Certain Federal Income Tax Consequences."
CHANGES IN TRADING PRICES OF BIO-VASCULAR COMMON STOCK
After the Distribution, Bio-Vascular expects that the Bio-Vascular Common
Stock will continue to be listed for trading on the Nasdaq National Market. As
a result of the Distribution, the trading prices of Bio-Vascular Common Stock
may be significantly lower than the trading prices of Bio-Vascular Common Stock
immediately prior to the Distribution. The combined trading prices of Bio-
Vascular Common Stock and Vital Images Common Stock after the Distribution may
be less than, equal to, or greater than, the trading prices of Bio-Vascular
Common Stock immediately prior to the Distribution.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Board of Directors of Bio-Vascular believes that the Distribution will
accomplish a number of important business objectives relating to the divergent
business interests and needs of the Surgical Business conducted by Bio-Vascular
and the Medical Visualization Business conducted by Vital Images.
Bio-Vascular initially acquired Vital Images in an effort to grow its
business through the Medical Visualization Business. Following the merger,
however, Bio-Vascular experienced success in the development of its tissue
technology in its Surgical Business to a greater degree and sooner than had been
anticipated. As a result of these developments, levels of financial and
management resources that were not anticipated at the time of the merger are
currently required by both the Surgical Business and the Medical Visualization
Business in order to maximize their respective technologies and growth
opportunities. The distribution and marketing channels of the two businesses
also began to diverge in a manner that was not previously anticipated. Due to
the diverging evolution of each business, a lack of synergy between the Surgical
Business and the Medical Visualization Business has become apparent to Bio-
Vascular's Board of Directors.
The Distribution is intended to separate the divergent Surgical Business
and the Medical Visualization Business, each having its own distinct financial,
investment and operating characteristics, so that each can adopt strategies and
pursue objectives more appropriate to its specific business than is possible
with Vital Images operating as a wholly-owned subsidiary of Bio-Vascular. Bio-
Vascular's Board believes that the Distribution will better enable management of
each company to concentrate attention and financial resources on research and
development and management of growth in each of their respective core
businesses, without regard to the corporate objectives, policies, challenges and
investment criteria of the other. Bio-Vascular's Board of Directors also
believes that, following the Distribution, each business will be better able to
focus on the distinct distribution and marketing channels, particularly as Vital
Images seeks to develop a direct sales channel for its Vitrea product in the
United States and a dealer network for Vitrea in Europe and Asia.
Vital Images' status as a separate public company after the Distribution
will also allow investors to better evaluate the performance and investment
characteristics and the future prospects of the Medical Visualization Business,
which may currently be overlooked by the investing community as a result of the
recent developments and growth in the Surgical Business. By separating the
Medical Visualization Business from the Surgical Business and allowing investors
to establish a separate valuation for each, Bio-Vascular's Board of Directors
believes that greater potential for increasing the long-term value to current
Bio-Vascular shareholders will result. As a public company following the
Distribution, Vital Images would also have greater ability to raise capital and
effect acquisitions or strategic relationships by issuing its own securities.
Finally, as a separate company, Vital Images will be able to develop
incentive-based compensation programs that are keyed directly to its earnings
and performance. The Board of Directors of Bio-Vascular believes that such
programs should enhance Vital Images' ability to attract, motivate and retain
key employees for the further development and growth of the Medical
Visualization Business.
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MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in a Distribution Agreement, dated as of ______________, 1997, between Bio-
Vascular and Vital Images (the "Distribution Agreement").
Bio-Vascular will effect the Distribution on the Distribution Date by
delivering all of the outstanding shares of Vital Images Common Stock to the
Distribution Agent for distribution to the shareholders of record of Bio-
Vascular Common Stock on the Record Date. The Distribution will be made on the
basis of one share of Vital Images Common Stock for each two shares of Bio-
Vascular Common Stock held on the Record Date. The actual total number of
shares of Vital Images Common Stock to be distributed will depend on the number
of shares of Bio-Vascular Common Stock outstanding on the Record Date. Based
upon the ___________ shares of Bio-Vascular Common Stock outstanding on
________________, 1997, approximately _______________ shares of Vital Images
Common Stock would be distributed to Bio-Vascular shareholders in the
Distribution. The shares of Vital Images Common Stock will be fully paid and
non-assessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of Capital Stock. -- Common Stock." The shares of
Vital Images Common Stock will also be distributed with certain attached
preferred stock purchase rights. See "Rights Agreement." Certificates
representing shares of Vital Images Common Stock will be mailed to Bio-Vascular
shareholders on the Mailing Date.
No holder of Bio-Vascular Common Stock will be required to pay any cash or
other consideration for the shares of Vital Images Common Stock to be received
in the Distribution, to surrender or exchange any shares of Bio-Vascular Common
Stock, or to take any other action in order to receive the shares of Vital
Images Common Stock to which they are entitled in the Distribution.
No certificates or scrip representing fractional shares of Vital Images
Common Stock will be issued to Bio-Vascular shareholders as a part of the
Distribution. The Distribution Agent will aggregate all fractional shares of
Vital Images Common Stock otherwise issuable in the Distribution into whole
shares and sell them in the open market at then-prevailing prices on behalf of
shareholders who would otherwise be entitled to receive such fractional share
interests. Such persons will receive instead a cash payment in the amount of
their pro rata share of the total sale proceeds, net of any commissions incurred
in connection with such sales. Such sales are expected to be made on, or as
soon as practicable after, the Distribution Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Bio-Vascular has received an opinion from Coopers & Lybrand L.L.P.
("Coopers & Lybrand") to the effect that (i) it appears that there is
substantial authority for viewing the Distribution as a tax-free transaction
qualifying under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the following discussion insofar as it relates to
statements of tax law or conclusions thereunder is correct and complete in all
material respects.
The opinion of Coopers & Lybrand received by Bio-Vascular represents only
the best judgment of Coopers & Lybrand, and is not binding on the Internal
Revenue Service (the "IRS"). Additionally, the opinion of Coopers & Lybrand is
limited insofar as it speaks only to the existence of "substantial authority"
for viewing the Distribution as non-taxable under Section 355 of the Code. An
opinion as to "substantial authority" is determined by an objective analysis of
current tax law and an application of
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such law to the facts. In its opinion, Coopers & Lybrand indicates that,
according to regulations promulgated under the Code, this standard is less
stringent than a "more likely than not" standard, which is met when there is a
greater than fifty percent likelihood of a position being upheld, but more
stringent than a "reasonable basis" standard, which, if satisfied, will
generally prevent imposition of penalties if a position is determined to be
incorrect. Accordingly, the opinion of Coopers & Lybrand is qualified by the
"substantial authority" standard, and there can be no reliance upon the opinion
expressed by Coopers & Lybrand other than as limited by such standard.
Bio-Vascular has not requested, and does not anticipate requesting, a
ruling from the IRS with respect to the federal income tax consequences of the
Distribution. Because no ruling will be received, and because the opinion of
Coopers & Lybrand is based only on a "substantial authority" standard, there can
be no assurance that the Distribution will qualify as a tax-free transaction.
Consequences of Qualification as a Tax-Free Distribution. The discussion
set forth below may not be applicable to certain Bio-Vascular shareholders who,
among other limitations, received their shares of Bio-Vascular Common Stock as
compensation, who are not citizens or residents of the United States or who are
otherwise subject to special treatment under the Code. Subject to such special
circumstances that may apply to certain Bio-Vascular shareholders, the
Distribution will have the following federal income tax consequences if treated
as non-taxable under Section 355 of the Code:
(1) A Bio-Vascular shareholder will not recognize any income, gain or
loss upon the receipt of Vital Images Common Stock which is received by
such shareholder as a result of the Distribution, although income and gain
or loss will be recognized in connection with any cash received in lieu of
fractional shares, as described below.
(2) A Bio-Vascular shareholder's tax basis in the Bio-Vascular Common
Stock with respect to which Vital Images Common Stock is received will be
apportioned between such shareholder's Bio-Vascular shares and the shares
of Vital Images Common Stock received by such shareholder (including any
fractional shares of Vital Images Common Stock deemed received) in
proportion to the relative fair market values of Bio-Vascular and Vital
Images on the Distribution Date.
(3) A Bio-Vascular shareholder's holding period for Vital Images
Common Stock received in the Distribution will include the period during
which such shareholder held the Bio-Vascular Common Stock with respect to
which the Vital Images Common Stock is distributed.
(4) A Bio-Vascular shareholder who receives cash in lieu of a
fractional share of Vital Images Common Stock as a result of the sale of
such fractional share by the Distribution Agent will be treated as if such
fractional share of Vital Images Common Stock had been received by the Bio-
Vascular shareholder as part of the Distribution and then sold by such
shareholder for cash. Accordingly, such shareholder will recognize gain or
loss equal to the difference between the cash so received and the amount of
tax basis allocable (as described above) to such fractional share of Vital
Images Common Stock. Such gain or loss will be capital gain or loss if
such fractional share of Vital Images Common Stock would have been held by
such shareholder as a capital asset.
Current United States Treasury regulations require that each Bio-Vascular
shareholder who receives shares of Vital Images Common Stock pursuant to the
Distribution attach a statement to such
21
<PAGE>
shareholder's federal income tax return for the taxable year in which the
Distribution occurs, providing certain information with respect to the
applicability of Section 355 of the Code to the Distribution. In a Tax Sharing
and Indemnification Agreement between the parties (discussed below), Bio-
Vascular has represented that it will provide each Bio-Vascular shareholder as
of the Record Date information necessary to comply with this requirement.
Consequences of Failure to Qualify as a Tax-Free Distribution. If the
Distribution ultimately were determined not to qualify as a tax-free transaction
pursuant to Section 355 of the Code, the following federal income tax
consequences would result:
(1) Each Bio-Vascular shareholder would be considered to have
received a distribution in an amount equal to the fair market value, when
distributed, of the shares of Vital Images Common Stock received by such
shareholder plus the amount of any cash received in lieu of fractional
shares of Vital Images Common Stock. Such a distribution would be taxed as
a dividend to such shareholder to the extent of Bio-Vascular's current or
accumulated earnings and profits for federal income tax purposes (which
current earnings and profits, if any, will be increased by any gain
recognized by Bio-Vascular as a result of the Distribution (as discussed
below)). To the extent that the aggregate fair market value of the shares
of Vital Images Common Stock distributed exceeds such earnings and profits,
such excess would be treated first as a non-taxable reduction in the tax
basis of a shareholder's Bio-Vascular Common Stock to the extent of such
tax basis, and thereafter as short-term or long-term capital gain, provided
the Bio-Vascular Common Stock is held by the shareholder as a capital
asset.
(2) A Bio-Vascular shareholder's tax basis in the shares of Vital
Images Common Stock received in the Distribution would equal the fair
market value of the Vital Images Common Stock on the date such shares are
distributed to the Bio-Vascular shareholder, and the shareholder's holding
period for the shares of Vital Images Common Stock will begin on such date.
In such event, a Bio-Vascular shareholder's tax basis in such shareholder's
Bio-Vascular Common Stock would not be affected by the Distribution,
unless, as described above, the amount of the Distribution exceeds the
current and accumulated earnings and profits of Bio-Vascular and is treated
as non-taxable reduction in tax basis. Upon a subsequent sale of the
shares of Vital Images Common Stock, a shareholder will recognize gain or
loss measured by the difference between the amount realized on such sale
and the shareholder's tax basis in the shares of Vital Images Common Stock
sold.
(3) Bio-Vascular would recognize gain in an amount equal to the
difference between the fair market value of the shares of Vital Images
Common Stock distributed and Bio-Vascular's basis in the shares of Vital
Images Common Stock. Any such gain to Bio-Vascular may be offset by
available net operating losses, if any, and such gain could have a limited
impact in the calculation of Bio-Vascular's alternative minimum tax
liability, because net operating losses cannot be used to offset completely
alternative minimum taxable income. However, Bio-Vascular does not expect
that significant net operating losses would be available to offset any such
gain.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO RECEIVED
THEIR SHARES OF BIO-VASCULAR COMMON STOCK THROUGH THE
22
<PAGE>
EXERCISE OF AN OPTION OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT
UNDER THE CODE. THE OPINION OF COOPERS & LYBRAND IS NOT BINDING ON THE IRS. ALL
SHAREHOLDERS MUST CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND EFFECT
OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF VITAL IMAGES COMMON STOCK
Vital Images has filed an application to list the Vital Images Common
Stock, and it is expected that the Vital Images Common Stock will be traded, on
the Nasdaq Small Cap Market under the symbol "VTAL." Based on the number of
holders of record of Bio-Vascular Common Stock as of ________, 1997, Vital
Images is expected initially to have approximately 1,250 shareholders of record
after the Distribution.
A "when-issued" trading market in the Vital Images Common Stock is expected
to develop on or about the Distribution Date. The term "when-issued" means
trading in shares prior to the time certificates are actually available or
issued. Prices at which shares of the Vital Images Common Stock may trade on
the when-issued basis or after the Distribution cannot be predicted, if such
trading occurs at all.
Shares of Vital Images Common Stock distributed to Bio-Vascular
shareholders will be freely transferable, except for shares received by persons
who may be deemed to be "affiliates" of Vital Images under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of Vital Images after the Distribution will generally include
individuals or entities that control, are controlled by, or are under common
control with, Vital Images, and may include certain officers and directors of
Vital Images as well as principal shareholders of Vital Images. Persons who are
affiliates of Vital Images will be permitted to sell their shares of Vital
Images Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 thereunder.
RELATIONSHIP BETWEEN BIO-VASCULAR AND VITAL IMAGES
AFTER THE DISTRIBUTIONECT IMAGES AFTER THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between Bio-
Vascular and Vital Images after the Distribution and providing for an orderly
transition of Vital Images to a separate publicly-held company, Bio-Vascular and
Vital Images have entered into or will enter into various agreements and
relationships, including those described in this section regarding the manner
and effect of the Distribution, certain transition services, employee benefits,
tax and indemnification matters, and other matters relating to the Distribution.
Each of these agreements is intended to set forth, on an arms-length basis, the
agreement of the parties with respect to each of these matters. The agreements
summarized in this section are included as exhibits to the Registration
Statement on Form 10, of which this Information Statement forms a part, and the
following summary is qualified in its entirety by reference to the agreements as
filed.
23
<PAGE>
DISTRIBUTION AGREEMENT
Bio-Vascular and Vital Images have entered into a Distribution Agreement,
which generally provides for, among other things, certain pre-Distribution
actions of the parties, the manner of effecting the Distribution, certain
indemnification rights and procedures, access to books and records and insurance
matters. Because Bio-Vascular and Vital Images have separately conducted the
Surgical Business and the Medical Visualization Business, the Distribution
Agreement does not contemplate either entity transferring or retaining any
assets or property, other than books and records relating to the corporate
records, business or operation of Vital Images and the contribution to Vital
Images' capital by Bio-Vascular.
Pursuant to the Distribution Agreement, Vital Images has been
reincorporated as a Minnesota corporation, and has taken other necessary
corporate actions in anticipation of its transition to an independent public
company. In anticipation of the Distribution, Bio-Vascular agreed to assign to
Vital Images $10,000,000 in cash, cash equivalents and marketable securities
effective November 1, 1996, and to contribute all intercompany debt owed by
Vital Images as of that date to the capital of Vital Images and has, effective
as of the Distribution Date, agreed to make such additional capital
contributions as are necessary to bring Vital Images' cash, cash equivalents and
marketable securities balances to a combined total of $10,000,000 and to
contribute any additional intercompany debt owed by Vital Images on the
Distribution Date.
The Distribution Agreement also sets forth certain conditions precedent to
the Distribution, including: (i) receipt by Bio-Vascular of an opinion of its
tax advisors as to certain tax considerations in connection with the
Distribution; (ii) receipt of any material approvals and consents necessary to
consummate the Distribution; (iii) existence of no order, injunction or decree
restraining, prohibiting or preventing the consummation of the Distribution;
(iv) effectiveness of the Registration Statement on Form 10; (v) receipt of a
favorable response from the Securities and Exchange Commission to a "no-action"
letter request filed by Bio-Vascular; and (vi) occurrence of no other event or
development that, in the judgment of Bio-Vascular's Board of Directors, would
have a material adverse effect on Bio-Vascular or its shareholders. The
Distribution is subject to satisfaction or waiver of each of these conditions
and certain other conditions set forth in the Distribution Agreement.
Additionally, the Distribution Agreement may be terminated, and the Distribution
abandoned, at any time prior to the Distribution Date by, and in the sole
discretion of, Bio-Vascular.
Under the Distribution Agreement, each of the parties has agreed to
indemnify the other against certain claims relating to or arising out of their
respective businesses on the Distribution. Additionally, each of Bio-Vascular
and Vital Images has agreed that it will not take, or permit any of its
affiliates to take, any action after the Distribution Date that could reasonably
be expected to prevent the Distribution from qualifying as a tax-free
distribution pursuant to Section 355 of the Code or any other transaction
contemplated by the Distribution Agreement that is intended by the parties to be
tax-free from failing to so qualify. In addition, each of Bio-Vascular and
Vital Images has agreed that it will not take, or permit any of its affiliates
to take, any action after the Distribution Date that could reasonably be
expected to have a material adverse impact on the known tax consequences to the
other party (except that each party may take any actions in the ordinary course
or in connection with any tax audit or filing).
Currently, Bio-Vascular has issued and outstanding warrants to purchase an
aggregate of 90,000 shares of Bio-Vascular Common Stock. Pursuant to the
Distribution Agreement, Bio-Vascular and Vital Images have agreed that, in
connection with the Distribution, Vital Images will assume its proportionate
24
<PAGE>
share of obligations represented by such warrants such that, after the
Distribution, each warrant will be exerciseable for shares of both Bio-Vascular
Common Stock and shares of Vital Images Common Stock, according to the
Distribution Ratio. The Distribution Agreement provides that, upon notice to
Bio-Vascular of the exercise of such warrants, Bio-Vascular will promptly
provide notice thereof to Vital Images, and Vital Images will promptly
thereafter issue to the exercising holder of the warrant the appropriate number
of shares of Vital Images Common Stock. Vital Images will be entitled to
receive a pro rata portion of the exercise price, with such pro rata portion to
be established by allocating the exercise price of the warrants between the
Vital Images Common Stock and the Bio-Vascular Common Stock issuable upon
exercise of the warrants in accordance with their average per share price for
the five consecutive trading days following the Distribution Date.
Finally, the Distribution Agreement provides for the allocation of benefits
under existing insurance policies between Bio-Vascular and Vital Images, grants
each of Bio-Vascular and Vital Images access to certain records and information
in the possession of the other, imposes certain confidentiality obligations on
each, and provides that, except as otherwise set forth therein or in any related
agreement, Bio-Vascular and Vital Images will each pay its own costs and
expenses in connection with the Distribution.
EMPLOYEE BENEFITS AGREEMENT
To address certain employee and employee benefits matters in connection
with the Distribution, Bio-Vascular and Vital Images have entered into an
Employee Benefits Agreement. Pursuant to the Employee Benefits Agreement, Vital
Images will retain or assume, as the case may be, sole responsibility as
employer for all employees of Vital Images as of the Distribution Date, and will
cause any Vital Images employee that is then a party to any employment, change
in control or other employment-related agreement with Bio-Vascular to terminate
such agreement effective as of the Distribution Date.
Bio-Vascular currently provides benefits to its employees and employees of
Vital Images under the Bio-Vascular 401(k) Retirement Plan and Trust (the "Bio-
Vascular 401(k) Plan"), Incentive Stock Option Plan (the "Incentive Plan"), 1992
Directors' Option Plan (the "Director Plan"), 1995 Stock Incentive Plan (the
"1995 Plan") and Employee Stock Purchase Plan (the "Purchase Plan"). Options to
purchase Bio-Vascular Common Stock are also currently outstanding pursuant to
stand-alone grants and pursuant to obligations under Vital Images' 1990
Management Incentive Stock Option Plan (the "1990 Plan") and 1992 Stock Option
Plan (the "1992 Plan"), as such obligations were assumed by Bio-Vascular in
connection with the 1994 merger between Bio-Vascular and Vital Images. Bio-
Vascular has also made awards of shares of restricted Bio-Vascular Common Stock
to employees of Bio-Vascular and Vital Images under the 1995 Plan and as stand-
alone awards. Pursuant to the Employee Benefits Agreement, Bio-Vascular and
Vital Images have agreed to adjust each existing Bio-Vascular employee benefit
or award in the following manner:
. 401(k) Plan. The Employee Benefits Agreement provides that Vital Images
-----------
will establish and administer a new plan named the Vital Images 401(k)
Retirement Plan and Trust (the "Vital Images 401(k) Plan"), which will
provide benefits under the Vital Images 401(k) Plan to all Vital Images
employees who, immediately prior to the Distribution Date, were
participants in, or otherwise entitled to benefits under, the Bio-
Vascular 401(k) Plan. All Vital Images employees who wish to participate
in the Vital Images 401(k) Plan will be required to enroll in the Vital
Images 401(k) Plan in accordance with its terms. As soon as practicable
after the Distribution Date, the Employee Benefits Agreement requires
Bio-
25
<PAGE>
Vascular to cause the trustees of the Bio-Vascular 401(k) Plan to
transfer to the trustee or other funding agent of the Vital Images
401(k) Plan the amounts (in cash, securities, other property, plan
loans, or a combination thereof) acceptable to the administrator or
trustee of the Vital Images 401(k) Plan representing the account
balances of all Vital Images employees, former employees or
beneficiaries thereof.
. Outstanding Bio-Vascular Options. Pursuant to the Employee Benefits
--------------------------------
Agreement, Bio-Vascular and Vital Images have agreed that each
unexercised option to purchase Bio-Vascular Common Stock outstanding as
of the Record Date ("Existing Bio-Vascular Options") will be adjusted to
reflect the Distribution (an "Adjusted Bio-Vascular Option"), and that
each holder of a Bio-Vascular Option will also be granted an option to
purchase Vital Images Common Stock in connection with the Distribution
(a "Vital Images Option").
The exercise price and number of shares covered by each Adjusted Bio-
Vascular Option, as well as the exercise price and number of shares
covered by each Vital Images Option, will be determined according to a
formula provided in the Employee Benefits Agreement that is based on the
relative fair market trading values of Bio-Vascular Common Stock and the
Vital Images Common Stock during the first five trading days following
the Distribution Date. Pursuant to the formula provided in the Employee
Benefits Agreement, these adjustments will be made in such a manner so
that the aggregate "intrinsic value," or difference between fair market
value and exercise price, of the Adjusted Bio-Vascular Option and Vital
Images Option will equal the pre-Distribution intrinsic value of the
Bio-Vascular Option with respect to which the adjustment and grant were
made.
In connection with the grant of Vital Images Options, Vital Images has
adopted certain option plans intended to "mirror" the provisions of the
Incentive Plan (the "Incentive Adjustment Plan"), the Director Plan (the
"Director Adjustment Plan") and the 1995 Plan (the "1995 Adjustment
Plan"). In order to ensure that each Vital Images Option is granted
without any additional benefit not provided by the Existing Bio-Vascular
Option with respect to which it is granted, Vital Images Options will be
granted under the terms of the corresponding "mirror" plan or, if
applicable, under the terms of the 1990 Plan or the 1992 Plan, or
pursuant to an identical non-plan award agreement.
It is anticipated that each person who is a Bio-Vascular employee or a
Vital Images employee immediately prior to the Distribution Date will
continue in such respective employment. While Bio-Vascular's option
plans generally restrict an optionees' right to exercise an option
following termination of employment, the Employee Benefits Agreement
provides that the terms of the Incentive Plan, Director Plan and 1995
Plan, as well as the Incentive Adjustment Plan, Director Adjustment
Plan, 1995 Adjustment Plan, 1990 Plan and 1992 Plan, and each non-plan
award agreement, will be modified to provide for continued
exercisability of the Adjusted Bio-Vascular Options or Vital Images
Options so long as the optionee remains in the employment of Bio-
Vascular or Vital Images, as the case may be, following the
Distribution.
Certain Existing Bio-Vascular Options are currently intended to qualify
as "incentive stock options" ("ISO's") under the Code. However,
continued ISO status requires that the optionee be employed by the
grantor (or a parent or subsidiary of the grantor) and that the option
generally be exercised within three months after an optionee's
termination. Because the Distribution will terminate the affiliation
between Bio-Vascular and Vital Images,
26
<PAGE>
employees of Vital Images holding Adjusted Bio-Vascular Options, as well
as employees of Bio-Vascular holding Vital Images Options, will lose any
claim to ISO status for such options three months after the Distribution
Date. Such options will thereafter be treated as a "non-qualified"
option.
Bio-Vascular and Vital Images believe that neither the grant of the
Vital Images Options nor the adjustments resulting in the Adjusted Bio-
Vascular Options should result in the recognition of taxable income by
Bio-Vascular or Vital Images or their respective optionees. However,
there can be no assurance that such recognition will not occur. Each
holder of an outstanding Bio-Vascular Option is urged to consult with
his or her own tax advisor.
. Purchase Plan. The Purchase Plan enables participating Bio-Vascular
-------------
employees to purchase, on the last day of each Offering Period (as
defined in the Purchase Plan), Bio-Vascular Common Stock at the lesser
of (i) 85% of the fair market value on the first day of the applicable
Offering Period or (ii) 85% of the fair market value on the last day of
such Offering Period. The purchase price is collected by means of
employee salary and wage deferrals. The Purchase Plan provides that the
right to participate terminates immediately upon the date the
participant ceases employment with Bio-Vascular or any qualifying
subsidiary. Any contributions collected prior to the date of
termination are paid to the participant in cash.
Pursuant to the Employee Benefits Agreement, immediately prior to the
Record Date the committee administering the Purchase Plan will adjust
the length of the then-current Offering Period to end prior to the
Record Date, and shares of Bio-Vascular Common Stock will be purchased
for all eligible participants so as to allow participants to participate
in the Distribution of Vital Images Common Stock. After the
Distribution, employees of Vital Images will be eligible to enroll in a
new Vital Images Employee Stock Purchase Plan (the "Vital Images
Purchase Plan"). The Employee Benefits Agreement provides that Offering
Periods will resume under the Purchase Plan on ____________, 1997, and
will commence under the Vital Images Purchase Plan on July 1, 1997, or
on such other dates as the administrators under the respective plans
determine.
. Non-Vested Restricted Stock Awards. Pursuant to the Employee Benefits
----------------------------------
Agreement, each award of restricted Bio-Vascular Common Stock that is
outstanding as of the Record Date will be entitled to participate in the
Distribution even though such award has not vested, and each holder
thereof will receive, according to the Distribution Ratio, an award of
restricted Vital Images Common Stock. No fractional shares of Vital
Images Common Stock, or cash in lieu thereof, will be issued with
respect to any shares of restricted Bio-Vascular Common Stock in the
Distribution. The Employee Benefits Agreement provides that the
restrictions on shares of restricted Bio-Vascular Common Stock and Vital
Images Common Stock granted to a Bio-Vascular employee will be identical
to the restriction underlying such employee's shares of restricted Bio-
Vascular Common Stock prior to the Distribution, and the restrictions on
shares of restricted Bio-Vascular Common Stock and Vital Images Common
Stock granted to any Vital Images employee will pertain to continued
employment by Vital Images, and will otherwise mirror the restriction on
such Vital Images employee's shares of restricted Bio-Vascular Common
Stock prior to the Distribution. As of March 4, 1997 there were 42,646
shares of non-vested restricted Bio-Vascular Common Stock outstanding.
Accordingly, it is anticipated that approximately 21,323 shares of
restricted Vital Images Common Stock will be awarded in connection with
the Distribution.
27
<PAGE>
The Employee Benefits Agreement also provides for the continuation of
medical, dental and other welfare plans by Bio-Vascular and Vital Images for the
benefit of their respective employees following the Distribution, and for the
allocation of liability for, and obligations to indemnify against, any
employment-related claims brought against Bio-Vascular or Vital Images, or both
companies jointly.
TAX SHARING AGREEMENT
Bio-Vascular and Vital Images have entered into a Tax Sharing Agreement
(the "Tax Sharing Agreement"), providing for their respective obligations
concerning various tax liabilities and related matters. The Tax Sharing
Agreement provides that Bio-Vascular will pay and indemnify Vital Images, with
respect to all federal, state, local and foreign income, franchise and similar
taxes relating to Bio-Vascular for any taxable period ending on or before the
Distribution Date. Bio-Vascular has also generally agreed to pay all other
taxes (other than those which are imposed solely on Vital Images) that are
payable in connection with the Distribution and the transactions related to the
Distribution, the liability for which arises on or before the Distribution Date.
The Tax Sharing Agreement provides that Vital Images will pay and indemnify Bio-
Vascular with respect to all federal, state, local and foreign income, franchise
and similar taxes relating to Vital Images for all taxable periods ending on,
before or after the Distribution Date. Further, the Distribution Agreement
provides for cooperation with respect to certain tax matters, including the
preparation of income tax returns, the exchange of information, the handling of
tax controversies, and the retention of records which may affect the income tax
liability of either party.
TRANSITION SERVICES AGREEMENT
It is the intent of Vital Images to operate as an entity completely
separate from Bio-Vascular as soon as practicable. Until such time, however,
Vital Images will be dependent on Bio-Vascular to provide certain corporate
transition services. In order to govern the terms and conditions of such
services, Bio-Vascular and Vital Images have entered into a Transition Services
Agreement, pursuant to which Bio-Vascular has agreed to provide Vital Images
with certain transitional support services in the areas of accounting,
financial, human resources and regulatory affairs, all of which constitute areas
in which Bio-Vascular has generally provided services to Vital Images since the
May 1994 merger. Generally, no services are expected to be provided beyond six
months following the Distribution Date, and after such time Vital Images expects
to provide such services on its own behalf or enter into arrangements with third
parties to obtain such services. Accordingly, the Transition Services Agreement
expressly provides that such services are transitional in nature, and sets the
term of such services for a period of six months following the Distribution
Date, subject to extension thereafter upon mutual written agreement of the
parties. The cost associated with the services to be provided by Bio-Vascular
will either be a fixed dollar amount based on the estimated cost to Bio-Vascular
of providing such services, or an amount to be determined pursuant to a formula
based on the actual services provided. Vital Images believes that the amounts
to be paid to Bio-Vascular for services under the Distribution Agreement will
not exceed the amounts that would have to be paid for the services if provided
by third parties.
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<PAGE>
FINANCING
INITIAL CAPITAL CONTRIBUTION BY BIO-VASCULAR
Prior to the Distribution, Vital Images participated in Bio-Vascular's
centralized funding and cash management, and cash requirements of Vital Images
were provided by Bio-Vascular. Following the Distribution, Bio-Vascular will no
longer provide such funds to finance Vital Images' operations or for any other
purposes. Accordingly, in anticipation of the Distribution, Bio-Vascular agreed
to assign to Vital Images $10,000,000 in cash, cash equivalents and marketable
securities, effective November 1, 1996, and to contribute all intercompany debt
owed by Vital Images as of that date to the capital of Vital Images.
Subsequently, Bio-Vascular's Board of Directors determined, effective as of the
Distribution Date, to make such additional capital contributions to Vital Images
as necessary to bring Vital Images' cash, cash equivalents and marketable
securities balances to a combined $10,000,000 and to contribute any additional
intercompany debt owed by Vital Images on the Distribution Date.
NEED FOR ADDITIONAL FINANCING
If Vital Images' operations progress as anticipated, of which there can be
no assurance, Vital Images believes that the capital contribution made by Bio-
Vascular, together with cash flows from operations, should be sufficient to
satisfy its cash requirements for at least the next two years. The timing of
Vital Images' future capital requirements, however, will depend on a number of
factors, including the ability of Vital Images to successfully commercialize and
market its products; the ability and willingness of physicians to use two- and
three-dimensional imaging software in clinical diagnosis, surgical planning,
patient screening and other diagnosis and treatment protocols; the impact of
competition in the medical visualization business; the ability of Vital Images
to differentiate its volume rendering software from competing products employing
surface rendering or other technologies; and the ability to enhance existing
products and develop new products on a timely basis. To the extent that Vital
Images' operations do not progress as anticipated, additional capital may be
required sooner. There can be no assurance that any required additional capital
will be available on acceptable terms, or at all, and the failure to obtain any
such required capital would have a material adverse effect on Vital Images'
business.
29
<PAGE>
CAPITALIZATION
Set forth below is the capitalization of Vital Images as of January 31,
1997 and on an as adjusted basis to give effect to the Distribution and certain
anticipated capital contributions as if the Distribution and such capital
contributions had occurred on January 31, 1997. The balance sheet data and the
as adjusted balance sheet data set forth below should be read in conjunction
with the financial statements set forth elsewhere in this Information Statement.
The as adjusted data may not reflect the capitalization of Vital Images in
the future or as it would have been had Vital Images been a separate,
independent public company on January 31, 1997.
<TABLE>
<CAPTION>
JANUARY 31, 1997
-------------------------------
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Debt obligations.............................. -- --
Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, no shares issued and
outstanding (no shares, as adjusted)......... -- --
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding
(4,749,751 shares issued and outstanding,
as adjusted)(1).............................. $ 10 $ 47,498
Additional paid-in capital(2)................. 13,003,047 14,555,559
Deferred compensation......................... (431,250) (431,250)
Net investment by Bio-Vascular(3)............. 3,162,004 3,162,004
Accumulated deficit........................... (6,260,998) (6,260,998)
Unrealized marketable securities
holding loss................................. (13,125) (13,125)
----------- -----------
Total equity............................. 9,459,688 11,059,688
----------- -----------
Total capitalization..................... $ 9,459,688 $11,059,688
=========== ===========
</TABLE>
_______________________
(1) Based on 9,499,502 shares of Bio-Vascular Common Stock issued and
outstanding as of January 31, 1997. Does not include an estimated 647,000
shares of Vital Images Common Stock anticipated to be issuable related to
stock options to be granted in connection with the Distribution, of which
an estimated 400,000 shares of Vital Images Common Stock are anticipated to
be subject to options that will be immediately exerciseable as of the
Distribution Date.
(2) Reflects the estimated capital contribution of $11,600,000 made by Bio-
Vascular to Vital Images to bring Vital Images' cash, cash equivalents and
marketable securities balances to a combined total of $10,000,000 as of the
Distribution Date. In anticipation of the Distribution, Bio-Vascular
agreed to assign to Vital Images $10,000,000 in cash, cash equivalents and
marketable securities, effective November 1, 1996, and to contribute all
intercompany debt owed by Vital Images as of that date. Actual cash, cash
equivalents or marketable securities contributed may be more or less than
this amount.
30
<PAGE>
(3) Reflects the contribution to capital of the intercompany balance due from
Vital Images to Bio-Vascular.
DIVIDEND POLICY
Vital Images has not declared or paid any cash dividends on its Common
Stock since its inception, and the Board of Directors presently intends to
retain all earnings for use in the business for the foreseeable future.
31
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data of Vital Images is derived from Vital
Images' financial statements and notes thereto. The selected financial data for
each of the fiscal years in the five-year period ended October 31, 1996 is
derived from the audited financial statements of Vital Images. The information
set forth below should be read in conjunction with Vital Images' financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED OR AT FOR THE YEAR ENDED OR AT
JANUARY 31, OCTOBER 31, DECEMBER 31,
---------------------- ----------------------------------- --------------------
1997(1) 1996(1) 1996(1) 1995(1) 1994(1)(2) 1993(2)(3) 1992(3)
------- ------- ------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue................................ $152 $143 $882 $2,894 (4) $1,680 $1,696 $1,826
Gross margin........................... 132 110 720 2,488 (4) 1,170 1,022 1,086
Operating expenses:
Selling, general and administrative.... 569 507 1,805 879 1,098 1,085 1,275
Research and development............... 445 307 1,460 1,357 1,255 745 519
Acquisition costs...................... -- -- -- -- 71 -- --
------ ----- ------- ------- ------- ------ ------
Operating income (loss)................ (882) (704) (2,545) 252 (4) (1,254) (808) (708)
Net income (loss)...................... $(754) $(705) $(2,546) $253 $(1,261) $(821) $(714)
Pro forma net loss
per share (unaudited)(5)............. $(.16) $(.54)
===== =====
Pro forma average number of
common shares outstanding
(unaudited)(5)....................... 4,750 4,742
BALANCE SHEETS:
Working capital (deficiency)........... $5,886 $(258) $(144) $4 $(108) $43
Total assets........................... 10,153 943 739 855 1,061 1,137
Short and long-term debt............... -- -- -- -- 118 218
Preferred stock........................ -- -- -- -- 537 --
Equity................................. 9,460 174 321 343 402 485
</TABLE>
__________________________
(1) Reflects Vital Images' results as a wholly-owned subsidiary of Bio-
Vascular. Vital Images was merged with Bio-Vascular in May 1994 in a
transaction accounted for as a pooling-of-interests. Results of operations
include allocations of general corporate overhead.
(2) Due to the merger in May 1994, Vital Images' fiscal year-end was changed to
October 31, effective as of October 31, 1994. Accordingly, the Statements
of Operations for fiscal 1994 and 1993 both include results of Vital Images
for November and December of 1993. Vital Images' revenues were $379 and
the net loss was $45 during this two-month period.
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<PAGE>
(3) Reflects Vital Images' results of operations as a separate company prior to
its merger with Bio-Vascular.
(4) Includes $1,500 of one-time license fee revenue, which contributed $1,322
to gross margin and operating income.
(5) The unaudited pro forma net loss per share is calculated for the three
months ended January 31, 1997, and for the year ended October 31, 1996
based on the number of shares of Bio-Vascular Common Stock outstanding,
adjusted for the one-for-two distribution ratio. Adjusted unaudited pro
forma net loss per share for the three months ended January 31, 1997 and
for the year ended October 31, 1996 is $(.21) and $(.73), respectively, and
is based on the unaudited pro forma net losses of $979 for the three months
ended January 31, 1997 and $3,446 for the year ended October 31, 1996. See
"Unaudited Pro Forma Statements of Operations."
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<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
The following unaudited pro forma statements of operations for the three
months ended January 31, 1997, and for the year ended October 31, 1996, present
the results of operations of Vital Images as if the separation of Vital Images
from Bio-Vascular had occurred on the first day of the applicable period.
The unaudited pro forma statements of operations are based on the
statements of Vital Images and are adjusted to reflect additional corporate
expenses as a stand-alone company. The unaudited pro forma statements of
operations do not purport to represent what Vital Images' results of operations
actually would have been if the separation had occurred on the first day of the
applicable period. The unaudited pro forma statements of operations are based
on assumptions that Vital Images believes are reasonable and should be read in
conjunction with Vital Images' financial statements and accompanying notes
thereto included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JANUARY 31, 1997 FOR THE YEAR ENDED OCTOBER 31, 1996
--------------------------------------- ---------------------------------------
PRO PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ----- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $ 152,493 $ 152,493 $ 882,126 $ 882,126
Cost of revenue................. 20,909 20,909 162,286 162,286
-------- --------- ---------- ----------
Gross margin.................. 131,584 131,584 719,840 719,840
Operating expenses:
Selling, general and
administrative................ 568,683 $ 183,000 (1) 751,683 1,805,522 $730,000 (1) 2,535,522
Research and development........ 445,358 42,000 (1) 487,358 1,459,490 170,000 (1) 1,629,490
-------- -------- --------- ---------- -------- ----------
Operating loss................ (882,457) (225,000) (1,107,457) (2,545,172) (900,000) (3,445,172)
Other income, net............... 129,132 129,132 923 -- (2) 923
-------- -------- --------- ---------- -------- ----------
Loss before income
taxes......................... (753,325) (225,000) (978,325) (2,544,249) (900,000) (3,444,249)
Income tax provision............ 500 500 1,500 1,500
-------- -------- --------- ---------- -------- ----------
Net loss...................... $(753,825) $(225,000) $ (978,825) $(2,545,749) $(900,000) $(3,445,749)
======== ======== ========= ========== ======== ==========
Pro forma adjusted net loss
per share..................... $(.21) $(.73)
========= ==========
Pro forma average number of
common shares outstanding..... 4,750,000 4,742,000
========= ==========
</TABLE>
__________________________
(1) Represents the additional estimated costs expected to be incurred by Vital
Images on a prospective basis, including the incremental costs associated
with Vital Images' status as a public company, such as additional executive
salaries, audit fees, directors' and officers' insurance, annual meetings,
printing fees and directors' fees. A portion of such costs are included in
the historical financial statements of Vital Images. Incremental costs are
estimated as follows:
34
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Executive compensation................ $125,000 $500,000
Audit and legal....................... 40,000 160,000
Shareholder relations................. 40,000 160,000
Directors' and officers' insurance.... 13,000 50,000
Annual directors' fees and expenses... 7,000 30,000
-------- --------
$225,000 $900,000
======== ========
</TABLE>
(2) Does not include an allocation of interest income based on the ratio of
cash, cash equivalents and marketable securities to be contributed to Vital
Images over total investment assets. Under Bio-Vascular's investment
strategies, interest income associated with this $10,000,000 to be
contributed was approximately $550,000 for the year ended October 31, 1996,
which may not have been the same, had such funds been maintained and
invested by Vital Images. As cash, cash equivalents and marketable
securities totaling $10,000,000 were assigned to Vital Images effective
November 1, 1996, results for the three months ended January 31, 1997, do
reflect investment earnings.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL OVERVIEW
Vital Images is engaged in the business of developing, marketing and
supporting medical visualization software and systems for use in clinical
diagnosis and surgical planning.
Vital Images was founded in 1988 by Vincent Argiro, Ph.D. and was acquired
by Bio-Vascular in May 1994 in a tax-free merger that was accounted for as a
"pooling of interests." Historically, Vital Images was engaged in developing
and marketing three-dimensional, volume rendering visualization software for
various disciplines and industries, but principally for gas and oil exploration,
microscopy and medical research. The acquisition by Bio-Vascular provided
financial and management resources to Vital Images and enabled Vital Images to
leverage these resources and focus its efforts on medical applications for its
technologies. Accordingly, by the fall of 1994, Vital Images discontinued its
efforts in the microscopy market. Concurrently, Vital Images invested in the
development and refinement of its VoxelGeo product for gas and oil exploration
and culminated these activities with the licensing of the VoxelGeo source code
in July 1995. In exchange for the license, Vital Images received a one-time
license fee of $1,500,000 and future royalty payments expected to begin in
calendar 1997. Any royalties will cease at the earlier of January 1, 2001, or
at such time as the aggregate royalties received equal $2,000,000. There can be
no assurance, however, that the amount of royalties, if any, that will be
received pursuant to this license arrangement will aggregate to $2,000,000.
After granting this license, Vital Images was able to focus all of its resources
on the development of its visualization products for medical applications,
including clinical diagnosis, screening and surgical planning.
In October 1995, Vital Images hired Andrew M. Weiss as President and Chief
Executive Officer, naming Dr. Argiro, who was serving as President of Vital
Images at that time, as Executive Vice President and Chief Technology Officer.
In November 1995 Vital Images received 510(k) marketing clearance from the FDA
to market its three-dimensional visualization software product, VoxelView, for
use in clinical diagnosis and surgical planning in concert with computed
tomography ("CT") or magnetic resonance imaging ("MRI") data. This event marked
Vital Images' entrance into the field of clinical applications for its
technologies.
In December 1995, Vital Images assessed its business strategy and
determined that to optimize its dedicated participation in the medical field, it
needed to create a new business model based on the development, marketing and
support of integrated software and hardware solutions for medical visualization.
As a result, Vital Images began development of a new product family of advanced
visualization products for routine clinical use and began to build the necessary
sales, marketing and support resources.
During 1996, Vital Images hired a Vice President of Sales and two field
sales representatives dedicated to the hospital market and began building its
development, quality and customer support teams. Vital Images also began
pursuing OEM relationship opportunities based on its new technology and entered
into a relationship with a leading ultrasound scanner company, Advanced
Technology Laboratories, Inc. See "Business -- Marketing, Distribution and
Customer Support." Vital Images is currently finalizing Vitrea, the first
product in its new product family. Vitrea, which combines Vital Images'
proprietary expertise in advanced volume rendering with a built-in workflow
designed for
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<PAGE>
clinical use, received FDA marketing clearance in December 1996. Vital Images
currently expects to release Vitrea commercially in the second quarter of
calendar 1997.
On October 28, 1996, the Bio-Vascular Board of Directors approved the spin-
off of Vital Images, which will result in the distribution of all of the Vital
Images' Common Stock to Bio-Vascular shareholders on a pro rata basis. The
decision to spin-off Vital Images occurred because, strategically and
financially, the timing and circumstances were right to separate Bio-Vascular's
Surgical and Medical Visualization Businesses for the long-term benefit of its
shareholders, and because of the belief that both businesses would benefit by
being able to adopt strategies and pursue objectives appropriate to its specific
business, focus on their distinct distribution and marketing channels, be
recognized and evaluated by the financial community as separate and distinct
businesses, and implement more focused incentive compensation arrangements that
are tied more directly to results of operations of each respective business.
In the Distribution, Bio-Vascular shareholders will receive one share of
Vital Images Common Stock for every two shares of Bio-Vascular Common Stock
owned as of the Record Date. In anticipation of the Distribution, Bio-Vascular
agreed to assign to Vital Images $10,000,000 in cash, cash equivalents and
marketable securities, effective November 1, 1996, and to contribute all
intercompany debt owed by Vital Images as of that date. Subsequently, Bio-
Vascular's Board of Directors determined, effective as of the Distribution Date,
to make such additional capital contributions to Vital Images as necessary to
bring Vital Images' cash, cash equivalents and marketable securities balances to
a combined $10,000,000 and to contribute any additional intercompany debt owed
by Vital Images on the Distribution Date.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 1997, WITH THE THREE MONTHS
ENDED JANUARY 31, 1996
Revenue increased 7% to $152,000 from $143,000.
The gross margin percentage increased to 86% from 77%, primarily due to the
elimination of existing royalty obligations on software, which were satisfied on
May 24, 1996. Vital Images' business strategy is currently to focus on the sale
of Vitrea and its Vitrea system, consisting of Vitrea software and third party
hardware and peripherals, designed to offer end users an integrated
visualization system. Vital Images receives only a nominal discount in
purchasing the third party hardware and peripheral components of the Vitrea
system and expects that its gross margin on the resale of these system
components will approximate the discount. As a result, as Vitrea systems
increase as a proportion of Vital Images' product mix, Vital Images expects that
overall gross margin percentages will decrease. This forward looking statement
will be influenced primarily by resale gross margins on the proprietary and
third party components of the Vitrea system and on Vital Images' anticipated
product mix and any deviation from Vital Images' expectations regarding future
resale gross margins and product mix could cause actual results to differ.
Selling, general and administrative expense increased 12% to $569,000 from
$507,000. General and administrative expense incurred in the three months ended
January 31, 1996, included hiring costs related to the employment of Mr. Weiss
during that period. The absence of these expenses in the three months ended
January 31, 1997 resulted in a decrease in general and administrative expense of
$100,000 between these periods. Selling expense increased by $125,000 as a
result of increased marketing activity and the employment of additional sales
personnel, including a Vice President of Sales during the entire three months
ended January 31, 1997, compared to only one month during the quarter ended
January 31, 1996. It is expected that selling expense will continue to increase
as Vital Images builds a direct sales
37
<PAGE>
force as the primary distribution channel for its products in the United States
and develops the marketing materials to support these direct marketing efforts.
Research and development expense increased 45% to $445,000 from $307,000,
due to the expenses associated with hiring of additional personnel intended to
increase Vital Images' development capabilities. Software development costs
incurred are expensed until the point that technological feasibility and proven
marketability of the product are established.
These increased expenses attributable to the continuing development of
Vital Images' management team and infrastructure resulted in an operating loss
of $882,000 for the three months ended January 31, 1997, compared an operating
loss of $704,000 for the three months ended January 31, 1996.
Other income, consisting primarily of interest income, was $129,000 for the
three months ended January 31, 1997, compared to other expense of $1,000 for the
three months ended January 31, 1996. Interest on the $10,000,000 in cash, cash
equivalents and marketable securities assigned by Bio-Vascular to Vital Images
effective November 1, 1996 provided the basis for the interest income during the
three months ended January 31, 1997.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1996, WITH THE YEAR ENDED OCTOBER 31,
1995
Revenue decreased $2,012,000, or 70%, to $882,000, from $2,894,000.
However, revenue from medical visualization increased 44% to $677,000, from
$469,000. For 1996, the only revenue Vital Images received from the geoscience
and microscopy markets was maintenance revenue of $93,000 and $59,000,
respectively. For 1995, geoscience revenue was $2,127,000 and included a
$1,500,000 one-time license fee for the VoxelGeo source code, while microscopy
revenue was $243,000.
The gross margin percentage decreased to 82% from 86%, due to the mix of
products and services.
Selling, general and administrative expense doubled, increasing $926,000 to
$1,805,000, from $879,000. General and administrative expense increased by
$460,000 and selling expense increased $466,000. The ongoing costs of additions
to personnel, including the employment of Mr. Weiss in October 1995 and a Vice
President of Sales in January 1996, the associated increase in business activity
and the development of marketing materials and an expansion of marketing
activities, accounted for these increases.
Research and development expense increased 8% to $1,459,000, from
$1,357,000, due to expenses associated with additional personnel hired to
increase Vital Images' development capabilities.
Due to the expenses associated with its business and technological
development activities, and due to lower revenue as a result of its more defined
market focus, Vital Images reported an operating loss of $2,545,000 for the year
ended October 31, 1996. This compares to operating income of $252,000 in 1995,
which resulted from the licensing of the VoxelGeo source code for a fee of
$1,500,000 and its $1,322,000 contribution to operating income.
As a wholly-owned subsidiary of Bio-Vascular during the presented years,
the allocated tax provision was computed using the "separate return" method and
represents state minimum taxes. Net operating losses, credits, and temporary
differences which would otherwise have given rise to a deferred
38
<PAGE>
tax asset have been fully offset by a valuation allowance as the future ability
of Vital Images to realize such losses, credits and deductions is not certain.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 1995, WITH THE YEAR ENDED OCTOBER 31,
1994
Revenue increased $1,214,000, or 72%, to $2,894,000, from $1,680,000, due
primarily to the $1,500,000 one-time VoxelGeo source code license fee received
in the fourth quarter of 1995. Geoscience revenue increased by 189% and medical
revenue, representing sales of Vital Images' software for use primarily as a
research tool, increased by 10%. Revenue from microscopy decreased by 45%.
The gross margin percentage increased to 86% from 70%, due to the positive
impact of the VoxelGeo source code license transaction. The 1994 product mix
was different from that of 1995 and included contract development work which has
relatively lower gross margins and lowered the overall gross margin percentage.
Selling, general and administrative expense decreased $219,000 to $879,000,
from $1,098,000. General and administrative expense increased by $39,000
primarily due to costs related to the employment of Mr. Weiss. Selling expense
decreased $258,000. The decrease in selling expense was primarily the result of
a marketing agreement signed late in 1994, under which CogniSeis Development,
Inc. assumed all responsibility for marketing VoxelGeo.
Research and development expense increased 8% to $1,357,000, from
$1,255,000 due to expense associated with additional development personnel hired
in the last quarter of 1995.
Vital Images had 1995 operating income of $252,000, which was primarily
attributable to the one-time license for the VoxelGeo source code which
contributed $1,322,000 to operating income. Vital Images had an operating loss
for 1994 of $1,254,000.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, Vital Images had no cash, owed approximately
$3,100,000 in intercompany debt, and participated in Bio-Vascular's centralized
funding and cash management. In anticipation of the Distribution, on November
1, 1996, Bio-Vascular agreed to assign to Vital Images $10,000,000 in cash, cash
equivalents and marketable securities and to contribute all intercompany debt
existing on that date. As a result, at January 31, 1997, Vital Images had
$9,033,000 in cash, cash equivalents and marketable securities. The
intercompany balance is included in equity as net investment by Bio-Vascular.
Subsequent to November 1, 1996, Bio-Vascular's Board of Directors determined,
effective as of the Distribution Date, to make such additional capital
contributions as necessary to bring Vital Images' cash, cash equivalents and
marketable securities balances to a combined $10,000,000 and to contribute any
additional intercompany debt existing on that Date.
If Vital Images' operations progress as anticipated, of which there can be
no assurance, Vital Images believes that the capital contribution made by Bio-
Vascular should be sufficient to satisfy its cash requirements for at least the
next two years. The timing of Vital Images' future capital requirements,
however, will depend on a number of factors, including the ability of Vital
Images to launch successfully its Vitrea product line; the ability and
willingness of physicians to use three-dimensional imaging software in clinical
diagnosis, surgical planning patient screening and other diagnosis and treatment
protocols; the impact of competition in the medical visualization business; and
the ability to enhance
39
<PAGE>
existing products and develop new products on a timely basis. To the extent that
Vital Images' operations do not progress as anticipated, additional capital will
be required sooner. There can be no assurance that any required additional
capital will be available on acceptable terms or at all, and the failure to
obtain any such required capital would have a material adverse effect on Vital
Images' business.
Cash used by operating activities in the three months ended January 31,
1997 and 1996 was $660,000 and $759,000, respectively. Vital Images invested
$176,000 and $61,000 in equipment during the three months ended January 31, 1997
and 1996, respectively, primarily on computer hardware and peripherals.
Vital Images has no material commitments at this time other than facility
leases and expected employment contracts, but will be using cash in the near
term as it continues to develop the infrastructure to support its business and
the development of the market for its products.
INFLATION
Management believes inflation has not had a material effect on Vital
Images' operations or on its financial condition.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of Vital Images' foreign transactions are negotiated,
invoiced and paid in U.S. dollars. Fluctuations in currency exchange rates in
other countries may therefore reduce the demand for Vital Images' products by
increasing the price of Vital Images' products in the currency of the countries
in which the products are sold.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) has issued Statement No.
123, "Accounting for Stock-Based Compensation." In fiscal 1997, Vital Images
intends to adopt the disclosure provisions of the Statement, while continuing to
account for options and other employee stock-based compensation using the
intrinsic value based method.
40
<PAGE>
BUSINESS
GENERAL
Vital Images is engaged in the business of developing, marketing and
supporting medical visualization software and systems for use in clinical
diagnosis and surgical planning. Medical visualization software involves the
application of computer graphics and image processing technologies to data
supplied by standard medical imaging equipment, such as computed tomography
("CT") scanners, magnetic resonance imaging ("MRI") devices, positron emission
tomography ("PET") scanners and ultrasound scanning equipment. By applying
these technologies to medical imaging data, Vital Images' products allow
clinicians to create both two- and three-dimensional views inside the human body
and to "fly through" these images to support their clinical diagnosis and
surgical planning.
Vital Images was incorporated in 1988 and has pioneered the use of
computer-based visualization software and, in particular, three-dimensional
visualization software based on "volume rendering" of imaging data. Initially,
Vital Images focused on developing powerful visualization software tools for use
by engineers and researchers in a variety of imaging applications, including oil
and gas exploration, microscopy and medical research.
In 1994, Vital Images was acquired by Bio-Vascular in a tax-free merger
accounted for as a "pooling of interests." The acquisition by Bio-Vascular
provided financial and management resources to Vital Images and enabled Vital
Images to leverage these resources and focus its efforts on medical applications
for its technologies. By the fall of 1994, Vital Images discontinued its
efforts in the microscopy market and, in July of 1995, granted an exclusive
source code license for its VoxelGeo product for gas and oil exploration to
CogniSeis Development, Inc. In exchange for this license, Vital Images received
a one-time license fee of $1,500,000 and future royalty payments expected to
begin in calendar 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General Overview."
Vital Images' current products include its VoxelView and Vitrea medical
visualization software. /VoxelView/, Vital Images' first medical visualization
product, received 510(k) marketing clearance from the FDA in November 1995 and
currently has approximately 350 user sites around the world. Vitrea, an
advanced version of Vital Images' technology for medical visualization
applications, received 510(k) marketing clearance from the FDA in December 1996
and is expected to be released commercially in the second quarter of calendar
1997. Vital Images intends to offer Vitrea both as a software package and as
part of an integrated software and hardware system to radiologists, surgeons and
other care providers. Vitrea and the integrated Vitrea(TM) system are both
designed for ready integration into hospital radiology networks.
TECHNOLOGY
The core technologies underlying Vital Images' products are based on a
visualization technique known as "volume rendering." Volume rendering is an
advanced technique for displaying two- or three-dimensional views on a computer
monitor that has significant advantages over the alternative technique, known as
"surface rendering," in that it permits the direct display of imaging data
without mathematical modeling and allows interactive control of the level of
"transparency" of the data. By comparison, surface rendering requires the
creation of artificial surfaces based on imaging data, and the usefulness of the
resulting visual image is largely dependent on where these surfaces are "set" by
the clinical
41
<PAGE>
technician. Volume rendering is not dependent on the creation of artificial
surfaces and allows visualization of varying components that might otherwise be
eliminated from a surface rendered image due to surface approximation.
Traditionally, volume rendering has largely been overlooked by
visualization companies because the computer power necessary to perform volume
rendering is, in general, significantly more intensive than the requirements
for surface rendering. Vital Images' experience with volume rendering has its
basis in the efforts of Dr. Argiro, who developed three-dimensional
visualization software using volume rendering as an aid in his research while
pursuing a doctoral degree in developmental neuroscience. While other
researchers focused on optimizing their work within the constraints of surface
rendering, Dr. Argiro focused on accelerating the performance of volume
rendering on standard computer platforms. As a result of his work, he developed
expertise in accelerated volume rendering, which forms the core of Vital Images'
volume rendering technology.
As the performance of standard computer platforms continues to increase
while the relative cost of such performance continues to decrease, Vital Images
believes that volume rendering will be a more accessible imaging solution for
routine clinical applications.
STRATEGY
Vital Images' overall strategy is to continue to develop and market leading
edge medical visualization software and systems to end users, and to seek
opportunities to integrate its technologies into medical imaging equipment
developed and marketed by other medical device manufacturers. Vital Images
intends to leverage its core competencies in volume rendering, computer
graphics, network technologies and medical applications and to continue to
pursue collaborative partnerships with leading medical institutions as it seeks
to develop further its product offerings.
In the near term, Vital Images expects to concentrate its efforts on the
development and sale of advanced radiology visualization systems, consisting of
third party workstations and Vital Images' proprietary visualization software.
These workstations are expected to provide accelerated two- and three-
dimensional visualization capabilities for clinical diagnosis, screening and
surgical planning. As this strategy is advanced, Vital Images expects to
continue to add additional clinical value to these integrated systems, including
additional "pre-set" parameters for visualization of certain anatomical
structures, in order to establish a leading edge position in the clinical
application of its products. Vital Images also plans to migrate its technology
to increasingly cost-effective computers and operating environments, leveraging
personal computer and Internet technologies. As these technologies evolve, the
demand for integrated radiology workstations is expected to increase, extending
to primary care physicians, surgeons and other care providers. In addition,
Vital Images plans to offer elements of its software technologies or complete
customized software solutions to manufacturers of diagnostic and medical imaging
devices for integration into their systems.
Over the next one to three years, Vital Images also plans to leverage its
visualization technologies into clinical applications in surgery and cancer
treatment through the development, acquisition or licensing of related treatment
technologies. Vital Images believes that the surgery and cancer treatment
markets are natural product line extensions for its visualization technologies.
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INDUSTRY BACKGROUND
Medical practices in the areas of diagnostic imaging, surgery and cancer
treatment have changed dramatically over the past 20 years, due in part to the
introduction of a variety of new imaging, visualization, computer, networking,
catheter and navigation technologies. The result has been the rapid adoption
and increased use of CT, MRI, PET and ultrasound devices and the incorporation
of new physician-care practices based on the imaging information provided by
these devices.
Each of these modalities captures data that provides a two- or three-
dimensional image of the inside of the human body. These images have
traditionally been viewed as a series of two-dimensional cross-sectional slices
on x-ray-type film. As computer and networking technologies improved, companies
began offering systems that provided for the electronic storage and transmission
of these images and allowed clinicians to view these images on a computer
screen. The first of these systems visualized the slice of data on a computer
monitor and then, more recently, began to permit viewing and manipulation of the
data as a single, three-dimensional image. As a result, the medical
visualization industry today involves the visualization, manipulation, analysis
and communication of medical images in two and three dimensions.
While the market for medical imaging devices in the United States and other
industrialized countries is generally mature, the medical visualization industry
and the markets for medical visualization products have historically lagged the
imaging market due to the lack of industry standards for the generation,
transmission and storage of medical imaging data and to computer cost and
performance considerations.
During the past five years, a number of technical and cost barriers to the
growth of the medical visualization industry and the picture archive and
communication systems ("PACS") industry have begun to erode. In particular, the
medical industry has embraced an image transmission and archiving standard
called DICOM3, promulgated by the American College of Radiology and the National
Electronic Manufacturer's Association. This standard permits imaging,
visualization, networking and archiving equipment and systems from different
vendors to work cooperatively within a single network. In addition, the cost-
to-performance ratio of computer products used in visualization and PACS have
improved dramatically, bringing the prices for medical visualization
capabilities and PACS within the grasp of many healthcare providers. Vital
Images believes that the increasing acceptance of industry standards such as
DICOM3 and the improvements in the cost-to-performance ratio for clinical
workstations will support continued market growth in the medical visualization
and PACS industries.
Vital Images also expects that a number of other trends and innovations in
medical imaging and visualization will support growth in the medical
visualization industry, such as
. higher levels of resolution, or image quality, being provided by
medical imaging devices, allowing higher quality visualization
results;
. increasing numbers of images or "slices" being provided by medical
imaging devices, making the viewing of printed images on x-ray film,
rather than in a visualization system, logistically impractical and
expensive; and
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. increasing clinical acceptance of electronic visualization as teaching
institutions rely more heavily on computer technology and as DICOM-
compliant PACS networks and imaging systems become standard in
radiology departments.
Vital Images believes that the increased use of medical visualization
technologies and of PACS will improve medical practices and clinical and
economic outcomes in the fields of diagnostic radiology, surgery and oncology.
More specifically, Vital Images believes that:
. increased use of medical visualization technology has the potential to
improve radiologists' ability to determine anatomical positions and
pathologies and enhance their ability to communicate their findings to
fellow clinicians, referring physicians and patients;
. advanced visualization may enhance surgeons' abilities to plan and
perform surgery by supplying them with improved, three-dimensional
visual information about the position of structures in the surgical
field;
. visualization may enhance oncologists' ability to isolate and plan
radiation therapy treatment and follow up on its effectiveness by
providing realistic, three-dimensional views of the treatment area;
and
. the integration of these clinical disciplines through electronic
visualization, networking and the Internet has the potential to
provide the opportunity for greater cross-discipline coordination due
to increased speed, access to three-dimensional visual information,
and the resulting ability to perform consultative, interactive
planning and examination on computer workstations.
MARKETS
Vital Images participates in the developing medical visualization system
market. The medical visualization system market has several segments, each at
its respective stage of maturity and with its own level of market penetration.
The medical visualization system market interrelates with a number of other
markets such as the diagnostic imaging equipment market, the PACS market and the
hospital and clinical information systems markets.
Medical visualization systems have applications in diagnostic screening and
radiology, remote diagnosis and consultation (e.g., telemedicine), surgical
assessment, planning, navigation and follow-up, cancer assessment and radiation
and chemotherapy treatment planning, and medical education. The customers for
these applications include radiology, surgery and oncology departments of
hospitals and research centers, diagnostic imaging and screening centers,
outpatient surgery centers and physician groups.
As discussed above, the overall market for medical visualization systems is
in its early stages, as the related technology and products that define this
market are relatively new and undergoing rapid change. Medical visualization
system solutions for diagnostic radiology have existed for the past five years.
However most have been expensive (over $100,000), slow, difficult to use, and of
limited clinical application. The use of medical visualization systems to assist
in surgical planning and navigation has only begun to emerge into clinical
practice in the last three to five years, and primarily in applications such as
biopsy guidance in neuroradiology. While medical visualization systems have also
been used in
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these applications and to support cancer treatment planning in the past, Vital
Images believes that perspective, three-dimensional volume rendering represents
an untapped resource for practitioners in the diagnostic screening and radiology
markets, the surgical planning, navigation and follow-up markets, and the cancer
treatment markets.
PRODUCTS AND PRODUCT DEVELOPMENTt
Vital Images' primary products include its initial medical visualization
software product, VoxelView, as well as Vitrea, its new advanced medical
visualization software product for clinical applications. It is expected that
Vitrea will be commercially launched during the second quarter of calendar 1997.
VoxelView received marketing clearance from the FDA in November 1995 for
use as a clinical diagnostic and surgical planning device when used with CT and
MRI medical imaging data. VoxelView is marketed primarily to medical
researchers, although it is also used by radiologists and surgeons as a clinical
diagnostic and planning tool. VoxelView's primary capability is the ability to
provide volume rendered, three-dimensional views of human anatomy using three-
dimensional image data sets from imaging devices such as CT and MRI scanners.
VoxelView is a highly flexible tool, allowing the clinician or researcher
interactively to control many visualization parameters, including brightness,
contrast, color, transparency, shading, lighting, texture, reflectivity and
orientation. However, the ability to control these visualization parameters
limits the usefulness of VoxelView in the routine clinical setting, where an end
user may be a skilled medical technician lacking expertise in computer graphics
techniques.
In December 1995, Vital Images assessed its business strategy and
determined that to optimize its dedicated participation in the medical field it
needed to create a new product to be offered as an integrated software and
hardware solution for direct clinical application. The objective for this new
product effort was to produce an easy-to-use, clinical tool to allow
radiologists and other clinicians to use two- and three-dimensional
visualization in their routine clinical processes. Unlike VoxelView, Vital
Images set out to design this new product for users with clinical knowledge,
rather than computer graphics expertise. Specifications for this new product,
called Vitrea, were developed in early 1996, with coding beginning in late
spring of that year. Vital Images submitted 510(k) documentation in September
1996 for Vitrea and was granted marketing clearance by the FDA in December 1996
for use as a clinical diagnostic and surgical planning device when used with CT
and MRI medical imaging data.
Vitrea capitalizes on Vital Images' experience in medical visualization and
provides clinicians with an easy-to-use tool with which to diagnose and plan
surgery, and represents Vital Images' most important step to date as a provider
of a range of clinical tools for broad distribution to the medical visualization
market. Vitrea's primary advantage is that it provides two- and three-
dimensional viewing for routine diagnosis and surgical planning, without
requiring the user to be trained in computer graphics techniques. A Vitrea user
can view the image data in two or three dimensions using visualization settings
based on specific clinical applications stored within the system and then
interactively navigate around, or "fly through," the image, allowing the user to
view clinically relevant anatomies and pathologies. Vital Images believes that
no competitor has developed this interactive "fly through" capability based on
volume rendering operating on a low-cost computer workstation. Vitrea also
allows the user to capture views by taking "snapshots," which can be downloaded
into customized reports for electronic transmission and archiving.
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Vitrea conforms to the latest medical imaging and computer industry
standards, such as Open GL computer graphics format and DICOM3.
Once commercial marketing of Vitrea begins, Vital Images expects to offer
Vitrea both as a software package and as a part of an integrated software and
hardware system, consisting of Vitrea software installed on a Silicon Graphics
O2 workstation. Pursuant to a reseller agreement between Vital Images and
Silicon Graphics, Vital Images will purchase O2 workstation systems at a nominal
discount, install its Vitrea software, and market the package as an integrated
medical visualization solution, thereby implementing Vital Images' strategy to
develop, market, sell and support an integrated visualization workstation. The
reseller agreement between Vital Images and Silicon Graphics is terminable at
will by either party upon 30 days' notice.
In addition to its immediate clinical applications, Vitrea also
incorporates a number of additional technological advances, making it adaptable
to routine clinical use in surgical navigation and cancer treatment and for
integration into diagnostic imaging equipment manufactured by other companies.
In particular, Vitrea was written using advanced programming techniques, a
modular, object-oriented design, C++ programming language, and a shared
messaging structure. These characteristics make it easy to modify Vitrea to suit
the clinical needs of surgical navigation and oncology, as well as allowing
diagnostic equipment manufacturers to integrate Vitrea or its components into
imaging system consoles and off-line review stations, thereby providing Vital
Images with the opportunity to leverage the Vitrea development investment into
new commercial areas.
In licensing its products, Vital Images provides three months of no
additional cost maintenance and support, and also offers support and maintenance
contracts to its customers, as well as certain other services such as
installation and training. Maintenance contracts for VoxelView have typically
been offered to licensees on an annual basis, and provide for software updates,
error correction, telephone support and other general maintenance services in
exchange for an annual maintenance fee. In connection with the commercial
release of Vitrea expected to take place in the second quarter of calendar 1997,
Vital Images intends to market similar annual maintenance services for both the
Vitrea software and the integrated Vitrea system, pursuant to which Vital Images
will provide updates, error correction, telephone support and general
maintenance services. Outside of these maintenance contracts, Vital Images is
required by FDA regulation to provide certain levels of support to end users as
a result of use of its products as medical devices. Maintenance contracts
currently marketed or intended to be marketed by Vital Images do not include
installation, training, testing and other services, whether on- or off- site, as
such services are, or will be, charged separately by Vital Images.
In August 1996, Vital Images entered into a product development agreement
with Advanced Technologies Laboratories, Inc. ("ATL"), one of the leading
ultrasound developers. Pursuant to this agreement, each party agreed to
collaborate exclusively with the other for a period of five years in connection
with the development of three-dimensional visualization products for medical
diagnostic ultrasound imaging applications, provided that Vital Images may
collaborate with other parties in connection with products to be used in multi-
modality environments (i.e., environments that offer multiple imaging
technologies and not just ultrasound imaging). ATL will reimburse Vital Images
for certain product development costs and will have responsibility for obtaining
regulatory approvals. Intellectual property developed jointly by the parties
pursuant to this agreement will be jointly owned by both parties, each with the
right to use or license such intellectual property.
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COMPETITION
The medical visualization systems market is immature, and the competition
in this market is intense but fragmented, consisting of numerous types of
competing businesses, each with their own focus and basis for their competitive
position. Vital Images faces competition from five primary sources in the
medical visualization market: (i) diagnostic imaging system suppliers; (ii)
other visualization systems and software developers; (iii) PACS vendors; (iv)
hospital, radiology and clinical systems suppliers; and (v) internal development
projects sponsored by hospital radiology departments.
The most significant sources of competition faced by Vital Images in the
medical visualization business are the various diagnostic imaging systems
suppliers, which are typically large, multinational companies, having far
greater financial and research and development resources than Vital Images, and
which also have well established sales and distribution networks for their
products. These companies, including GE Medical Systems, Siemens Medical
Systems, Inc. and Toshiba Medical Systems, are engaged in the business of
developing and marketing medical imaging systems, such as CT and MRI equipment,
and either offer, or will likely seek to offer, visualization capabilities
integrated into their products in addition to the visualization capabilities
typically provided as a part of the operator's console on the imaging equipment
itself. This visualization capability may be internally developed by these
companies, or may be licensed from independent vendors, such as Vital Images.
In addition, Vital Images faces competition from companies developing other
visualization technologies, such as electronic emulation of the traditional
film/light box viewing methods, and surface rendering, three-dimensional
visualization software designed to run on personal computers. PACS companies
also often provide some visualization capability in addition to their image
archiving and networking products. Vendors of hospital, clinical and radiology
information systems have also diversified into the PACS and medical
visualization product lines, either through internal development or business
development. These companies, which may be large or small, attempt to offer an
integrated system covering a full range of administrative, clinical and
radiology information management capabilities to healthcare providers. Finally,
many research and university healthcare institutions attempt to develop their
own visualization systems. Some departments have in the past, and may in the
future, attempt to secure FDA clearance for such systems, and to license such
systems or technology for general commercial sale.
Vital Images' competitive position is based on its ability to (i) provide
differentiated medical visualization system products that operate in multi-
vendor network and image source environments; (ii) provide clinical quality,
three-dimensional, volume rendered images and interactive navigation on a low
cost standard computer; (iii) integrate clinical knowledge from its
collaborative clinical partners into its products; (iv) offer a "DICOM client"
system which can operate on any DICOM network, independent of the imaging system
and network provider; (v) serve both OEM and end-user customers through the
development of a modular end-user system that can easily be segmented for OEM
customers; and (vi) leverage its visualization technology across multiple
clinical disciplines, including radiology, surgery and oncology.
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MARKETING, DISTRIBUTION AND CUSTOMER SUPPORT
Vital Images intends to market its products both as a software package
and as part of an integrated software and hardware system to primary care
physicians, radiologists, surgeons and medical researchers. Vital Images will
market its products directly to end-user customers, such as hospitals and
clinics, as well as to select diagnostic imaging companies, digital imaging
equipment manufacturers and PACS companies for resale on either a Vital Images'
branded or private label basis.
In addition, Vital Images intends to market its products directly to OEMs
on either a standard or customized basis. In connection with its OEM
opportunities, Vital Images will either provide complete systems for resale by
such OEMs or will provide elements of its technology for incorporation into the
products and systems of such OEMs. Vital Images has already established an OEM
relationship with ATL, pursuant to a sales and marketing agreement entered into
in August 1996. Pursuant to this agreement, ATL has been granted exclusive
world-wide rights to market products jointly developed by the parties for use in
the medical diagnostic ultrasound market in return for royalty payments on such
sales. ATL's exclusivity will continue from year to year for each product upon
the attainment of agreed-upon market objectives.
Vital Images intends to market its products both domestically and
internationally. In the United States, Vital Images intends to market its
products through its direct sales force as well as through OEMs and
distributors. Internationally, Vital Images intends to market its products
through OEMs, distributors and dealers. As of January 31, 1997, Vital Images
had two direct salespersons, one OEM customer and two distributors and dealers.
INTELLECTUAL PROPERTY
Although Vital Images has filed a patent application with respect to
certain of its technology, it generally does not rely on patent protection with
respect to its products and technologies. Instead, Vital Images relies
primarily on a combination of trade secret and copyright law, employee and third
party nondisclosure agreements and other protective measures to protect
intellectual property rights pertaining to its products and technologies. There
can be no assurance, however, that these measures will provide adequate
protection of Vital Images' trade secrets, know-how or other intellectual
property from unauthorized use, misappropriation or disclosure, or that others
will not independently develop similar technologies or duplicate technology
developed by Vital Images. In addition, to the extent that any patents are
applied for, there can be no assurance that such applications will result in
issued patents or, if issued, that such patents will be held to be valid or will
otherwise be of value.
Competitors and potential competitors of Vital Images, many of which have
substantially greater resources, may have applied for or obtained, or may in the
future apply for or obtain, patents that could prevent, limit or interfere with
the ability of Vital Images to manufacture and sell its products and
technologies. Although Vital Images does not believe that its products and
technologies infringe any existing patents or intellectual property rights of
third parties, there can be no assurance that such infringement does not
currently exist or will not exist in the future. The costs of defending an
intellectual property claim could be substantial and could adversely affect
Vital Images, even if it were ultimately successful in defending any such
claims. If Vital Images' products or technologies were found to infringe the
rights of a third party, Vital Images could be required to pay significant
damages or license fees or cease production, which could have a material adverse
effect on Vital Images' business.
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Because of the rapid pace of technological change in the medical
visualization industry, Vital Images believes that patent, trade secret and
copyright protection are less significant to its competitive position than
factors such as the knowledge, ability and experience of its personnel; new
product developments and enhancements; and ongoing, reliable product maintenance
and support.
Pursuant to a licensing agreement dated June 30, 1992 between Vital
Images and Maharishi International University ("MIU"), MIU granted a perpetual,
worldwide, exclusive source code license to certain volume rendering software
developed by Dr. Argiro at MIU and used in Vital Images' VoxelView product.
Royalty obligations of Vital Images pursuant to this agreement expired in May of
1996.
Vital Images' current products include certain DICOM libraries that are
subject to an exclusive license arrangement with Duke University. This
software, which allows Vital Images' products to interface with DICOM networks,
has been licensed to Vital Images in exchange for royalty obligations of one
percent of net revenue derived from each license granted by Vital Images for
products utilizing the software, with a minimum royalty obligation of $150 for
each license of such products.
MANUFACTURING AND SERVICE
As of February 1997, the Vital Images' manufacturing capabilities were
limited to the production, quality assurance and distribution of its VoxelView
software, which is distributed on CD-ROM. With the launch of Vitrea planned for
mid-1997, Vital Images is currently investing in additional capabilities to
allow receipt of computer workstations, integration of the Vitrea software and
testing and shipping of the integrated system to end users. In addition, Vital
Images expects to add service capabilities, for integrating Vitrea workstations
into customers' computer networks, configuring network requirements and
validating operations on site.
Vital Images relies primarily on its own software development as its core
value added. Given the nature of software, there is no raw material as such.
Vital Images sources its DICOM libraries from Duke University and the operating
system for integrated computer workstations from other parties. In addition,
Vital Images sources systems components, computers and computer peripherals from
suppliers such as Silicon Graphics and Access Graphics, Inc.
GOVERNMENTAL REGULATION
As medical devices, Vital Images' medical visualization products are
subject to extensive and rigorous regulation by numerous governmental
authorities, principally the FDA and corresponding foreign agencies. In the
United States, the FDA administers the Federal Food, Drug and Cosmetics Act and
amendments thereto contained in the Safe Medical Devices Act of 1990. These
regulations classify medical devices as either Class I, II or III devices, which
are subject to general controls, special controls or premarket approval
requirements, respectively. All Class I and II devices, as well as some Class
III devices marketed prior to the effective date of the Medical Device
Amendments of 1976, can be cleared for marketing pursuant to a 510(k) pre-market
notification establishing that the device is "substantially equivalent" to a
device that was legally marketed prior to May 28, 1976, the date on which the
Medical Device Amendments of 1976 became effective. The 510(k) pre-market
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer.
If substantial equivalence cannot be established, or if the FDA
determines that the device or the particular application for the device requires
a more rigorous review, the FDA will require that the
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manufacturer submit a PMA application that must be carefully reviewed and
approved by the FDA prior to sale and marketing of the device in the United
States. The PMA application must contain the results of clinical trials, the
results of all relevant prototype tests, laboratory and animal studies, a
complete description of the device and its components, and a detailed
description of the methods, facilities and controls used for manufacturing. In
addition, the submission must include the proposed labeling, advertising
literature and training methods, if applicable. The process of obtaining a PMA
can be expensive, uncertain and lengthy, frequently requiring anywhere from one
to several years from the date of FDA submission, if approval is obtained at
all. Moreover, a PMA, if granted, may include significant limitations on the
indicated uses for which a product may be marketed.
Both of Vital Images' current products, VoxelView 2.5 and Vitrea, are
classified as Class II medical devices and have received marketing clearance
from the FDA as the result of 510(k) submissions. VoxelView 2.5 received
marketing clearance in November 1995 for use as a clinical diagnostic and
surgical planning device when used in concert with CT and MRI medical imaging
data. Vitrea was cleared for marketing in December 1996 for clinical diagnosis
and surgical planning in concert with CT and MRI medical imaging data, both as
stand-alone software and as a part of the integrated Vitrea system. Although
Vital Images has received marketing clearance for these products as Class II
devices, there can be no assurance that future products or enhancements to
existing products introduced by Vital Images will not be subject to the more
rigorous PMA process, or that marketing clearance will be granted at all. Vital
Images has no history of obtaining marketing clearance for its products as a
company independent from Bio-Vascular, although Vital Images intends to develop
an internal regulatory affairs capability following the Distribution.
Vital Images will also increasingly become subject to regulation in those
foreign countries in which it sells its products with regard to product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. Many of the regulations
applicable to Vital Images' products in such countries are similar to those of
the FDA, and the national health or social security organizations of certain of
such countries may require Vital Images' products to be qualified before they
can be marketed in those countries. To date, Vital Images has only had limited
experience in complying with the regulatory requirements of foreign countries in
which its products are marketed, and has not had such experience as an
independent company from Bio-Vascular. Vital Images' ability to successfully
market and sell its products internationally will depend in large part on its
ability to comply with such foreign regulatory requirements.
Vital Images is also subject to periodic inspections by the FDA, whose
primary purpose is to audit Vital Images' compliance with good manufacturing
practices ("GMP") established by the FDA and other applicable government
standards. Strict regulatory action may be initiated in response to audit
deficiencies or to product performance problems. Vital Images believes that its
manufacturing and quality control procedures are in compliance with the
requirements of the FDA regulations.
The financial arrangements through which Vital Images markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations in the United States with respect to the provision of services or
products to patients who are Medicare or Medicaid beneficiaries. Violations of
these laws and regulations may result in civil and criminal penalties, including
substantial fines and imprisonment. In a number of states, the scope of these
laws and regulations have been extended to include the provision of services or
products to all patients, regardless of the source of payment, although there is
variation from state to state as to the exact provisions of such laws or
regulations. In other states, and, on a national level, several health care
reform initiatives have been proposed which would have a similar impact. Vital
Images believes that its operations and its marketing,
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sales and distribution practices currently comply in all respects with all
current fraud and abuse and physician anti-referral laws and regulations, to the
extent they are applicable. Although Vital Images does not believe that it will
need to undertake any significant expense or modification to its operations or
its marketing, sales and distribution practices to comply with federal and state
fraud and abuse and physician anti-referral regulations currently in effect or
proposed, financial arrangements between manufacturers of medical devices and
other health care providers may be subject to increasing regulation in the
future. Compliance with such regulations could adversely affect Vital Images'
marketing, sales and distribution practices, and may affect Vital Images in
other respects not presently foreseeable, but which could have an adverse impact
on Vital Images' business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
Vital Images' products are purchased primarily by hospitals, clinics and
other users which then bill various third party payors for the services provided
to the patients. These payors, which include Medicare, Medicaid, private
insurance companies and managed care organizations, reimburse part or all of the
costs and fees associated with the procedures utilizing Vital Images' products.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for
admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique and, as a result, hospitals are generally willing to
implement new cost-saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of changes in the resource-based relative value scale method of payment
calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using Vital Images' products or the eligibility (or the extent or
amount of coverage) of Vital Images' products could have an adverse impact on
business.
In response to the focus of national attention on rising health care
costs, a number of changes to reduce costs have been proposed or have begun to
emerge. There have been, and may continue to be proposals by legislators and
regulators and third party payors to curb these costs. There has also been a
significant increase in the number of Americans enrolling in some form of
managed care plan, and over 80% of hospitals participate in or have agreements
with HMOs. It has become a typical practice for hospitals to affiliate
themselves with as many managed care plans as possible. Higher managed care
penetration typically drives down the prices of healthcare procedures, which in
turn places pressure on medical supply prices. This causes hospitals to
implement tighter vendor selection and certification processes, by reducing the
number of vendors used, purchasing more products from fewer vendors and trading
discounts on price for guaranteed higher volumes to vendors. Hospitals have
also sought to control and reduce costs over the last decade by joining group
purchasing organizations or purchasing alliances. Vital Images cannot predict
what continuing or future impact these practices, the existing or proposed
legislation, or such third party payor measures may have on its future business.
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FACILITIES
Vital Images leases approximately 10,000 square feet of space at 3100
West Lake Street, Minneapolis, Minnesota 55416 for its principal executive
offices. This space is leased pursuant to a five-year lease with a term ending
on January 31, 2002, with the option of early termination after three years on
certain conditions. Minimum annual lease payments for this space are currently
estimated to total $99,000 per year. On September 1, 1997, Vital Images will
increase its leased space to approximately 14,000 square feet. Accordingly, its
minimum annual lease payments will increase to $135,000 per year. Thereafter,
under the terms of the lease, the minimum annual lease payments will increase 4%
per year. The lease also provides for Vital Images to pay its pro-rata share of
common area expenses and real estate taxes on the building. These expenses are
estimated to be approximately $8.00 per square foot per year. In addition,
Vital Images is required to post a security deposit of up to $150,000 if, during
the term of the lease, the aggregate balance of cash and marketable securities
owned by Vital Images falls below $3,000,000 or its net worth falls below
$1,000,000.
Additionally, Vital Images leases approximately 9,000 square feet of
office space at 505 North Fourth Street in Fairfield, Iowa 52556, used primarily
for research and development. Vital Images' lease for this space expires on May
31, 1997, although Vital Images intends to renew the lease for an additional
term subject to negotiation. Current annual lease obligations for this space
total $75,000. Vital Images also pays the operating costs and real estate taxes
on this property.
EMPLOYEES
As of February 28, 1997, Vital Images had thirty-five (35) employees,
with eighteen (18) involved in research and development, seven (7) in sales and
marketing, five (5) in technical support functions and five (5) in
administrative functions.
LEGAL PROCEEDINGS
Vital Images is not engaged in any legal proceedings at this time.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors, director
nominees and executive officers of Vital Images.
As of the Distribution Date, Vital Images' Board of Directors (the
"Board") will be comprised of six directors, as indicated in the table below.
Of the individuals listed below, Messrs. Perkins and Strickland are currently
directors of Bio-Vascular and Vital Images and will continue to serve as
directors of both companies following the Distribution Date, although it is
expected that Mr. Perkins will only serve as a director of Vital Images for a
transitional period of approximately 12 to 18 months and will not seek
reelection to the Board thereafter. Each of the directors and director nominees
named below will serve for a term expiring at the 1998 annual meeting of the
shareholders of Vital Images and until such person's successor has been elected
and qualified.
It is expected that the current executive officers of Vital Images will
continue to serve in their respective capacities following the Distribution
Date.
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
Andrew. M. Weiss......... 39........... President, Chief Executive Officer
and Director Nominee
Richard W. Perkins....... 66........... Director
Douglas M. Pihl.......... 58........... Director Nominee
Edward E. Strickland..... 70........... Chairman of the Board and Director
Sven A. Wehrwein......... 46........... Director Nominee
Vincent Argiro, Ph.D..... 41........... Executive Vice President, Chief
Technology Officer and Director
Nominee
David A. Davis........... 42........... Vice President, Sales
Gregory S. Furness....... 43........... Vice President, Finance, Chief
Financial Officer, Treasurer and
Secretary
Jay D. Miller............ 37........... Vice President, Marketing and
Business Development
Andrew M. Weiss. Mr. Weiss was named Chief Executive Officer of Vital
Images in March 1997, and has served as President of Vital Images and as a Vice
President of Bio-Vascular since October 1995. In connection with the
Distribution, it is expected that Mr. Weiss will resign as a Vice President of
Bio-Vascular on or before the Distribution Date. From July 1994 until October
1995, Mr. Weiss served as Vice President of Sales and Marketing for Marquette
Electronics, Inc., a medical device manufacturer. From January 1986 through
June 1994, Mr. Weiss was employed by General Electric Company, a multi-national
corporation with operations including medical device and medical imaging
equipment
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manufacturing, serving as Marketing Manager of GE Capital - Vendor Financial
Services from January 1994 through June 1994, as Marketing Programs Manager for
GE Medical Systems - Americas from April 1992 through December 1993 and as
Marketing Programs Manager for GE Medical Systems - Europe from January 1990
through March 1992.
Richard W. Perkins. Mr. Perkins has served as President, Chief Executive
Officer and a director of Perkins Capital Management, Inc., an investment
management firm, since 1984. Mr. Perkins also serves on the Board of Directors
of Bio-Vascular, LifeCore Biomedical, Inc., Children's Broadcasting Corporation,
CNS, Inc., Nortech Systems, Inc., Garment Graphics, Inc., Discus Acquisition
Corporation, Eagle Pacific Industries, Inc. and Quantech Ltd.
Douglas M. Pihl. Mr. Pihl has been a private investor since August 1996.
From May 1992 to August 1996, Mr. Pihl was the President and Chief Executive
Officer of NetStar, Inc. Mr. Pihl has over 30 years of experience in the
computer industry with extensive responsibility in design, product planning and
management. From February 1989 to December 1990 he was Senior Vice President,
Development for Apertus Technologies, Inc. (formerly Lee Data Corporation).
From December 1987 until February 1989, Mr. Pihl was an independent consultant.
He was Senior Vice President-Development of Lee Data Corporation ("Lee Data")
from April 1979 until December 1987. Mr. Pihl was a founder in 1979 of Lee
Data, Minneapolis, Minnesota, which then developed, manufactured and marketed
computer peripheral products.
Edward E. Strickland. Mr. Strickland has been an independent financial
consultant since 1986. Mr. Strickland serves on the Board of Directors of Bio-
Vascular, Communications Systems, Inc., Hector Communications, Inc., AVECOR
Cardiovascular Inc., Quantech Ltd. and as Chairman of the Board of Reuter
Manufacturing, Inc., formerly Green Isle Environmental Services, Inc. Mr.
Strickland also served as a director of Vital Images prior to the May 1994
merger with Bio-Vascular.
Sven A. Wehrwein. Mr. Wehrwein served as Chief Financial Officer of
InStent Inc., an emerging medical device company, from June 1995 to August 1996.
InStent was acquired by Medtronic, Inc. in June 1996. From July 1990 to
December 1994, Mr. Wehrwein served as a Managing Director in the Corporate
Finance Department of Wessels, Arnold & Henderson, a Minneapolis-based
investment banking firm. Mr. Wehrwein served as a managing Director in the
Corporate Finance Department of Drexel Burnham Lambert Securities Limited in
London from 1989 to 1990. From 1984 through 1989, Mr. Wehrwein was a member of
the Corporate Finance Department of Drexel Burnham Lambert Incorporated in New
York, most recently as a Managing director. Mr. Wehrwein was a Vice President
of Corporate Finance at Dean Witter Reynolds Inc. from 1980 to 1984 and served
as an auditor with Coopers & Lybrand from 1976 to 1979. From January 1995 to
May 1995 and from September 1996 to the present, Mr. Wehrwein has been an
independent financial consultant. Mr. Wehrwein is a Certified Public Accountant
and received his Masters of Management Degree from the Sloan School of
Management at the Massachusetts Institute of Technology.
Vincent Argiro. Dr. Argiro was appointed Executive Vice President and
Chief Technology Officer of Vital Images in October 1995, and has served as a
Vice President of Bio-Vascular since May 1994. In connection with the
Distribution, it is expected that Dr. Argiro will resign as a Vice President of
Bio-Vascular on or before the Distribution Date. Dr. Argiro served as a
director of Bio-Vascular from May 1994 until March 1996. Following the
acquisition of Vital Images by Bio-Vascular in May 1994, Dr. Argiro served as
President of Vital Images until October 1995. Dr. Argiro, the founder of Vital
Images, served as Chairman of the Board of Vital Images from 1988 until May
1994. From 1988 to 1990 and from September 1991 to June 1992, Dr. Argiro also
served as President of Vital Images. Prior
54
<PAGE>
to June 1992, Dr. Argiro served as an Associate Professor of Physiology at
Maharishi International University in Fairfield, Iowa, where he conducted
research in neuroscience and cell biology.
David A. Davis. Mr. Davis was named Vice President, Sales of Vital Images
in January 1996. Prior to his employment by Vital Images, Mr. Davis was
employed by ATL Interspec Cardiology, serving as Vice President of Marketing
from June 1993 until October 1995, and as Vice President of Sales from July 1991
until June 1993. Prior to 1991, Mr. Davis was employed by Advanced Technology
Laboratories, Inc., a world leader in ultrasound imaging devices, and by GE
Medical Systems, Inc.
Gregory S. Furness. Mr. Furness was named Vice President, Finance Chief
Financial Officer, Treasurer and Secretary of Vital Images in February 1997.
From December 1987 to December 1996 Mr. Furness served as Executive Vice
President and Chief Financial Officer of CAMAX Manufacturing Technologies, Inc.,
a computer-aided manufacturing software developer, which was acquired by
Structural Dynamics Research Corporation in June 1996. Prior to December 1987,
Mr. Furness was employed as Vice President, Finance and Chief Financial Officer
of Mizar, Inc., and as an audit manager at Deloitte and Touche, LLP. Mr.
Furness is a Certified Public Accountant.
Jay D. Miller. Mr. Miller was named Vice President, Marketing and Business
Development of Vital Images in February 1997. From 1989 until his employment by
Vital Images, Mr. Miller was employed by GE Medical Systems, Inc. in positions
of increasing responsibility in the marketing area, including serving as product
manager for MRI imaging products and marketing manger for the cardiology market
segment.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the Distribution Date, it is expected that the Board will
establish an Audit Committee, a Compensation Committee and a Nominating
Committee. Pursuant to the Bylaws of Vital Images, the Board may also establish
other committees from time to time in its discretion.
The Audit Committee is expected to consist of at least two outside
directors and will, among other things, recommend the appointment of independent
public accountants, review the scope of the annual audit and the engagement
letter, review the independence of the independent accountants and review the
findings and recommendations of the independent accountants and management's
response. The Audit Committee will also review the internal audit and control
functions of Vital Images and make recommendations for changes in the accounting
systems, if so warranted.
The Compensation Committee is also expected to be comprised of at least two
outside directors and will determine compensation for the officers of Vital
Images, provide for management continuity, and administer stock-based
compensation plans and other performance-based compensation plans adopted by
Vital Images.
The Nominating Committee will act to select and recommend candidates to
serve on the Board, who will be submitted for election at annual meetings of the
shareholders of Vital Images. The Nominating Committee will also review and
make recommendations to the Board concerning the composition and size of the
Board and its Committees. The composition of the Nominating Committee will be
determined by the Board at a later date, and is expected to consist of at least
two directors.
55
<PAGE>
COMPENSATION OF DIRECTORS
Outside directors of Vital Images are expected to receive compensation of
$250 for each Board meeting attended. In addition, all members of the Board are
expected to be reimbursed for out of pocket expenses in connection with
attending Board meetings. Committee members are not expected to receive any
additional compensation by reason of their service on such committee(s).
DIRECTOR STOCK OPTION PLAN
The Board of Directors and sole shareholder of Vital Images adopted the
Vital Images, Inc. 1997 Director Stock Option Plan (the "Director Plan") prior
to the Distribution Date, effective upon the consummation of the Distribution
(the "Effective Date"). A maximum of 75,000 shares of Vital Images Common Stock
is available for purchase upon the exercise of options granted or to be granted
under the Director Plan, subject to adjustments in the event of any
recapitalization, stock split, reverse stock split, stock dividend,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event affecting the
Common Stock. Shares to be delivered at the time a stock option is exercised
shall be made available from authorized and unissued shares or treasury shares
of Vital Images Common Stock. The Director Plan will be administered by Vital
Images' Board of Directors. The Board of Directors will have the power to
construe the Director Plan and to execute its terms in all respects, except
that, with respect to automatic option grants, the Board of Directors has no
authority or discretion as to persons eligible to receive options under the
Director Plan or the number of shares covered by options granted under the
Director Plan, which matters are specifically governed by provisions in the
Director Plan.
The Director Plan provides nonemployee directors of Vital Images (each an
"Eligible Director") with automatic grants of stock options, and allows the
Board of Directors to make additional discretionary option grants to any or all
Directors. Each Eligible Director will automatically be granted an initial
option to purchase 15,000 shares on the Effective Date, and Eligible Directors
appointed or elected after the Effective Date will automatically be granted an
initial option to purchase 15,000 shares under the Director Plan on the date of
his or her initial election or appointment to the Board of Directors (in each
case, an "Initial Grant"). On the third anniversary date of the date of the
Initial Grant to each Eligible Director and on each successive third anniversary
thereafter such Eligible Director will automatically receive an option under the
Director Plan to purchase an additional 15,000 shares of Vital Images Common
Stock. All options automatically granted under the Director Plan will expire
eight (8) years after the date of grant. Each option granted under the Director
Plan will be evidenced by an option agreement executed on behalf of Vital Images
and by the Eligible Director to whom such option is granted. The exercise price
per share for each option granted under the Director Plan (with the exception
noted above) will be equal to 100% of the "fair market value" of a share of
Vital Images' Common Stock on the date such option is granted. Options
automatically granted under the Director Plan vest and become exerciseable as to
one-third of the option shares on the first, second and third December 31
following the date of grant. Payment for the exercise price of options granted
under the Director Plan may be made in cash, or in the discretion of the Board
of Directors, by delivery of shares of Vital Images Common Stock having an
aggregate fair market value on the date of exercise which is not less than the
exercise price of the option, or by a combination thereof. The Director plan
also permits the Board of Directors to make discretionary grants of stock
options to one or more Directors in addition to the automatic option grants
described above.
Unless terminated by earlier action of the Board, the Director Plan will
terminate on _____________, 2007, and no option can be granted under the
Director Plan after such date. However,
56
<PAGE>
options outstanding upon termination of the Director Plan may continue to be
exercised in accordance with their terms.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for Mr.
Weiss, as the President and Chief Executive Officer of Vital Images, and each of
the two other executive officers of Vital Images as of October 31, 1996 whose
salary and bonus exceeded $100,000 in the fiscal year ended October 31, 1996.
Information set forth in the table below reflects compensation paid to the named
individuals for services rendered to Vital Images and/or of Bio-Vascular. All
restricted stock award values and option award information set forth in the
table relate to awards of, or options to purchase, shares of Bio-Vascular Common
Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
SHARES OF
RESTRICTED BIO-VASCULAR
NAME AND OTHER ANNUAL AWARD(S) OF COMMON STOCK
PRINCIPAL COMPENSATION BIO-VASCULAR COMMON UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) ($) STOCK (1) OPTIONS (#)(2) COMPENSATION(3)
- --------------- ---- ---------- --------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew M. Weiss 1996 $150,000 $50,000 --- --- 231,064 $88,510
President and 1995 2,308 50,000 --- --- --- ---
Chief Executive 1994 --- --- --- --- --- ---
Officer(4)
Vincent Argiro, 1996 $105,000 --- --- --- --- ---
Ph.D. 1995 79,800 $20,000 --- --- --- ---
Executive Vice 1994 29,403 50,000 --- $ 42,120(6) 21,000 $2,000
President and
Chief Technology
Officer(5)
David A. Davis 1996 $100,000 $40,000 --- --- 20,000 $38,196
Vice President, 1995 --- --- --- --- --- ---
Sales (7) 1994 --- --- --- --- --- ---
</TABLE>
____________________
(1) Restricted stock grants are valued at the market price on the date of grant
regardless of whether such shares have vested. In connection with the
Distribution, each holder of shares of restricted Bio-Vascular Common Stock
will receive a number of restricted shares of Vital Images Common Stock
according to the Distribution Ratio. To date, Bio-Vascular has not paid
dividends on Bio-Vascular Common Stock, including shares of Bio-Vascular
Common Stock subject to restricted stock grants.
(2) In connection with the Distribution, outstanding options to purchase Bio-
Vascular Common Stock will be adjusted to reflect the Distribution, and the
holder will be granted options to purchase Vital Images Common Stock as set
forth in the Employee Benefits Agreement. See "Relationship Between Vital
Images and Bio-Vascular Following the Distribution--Employee Benefits
Agreement."
57
<PAGE>
(3) "All Other Compensation" paid to Mr. Weiss and Mr. Davis in 1996 consisted
entirely of relocation expenses reimbursed by Bio-Vascular. "All Other
Compensation" paid to Dr. Argiro in 1994 consisted entirely of automobile
expenses paid by Bio-Vascular.
(4) Mr. Weiss was named as a Vice President of Bio-Vascular and President of
Vital Images in October 1995.
(5) Dr. Argiro's employment with Bio-Vascular commenced in May 1994 upon the
acquisition of Vital Images by Bio-Vascular
(6) As of October 31, 1996, Dr. Argiro held an aggregate of 4,320 restricted
shares of Bio-Vascular Common Stock, valued at $27,540 as of such date.
Effective May 24, 1994, Dr. Argiro was granted an award of 12,960 shares of
Bio-Vascular Common Stock, vesting in three equal installments of 4,320
shares on each successive May 24 following the date of grant.
(7) Mr. Davis was named Vice President, Sales of Vital Images in January 1996.
GRANTS OF OPTIONS TO PURCHASE BIO-VASCULAR COMMON STOCK
The following table discloses information regarding options to purchase
Bio-Vascular Common Stock granted to Mr. Weiss and Mr. Davis during the fiscal
year ended October 31, 1996. No options to purchase Bio-Vascular Common Stock
were granted to Dr. Argiro during the fiscal year ended October 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
Number of
shares of Bio- Percent of total
Vascular Common options granted Market
Stock underlying to Bio-Vascular Exercise or Price on
options employees in base price Expiration Date of
Name granted (#) (1) fiscal year (2) ($/sh) Date Grant ($/sh)
- ------------ --------------- --------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Andrew M. Weiss 200,000 (3) 65.82 $10.000 10/25/07 $12.875
31,064 (4) 10.22 12.875 10/25/04 12.875
David A. Davis 20,000 (5) 6.58 11.375 01/02/05 11.375
</TABLE>
___________________
(1) In connection with the Distribution, outstanding options to purchase Bio-
Vascular Common Stock will be adjusted to reflect the Distribution, and the
holder will be granted options to purchase Vital Images Common Stock as set
forth in the Employee Benefits Agreement. See "Relationship Between Vital
Images and Bio-Vascular Following the Distribution--Employee Benefits
Agreement."
(2) Based on total options to purchase Bio-Vascular Common Stock granted to
Bio-Vascular and Vital Images employees.
(3) Reflects a non-plan grant of options to Mr. Weiss on December 18, 1995,
vesting in five annual installments of 40,000 on each successive October 25
thereafter, and expiring seven years from the date of vesting.
(4) Reflects a grant of options to Mr. Weiss pursuant to Bio-Vascular's 1988
Incentive Stock Option Plan (the "1988 Plan") on December 18, 1995, vesting
in four annual installments of 7,766 on each successive October 25
thereafter. Under the 1988 Plan, a "change in control" occurs when (i) any
person is or becomes the beneficial owner of securities of Bio-Vascular
representing fifty percent (50%) or more of the combined voting power of
Bio-Vascular's then outstanding
58
<PAGE>
securities; or (ii) the occurrence of a transaction requiring shareholder
approval and involving the sale of all or substantially all of the assets
of Bio-Vascular or the merger of Bio-Vascular with or into another
corporation. Generally, upon termination of employment of an optionee under
the 1988 Plan, options under the 1988 Plan which are exerciseable upon the
date of termination will remain exerciseable for a period of time set forth
in the 1988 Plan or the expiration of the term of the options, whichever is
earlier; provided, however, that if the termination is for cause, options
granted under the 1988 Plan may be canceled. For the purposes of the
Distribution, optionees under the 1988 Plan who continue in the employment
of Vital Images will not be considered "terminated" for the purposes of the
1988 Plan. See "Relationship Between Vital Images and Bio-Vascular
Following the Distribution--Employee Benefits Agreement."
(5) Reflects a grant of options to Mr. Davis pursuant to the 1988 Plan, vesting
in four annual installments of 5,000 on each successive January 2
thereafter, and expiring five years from the date of vesting. See note 4
above.
EXERCISES AND YEAR-END VALUES OF OPTIONS TO PURCHASE BIO-VASCULAR COMMON STOCK
The following table shows, for Mr. Weiss and each other executive officer
of Vital Images named in the Summary Compensation Table above, information
regarding exercise of options to purchase Bio-Vascular Common Stock during the
fiscal year ended October 31, 1996, and the value of all unexercised options to
purchase Bio-Vascular Common Stock held by each such individual as of October
31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
SHARES OF
BIO-VASCULAR
COMMON NUMBER OF SHARES OF BIO-VASCULAR VALUE OF UNEXERCISED IN-THE-MONEY
STOCK COMMON STOCK UNDERLYING OPTIONS TO PURCHASE BIO-VASCULAR
ACQUIRED ON VALUE UNEXERCISED OPTIONS AT FISCAL COMMON STOCK AT
EXERCISE REALIZED YEAR END (#) (1) FISCAL YEAR END ($) (2)
--------------------------------- ----------------------------------
NAME (#) ($) EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- ---- ------------- ---------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Andrew M. Weiss -- -- 47,766 183,298 $ 0 $ 0
Vincent Argiro, Ph.D. -- -- 14,000 7,000 43,750 21,875
David A. Davis -- -- -- 20,000 0 0
</TABLE>
______________________
(1) In connection with the Distribution, outstanding options to purchase Bio-
Vascular Common Stock will be adjusted to reflect the Distribution, and the
holder will be granted options to purchase Vital Images Common Stock as set
forth in the Employee Benefits Agreement. See "Relationship Between Vital
Images and Bio-Vascular following the Distribution--Employee Benefits
Agreement."
(2) Based upon the market value of the underlying Bio-Vascular Common Stock as
of October 31, 1996, less the exercise price.
CHANGE IN CONTROL AGREEMENTS
Vital Images expects to enter into an agreement with each of the above-
named officers in order to provide for certain benefits upon a "change in
control" of Vital Images, as defined in such agreements.
59
<PAGE>
Upon a change in control, such officer would be entitled to a lump sum cash
payment equal to the officer's highest monthly compensation multiplied by ____,
as well as employee welfare benefits then in effect for a period of ____ months,
if his employment with Vital Images is terminated for certain grounds and within
a specific time period. Therefore, if such officer's employment with Vital
Images is terminated for any reason other than death, cause, disability or
retirement, or if he terminates his employment with Vital Images for good
reason, and the termination occurs within the twelve month period beginning on
the date of a change in control, or prior to a change in control if his
termination was a condition of the change in control, such officer will receive
change in control benefits. The agreements are also expected to incorporate
standard confidentiality restrictions.
1997 STOCK OPTION AND INCENTIVE PLAN
The Vital Images, Inc. 1997 Stock Option and Incentive Plan (the "Stock
Incentive Plan") was adopted by the Board of Directors and sole shareholder of
Vital Images prior to the Distribution Date and will become effective upon the
consummation of the Distribution. The Stock Incentive Plan permits the granting
of awards to employees, directors and consultants of Vital Images in the form of
stock options, restricted stock, performance units, and stock bonuses. The
Stock Incentive Plan currently provides that the Board of Directors may grant
awards covering up to an aggregate of 675,000 shares of Vital Images Common
Stock, subject to equitable adjustment in the event of a stock split, stock
dividend, reduction or combination of shares, merger, consolidation,
recapitalization or other similar transactions. The Stock Incentive Plan may be
administered by the entire Board of Directors, or by a committee appointed by
the Board. The Stock Incentive Plan initially will be administered by the
Compensation Committee. The Stock Incentive Plan gives broad powers to the
Compensation Committee to administer and interpret the Stock Incentive Plan,
including the authority to select the individuals to be granted award and to
prescribe the particular form and conditions of each award granted. Awards may
be granted pursuant to the Stock Incentive Plan through _____________ 2007. The
Stock Incentive Plan may be terminated earlier by the Board of Directors in its
sole discretion.
Stock options granted under the Stock Incentive Plan may be "incentive
stock options" meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or non-qualified options which do not
meet the requirements of Section 422. The Stock Incentive Plan provides that
the exercise price of all incentive and non-qualified stock options granted
under the Stock Incentive Plan must be at least 100% and 85%, respectively, of
the fair market value of Vital Images Common Stock at the date of grant. Full
payment for the shares (which may be made, in the Board's discretion in whole or
in part, in shares of Common Stock valued at the fair market value on the date
the option is exercised) must be made at the time the option is exercised.
Restricted Stock granted under the Stock Incentive Plan shall be subject to
conditions and restrictions as may be specified by the Compensation Committee.
Generally, participants will have the rights and privileges of a shareholder as
to the shares of restricted stock, including the right to vote, except that the
restricted stock shall remain in the custody of Vital Images until all
restrictions have lapsed, and none of the shares representing the restricted
stock may be sold, transferred, assigned, pledged, or otherwise encumbered or
disposed of during the period of restrictions determined by the Compensation
Committee. Upon the satisfaction of the conditions and the lapsing of
restrictions applicable to restricted stock awards, Vital Images shall deliver
to the participant a stock certificate for the number of shares of restricted
stock granted, free of all such restrictions. Under the Stock Incentive Plan,
the Compensation Committee may also grant performance units and stock bonuses
entitling the recipient to receive an amount of cash or a number of shares of
Common Stock
60
<PAGE>
upon the achievement of performance or other goals. No awards have been granted
under the Stock Incentive Plan.
STOCK PURCHASE PLAN
The Vital Images, Inc. 1997 Employee Stock Purchase Plan (the "Stock
Purchase Plan") was adopted by the Board of Directors and sole stockholder of
Vital Images prior to the Distribution, and will become effective upon the
consummation of the Distribution. The Stock Purchase Plan permits eligible
employees to make voluntary contributions through payroll deductions to be used
to purchase stock from Vital Images. The Stock Purchase Plan consists of
periodic offerings, with the first such offering planned to begin on July 1,
1997. Each offering under the Stock Purchase Plan will be for a period of three
months (an "Offering Period"). An employee may elect to have up to a maximum of
10% deducted from his or her regular salary for purposes of purchasing shares
under the Stock Purchase Plan. The price at which the employees shares are
purchased will be the lower of (a) 85% of the closing price of the Common Stock
of Vital Images on the day that an Offering Period commences under the Stock
Purchase Plan, or (b) 85% of the closing price of the Vital Images Common Stock
on the day that such Offering Period terminates. With certain exceptions, all
employees of Vital Images who work at least 20 hours per week, including
officers and directors who are employees, are eligible to participate in the
Stock Purchase Plan. The Stock Purchase Plan provides for the issuance of up to
250,000 shares of Common Stock, and will be administered by the Board of
Directors of Vital Images, or by the Compensation Committee. No shares have
been issued under the Stock Purchase Plan.
OTHER STOCK OPTION PLANS
In connection with the issuance of Vital Images Options with respect to
Existing Bio-Vascular Options, Vital Images has adopted the 1995 Adjustment
Plan, the Incentive Adjustment Plan and the 1992 Director Adjustment Plan. Each
of these plans is intended to mirror the provisions of a corresponding Bio-
Vascular option plan. As each Bio-Vascular option plan generally provides for
the termination of options following termination of employment, each of such
mirror plans has been modified to provide that the Distribution will not cause a
termination of any Bio-Vascular employee for the purposes of such plans, and
that options held by Bio-Vascular employees following the Distribution will
remain exerciseable following the Distribution, so long as such employees remain
employed by Bio-Vascular or any subsidiary. Similar modifications to the 1990
Plan and the 1992 Plan have also been adopted by Vital Images. Awards of
options under these plans, as well as pursuant to certain non-plan award
agreements, will be made in connection with the Distribution. It is intended
that the 1995 Adjustment Plan, the Incentive Adjustment Plan and the Director
Adjustment Plan, as well as the 1992 Plan and the 1990 Plan, will not be
utilized to grant options to purchase Vital Images Common Stock other than in
connection with the Distribution. See "Relationship Between Vital Images and
Bio-Vascular Following the Distribution--Employee Benefits Agreement."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
shares of Vital Images Common Stock beneficially owned by each person expected
to be the beneficial owner of more than 5% of the outstanding shares of such
stock as of the Distribution Date, based on information which has been obtained
from Bio-Vascular's records, and a review of statements filed with the
Securities and Exchange Commission pursuant to Sections 13(d) and 13(g) of the
Exchange Act with respect to Bio-Vascular Common Stock and received by Bio-
Vascular prior to February 15, 1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) PERCENT OF CLASS (2)
- ------------------- ---------------------- --------------------
<S> <C> <C>
Perkins Capital Management, Inc.(3) 397,350 8.4%
730 East Lake Street
Wayzata, MN 55391-1769
</TABLE>
_____________________
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or members of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned
by such person or group.
(2) Assumes approximately 4,750,000 shares of Vital Images Common Stock
outstanding as of the Distribution Date, based upon 9,499,502 shares of
Bio-Vascular Common Stock outstanding as of February 15, 1997.
(3) Based upon a Schedule 13G filed as of January 22, 1997 with the Securities
and Exchange Commission with respect to beneficial ownership of Bio-
Vascular Common Stock. Excludes shares expected to be beneficially owned
by Mr. Perkins, a director of Vital Images and the controlling shareholder
of Perkins Capital Management, Inc., a registered investment advisor
("PCM"). Of the 397,350 shares anticipated to be held for the account of
clients of PCM for which beneficial ownership is expected to be disclaimed
by PCM (the "PCM Shares"), PCM is expected to have sole investment power
with regard to all such shares and sole voting power over 36,200 of such
shares.
62
<PAGE>
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of
Vital Images Common Stock which are expected to be beneficially owned as of the
Distribution Date, by (i) each director and director nominee of Vital Images;
(ii) each executive officer of Vital Images named in the Summary Compensation
table above; and (iii) by all directors and executive officers as a group, based
upon each such person's respective beneficial ownership of Bio-Vascular Common
Stock as of February 15, 1997. The table includes shares of Vital Images Common
Stock that are expected to be deemed beneficially owned by each such person in
connection with the treatment of options to purchase Bio-Vascular Common Stock
and restricted shares of Bio-Vascular Common Stock in the Distribution. See
"Relationship Between Vital Images and Bio-Vascular Following the Distribution--
Employee Benefits Agreement."
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) CLASS (3)
-------------------- ---------------------- ---------
<S> <C> <C>
Andrew M. Weiss (4) 23,883 *
Richard W. Perkins (5) 82,375 1.7%
Douglas M. Pihl 500 *
Edward E. Strickland (6) 87,475 1.8%
Sven A. Wehrwein 0 -
Vincent Argiro, Ph.D. (7) 230,850 4.9%
David A. Davis (8) 2,500 *
All directors and executive officers 427,083 8.9%
as a group (7 persons) (4)(5)(6)(7)(8)
</TABLE>
______________________
* = Less than 1%
(1) Unless otherwise indicated, the address of each such person is 3100 West
Lake Street, Suite 100, Minneapolis, MN 55416.
(2) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or members of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned
by such person or group.
(3) Assumes 4,750,000 shares of Vital Images Common Stock outstanding, based on
9,499,502 shares of Bio-Vascular Common Stock outstanding as of February
15, 1997.
(4) Represents shares that Mr. Weiss has the right to acquire within 60 days
upon the exercise of options.
(5) Includes 2,500 shares held by the Perkins Foundation, 39,250 shares held by
various trusts of which Mr. Perkins is the sole trustee, and 28,125 shares
held by Quest Venture Partners, of which Mr. Perkins is a 40% partner. Also
includes 12,500 shares Mr. Perkins has the right to
63
<PAGE>
acquire within 60 days upon the exercise of options. Excludes the 397,350
PCM Shares. Mr. Perkins disclaims beneficial ownership of the PCM Shares.
(6) Includes 22,500 shares Mr. Strickland has the right to acquire within 60
days upon the exercise of options.
(7) Includes 7,000 shares that Dr. Argiro has the right to acquire within 60
days upon the exercise of options.
(8) Represents shares that Mr. Davis has the right to acquire within 60 days
upon the exercise of options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following the Distribution, Bio-Vascular will continue to have a
relationship with Vital Images as a result of the Distribution Agreement and the
Transition Services Agreement. Except as contemplated by the Distribution
Agreement, the Transition Services Agreement or as otherwise described in this
Information Statement, Bio-Vascular and Vital Images will cease to have any
material contractual relationships with each other. See "Relationship Between
Bio-Vascular and Vital Images After the Distribution."
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Articles provide that the authorized capital stock of Vital Images
consists of 25,000,000 shares, of which 20,000,000 shares is Common Stock and
5,000,000 shares is preferred stock. The following summary of the terms and
provisions of Vital Images' capital stock does not purport to be complete and is
qualified in its entirety by reference to the Articles and applicable law.
COMMON STOCK
Upon the Distribution, and based upon the ownership of Bio-Vascular shares,
it is anticipated that there will be approximately _____________ shares of Vital
Images Common Stock issued and outstanding, held of record by ____ shareholders.
The holders of Vital Images Common Stock are entitled to one vote for each share
on all matters submitted to a vote of shareholders and may not cumulate votes
for the election of directors. Accordingly, the owners of a majority of the
shares of Vital Images Common Stock outstanding will have the power to elect all
of the directors. Each share of outstanding Vital Images Common Stock is
entitled to participate equally in any distribution of net assets made to the
shareholders in liquidation, dissolution or winding up of Vital Images and is
entitled to participate equally in dividends as and when declared by the Board
of Directors. There will be no redemption, sinking fund, conversion or
preemptive rights with respect to the shares of Vital Images Common Stock. All
shares of Vital Images Common Stock will have equal rights and preferences.
PREFERRED STOCK
Upon the Distribution, no shares of preferred stock will be issued or
authorized by the Board of Directors for issuance other than the Series A Junior
Preferred Stock authorized in connection with the Rights Agreement. See "Rights
Agreement." Under the governing Minnesota law and Vital Images' Articles, no
action by Vital Images' shareholders is necessary, and only action of the Board
of Directors is required, to authorize the issuance of any of the shares of
preferred stock. The Board of Directors is empowered to establish, and to
designate the name of, each other class or series of the shares of preferred
stock and to set the terms of such shares (including terms with respect to
redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences). Accordingly, the Board of Directors, without
shareholder approval, may issue shares of preferred stock with terms (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences) that could adversely
affect the voting power and other rights of holders of the Vital Images Common
Stock. It is not possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of the Vital Images Common
Stock until the Board of Directors determines the specific rights of the holders
of such preferred stock. However, the effects might include, among other things,
restricting dividends on the Vital Images Common Stock, diluting the voting
power of the Vital Images Common Stock, impairing the liquidation rights of the
Vital Images Common Stock and delaying or preventing a change in control of
Vital Images. Other than any potential issuance of the Series A Junior
Preferred Stock pursuant to the Rights Agreement, Vital Images has no present
plans to issue any shares of preferred stock.
CERTAIN LIMITED LIABILITY, INDEMNIFICATION AND ANTI-TAKEOVER PROVISIONS
Article X of Vital Images' Articles, and Article VI, Section 1 of Vital
Images' By-Laws, provide that Vital Images will indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent, as permitted by Minnesota Statutes Section 302A.521 as enacted and
amended.
65
<PAGE>
Section 302A.521 of the Minnesota Business Corporation Act provides that a
Minnesota business corporation shall indemnify any director, officer, employee
or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity (as defined) of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 contains detailed terms regarding such right of indemnification and
reference is made thereto for a complete statement of such indemnification
rights.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Vital Images
pursuant to the foregoing provisions, Vital Images has been informed that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
As a Minnesota corporation, Vital Images is subject to the provisions of
Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act.
Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act may
deny shareholders the receipt of a premium on their Vital Images Common Stock
and may also have a depressive effect on the market price of the Vital Images
Common Stock. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved in a prescribed manner. A "control share
acquisition" is an acquisition, directly or indirectly, of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. In general, Section 302A.673 prohibits a
public Minnesota corporation form engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a person
who is the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock or who is an affiliate or associate of the
corporation and at any time within four years prior to the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Vital Images Common Stock will be
American Stock Transfer & Trust Company.
66
<PAGE>
RIGHTS AGREEMENT
The Vital Images Common Stock distributed in the Distribution will be
issued with Preferred Stock Purchase Rights ("Rights"). Each Right will entitle
the registered holder to purchase from Vital Images at any time following the
Rights Distribution Date (as defined below) one one-thousandth of a share (a
"Preferred Stock Fraction") of Vital Images' Series A Junior Preferred Stock,
par value $.01 per share (the "Preferred Stock"), or a combination of securities
and assets of equivalent value, at a purchase price of $____ per Preferred Stock
Fraction (the "Purchase Price"), subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of _________,
1997 between Vital Images and ________________, as Rights Agent (the "Rights
Agreement"). The description set forth below is intended as a summary only and
is qualified in its entirety by reference to the Rights Agreement, which is
filed as an exhibit to the Registration Statement on Form 10, of which this
Information Statement forms a part.
Initially, the Rights will be evidenced by Vital Images Common Stock
certificates, and no separate Rights Certificates will be distributed. The
Rights will separate from the Vital Images Common Stock and will be distributed
to the holders thereof on the "Rights Distribution Date," which shall be the
close of business on the tenth business day following the first to occur of the
following: (i) a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding Vital Images
Common Stock, other than as a result of a Permitted Offer, as defined (the
"Stock Acquisition Date"); (ii) the announcement (or such later date as the
Board of Directors, acting by a majority of the Continuing Directors, may
determine) of a tender offer or exchange offer (other than a Permitted Offer, as
defined) that would result in a person or group beneficially owning 15% or more
of the outstanding Vital Images Common Stock; or (iii) a determination by the
Board that a Person is an Adverse Person, and that such Person, alone or
together with its affiliates and associates, has become the beneficial owner of
a substantial amount of Vital Images Common Stock (which amount shall in no
event be less than the greater of 10% of Vital Images Common Stock then
outstanding or the sum of .001% and the largest percentage of the outstanding
shares of Vital Images' Common Stock then known by the Company to be
beneficially owned by any person (with certain exceptions)) and (A) such
beneficial ownership by such Person is intended to cause Vital Images to
repurchase the Vital Images Common Stock beneficially owned by such Person or to
cause pressure on Vital Images to take action or enter into a transaction or
series of transactions intended to provide such Person with short-term financial
gain under circumstances where the Board determines that the best long-term
interests of Vital Images and its shareholders would not be served by taking
such action or entering into such transaction or series of transactions at that
time or (B) such beneficial ownership is causing or reasonably likely to cause a
material adverse impact including, but not limited to, impairment of
relationships with customers or impairment of Vital Images' ability to maintain
its competitive position.
A "Permitted Offer" means a tender or exchange offer which is for all
outstanding Vital Images Common Stock at a price and on terms determined, prior
to the purchase of shares under such tender or exchange offer, by the Board at a
time when a majority of the members of the Board are Continuing Directors to be
fair to the Vital Images shareholders and otherwise in the best interests of
Vital Images and its shareholders (other than the Person or any affiliate or
associate thereof on whose behalf the offer is being made).
A "Continuing Director" is (i) any person who is a member of the Board of
Directors, while such person is a member of the Board of Directors, who is not
an Acquiring Person or an Adverse Person, or
67
<PAGE>
an affiliate or associate of either of the foregoing, or a representative,
nominee or designee of an Acquiring Person or an Adverse Person or any such
affiliate or associate, and who was a member of the Board prior to the date of
the Rights Agreement, or (ii) any person who subsequently becomes a member of
the Board of Directors, while such person is a member of the Board, who is not
an Acquiring Person or an Adverse Person, or an affiliate or associate of either
of the foregoing, or a representative, nominee or designee of an Acquiring
Person, an Adverse Person or any such affiliate or associate, and whose initial
nomination or initial election to the Board of Directors is recommended or
approved by the Board at a time when a majority of the members of the Board are
Continuing Directors.
The Rights are not exerciseable until the Rights Distribution Date and will
expire at the close of business on ____________, unless earlier redeemed or
exchanged by Vital Images as described below (the earliest of all such dates,
the "Expiration Date").
If (i) a person or group, with certain exceptions, becomes the beneficial
owner of more than 15% of the then outstanding Vital Images Common Stock, other
than as a result of a Permitted Offer or (ii) the Board determines that a person
is an Adverse Person (such events to be referred to as "Section 11(a)(ii)
Events"), then each holder of a Right will thereafter have the right to receive,
upon exercise, that number of Preferred Stock Fractions (or in certain
circumstances, that number of shares of Vital Images Common Stock, cash, non-
cash property or other securities of Vital Images) having a market value equal
to two times the Exercise Price of the Right. The Rights, however, are not
exerciseable following the occurrence of either of the events set forth above
until such time as the Rights are no longer redeemable by Vital Images as set
forth below. Notwithstanding any of the foregoing, following the occurrence of
either of the events set forth above, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person or Adverse Person (or certain related persons and transferees)
will be null and void.
If at any time following the Stock Acquisition Date, other than pursuant to
a Permitted Offer, (i) Vital Images is acquired in a merger or other business
combination transaction in which Vital Images is not the surviving corporation
or the Vital Images Common Stock is changed or exchanged or (ii) 50% or more of
the Vital Images' assets or earning power is sold or transferred, (such events
to be referred to as "Section 13 Events") each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive that number of shares of common stock of the acquiring company
which equals the exercise price of the Right divided by one-half of the current
market price of such common stock at the date of the occurrence of the event.
The Section 11(a)(ii) Events and the Section 13 Events are collectively referred
to as the "Triggering Events."
At any time after the occurrence of a Section 11(a)(ii) Event, at the
election of the Board, Vital Images may exchange the Rights (other than Rights
which have become void), in whole or in part, at an exchange ratio of one
Preferred Stock Fraction per Right (subject to adjustment).
The Purchase Price payable and the number of Preferred Stock Fractions
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent dilution (i) in the event of a stock dividend on, or a subdivision,
split, combination, consolidation or reclassification of, the Preferred Stocks,
(ii) if all holders of any security of Vital Images are granted rights, options
or warrants to subscribe for or purchase Preferred Stocks or convertible
securities at less than the current market price of the Preferred Stocks, or
(iii) upon the distribution to holders of Preferred Stocks of evidences of
indebtedness or assets (excluding quarterly cash dividends) or of subscription
rights or warrants (other than those referred to above).
68
<PAGE>
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. Vital Images will not be required to issue fractional Preferred Stocks
other than fractions which are integral multiples of Preferred Stock Fractions
(or, in the event of an appropriate election, shares of Vital Images Common
Stock), and, in lieu of such fractional Preferred Stocks (or shares of Vital
Images Common Stock, as the case may be), an adjustment in cash will be made
based on the market price of the Preferred Stocks (or common stock, if
appropriate) on the last trading date prior to the date of exercise.
In general, at any time prior to the first to occur of (i) ten days
following the Stock Acquisition Date, (ii) ten days after a person is determined
to be an Adverse Person, or (iii) the Final Expiration Date, Vital Images, upon
determination of the Board, may redeem the Rights in whole, but not in part, at
a price of $.001 per Right (payable in cash, stock or other consideration deemed
appropriate by the Board of Directors). Immediately upon redemption of the
Rights, the Rights will terminate, and the only right of the holders of the
Rights will be to receive the $.001 redemption price.
The Preferred Stocks purchasable upon exercise of the Rights will be
nonredeemable and junior to any other series of preferred stock Vital Images may
issue (unless otherwise provided in the terms of such other stock). Each
Preferred Stock will have a preferential quarterly dividend in an amount equal
to 1,000 times the dividend declared on each share of Vital Images Common Stock,
but in no event less than $100. In the event of liquidation, the holders of
Preferred Stocks will receive a preferred liquidation payment equal to the
greater of $1,000 per share, plus accrued dividends, or 1,000 times the payment
made with respect to each share of Vital Images Common Stock. Each Preferred
Stock will have 1,000 votes, voting together with the Vital Images Common Stock.
In the event of any merger, consolidation or other transaction in which Vital
Images Common Stock is exchanged, each Preferred Stock will be entitled to
receive 1,000 times the amount and type of consideration received per share of
Vital Images Common Stock. The rights of the Preferred Stocks as to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of Vital Images, including, without limitation, the
right to vote or receive dividends. The creation of the Rights should not be
taxable to shareholders. Shareholders may, however, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exerciseable for Preferred Stocks (or other consideration) of Vital Images or
for common stock of an acquiring company as set forth above.
Prior to the Rights Distribution Date, the Board may adopt amendments to
any of the provisions of the Rights Agreement (with certain exceptions),
including amendments that modify the definition of Acquiring Person, change the
Purchase Price or extend the Final Expiration Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board to cure any ambiguity, to make changes which do not adversely affect the
interests of holders of Rights (excluding any Rights held by an Acquiring Person
or Adverse Person that have become null and void under the Rights Agreement).
One Right will be attached to each share of Vital Images Common Stock
distributed in the Distribution so long as the Rights Agreement remains in
effect and the Rights continue to remain attached to and trade with the shares
of Vital Images Common Stock, Vital Images will issue one Right for each share
of Vital Images Common Stock issued between the Record Date and any Rights
Distribution Date, so that all outstanding shares of Vital Images Common Stock
will have attached Rights. Based upon the ___________ shares of Bio-Vascular
Common Stock outstanding on
69
<PAGE>
________________, 1997 and the _______ shares of Bio-Vascular Common Stock
reserved for issuance under outstanding warrants and options, Vital Images will
initially reserve for issuance upon exercise of the Rights _______ Preferred
Stocks.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Vital Images
on terms not approved by Vital Images' Board. The Rights should not interfere
with any merger or other business combination approved by Vital Images' Board
because the Rights may be redeemed by Vital Images until the tenth day following
the first public announcement that a person or group has become an Acquiring
Person.
ADDITIONAL INFORMATION
Vital Images has filed with the Commission a Registration Statement on Form
10 (the "Registration Statement", including any amendments or supplements
thereto) under the Exchange Act with respect to the shares of Vital Images
Common Stock being received by Bio-Vascular shareholders in the Distribution.
This Information Statement does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Information Statement as to
the contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by Vital Images
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission at
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Seven World Trade Center, Suite 1300, 13th Floor, New York, New York
10048. Copies of such information can be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission also maintains a Website at
http://www.sec.gov that contains reports, proxy and information statements,
registration statements and other information that has been or will be filed by
Vital Images. In addition, the Vital Images Common Stock is expected to be
listed on the Nasdaq SmallCap Market. Reports, proxy statements and other
information concerning Vital Images can be inspected and copied at the Public
Reference Room of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants.............................................. F-2
Balance Sheets as of January 31, 1997 and October 31, 1996 and 1995............ F-3
Statements of Operations for the three months ended January 31, 1997 and 1996
and the years ended October 31, 1996, 1995 and 1994............................ F-4
Statements of Equity for the three months ended January 31, 1997
and the years ended October 31, 1996, 1995 and 1994............................ F-5 and F-6
Statements of Cash Flows for the three months ended January 31, 1997 and 1996
and the years ended October 31, 1996, 1995 and 1994............................ F-7
Notes to Financial Statements.................................................. F-8 to F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Bio-Vascular, Inc.:
We have audited the accompanying balance sheets of Vital Images, Inc. as of
October 31, 1996 and 1995, and the related statements of operations, equity and
cash flows for each of the three years in the period ended October 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vital Images, Inc. as of
October 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 16, 1996
F-2
<PAGE>
VITAL IMAGES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 6,045,839 $ -- $ --
Accounts receivable, net of an allowance for doubtful
accounts of $10,400 at January 31, 1997 and $48,800
and $20,000 at October 31, 1996 and 1995, respectively............... 131,564 190,807 234,032
Prepaid expenses and other current assets............................. 190,018 92,114 40,860
----------- ----------- -----------
Total current assets................................................ 6,367,421 282,921 274,892
Equipment and leasehold improvements, net............................... 775,236 651,351 464,602
Patent costs, net....................................................... 23,458 8,639 --
Marketable securities, long-term........................................ 2,986,875 -- --
----------- ----------- -----------
Total assets........................................................ $10,152,990 $ 942,911 $ 739,494
=========== =========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable...................................................... 61,479 59,533 66,860
Accrued expenses...................................................... 166,029 196,850 218,479
Deferred revenues..................................................... 253,697 285,027 133,511
----------- ----------- -----------
Total current liabilities........................................... 481,205 541,410 418,850
Deferred revenues....................................................... 212,097 227,097 --
----------- ----------- -----------
Total liabilities................................................... 693,302 768,507 418,850
Commitments (Note 8)
Equity:
Common Stock: authorized, issued and outstanding shares
of $.01 par value; 1,000 in 1997, 1996 and 1995...................... 10 10 10
Additional paid-in capital............................................ 13,003,047 3,003,047 2,428,047
Deferred compensation................................................. (431,250) (460,000)
Net investment by Bio-Vascular, Inc................................... 3,162,004 3,138,520 854,011
Accumulated deficit................................................... (6,260,998) (5,507,173) (2,961,424)
Unrealized marketable securities holding loss......................... (13,125) -- --
----------- ----------- -----------
Total equity........................................................ 9,459,688 174,404 320,644
----------- ----------- -----------
Total liabilities and equity...................................... $10,152,990 $ 942,911 $ 739,494
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED OCTOBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
License fee revenue.................... $ 106,889 $ 73,819 $ 605,196 $2,528,118 $ 1,296,152
Maintenance revenue.................... 45,604 69,048 276,930 365,536 383,623
---------- --------- ----------- ---------- -----------
Total revenue..................... 152,493 142,867 882,126 2,893,654 1,679,775
Cost of revenue........................ 20,909 33,224 162,286 405,174 509,333
---------- --------- ----------- ---------- -----------
Gross margin...................... 131,584 109,643 719,840 2,488,480 1,170,442
Operating expenses:
Selling, general and administrative.... 568,683 506,565 1,805,522 879,473 1,098,104
Research and development............... 445,358 306,792 1,459,490 1,356,578 1,254,946
Acquisition costs...................... -- -- -- -- 71,573
---------- --------- ----------- ---------- -----------
Operating income (loss)........... (882,457) (703,714) (2,545,172) 252,429 (1,254,181)
Other income (expense), net............ 129,132 (791) 923 1,291 (11)
---------- --------- ----------- ---------- -----------
Income (loss) before income taxes...... (753,325) (704,505) (2,544,249) 253,720 (1,254,192)
Income tax provision................... 500 375 1,500 1,100 7,272
---------- --------- ----------- ---------- -----------
Net income (loss)................. $ (753,825) $(704,880) $(2,545,749) $ 252,620 $(1,261,464)
========== ========= =========== ========== ===========
Pro forma net
loss per share (unaudited)........... $ (.16) $ (.54)
========== ===========
Pro forma average number
of common shares
outstanding (unaudited).............. 4,750,000 4,742,000
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
VITAL IMAGES, INC.
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Balances at October 31, 1993............. 1,347,525 $ 1,913,960 297,500 $ 536,842
Compensation expense................ -- -- -- --
Merger with Bio-Vascular, Inc....... (1,346,525) (1,913,950) (297,500) (536,842)
Net amount received from
Bio-Vascular....................... -- -- -- --
Net loss............................ -- -- -- --
---------- ----------- -------- ---------
Balances at October 31, 1994............. 1,000 10 -- --
Net amount paid to Bio-Vascular..... -- -- -- --
Net income.......................... -- -- -- --
---------- ----------- -------- ---------
Balances at October 31, 1995............. 1,000 10 -- --
Issuance of stock option at below
market price....................... -- -- -- --
Stock compensation.................. -- -- -- --
Net amount received from
Bio-Vascular....................... -- -- -- --
Net loss............................ -- -- -- --
---------- ----------- -------- ---------
Balances at October 31, 1996............. 1,000 10 -- --
Contribution of capital from
Bio-Vascular
(unaudited)......................... -- -- -- --
Stock compensation (unaudited)...... -- -- -- --
Net amounts received from
Bio-Vascular
(unaudited)......................... -- -- -- --
Unrealized marketable
securities holding
loss (unaudited)................... -- -- -- --
Net loss (unaudited)................ -- -- -- --
---------- ----------- -------- ---------
Balances at January 31, 1997 (unaudited). 1,000 $ 10 -- --
========== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
VITAL IMAGES, INC.
STATEMENTS OF EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
NET MARKETABLE
ADDITIONAL INVESTMENT BY SECURITIES
PAID-IN DEFERRED BIO- ACCUMULATED HOLDING
CAPITAL COMPENSATION VASCULAR, INC. DEFICIT LOSS
----------- ------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balances at October 31, 1993................... -- $ (54,420) -- $(1,952,580) --
Compensation expense......................... -- 31,675 -- -- --
Merger with Bio-Vascular, Inc................ $ 2,428,047 22,745 -- -- --
Net amount received from Bio-Vasular......... -- -- $1,099,970 -- --
Net loss..................................... -- -- -- (1,261,464) --
----------- --------- ---------- ----------- ----------
Balances at October 31, 1994.................. 2,428,047 -- 1,099,970 (3,214,044) --
Net amount paid to Bio-Vascular............. -- (245,959) -- --
Net income.................................. -- -- -- 252,620 --
----------- --------- ---------- ----------- ----------
Balances at October 31, 1995 2,428,047 -- 854,011 (2,961,424) --
Issuance of stock option at below
market price.............................. 575,000 (575,000) -- -- --
Stock compensation.......................... -- 115,000 -- -- --
Net amount received from Bio-Vascular....... -- -- 2,284,509 -- --
Net loss.................................... -- -- -- (2,545,749) --
----------- --------- ---------- ----------- ----------
Balances at October 31, 1996 3,003,047 (460,000) 3,138,520 (5,507,173) --
Contribution of capital from Bio-Vascular
(unaudited)................................. 10,000,000 -- -- -- --
Stock compensation (unaudited).............. -- 28,750 -- -- --
Net amounts received from Bio-Vascular
(unaudited)................................. -- -- 23,484 -- --
Unrealized marketable securities holding
loss (unaudited)........................... -- -- -- -- $(13,125)
Net loss (unaudited)........................ -- -- -- (753,825) --
----------- --------- ---------- ----------- ----------
Balances at January 31, 1997 (unaudited)...... $13,003,047 $(431,250) $3,162,004 $(6,260,998) $(13,125)
=========== ========= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JANUARY 31, FOR THE YEARS ENDED OCTOBER 31,
-------------------- -----------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................................... $ (753,825) $(704,880) $(2,545,749) $ 252,620 $(1,261,464)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..................... 51,689 45,992 183,396 204,636 444,466
Provision for uncollectible accounts.............. 1,052 3,000 36,592 32,863 --
Other............................................. 4,555 1,573 1,073 (1,703) --
Non-cash compensation............................. 28,750 16,324 115,000 8,375 23,300
Changes in operating assets and liabilities:
Accounts receivable............................. 58,191 (2,100) 6,633 153,293 (181,427)
Other current assets............................ 24,974 (2,028) (51,255) (6,059) (30,423)
Current liabilities............................. (28,875) (110,122) (28,956) (50,731) 107,815
Deferred revenues............................... (46,331) (6,812) 378,613 (41,320) (134,841)
---------- --------- ----------- --------- -----------
Net cash provided by (used in)
operating activities......................... (659,820) (759,053) (1,904,653) 551,974 (1,032,574)
---------- --------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and improvements............. (175,575) (60,613) (375,047) (307,718) (230,814)
Dispositions of fixed assets........................ -- 3,330 3,830 1,703 --
Additions to patents................................ (14,819) -- (8,639) -- --
---------- --------- ----------- --------- -----------
Net cash used in investing activities............. (190,394) (57,283) (379,856) (306,015) (230,814)
---------- --------- ----------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Received from (paid to) Bio-Vascular, Inc........... 6,896,053 816,336 2,284,509 (245,959) 1,099,970
Payment on debt..................................... -- -- -- -- (123,521)
---------- --------- ----------- --------- -----------
Net cash provided by (used in)
financing activities............................. 6,896,053 816,336 2,284,509 (245,959) 976,449
---------- --------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................................... 6,045,839 -- -- -- (286,939)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................................... -- -- -- -- 286,939
========== ========= =========== ========= ===========
CASH AND CASH EQUIVALENTS AT
END OF PERIOD......................................... $6,045,839 -- -- -- --
========== ========= =========== ========= ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................. -- $ 984 $ 6,848
=========== ========= ===========
Acquisition of equipment under capital leases....... -- $ -- $ 12,049
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31,1997
AND 1996 IS UNAUDITED
(1) BACKGROUND, BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Background:
Vital Images, Inc. (the "Company") is a wholly-owned subsidiary of Bio-Vascular,
Inc. On October 28, 1996, the Bio-Vascular Board of Directors approved a plan to
separate Vital Images as an independent, publicly owned company. This
transaction is to be effected through the distribution of shares of the Company
to Bio-Vascular shareholders on or about April ___, 1997 (the "Distribution").
Shareholders will receive one share of the Company for each two shares of Bio-
Vascular common stock held. The Company has attempted to structure the
transaction as tax-free, but since no advance ruling will be sought from the
Internal Revenue Service, no assurance can be made about the final tax treatment
of the transaction. In anticipation of the Distribution, Bio-Vascular made a
capital contribution to Vital Images of the intercompany debt due from Vital
Images and assigned $10 million in cash, cash equivalents and marketable
securities to Vital Images effective November 1, 1996. Subsequently, Bio-
Vascular's Board of Directors agreed to make such additional capital
contributions as are necessary to bring the Company's cash, cash equivalents and
marketable securities balances to a combined total of $10 million effective as
of the Distribution Date. Bio-Vascular and the Company will also enter into a
number of agreements to facilitate the Distribution and the transition of the
Company to an independent business.
On May 24, 1994, Bio-Vascular acquired Vital Images through a "stock for stock"
exchange of 1,645,025 shares of Bio-Vascular Common Stock for the 1,645,025
shares of Vital Images common and Series A preferred stock outstanding. The
merger was accounted for under the "pooling-of-interests" method of accounting
for financial reporting purposes.
Business Description:
Vital Images, Inc. ("the Company") develops, markets and supports certain
software products for interactive visualization and analysis of three-
dimensional medical image data. The end users of Vital Images' software have
been primarily researchers and innovators who have adapted the core technology
to meet their needs. Vital Images is a leading developer of 3D volume rendering
software for medical research, clinical diagnosis and screening and surgical
planning. The Company's products, which are sold worldwide to hospitals, medical
imaging centers and surgery centers, are intended to reduce invasive procedures,
enhance visual information and produce fast results.
In December 1996, Vital Images received clearance from the FDA to market its new
Vitrea 3D medical visualization system. The Vitrea system permits the user to
visualize radiological images in two or three dimensions, and navigate or "fly
through" them interactively. The Vitrea system, which consists of proprietary
software from Vital Images, operates on the new Silicon Graphics O2 computer and
will be marketed as an integrated visualization system.
F-8
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31,1997
AND 1996 IS UNAUDITED
Basis of Presentation:
The financial statements reflect the assets, liabilities, revenues and expenses
of the Company as it was operated as a wholly-owned subsidiary of Bio-Vascular.
The Statements of Operations include an allocation of certain general corporate
expenses of Bio-Vascular for administration, accounting, finance, human
resources and regulatory functions. These allocations were based on estimates of
personnel time and effort spent on the Company. Management believes these
allocations were made on a reasonable basis. Corporate overhead allocations were
$57,000, $44,000, $226,000, $66,000 and $79,000 for the three month periods
ended January 31, 1997 and 1996, and for the years ended October 31, 1996, 1995
and 1994, respectively.
The Company's financing requirements are represented primarily by cash
transactions with Bio-Vascular and are reflected in the "Net Investment by Bio-
Vascular" equity account. Activity in the Net Investment by Bio-Vascular equity
account relates to net cash received from Bio-Vascular through intercompany
advances to fund the Company's operating deficits. In anticipation of the
Distribution, Bio-Vascular made a capital contribution to Vital Images of the
intercompany debt due from Vital Images and assigned $10 million in cash, cash
equivalents and marketable securities, to Vital Images, effective November 1,
1996, consisting of approximately $3,000,000 of marketable securities and
approximately $6,873,000 of cash and cash equivalents, along with the related
accrued interest and unamortized premiums.
The financial information included herein is not necessarily indicative of the
financial position, results of operations or cash flows of the Company in the
future or what the financial position, results of operations or cash flows would
have been if the Company had been a separate, independent company during the
periods presented. (See Note 3 of the Notes to Financial Statements for the
Unaudited Pro Forma Statements of Operations.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates:
The preparation of the Company's financial statements in conformity with
generally accepting accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-9
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31,1997
AND 1996 IS UNAUDITED
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company held no
cash or cash equivalents as of October 31, 1996 and 1995. Cash equivalents at
January 31, 1997, are primarily concentrated in one money market fund.
Marketable Securities:
Investments having original maturities in excess of three months are classified
as marketable securities. Investments are classified as short-term or long-term
in the balance sheet based on their maturity date.
At January 31, 1997, all of the Company's marketable securities are classified
as available-for-sale and all mature in two years or less. Available-for-sale
investments are recorded at market value with unrealized holding gains and
losses included as a separate component of equity.
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using accelerated and straight-line methods over the
estimated useful lives (generally three to seven years) or lease life. Major
replacements and improvements are capitalized, and maintenance and repairs which
do not improve or extend the useful lives of the respective assets are charged
to operations. The asset and related accumulated depreciation or amortization
accounts are adjusted for asset retirement or disposal with the resulting gain
or loss shown in non-operating income.
Revenue Recognition:
The Company recognizes software revenues upon shipment of the products. Revenue
from maintenance contracts is generally deferred and recognized on a
straight-line basis over the applicable maintenance contract period. Costs
associated with maintenance revenues are charged to operations as incurred.
Research and Development:
Research and development costs are expensed as incurred. Software development
costs incurred in the research and development of new software products are
expensed until the point that technological feasibility of the product is
established. Similar consideration is given to proven marketability in
evaluating net realizable value.
Income Taxes:
The Company accounts for income taxes using the liability method. The liability
method provides that deferred tax assets and liabilities are recorded based on
the differences between the tax bases of assets
F-10
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31,1997
AND 1996 IS UNAUDITED
and liabilities and their carrying amounts for financial reporting purposes
("temporary differences"). Temporary differences relate primarily to operating
loss carryforwards and research and experimentation credit carryforwards.
As a wholly-owned subsidiary of Bio-Vascular, the Company has not filed separate
federal income tax returns but rather is included in the federal income tax
returns filed by Bio-Vascular. The Company's allocated income tax provisions are
based on the "separate return" method and consist solely of certain state
minimum fees.
Earnings (loss) per share:
Given the Company's historical capital structure as a wholly-owned subsidiary of
Bio-Vascular and the changes therein to be effected by the spin-off of the
Company from Bio-Vascular, historical earning per share amounts are not
presented in the financial statements as they are not considered to be
meaningful.
Unaudited pro forma net loss per share:
Unaudited pro forma net loss per share is calculated as if the Distribution
occurred at the beginning of each of the periods for which the unaudited pro
forma net loss per share is presented and is based on the number of shares of
Bio-Vascular stock outstanding, as adjusted for the distribution ratio of one
share of the Company's Common Stock for each two shares of Bio-Vascular Common
Stock held.
Interim Periods:
The balance sheet at January 31, 1997, and the statements of operations and cash
flows for the three month periods ended January 31, 1997 and 1996, and the
statement of equity for the three month period ended January 31, 1997, together
with the related notes, are unaudited, but in the opinion of management of the
Company, include all adjustments (which consist only of accruals of a normal
recurring nature) necessary to present fairly, in all materials respects, the
financial position at January 31, 1997, and the results of operations and cash
flows of the Company for the three month periods ended January 31, 1997 and
1996.
(3) UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
As a result of the Distribution, the Company believes that the following pro
forma financial information is important to enable the reader to obtain a more
meaningful understanding of the Company's results of operations. The pro forma
financial information set forth below is for information purposes and may not be
indicative of Vital Images' future performance, and does not necessarily reflect
the results of operations of Vital Images had Vital Images operated as a
separate, stand-alone entity during each of the periods presented.
F-11
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31,1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JANUARY 31, 1997 FOR THE YEAR ENDED OCTOBER 31, 1996
--------------------------------------- ----------------------------------------
PRO PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 152,493 $ 152,493 $ 882,126 $ 882,126
Cost of revenue................ 20,909 20,909 162,286 162,286
--------- ----------- ----------- -----------
Gross margin............. 131,584 131,584 719,840 719,840
Operating expenses:
Selling, general and
administrative............ 568,683 $183,000 (1) 751,683 1,805,522 $730,000 (1) 2,535,522
Research and development....... 445,358 42,000 (1) 487,358 1,459,490 170,000 (1) 1,629,490
--------- --------- ----------- ----------- -------- -----------
Operating loss........... (882,457) (225,000) (1,107,457) (2,545,172) (900,000) (3,445,172)
Other income, net.............. 129,132 129,132 923 -- (2) 923
--------- --------- ----------- ----------- -------- -----------
Loss before income
taxes..................... (753,325) (225,000) (978,325) (2,544,249) (900,000) (3,444,249)
Income tax provision........... 500 500 1,500 1,500
--------- --------- ----------- ----------- --------- -----------
Net loss................. $(753,825) $(225,000) $ (978,825) $(2,545,749) $(900,000) $(3,445,749)
========= ========= =========== =========== ========= ===========
Pro forma adjusted net loss
$(.21) $ (.73)
per share................. =========== ===========
Pro forma average number of
4,750,000 ===========
common shares outstanding. =========== 4,742,000
===========
</TABLE>
____________________________________
(1) Represents the additional estimated costs expected to be incurred by Vital
Images on a prospective basis, including the incremental costs associated
with Vital Images' status as a public company, such as additional executive
salaries, audit fees, directors' and officers' insurance, annual meetings,
printing fees and directors' fees. A portion of such costs are included in
the historical financial statements of Vital Images. Incremental costs are
estimated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Executive compensation................ $125,000 $500,000
Audit and legal....................... 40,000 160,000
Shareholder relations................. 40,000 160,000
Directors' and officers' insurance.... 13,000 50,000
Annual directors' fees and expenses... 7,000 30,000
-------- --------
$225,000 $900,000
======== ========
</TABLE>
F-12
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
(2) Does not include an allocation of interest income based on the ratio of
cash, cash equivalents and marketable securities to be contributed to Vital
Images over total investment assets. Under Bio-Vascular's investment
strategies, interest income associated with this $10,000,000 to be
contributed was approximately $550,000 for the year ended October 31, 1996,
which may not have been the same, had such funds been maintained and
invested by Vital Images. As cash, cash equivalents and marketable
securities totaling $10,000,000 were assigned to Vital Images effective
November 1, 1996, results for the three months ended January 31, 1997, do
reflect investment earnings.
(4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
------------ ---------------- ---------------
<S> <C> <C> <C>
Equipment and leasehold improvements:
Furniture and fixtures................................. $ 148,932 $ 120,618 $ 66,453
Computer equipment..................................... 1,334,713 1,192,671 1,000,072
Computer software...................................... 145,078 139,860 114,091
Leasehold improvements................................. 23,048 23,048 23,048
Less accumulated depreciation and amortization......... (876,535) (824,846) (739,062)
---------- --------------- --------------
Equipment and leasehold improvements, net.............. $ 775,236 $ 651,351 $ 464,602
========== =============== ==============
Accrued expenses:
Payroll, other employee benefits and related taxes..... $ 97,656 $ 108,302 $ 76,733
Royalties.............................................. -- -- 78,294
Research reimbursement, shareholder.................... -- -- 40,000
Other.................................................. 68,373 88,548 23,452
---------- --------------- --------------
Total accrued expenses................................. $ 166,029 $ 196,850 $ 218,479
========== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED OCTOBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994
-------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Depreciation and amortization expense:
Depreciation.......................... 51,689 45,992 $ 183,396 $ 160,176 $ 164,929
Amortization of intangibles........... -- -- -- 44,460 66,884
Amortization of software
-------- -------- ----------- ---------- ----------
development costs.................... -- -- -- -- 212,653
-------- -------- ----------- ---------- ----------
Total depreciation and
======== ======== =========== ========== ==========
amortization expense............... $51,689 $45,992 $ 183,396 $ 204,636 $ 444,466
======== ======== =========== ========== ==========
</TABLE>
F-13
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
(5) DEFERRED REVENUE
Deferred revenue consists of deferred maintenance contract revenue. Deferred
revenue at January 31, 1997 and October 31, 1996, also includes amounts received
from Advanced Technology Laboratories, Inc. ("ATL") in August 1996 to enter into
an exclusive development agreement with Vital Images. The agreement with ATL is
a five year agreement to co-develop Vital Images' 3D technology for use in ATL's
ultrasound imaging systems.
The contract fee revenue of $300,000 received from ATL is being amortized on a
straight-line basis over the five year term of the agreement. Unearned contract
development amounts of $100,000, also received from ATL, are being recorded as
an offset against research and development expense as development expenses are
incurred relating to the ATL - Vital Images joint development agreement.
(6) INCOME TAXES
The recorded income tax provision for each of the periods presented represents
state minimum taxes. As of October 31, 1996, the Company has $1.6 million of
net operating loss carryforwards subject to limitation under Section 382 of the
Internal Revenue Code (IRC) due to the change in ownership. These carryforwards
begin to expire in 2005. In addition, the Company has $237,000 of Research and
Experimentation (R&E) credits, of which $137,000 are limited by IRC Section 383.
These credits begin to expire in 2004. The deferred tax assets associated with
the net operating losses and R&E credits have been totally offset by a valuation
allowance as the future utilization of such losses and credits is uncertain.
(7) EQUITY
Change in Authorized Shares:
The Company intends, prior to the Distribution Date, to increase the number of
authorized shares of common stock of the Company from 1,000 shares to 20,000,000
shares. Additionally, a new class of preferred stock will be created with
5,000,000 shares authorized.
Warrants:
In connection with a 1995 stock offering and issuance of Bio-Vascular Common
Stock, Bio-Vascular issued to the underwriter warrants to purchase 90,000 share
of Common Stock, at an exercise price of $16.375 per share. Pursuant to the
Distribution Agreement with Bio-Vascular, Vital Images will assume its
proportionate share of obligations represented by such warrants such that, after
the Distribution Date, each warrant will be exerciseable for shares of both Bio-
Vascular Common Stock and Vital Images Common Stock according to the
Distribution Ratio. These warrants are exerciseable until 1999.
F-14
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
Stock Option Plans:
The Company has no stock options outstanding. The Company does intend to adopt
stock option plans and grant options to Bio-Vascular option holders pursuant to
the terms of an Employee Benefits Agreement between Bio-Vascular and the
Company. While these grants will take place on the Distribution Date, the
ultimate number of options granted and the associated exercise price is not
presently determinable as, in accordance with Emerging Issues Task Force Issue
No. 90-9, the actual number of options and exercise price is dependent on market
conditions subsequent to the Distribution. The Company has also adopted a 1997
Stock Option and Incentive Plan and Director Stock Option Plan, and has reserved
675,000 and 75,000 shares, respectively, for issuance under such plans.
At January 31, 1997, options to purchase 1,293,720 Bio-Vascular shares are
outstanding, and 797,552 are exerciseable.
Rights Plan:
The Company intends, prior to the Distribution Date, to declare a dividend
distribution of one Preferred Stock Purchase Right (Right) on each outstanding
share of the Company's common stock. With certain exceptions, the Right will
become exerciseable only in the event that an acquiring party accumulates 15% or
more of the Company's common stock or a party announces an offer to acquire 15%
or more of the Company's common stock. The Right will expire on ______________,
if not previously redeemed or exercised. Each Right will entitle the holder to
purchase one-tenth of a share of preferred stock at a price of $_________. In
addition, upon the occurrence of certain events, holders of the Right will be
entitled to purchase for the exercise price, a number of preferred stock
fractional interests having a then current market value of twice the exercise
price or a defined number of shares of an acquiring entity's common stock at a
then current market value of twice the exercise price. The Company will
generally be entitled to redeem the Right at $.001 per Right at any time until
the tenth day following the acquisition of 15% or more of the Company's common
stock or the point at which the Company's Board of Directors determines that a
person is an Adverse Person, as defined by the Rights Agreement.
New Accounting Standard:
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation. In Fiscal 1997, the Company
intends to adopt the disclosure provisions of the statement while continuing to
account for options and other stock-based compensation using the intrinsic
value-based method.
(8) COMMITMENTS
Operating Leases:
The Company leases office facilities in Fairfield, Iowa, under a non-cancelable
operating lease expiring on May 31, 1997. The lease includes an option to renew
for one four-year period. In February 1997, the
F-15
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
Company entered into a new noncancelable operating lease in Minneapolis,
Minnesota expiring January 31, 2002, with an option of early termination after
three years on certain conditions. Total annual base rental expense for this new
lease is approximately $99,000 per year. On September 1, 1997, the Company will
increase its leased space in Minneapolis. Accordingly, its minimum annual lease
payments will increase to $135,000 per year. The Company is also required to
contribute to the cost of certain building improvements and operating costs.
Total rent expense was $74,400, $74,340 and $92,385 for the years ended October
31, 1996, 1995 and 1994, respectively, and $18,585 for the three months ended
January 31, 1997.
The lease on the Minneapolis facility also requires the Company to post a
security deposit of up to $150,000 if, during the term of the lease, the
aggregate balance of cash and marketable securities owned by the Company falls
below $3,000,000 or its net worth falls below $1,000,000.
(9) EMPLOYEE BENEFIT PLANS
Salary Reduction Plan:
Prior to the Distribution, the Company's employees participated in Bio-
Vascular's salary reduction plan, which qualifies under Section 401(k) of the
Internal Revenue Code. Employee contributions are limited to 15% of their annual
compensation, subject to annual limitations. At the discretion of the Board of
Directors, Bio-Vascular may make matching contributions equal to a percentage of
the salary reduction contribution or other discretionary amount. There have been
no contributions to the plan by Bio-Vascular since its inception. The Company
intends to adopt its own benefit plan.
Employee Stock Purchase Plan:
Prior to the Distribution, the Company's employees participated in Bio-
Vascular's Employee Stock Purchase Plan. The Company intends to adopt its own
plan under which 250,000 shares of common stock will be reserved for future
issuance. The Plan will be established to enable employees of the Company to
invest in Company stock through payroll deduction. Shares of stock will be
granted to employees at 85 percent of market value.
F-16
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
(10) MAJOR CUSTOMERS AND GEOGRAPHIC DATA
<TABLE>
<CAPTION>
PERCENTAGE
OF
SIGNIFICANT PERCENTAGE ACCOUNTS
CUSTOMER SALES OF SALES RECEIVABLE
----------- ----- -------- ----------
<S> <C> <C> <C> <C>
Year ended October 31, 1996 ................ Mitsubishi $98,992 11% 9%
Chemical
Year ended October 31, 1995 ................ CogniSeis $1,781,558 62% ----
Development, Inc.
Year ended October 31, 1994 ................ ---- ---- ---- ----
</TABLE>
The Company's accounts receivable is generally concentrated with a small base of
customers. As of January 31, 1997, four customers accounted for 63% of accounts
receivable, while at October 31, 1996, five customers accounted for 69% of
accounts receivable and at October 31, 1995, three customers accounted for 59%
of accounts receivable.
Export sales amounted to 30%, 13%, and 39% of total sales for 1996, 1995 and
1994, respectively and 31% and 23% for the three months ended January 31, 1997
and 1996, respectively. Substantially all of the Company's export sales are
negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area
are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
--------------------------- -------------------------------------
1997 1996 1996 1995 1994
-------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Asia and Pacific Region ......... $18,850 $26,259 $144,123 $210,425 $269,160
Europe .......................... 27,640 6,473 111,166 114,672 359,468
Canada and Mexico ............... 1,395 589 6,263 56,290 33,826
</TABLE>
F-17
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
The following table sets forth the revenue of the Company by customer profile
for the years ended October 31, 1996, 1995 and 1994. For the three month
periods ended January 31, 1997 and 1996, revenues were primarily from Medical.
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------
1996 1995 1994
-------- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Medical......................... $667 $ 467 $428
Geoscience...................... 59 2127(1) 736
Microscopy...................... 93 243 440
Other........................... 63 57 76
---- ------ ------
$882 $2,894 $1,680
==== ====== ======
</TABLE>
(1) Includes $1,500 of one-time license fee revenue. In exchange for this
license, Vital Images also received future royalty payments expected to
begin in calendar 1997. Any royalties will cease at the earlier of January
1, 2001 or at such time as the aggregate royalties received equal $2,000.
There can be no assurance that royalties received under this agreement, if
any, will aggregate to the $2,000 on or before January 1, 2001.
F-18
<PAGE>
PART II
-------
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The financial statements filed as a part of this Registration Statement on
Form 10 are listed on the Index to Financial Statements contained on page
F-1 of the Information Statement forming a part hereof.
(b) Exhibits to Registration Statement on Form 10:
<TABLE>
<CAPTION>
Item No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of Vital Images, Inc. ......................... Filed herewith electronically.
3.2 Bylaws of Vital Images, Inc. ............................................ Filed herewith electronically.
4.1 Articles of Incorporation of Vital Images, Inc. ......................... See Exhibit 3.1.
4.2 Bylaws of Vital Images, Inc. ............................................ See Exhibit 3.2.
4.3 Form of Certificate representing Vital Images, Inc.
Common Stock............................................................. Filed herewith electronically.
4.4 Rights Agreement, dated effective as of ________, 1997, between Vital
Images, Inc. and ____________, which includes as Exhibit A the form
of Rights Certificate.................................................... Filed herewith electronically.
4.5 Form of Certificate of Designation, Preferences and
Rights of Series A Junior Preferred Stock
of Vital Images, Inc. ................................................... Filed herewith electronically.
8.1 Opinion of Coopers & Lybrand L.L.P.,
dated January 10, 1997................................................... Filed herewith electronically.
8.2 Opinion of Coopers & Lybrand L.L.P., dated
March 6, 1997............................................................ Filed herewith electronically.
10.1 Form of Distribution Agreement, to be dated effective
as of _________, 1997 between Bio-Vascular, Inc. and
Vital Images, Inc. ...................................................... Filed herewith electronically.
10.2 Form of Employee Benefits Agreement, to be
dated effective as of __________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically.
10.3 Form of Tax Sharing Agreement, to be dated
effective as of _________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
10.4 Form of Transition Services Agreement, to be
dated effective as of _________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically.
10.5 Incentive Stock Option Adjustment Plan................................... Filed herewith electronically.
10.6 1990 Stock Option Plan................................................... Filed herewith electronically.
10.7 1992 Stock Option Plan................................................... Filed herewith electronically.
10.8 1992 Director Stock Option Adjustment Plan............................... Filed herewith electronically.
10.9 1995 Stock Incentive Adjustment Plan..................................... Filed herewith electronically.
10.10 Employee Stock Purchase Plan............................................. Filed herewith electronically.
10.11 1997 Stock Option and Incentive Plan..................................... Filed herewith electronically.
10.12 1997 Director Stock Option Plan.......................................... Filed herewith electronically.
10.13 Stock Option Adjustment Agreement between
Vital Images, Inc. and Andrew M. Weiss................................... Filed herewith electronically.
10.14 License Agreement dated August 25, 1995
between Vital Images, Inc. and CogniSeis
Development, Inc. CogniSeis Development, Inc. .......................... Filed herewith electronically.
10.15 Lease Agreement dated May 14, 1993 between
Vital Images, Inc. and Douglas Green IRA Trust........................... Filed herewith electronically.
10.16 Lease Agreement dated January 31, 1997 between
ACKY - 3100 Lake Limited Partnership and
Vital Images, Inc. ...................................................... Filed herewith electronically.
10.17 Form of Change in Control Agreement between
Vital Images, Inc. and Andrew M. Weiss, Vincent A.
Argiro, Ph.D., David A. Davis, Gregory S. Furness
and Jay D. Miller........................................................ Filed herewith electronically.
10.18 Joint Development Agreement dated August 14,
1996 between Vital Images, Inc. and ATL Ultrasound, Inc.* ............... Filed herewith electronically.
</TABLE>
__________________________________
* Portions of such exhibit are subject to a request for confidential
treatment filed with the Commission by the Registrant.
II-2
<PAGE>
<TABLE>
<S> <C> <C>
10.19 Sales and Marketing Agreement dated August 14,
1996 between Vital Images and ATL Ultrasound, Inc.* ..................... Filed herewith electronically.
23.1 Consent of Coopers & Lybrand L.L.P., dated
March 11, 1997........................................................... Filed herewith electronically.
27.1 Financial Data Schedule.................................................. Filed herewith electronically.
</TABLE>
___________________________________
* Portions of such exhibit are subject to a request for confidential
treatment filed with the Commission by the Registrant.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 12, 1997 VITAL IMAGES, INC.
By: /s/ Andrew M. Weiss
----------------------------------------
Andrew M. Weiss
President and Chief Executive Officer
II-4
<PAGE>
VITAL IMAGES, INC.
REGISTRATION STATEMENT ON FORM 10
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
Item No. Description Method of Filing
- -------- ----------- ----------------
3.1 Articles of Incorporation of Vital Images, Inc. ......................... Filed herewith electronically.
3.2 Bylaws of Vital Images, Inc. ............................................ Filed herewith electronically.
4.1 Articles of Incorporation of Vital Images, Inc. ......................... See Exhibit 3.1.
4.2 Bylaws of Vital Images, Inc. ............................................ See Exhibit 3.2.
4.3 Form of Certificate representing Vital Images, Inc.
Common Stock............................................................. Filed herewith electronically.
4.4 Rights Agreement, dated effective as of ________, 1997, between Vital
Images, Inc. and ____________, which includes as Exhibit A the form of
Rights Certificate...................................................... Filed herewith electronically.
4.5 Form of Certificate of Designation, Preferences and
Rights of Series A Junior Preferred Stock
of Vital Images, Inc. ................................................... Filed herewith electronically.
8.1 Opinion of Coopers & Lybrand L.L.P.,
dated January 10, 1997................................................... Filed herewith electronically.
8.2 Opinion of Coopers & Lybrand L.L.P., dated
March 6, 1997............................................................ Filed herewith electronically.
10.1 Form of Distribution Agreement, to be dated effective
as of _________, 1997 between Bio-Vascular, Inc. and
Vital Images, Inc. ...................................................... Filed herewith electronically.
10.2 Form of Employee Benefits Agreement, to be
dated effective as of __________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically.
10.3 Form of Tax Sharing Agreement, to be dated
effective as of _________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically
10.4 Form of Transition Services Agreement, to be
dated effective as of _________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc. ............................... Filed herewith electronically.
10.5 Incentive Stock Option Adjustment Plan................................... Filed herewith electronically.
</TABLE>
E-1
<PAGE>
<TABLE>
<S> <C> <C>
10.6 1990 Stock Option Plan................................................... Filed herewith electronically.
10.7 1992 Stock Option Plan................................................... Filed herewith electronically.
10.8 1992 Director Stock Option Adjustment Plan............................... Filed herewith electronically.
10.9 1995 Stock Incentive Adjustment Plan..................................... Filed herewith electronically.
10.10 Employee Stock Purchase Plan............................................. Filed herewith electronically.
10.11 1997 Stock Option and Incentive Plan..................................... Filed herewith electronically.
10.12 1997 Director Stock Option Plan.......................................... Filed herewith electronically.
10.13 Stock Option Adjustment Agreement between
Vital Images, Inc. and Andrew M. Weiss................................... Filed herewith electronically.
10.14 License Agreement dated August 25, 1995
between Vital Images, Inc. and CogniSeis
Development, Inc. CogniSeis Development, Inc. .......................... Filed herewith electronically.
10.15 Lease Agreement dated May 14, 1993 between
Vital Images, Inc. and Douglas Green IRA Trust........................... Filed herewith electronically.
10.16 Lease Agreement dated January 31, 1997 between
ACKY - 3100 Lake Limited Partnership and
Vital Images, Inc. ...................................................... Filed herewith electronically.
10.17 Form of Change in Control Agreement between
Vital Images, Inc. and Andrew M. Weiss, Vincent A.
Argiro, Ph.D., David A. Davis, Gregory S. Furness
and Jay D. Miller........................................................ Filed herewith electronically.
10.18 Joint Development Agreement dated August 14,
1996 between Vital Images, Inc. and ATL Ultrasound, Inc* ................ Filed herewith electronically.
10.19 Sales and Marketing Agreement dated August 14,
1996 between Vital Images and ATL Ultrasound, Inc.* ..................... Filed herewith electronically.
23.1 Consent of Coopers & Lybrand L.L.P., dated March 11, 1997................ Filed herewith electronically.
27.1 Financial Data Schedule.................................................. Filed herewith electronically.
</TABLE>
___________________________________
* Portions of such exhibit are subject to a request for confidential
treatment filed with the Commission by the Registrant.
E-2
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
VITAL IMAGES, INC.
The undersigned incorporator, being a natural person, eighteen years of age or
older, in order to form a corporate entity under Minnesota Statutes, Chapter
302A, adopts the following Articles of Incorporation:
ARTICLE I.
The name of this Corporation is Vital Images, Inc. (the "Corporation").
ARTICLE II.
The registered office of the Corporation in Minnesota is: 3100 West Lake Street,
Suite 100, Minneapolis, Minnesota 55416.
ARTICLE III.
The aggregate number of shares of stock which the Corporation shall have
authority to issue is twenty-five million (25,000,000) shares, twenty million
(20,000,000) of which shall be designated common stock, $0.01 par value
(hereinafter referred to as "Common Stock"), and five million (5,000,000) of
which shall be designated preferred stock, $0.01 par value (hereinafter referred
to as "Preferred Stock"). The Board of Directors is authorized to establish,
from the authorized shares of Preferred Stock, one or more classes or series of
shares, to designate each such class and series, and to fix the rights and
preferences of each such class and series. Without limiting the authority of the
Board of Directors granted hereby, each such class or series of Preferred Stock
shall have such voting powers (full or limited or no voting powers), such
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions as shall be stated and
expressed in the resolution or resolutions providing for the issue of such class
or series of Preferred Stock as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares thereof. Except as provided in the
resolution or resolutions of the Board of Directors creating any series of
Preferred Stock, the shares of Common Stock shall have the exclusive right to
vote for the election and removal of directors and for all other purposes. Each
holder of Common Stock shall be entitled to one vote for each share held.
<PAGE>
ARTICLE IV.
The name and address of the incorporator of this Corporation is:
<TABLE>
<CAPTION>
NAME ADDRESS
- ---- -------
<S> <C>
Mark J. Sexton Oppenheimer Wolff & Donnelly
Plaza VII, Suite 3400
45 South Seventh Street
Minneapolis, MN 55402-1609
</TABLE>
ARTICLE V.
Shares of the Corporation acquired by the Corporation shall become authorized
but unissued shares and may be reissued as provided in these Articles of
Incorporation.
ARTICLE VI.
No shareholder of this Corporation shall have any cumulative voting rights.
ARTICLE VII.
No shareholder of this Corporation shall have any preemptive rights by virtue of
Section 302A.413 of the Minnesota Statutes (or similar provisions of future law)
to subscribe for, purchase or acquire any shares of the Corporation of any class
or series, whether unissued or now or hereafter authorized, or any obligations
or other securities convertible into or exchangeable for any such shares.
ARTICLE VIII.
Any action required or permitted to be taken at a meeting of the Board of this
Corporation may be taken by written action signed by the number of directors
that would be required to take such action at a meeting of the Board of
Directors at which all directors are present.
ARTICLE IX.
No director of this Corporation shall be personally liable to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty by such
director as a director; provided, however, that this Article shall not eliminate
or limit the liability of a director to the extent provided by applicable law
(i) for any breach of the director's duty of loyalty to the Corporation or its
shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section
302A.559 or 80A.23 of the Minnesota Statutes, as amended; (iv) for any
transaction from which the director derived an improper personal benefit; or (v)
for any act or omission occurring prior to the effective date of this Article.
If the Minnesota Business Corporation Act hereafter is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director
2
<PAGE>
of the Corporation in addition to the limitation and elimination of personal
liability provided herein, shall be eliminated or limited to the fullest extent
permitted by the Minnesota Business Corporation Act, as so amended. No amendment
to or repeal of this Article IX shall apply to, or have any effect on, the
liability or alleged liability of any director for or with respect to any acts
or omissions of such director occurring prior to such amendment or repeal.
ARTICLE X.
The Corporation shall indemnify to the fullest extent permissible under the
provisions of Chapter 302A of the Minnesota Statutes, as amended, (as now or
hereafter in effect) any person made or threatened to be made a party to or
witness in any threatened, pending, or completed civil, criminal,
administrative, arbitration, or investigative proceeding, including a proceeding
by or in the right of the Corporation by reason of the fact that such person or
person's testator or intestate, is or was a director or officer of the
Corporation, or by reason of the fact that such director or officer, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation, or whose duties in that position involved service as a director,
officer, partner, trustee or agent of another organization or employee benefit
plan, against all judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements. Nothing contained herein shall affect any rights to
indemnification to which employees or agents of the Corporation other than
directors and officers may be entitled under the provisions of Chapter 302A of
the Minnesota Statutes, as amended. Any repeal or modification of this Article X
shall be prospective only, and shall not adversely affect any right to
indemnification or protection of a director or officer of the Corporation
existing at the time of such repeal or modification. No amendment to or repeal
of this Article shall apply to or have any effect on the liability of or alleged
liability of any director or the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of March, 1997.
INCORPORATOR:
/s/ Mark J. Sexton
----------------------------------------
Mark J. Sexton
3
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
VITAL IMAGES, INC.
ARTICLE I.
Offices.
-------
Section 1. Principal Executive Office. The principal executive office of
the Corporation shall be determined from time to time by the Board of Directors.
Section 2. Registered Office. The registered office of the Corporation
required by Chapter 302A of the Minnesota Statutes to be maintained in the State
of Minnesota is as designated in the Articles of Incorporation. The Board of
Directors of the Corporation may, from time to time, change the location of the
registered office. On or before the day that such change is to become effective,
a certificate of such change and of the new address of the new registered office
shall be filed with the Secretary of State of the State of Minnesota.
Section 3. Other Office. The Corporation may establish and maintain such
other offices, within or without the State of Minnesota, as are from time to
time authorized by the Board of Directors.
ARTICLE II.
Meetings of Shareholders.
------------------------
Section 1. Place of Meetings. Each meeting of the shareholders shall be
held at the principal executive office of the Corporation or at such other place
as may be designated by the Board of Directors, the Chairman of the Board, or
the President and Chief Executive Officer; provided, however, that any meeting
called by or at the demand of a shareholder or shareholders shall be held in the
county where the principal executive office of the Corporation is located.
Section 2. Regular Meetings. Regular meetings of the shareholders may be
held on an annual or other less frequent basis as determined by the Board of
Directors; provided, however, that if a regular meeting has not been held during
the immediately preceding 15 months, a shareholder or shareholders holding three
percent or more of the voting power of all shares entitled to vote may demand a
regular meeting of shareholders by written demand given to the Chairman of the
Board or the President and Chief Executive Officer of the Corporation. If said
officer fails to call and hold such meeting within ninety (90) days after
receipt of the demand, the shareholder making the demand shall have the right
and power to call such meeting. At each regular meeting the shareholders shall
elect qualified successors for directors who serve for an indefinite term or
whose terms have expired or are due to expire within six months after the date
of the meeting and may transact any other business, provided, however, that no
business with respect to which special notice is required by law shall be
transacted unless such notice shall have been given.
Section 3. Notice of Regular Meeting. Unless otherwise required by law,
written notice of the time and place of each regular shareholder meeting shall
be mailed, postage prepaid, at least ten (10) but not more than sixty (60) days
before such meeting, to each shareholder entitled to vote thereat at his or her
address as the same appears upon the books of the Corporation.
<PAGE>
Section 4. Special Meetings. A special meeting of the shareholders may be
called for any purpose or purposes at any time by the Chairman of the Board or
the President and Chief Executive Officer and shall be called by the Chairman or
the President and Chief Executive Officer at the request in writing of two or
more members of the Board of Directors or at the request in writing of one or
more shareholders holding not less than ten percent of the voting power of all
shares of the Corporation entitled to vote. Such request which shall be by
registered mail or delivered in person to the Chairman or the President and
Chief Executive Officer of the Corporation specifying the purposes of such
meeting.
Section 5. Notice of Special Meetings. Written notice of the time, place
and purpose or purposes of a special meeting shall be mailed, postage prepaid,
at least five (5) but not more than sixty (60) days before such meeting, to each
shareholder entitled to vote at such meeting at his or her address as the same
appears upon the books of the Corporation.
Section 6. Business to be Transacted. No business shall be transacted at
any special meeting of shareholders except that stated in the notice of the
meeting.
Section 7. Waiver of Notice. A shareholder may waive notice of the date,
time, place and purpose or purposes of a meeting of shareholders. A waiver of
notice by a shareholder entitled to notice is effective whether given before, at
or after the meeting, and whether given in writing, orally or by attendance.
Attendance by a shareholder at a meeting is a waiver of notice of that meeting,
unless the shareholder objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened,
or objects before a vote on an item of business because the item may not
lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
Section 8. Quorum and Adjournment. The holders of a majority of the voting
power of the shares entitled to vote at a meeting, present in person or by proxy
at the meeting, shall constitute a quorum at all meetings of the shareholders
for the transaction of business except as otherwise provided by statute or by
the Articles of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
noticed. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment, even
though the withdrawal of a number of shareholders originally present leaves less
than the proportion or number otherwise required for a quorum.
Section 9. Voting Rights. A shareholder may cast his or her vote in person
or by proxy. When a quorum is present at the time a meeting is convened, the
affirmative vote of the holders of a majority of the shares entitled to vote on
any question present in person or by proxy shall decide such question unless the
question is one upon which, by express provision of the applicable statute or
the Articles of Incorporation, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
Section 10. Proxies. A shareholder may cast or authorize the casting of a
vote by filing a written appointment of a proxy with an officer of the
Corporation at or before the meeting at which the appointment is to be
effective. The shareholder may sign or authorize the written appointment by
telegram, cablegram or other means of electronic transmission setting forth or
submitted with
2
<PAGE>
information sufficient to determine that the shareholder authorized such
transmission. Any copy, facsimile, telecommunication or other reproduction of
the original of either the writing or transmission may be used in lieu of the
original, provided that it is a complete and legible reproduction of the entire
original. No proxy shall be valid after eleven (11) months from its date, unless
the proxy expressly provides for a longer period.
Section 11. Manner of Voting. Each shareholder shall at every meeting of
the shareholders be entitled to one vote in person or by proxy for each share of
the capital stock having voting power held by such shareholder and except where
the transfer books of the Corporation have been closed or a date has been fixed
as a record date for the determination of its shareholders entitled to vote, no
share of stock that has been transferred on the books of the Corporation within
twenty (20) days next preceding any election of directors shall be voted in such
election of directors.
Section 12. Record Date. The Board of Directors may fix a date, not
exceeding sixty (60) days preceding the date of any meeting of shareholders, as
a record date for the determination of the shareholders entitled to notice of
and to vote at such meeting, and in such case only shareholders of record on the
date so fixed, or their legal representatives, shall be entitled to notice of
and to vote at such meeting, notwithstanding any transfer of any shares on the
books of the Corporation after any record date so fixed. The Board of Directors
may close the books of the Corporation against transfers of shares during the
whole or any part of such period.
Section 13. Organization of Meetings. The Chairman of the Board shall
preside at all meetings of the shareholders. In the absence of the Chairman of
the Board or if the office of Chairman of the Board is vacant, the President and
Chief Executive Officer shall preside at meetings of the shareholders. The
Secretary shall act as secretary of all meetings of the shareholders, or in his
or her absence any person appointed by the presiding officer shall act as
secretary.
Section 14. Electronic Conferences and Participation by Electronic means.
A conference among shareholders conducted by any means of communication through
which the shareholders may simultaneously hear each other during the conference
shall constitute a regular or special meeting of shareholders, provided the
notice of the conference is given to every holder of shares entitled to vote
pursuant to sections 3 or 5 hereof. A shareholder may participate in a regular
or special meeting of shareholders by any means of communication through which
the shareholder, other shareholders so participating, and all shareholders
physically present at the meeting may simultaneously hear each other during the
meeting. Such participation in a meeting shall constitute presence at the
meeting in person or by proxy.
Section 15. Action Without a Meeting. Any action required or permitted to
be taken at a shareholders' meeting may be taken without a meeting if authorized
by a writing or writings signed by all of the holders of shares who would be
entitled to vote on that action. Such action shall be effective on the date on
which the last signature is placed on such writing or writings, unless a
different effective date is provided in the written action. If any action so
taken requires a certificate to be filed in the office of the Secretary of
State, the officer signing such certificate shall state therein that the action
was effected in the manner aforesaid.
3
<PAGE>
ARTICLE III.
Board of Directors.
------------------
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under its Board of Directors which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these Bylaws required to be
exercised or done by the shareholders.
Section 2. Number and Term of Office. The number of directors which
shall constitute the whole board shall be at least one (1), or such other number
as may be determined by the Board of Directors or by the shareholders at a
regular or special meeting. Except as otherwise permitted by statute, the
directors shall be elected at each regular meeting of the Corporation's
shareholders (or at any special meeting of the shareholders called for that
purpose) by a majority of the voting power of the shares represented and voting,
and each director shall be elected to serve until the next regular meeting of
the shareholders and thereafter until a successor is duly elected and qualified,
unless a prior vacancy shall occur by reason of death, resignation, or removal
for office. Directors shall be natural persons, but need not be shareholders.
Section 3. Resignation and Removal. Any director may resign at any time
by giving written notice to the Corporation. Such resignation shall take effect
at the date of the receipt of such notice, or at any later time specified
therein, and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Any director may be
removed at any time, with or without cause, by the affirmative vote of the
holders of a majority of the voting shares entitled to elect such director.
Section 4. Vacancies. If the office of any director becomes vacant by
reason of death, resignation, removal, disqualification, or otherwise, the
directors then in office, although less than a quorum, by a majority vote, may
choose a successor who shall hold office for the unexpired term in respect of
which such vacancy occurred. With respect to the initial election of a director
to fill a newly created directorship resulting from an increase in the number of
directors by action of the Board of Directors in the manner permitted by
statute, such vacancy shall be filled by the affirmative vote of a majority of
the directors serving at the time of the increase.
Section 5. Meetings of Directors. The Board of Directors of the
Corporation may hold meetings, from time to time, either within or without the
State of Minnesota, at such place as a majority of the members of the Board of
Directors may from time to time appoint. If the Board of Directors fails to
select a place for the meeting, the meeting shall be held at the principal
executive office of the Corporation.
Section 6. Calling Meetings. Meetings of the Board of Directors may be
called by (i) the Chairman of the Board or the President and Chief Executive
Officer on two (2) days' notice or (ii) any director on ten (10) days' notice,
to each director, either personally, by telephone or by mail or telegram. Every
such notice shall state the date, time and place of the meeting. Notice of a
meeting called by a person other than the Chairman of the Board or the President
and Chief Executive Officer shall state the purpose of the meeting.
Section 7. Participation by Electronic Communications. Directors of the
Corporation may participate in a meeting of the Board of Directors by means of
conference telephone or by similar means
4
<PAGE>
of communication by which all persons participating in the meeting can
simultaneously hear each other. A director so participating shall be deemed
present in person at the meeting.
Section 8. Waiver of Notice. A director may waive notice of a meeting of
the Board of Directors. A waiver of notice by a director entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally, or by attendance. Attendance by a director at a meeting is a
waiver of notice of that meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting was
not lawfully called or convened and does not participate thereafter in the
meeting.
Section 9. Absent Directors. A director may give advance written consent
or opposition to a proposal to be acted on at a meeting of the Board of
Directors by actual delivery prior to the meeting of such advance written
consent or opposition to the Chairman of the Board or the President and Chief
Executive Officer or a director who is present at the meeting. If the director
is not present at the meeting, advance written consent or opposition to a
proposal shall not constitute presence for purposes of determining the existence
of a quorum, but consent or opposition shall be counted as a vote in favor of or
against the proposal and shall be entered in the minutes or other record of
action at the meeting, if the proposal acted on at the meeting is substantially
the same or has substantially the same effect as the proposal to which the
director has consented or objected.
Section 10. Quorum. At all meetings of the Board of Directors a majority
of the directors shall constitute a quorum for the transaction of business, and
the act of a majority of the directors present at any meeting at which there is
a quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by applicable statute or by the Articles of Incorporation.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present. If a
quorum is present at the call of a meeting, the directors may continue to
transact business until adjournment notwithstanding the withdrawal of enough
directors to leave less than a quorum.
Section 11. Organization of Meetings. The Chairman of the Board shall
preside at all meetings of the Board of Directors and in his or her absence the
President and Chief Executive Officer shall act as presiding officer. The
Secretary shall act as secretary of all meetings of the Board of Directors, and
in his or her absence any person appointed by the presiding officer shall act as
secretary.
Section 12. Committees. The Board of Directors, by a resolution approved
by the affirmative vote of a majority of the directors then holding office, may
establish one or more committees of one or more persons having the authority of
the Board of Directors in the management of the business of the corporation to
the extent provided in such resolution. Such committees, however, shall at all
times be subject to the direction and control of the Board of Directors.
Committee members need not be directors and shall be appointed by the
affirmative vote of a majority of the directors present. A majority of the
members of any committee shall constitute a quorum for the transaction of
business at a meeting of any such committee. In other matters of procedure the
provisions of these Bylaws shall apply to committees and the members thereof to
the same extent they apply to the Board of Directors and directors, including,
without limitation, the provisions with respect to meetings and notice thereof,
absent members, written actions, and valid acts. Each committee shall keep
regular minutes of its proceedings and report the same to the Board of
Directors.
Section 13. Action Without Meeting. Unless otherwise restricted by the
Articles of Incorporation or these Bylaws, any action required or permitted to
be taken at any meeting of the Board
5
<PAGE>
of Directors may be taken without a meeting, if a written consent thereto is
signed by all members of the Board of Directors and such written consent is
filed with the minutes of proceedings of the Board of Directors. If the proposed
action need not be approved by the shareholders and the Articles of
Incorporation so provide, action may be taken by written consent signed by the
number of directors that would be required to take the same action at a meeting
of the Board of Directors at which all directors were present. Such action shall
be effective on the date on which the last signature is placed on such writing
or writings, or such other effective date as is set forth therein.
Section 14. Compensation of Directors. By resolution of the Board of
Directors, each director may be paid his or her expenses, if any, of attendance
at each meeting of the Board of Directors, and each director who is not a
salaried officer of the Corporation may be paid a stated amount as a director or
a fixed sum for attendance at each meeting of the Board of Directors, or both.
No such payment shall preclude a director from serving the Corporation in any
other capacity and receiving compensation therefor.
ARTICLE IV.
Officers.
--------
Section 1. Number and Qualification. The officers of the Corporation
shall consist of one or more natural persons duly elected by the Board of
Directors exercising the functions of the offices of chief executive officer,
chief financial officer and secretary. The officers designed as the President
and Chief Executive Officer; Vice President, Finance and Chief Financial
Officer; and Secretary will exercise the functions of the chief executive
officer, chief financial officer and secretary, respectively. The Board of
Directors may elect or appoint such other officers or agents as it deems
necessary for the operation and management of the Corporation, with such powers,
rights, duties and responsibilities as may be determined by the Board of
Directors, including, without limitation, one Chairman of the Board, one or more
Vice Presidents, a Treasurer, one or more Assistant Secretaries and Assistant
Treasurers, each of whom shall have the powers, rights duties and
responsibilities set for the in these Bylaws unless otherwise determined by the
Board. Any of the offices or functions of those offices may be held or exercised
by the same person.
Section 2. Election and Term of Office. The initial officers of the
Corporation shall be elected by the Board of Directors at its first duly held
meeting and all officers shall hold office until their successors have been duly
elected, unless prior thereto such officer shall have resigned or been removed
from office as hereinafter provided.
Section 3. Resignation, Removal and Vacancies. An officer may resign at
any time by giving written notice to the Corporation. The resignation is
effective without acceptance when the notice is given to the Corporation, unless
a later effective date is specified in the notice. Any officer or agent elected
or appointed by the Board of Directors shall hold office at the pleasure of the
Board of Directors and may be removed, with or without cause, at any time by the
affirmative vote of a majority of the Board of Directors present at a duly held
Board meeting. A vacancy in an office may, or in the case of a vacancy in the
office of President and Chief Executive Officer or Vice President, Finance and
Chief Financial Officer shall, be filled for the unexpired portion of the term
by action of the Board of Directors.
Section 4. Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors or by the President and Chief Executive
Officer if authorized by the Board of Directors.
6
<PAGE>
Section 5. The President and Chief Executive Officer. Unless provided
otherwise by a resolution adopted by the Board of Directors, the President and
Chief Executive Officer shall have general active management of the business of
the corporation, shall, in the absence of the Chairman of the Board, preside at
meetings of the shareholders and Board of Directors, shall see that all orders
and resolutions of the Board of Directors are carried into effect, shall sign
and deliver in the name of the corporation any deeds, mortgages, bonds,
contracts, or other instruments pertaining to the business of the corporation,
except in cases in which the authority to sign and deliver is required by law to
be exercised by another person or is expressly delegated by the Articles of
Incorporation, these Bylaws, or the Board of Directors to some other officer or
agent of the corporation, shall maintain records of and, whenever necessary,
certify proceedings of the Board of Directors and shareholders, and shall
perform such other duties as may from time to time be prescribed by the Board of
Directors. Unless otherwise determined by the Board of Directors, the President
shall be the Chief Executive Officer. If an officer other than the President is
designated Chief Executive Officer, the President shall perform such duties as
may from time to time be assigned to her or him by the Board of Directors.
Section 6. The Vice President, Finance and Chief Financial Officer.
Unless provided otherwise by a resolution adopted by the Board of Directors, the
Vice President, Finance and Chief Financial Officer shall keep accurate
financial records for the corporation, shall deposit all monies, drafts, and
checks in the name of and to the credit of the corporation in such banks and
depositories as the Board of Directors shall designate from time to time, shall
endorse for deposit all notes, checks, and drafts received by the corporation as
ordered by the Board of Directors, making proper vouchers therefor, shall
disburse corporate funds and issue checks and drafts in the name of the
corporation as ordered by the Board of Directors, shall render to the President
and Chief Executive Officer and the Board of Directors, whenever requested, an
account of all such officer's transactions as Vice President, Finance and Chief
Financial Officer and of the financial condition of the corporation, and shall
perform such other duties as may be prescribed by the Board of Directors or the
President and Chief Executive Officer from time to time. Unless otherwise
determined by the Board of Directors, the Vice President, Finance shall be the
Chief Financial Officer. If an officer other than the Vice President, Finance is
designated Chief Financial Officer, the Vice President, Finance shall perform
such duties as may from time to time be assigned to her or him by the Board of
Directors.
Section 7. The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders and of the Board, and shall perform
such other duties as the Board of Directors may from time to time subscribe.
Section 8. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the shareholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose. He or she shall give, or cause to be given,
notice of all meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President and Chief Executive Officer, under whose supervision
he or she shall be.
Section 9. The Vice President. The Vice President, if any, or if there
shall be more than one, the Vice Presidents in the order determined by the Board
of Directors, shall, in the absence or disability of the President and Chief
Executive Officer, perform the duties and exercise the powers of the President
and Chief Executive Officer and shall perform such other duties and have such
other powers as the Board of Directors or the President and Chief Executive
Officer may from time to time prescribe.
7
<PAGE>
Section 10. The Treasurer. The Treasurer, if any, shall, in the absence
or disability of the Vice President, Finance and Chief Financial Officer,
perform the duties and exercise the powers of the Vice President, Finance and
Chief Financial Officer and shall perform such other duties and have such other
powers as the Board of Directors, the President and Chief Executive Officer, or
the Vice President, Finance and Chief Financial Officer may from time to time
prescribe.
Section 11. Assistant Secretary. The Assistant Secretary or, if there be
more than one, the Assistant Secretaries, in the order determined by the Board
of Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors or the President and
Chief Executive Officer may from time to time prescribe.
Section 12. Authority and Duties. In addition to the foregoing authority
and duties, all officers of the Corporation shall respectively have such
authority and perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of a majority
of the directors present, an officer elected or appointed by the Board may,
without the approval of the Board, delegate some or all of the duties and powers
of an office to other persons.
ARTICLE V.
Certificates of Stock.
---------------------
Section 1. Certificates of Stock. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the name
of the Corporation by the President and Chief Executive Officer and the
Secretary or an Assistant Secretary of the Corporation, if there be one,
certifying the number of shares owned by him or her in the Corporation. The
certificates of stock of each class shall be numbered in the order of their
issue.
Section 2. Facsimile Signatures. Where a certificate is signed (1) by a
transfer agent or an assistant transfer agent, or (2) by a transfer clerk acting
on behalf of the Corporation and a registrar, the signature of any such
President and Chief Executive Officer, Secretary or Assistant Secretary may be
by facsimile. In case any officer or officers who have signed, or whose
facsimile signature or signatures have been used on any such certificate or
certificates shall cease to be such officer or officers of the Corporation
before such certificate or certificates have been delivered by the Corporation,
such certificate or certificates may nevertheless be adopted by the Corporation
and be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the Corporation.
Section 3. Lost or Destroyed Certificates. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the Corporation a bond in such sum as
it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
8
<PAGE>
Section 4. Transfers of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 5. Registered Shareholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall be entitled
to hold liable for calls and assessments a person so registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by applicable statute.
9
<PAGE>
ARTICLE VI.
Indemnification.
---------------
Section 1. Indemnification. The Corporation shall indemnify to the
fullest extent permissible under the provisions of Chapter 302A of the Minnesota
Statutes, as amended, (as now or hereafter in effect) any person made or
threatened to be made a party to or witness in any threatened, pending, or
completed civil, criminal, administrative, arbitration, or investigative
proceeding, including a proceeding by or in the right of the Corporation by
reason of the fact that he, his testator or intestate, is or was a director or
officer of the Corporation, or by reason of the fact that such director or
officer, while a director or officer of the Corporation, is or was serving at
the request of the Corporation, or whose duties in that position involved
service as a director, officer, partner, trustee or agent of another
organization or employee benefit plan, against all judgments, penalties, fines,
including, without limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements. Nothing contained herein shall
affect any rights to indemnification to which employees or agents of the
Corporation other than directors and officers may be entitled under the
provisions of Chapter 302A of the Minnesota Statutes, as amended. Any repeal or
modification of this Article VI shall be prospective only, and shall not
adversely affect any right to indemnification or protection of a director or
officer of the Corporation existing at the time of such repeal or modification.
No amendment to or repeal of this Article shall apply to or have any effect on
the liability of or alleged liability of any director or the Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
Section 2. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
ARTICLE VII.
General Provisions.
------------------
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 2. Dividends. Subject to the provisions of the applicable
statute and the Articles of Incorporation, dividends upon the capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting, and may be paid in cash, in property, or in shares of the
capital stock.
Section 3. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purposes as the directors shall think conducive to the interest
of the Corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.
Section 4. Seal. The Corporation shall not have a corporate seal.
10
<PAGE>
Section 5. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 6. Amendments. The Board of Directors shall have the power to
adopt, amend or repeal the Bylaws of the Corporation, subject to the power of
the shareholders to change or repeal the same, provided, however, that the Board
shall not adopt, amend or repeal any Bylaw fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board, or fixing the number of director of their classifications,
qualifications or terms of office, but may adopt or amend a Bylaw that increases
the number of directors.
11
<PAGE>
EXHIBIT 4.3
SEE LEGEND ON REVERSE SIDE
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
CUSIP
VITAL IMAGES, INC.
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
VITAL IMAGES, INC.
transferable on the books of the Corporation in person or by duly
authorized attorney on surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned by the Transfer Agent and
Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated:
SECRETARY AND CHIEF FINANCIAL OFFICER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in the Rights Agreement between Vital Images, Inc. (the -Company+)
and (the-Rights Agent+) dated as of February , 1997 (the -Rights Agreement+),
and as the same may be amended from time to time, the terms of which (including
restrictions on the transfer of such Rights) are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
the Company. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on the date of mailing,
without charge after receipt of a written request therefor from such holder.
Under certain circumstances, as set forth in the Rights Agreement, Rights issued
to, or held by, any Person who is, was or becomes an Acquiring Person, an
Adverse Person or any Affiliate or Associate thereof (as such terms are defined
in the Rights Agreement), and any subsequent holder of such Rights, whether
currently held by or on behalf of such Person or any subsequent holder, may
become null and void.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
Additional abbreviations may also be used though not in the above list.
For value received hereby sell, assign and transfer unto
Please PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE
Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
UTMA - ________ Custodian ________
(Cust) (Minor)
under Uniform Transfer to Minors
Act _____________________
(State)
Please insert social security OR other
identifying number of assignee
Dated
NOTICE:- The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular without alteration
or enlargement or any change whatever.
SIGNATURE GUARANTEED
<PAGE>
EXHIBIT 4.4
RIGHTS AGREEMENT
between
VITAL IMAGES, INC.
and
[RIGHTS AGENT]
dated as of February __, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page No.
- --------- --------
<S> <C>
1. Certain Definitions......................................................................................... 1
-------------------
2. Appointment of Rights Agent................................................................................. 6
---------------------------
3. Issue of Rights Certificates................................................................................ 7
----------------------------
4. Form of Rights Certificates................................................................................. 8
---------------------------
5. Countersignature and Registration........................................................................... 9
---------------------------------
6. Transfer, Split Up, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates...................................... 10
----------------------------------------------------------------------
7. Exercise of Rights; Purchase Price; Expiration Date......................................................... 11
---------------------------------------------------
8. Cancellation of Rights Certificates......................................................................... 12
-----------------------------------
9. Reservation and Availability of Capital Stock; Registration................................................ 12
------------------------------------------------------------
10. Capital Stock Record Date................................................................................. 14
-------------------------
11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights............................... 14
---------------------------------------------------------------------------
12. Certificate of Adjusted Purchase Price or Number of Shares................................................ 22
----------------------------------------------------------
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...................................... 22
--------------------------------------------------------------------
14. Fractional Rights and Fractional Shares................................................................... 24
---------------------------------------
15. Rights of Action.......................................................................................... 25
----------------
16. Agreement of Rights Holders............................................................................... 25
---------------------------
17. Rights Certificate Holder Not Deemed a Shareholder........................................................ 26
--------------------------------------------------
18. Concerning the Rights Agent............................................................................... 26
---------------------------
19. Merger or Consolidation or Change of Name of Rights Agent................................................. 27
---------------------------------------------------------
20. Duties of Rights Agent.................................................................................... 27
----------------------
21. Change of Rights Agent.................................................................................... 29
----------------------
22. Issuance of New Rights Certificates....................................................................... 30
-----------------------------------
23. Redemption and Termination................................................................................ 30
--------------------------
24. Exchange.................................................................................................. 30
--------
25. Notice of Certain Events.................................................................................. 31
------------------------
26. Notices................................................................................................... 32
-------
27. Supplements and Amendment................................................................................. 33
-------------------------
28. Successors................................................................................................ 33
----------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
29. Determinations and Actions by the Board................................................................... 34
---------------------------------------
30. Benefits of this Agreement................................................................................ 34
--------------------------
31. Severability.............................................................................................. 34
------------
32. Governing Law............................................................................................. 34
-------------
33. Counterparts.............................................................................................. 34
------------
34. Descriptive Headings...................................................................................... 34
--------------------
</TABLE>
Exhibits
- --------
A- Form of Certificate of Designation, Preferences and Rights of Series A
Junior Preferred Stock
B- Form of Rights Certificate
C- Summary of Rights Agreement
iii
<PAGE>
RIGHTS AGREEMENT
----------------
THIS RIGHTS AGREEMENT, dated as of February __, 1997 (this "Agreement"), is
between Vital Images, Inc., a Minnesota corporation (the "Company"), and
____________, a _________________, as Rights Agent (the "Rights Agent").
As of the date of this Agreement, all of the Company's issued and
outstanding capital stock consists of 1,000 of the Company's Common Shares (as
hereinafter defined), held beneficially and of record by the Company's parent
entity, Bio-Vascular, Inc., a Minnesota corporation ("Bio-Vascular"). In
connection with a proposed spin-off of all of the issued and outstanding capital
stock of the Company by Bio-Vascular (the "Spin-Off"), the Company will
authorize and issue additional Common Shares, which will be distributed pro-rata
to the Shareholders of Bio-Vascular, effective as of the close of business (as
hereinafter defined) on a date to be determined by the Board of Directors of
Bio-Vascular (the "Spin-Off Distribution Date).
In anticipation of the Spin-Off, and of the Company's resulting status as an
independent public Company thereafter, on February __, 1997 (the "Rights
Dividend Declaration Date"), the Board of Directors of the Company (as the
composition of Board of Directors may change from time to time, the "Board")
authorized and declared a dividend distribution of one Right for each Common
Share of the Company outstanding at the close of business on __________, 1997
(the "Record Date"), each Right (individually a "Right" and collectively the
"Rights") initially representing the right to purchase one one-thousandth of a
Preferred Share (as hereinafter defined) of the Company having the rights,
powers and preferences set forth in the form of the Certificate of Designation,
Preferences and Rights attached hereto as Exhibit A, upon the terms and subject
to the conditions hereinafter set forth, and has further authorized and directed
the issuance of one Right for each Common Share issued (i) between the Record
Date and the earlier of the Distribution Date or the Expiration Date (both as
hereinafter defined), including, but not limited to, each Common Share to be
issued and distributed in connection with the Spin-Off, or (ii) upon the
exercise or conversion, prior to the Expiration Date, of any option, warrant or
other security exercisable for or convertible into Preferred Shares or Common
Shares, which option, warrant or other security is outstanding on the
Distribution Date.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the following
-------------------
terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, alone or
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the Common Shares then outstanding
(other than as a result of a Permitted Offer (as hereinafter defined)), but
shall not include the Company, any Subsidiary of the Company, or any
employee benefit plan of the Company or of any Subsidiary of the Company,
or any Person organized, appointed or established by the Company for or
pursuant to the terms of any such plan and holding Common Shares, or, prior
to or on the Spin-Off Distribution Date, Bio-Vascular. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person": (i) as the result
of an acquisition of Common Shares by the Company which, by reducing the
number of Common Shares outstanding, increases the proportionate number of
Common Shares beneficially owned by such Person to 15% or more of the
Common Shares then outstanding; provided, however, that if a Person,
together with all Affiliates and Associates of such Person, shall become
the Beneficial
1
<PAGE>
Owner of 15% or more of the Common Shares then outstanding by reason of
Common Share purchases by the Company and, together with all Affiliates and
Associates of such Person, shall thereafter become the Beneficial Owner of
any additional Common Shares, other than pursuant to the receipt of stock
dividends or stock splits on a pro rata basis on Common Shares already
beneficially owned by such Person, and, immediately after becoming the
Beneficial Owner of such additional shares, such Person, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the Common Shares then outstanding, then such Person (unless
such Person shall be the Company, any Subsidiary of the Company, or any
employee benefit plan of the Company or of any Subsidiary of the Company,
or any Person organized, appointed or established by the Company for or
pursuant to the terms of any such plan and holding Common Shares, or, prior
to or on the Spin-Off Distribution Date, Bio-Vascular), shall be deemed to
be an "Acquiring Person"; or (ii) who beneficially owns 15% or more of the
outstanding Common Shares but who acquired Beneficial Ownership of Common
Shares without any plan or intention to seek or affect control of the
Company, if such Person promptly enters into an irrevocable commitment
promptly to divest, and thereafter promptly divests (without exercising or
retaining any power, including voting, with respect to such shares),
sufficient shares of Common Shares (or securities convertible into,
exchangeable into or exercisable for Common Shares) so that such Person
ceases to be the Beneficial Owner of 15% or more of the outstanding shares
of Common Shares; or (iii) who beneficially owns Common Shares consisting
solely of one or more (A) Common Shares beneficially owned pursuant to the
grant for exercise of an option granted to such Person by the Company in
connection with an agreement to merge with, or acquire, the Company entered
into prior to a Section 11(a)(ii) Trigger Date, (B) Common Shares (or
securities convertible into, exchangeable into or exercisable for Common
Shares), beneficially owned by such Person or its Affiliates or Associates
at the time of grant of such option or (C) Common Shares (or securities
convertible into, exchangeable into or exercisable for Common Shares)
acquired by Affiliates or Associates of such Person after the time of such
grant which, in the aggregate, amount to less than 1% of the outstanding
Common Shares.
(b) "Act" shall mean the Securities Act of 1933, as amended.
(c) "Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii).
(d) "Adverse Person" shall mean any Person determined to be an Adverse
Person pursuant to the criteria set forth in Section 11(a)(ii)(B);
provided, however, that the in no event will Bio-Vascular be deemed an
Adverse Person prior to or on the Spin-Off Distribution Date.
(e) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act as in effect on the date hereof.
(f) "Agreement" shall have the meaning set forth in the preamble clause at
the beginning hereof.
(g) (i) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(A) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, beneficially owns;
(B) which such Person or any of such Person's Affiliates or
Associates,
2
<PAGE>
directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding,
whether or not in writing (other than customary agreements with
and between underwriters and selling group members with respect
to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, other rights,
warrants or options or otherwise; provided, however, that a
Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," (1) securities tendered pursuant to a tender
or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, (2) securities
issuable upon exercise of Rights at any time prior to the
occurrence of a Triggering Event, or (3) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering
Event, which Rights were acquired by such Person or any of such
Person's Affiliates or Associates prior to the Distribution Date
or pursuant to Section 3(a) or Section 22 (the "Original Rights")
or pursuant to Section 11(i) in connection with an adjustment
made with respect to any Original Rights;
(C) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right (sole or
shared) to vote or dispose of or has "beneficial ownership" of
(as determined pursuant to Rule 13d-3 of the General Rules and
Regulations under the Exchange Act, or any comparable or
successor rule, whether or not the Company is subject to the
Exchange Act), including, without limitation, pursuant to any
agreement, arrangement or understanding, whether or not in
writing; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security
under this Section 1(g)(i)(C) as a result of an oral or written
agreement, arrangement or understanding to vote such security if
such agreement, arrangement or understanding (1) arises solely
from a revocable proxy given to such Person or any of such
Person's Affiliates or Associates in response to a proxy or
consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations
under the Exchange Act (and if such provisions are not applicable
by law, such proxy or solicitation is made in substantially the
same manner as if such provisions were applicable), and (2) is
not also then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report) (and if the
Company is not subject to the Exchange Act, would not be then
reportable if the Company was subject to the Exchange Act); or
(D) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates)
has any agreement, arrangement or understanding, whether or not
in writing (other than customary agreements with and between
underwriters and selling group members with respect to a bona
fide public offering of securities) for the purpose of acquiring,
holding, voting (except pursuant to a revocable proxy as
described in Section 1(g)(i)(C)(1)) or disposing of such
securities.
(ii) Notwithstanding anything in this definition to the contrary, the
phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities,
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<PAGE>
shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued
and outstanding which such Person is deemed to own beneficially
hereunder.
(h) "Board" shall have the meaning set forth in the recital clause at the
beginning of this Agreement.
(i) "Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of Minnesota are authorized
or obligated by law or executive order to close.
(j) "Close of business" on any given date shall mean 5:00 p.m. Minneapolis,
Minnesota time, on such date; provided, however, that if such date is not a
Business Day, it shall mean 5:00 p.m. Minneapolis, Minnesota time on the
next succeeding Business Day.
(k) "Common Shares," when used with reference to the Company, shall mean
the shares of Common Stock, par value $.01 per share, of the Company.
"Common Shares," when used with reference to any Person other than the
Company, shall mean: (i) in the case of Persons organized in corporate
form, the shares of capital stock or units of equity security with the
greatest voting power of such Person or, if such Person is a Subsidiary of
another Person, of the Person or Persons which ultimately control or direct
the management of such first-mentioned Person, and (ii) in the case of
Persons not organized in corporate form, the units of beneficial interest
which (A) represent the right to participate generally in the profits and
losses of such Person (including without limitation any flow-through tax
benefits resulting from an ownership interest in such Person) and (B) are
entitled to exercise the greatest voting power of such Person or, in the
case of a limited partnership, shall have the power to remove the general
partner or partners.
(l) "Common stock equivalents" shall have the meaning set forth in Section
11(a)(iii).
(m) "Company" shall have the meaning set forth in the preamble clause at
the beginning of this Agreement.
(n) "Continuing Director" shall mean (i) any Person who is a member of the
Board, while such Person is a member of the Board, who is not an Acquiring
Person or an Adverse Person, or an Affiliate or Associate of any such
Person, or a representative, nominee or designee of an Acquiring Person or
an Adverse Person or of any such Affiliate or Associate, and was a member
of the Board prior to the date of this Agreement, or (ii) any Person who
subsequently becomes a member of the Board, while such Person is a member
of the Board, who is not an Acquiring Person or an Adverse Person, or an
Affiliate or Associate of any such Person, or a representative, nominee or
designee of an Acquiring Person or an Adverse Person or of any such
Affiliate or Associate, if such Person's initial nomination for election or
initial election to the Board is recommended or approved by the Board at a
time when a majority of the members of the Board are Continuing Directors.
(o) "Current Market Price" shall have the meaning set forth in Section
11(d).
(p) "Current Value" shall have the meaning set forth in Section 11(a)(iii).
(q) "Distribution Date" shall have the meaning set forth in Section 3(a).
4
<PAGE>
(r) "Equivalent preferred shares" shall have the meaning set forth in
Section 11(b).
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(t) "Exchange Ratio" shall have the meaning set forth in Section 24(a).
(u) "Expiration Date" shall have the meaning set forth in Section 7(a).
(v) "Final Expiration Date" shall mean the close of business on February __
2007 [I.E., 10 YRS. LESS 1 DAY FROM SPIN-OFF DISTRIBUTION DATE].
(w) "Original Rights" shall have the meaning set forth in Section
1(g)(i)(B)(3).
(x) "Person" shall mean any individual, firm, corporation, partnership or
other entity.
(y) "Permitted Offer" shall mean a tender or exchange offer which is for
all outstanding Common Shares at a price and on terms determined, prior to
the purchase of shares under such tender or exchange offer, by the Board at
a time when a majority of the members of the Board are Continuing Directors
to be fair to the Company's holders of Common Shares (taking into account
all factors that such directors deem relevant including, without
limitation, prices that could reasonably be achieved if the Company or its
assets were sold on an orderly basis designed to realize maximum value) and
otherwise in the best interests of the Company and its shareholders (other
than the Person or any Affiliate or Associate thereof on whose behalf the
offer is being made), taking into account all factors as the Board may deem
relevant and which the Board, after receiving advice from one or more
investment banking firm selected by the Board, determines to recommend to
the Company's shareholders.
(z) "Preferred Share" shall mean a share of Series A Junior Preferred
Stock, par value $.01 per share, of the Company and, to the extent that
there are not a sufficient number of shares of Series A Junior Preferred
Stock authorized to permit the full exercise of the Rights, shares of any
other series of Preferred Stock of the Company designated for such purpose
containing terms substantially similar to the terms of the Series A Junior
Preferred Stock.
(aa) "Preferred Share Fraction" shall mean one one-thousandth of a
Preferred Share.
(bb) "Principal Party" shall have the meaning set forth in Section 13(b).
(cc) "Purchase Price" shall have the meaning set forth in Section 4(a), and
shall initially be as set forth in Section 7(b).
(dd) "Record Date" shall have the meaning set forth in the recital clause
at the beginning of this Agreement.
(ee) "Redemption Price" shall have the meaning set forth in Section 23(a).
(ff) "Rights" shall have the meaning set forth in the recital clause at the
beginning of this Agreement.
(gg) "Rights Agent" shall have the meaning set forth in the preamble clause
at the beginning of this Agreement until a successor Rights Agent shall
have become such pursuant to the
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<PAGE>
applicable provisions of this Agreement, and thereafter "Rights Agent"
shall mean such successor Rights Agent. If at any time there is more than
one Person appointed by the Company as Rights Agent pursuant to the
provisions of this Agreement, "Rights Agent" shall mean and include each
such Person.
(hh) "Rights Certificates" shall have the meaning set forth in Section
3(a).
(ii) "Rights Dividend Declaration Date" shall have the meaning set forth in
the recital clause at the beginning of this Agreement.
(jj) "Section 11(a)(ii) Election" shall mean the election described in
Sections 11(a)(ii)(x) and (y).
(kk) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii)(A) or (B).
(ll) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii).
(mm) "Section 13 Event" shall mean any event described in clauses (i), (ii)
or (iii) of Section 13(a).
(nn) "Section 24(a) Election" shall have the meaning set forth in Section
24(a).
(oo) "Spread" shall have the meaning set forth in Section 11(a)(iii).
(pp) "Stock Acquisition Date" shall mean the date of first public
announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or an Acquiring Person that an Acquiring
Person has become such.
(qq) "Subsidiary" shall mean, with reference to any Person, any other
Person of which at least a majority of the voting power of the voting
equity securities or equity interests is beneficially owned, directly or
indirectly, or otherwise controlled by such first-mentioned Person.
(rr) "Substitute Consideration" shall have the meaning set forth in Section
11(a)(iii).
(ss) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii).
(tt) "Trading Day" shall have the meaning set forth in Section 11(d)(i).
(uu) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights
---------------------------
Agent to act as agent for the Company and the holders of the Rights (who, in
accordance with Section 3 hereof, shall prior to the Distribution Date also be
the holders of Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such additional Rights Agents as it may deem necessary
or desirable.
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<PAGE>
Section 3. Issue of Rights Certificates.
----------------------------
(a) Until the first to occur of:
(i) the close of business on the tenth Business Day after the
Stock Acquisition Date (or, if the tenth Business Day after the
Stock Acquisition Date occurs before the Record Date, the close
of business on the Record Date),
(ii) the close of business on the tenth Business Day (or such
later date as may be determined by the Board prior to such time
as any Person has become an Acquiring Person) after the date that
a tender or exchange offer (other than a Permitted Offer) by any
Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of
the Company, or any Person or entity organized, appointed or
established by the Company and holding Common Shares for or
pursuant to the terms of any such plan, or, prior to or on the
Spin-Off Distribution Date, Bio-Vascular) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General
Rules and Regulations under the Exchange Act (or any comparable
or successor rule), if, upon consummation thereof, such Person
would be the Beneficial Owner of 15% or more of the Common Shares
then outstanding, or
(iii) the close of business on the tenth Business Day after a
determination, pursuant to Section 11(a)(ii)(B), that a Person is
an Adverse Person,
(the first to occur of (i), (ii), and (iii) being herein referred
to as the "Distribution Date"), (A) the Rights will be evidenced
(subject to the provisions of Section 3(b)) by the certificates
for the Common Shares registered in the names of the holders
thereof (which certificates for Common Shares shall be deemed
also to be certificates for Rights where the context so requires)
and not by separate certificates and (B) the Rights will be
transferable only in connection with the transfer of the
underlying Common Shares (including a transfer to the Company).
As soon as practicable after the Company has notified the Rights
Agent of the occurrence of the Distribution Date, the Rights
Agent will send by first-class, postage prepaid mail, to each
record holder of Common Shares as of the close of business on the
Distribution Date, at the address of such holder shown on the
records of the Company, one or more Rights certificates, in
substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each Common Share so
held, subject to adjustment as provided herein. In the event that
an adjustment in the number of Rights per Common Share has been
made pursuant to Section 11(p), at the time of distribution of
the Right Certificates, the Company shall make and notify the
Rights Agent of the necessary and appropriate rounding
adjustments (in accordance with Section 14(a)) so that Rights
Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As
of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
(b) In connection with the Spin-Off, the Company will cause the
Information Statement to be provided to Bio-Vascular shareholders to
contain substantially the information set forth in the Summary of Rights
Agreement attached hereto as Exhibit C. With respect to certificates for
the Common Shares outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates for
the Common Shares and the registered holders of the Common Shares shall
also be the registered holders of the associated Rights. Until the
earlier of the Distribution Date or the Expiration Date, the transfer of
any certificates representing Common Shares in respect of which Rights
have been issued shall also constitute the transfer of
7
<PAGE>
the Rights associated with such Common Shares. Certificates issued after
the Record Date upon the transfer of Common Shares outstanding on the
Record Date shall bear the legend set forth in Section 3(c).
(c) Rights shall be issued in respect of all Common Shares which are
issued after the Record Date but prior to the earlier of the Distribution
Date or the Expiration Date, including Common Shares issued and
distributed in the Spin-Off. Rights shall also be issued to the extent
provided in Section 22 in respect of all Common Shares which are issued
after the Distribution Date and prior to the Expiration Date and upon the
exercise or conversion, prior to the Expiration Date, of any option,
warrant or other security exercisable for or convertible into Common
Shares, which option, warrant or other security is outstanding on the
Distribution Date. Certificates representing Common Shares (including,
without limitation, certificates issued upon transfer or exchange of
Common Shares) issued after the Record Date but prior to the earlier of
the Distribution Date or the Expiration Date, including Common Shares
issued and distributed in the Spin-Off, shall also be deemed to be
certificates for the associated Rights, and shall bear the following
legend:
"This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in the Rights Agreement between
Vital Images, Inc. (the "Company") and _____________ (the "Rights
Agent") dated as of February __, 1997 (the "Rights Agreement"),
and as the same may be amended from time to time, the terms of
which (including restrictions on the transfer of such Rights) are
hereby incorporated herein by reference and a copy of which is on
file at the principal executive offices of the Company. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. The Company will mail to
the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge after receipt of
a written request therefor from such holder. Under certain
circumstances, as set forth in the Rights Agreement, Rights
issued to, or held by, any Person who is, was or becomes an
Acquiring Person, an Adverse Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), and
any subsequent holder of such Rights, whether currently held by
or on behalf of such Person or by any subsequent holder, may
become null and void."
Until the earlier of the Distribution Date or the Expiration Date, the
Rights associated with the Common Shares represented by certificates for
Common Shares shall be evidenced by such certificates alone, and
registered holders of Common Shares shall also be the registered holders
of the associated Rights, and the transfer of any of such certificates
shall also constitute the transfer of the Rights associated with such
Common Shares, whether or not containing the foregoing legend. If the
Company purchases or acquires and cancels any Common Shares after the
Record Date but prior to the earlier of the Distribution Date or the
Expiration Date, any Rights associated with such Common Shares shall be
deemed cancelled and retired so that the Company shall not be entitled to
exercise any Rights associated with the Common Shares that are no longer
outstanding.
Section 4. Form of Rights Certificates
---------------------------
(a) The Rights Certificates (and the forms of election to exercise,
certification and assignment to be printed on the reverse thereof) shall
each be substantially in the form set forth in Exhibit B hereto and may
have such marks of identification or designation and such legends,
summaries or
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<PAGE>
endorsements printed thereon as the Company may deem appropriate and as
are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock
exchange, national market system or over-the-counter market on which the
Rights may from time to time be listed, to conform to usage, or to
reflect adjustments to the Rights made pursuant to this Agreement.
Subject to the provisions of Section 11 and Section 22, the Rights
Certificates, whenever distributed, shall entitle the holders thereof to
purchase such number of Preferred Share Fractions as shall be set forth
therein at the price per Preferred Share Fraction set forth therein (the
"Purchase Price"), but the amount and type of securities purchasable upon
the exercise of each Right and the Purchase Price thereof shall be
subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 that represents Rights beneficially owned by a Person reasonably
believed by the Board to be (i) an Acquiring Person, an Adverse Person or
any Associate or Affiliate of any such Person, (ii) a transferee of an
Acquiring Person or an Adverse Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person or Adverse
Person becomes such, or (iii) a transferee of an Acquiring Person or an
Adverse Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person or Adverse
Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person or
Adverse Person (or from any such Associate or Affiliate) to holders of
equity interests in such Acquiring Person or Adverse Person (or any such
Associate or Affiliate) or to any Person with whom such Acquiring Person
or Adverse Person (or any such Associate or Affiliate) has any continuing
oral or written plan, agreement, arrangement or understanding regarding
the transferred Rights or (B) a transfer which the Board has determined
is part of an oral or written plan, arrangement or understanding that has
as a primary purpose or effect avoidance of Section 7(e), and any Rights
Certificate issued to any such Person pursuant to Section 6 or Section 11
upon transfer, exchange, replacement or adjustment of any other Rights
Certificate referred to in this sentence, shall contain (to the extent
feasible) the following legend, modified as applicable to such Person:
"The Rights represented by this Rights Certificate are or were
beneficially owned by a person who was or became an [Acquiring]
[Adverse] Person or an Affiliate or Associate of an [Acquiring]
[Adverse] Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights
represented hereby may become null and void in the circumstances
specified in Section 7(e) of such Agreement."
The provisions of Section 7(e) of this Agreement shall be operative
whether or not the foregoing legend is contained on any such Rights
Certificate.
Section 5. Countersignature and Registration
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chief Executive Officer, its President and Chief Operating
Officer or any Vice President, either manually or by facsimile signature,
and shall have affixed thereto the Company's seal (if any) or a facsimile
thereof, which shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature.
[CHANGE TITLES HERE AND THROUGHOUT DEPENDING ON VITAL'S OFFICER TITLES.]
The Rights Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights
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<PAGE>
Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and
delivered by the Company with the same force and effect as though the
person who signed such Rights Certificates had not ceased to be such
officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the
execution of such Rights Certificate, shall be a proper officer of the
Company to sign such Rights Certificate, although at the date of the
execution of this Rights Agreement any such person was not such an
officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated by the Rights Agent as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates
issued hereunder. Such books shall show the names and addresses of the
respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates, the date of
each of the Rights Certificates and whether each such Rights Certificate
contains a legend as set forth in Section 4(b).
Section 6. Transfer, Split Up, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates
- ----------------------------------------------------------------------
(a) Subject to the provisions of Section 4(b), Section 7(e), Section
14 and Section 20(k), at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the
Expiration Date, any Rights Certificate or Certificates may be
transferred, split up, combined or exchanged for another Rights
Certificate or Certificates, entitling the registered holder to purchase
a like number of Preferred Share Fractions (or, following a Triggering
Event, Common Shares, other securities, cash or other assets, as the case
may be) as the Rights Certificate or Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to
purchase. Any registered holder desiring to transfer, split up, combine
or exchange any Rights Certificate or Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Certificates to be transferred, split up, combined
or exchanged, with the form of assignment and certificate appropriately
executed, at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any
action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have duly completed
and executed the certificate contained in the form of assignment on the
reverse side of such Rights Certificate and shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to
Section 4(b), Section 7(e), Section 14 and Section 20(k), countersign and
deliver to each Person entitled thereto a Rights Certificate or
Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any transfer tax or charge
that may be imposed in connection with any transfer, split up,
combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to them,
and, at the Company's or the Rights Agent's request, reimbursement to the
Company and the Rights Agent of all reasonable expenses incidental
thereto, and upon surrender to the Rights Agent and cancellation of the
Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature
and delivery to the registered owner in lieu of the Rights Certificate so
lost, stolen, destroyed or mutilated.
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<PAGE>
Section 7. Exercise of Rights; Purchase Price; Expiration Date
---------------------------------------------------
(a) Subject to Section 7(e), the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein, including, without limitation, the
restrictions on exercisability set forth in Section 9(c), Section
11(a)(iii) and Section 23(a)) in whole or in part, at any time after the
Distribution Date, upon surrender of the Rights Certificate, with the
form of election to exercise and the certificate on the reverse side
thereof duly completed and executed, to the Rights Agent at the office of
the Rights Agent designated for such purpose, together with payment of
the aggregate Purchase Price for the total number of Preferred Share
Fractions (or Common Shares, other securities, cash or other assets, as
the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the first to occur of: (i) the Final
Expiration Date; (ii) the time at which such Rights expire as provided in
Section 13(d); (iii) the time at which such Rights are redeemed as
provided in Section 23; or (iv) the time at which such Rights are
exchanged as provided in Section 24 (the first to occur of (i), (ii),
(iii) and (iv) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each Preferred Share Fraction purchasable
pursuant to the exercise of a Right shall initially be _______________
and shall be subject to adjustment from time to time as provided in
Section 11 and Section 13(a) and shall be payable in accordance with
Section 7(c).
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to exercise and certificate on the
reverse side thereof duly completed and executed, accompanied by payment
of the Purchase Price for each Preferred Share Fraction (or Common Share,
other securities, cash or other assets, as the case may be) to be
purchased and an amount equal to any applicable transfer tax or charge,
the Rights Agent shall, subject to Section 14(b) and Section 20(k),
thereupon promptly (i) requisition from any transfer agent of the
Preferred Shares (or make available, if the Rights Agent is the transfer
agent for such Preferred Shares) certificates for the total number of
Preferred Shares to be purchased, and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests, (ii)
requisition from the Company the amount of cash, if any, to be paid in
lieu of fractional shares in accordance with Section 14, (iii) promptly
after receipt of such certificates, cause the same to be delivered to or
upon the order of the registered holder of such Rights Certificate,
registered in such name or names as may be designated by such holder, and
(iv) promptly after receipt thereof, deliver such cash, if any, to or
upon the order of the registered holder of such Rights Certificate. The
payment of the Purchase Price (as such amount may be reduced pursuant to
Section 11(a)(iii)) may be made by cash, certified bank check or money
order payable to the order of the Company. If the Company determines to
issue other securities of the Company (including without limitation, upon
an appropriate Section 11(a)(ii) Election or Section 24(a) Election,
Common Shares), pay cash and/or distribute other assets pursuant to
Section 11(a), the Company will make all arrangements necessary so that
such other securities, cash and/or other assets are available for
distribution by the Rights Agent, if and when appropriate. The Company
reserves the right to require prior to the occurrence of a Triggering
Event that, upon any exercise of Rights, a number of Rights be exercised
so that only whole Preferred Shares would be issued.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or
names as may be designated by such holder, subject to the provisions of
Section 14.
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<PAGE>
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event or a Section
13 Event, any Rights that are or were beneficially owned by (i) an
Acquiring Person, an Adverse Person or any Associate or Affiliate of any
such Person, (ii) a transferee of an Acquiring Person or an Adverse
Person (or of any such Associate or Affiliate) who becomes a transferee
after the Acquiring Person or Adverse Person becomes such, or (iii) a
transferee of an Acquiring Person or an Adverse Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person or Adverse Person becoming such and receives
such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or Adverse Person (or from any
such Associate or Affiliate) to holders of equity interests in such
Acquiring Person or Adverse Person (or any such Associate or Affiliate)
or to any Person with whom the Acquiring Person or Adverse Person (or any
such Associate or Affiliate) has any continuing oral or written plan,
agreement, arrangement or understanding regarding the transferred Rights
or (B) a transfer which the Board has determined is part of an oral or
written plan, agreement, arrangement or understanding that has as a
primary purpose or effect the avoidance of this Section 7(e), shall
become null and void without any further action, and any holder of such
Rights shall have no rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to ensure that the provisions of this
Section 7(e) and Section 4(b) are complied with, but shall have no
liability to any holder of a Rights Certificate or other Person as a
result of its failure to make any determinations with respect to an
Acquiring Person or Adverse Person or any of their respective Affiliates,
Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake
any action with respect to a registered holder upon the occurrence of any
purported transfer or exercise as set forth in this Section 7 unless such
registered holder shall have (i) duly completed and executed the
certificate following the form of assignment or election to exercise set
forth on the reverse side of the Rights Certificate surrendered for such
assignment or exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation of Rights Certificates. All Rights Certificates
-----------------------------------
surrendered for the purpose of exercise, transfer, split up, combination or
exchange shall, if surrendered to the Company or to any of its agents, be
delivered to the Rights Agent for cancellation or in cancelled form, or, if
surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
this Agreement. The Company shall deliver to the Rights Agent for cancellation
and retirement, and the Rights Agent shall so cancel and retire, any other
Rights Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company.
Section 9. Reservation and Availability of Capital Stock; Registration
------------------------------------------------------------
(a) The Company covenants and agrees that it will cause to be
reserved and kept available for issuance prior to the Expiration Date
upon the exercise of outstanding Rights as many of its authorized and
unissued Preferred Shares (and, following the occurrence of a Triggering
Event, if applicable, out of its authorized and unissued Common Shares
and/or other securities) which together at all times after the
Distribution Date as provided in this Agreement, including Section
11(a)(iii), will be sufficient to permit the exercise in full of all
outstanding Rights pursuant to Section 7(a).
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(b) If the Preferred Shares (and, following the occurrence of a
Triggering Event, Common Shares or other securities, if applicable)
issuable and deliverable upon the exercise of the Rights are listed or
admitted for trading on any national securities exchange or included for
quotation on any national market system, the Company shall use its best
efforts to cause, from and after such time as the Rights become
exercisable, all shares and other securities reserved for such issuance
to be listed or admitted for trading on such national securities exchange
or included for quotation on any such national market system upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as is
practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event as of which the consideration to be delivered by
the Company upon exercise of the Rights has been determined pursuant to
this Agreement, including in accordance with Section 11(a)(iii), or as
soon as is required by law following the Distribution Date, as the case
may be, a registration statement or statements under the Act, with
respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form or forms, (ii) cause such registration
statement or statements to become effective as soon as practicable after
such filing, and (iii) cause such registration statement or statements to
remain effective (with a prospectus at all times meeting the requirements
of the Act) until the earlier of (A) the date as of which the Rights are
no longer exercisable for such securities or (B) the Expiration Date. The
Company will also take such action as may be appropriate under, or to
ensure compliance with, the securities or "blue sky" laws of the various
states. The Company may temporarily suspend, for a period of time not to
exceed 90 days after the date set forth in clause (i) of the first
sentence of this Section 9(c), the exercisability of the Rights in order
to prepare and file such registration statement or statements and permit
it or them to become effective. Upon any such suspension, the Company
shall either advise in writing all shareholders of record as of that date
or issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as either advise in
writing all shareholders of record as of that date or issue a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the
Rights shall not be exercisable in any jurisdiction unless the requisite
qualifications in such jurisdiction, if any, shall have been obtained,
the exercise thereof shall not be permitted under applicable law or a
registration statement (if required by law) shall not have been declared
effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares or other
securities, if applicable) delivered upon exercise of Rights shall, at
the time of delivery of the certificates for such shares or other
securities (subject to payment of the Purchase Price and any applicable
transfer taxes or charges), be duly and validly authorized and issued
and, with respect to Preferred Shares, Common Shares or other shares of
capital stock, fully paid and non-assessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges
that may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for Preferred Share Fractions (or
Common Shares or other securities, as the case may be) upon the exercise
of Rights. The Company shall not, however, be required (i) to pay any
transfer tax or charge that may be payable in respect of any transfer or
delivery of Rights Certificates to a Person other than, or the issuance
or delivery of a number of Preferred Share Fractions (or Common Shares or
other securities, as the case may be) in respect of a name other than
that of the registered holder of the Rights Certificate evidencing Rights
surrendered for exercise or (ii) to issue or deliver any certificates for
a number of Preferred Share Fractions (or Common Shares or other
securities,
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as the case may be) in a name other than that of the registered holder
upon the exercise of any Rights until such tax or charge shall have been
paid (any such tax or charge being payable by the holder of such Rights
Certificate at the time of surrender) or until it has been established to
the Company's satisfaction that no such tax or charge is due.
Section 10. Capital Stock Record Date. Each Person in whose name any
-------------------------
certificate for a number of Preferred Share Fractions (or Common Shares or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such Preferred
Share Fractions (or Common Shares or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and all applicable transfer taxes or charges) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the applicable transfer books of the Company are closed, such Person shall
be deemed to have become the record holder of such shares (or other securities,
as the case may be), fractional or otherwise, on, and such certificate shall be
dated, the next succeeding Business Day on which the applicable transfer books
of the Company are open. Prior to the exercise of the Rights evidenced thereby,
the holder of a Rights Certificate, as such, shall not be entitled to any rights
of a shareholder of the Company with respect to Preferred Share Fractions (or
Common Shares or other securities, as the case may be) for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions, or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number
-----------------------------------------------------------------
of Rights. The Purchase Price, the number and kind of Preferred Shares, Common
- ---------
Shares or other securities covered by each Right and the number of Rights
outstanding are subject to adjustment from time to time as provided in this
Section 11:
(a)
(i) If the Company shall at any time after the date of this
Agreement (A) declare or pay any dividend on any security of the
Company payable in Preferred Shares, (B) subdivide or split the
outstanding Preferred Shares, (C) combine or consolidate the
outstanding Preferred Shares into a smaller number of shares or
effect a reverse stock split of the outstanding Preferred Shares,
or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section
7(e), the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such subdivision,
split, combination, consolidation, reverse stock split or
reclassification, and the number and kind of shares of capital
stock issuable on such date (and any applicable transfer taxes or
charges), shall be proportionately adjusted so that the holder of
any Right exercised after such time shall be entitled to receive,
upon payment of the Purchase Price then in effect (and any
applicable transfer taxes or charges), the aggregate number and
kind of shares of capital stock which, if such Right had been
exercised immediately prior to such date and at a time when the
Company's transfer books for the Preferred Shares (or other
capital stock, as the case may be) were open, such holder would
have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, split, combination,
consolidation, reverse stock split, or reclassification. If an
event occurs that would require an adjustment under both this
Section 11(a)(i) and Section 11(a)(ii), the adjustment provided
for in this Section 11(a)(i) shall be in addition to, and shall
be made prior to, any adjustment required
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pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event:
(A) Any Person shall, at any time after the Rights
Dividend Declaration Date, become an Acquiring Person,
unless the event causing such Person to become an
Acquiring Person is a transaction set forth in Section
13(a), or
(B) the Board shall declare any Person (other than Bio-
Vascular, prior to or on the Spin-Off Distribution Date)
to be an Adverse Person, upon a determination by the Board
that such Person, alone or together with its Affiliates or
Associates, has, at any time after the Rights Dividend
Declaration Date, become the Beneficial Owner of a
substantial amount of Common Shares, which amount shall in
no event be less than the greater of (1) 10% of the Common
Shares then outstanding or (2) the sum of .001% and the
largest percentage of the outstanding Common Shares then
known by the Company to be beneficially owned by any
Person (other than the Company, any subsidiary of the
Company, or any employee benefit plan of the Company or
any Subsidiary of the Company, or any Person organized,
appointed or established by the Company and holding Common
Shares for or pursuant to the terms of any such plan, or
prior to or on the Spin-Off Distribution Date, Bio-
Vascular) and a determination by the Board, after
reasonable inquiry and investigation, including
consultation with such Persons as the Board shall deem
appropriate, that (x) such Beneficial Ownership by such
Person is intended to cause the Company to repurchase the
Common Shares beneficially owned by such Person or to
cause pressure on the Company to take action or enter into
a transaction or series of transactions intended to
provide such Person or its Affiliates or Associates with
short-term financial gain under circumstances where the
Board determines that the best long-term interests of the
Company and its shareholders would not be served by taking
such action or entering into such transaction or series of
transactions at that time or (y) such Beneficial Ownership
is causing or reasonably likely to cause a material
adverse impact (including, but not limited to, impairment
of relationships with customers or impairment of the
Company's ability to maintain its competitive position) on
the business or prospects of the Company,
then, promptly following the first occurrence of a Section
11(a)(ii) Event, proper provision shall be made so that each
holder of a Right (except as provided below and in Section 7(e))
shall thereafter have the right to receive, upon exercise thereof
at the then current Purchase Price, in accordance with the terms
of this Agreement if no Section 11(a)(ii) Event or Section 13
Event had occurred, (xx) such number of Preferred Share
Fractions, or (yy) at the election of the Board and in lieu of a
number of Preferred Share Fractions (a "Section 11(a)(ii)
Election"), such number of Common Shares that equals the result
obtained by (xxx) multiplying the then current Purchase Price if
no Section 11(a)(ii) Event or Section 13 Event had occurred by
the then number of Preferred Share Fractions for which a Right
was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event if no Section 11(a)(ii) Event or Section
13 Event had occurred, and (yyy) dividing that product (which,
following such first occurrence, shall thereafter be referred to
as the "Purchase Price" for each Right for all purposes of this
Agreement) by one one-thousandth of 50% of the Current Market
Price (determined pursuant to Section 11(d)(ii)) per Preferred
Share, or 50% of the current market price (determined
15
<PAGE>
pursuant to Section 11(d)(ii)) per Common Share, as the case may
be, on the date of such first occurrence (such number of shares,
the "Adjustment Shares").
(iii) If the number of Preferred Shares (or Common Shares, if
applicable) that are authorized by the Company's Articles of
Incorporation but not outstanding or reserved for issuance for
purposes other than upon exercise of the Rights ("Available
Shares") are not sufficient to permit the exercise in full of all
of the exercisable Rights in accordance with Section 11(a)(ii),
the Company shall:
(A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of a Right
(the "Current Value") over (2) the Purchase Price (such
excess, the "Spread"), and (B) with respect to each Right,
use its best efforts to make adequate provision to
substitute in lieu soley of the Adjustment Shares, upon
payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Preferred Shares,
Common Shares and/or other equity securities of the
Company (including, without limitation, shares, or units
of shares, of preferred stock which based on, among other
things, the dividend and liquidation rights of such
preferred shares, have substantially the same economic
value as Common Shares (such shares of preferred stock,
"common stock equivalents")), (4) debt securities of the
Company, (5) other assets, or (6) any combination of the
foregoing (whichever substituted, the "Substitute
Consideration"), having an aggregate value equal to the
Current Value, where such aggregate value has been
determined by the Board based upon the advice of an
investment banking firm selected by the Board; provided,
however, if the Company shall not have made adequate
provision to deliver substitute consideration pursuant to
clause (B) above within 30 days following the later of (x)
the date of the occurrence of a Section 11(a)(ii) Event
and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of
(x) and (y) being referred to herein as the "Section
11(a)(ii) Trigger Date"), then the Company shall be
obligated to use its best efforts to obtain shareholder
approval for the authorization of additional Preferred
Shares (or Common Shares, as the case may be) within 90
days after the Section 11(a)(ii) Trigger Date (such
period, as it may be extended, the "Substitution Period")
to enable each holder of Rights that have not become void
pursuant to Section 7(e) to receive aggregate value equal
to the Spread. To the extent that some action need be
taken pursuant to the first and/or second sentences of
this Section 11(a)(iii), the Company (xx) shall provide,
subject to Section 7(e), that such action shall apply
uniformly to all outstanding Rights, (yy) may suspend the
exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence
and to determine the value thereof, and (zz) shall not
provide Substitute Consideration except to the extent that
the aggregate number of Adjustment Shares for which Rights
are then exercisable exceeds the number of Available
Shares. In the event of any such suspension, the Company
shall give notice to the Rights Agent and either advise in
writing all shareholders of record as of that date or
issue a public announcement stating that the
exercisability of the Rights has been temporarily
suspended, as well as a notice to the Rights Agent and
either a written notice to all shareholders of record or a
public announcement at such time as the suspension is no
longer in effect. For purposes of this Section 11(a)(iii),
(xxx)
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<PAGE>
the value of the Preferred Shares shall be the Current Market
Price (as determined pursuant to Section 11(d)(ii)) per Preferred
Share on the Section 11(a)(ii) Trigger Date, (yyy) the value of
the Common Shares (if applicable) shall be the Current Market
Price (as determined pursuant to Section 11(d)(i)) per Common
Share on the Section 11(a)(ii) Trigger Date, and (zzz) the value
of any other "common stock equivalent" shall be deemed to have
the same value as a Common Share on such date. Notwithstanding
anything herein stated, the purchase price of a Right shall not
be less than the aggregate par value of the Preferred Shares or
Common Shares purchased upon exercise of a Right. If, despite
the best efforts of the Company, there is insufficient Substitute
Consideration available to enable each holder of Rights that have
not become void pursuant to Section 7(e) to receive aggregate
value equal to the Spread, neither the Company nor the members of
the Board shall be liable in any respect.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of any security of the Company entitling
them to subscribe for or purchase (for a period expiring within 45 calendar
days after such record date) Preferred Shares (or shares having the same
rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than
the Current Market Price (as determined pursuant to Section 11(d)(ii)) per
Preferred Share on such record date, the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of Preferred Shares outstanding on
such record date, plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred shares so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at
such Current Market Price, and the denominator of which shall be the number
of Preferred Shares outstanding on such record date, plus the number of
additional Preferred Shares and/or equivalent preferred shares to be
offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however,
that in no event shall the consideration to be paid upon the exercise of
one Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right. In case such
subscription price may be paid by delivery of consideration part or all of
which may in a form other than cash, the value of such consideration shall
be as determined in good faith by the Board, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding
on the Rights Agent and the holders of the Rights. Preferred Shares owned
by or held for the account of the Company shall not be deemed outstanding
for the purpose of any such computation. Such adjustments shall be made
successively whenever such a record date is fixed, and in the event that
such rights, options or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all
holders of Preferred Shares (including any such distribution made in
connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash
(other than a regular quarterly dividend out of the earnings or retained
earnings of the Company), non-cash assets (other than a regular quarterly
dividend referred to above or a dividend payable in Preferred Shares, but
including any dividend payable in stock other than Preferred Shares) or
subscription rights or warrants (excluding those referred to in Section
11(b)), the Purchase Price
17
<PAGE>
to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Current Market Price (as
determined pursuant to Section 11(d)(ii)) per Preferred Share on such
record date, less the fair market value (as determined in good faith by the
Board, whose determination shall be described in a statement filed with the
Rights Agent and shall be binding on the Rights Agent and the holder of the
Rights) of the portion of the cash, non-cash assets or evidences of
indebtedness so to be distributed or of such subscription rights or
warrants applicable to a Preferred Share, and the denominator of which
shall be such Current Market Price (as determined pursuant to Section
11(d)(ii)) per Preferred Share; provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed, and in the event that
such distribution is not so made, the Purchase Price shall be adjusted to
be the Purchase Price which would have been in effect if such record date
had not been fixed.
(d)
(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii), the "Current Market
Price" per Common Share on any date shall be deemed to be the average
of the daily closing prices per share of such Common Shares for the 30
consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date, and for purposes of computations made
pursuant to Section 11(a)(iii), the "Current Market Price" per share
of Common Shares on any date shall be deemed to be the average of the
daily closing prices per share of such Common Shares for the 10
consecutive Trading Days immediately following such date; provided,
however, that in the event that the Current Market Price per share of
the Common Shares is determined during a period following the
announcement by the issuer of such Common Shares of (A) a dividend or
distribution on such Common Shares payable in such Common Shares or
securities convertible into such Common Shares (other than the
Rights), or (B) any subdivision, split, combination or
reclassification of such Common Shares, and prior to the expiration of
the requisite 30 Trading Day or 10 Trading Day period, as set forth
above, after the ex-dividend date for such dividend or distribution,
or the record date for such subdivision, split, combination or
reclassification, then, and in each such case, the "Current Market
Price" shall be properly adjusted to take into account ex-dividend
trading. The closing price for each Trading Day shall be the last
sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the Common Shares are listed or
admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the last sale
price or, if not so reported, the average of the high bid and low
asked prices in the over-the-counter market, as reported by The Nasdaq
National Market or The Nasdaq SmallCap Market or such other system
then in use, or, if on any such date the Common Shares are not quoted
or reported by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a
market in the Common Shares selected by the Board. If on any such
date no professional market maker is making a market in the Common
Shares, the "Current Market Price" per share shall mean the fair value
per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights
Agent and shall be binding on the Rights Agent and the holders of the
Rights. The term "Trading Day" shall mean a day on which the
principal national securities exchange on
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<PAGE>
which the Common Shares are listed or admitted to trading is open for
the transaction of business or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, a Business
Day.
(ii) For the purpose of any computation hereunder, the "Current Market
Price" per Preferred Share shall be determined in the same manner as
set forth above for the Common Shares in Section 11(d)(i) (other than
the last sentence thereof). If the Current Market Price per Preferred
Share cannot be determined in the manner provided above or if the
Preferred Shares are not publicly held or listed or traded in a manner
described in Section 11(d)(i), the "Current Market Price" per
Preferred Share shall be conclusively deemed to be an amount equal to
one thousand (1000) (as such number may be appropriately adjusted for
such events as stock splits, stock dividends and recapitalizations
with respect to the Common Shares occurring after the date of this
Agreement) multiplied by the Current Market Price per Common Share.
If neither the Common Shares nor the Preferred Shares are publicly
held or so listed or traded, "Current Market Price" per Preferred
Share shall mean the fair value per share as determined in good faith
by the Board, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights. For all purposes of this Agreement,
the "Current Market Price" of a Preferred Share Fraction shall be
equal to the "Current Market Price" of one Preferred Share divided by
one thousand (1000).
(e) Anything herein to the contrary notwithstanding, except the last
sentence of this Section 11(e), no adjustment in the Purchase Price shall
be required unless such adjustment would require an increase or decrease of
at least 1% in the Purchase Price; provided, however, that any adjustments
which by reason of this Section 11(e) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 11 shall be made to the nearest cent or to
the nearest ten-thousandths of a Common Share or other share (other than
Preferred Shares) or one-millionth of a Preferred Share, as the case may
be. Notwithstanding the first sentence of this Section 11(e), any
adjustment which would be required by this Section 11, but for the first
sentence of this Section 11(e), shall be made no later than the earlier of
(i) three years from the date of the transaction or event which mandates
such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or
Section 13(a), the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock other than Preferred
Shares, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Preferred Shares
contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and
(m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Preferred Share
Fractions (or other securities) purchasable from time to time hereunder
upon exercise of the Rights, all subject to further adjustment as provided
herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and
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<PAGE>
(c), each Right outstanding immediately prior to the making of such
adjustment shall thereafter evidence the right to purchase, at the adjusted
Purchase Price, that number of Preferred Share Fractions (calculated to the
nearest one-millionth of a Preferred Share) obtained by (i) multiplying (A)
the number of Preferred Share Fractions covered by a Right immediately
prior to this adjustment, by (B) the Purchase Price in effect immediately
prior to such adjustment of the Purchase Price, and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company, acting by the decision of the Board, may elect on or after
the date of any adjustment of the Purchase Price to adjust the number of
Rights, in lieu of any adjustment in the number of Preferred Share
Fractions purchasable upon the exercise of a Right. Each of the Rights
outstanding after the adjustment in the number of Rights shall be
exercisable for the number of Preferred Share Fractions for which a Right
was exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become that
number of Rights (calculated to the nearest one-millionth of a Preferred
Share) obtained by dividing the Purchase Price in effect immediately prior
to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall
either advise in writing all shareholders of record as of that date or make
a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time,
the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the
Rights Certificates have been issued, shall be at least 10 Business Days
later than the date of written advice to all shareholders of record or the
public announcement. If Rights Certificates have been issued, upon each
adjustment of the number of rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights
Certificates evidencing, subject to Section 14, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or at
the option of the Company, shall cause to be distributed to such holders of
record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof,
if required by the Company, new Rights Certificates evidencing all the
Rights to which such holders shall be entitled after such adjustment.
Rights Certificates so to be distributed shall be issued, executed and
countersigned in the manner provided for herein (and may bear, at the
option of the Company, the adjusted Purchase Price) and shall be registered
in the names of the holders of record of Rights Certificates on the record
date specified in the written notice to shareholders or the public
announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of Preferred Share Fractions issuable upon the exercise of the
Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per Preferred Share Fraction and the
number of Preferred Share Fractions which were expressed in the initial
Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then stated or par value, if any, of the number of
Preferred Share Fractions issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully
paid and non-assessable Preferred Share Fractions at such adjusted Purchase
Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until
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<PAGE>
the occurrence of such event the issuance to the holder of any Right
exercised after such record date the Preferred Share Fractions and other
capital stock or securities of the Company, if any, issuable upon such
exercise over and above the number of Preferred Share Fractions and other
capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares or securities (fractional or
otherwise) upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and
to the extent that in its sole discretion the Board shall determine to be
advisable in order that any (i) consolidation or subdivision of the
Preferred Shares, (ii) issuance wholly for cash of any Preferred Shares at
less than the Current Market Price, or (iii) issuance wholly for cash of
Preferred Shares or securities which by their terms are convertible into or
exchangeable for Preferred Shares, (iv) stock dividends or (v) issuance of
rights, options or warrants referred to in this Section 11, hereafter made
by the Company to holders of its Preferred Shares shall not be taxable to
such shareholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date and prior to the Expiration Date, (i) consolidate
with any Person (other than a Subsidiary of the Company in a transaction
that complies with Section 11(o)), (ii) merge with or into any other Person
(other than a Subsidiary of the Company in a transaction which complies
with Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to
sell or transfer), in one transaction, or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning
power of the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its Subsidiaries in
one or more transactions each of which complies with Section 11(o)), if (A)
at the time of or immediately after such consolidation, merger, sale or
transfer there are any rights, warrants or other instruments or securities
outstanding or agreements in effect that would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights, (B)
prior to, simultaneously with or immediately after such consolidation,
merger, sale or transfer, the shareholders of the Person who constitutes,
or would constitute, the "Principal Party" for purposes of Section 13(a)
shall have received a distribution of Rights previously owned by such
Person or any of its Affiliates and Associates, or (C) with respect to a
transaction of the nature listed in Section 11(a)(ii), there are
insufficient Available Shares to permit the exercise in full of the Rights,
except to the extent that Substitute Consideration has been substituted.
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23, Section 24 or Section 27, take
(or permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded
by the Rights, unless such action is approved by the Board.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend
Declaration Date and prior to the Distribution Date (i) declare or pay any
dividend on the outstanding Common Shares payable in Common Shares, (ii)
subdivide or split the outstanding Common Shares, or (iii) combine or
consolidate the outstanding Common Shares into a smaller number of Common
Shares or effect a reverse stock split of the outstanding Common Shares, or
(iv) issue any shares of its capital
21
<PAGE>
stock in a reclassification of the Common Shares (including any such
reclassification in connection with the consolidation or merger in which
the Company is the continuing or surviving corporation), the number of
Rights associated with each Common Share then outstanding, or issued or
delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated
with each Common Share following any such event shall equal the result
obtained by multiplying the number of Rights associated with each Common
Share immediately prior to such event by a fraction, the numerator of which
shall be the number of Common Shares outstanding immediately prior to the
occurrence of such event and the denominator of which shall be the total
number of Common Shares outstanding following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Section 11 or Section 13, the
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Rights Agent, and with each transfer agent for the Preferred
Shares and the Common Shares, a copy of such certificate, and (c) if such
adjustment is made after the Distribution Date, mail a brief summary thereof to
each holder of a Rights Certificate (or, if prior to the Distribution Date, to
each holder of a certificate representing Common Shares) in accordance with
Section 26. The Rights Agent shall be fully authorized to rely and be protected
in relying on any such certificate and on any adjustment therein described.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
--------------------------------------------------------------
Power
- -----
(a) If, following the Stock Acquisition Date, directly or indirectly,
(i) the Company shall consolidate with, or merge with and into, any
other Person (other than a Subsidiary of the Company in a transaction
that complies with Section 11(o)), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger,
(ii) any Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o)) shall consolidate with,
or merge with or into, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger
and, in connection with such consolidation or merger, all or part of
the outstanding Common Shares held by existing shareholders of the
Company shall be changed into or exchanged for stock or other
securities of any Person or cash or any other property (except as the
result of statutory dissenters' rights), or
(iii) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer), in one transaction
or a series of related transactions, assets, or earning power
aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Person or
Persons (other than the Company or any Subsidiary of the Company in
one or more transactions each of which complies with Section 11(o)),
then, and in each such case, except as contemplated by Section 13(d),
proper provision shall be made so that: (A) each holder of a Right,
except as otherwise provided herein, shall thereafter have the right
to receive, upon the exercise thereof at the then current Purchase
Price in accordance with the terms of this Agreement if no Section
11(a)(ii) Event or Section 13 Event had occurred, such number of
validly authorized and issued, fully paid, non-assessable and freely
tradeable Common Shares of the Principal Party,
22
<PAGE>
not subject to any liens, encumbrances, rights of first refusal or
other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price if no Section 11(a)(ii)
Event or Section 13 Event had occurred by the number of Preferred
Share Fractions for which a Right would be exercisable immediately
prior to the first occurrence of a Section 13 Event if no Section
11(a)(ii) Event or Section 13 Event had occurred and (2) dividing that
product (which, following the first occurrence of a Section 13 Event,
shall be referred to as the "Purchase Price" for each Right for all
purposes of this Agreement) by 50% of the Current Market Price
(determined pursuant to Section 11(d)) per Common Share of such
Principal Party on the date of consummation of such Section 13 Event;
(B) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and
duties of the Company pursuant to this Agreement; (C) the term
"Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 shall
apply only to such Principal Party following the first occurrence of a
Section 13 Event; (D) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number
of its Common Shares) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be, in
relation to its Common Shares thereafter deliverable upon the exercise
of the Rights; and (E) the provisions of Section 11(a)(ii) shall be of
no effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean (i) in the case of any transaction
described in Section 13(a)(i) or (ii), the Person that is the issuer of any
securities into which Common Shares are converted in such merger or
consolidation, and if no securities are so issued, the Person that is the
other party to such merger or consolidation, and (ii) in the case of any
transaction described in Section 13(a)(iii), the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions; provided, however, that in
any such case, (A) if the Common Shares of such Person are not at such time
and have not been continuously over the preceding 12 month period
registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the Common Shares of which
are and have been so registered, "Principal Party" shall refer to such
other Person; and (B) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Shares of two or more of
which are and have been so registered, "Principal Party" shall refer to
whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value.
(c)
(i) The Company shall not consummate any such transaction constituting
a Section 13 Event unless the Principal Party shall have a sufficient
number of authorized Common Shares which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company
and such Principal Party shall have executed and delivered to the
Rights Agent a supplemental agreement providing for the terms set
forth in Sections 13(a) and (b) and further providing that, as soon as
practicable after the date of consummation of any transaction
constituting a Section 13 Event, the Principal Party will (A) prepare
and file a registration statement under the Act with respect to the
Rights and the securities purchasable upon exercise of the Rights on
an appropriate form, and will use its best efforts to cause such
registration statement to (1) become effective as soon as practicable
after such filing and (2) remain effective (with a prospectus at all
times meeting the requirements of the Act) until the Expiration Date,
and (B) will deliver to holders of the
23
<PAGE>
Rights historical financial statements for the Principal Party and
each of its Affiliates that comply in all respects with the
requirements for registration on Form 10 under the Exchange Act.
(ii) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. If
a Section 13 Event shall occur at any time after the occurrence of a
Section 11(a)(ii) Event, the Rights which have not theretofore been
exercised shall thereafter become exercisable in the manner described
in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary, Section 13
shall not be applicable to a transaction described in subparagraphs (i) and
(ii) of Section 13(a) if: (i) such transaction is consummated with a
Person or Persons who acquired Common Shares pursuant to a Permitted Offer
(or a wholly owned Subsidiary of any such Person or Persons); (ii) the
price per Common Share offered in such transaction is not less than the
price per Common Share paid to all holders of Common Shares whose shares
were purchased pursuant to such Permitted Offer, and (iii) the form of
consideration offered in such transaction is the same as the form of
consideration paid pursuant to such Permitted Offer. Upon consummation of
any such transaction contemplated by this Section 13(d), all Rights
hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights, except
prior to the Distribution Date as provided in Section 11(p), or to
distribute Rights Certificates that evidence fractional Rights. The
Company may, in lieu of such fractional Rights, pay to the registered
holders of the Rights Certificates with regard to which such fractional
Rights would otherwise be issuable, an amount in cash equal to the same
fraction of the current market value of a whole Right. For purposes of
this Section 14(a), the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the
date on which such fractional Rights would have been otherwise issuable.
The closing price of the Rights for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading, or if the Rights are
not listed or admitted to trading on any national securities exchange, the
last sale price or, if not so reported, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq
System or such other system then in use or, if on any such date the Rights
are not reported or quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Board. If on any such date
no such professional market maker is making a market in the Rights, the
fair value of the Rights on such date shall be as determined in good faith
by the Board, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding upon the Rights Agent and the
holders of the Rights.
(b) The Company shall not be required to issue fractions of Preferred
Shares upon exercise of the Rights or to distribute certificates that
evidence fractional Preferred Shares, except in each case, and prior to the
Stock Acquisition Date, fractions which are integral multiples of Preferred
Share Fractions. The Company may, in lieu of fractional Preferred Shares
which are not integral multiples of Preferred Share Fractions, pay to the
registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction
of the current market value of one Preferred Share. For purposes of this
Section 14(b), the
24
<PAGE>
current market value of a Preferred Share shall be as determined pursuant
to Section 11(d)(ii) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event and at or after a
Section 11(a)(ii) Election or Section 24(a) Election, the Company shall not
be required to issue fractions of Common Shares upon exercise of the Rights
or to distribute certificates that evidence fractional Common Shares. The
Company may, in lieu of fractional Common Shares, pay to the registered
holders of Rights Certificates at the time such Rights are exercised as
herein provided an amount in cash equal to the same fraction of the current
market value of one Common Share. For purposes of this Section 14(c), the
current market value of one Common Share shall be as determined pursuant to
Section 11(d)(i) for the Trading Day immediately prior to the date of such
exercise.
(d) In the event the Company determines it advisable to issue fractions of
Rights, fractions of Preferred Shares for fractions which are not integral
multiples of Preferred Share Fractions or fractions of Common Shares as
permitted in this Agreement, the Company shall immediately so notify the
Rights Agent at least five Business Days prior to the date such fractions
are to be issued. The Company and the Rights Agent shall then adopt
mutually agreeable procedures with respect to any such issuance. If the
Company and the Rights Agent are unable to agree upon such procedures, the
Rights Agent may resign and be discharged from its duties under this
Agreement or the Company may remove the Rights Agent, both as set forth in
Section 21; provided, however, that only one day's prior written notice
need be given of such resignation or removal.
(e) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights, or any fractions of Preferred
Shares for fraction which are not integral multiples of a Preferred Share
Fraction, or any fractional Common Shares (if applicable) upon exercise of
a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
associated Common Share certificates). Any registered holder of any Rights
Certificate (or, prior to the Distribution Date, the associated Common Share
certificate), without the consent of the Rights Agent or of the holder of any
other Rights Certificate (or, prior to the Distribution Date, the associated
Common Share certificate), may, in such holder's own behalf and for such
holder's own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
such holder's right to exercise the Rights in the manner provided in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right, by accepting
---------------------------
the same, consents and agrees with the Company and the Rights Agent and with
every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of Common Shares;
(b) on or after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered
at the office or offices of the Rights Agent designated for such purposes,
duly endorsed or accompanied by a proper instrument of transfer
25
<PAGE>
and with the appropriate forms and certificates duly completed and fully
executed and otherwise complying with any other requirements set forth in
this Agreement;
(c) subject to Section 6(a) and Section 7(f), the Company and the Rights
Agent may deem and treat the Person in whose name a Rights Certificate (or,
prior to the Distribution Date, the associated Common Share certificate) is
registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the
Rights Certificate or the associated Common Share certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent, subject to the
last sentence of Section 7(e), shall be required to be affected by any
notice or knowledge to the contrary; and
(d) Notwithstanding anything in this Agreement or the Rights to the
contrary, the Company, the Board and the Rights Agent shall not have any
liability to any holder of a Right or other Person as a result of the
inability of the Company or the Rights Agent to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No holder, as
--------------------------------------------------
such, of any Rights Certificate shall be entitled to vote, receive dividends or
be deemed for any purpose the holder of the number of Preferred Share Fractions
or any other securities of the Company (including the Common Shares) which may
at any time be issuable on the exercise of the Rights represented thereby, nor
shall anything contained herein or in any Rights Certificate be construed to
confer upon the holder of any Rights Certificate, as such, any of the rights of
a shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting shareholders (except as provided in Section 25), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent
---------------------------
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand
of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the acceptance,
administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Company also agrees to indemnify
the Rights Agent for, and to hold it harmless against, any loss, liability
or expense incurred without negligence, bad faith or willful misconduct on
the part of the Rights Agent, for anything done or omitted by the Rights
Agent in connection with the acceptance, administration and execution of
this Agreement and the exercise and performance of its duties hereunder,
including without limitation the costs and expenses of defending against
and appealing any such claim of liability.
(b) The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, instruction, direction, consent,
certificate, statement or other paper or document
26
<PAGE>
believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent
---------------------------------------------------------
(a) Any Person into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any Person resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any Person succeeding to the corporate
trust or stock transfer business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto; provided, however, that such
Person would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the
Rights Certificates shall have been countersigned but not delivered, any
such successor Rights Agent may adopt the countersignature of a predecessor
Rights Agent and deliver such Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the
name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates
and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed, and
at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under
its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates
either in its prior name or in its changed name; and in all such cases such
Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and
----------------------
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Rights Certificates (or, prior to
the Distribution Date, the associated Common Share certificates), by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel selected by it (who may
be legal counsel for the Company), and the advice of such counsel shall be
full and complete authorization and protection to the Rights Agent as to
any action taken, suffered or omitted by it in good faith and in accordance
with such advice.
(b) Whenever in the performance of its duties under this Agreement, the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including without limitation the identity of any Acquiring Person or
Adverse Person and the determination of "Current Market Price") be proved
or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chief Executive
Officer, the President and Chief Operating Officer, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant
Secretary of the Company and delivered to the Rights Agent; and any such
certificate shall be full and complete authorization and protection to the
Rights Agent for any action taken, suffered or omitted in good faith by it
under the provisions of this Agreement in reliance upon such certificate.
27
<PAGE>
(c) The Rights Agent shall not be liable or responsible hereunder except
for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity
or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights
Certificate; nor shall it be responsible for any adjustment required under
the provisions of Section 11, Section 13 or Section 24 or responsible for
the manner, method or amount of any such adjustment or the ascertaining of
the existence of facts that would require any such adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after
receipt of a certificate delivered pursuant to Section 12 describing any
such adjustment); nor shall it be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares or
Common Shares to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Preferred Shares or Common Shares will,
when so issued, be validly authorized and issued, fully paid and non-
assessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably
be required by the Rights Agent for the carrying out or performing by the
Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions or direction with respect to the administration of this
Agreement and the exercise and performance of its duties hereunder from any
one of the Chief Executive Officer, the President and Chief Operating
Officer, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Company, and to apply to such
officers for advice, instructions or direction in connection with its
duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions or direction of
any such officer or for any delay in acting while waiting for those
instructions or direction.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Rights Agent under this Agreement. Nothing herein shall preclude
the Rights Agent or any shareholder, director, officer or employee of the
Rights Agent from acting in any other capacity for the Company or for any
other Person.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be liable
or responsible for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss or damages to the Company resulting
from any such act, default, neglect or misconduct; provided, however,
reasonable care was exercised in the selection and continued employment
thereof.
28
<PAGE>
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights
or powers if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is
not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to exercise, as the case may be, has either
not been duly completed and executed or indicates an affirmative response
to clause 1 and/or 2 thereof, the Rights Agent shall not take any further
action with respect to such requested exercise or transfer until it has
received instructions with respect thereto from the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor Rights
----------------------
Agent may resign and be discharged from its duties under this Agreement upon 30
days' notice in writing mailed to the Company, and to each transfer agent of the
Common Shares and the Preferred Shares the existence of which the Rights Agent
has received notice from the Company, by registered or certified mail, and to
the registered holders of the Rights Certificates after the Distribution Date
(or, prior to the Distribution Date, the associated Common Share certificates)
by first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Shares and the Preferred Shares, by registered or certified mail, and to
the registered holders of the Rights Certificates after the Distribution Date
(or, prior to the Distribution Date, the associated Common Share certificates)
by first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the registered holder of a Rights Certificate
(or, prior to the Distribution Date, the associated Common Share certificate)
who shall, with such notice, submit such holder's Rights Certificate (or, prior
to the Distribution Date, the associated Common Share certificate) for
inspection by the Company, then such registered holder may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States,
the State of Minnesota or the State of New York (or of any other state of the
United States so long as such corporation is authorized to do business as a
banking institution in the State of Minnesota or the State of New York) in good
standing, having an office in the State of Minnesota or the State of New York,
which is authorized under such laws to exercise corporate trust powers and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $5 million or an affiliate of such a corporation. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for such purpose. Not later than the effective date of any
such appointment, the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Shares and the
Preferred Shares, and, after the Distribution Date, mail a notice thereof in
writing to the registered holders of the Rights Certificates (or, prior to the
Distribution Date, the associated Common Share certificates) by first-class
mail. Failure to give any notice provided for in this Section 21 or to appoint
a successor Rights Agent, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
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<PAGE>
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
-----------------------------------
provisions of this Agreement or of the Rights to the contrary, but subject to
Section 7(e), the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be specified by the Board to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Rights Certificates
made in accordance with the provisions of this Agreement.
Section 23. Redemption and Termination
--------------------------
(a) Subject to the provisions of Section 27, the Board may, at its option,
at any time prior to the first to occur of the close of business on (i) the
tenth Business Day following the Stock Acquisition Date (or, if the Stock
Acquisition Date shall have occurred prior to the Record Date, the close of
business on the tenth Business Day following the Record Date), (ii) the
tenth Business Day after a determination, pursuant to Section 11(a)(ii)(B),
that a person is an Adverse Person, or (iii) the Final Expiration Date,
redeem all but not less than all of the then outstanding Rights at a
redemption price of $.001 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price") and the Company may, at its option,
pay the Redemption Price in Preferred Shares (based on the "Current Market
Price," as defined in Section 11(d)(ii) of the Preferred Shares at the time
of redemption), Common Shares (based on the "Current Market Price," as
defined in Section 11(d)(i) of the Common Shares at the time of
redemption), cash or any other form of consideration deemed appropriate by
the Board. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of
a Section 11(a)(ii) Event until such time as the Company's right of
redemption hereunder has expired. The Company shall promptly notify the
Rights Agent following the action of the Board ordering redemption of the
Rights.
(b) Immediately upon the action of the Board ordering the redemption of the
Rights pursuant to this Section 23, and without any further action and
without any notice, the right to exercise the Rights will terminate, and
the only right thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held. Promptly after the action of the
Board ordering the redemption of the Rights, the Company shall give notice
of such redemption to the Rights Agent and the registered holders of the
then outstanding Rights by mailing such notice to all such holders at each
holder's last address as it appears upon the registry books of the Rights
Agent for the Common Shares; provided, however, the failure to give or any
defect in any such notice shall not affect the validity of such redemption.
Any notice which is mailed in the manner provided in Section 26 shall be
deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made.
Section 24. Exchange
--------
(a) The Board may, at its option, at any time after a Section 11(a)(ii)
Event, exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the
provisions of Section 7(e)) for Preferred Share Fractions (or, at the
election of the Board (a "Section 24(a) Election"), Common Shares) at an
exchange ratio of one Preferred Share Fraction (or Common Share, as the
case may be) per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
exchange ratio being hereinafter referred to as the "Exchange Ratio").
30
<PAGE>
(b) Immediately upon the action of the Board ordering the exchange of any
Rights pursuant to Section 24(a) and without any further action and without
any notice, the right to exercise such Rights shall terminate, and the only
right thereafter of a holder of such Rights shall be to receive that number
of Preferred Share Fractions (or Common Shares, as the case may be) equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly notify the Rights Agent and give public
notice of any such exchange; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in
the manner provided in Section 26 shall be deemed given, whether or not the
holder receives the notice. Each such notice of exchange will state the
method by which the exchange of Preferred Share Fractions (or Common
Shares, as the case may be) for Rights will be effected and, in the event
of any partial exchange, shall be effected pro rata based on the number of
Rights (other than Rights which have become void pursuant to the provision
of Section 7(e)) held by each holder of Rights.
(c) If there are not sufficient Preferred Shares (or Common Shares, if
applicable) issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 24,
the Company shall take all such action as may be necessary to authorize
additional Preferred Shares (or Common Shares, as the case may be) for
issuance upon exchange of the Rights.
(d) The Company shall not be required to issue fractions of Common Shares
or Preferred Shares or to distribute certificates which evidence fractional
Common Shares or Preferred Shares, except in each case for fractions of
Preferred Shares which are integral multiples of Preferred Share Fractions.
In lieu of such fractional Preferred Shares which are not integral
multiples of Preferred Share Fractions, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
fractional Preferred Shares would otherwise be issuable, an amount in cash
equal to the same fraction of the Current Market Value of a whole Preferred
Share, as determined pursuant to the second sentence of Section 11(d)(ii),
for the Trading Day immediately prior to the date of exchange pursuant to
this Section 24.
(e) If applicable, the Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional
Common Shares. In lieu of such fractional Common Shares, there shall be
paid to the registered holders of the Rights Certificates with regard to
which such fractional Common Shares would otherwise be issuable, an amount
in cash equal to the same fraction of the Current Market Value of a whole
Common Share. For the purposes of this Section 24(e), the Current Market
Value of a whole Common Share shall be as determined pursuant to Section
11(d)(i) for the Trading Day immediately prior to the date of exchange
pursuant to this Section 24.
Section 25. Notice of Certain Events
------------------------
(a) If the Company shall propose, at any time after the Distribution Date,
(i) to pay any dividend payable in stock of any class to the holders of
Preferred Shares or to make any other distribution to the holders of
Preferred Shares (other than a regular quarterly cash dividend out of
earnings or retained earnings of the Company), (ii) to offer to the holders
of Preferred Shares rights or warrants to subscribe for or to purchase any
additional Preferred Shares or shares of stock of any class or any other
securities, rights or options, (iii) to effect any reclassification of the
Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any
consolidation or merger into or with any other Person (other
31
<PAGE>
than a Subsidiary of the Company in a transaction which complies with
Section 11(o)), or to effect any sale or other transfer (or to permit one
or more of its Subsidiaries to effect any sale or other transfer), in one
transaction or a series of related transactions, of more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person or Persons (other than the Company and/or any of
its Subsidiaries in one or more transactions each of which complies with
Section 11(o)), or (v) to effect the liquidation, dissolution or winding up
of the Company, then, in each such case, the Company shall give to each
registered holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend or
distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of Preferred Shares, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered
by Section 25(a)(i) or (ii) at least ten Business Days prior to the record
date for determining holders of Preferred Shares for purposes of such
action, and in the case of any such other action, at least ten Business
Days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Preferred Shares, whichever shall
be the earlier.
(b) In case any Triggering Events shall occur, then, in any such case, (i)
the Company shall as soon as practicable thereafter give to each registered
holder of a Rights Certificate, to the extent feasible and in accordance
with Section 26, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights
under Section 11(a)(ii) or Section 13, and (ii) in the event of an
appropriate Section 11(a)(ii) Election or Section 24(a) Election, all
references in Section 25(a) shall be deemed thereafter to refer to Common
Shares and/or, if appropriate, other securities.
Section 26. Notices
-------
(a) Notices, communications or demands authorized by this Agreement to be
given or made by the Rights Agent or by the registered holder of any Rights
Certificate (or, prior to the Distribution Date, the associated Common
Share certificate) to or on the Company shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Rights Agent) as follows:
Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
Attention: Chief Executive Officer
with a copy to:
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michele D. Vaillancourt, Esq.
32
<PAGE>
(b) Subject to the provisions of Section 21, notices, communications or
demands authorized by this Agreement to be given or made by the Company or
by the holder of any Rights Certificate (or, prior to the Distribution
Date, the associated Common Share certificate) to or on the Rights Agent
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the
Company) as follows:
[RIGHTS AGENT]
Attention: __________________
(c) Notices, communications or demands authorized by this Agreement to be
given or made by the Company or the Rights Agent to the registered holder
of any Rights Certificate (or, prior to the Distribution Date, the
associated Common Share certificate) shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed to such holder at the
address of such holder as shown on the registry books of the Company
maintained by the Company, the Rights Agent or the transfer agent for the
Common Shares, as appropriate.
Section 27. Supplements and Amendments. Prior to the Distribution Date and
--------------------------
subject to the penultimate sentence of this Section 27, the Company may and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement, including without limitation to modify or amend the
definition of Acquiring Person set forth in Section 1(a) hereof, to change the
Purchase Price set forth in Section 4(a) and Section 7(b) hereof, and to extend
the Final Expiration Date, without the approval of any holders of certificates
representing Common Shares and without the approval of any holders of Rights or
holders of certificates representing Rights. From and after the Distribution
Date and subject to the penultimate sentence of this Section 27, the Company may
and the Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order
(a) to cure any ambiguity herein, (b) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other provision
herein, or (c) to otherwise change or supplement the provisions hereunder in any
manner which the Company may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Rights Certificates (other than
Rights Certificates evidencing Rights that shall have become null and void
pursuant to Section 7(e)). Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section 27, the Rights Agent
shall execute such supplement or amendment. Notwithstanding anything contained
in this Agreement to the contrary, no supplement or amendment shall be made
which lowers the thresholds for an Acquiring Person or Adverse Person to less
than the greater of (i) the sum of .001% and the largest percentage of
outstanding Common Shares then known by the Company to be beneficially owned by
any Person (other than the Company, any Subsidiary of the Company, or any Person
organized, appointed or established by the Company and holding Common Shares for
or pursuant to the terms of any such plan, or, prior to or on the Spin-Off
Distribution Date, Bio-Vascular) or (ii) 10% of the outstanding Common Shares;
which extends the period during which Rights may be redeemed unless at the time
of the amendment, no Person has become an Acquiring Person or designated an
Adverse Person or a majority of the Board of Directors are Continuing Directors;
or which changes the Redemption Price or the number of Preferred Share Fractions
for which a Right is exercisable. Prior to the Distribution Date, the interests
of the holders of Rights shall be deemed coincident with the interests of the
holders of Common Shares.
Section 28. Successors. All the covenants and provisions of this Agreement by
----------
or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
33
<PAGE>
Section 29. Determinations and Actions by the Board. For all purposes of this
---------------------------------------
Agreement, any calculation of the number of Common Shares outstanding at any
particular time, including for purposes of determining the particular percentage
of such outstanding Common Shares of which any Person is the Beneficial Owner,
shall be made in accordance with the last sentence of Rule 13d-3d(d)(1)(i) of
the General Rules and Regulations under the Exchange Act, whether or not the
Common Shares are registered under the Exchange Act. The Board shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board or to the Company or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (a) interpret the provisions of this
Agreement, and (b) make all calculations and determinations deemed necessary or
advisable for the administration of this Agreement (including a determination to
redeem or not redeem the Rights or to amend or supplement this Agreement). All
such actions, calculations, interpretations and determinations (including for
purposes of clause (ii) below, all omissions with respect to the foregoing)
which are done or made by the Board in good faith shall (i) be final, conclusive
and binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (ii) not subject the Board or any director to any liability
to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, the associated Common Share certificates) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Shares).
Section 31. Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable for any purpose or under any set of
circumstances or as applied to any Person, such invalid, void or unenforceable
term, provision, covenant or restriction shall continue in effect to the maximum
extent possible for all other purposes, under all other circumstances and as
applied to all other Persons, and the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated; provided,
however, that notwithstanding anything in this Agreement or the Rights to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board
determines, at a time when a majority of its Directors are Continuing Directors,
in its good faith judgment that severing the invalid language from this
Agreement would adversely affect the purpose of effect of this Agreement, the
right of redemption set forth in Section 23 hereof shall be reinstated and shall
not expire until the close of business on the tenth Business Day following the
date of such determination by the Board.
Section 32. Governing Law. This Agreement, each Right and each Rights
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Minnesota and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the Sections of this
--------------------
Agreement are inserted for convenience only and shall not control or affect the
meaning or construction of any of the provisions hereof.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: VITAL IMAGES, INC.
By:____________________________ By:____________________________
Name:__________________________ Name:__________________________
Title:_________________________ Title:_________________________
Attest: [RIGHTS AGENT]
By:____________________________ By:____________________________
Name:__________________________ Name:__________________________
Title:_________________________ Title:_________________________
35
<PAGE>
EXHIBIT 4.5
FORM
of
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
of
SERIES A JUNIOR PREFERRED STOCK
of
VITAL IMAGES, INC.
Pursuant to Section 302A.401 of the
Minnesota Business Corporations Act
of the State of Minnesota
__________________
We, ___________, Chief Executive Officer, and ______________, Chief
Financial Officer and Treasurer, of Vital Images, Inc., a corporation organized
and existing under the Business Corporations Act of the State of Minnesota (the
"Corporation"), in accordance with the provisions thereof, DO HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors by the
Articles of Incorporation of the Corporation, the said Board of Directors on
February __, 1997, adopted the following resolution creating a series of
[NUMBER] shares of Preferred Stock designated as Series A Junior Preferred
Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its Articles
of Incorporation, a series of Preferred Stock of the Corporation be and it
hereby is created, and that the designation and amount thereof and the voting
powers, preferences and relative, participation, optional and other special
rights of the shares of such series, and the qualifications, limitation or
restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall
----------------------
be designated as Series A Junior Preferred Stock, par value $.01 per share (the
"Series A Junior Preferred Shares"), and the number of shares constituting such
series shall be [NUMBER].
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to Series A
Junior Preferred Shares with respect to dividends, the holders of Series A
Junior Preferred Shares shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of January, March, July and
October in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date,") commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a Series A Junior Preferred
Share, in an amount per share (rounded to the nearest cent) equal to (subject to
the provision for adjustment hereinafter set forth), 1,000 times the aggregate
per share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock"), since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a Series A Junior Preferred Share. In the
event the Corporation shall at any time after February __, 1997 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of Series A Junior Preferred Shares were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Shares as provided in paragraph (a) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue and be cumulative on outstanding
Series A Junior Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Junior Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Junior Preferred Shares entitled to receive
a quarterly dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Junior Preferred Shares in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date
for the determination of holders of Series A Junior Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. In addition to any other voting rights
-------------
required by law, the holders of Series A Junior Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Series A Junior Preferred Share shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the
2
<PAGE>
stockholders of the Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding shares of
Common Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the number of votes per share
to which holders of Series A Junior Preferred Shares were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in dividends on
the Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be increased by
two, and the holders of the Series A Junior Preferred Shares shall have the
right at such meeting, voting together as a single class, to elect two directors
of the Corporation to fill such newly created directorships. Each director
elected by the holders of Series A Junior Preferred Shares (herein called a
"Series A Preferred Director") shall continue to serve as such director for the
full term for which he shall have been elected, notwithstanding that prior to
the end of such term a default in dividends shall cease to exist. Any Series A
Preferred Director may be removed by, and shall not be removed except by, the
vote of the holders of record of the outstanding Series A Junior Preferred
Shares, voting together as a single class, at a meeting of the stockholders, or
of the holders of Series A Junior Preferred Shares called for such purpose.
Thereafter, so long as a default in dividends on the Series A Preferred Shares
shall exist (i) any vacancy in the office of a Series A Preferred Director may
be filled (except as provided in the following clause (ii)) by an instrument in
writing signed by the remaining Series A Preferred Director and filed with the
Corporation and (ii) in the case of the removal of any Series A Preferred
Director, the vacancy may be filled by the vote of the holders of the
outstanding Series A Junior Preferred Shares, voting together as a class, at the
same meeting at which such removal shall be voted. Each director appointed as
aforesaid by the remaining Series A Preferred Director shall be deemed, for all
purposes hereof, to be a Series A Preferred Director. Whenever the term of
office of the Series A Preferred Directors shall end and no default in dividends
on the Series A Junior Preferred Shares shall exist, the number of directors
constituting the Board of Directors of the Corporation shall be reduced by two.
For the purposes of this Section 3(b), a "default in dividends" on the Series A
Junior Preferred Shares shall be deemed to have occurred whenever there shall be
an arrearage in the payment of any dividends to which the holders of the Series
A Junior Preferred Shares are entitled to receive, whether or not any such
dividends have been declared by the Board of Directors, for six consecutive
quarters, and, having so occurred, such default shall be deemed to exist
thereafter until, but only until, all accrued dividends on all shares of Series
A Junior Preferred Shares then outstanding shall have been paid through the last
Quarterly Dividend Payment Date.
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total number
of the Series A Junior Preferred Shares shall, call a special meeting of holders
of such Series A Junior Preferred Shares for the election of directors. In the
case of such a written request, such special meeting shall be held within 90
days after the delivery of such request, and, in either case, at the place and
upon the notice provided by law and in the Bylaws of the Corporation; provided
that the Corporation shall not be required to call such a special meeting if
such request is received less than 120 days before the date fixed for the next
ensuing annual or special meeting of stockholders of the Corporation. After the
number of directors of the Corporation shall have been increased by two as
hereinabove provided, the number as so increased may thereafter be further
increased or decreased in such manner as may be permitted by the Articles of
Incorporation or By-laws, provided that no such action shall impair the right of
the holders of Series A Junior Preferred Shares to elect and
3
<PAGE>
to be represented by two directors as herein provided.
(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Junior
Preferred Shares and the holders of Common Stock (and the holders of shares of
any other series or class entitled to vote thereon) shall vote together as one
class on all matters submitted to a vote of stockholders of the Corporation.
Section 4. Certain Restrictions.
--------------------
(a) Whenever any dividends or other distributions payable on the
Series A Junior Preferred shares as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on Series A Junior Preferred Shares outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
share ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Preferred Shares;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Junior Preferred Shares, except dividends paid ratably on the
Series A Junior Preferred Shares and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Junior
Preferred Shares, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding
up) to the Series A Junior Preferred Shares; or
(iv) purchase or otherwise acquire for consideration any Series
A Junior Preferred Shares, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any Series A Junior Preferred Shares
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued Preferred
Stock and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up. In the event of
--------------------------------------
any voluntary or
4
<PAGE>
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series A Junior Preferred Shares shall be entitled to receive the
greater of (a) $1,000.00 per share, plus accrued dividends to the date of
distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Junior Preferred
Shares were entitled immediately prior to such event pursuant to clause (b) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Junior Preferred Shares shall at the same time be similarly exchanged or changed
in an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
Series A Junior Preferred Shares shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The Series A Junior Preferred Shares shall
-------------
not be redeemable.
Section 9. Ranking. The Series A Junior Preferred Stock shall rank
-------
junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. Fractional Shares. Series A Junior Preferred Shares may
-----------------
be issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Preferred Shares.
Section 11. Amendment. The Articles of Incorporation of the
---------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A Junior
Preferred Shares so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding Series A Junior Preferred
Shares, voting separately as a class.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and subscribed this
Certificate and do affirm the foregoing as true under penalties of perjury this
__ day of February, 1997.
_______________________________________
Andrew M. Weiss
Chief Executive Officer
ATTEST:
___________________________________
Gregory S. Furness
Chief Financial Officer
and Treasurer
6
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
January 10, 1997
John Karcanes, President
Bio-Vascular, Inc.
2575 University Avenue
St. Paul, MN 55114-1024
Dear Mr. Karcanes:
You have requested our opinion regarding the tax consequences of the proposed
spin-off by Bio-Vascular, Inc. (Bio) of its wholly-owned subsidiary, Vital
Images, Inc. (Vital). Our opinion is based solely upon the facts provided by
Bio-Vascular and its representatives. Accordingly, if there are any facts which
differ from or are not explicitly stated herein, our opinion may differ from
that expressed in this letter.
Facts
Bio-Vascular, a Minnesota corporation incorporated on July 29, 1985, develops,
manufactures and markets proprietary specialty medical products for use in
thoracic, cardiac, neuro and vascular surgery. In July of 1985 Bio acquired
certain rights to the cardiovascular business of Genetic Laboratories Inc.
(BioPlasty). In February of 1986 Bio acquired all of Genetic's interest in a
small diameter graft. Genetic (which subsequently changed its name to Bioplasty)
became a privately held company followings its chapter 7 bankruptcy filing. Bio,
while manufacturing some and marketing all of its acquired products, developed
and acquired various technologies, establishing a niche in the medical device
marketplace. Bio sought acquisitions which would leverage its existing
development and management capabilities. In 1993 and 1994, Bio's products seemed
to have settled into very low growth patterns or, in the case of its largest
selling product, declining sales. At that time Bio also closed clinical studies
of its small diameter graft, significantly reducing its growth potential. Bio,
seeking products and technology to generate growth, acquired Vital. Vital, an
Iowa corporation incorporated on September 3, 1988 develops, markets and
supports software products for three-dimensional visualization and visualization
systems. At the time of its acquisition, Vital possessed products suitable for
current marketing but lacked the cash to develop further its products and also
lacked depth in its management resources and capabilities, both of which Bio was
able to supply. Bio acquired Vital on May 24, 1994 in a tax-free acquisition
pursuant to Internal Revenue Code section 368(a)(1)(B). One share of Bio stock
was exchanged for each share of outstanding Vital stock. The primary shareholder
of Vital, at the time of its acquisition by Bio, was Dr. Vincent Argiro, who
owned 31 percent of Vital. Since the acquisition, Dr. Argiro has owned and
continues to own approximately 5.4 to 5.6 percent of Bio stock. As a result of
the acquisition, Bio became the common parent of an
<PAGE>
John Karcanes, President 2 January 10, 1997
affiliated group of corporations, namely Bio and Vital, which currently files a
consolidated federal income tax return as an accrual basis taxpayer whose fiscal
year ends October 31.
As a result of the acquisition, Bio was able to provide key resources and the
expertise necessary to develop Vital's core operational, management and
strategic infrastructure. Simultaneously and unexpectedly, Bio's own research
led to its significant success in the development and marketing of tissue
technology. The result of this fortuitous but unanticipated development means,
however, that extensive financial and management resources are currently
required by both companies to maximize their technologies and related
opportunities. In other words, with limited resources available to allocate
between these two disparate technologies (surgical and imaging), with their
diverging distribution requirements and their significant demands for management
focus, the lack of synergy between Bio and Vital has become both apparent and
pronounced. Prompted by this divergence and the resulting lack of synergy, Bio
now proposes to distribute Vital stock pro rata to its shareholders. In
conjunction with the proposed transaction, Bio will make an equity contribution
to Vital of its outstanding inter-company receivable (approximately $3 million)
and cash in amount of approximately $10 million. This contribution is intended
to provide Vital with resources sufficient to allow it to complete development
of its imaging workstation product and to increase its distribution network. All
property (real, intellectual or intangible) will remain with its respective
business following the separation. For each two shares of Bio common stock, held
on the date of record, Bio shareholders will receive one share of Vital common
stock. The proposed date of distribution is March 31, 1997.
On October 31,1996, Bio had 20,000,000 authorized shares of which 9,484,898 were
issued and outstanding. Prior to the distribution, Dr. Vincent Argiro will
decrease, through stock sales on the open market, his percentage ownership
(including options) of Bio to below 5 percent. As a result, following the
distribution shareholders owning more than 5 percent of common stock will
include only Perkins Capital Management, Inc., which currently controls 9.4
percent. Because Perkins Capital Management Inc. does not possess beneficial
ownership of its shares, in substance there will be no "significant
shareholders," as defined by Rev. Proc. 96-30, following the spin-off. To ensure
continuity of management and to facilitate the transition following the
distribution, the Board of Directors of Bio and Vital will share three common
directors for a period of no more than 18 months. After this period of
transition, a one-member overlap between the Bio and Vital boards is likely.
There will also be a period of transition during which Bio will provide
management support for Vital which currently lacks a developed independent
management structure of its own. Vital will assume responsibility for Accounting
Finance, Human Resources and Regulatory Affairs, within a reasonable period of
time after the hire of each of the individuals responsible for any particular
activity, presumably for a given department within two months of each new hire.
It is expected that the transition will be effected, in toto, as the hire of
different positions and responsibilities is completed. In no case will the
entire transition period extend beyond six months post-distribution.
Consideration for this management support will be for fair market value based on
terms and conditions arrived at by the parties
<PAGE>
John Karcanes, President 3 January 10, 1997
bargaining at arm's length. After a period of transition during which the new
CFO will put in place Vital's own management structure, Bio will provide no
further management support for Vital and the separation of the two entities will
then be complete.
Representations:
The representatives of Bio and Vital make the following representations.
. The fair market value of Vital stock to be received by each shareholder of Bio
will be approximately equal to the fair market value of Bio stock surrendered
by the shareholder in the exchange. Thus for each two shares of Bio owned,
one share of Vital will be distributed to each Bio shareholder.
. Following the transaction, Bio and Vital will each continue the active conduct
of its business, independently and with its separate employees. Vital will
assume responsibility for Accounting, Finance, Human Resources and Regulatory
Affairs, within a reasonable period of time after the hire of each of the
individuals responsible for any particular activity, presumably for a given
department within two months of each hire. It is expected that the transition
will be effected, in toto, as the hire of different positions and
responsibilities is completed. In no case will the entire transition period
extend beyond six months post-distribution.
. The distribution of Vital stock is carried out because the separation of Bio-
Vascular and Vital will enhance the success of their respective businesses for
the following business reasons.
The separation:
. will make the corporations more attractive to the capital markets;
. will allow greater management focus on the separate businesses;
. will allow each business to invest in research and development and
marketing appropriate to its particular stage of development;
. allow each business to focus its technology base and research and
development process on its particular and distinct needs; and,
. will allow each business to focus on its distinct marketing strategies and
sale channels.
. There is no plan or intention by any shareholder who owns 5 percent or more of
the stock of the Bio, and the management of Bio, to its best knowledge, is not
aware of any plan or
<PAGE>
John Karcanes, President 4 January 10, 1997
intention on the part of any particular remaining shareholder or security
holder of Bio to sell, exchange, transfer by gift, or otherwise dispose of
any stock in, or securities of, either Bio or Vital after the transaction
with either the result or intention of disturbing the shareholders'
continuity of proprietary interest in either Vital or Bio.
. There is no plan or intention by either Bio or Vital, directly or through any
subsidiary corporation, to purchase any of its outstanding stock after the
transaction.
. Bio and Vital have no accumulated earnings and profits at the beginning of
their respective taxable years;
. Bio and Vital will have no current earnings and profits as of the date of the
distribution;
. Current earnings and profits at the end of Bio's fiscal year are projected,
although not calculable with any reasonable accuracy at this time;
. No distribution of property by Bio immediately before the transaction would
require recognition of gain resulting in current earnings and profits for the
taxable year of the distribution;
. No intercorporate debt will exist between Bio and Vital at the time of, or
subsequent to, the distribution of Vital stock.
. Immediately before the distribution, items of income, gain, loss, deduction,
and credit will be taken into account as required by the applicable
intercompany transaction regulations, 1.1502-13 and 1.1502-14, as in effect
before T.D. 8597 and after T.D. 8597.
. Payments made in connection with all continuing transactions, if any, between
Bio and Vital will be for fair market value based on terms and conditions
arrived at by the parties bargaining at arm's length.
Law & Analysis
Internal Revenue Code section 355 allows for a tax-free division of a corporate
enterprise into two separate corporations with the result that the original
shareholders control two separate corporations in place of owning shares of a
single former corporation. Underlying the tax-free treatment offered by section
355 is the premise that nonrecognition is appropriate where owners of a business
merely change the business form while continuing to operate the business. Thus,
receipt of stock of a "controlled corporation" results in no gain or loss to the
shareholders or to the "distributing corporation." 355(a); 1.355-1. If
shareholders receive property other than
<PAGE>
John Karcanes, President 5 January 10, 1997
stock, the provisions of section 356 determine the tax consequences of that
portion of the transaction.
Section 355 Requirements
To benefit from the nonrecognition provisions of section 355, it is necessary to
meet its rather exacting requirements, designed to prevent a "bail-out" of
corporate earnings and profits at capital gains rates. This potential for a
"bail-out" exists because, following a spin-off, shareholders will be accorded
capital gains treatment on either the sale of their shares or liquidation of one
of the two corporations whose interest they now own, rather than dividend, i.e.
ordinary income, treatment for what would otherwise be a distribution out of
corporate earnings and profits.
The requirements to be met for a tax-free spin-off are set forth in the Internal
Revenue Code and the regulations promulgated under the applicable Code section.
Revenue Procedure 96-30 offers additional guidelines. Revenue Procedures
published by the Internal Revenue Service provide guidelines which must be met
in order to receive a favorable advance ruling regarding the tax consequences of
a proposed transaction. While lacking the force of law and not binding on those
who do not seek an advance ruling, the Procedure guidelines nonetheless offer
substantial authority/1/ for the position, for example, that a particular
transaction is tax-free.
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/1/ Regulation 1.6662-4(d)(1) states the general rule: "If there is or was
substantial authority for the tax treatment of an item (not a tax shelter item),
the item is treated as if it were shown properly on the return for the taxable
year in computing the amount of tax shown on the return." 1.6662-4(d)(1). Cf.
1.6661-3. In essence, substantial authority serves to insulate the taxpayer
from the imposition of penalties due to a substantial understatement of tax or
because of lack of accuracy.
Regulation 1.6662-4(d)(3) specifically includes revenue procedures, inter
alia, in its express definition of what constitutes substantial authority. This
regulation provides an exclusive list of authority deemed to qualify as
substantial authority. But note Regulation 1.6661-3(b)(3): "There may be
substantial authority for the tax treatment of an item despite the absence of
certain types of authority. Thus, a taxpayer may have substantial authority for
a position that is supported only by a well-reasoned construction of the
applicable statutory provision." Cf. 1.6662-4(d)(3)(ii).
The "substantial authority standard" is defined as "an objective standard
involving an analysis of the law and application of the law to relevant facts.
The substantial authority standard is less stringent than the "more likely than
not" standard (the standard that is met when there is a greater than 50-percent
likelihood of the position being upheld), but more stringent than the reasonable
basis standard (the standard which, if satisfied, generally will prevent
imposition of the penalty under section 6662(b)(1)[negligence or disregard of
rules or regulations] for negligence)." 1.6662-4(d)(2). Cf. 1.6661-3(a)(2).
<PAGE>
John Karcanes, President 6 January 10, 1997
The Internal Revenue Code states five statutorily prescribed requirements.
. The distributing corporation must be in control of the subsidiary, or
controlled corporation, immediately before the transaction. 355(a)(1)(A).
Control, defined by reference to section 368(c), means ownership of stock
possessing at least 80 percent of the voting power of all classes of stock
and at least 80 percent of the total number of shares of all other classes
of stock.
. Both the distributing and the controlled corporations must be engaged in the
"active conduct of a trade or business" immediately after the distribution.
355(a)(1)(C); 355(b)(1)(A).
. Both the distributing and controlled corporations must satisfy the "active
conduct of a trade or business" for the 5-year period which precedes the
transaction. 355(a)(1)(C); 355(b)(2)(B).
The distributing corporation must distribute all of the stock or securities
of the controlled corporation (or stock sufficient to satisfy the definition
of control stated in section 368(c)). 355(a)(1)(D).
. The distribution must not be used principally as a "device" for distributing
the corporation's earnings and profits. 355(a)(1)(B); 1.355-2(d).
The Regulations add two additional requirements while in general expatiating on
those set forth in the Code.
. For section 355 to apply, there must be one or more corporate business
purposes. 1.355-2.
. There must be continuity of interest in each of the modified corporate forms
following the separation. 1.355-2(c).
Revenue Procedure 96-30 defines as an acceptable corporate business purpose a
separation which will enhance the success of the businesses by enabling the
corporations to resolve management, systemic, or other problems that arise (or
are exacerbated) by the taxpayer's operation of different businesses within a
single corporation or affiliated groups.
Factors which are deemed potentially inconsistent with such a corporate business
purpose and, hence, which cause the Service to scrutinize the transaction more
carefully include:
. the presence of a significant shareholder, that is an individual who,
directly or indirectly, is the owner of 5 percent or more of either the
distributing or controlled corporation and who
<PAGE>
John Karcanes, President 7 January 10, 1997
actively participates in the management or operation of either the
distributing or controlled corporation;
. a continuing relationship between distributing and controlled corporations;
. cross ownership by a significant shareholder of any direct or indirect
continuing interest in both distributing and controlled;
. internal restructuring where the distributee would not be eligible for 100-
percent dividends received deduction by the terms of Internal Revenue Code
section 243; and,
. a continuing relationship (as, for example, either a director or employee)
between the two businesses where the spin-off is to allow a significant
shareholder to concentrate on a particular business.
Requirements of the Internal Revenue Code
Control
The first requirement of section 355 is that the distributing corporation must
control the corporation whose stock or securities are being distributed.
355(a)(1). Control is defined as more than 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of the corporation.
368(c). Bio-Vascular owns Vital Images as a wholly-owned (100 percent)
subsidiary. Consequently, the proposed transaction satisfies the control
requirement.
Distribution of stock or securities
The distributing corporation must distribute all (or stock sufficient to satisfy
the definition of control set forth in section 368(c)) of the stock or
securities of the controlled corporation. 355(a)(1)(B). All of the Vital stock
is being distributed pro rata by Bio to its shareholders and Bio will retain no
stock or securities in Vital, thereby satisfying this requirement.
"Active Conduct of a Trade or Business"
The "active conduct of a trade or business" requirement is the principal anti-
"bail-out" provision of section 355 and is defined with particularity in
Regulation 1.355-3(b). A corporation is treated as engaged in the active
conduct of a trade or business if it is itself engaged in the active conduct of
a trade or business. 355(b)(2)(A). The "active conduct" requirement is
comprised of two parts: both businesses must have been actively conducted
during the 5-year period ending on the date of the spin-off (355(b)(2)(A)-(B))
and both businesses must continue to be actively
<PAGE>
John Karcanes, President 8 January 10, 1997
conducted following the spin-off (355(b)(1)(A)). The "active conduct"
requirement will not be met if control was acquired through a taxable
transaction. 355(b)(2)(C)-(D).
Satisfaction of the various facets of the "active conduct of a trade or
business" requirement eliminates the concern that the spin-off is an attempt to
bail-out corporate earnings at capital gains rates (through the liquidation, for
example, of one of the corporations). If active for the preceding five years,
the spin-off does not represent a temporary investment of liquid assets in a
business which would allow the "bail-out" of earnings and profits by an
immediate disposition of that new business. The requirement that the business
not have been acquired in either a taxable asset purchase or stock acquisition
(355(b)(2)(C)-(D)) within the preceding 5-year period reinforces this concern.
Both Bio and Vital satisfy the requirement of being engaged in the active
conduct of a trade or business for the preceding 5-year period (their respective
dates of incorporation are 1985 and 1988 with active conduct continuous from
their incorporation) and both intend to continue the active conduct of their
respective trades or business in the period immediately following the proposed
spin-off. While Bio acquired Vital in 1994 (within the 5-year period ending on
the date of the proposed spin-off), the acquisition was by means of a tax-free
reorganization, carried out under the terms of section 368(a)(1)(B). Hence, the
acquisition will not violate the terms of 355(b)(2)(D). Thus, all of the
requirements regarding the active conduct of a trade or business are
satisfied.
Distribution not principally a "device"
Section 355 requires that the distribution not be used principally as a "device"
for distributing corporate earnings and profits. 355(a)(1)(B). "Section 355
recognizes that a tax-free distribution of the stock of a controlled corporation
presents a potential for tax avoidance by facilitating the avoidance of the
dividend provisions of the Code through the subsequent sale or exchange of stock
of one corporation and the retention of the stock of another corporation. A
device can include a transaction that effects a recovery of basis." 1.355-
2(d)(1).
A "facts and circumstances" test, including an examination of whether factors
indicative of device or nondevice are present, is used to determine whether the
stock distributed through the spin-off is a "device." 1.355-2(d)(1). The factors
(device and nondevice) are not weighted equally. Thus, for example, the presence
of a strong corporate business purpose (nondevice factor) can outweigh the fact
that a distribution is pro rata (device factor). See 1.355-2(d)(4), Example (2).
/2/ In addition to those requirements expressly set out in the Code, the
Regulations offers further explanatory statements (all of which are satisfied by
Bio and Vital) regarding this requirement. See 1.355-3(b) passim.
<PAGE>
John Karcanes, President 9 January 10, 1997
Factors indicative of "device" include:
. Pro rata, or substantially pro rata, distribution;
. Subsequent sale or exchange of stock (whether or not negotiated or agreed
upon before distribution);/3/
. Nature and use/4/ of assets following the distribution.
1.355-2(d)(2).
Nondevice factors include:
. Corporate business purpose;
. Distributing corporation publicly traded and widely held;/5/
. Distribution to domestic corporate shareholders.
1.355-2(d)(3).
If the transaction is specified in Regulation 1.355-2(d)(5), then ordinarily the
Service will consider the distribution not to have been made principally as a
device. Transactions ordinarily not considered a device include those where 1)
the distributing and controlled corporations have no accumulated earnings and
profits at the beginning of their respective taxable years; 2) the distributing
and controlled corporations have no current earnings and profits at the date of
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/3/ The greater the percentage of stock sold and the shorter the time between
the distribution and the sale or exchange, the stronger the evidence of
device. 1.355-2(d)(2)(iii).
/4/ The "nature and use" of the assets looks to whether there are assets not
used in the trade or business on the one hand or whether the one of the
businesses is a "secondary business" which continues as a "secondary
business" (i.e., providing goods or services) for the other business for a
significant period following the distribution. 1.355-2(d)(3)(iv).
/5 That the distributing corporation is publicly traded is considered evidence
of nondevice. "Publicly traded" means in this context that no shareholder
directly or indirectly is the beneficial owner of more than 5 percent of
any class of stock The presence of a 5-percent shareholder thus undercuts
the argument that the company is publicly held which in turn constitutes a
nondevice factor. Or, more simply put, the presence of a 5 percent
shareholder could be seen by the Service as evidence of device.
<PAGE>
John Karcanes, President 10 January 10, 1997
distribution, and 3) no distribution of property by the distributing corporation
immediately before the separation would require recognition of gain in current
earnings and profits. 1.355-2(d)(5)./6/
The pro-rata distribution of Vital stock to Bio-Vascular shareholders is a
factor indicative of "device" in the proposed transaction which can be balanced,
and indeed offset, by the business exigencies requiring separation, i.e., a
strong corporate business purpose. While Bio is a publicly traded and widely
held corporation, a factor generally indicative of nondevice, the existence of
any 5 percent shareholders soon after the spin-off, although none exist at the
date of spin-off, might militate against this as a nondevice factor. How the
Service would view the emergence of a greater than 5 percent shareholder
following the transaction if that shareholder had decreased his interest to an
amount below 5 percent just prior to the transaction is not clear. That Bio has
no knowledge of any plan or intention on the part of its shareholders to sell
either Bio or Vital stock following the transaction is also evidence of
nondevice.
The lack of accumulated and current earnings and profits/7/ at the date of Bio's
distribution of Vital is also supportive of an interpretation that the
transaction is not a "device." However, following the spin-off, current earnings
and profits are projected/8/ for Bio for its year ending October 31, 1997. The
absence of accumulated and current earnings and profits at the date of Vital's
distribution, it could be argued, should outweigh the existence of earnings and
profits at the end of Bio's fiscal year as evidence of nondevice, especially
given the vagaries which will ultimately determine the extent to which there are
current earnings and profits at the end of Bio's fiscal year.
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/6/ 1.355-2(d)(5) includes other transactions deemed not to be a device which
are not relevant to this transaction.
/7/ Bio has calculated, in accordance with regulations 1.1502-33 and 1.312-10,
the affiliated group's accumulated earnings and profits as of November 1, 1996.
According to these calculations, there are no accumulated earnings and profits.
Similarly, no current earnings and profits are projected as of the date of the
spin-off. Following Vital's spin-off, however, Bio will have income which will
result in current earnings and profits for Bio at year end, October 31, 1997.
/8/ Given the date of Vital's distribution, it is not possible to predict with
accuracy what Bio's current earnings and profits will be at October 31, 1997.
However, if the distribution of Vital is deemed to be a taxable transaction,
then the distribution will be treated as ordinary income, to the extent of
earnings and profits. See sections 301(a) and (c)(1) (a distribution of property
(including stock (see section 317(a)) shall be treated as ordinary income to the
extent of current earnings and profits (see section 316)). If the distribution
exceeds the amount of current and accumulated earnings and profits, then it is
treated first as a recovery of basis (see section 301(c)(2)) and then as an
amount received as capital gain (gain from the sale of a capital asset)(see
section 301(c)(3)). In short, to the extent of any current earnings and profits
at the end of Bio's fiscal year and if the transaction is deemed to be a
taxable, not a tax-free, spin-off there would be ordinary income.
<PAGE>
John Karcanes, President 11 January 10, 1997
Nonetheless, the existence of current earnings and profits poses a risk: not
only does it serve as evidence of device, but also because gain could result to
the corporation with the Vital stock deemed a distribution to shareholders of
appreciated property (if it results in the spin-off being deemed a taxable
distribution)./9/
At the date of distribution each company will own its respective assets to be
used in its trade or business. All liquid assets will be split between the
companies in accordance with projections of the mid-term working capital needs
of each respective company. Thus, there are no nonbusiness assets present to
suggest a "bail-out" of liquid assets.
Regulation Requirements
Independent Business Purpose
The Regulations require an independent corporate business./10/ 1.355-2(b). "The
principal reason for this business purpose requirement is to provide
nonrecognition treatment only to distributions that are incident to
readjustments of corporate structures required by business exigencies and that
effect only readjustments of continuing interests in property under modified
corporate forms." 1.355-2(b)(1). This business purpose requirement is
independent of other section 355 requirements. A corporate business purpose is a
"real and substantial non-Federal tax purpose germane to the business of the
distributing corporation, the controlled corporation or the affiliated group[.]"
1.355-2(b)(2).
The proposed transaction is motivated entirely by real and substantial non-
Federal tax purposes germane to the business of both Bio and Vital. Given that
increased Federal income tax will
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/9/ Section 311(b) prescribes that if a corporation distributes property
(including stock) to a shareholder and the fair market value of such property
exceeds its adjusted basis in the hands of the distributing corporation, then
the corporation shall recognize gain as if the property were sold to the
distributee shareholder at its fair market value. Given that no accurate
projection is available of the value at which Vital stock will trade following
its distribution, it is not possible to predict with any meaningful accuracy the
amount of any "311(b) gain." Suffice it to say, however, that if the spin-off
fails to qualify as a tax-free distribution, to the extent that there exists
311(b) gain, there will be current earnings and profits at least in an amount
equal to that gain (i.e., the amount by which the fair market value of Vital
stock (determined by the price at which it is traded following its distribution)
exceeds its basis in Bio's hands, that is the value of Vital stock at its date
of acquisition by Bio in the tax-free reorganization under section
368(a)(1)(B)).
/10/ Note that while an independent business purpose is a separate requirement,
a strong corporate business factor also serves as evidence of nondevice. See
1.355-2(b)(2) and 1.355-2(d)(3) (discussed supra).
<PAGE>
John Karcanes, President 12 January 10, 1997
likely result from the transaction (because Vital's losses will no longer be
available to offset Bio's income), it should be clear that the transaction is
not motivated by tax avoidance purposes.
More specifically, the spin-off of Vital by Bio is motivated by the current
business exigencies of these two distinct and disparate businesses. As separate
companies,
. each business will be more attractive to the capital markets;
. each business will be able to focus its management resources on its own
business requirements;
. each business will be able to invest in research and development and
marketing needs appropriate to its distinct stage of development;
. each business will be able to focus on its distinct distribution and
marketing channels.
The two companies lack a common technology base. This lack of common technology
results in competition for the limited resources available rather than the
synergy anticipated at the date of acquisition. This lack of synergy also causes
confusion in the capital markets on the correct valuation of the these two very
different businesses uncomfortably co-existing as one entity. The disparate
nature of Bio and Vital also requires different marketing strategies and sales
channels. Together Bio and Vital are unable to benefit from their present
circumstances, which have arisen since the acquisition in 1994. In short, both
Bio and Vital have the potential for significant growth as independent
businesses, potential which is unavailable to either so long as they remain
together.
Continuity of Interest
A continuity of interest requirement is prescribed by the Regulations as an
independent requirement for spin-off transactions as well as reorganizations.
1.355-2(c). "Section 355 applies to a separation that effects only a
readjustment of continuing interests in the property of the distributing and
controlled corporations." Id. Thus persons who were directly or indirectly the
owners of the enterprise prior to the distribution must own stock sufficient to
establish continuity of interest in the modified corporate forms existing after
the separation. No minimum required continuity is specified, although 50 percent
should be sufficient. See 1.355-2(c)(2), Example (2). A non-pro-rata
distribution (if, for example, some shareholders were to own Bio and others
Vital after the separation) would not, however, violate the continuity of
interest requirement. 1.355-2(c)(2), Example (1).
Because the proposed transaction is a pro rata distribution and because Bio,
Vital and its representatives have no knowledge of any plan or intention by any
shareholders to sell or
<PAGE>
John Karcanes, President 13 January 10, 1997
otherwise dispose of their stock in Bio or Vital following the transaction,
there should be approximately 100 percent continuity of interest. Thus the
continuity of interest requirement should be well satisfied.
Revenue Procedure 96-30
Revenue Procedure 96-30 sets forth the current guidelines for taxpayers seeking
an advance ruling on the tax-free status of a spin-off. This recent revenue
procedure, published May 6, 1996, also aims to provide somewhat more liberalized
guidelines and business purposes under which advance rulings may be sought.
Since publication only two private letter rulings have been issued under these
guidelines and neither have yet been made publicly available. In sum, guidance
for how the Service will rule based on Revenue Procedure 96-30 is lacking. As
stated earlier, however, adherence to these guidelines should provide
substantial authority/11/ for treating a transaction as qualifying for tax-free
treatment under section 355.
Revenue Procedure 96-30 offers for the first time as a valid corporate business
purpose the "fit and focus" purpose. "Fit and focus" defines as a valid
corporate business purpose a separation undertaken to enhance the success of the
businesses by enabling the corporations to resolve management, systemic, or
other problems that arise (or are exacerbated) by the taxpayer's operation of
different businesses within a single corporation or affiliated group. In
essence, what the "fit and focus" business purpose recognizes is a management
level "going your own way" purpose. See 1.355-2(b)(5), Example (2). The "going
your own way" business purpose represents, essentially, a "clean break" by the
two corporations, circumstances which offer less possibility that the separation
is undertaken as a "bail-out" of corporate earnings and profits.
Because this business purpose is a modified "going your own way" purpose, the
Service will look with special scrutiny at evidence of a continued relationship
between Bio and Vital following the transaction. The presence of a continuing
relationship undercuts the importance of this business purpose as a real and
substantial non-Federal tax purpose. Thus, the presence of a significant
shareholder will ordinarily result in the Service not issuing an advance ruling.
A "significant shareholder" is defined as a person who owns, directly or
indirectly, 5 percent or more of either the distributing or controlled
corporations and who actively participates in the management or operation of
either corporation.
Other factors will cause the Service to scrutinize the transaction for
inconsistencies between the business purpose invoked and any retained interests,
whether these interests are evidenced by equity interests or overlapping
management or employment relationships. Factors expressly cited as inviting
special scrutiny include:
- --------------------------------------------------------------------------------
/11/ See supra, note 1.
<PAGE>
John Karcanes, President 14 January 10, 1997
. any continuing relationship between the distributing and controlled
corporations;
. the cross ownership by a significant shareholder of any direct or indirect
continuing interest in both distributing and controlled corporations;
. overlap, other than transitional, between the respective Boards of
Directors.
Only/12/ Dr. Vincent Argiro currently qualifies as a significant shareholder,
because of his greater than 5 percent interest (5.6-5.4 percent) and his key
position within Vital. As the transaction is currently structured, Dr. Argiro
will sell on the open market stock sufficient to reduce his interest at the date
of the transaction to less than 5-percent. Dr. Argiro, an individual critical
to Vital's success, will continue his employment relationship with Vital and
will continue to own his pro rata share of both Bio and Vital stock following
the spin-off.
No long-term continuing relationship will exist between Bio and Vital.
Nevertheless, to ensure continuity of management and to facilitate the
transition following the distribution, the Board of Directors of Bio and Vital
will share no more than three common directors for the transition period,
anticipated to last no longer than 18 months. After this period of transition,
a one-member overlap between the Bio and Vital boards is likely. Vital will
assume responsibility for Accounting, Finance, Human Resources and Regulatory
Affairs, within a reasonable period of time after the hire of individuals
responsible for any particular activity, presumably for a given department
within two months of each new hire. It is expected that the transition will be
effected, in toto, as the hire of different positions and responsibilities is
completed. In no case will the entire transition period extend beyond six
months post-distribution.
Basis
The basis of stock received by a distributee shareholder in a transaction
qualifying under section 355 is determined by the provisions of section 358.
Where no boot is received,/13/ the aggregate bases of the original stock or
securities of each shareholder will be allocated/14/ among the stock
- --------------------------------------------------------------------------------
/12/ Perkins Capital Management currently controls 9.4 percent of Bio-Vascular
stock. Richard W. Perkins, President of Perkins Capital Management and a Bio
Director owns stock individually as well. Mr. Perkins disclaims beneficial
ownership of the stock owned through Perkins Capital Management and thus is not
deemed to be a significant shareholder for purposes of this analysis.
/13/ If boot is received, the boot takes as its basis its fair market value. See
section 358(a)(2). The basis of the nonrecognition property is thereby reduced
by the amount of the boot received and then increased by the amount of any
dividend or gain recognized. 358(a)(1)
/14/ See 1.358-2.
<PAGE>
John Karcanes, President 15 January 10, 1997
received or retained in proportion to their respective fair market values./15/
In short, each shareholder allocates his existing basis in Bio stock between the
Bio and Vital stock owned after the separation in proportion to their relative
fair market values.
Conclusion
Based on the transaction as it is currently structured:
. a pro rata distribution of Vital stock made when there are no accumulated
earnings and profits and no current earnings and profits at the date of
separation (although there may be current earnings and profits at the end of
Bio's fiscal year);
. no significant shareholders in existence at the time of the spin-off or
anticipated following the spin-off;
. a three-member overlap for a period of no longer than 18 months between the
Boards of Directors of Bio and Vital;
. temporary Bio management support will be provided to Vital which will assume
responsibility for Accounting, Finance, Human Resources and Regulatory
Affairs, within a reasonable period of time after the hire of each of the
individuals responsible for any particular activity, presumably within two
months of each new hire. It is expected that the transition will be effect, in
toto, as the hire of different positions and responsibilities is completed,
and in no case will the entire transition period extend beyond six months
post-distribution. Consideration for services rendered will be based on fair
market value bargained for by parties at arm's length;
. a strong business purpose mandating the separation of the two corporations for
their continued growth and, indeed, viability;
. all of the 355 statutory and regulatory requirements expressly satisfied,
it appears that there is substantial authority for viewing this corporate
separation as a non-taxable transaction under section 355 of the Internal
Revenue Code. Because of the lack of any rulings
- --------------------------------------------------------------------------------
/15/ The relative fair market value of the two companies' stock will be
determined by the prices at which the two companies' shares are publicly traded
following the separation. Given that the fair market value at which the shares
will trade is unknown and given that the gain (or loss) for each individual
shareholder will be determined by the difference between the stock trading price
and the shareholder's basis, no prediction of the tax consequences to individual
shareholders is possible based on information currently available.
<PAGE>
John Karcanes, President 16 January 10, 1997
issued and published based on Revenue Procedure 96-30, which sets forth this new
business purpose ("fit and focus"), it is not possible to assert with any
greater certitude that the current transaction is structured to allay all of the
Services concerns in a tax-free spin-off.
If you have any questions or comments on this matter, please call Jim
Griebel or Rob Wight of our office at 370-9300.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
JBG/WRW:te-K74
<PAGE>
EXHIBIT 8.2
March 6, 1997
Mr. John Karcanes
President
Bio-Vascular, Inc.
2575 University Avenue
St. Paul, MN 55114-1024
Dear Mr. Karcanes:
We hereby confirm that the statements made in the Vital Images, Inc.
Registration Statement on Form 10 under the caption "The Distribution -- Certain
Federal Income Tax Consequences of the Distribution," to the extent that they
relate to a description of the tax consequences of the Distribution, are true
and accurate in all material respects.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
<PAGE>
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
between
Bio-Vascular, Inc.
and
Vital Images, Inc.
Dated ________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1. DEFINITIONS..................................................... 1
ARTICLE 2. PRE-DISTRIBUTION TRANSACTIONS................................... 4
2.1. Reincorporation; Other Corporate Action........................... 4
2.2. Bio-Vascular Approval............................................. 4
2.3. Related Agreements................................................ 4
2.4. Securities Law Actions............................................ 4
2.5. Capital Contribution.............................................. 5
ARTICLE 3. THE DISTRIBUTION................................................ 5
3.1. Conditions to the Distribution.................................... 5
3.2. The Distribution.................................................. 6
3.3. Fractional Shares................................................. 6
3.4. Warrants.......................................................... 6
ARTICLE 4. INDEMNIFICATION, CLAIMS AND OTHER MATTERS....................... 7
4.1. Indemnification by Bio-Vascular................................... 7
4.2. Indemnification by Vital Images................................... 7
4.3. Insurance Proceeds................................................ 8
4.4. Procedure for Indemnification..................................... 8
4.5. Other Claims...................................................... 10
4.6. Contribution in Respect of Certain Indemnifiable Losses........... 10
4.7. No Beneficiaries.................................................. 10
ARTICLE 5. CERTAIN ADDITIONAL MATTERS...................................... 10
5.1. Construction of Agreements........................................ 10
5.2. Consents, Etc..................................................... 11
5.3. No Representations or Warranties.................................. 11
5.4. Officers and Directors............................................ 11
5.5. Existing Intercompany Arrangements................................ 11
5.6. Intercompany Accounts............................................. 11
5.7. Qualification as Tax-Free Distribution............................ 11
ARTICLE 6. ACCESS TO INFORMATION AND SERVICES.............................. 12
6.1. Provision of Corporate Records.................................... 12
6.2. Access to Information............................................. 12
6.3. Production of Witnesses and Individuals........................... 12
6.4. Retention of Records.............................................. 13
6.5. Confidentiality................................................... 13
6.6. Privileged Matters................................................ 14
ARTICLE 7. INSURANCE....................................................... 15
7.1. Policies and Rights of Vital Images............................... 15
7.2. Post-Distribution Date Claims..................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.3. Administration and Reserves....................................... 16
7.4. Allocation of Insurance Proceeds................................. 16
7.5. Agreement for Waiver of Conflict and Shared Defense.............. 16
ARTICLE 8. DISPUTE RESOLUTION............................................. 16
8.1. Negotiation and Binding Arbitration.............................. 16
8.2. Initiation....................................................... 17
8.3. Submission to Arbitration........................................ 17
8.4. Equitable Relief................................................. 17
8.5. Consolidation.................................................... 17
SECTION 9. MISCELLANEOUS.................................................. 17
9.1. Entire Agreement................................................. 17
9.2. Expenses......................................................... 17
9.3. Governing Law.................................................... 17
9.4. Jurisdiction and Venue........................................... 18
9.5. Notices.......................................................... 18
9.6. Modification of Agreement........................................ 18
9.7. Termination...................................................... 18
9.8. Successors and Assigns........................................... 18
9.9. No Third Party Beneficiaries..................................... 19
9.10. Titles and Headings; Interpretation.............................. 19
9.11. Exhibits......................................................... 19
9.12. Severability..................................................... 19
9.13. No Waiver........................................................ 19
9.14. Survival......................................................... 19
9.15. Counterparts..................................................... 19
</TABLE>
EXHIBITS
Exhibit A Employee Benefits Agreement
Exhibit B Tax Sharing Agreement
Exhibit C Transition Services Agreement
ii
<PAGE>
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (this "Agreement"), dated as of _________, 1997, is
made and entered into by and between Bio-Vascular, Inc., a Minnesota corporation
("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation ("Vital
Images").
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, engaged in the business of developing, marketing and supporting
medical visualization software and systems for use in clinical diagnosis and
surgical planning.
WHEREAS, the Board of Directors of Bio-Vascular has determined it to
be in the best interests of the shareholders of Bio-Vascular to separate Vital
Images from Bio-Vascular by distributing all of the issued and outstanding
shares of Vital Images common stock, $.01 par value per share, including certain
preferred stock purchase rights attached thereto (the "Vital Images Common
Stock"), to the holders of Bio-Vascular's common stock, par value $.01 per share
(the "Bio-Vascular Common Stock"), as provided herein; and
WHEREAS, Bio-Vascular and Vital Images have determined that it is
necessary and desirable to establish the principal corporate transactions
required to effect the Distribution, certain other agreements governing matters
relating to the Distribution and the relationship of Bio-Vascular and Vital
Images after the Distribution.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound hereby, Bio-
Vascular and Vital Images agree as follows:
ARTICLE
I.
DEFINITIONS
As used in this Agreement, initially capitalized terms defined
immediately after their use shall have the respective meanings thereby provided,
and the following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
Action: any action, claim, suit, arbitration, inquiry, subpoena, discovery
request, proceeding or investigation by or before any court or grand jury, any
governmental or other regulatory or administrative agency or commission or any
arbitration tribunal.
Affiliate: with respect to any specified person, a person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with such specified person; provided, however, that
unless otherwise expressly provided, Vital Images and Bio-Vascular shall not be
deemed to be Affiliates of one another for purposes of this Agreement.
Agent: American Stock Transfer & Trust Company, the distribution agent
appointed by Bio-Vascular and Vital Images to distribute or make book entry
credits for the Vital Images Common Stock in connection with the Distribution.
<PAGE>
Books and Records: the books and records (or true and complete copies
thereof), including computerized records, of Bio-Vascular that relate
principally to Vital Images and are necessary for the operation of the Vital
Images Business, including, without limitation, the corporate documents and
records of corporate proceedings of Vital Images, all books and records relating
to Vital Images Employees, the purchase of materials, supplies and services by
Vital Images; the dealings with customers of Vital Images; and all files
relating to any Action involving Vital Images.
Code: the Internal Revenue Code of 1986, as amended.
Commission: the Securities and Exchange Commission.
Distribution: the distribution as a dividend of Vital Images Common Stock
to holders of Bio-Vascular Common Stock, as provided in Article 3 hereof.
Distribution Date: the effective date of the Distribution, as determined
by the Board of Directors of Bio-Vascular.
Employee Benefits Agreement: the agreement, substantially in the form of
Exhibit A hereto, pursuant to which Bio-Vascular and Vital Images will provide
for certain employee benefit matters.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Form 10: the Registration Statement on Form 10 filed by Vital Images with
the Commission to register the Vital Images Common Stock pursuant to the
Exchange Act.
Indemnifiable Losses: with respect to any claim by an Indemnitee for
indemnification authorized pursuant to Article 4 hereof, any and all losses,
liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and expenses in connection therewith) suffered by
such Indemnitee with respect to such claim.
Indemnifying Party: any party who is required to pay any other person
pursuant to Article 4 hereof.
Indemnitee: any party who is entitled to receive payment from an
Indemnifying Party pursuant to Article 4 hereof.
Indemnity Payment: the amount an Indemnifying Party is required to pay an
Indemnitee pursuant to Article 4 hereof.
Information Statement: the definitive information statement, substantially
in compliance with Regulation 14C under the Exchange Act, to be mailed to the
holders of Bio-Vascular Common Stock in connection with the Distribution.
Insurance Proceeds: those monies (i) received by an insured from an
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
2
<PAGE>
Insured Claims: those Liabilities that, individually or in the aggregate,
are covered within the terms and conditions of any of the Policies, whether or
not subject to deductibles, co-insurance, uncollectibility or retrospectively-
rated premium adjustments, but only to the extent that such Liabilities are
within applicable Policy limits, including aggregates.
Intercompany Debt: intercompany debt owed by Vital Images to Bio-Vascular.
Liabilities: any and all debts, liabilities and obligations, whether
accrued, contingent or reflected on a balance sheet, known or unknown,
including, without limitation, those arising under any law, rule, regulation,
Action, order or consent decree of any governmental entity or any judgment of
any court of any kind or award of any arbitrator of any kind, and those arising
under any contract, commitment or undertaking.
Policies: insurance policies and insurance contracts of any kind,
including, without limitation, primary and excess policies, comprehensive
general liability policies, automobile and workers' compensation insurance
policies, and self-insurance arrangements, together with the rights and benefits
thereunder.
Record Date: the date determined by the Board of Directors of Bio-Vascular
as the record date for the Distribution.
Related Agreements: the Employee Benefits Agreement, Transition Services
Agreement, Tax Sharing Agreement and all other agreements entered into by Bio-
Vascular and Vital Images pursuant to this Agreement or otherwise in connection
with the Distribution.
Securities Act: the Securities Act of 1933, as amended.
Shared Policies: all Policies owned or maintained by or on behalf of Bio-
Vascular prior to the Distribution Date, relating to both Bio-Vascular's
business and the Vital Images Business.
Staff: the Staff of the Commission.
Tax Sharing Agreement: the agreement, substantially in the form of Exhibit
B hereto, pursuant to which Bio-Vascular and Vital Images will provide for
certain tax matters.
Transition Services Agreement: the agreement, substantially in the form of
Exhibit C hereto, pursuant to which Bio-Vascular will provide certain
transitional services to Vital Images following the Distribution Date.
Vital Images Business: (i) the business of developing, marketing and
supporting medical visualization software and systems for use in clinical
diagnosis and surgical planning; (ii) any terminated, divested or discontinued
businesses or operations as of the Distribution Date that primarily related to
Vital Images or were conducted by Vital Images; and (iii) any business or
operation conducted by Vital Images or any Affiliate of Vital Images at any time
on or after the Distribution Date.
Vital Images Employee: any employee of Vital Images, and any employee of
Bio-Vascular who is assigned to Vital Images on or prior to the Distribution
Date, including, but not limited to, any such employee who was laid off, on
leave of absence or any disability leave as of the Distribution Date.
3
<PAGE>
Warrants: all unexercised warrants to purchase Bio-Vascular Common Stock
issued and outstanding as of the Record Date, which as of the date hereof,
consist of warrants to purchase an aggegrate of 90,000 shares of Bio-Vascular
Common Stock issued and outstanding and anticipated to remain as such as of the
Record Date.
ARTICLE
2.
PRE-DISTRIBUTION TRANSACTIONS
2.1. Reincorporation; Other Corporate Action. Prior to the date of this
Agreement, Vital Images, formerly an Iowa corporation, will have taken all
necessary action to reincorporate as a Minnesota corporation, and to
qualify as a foreign corporation in each jurisdiction where the conduct of
its business or location of its properties or employees so requires. In
addition, Vital Images will take all other corporate action necessary to
undertake the transactions contemplated by this Agreement or any Related
Agreement, which corporate actions will include, but will not be limited
to, authorization of a sufficient number of shares of Vital Images Common
Stock necessary to effect the Distribution and the approval of appropriate
stock-based compensation or other plans, agreements and arrangements, as
provided for in the Employee Benefits Agreement.
2.2. Bio-Vascular Approval. Bio-Vascular shall cooperate with Vital Images in
effecting, and if so requested by Vital Images, Bio-Vascular shall, as the
sole shareholder of Vital Images, approve or ratify, any actions that are
reasonably necessary or desirable to be taken by Vital Images to
effectuate the transactions contemplated by this Agreement or any Related
Agreement in a manner consistent with the terms hereof or thereof, as the
case may be, including, without limitation, the reincorporation of Vital
Images as a Minnesota corporation, the election or appointment of
directors and officers of Vital Images to serve in such capacities
following the Distribution Date, and the approval of appropriate stock-
based compensation or other plans, agreements and arrangements for Vital
Images Employees, non-Vital Images Employee members of Vital Images' Board
of Directors and consultants of Vital Images.
2.3. Related Agreements. Bio-Vascular and Vital Images will use their best
efforts to cause, on or before the Distribution Date, the execution and
delivery by each party of the Related Agreements and any other agreements
deemed necessary or desirable by the parties to establish and govern the
post-Distribution relationship of the parties.
2.4. Securities Law Actions.
(a) Bio-Vascular and Vital Images will prepare, and file with the
Commission, the Form 10, which shall include the Information
Statement, setting forth appropriate disclosure concerning Vital
Images, the Distribution and any other appropriate matters required to
be stated therein or determined to be included therein by Bio-Vascular
and Vital Images. Bio-Vascular and Vital Images shall use reasonable
efforts to cause the Form 10 to become effective under the Exchange
Act as soon as practicable after the filing thereof, and, prior to the
Distribution Date, Bio-Vascular shall mail the Information Statement
to holders of Bio-Vascular Common Stock as of the Record Date. The
joint obligations of Bio-Vascular and Vital Images under this Section
2.4(a) shall not affect their respective obligations of indemnity
under Article 4 hereof.
4
<PAGE>
(b) Bio-Vascular and Vital Images shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of the
various states or other political subdivisions of the United States in
connection with the Distribution.
(c) Vital Images will prepare and file, and will use its best efforts to
have approved, an application for listing of the Vital Images Common
Stock on the Nasdaq SmallCap Market.
2.5. Capital Contribution. In anticipation of the Distribution, Bio-Vascular has
assigned to Vital Images $10 milllion in cash, cash equivalents and
marketable securities, effective November 1, 1996, and has contributed the
Intercompany Debt as of that date, in the amount of approximately $3.1
million, to the capital of Vital Images. Effective as of the Distribution
Date, Bio-Vascular will make such additional capital contributions to Vital
Images as necessary to bring Vital Images' cash, cash equivalents and
marketable securities balances to a combined $10 million and eliminate any
additional Intercompany Debt owed by Vital Images on the Distribution Date.
ARTICLE
3.
THE DISTRIBUTION
3.1. Conditions to the Distribution. The Board of Directors of Bio-Vascular will
have the sole discretion to determine, by resolution, the Record Date, the
Distribution Date and all appropriate procedures in connection with the
Distribution, provided that the Distribution will not occur prior to such
time as each of the following conditions have been satisfied or have been
waived by Bio-Vascular's Board of Directors, in its sole discretion:
(a) an opinion from Coopers & Lybrand, LLP will have been obtained, in
form and substance satisfactory to Bio-Vascular's Board of Directors,
with respect to the federal income tax status of the Distribution
under Section 355 of the Code;
(b) any material approvals and consents necessary to consummate the
Distribution will have been obtained and will be in full force and
effect;
(c) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Distribution will be in effect, and
no other event will have occurred or failed to occur that prevents the
consummation of the Distribution;
(d) the Form 10 will have been declared effective by the Commission;
(e) Bio-Vascular will have received a favorable response from the Staff to
a request for "no-action" treatment concerning, among other matters,
whether the Distribution and related
5
<PAGE>
transactions may be effected without registration of the Vital Images
Common Stock under the Securities Act; and
(f) no other events or developments shall have occurred subsequent to the
date of this Agreement that, in the judgment of Bio-Vascular's Board
of Directors, would result in the Distribution having a material
adverse effect on Bio-Vascular or its shareholders;
provided further that the satisfaction of such conditions will not create
any obligation on the part of Bio-Vascular, Vital Images or any other
person to effect or to seek to effect the Distribution or in any way limit
Bio-Vascular's right to terminate this Agreement.
3.2. The Distribution. On or prior to the Distribution Date, Bio-Vascular will
deliver to the Agent the certificate for all of the shares of Vital Images
Common Stock owned by Bio-Vascular prior to the Distribution. Upon
certification by Bio-Vascular as to the number of shares of Bio-Vascular
Common Stock outstanding on the Record Date, Vital Images will deliver to
the Agent, for the benefit of holders of record of Bio-Vascular Common
Stock on the Record Date, stock certificate(s) representing, in the
aggregate (and rounded down to the nearest whole share), a number of shares
representing one (1) share of Vital Images Common Stock for every two (2)
shares of Bio-Vascular Common Stock outstanding on the Record Date (less
the shares of Vital Images Common Stock owned by Bio-Vascular prior to the
Distribution and previously delivered to the Agent pursuant to this
Section), and shall instruct the Agent to distribute, as promptly as
practicable following the Distribution Date to holders of record of Bio-
Vascular Common Stock on the Record Date, one (1) share of Vital Images
Common Stock for every two (2) shares of Bio-Vascular Common Stock, and
cash in lieu of fractional shares of Vital Images Common Stock, to be
obtained in the manner provided in Section 3.3 hereof. All of the shares of
Vital Images Common Stock issued in the Distribution will be fully paid,
nonassessable and free of preemptive rights.
3.3. Fractional Shares. No certificates or scrip representing fractional shares
of Vital Images Common Stock will be issued as a part of the Distribution,
and in lieu of receiving fractional shares, each holder of Bio-Vascular
Common Stock who would otherwise be entitled to receive a fractional share
of Vital Images Common Stock pursuant to the Distribution will receive cash
for such fractional share. Bio-Vascular and Vital Images agree that Bio-
Vascular shall instruct the Agent: (i) to determine the number of whole
shares and fractional shares of Vital Images Common Stock allocable to each
holder of Bio-Vascular Common Stock as of the Record Date; (ii) to
aggregate all such fractional shares into whole shares; (iii) to sell the
whole shares obtained thereby in the open market at then-prevailing prices
on behalf of Bio-Vascular shareholders who would otherwise be entitled to
receive fractional shares interests; and (iv) to distribute to each such
Bio-Vascular shareholder such shareholder's ratable share of the total
proceeds of such sales (net of any commissions incurred in connection with
such sales), net of any amounts required to be withheld under applicable
law.
3.4. Warrants. Vital Images will assume its proportionate share of obligations
represented by the Warrants such that, after the Distribution, each Warrant
will be exercisable for shares of both Bio-Vascular Common Stock and shares
of Vital Images Common Stock, according to the ratio set forth in Section
3.2 hereof. Upon notice to Bio-Vascular of the exercise of any Warrants,
Bio-Vascular will promptly provide notice thereof to Vital Images, and
Vital Images will promptly thereafter issue to the exercising holder of
such Warrants the appropriate number of shares of Vital Images Common
Stock. Vital Images will be entitled to receive a pro rata portion
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of the exercise price, determined by multiplying the per share exercise
price stated in the Warrant by the ratio of the post-Distribution fair
market value of Vital Imates Common Stock to the post-Distribution fair
market value of Bio-Vascular Common Stock. For the purposes of this Section
3.4, "post-Distribution fair market value" means:
(i) with respect to Bio-Vascular Common Stock, the average of the
last reported sales prices on each of the five (5) trading days
immediately following the Distribution Date, as reported by the
Nasdaq National Market;
(ii) with respect to Vital Images Common Stock, the average of the
daily average of bid and asked prices reported by the Nasdaq
SmallCap Market or "over the counter market" on each of the five
(5) trading days immediately following the Distribution Date.
ARTICLE
4.
INDEMNIFICATION, CLAIMS
AND OTHER MATTERS
4.1. Indemnification by Bio-Vascular. Bio-Vascular will indemnify, defend and
hold harmless Vital Images and each of its directors, officers, employees,
agents and Affiliates from and against any and all Indemnifiable Losses of
Vital Images or any of its Affiliates arising out of or due to, directly or
indirectly, any Action relating to: (i) the business or operations of Bio-
Vascular, or its Affiliates, exclusive of the Vital Images Business; (ii)
any claim that the information included in the Information Statement or
Form 10 under (A) the captions "Summary -- Distributing Corporation,"
"-- Principal Businesses to be Retained by Bio-Vascular" or "-- Primary
Purpose of the Distribution," (B) the captions "The Distribution -- Reasons
for the Distribution," "-- Manner of Effecting the Distribution" and "--
Certain Federal Income Tax Consequences" or (C) the caption "Security
Ownership of Certain Beneficial Owners" is false or misleading with respect
to any material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(iii) Third Party Claims (as defined below) of failure by Bio-Vascular to
perform under, or any violation by Bio-Vascular of, any provision of this
Agreement or any Related Agreement, which is to be performed or complied
with by Bio-Vascular; and (iv) breaches of this Agreement or any Related
Agreement by Bio-Vascular or its Affiliates.
4.2. Indemnification by Vital Images. Vital Images will indemnify, defend and
hold harmless Bio-Vascular and each of its directors, officers, employees,
agents and Affiliates from and against any and all Indemnifiable Losses of
Bio-Vascular or any of its Affiliates arising out of or due to, directly or
indirectly, any Action relating to: (i) the Vital Images Business and its
operation prior to, on or after the Distribution Date (including any
Indemnifiable Loss relating to, arising out of or resulting from any act or
failure to act by any director, officer or agent of Vital Images or any
Vital Images Employee, whether or not such act or failure to act is or was
within such person's authority); (ii) any claim that the information
included in the Information Statement or Form 10, other than the
information under the captions listed in Section 4.1(ii) hereof, is false
or misleading with respect to any material fact or omits to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (iii) Third Party Claims of failure by Vital Images
to perform under, or any violation by Vital Images of, any provision of
this Agreement or any
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Related Agreement which is to be performed or complied with by Vital
Images; and (iv) breaches of this Agreement or any Related Agreement by
Vital Images or its Affiliates.
4.3. Insurance Proceeds. The amount that any Indemnifying Party is or may be
required to pay to any Indemnitee pursuant to Section 4.1 or Section 4.2
hereof will be reduced (including, without limitation, retroactively) by
any Insurance Proceeds and other amounts actually recovered by or on behalf
of such Indemnitee in reduction of the related Indemnifiable Loss. If an
Indemnitee shall have received an Indemnity Payment in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Indemnifiable Loss as
specified above, then such Indemnitee will pay to such Indemnifying Party a
sum equal to the amount of such Insurance Proceeds or other amounts
actually received. Notwithstanding the foregoing, nothing in this Section
will grant to Vital Images or its Affiliates any direct or indirect rights
or benefits to insurance coverage with respect to which Vital Images is not
otherwise entitled under Article 7 hereof, nor require Bio-Vascular or its
Affiliates to make any claim for insurance coverage unless and to the
extent that Vital Images would otherwise be entitled to have Bio-Vascular
make a claim under Article 7 hereof.
4.4. Procedure for Indemnification.
(a) If either party shall receive notice of any claim or Action brought,
asserted, commenced or pursued by any person or entity not a party to
this Agreement (hereinafter a "Third Party Claim"), with respect to
which the other party is or may be obligated to make an Indemnity
Payment, it shall give such other party prompt notice thereof
(including any pleadings relating thereto) after becoming aware of
such Third Party Claim, specifying in such reasonable detail as is
known to it the nature of such Third Party Claim and the amount or
estimated amount thereof, to the extent such estimate is then feasible
(which estimate shall not be conclusive of the final amount of such
claim); provided, however, that the failure of a party to give notice
as provided in this Section 4.4 shall not relieve the other party of
its indemnification obligations under this Article 4, except to the
extent that such other party is actually prejudiced by such failure to
give notice.
(b) For any Third Party Claim concerning which notice is required to be
given, and, in fact, is given under subparagraph (a) of this Section
4.4, the Indemnifying Party shall defend in a timely manner, to the
extent permitted by law, such Third Party Claim through counsel
appointed by the Indemnifying Party and reasonably acceptable to the
Indemnitee. Once an Indemnifying Party has commenced its defense of an
Indemnitee, it cannot withdraw from such defense until conclusion of
the matter, unless the Indemnified Party agrees to the withdrawal or
the Indemnitee is also defending the claim. The Indemnitee shall have
the right to participate in the defense of the Third Party Claim by
employing separate counsel at its own expense.
(c) If a party responds to a notice of a Third Party Claim by denying its
obligation to indemnify the other party, or if the Indemnifying Party
fails to defend in a timely manner, the Indemnitee shall be entitled
to defend such Third Party Claim through counsel appointed by it. In
addition, if it is later determined that such party wrongfully denied
such claim, or the Indemnifying Party failed to defend timely, then
the Indemnifying Party shall (i) reimburse the Indemnitee for all
costs and expenses (other than salaries of officers and employees)
incurred reasonably by the Indemnitee in connection with its defense
of such Third Party Claim; and (ii) be estopped from
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challenging a judgment, order, settlement, compromise, or consent
judgment resolving the Third Party Claim entered into in good faith by
the Indemnitee (if such claim has been resolved prior to the
conclusion of the proceeding between the Indemnitee and Indemnifying
Party). An Indemnifying Party, after initially rejecting a claim for
defense or indemnification, may defend and indemnify the Indemnitee,
at any time prior to the resolution of said Third party Claim, for
such claim, provided that (x) the Indemnifying Party reimburses the
Indemnitee for all costs and expenses (other than salaries of officers
and employees) incurred reasonably by the Indemnitee in connection
with its defense of such Third Party Claim up to the time the
Indemnifying Party assumes control of the defense of such claim
(including costs incurred in the transition of the defense from the
Indemnitee to the Indemnifying Party); and (y) the assumption of the
defense of the Third Party Claim will not prejudice or cause harm to
the Indemnitee.
(d) With respect to any Third Party Claim for which indemnification has
been claimed hereunder, no party shall enter into any compromise or
settlement, or consent to the entry of any judgment which (i) does not
include as a term thereof the giving by the third party of a release
to the Indemnitee from all further liability concerning such Third
Party Claim on terms no less favorable than those obtained by the
party entering into such compromise, settlement or consent; or (ii)
imposes any obligation on the Indemnitee without such Indemnitee's
written consent (such consent not to be withheld unreasonably), except
an obligation to pay money which the Indemnifying Party has agreed to
pay on behalf of the Indemnitee. In the event that an Indemnitee
enters into any such compromise, settlement or consent without the
written consent of the Indemnifying Party (other than as contemplated
by Section 4.4(c) hereof), the entry of such compromise, settlement or
consent shall relieve the Indemnifying Party of its indemnification
obligation related to the claims underlying such compromise,
settlement or consent.
(e) Upon final judgment, determination, settlement or compromise of any
Third Party Claim, and unless otherwise agreed by the parties in
writing, the Indemnifying Party shall pay promptly on behalf of the
Indemnitee, or to the Indemnitee in reimbursement of any amount
theretofore required to be paid by the Indemnitee, the amount so
determined by final judgment, determination, settlement or compromise.
Upon the payment in full by the Indemnifying Party of such amount, the
Indemnifying Party shall succeed to the rights of such Indemnitee to
the extent not waived in settlement, against the third party who made
such Third Party Claim and any other person who may have been liable
to the Indemnitee with respect to the indemnified matter.
(f) In connection with defending against Third Party Claims, the parties
shall cooperate with and assist each other by making available all
employees, books, records, communications, documents, items and
matters within their knowledge, possession or control that are
necessary, appropriate or reasonably deemed relevant with respect to
defense of such claims; provided, however, that nothing in this
subparagraph (f) shall be deemed to require the waiver of any
privilege, including the attorney-client privilege, or protection
afforded by the attorney work product doctrine. In addition,
regardless of the party actually defending a Third Party Claim for
which there is an indemnity obligation under Section 4.1 or 4.2
hereof, the parties shall give each other regular status reports
relating to such action with detail sufficient to permit the other
party to assert and protect its rights and obligations under this
Agreement.
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(g) The provisions of this Section 4.4 shall survive for two (2) years
following the date of this Agreement and shall be the exclusive
procedures for any claims subject to the provisions of Sections 4.1 or
4.2 hereof.
4.5. Other Claims. Any claim on account of an Indemnifiable Loss which does not
result from a Third Party Claim shall be asserted by written notice from
the Indemnitee to the Indemnifying Party within sixty (60) days of first
learning of the breach under Section 4.1(iv) or Section 4.2(iv) hereof, as
the case may be. All such claims that are not timely asserted pursuant to
this Section shall be deemed to be forever waived. The Indemnitee's written
notice shall contain such information as the Indemnitee has regarding the
alleged breach. Such Indemnifying Party shall have a period of sixty (60)
days (or such shorter time period as may be required by law as indicated by
the Indemnitee in the written notice) within which to respond thereto. If
such Indemnifying Party does not respond within such 60-day period (or
lesser period), such Indemnifying Party shall be deemed to have accepted
responsibility to make payment for the amount of Indemnifiable Loss and
shall have no further right to contest the validity of such claim. If such
Indemnifying Party does respond within such 60-day (or lesser) period and
rejects such claim in whole or in part, such Indemnitee shall be free to
pursue such remedies as may be available under applicable law or under this
Agreement.
4.6. Contribution in Respect of Certain Indemnifiable Losses. If the
indemnification provided for in this Article 4 is unavailable to an
Indemnitee in respect of any Indemnifiable Loss arising out of, or related
to, information contained in the Information Statement or the Form 10, the
Indemnifying Party, in lieu of indemnifying such Indemnitee, shall
contribute to the amount paid or payable by such Indemnitee as a result of
such Indemnifiable Loss, in such proportion as is appropriate to reflect
the relative fault of Vital Images, its directors, officers, employees or
agents, on the one hand, and Bio-Vascular, its directors, officers,
employees or agents, on the other hand, in connection with the statements
or omissions which resulted in such Indemnifiable Loss. The relative fault
of such respective groups shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by either such group.
4.7. No Beneficiaries. Except to the extent expressly provided otherwise in
this Article 4, the indemnification provided for by this Article 4 shall
not inure to the benefit of any third party or parties and shall not
relieve any insurer who would otherwise be obligated to pay any claim of
the responsibility with respect thereto or, solely by virtue of the
indemnification provisions hereof, provide any such subrogation rights with
respect thereto and each party agrees to waive such rights against the
other to the fullest extent permitted.
ARTICLE
5.
CERTAIN ADDITIONAL MATTERS
5.1. Construction of Agreements. Notwithstanding any other provisions in this
Agreement to the contrary, in the event and to the extent that there is a
conflict between the provisions of this Agreement and the provisions of any
Related Agreement, the provisions of such Related Agreement shall control.
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5.2. Consents, Etc. Bio-Vascular and Vital Images shall use their best efforts
to obtain any consent, approval or amendment required to novate and/or
assign all agreements, leases, licenses and other rights of any nature
whatsoever relating to the Vital Images Business to Vital Images, and to
have Bio-Vascular released and Vital Images substituted as guarantor under
any guarantees by Bio-Vascular of obligations of Vital Images; provided,
however, that Bio-Vascular shall not be obligated to pay any consideration
therefor (except for filing fees and other administrative charges) to any
third party from whom such consents, approvals and amendments are
requested.
5.3. No Representations or Warranties. Vital Images understands and agrees that
Bio-Vascular is not, in this Agreement, or in any Related Agreement or any
other agreement or document contemplated by this Agreement, representing or
warranting in any way as to the businesses and Liabilities retained,
transferred or assumed in connection with the Distribution, or that the
obtaining of the consents or approvals, the execution and delivery of any
ancillary or amendatory agreements or the making of the filings and
applications contemplated by this Agreement will satisfy the provisions of
all applicable agreements or the requirements of all applicable laws or
judgments, it being understood and agreed that, subject to Section 5.2
hereof, Vital Images shall bear the economic and legal risk or the business
and Liabilities retained or assumed hereunder by Vital Images, and the
legal and economic risk that any necessary consents or approvals are not
obtained or that any requirements of law or judgments are not complied with
or satisfied.
5.4. Officers and Directors. Vital Images and Bio-Vascular shall take all
necessary actions to elect or otherwise appoint, as of the Distribution
Date, individuals to be directors or officers (or both) of Vital Images, as
set forth in the Information Statement, and to cause the resignation of
individuals as officers and directors of each so that there are no common
directors or officers of Vital Images and Bio-Vascular as of the
Distribution Date, except as described in the Information Statement.
5.5. Existing Intercompany Arrangements. Except as otherwise provided in this
Agreement or in any Related Agreement, any and all agreements,
arrangements, commitments or understandings, whether or not in writing,
between Bio-Vascular and Vital Images will be terminated and of no further
force and effect as of the Distribution Date. Following the Distribution
Date, the parties shall discuss in good faith the provision of any services
and products to be provided by the other, but which inadvertently were not
the subject of this Agreement, the Transition Services Agreement or any
other Related Agreement. Nothing in this Section, however, will require or
authorize Bio-Vascular or Vital Images to provide and charge each other for
any services other than on the terms and conditions specified in the
Transition Services Agreement or the other Related Agreements.
5.6. Intercompany Accounts. Notwithstanding Section 5.5 hereof, any
intercompany receivable, payable or loan between Bio-Vascular and Vital
Images outstanding on the Distribution Date will not be deemed altered,
amended or terminated as a result of this Agreement or the consummation of
the transactions contemplated hereby and will continue in accordance with
its terms following the Distribution Date; provided, however, that all
Intercompany Debt will be contributed to the capital of Vital Images, as
provided in Section 2.5 hereof.
5.7. Qualification as Tax-Free Distribution.
(a) After the Distribution Date, neither Bio-Vascular or Vital Images will
take, or allow any Affiliate to take, any action which could
reasonably be expected to prevent the
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Distribution from qualifying as a tax-free distribution within the
meaning of Section 355 of the Code.
(b) After the Distribution Date, Vital Images will not, nor allow any
Affiliate of Vital Images to, take any action or enter into any
transaction which could reasonably be expected to materially adversely
impact the anticipated tax consequences to Bio-Vascular, which are
known to Vital Images, of any transaction contemplated by this
Agreement; provided, however, that nothing in this Section 5.7(b)
shall prohibit Vital Images from taking any action, or entering into
any transaction (or permitting or causing any Affiliate to so act or
enter) in the ordinary course of business or in the ordinary course of
business dealing, or in connection with the settlement of any audit
issue or in connection with the filing of any tax return. After the
Distribution Date, Bio-Vascular shall not, nor allow any Affiliate to,
take any action or enter into any transaction which could reasonably
be expected to materially adversely impact the anticipated tax
consequences to Vital Images, which are known to Bio-Vascular, of any
transaction contemplated by this Agreement; provided, however, that
nothing in this Section 5.7(b) shall prohibit Bio-Vascular from taking
any action, or entering into any transaction (or permitting or causing
any Affiliate so to act or enter), in the ordinary course of business
or in the ordinary course of business dealing, or in connection with
the settlement of any audit issue or in connection with the filing of
any tax return.
ARTICLE
6.
ACCESS TO INFORMATION AND SERVICES
6.1. Provision of Corporate Records. As soon as practicable after the
Distribution Date, Bio-Vascular will deliver to Vital Images copies of all
Books and Records. Such Books and Records will be the property of Bio-
Vascular, but will be made available, upon reasonable notice and during
normal business hours, to Vital Images for review and duplication until the
earlier of (i) notice from Vital Images that such Books and Records are no
longer needed by Vital Images, or (ii) the seventh anniversary of the
Distribution Date.
6.2. Access to Information. From and after the Distribution Date, Bio-Vascular
and Vital Images will afford to each other and to each other's authorized
accountants, counsel and other designated representatives reasonable access
and duplicating rights (with copying costs to be borne by the requesting
party) during normal business hours to all Books and Records and documents,
communications, items and matters, including computer data (collectively,
"Information") within each other's knowledge, possession or control,
relating to the Vital Images Business or Vital Images Employees, insofar as
such access is reasonably required by Bio-Vascular or Vital Images, as the
case may be, (and shall use reasonable efforts to cause persons or firms
possessing Information to give similar access). Information may be
requested under this Article 6 for any legitimate business purpose
including, without limitation, audit, accounting, claims, Actions,
litigation and tax purposes, as well as for purposes of fulfilling
disclosure and reporting obligations, but not for competitive purposes.
6.3. Production of Witnesses and Individuals. From and after the Distribution
Date, Bio-Vascular and Vital Images will use reasonable efforts to make
available to each other, upon written request, their respective officers,
directors, employees and agents for fact finding, consultation
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and interviews and as witnesses to the extent that any such person may
reasonably be required in connection with any Actions in which the
requesting party may from time to time be involved. Bio-Vascular and Vital
Images agree to reimburse each other for reasonable out-of-pocket expenses
(but not labor charges or salary payments) incurred by the other in
connection with providing individuals and witnesses pursuant to this
Section 6.3.
6.4. Retention of Records. Except when a longer retention period is otherwise
required by law, agreed to in writing, or specifically provided for herein
or in any Related Agreement, Bio-Vascular and Vital Images will retain, for
ten (10) years following the date of this Agreement or such longer period
that may be deemed necessary, all material Information relating to Vital
Images. Notwithstanding the foregoing, in lieu of retaining any specific
Information, Bio-Vascular or Vital Images may offer in writing to deliver
such Information to the other and, if such offer is not accepted within
ninety (90) days, the offered Information may be destroyed or otherwise
disposed of at any time. If a recipient of such offer requests in writing
prior to the scheduled date for such destruction or disposal that any of
the Information proposed to be destroyed or disposed of be delivered to
such requesting party, the party proposing the destruction or disposal will
promptly arrange for the delivery of such of the Information as was
requested (at the cost of the requesting party).
6.5. Confidentiality.
(a) Each of Bio-Vascular and Vital Images will hold, and will cause its
officers, employees, agents, consultants, advisors and Affiliates to
hold, in strict confidence, and not to disclose, unless compelled to
disclose by judicial or administrative process or, in the opinion of
its independent legal counsel, by other requirements of law, all
confidential information concerning the other party.
(b) For purposes of this Section 6.5, confidential information about a
particular party (referred to herein as the "first party") shall mean
information known by the other party on the Distribution Date and
reasonably understood by the other party to be confidential and
related to the first party's business interests, or disclosed
confidentially by the first party to the other party after the
Distribution Date under the terms and for purposes of this Agreement
or any of the Related Agreements, except for:
(i) information which is or becomes publicly available through no
act of the other party, from and after the date of public
availability;
(ii) information disclosed to the other party by a third party,
provided: (A) under the circumstances of disclosure the other
party does not have a duty of non-disclosure owed to such third
party; (B) the third party's disclosure is not violative of a
duty of non-disclosure owed to another, including the first
party; and (C) the disclosure by the third party is not
otherwise unlawful; and
(iii) information developed by the other party independent of any
confidential information of the first party which is known by
the other party on the Distribution Date and/or disclosed by the
first party thereafter.
(c) The foregoing restrictions shall expire with respect to business
information which is confidential information five (5) years after the
date of disclosure of such information,
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unless and to the extent Bio-Vascular and Vital Images agree to a
longer period for the foregoing restrictions with respect to specific
categories of confidential business information, in which case the
foregoing restrictions shall expire with respect to such information
on the expiration of such longer period. The date of disclosure in the
case of confidential business information known by a party on the
Distribution Date shall be the Distribution Date. Each of Bio-Vascular
and Vital Images shall not disclose to another, or use, except for
purposes of fulfilling their respective obligations under this
Agreement or the relevant Related Agreements, any business information
which is confidential information of Vital Images or confidential
information of Bio-Vascular, respectively. The foregoing restrictions
shall not expire until such time and to the extent that such
information ceases to be confidential information.
(d) Each party shall protect confidential information of the other party
by using the same degree of care, but no less than a reasonable degree
of care, to prevent the unauthorized disclosure of the other party's
confidential information as the party uses to protect its own
confidential information of a like nature.
(e) Each party shall ensure that its Affiliates, sublicensees and other
transferees (such as advisors, attorneys and other consultants) agree
to be bound by the same restrictions on use and disclosure of
confidential information as bind the party in advance of the
disclosure of confidential information to them.
6.6. Privileged Matters.
(a) Bio-Vascular and Vital Images agree that Vital Images will maintain,
preserve and assert all privileges, including, without limitation, any
privilege or protection arising under or relating to any attorney-
client relationship (including, without limitation, the attorney-
client and work product privileges), that existed prior to the
Distribution Date ("Privilege" or "Privileges"). Vital Images will not
waive any Privilege that could be asserted under applicable law
without the prior written consent of Bio-Vascular. The rights and
obligations created by this paragraph apply to all information as to
which, but for the Distribution, Bio-Vascular would have been entitled
to assert or did assert the protection of a Privilege ("Privileged
Information"), including but not limited to (i) any and all
information generated prior to the Distribution Date but which, after
the Distribution, is in the possession of Vital Images; (ii) all
communications subject to a Privilege occurring prior to the
Distribution Date between counsel for Bio-Vascular and any person who,
at the time of the communication, was an employee of Bio-Vascular,
regardless of whether such employee is or becomes an Vital Images
Employee; and (iii) all information generated, received or arising
after the Distribution Date that refers or relates to Privileged
Information generated, received or arising prior to the Distribution
Date.
(b) Upon receipt by Vital Images or any of its Affiliates of any subpoena,
discovery or other request that arguably calls for the production or
disclosure of Privileged Information, or if Vital Images obtains
knowledge that any current or former employee of Vital Images has
received any subpoena, discovery or other request which arguably calls
for the production or disclosure of Privileged Information, Vital
Images will promptly notify Bio-Vascular of the existence of the
request and will provide Bio-Vascular a reasonable opportunity to
review the information and to assert any rights it may have under this
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Section 6.6 or otherwise to prevent the production or disclosure of
Privileged Information. Vital Images will not produce or disclose any
information arguably covered by a Privilege under this Section 6.6
unless (i) Bio-Vascular has provided its express written consent to
such production or disclosure; or (ii) a court of competent
jurisdiction has entered a final, non-appealable order finding that
the information is not entitled to protection under any applicable
privilege.
(c) Bio-Vascular's delivery of copies of the Books and Records and other
information to Vital Images, and Bio-Vascular's agreement to permit
Vital Images to possess copies of Privileged Information occurring or
generated prior to the date of this Agreement, are made in reliance on
Vital Images' agreement, as set forth in this Section 6.6, to maintain
the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The access to information being
granted pursuant to Sections 6.1 and 6.2 hereof, the agreement to
provide witnesses and individuals pursuant to Section 6.3 hereof and
transfer of Privileged Information to Vital Images pursuant to this
Agreement shall not be deemed a waiver of any Privilege that has been
or may be asserted under this Section 6.6 or otherwise. Nothing in
this Distribution Agreement shall operate to reduce, minimize or
condition the rights granted to Bio-Vascular in, or the obligations
imposed upon Vital Images by, this Section 6.6.
(d) If there is a reasonable likelihood that the waiver by Bio-Vascular of
any Privilege could expose Vital Images to liability or could
otherwise adversely affect Vital Images, Bio-Vascular will consult
with Vital Images prior to such waiver, and Bio-Vascular will assert
or preserve the Privilege, as applicable, if reasonably practical and
if Bio-Vascular's interests will not be adversely affected by its
assertion or preservation of the Privilege.
ARTICLE
7.
INSURANCE
7.1. Policies and Rights of Vital Images. Before, on and after the Distribution
Date, Vital Images shall have any and all rights of an insured party under
each of the Shared Policies, specifically including, but not limited to,
rights of indemnity and the right(s) to be defended by or at the expense of
insurer(s), with respect to all injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred on or prior to the
Distribution Date by any party in or in connection with the conduct of
Vital Images or, to the extent any claim is made against Vital Images, Bio-
Vascular, and which injuries, losses, liabilities, damages and expenses may
arise out of insured or insurable occurrences or events under one or more
of the Shared Policies; provided, however, that nothing in this clause is
intended to effectuate or shall be deemed to constitute or reflect the
assignment of the Shared Policies, or any of them, to Vital Images.
7.2. Post-Distribution Date Claims. If, subsequent to the Distribution Date, any
person, corporation, firm or entity shall assert a claim against Vital
Images with respect to any injury, loss, liability, damage or expense
incurred or claimed to have been incurred prior to the Distribution Date
in, or in connection with, the conduct of Vital Images or, to the extent
any claim is made against Vital Images, Bio-Vascular, and which injury,
loss, liability, damage or expense may arise out of insured or insurable
occurrences or events under one or more of the Shared Policies, Bio-
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Vascular shall at the time such claim is asserted be deemed to assign,
without need of further documentation, to Vital Images any and all rights
of an insured party under the applicable Shared Policy(ies) with respect to
such asserted claim, specifically including rights of indemnity and the
right(s) to be defended by or at the expense of the insurer(s); provided,
however, that nothing in this sentence is intended to effectuate or shall
be deemed to constitute or reflect the assignment of the Shared Policies,
or any of them, to Vital Images.
7.3. Administration and Reserves. Subject to any contrary provisions of any
Related Agreement, from and after the Distribution Date:
(a) Vital Images shall be entitled to any reserves established by Bio-
Vascular or any of its subsidiaries, or the benefit of reserves held
by any insurance carrier, with respect to the Liabilities of Vital
Images; and
(b) Bio-Vascular shall be entitled to any reserves established by Bio-
Vascular or any of its subsidiaries, or the benefit of reserves held
by any insurance carrier, with respect to Bio-Vascular's Liabilities.
7.4. Allocation of Insurance Proceeds. Insurance Proceeds received with respect
to claims, costs and expenses under the Policies shall be paid to Vital
Images with respect to the Liabilities of Vital Images and to Bio-Vascular
with respect to Bio-Vascular's Liabilities. Payment of the allocable
portions of indemnity costs of Insurance Proceeds resulting from the
liability policies will be made to the appropriate party upon receipt from
the insurance carrier. In the event that the aggregate limits on any of the
Shared Policies are exceeded, the parties agree to provide an equitable
allocation of Insurance Proceeds received after the Distribution Date based
upon their respective bona fide claims. The parties agree to use their best
efforts to cooperate with respect to insurance matters.
7.5. Agreement for Waiver of Conflict and Shared Defense. In the event that
Insured Claims of both Vital Images and Bio-Vascular exist relating to the
same occurrence, Vital Images and Bio-Vascular agree to jointly defend and
to waive any conflict of interest necessary to the conduct of that joint
defense. Nothing in this paragraph shall be construed to limit or otherwise
alter in any way the indemnity obligations of the parties to this
Agreement, including those created by this Agreement, by operation of law
or otherwise.
ARTICLE
8.
DISPUTE RESOLUTION
8.1. Negotiation and Binding Arbitration. Except with respect to matters
involving Section 6.6 hereof (Privileged Matters) and except as may
expressly be provided in any other agreement between the parties entered
into pursuant hereto, if a dispute, controversy or claim (collectively, a
"Dispute") between Bio-Vascular and Vital Images arises out of or relates
to this Agreement, a Related Agreement or any other agreement entered into
pursuant hereto or thereto, including, without limitation, the breach,
interpretation or validity of any such agreement or any matter involving an
Indemnifiable Loss, Bio-Vascular and Vital Images agree to use the
following procedures, in lieu of either party pursuing other available
remedies and as the sole remedy (except as provided in Section 8.4 below),
to resolve the Dispute.
16
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8.2. Initiation. A party seeking to initiate the procedures will give written
notice to the other party, briefly describing the nature of the Dispute. A
meeting will be held between the parties within ten (10) days of the
receipt of such notice, attended by individuals with decision-making
authority regarding the Dispute, to attempt in good faith to negotiate a
resolution of the Dispute.
8.3. Submission to Arbitration. If, within thirty (30) days after such meeting,
the parties have not succeeded in negotiating a resolution of the Dispute,
they will agree to submit the Dispute to binding arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association, by a sole arbitrator selected by the parties. The arbitration
will be held in St. Paul, Minnesota and governed by the Minnesota
equivalent of the Federal Arbitration Act, 9 U.S.C. (S)(S) 1-16, and
judgment upon the award rendered by the arbitrator may be entered by any
court having jurisdiction thereof. The costs of arbitration will be
apportioned between Bio-Vascular and Vital Images as determined by the
arbitrator in such manner as the arbitrator deems reasonable, taking into
account the circumstances of the Dispute, the conduct of the parties during
the proceeding, and the result of the arbitration.
8.4. Equitable Relief. Nothing herein will preclude either party from seeking
equitable relief to prevent any immediate, irreparable harm to its
interests, including multiple breaches of this Agreement or the relevant
Related Agreement by the other party. Otherwise, these procedures are
exclusive and will be fully exhausted prior to the initiation of any
litigation. Either party may seek specific enforcement of any arbitrator's
decision under this Article 8.
8.5. Consolidation. The arbitrator may consolidate an arbitration under this
Agreement with any arbitration arising under or relating to the Related
Agreements or any other agreement between the parties entered into pursuant
hereto, as the case may be, if the subject of the Disputes thereunder arise
out of or relate essentially to the same set of facts or transactions. Such
consolidated arbitration will be determined by the arbitrator appointed for
the arbitration proceeding that was commenced first in time.
ARTICLE
9.
MISCELLANEOUS
9.1. Entire Agreement. This Agreement, including the Exhibits and the
agreements and other documents referred to herein, shall constitute the
entire agreement between Bio-Vascular and Vital Images with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter.
9.2. Expenses. Except as otherwise expressly provided in this Agreement, any
Related Agreement or any other agreement being entered into between Bio-
Vascular and Vital Images in connection with this Agreement, Bio-Vascular
and Vital Images shall each pay their own costs and expenses incurred in
connection with the Distribution and the consummation of the transactions
contemplated by this Agreement.
9.3. Governing Law. This Agreement, the Related Agreements and any other
agreement entered into in connection with the Distribution, shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota (regardless of the laws that might otherwise
17
<PAGE>
govern under applicable principles of conflict of laws) as to all matters,
including, without limitation, matters of validity, construction, effect,
performance and remedies.
9.4. Jurisdiction and Venue. Subject to the arbitration provisions of this
Agreement, each party consents to the personal jurisdiction of the state
and federal courts located in the State of Minnesota and hereby waives any
argument that venue in any such forum is not convenient or proper.
9.5. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly
given (i) on the date of service if served personally on the party to whom
notice is given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United States
Postal Service, provided receipt of delivery has been confirmed; or (iv) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by registered or
certified mail, postage prepaid, properly addressed and return-receipt
requested, to the party as follows:
If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota 55114
Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8010
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
9.6. Modification of Agreement. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
9.7. Termination. This Agreement may be terminated and the Distribution
abandoned at any time prior to the Distribution Date by, and in the sole
discretion of, Bio-Vascular without the approval of Vital Images. In the
event of such termination, neither party (or any of its directors of
officers) shall have any liability of any kind to the other party.
9.8. Successors and Assigns.
(a) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective
successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned
18
<PAGE>
by either party without the prior written consent of the other party,
and such consent shall not be unreasonably withheld.
(b) The obligations of Bio-Vascular and Vital Images under Articles 4 and
7 hereof shall survive the sale or other transfer by either of them of
any of their respective assets or businesses or the assignment by
either of them of any of their respective Liabilities.
9.9. No Third Party Beneficiaries. Except for certain parties entitled to
indemnification under Sections 4.1 and 4.2 hereof and listed therein, this
Agreement is solely for the benefit of the parties hereto and is not
intended to confer upon any other person except the parties hereto any
rights or remedies hereunder.
9.10. Titles and Headings; Interpretation. The titles and headings to Articles
and Sections herein are inserted for convenience of reference only and are
not intended to constitute a part of or to affect the meaning or
interpretation of this Agreement. As used in this Agreement, the term
"person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof. Whenever any words are
used herein in the masculine gender, they shall be construed as though
they were also used in the feminine gender in all cases where they would
so apply.
9.11. Exhibits. The Exhibits to this Agreement shall be construed with and as
an integral part of this Agreement to the same extent as if the same had
been set forth verbatim herein.
9.12. Severability. In case any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions hereof without including any of
such which may hereafter be declared invalid, void or unenforceable. In
the event that any such term, provision, covenant or restriction is
hereafter held to be invalid, void or unenforceable, the parties hereto
agree to use their best efforts to find and employ an alternate means to
achieve the same or substantially the same result as that contemplated by
such term, provision, covenant or restriction.
9.13. No Waiver. Neither the failure nor any delay on the part of any party
hereto to exercise any right under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
preclude any other or further exercise of the same or any other right, nor
shall any waiver of any right with respect to any occurrence be construed
as a waiver of such right with respect to any other occurrence.
9.14. Survival. All covenants and agreements of the parties contained in this
Agreement will survive the Distribution Date.
9.15. Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered on their behalf as of the date first written above.
BIO-VASCULAR, INC.
By:
-------------------------------
Its:
-------------------------------
VITAL IMAGES, INC.
By:
-------------------------------
Its:
-------------------------------
20
<PAGE>
EXHIBIT 10.2
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT (this "Agreement"), dated as of _____________,
1997, is made and entered into by and between Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation
("Vital Images"). Capitalized terms used in this Agreement and not defined
herein will have the meaning given in that certain Distribution Agreement
between the parties, dated of even date herewith (the "Distribution Agreement").
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, and as such, directors, officers and employees of both Bio-Vascular
and Vital Images participate in certain stock-based compensation and incentive
plans, insurance plans and retirement and other benefit plans currently
maintained or sponsored by Bio-Vascular;
WHEREAS, Bio-Vascular and Vital Images have entered into the Distribution
Agreement, pursuant to which Bio-Vascular will distribute all of the issued and
outstanding shares of Vital Images Common Stock to its shareholders, on such
terms and conditions as are contained therein;
WHEREAS, following the Distribution, Bio-Vascular and Vital Images will be
operated as independent public companies, and Vital Images will no longer be a
wholly-owned subsidiary of Bio-Vascular; and
WHEREAS, Bio-Vascular and Vital Images wish to provide for the allocation
of responsibilities with respect to certain employee benefit matters following
the Distribution, including, but not limited to, stock-based compensation and
incentive plans, insurance plans and retirement and other benefit plans.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound, Bio-Vascular and
Vital Images hereby agree as follows:
ARTICLE
1.
ADDITIONAL BENEFITS DEFINITIONS
1.1 Additional Benefits Definitions. As used in this Agreement, capitalized
--------------------------------
terms defined immediately after their use shall have the respective
meanings thereby provided, and the following additional terms shall have
the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
Adjusted Bio-Vascular Option. An Existing Bio-Vascular
----------------------------
Option adjusted in the manner provided in Section 4.6 hereof.
Bio-Vascular Adjustment Plans. The Bio-Vascular, Inc. 1990
-----------------------------
Management Incentive Stock Option Adjustment Plan and 1992 Stock
Option Adjustment Plan to be adopted pursuant to Section 4.3 hereof
for the purpose of enabling Bio-Vascular to grant options to purchase
Bio-Vascular Common Stock to holders of Bio-Vascular Options granted
under the Existing Vital Images Option Plans. Each Bio-Vascular
Adjustment Plan will "mirror" the material provisions of the
corresponding Existing Vital Images Option Plan, except that each Bio-
Vascular Adjustment Plan will provide that: (i) the Distribution will
not be deemed a "termination" of the employment of any Vital Images
<PAGE>
Employee for the purposes of the Plan, and (ii) following the
Distribution, termination of employment of any Vital Images Employee
for the purposes of the Plan will be determined by reference to
employment by Vital Images or any of its subsidiaries.
Bio-Vascular Option Plans. The Bio-Vascular, Inc. Incentive Stock
-------------------------
Option Plan, 1992 Directors' Option Plan and 1995 Stock Incentive
Plan.
Cutoff Date. The business day immediately preceding the
-----------
Distribution Date.
Distribution Ratio. The ratio set forth in the Distribution
------------------
Agreement at which shares of Vital Images Common Stock will be issued
with respect to shares of Bio-Vascular Common Stock in the
Distribution.
Employee. An individual who, on the Distribution Date, is
--------
identified as being in any of the following categories.
Bio-Vascular Categories of Employees:
(i) Bio-Vascular Terminee. Any individual formerly employed
---------------------
in the Retained Business whose employment was terminated
prior to the Distribution Date.
(ii) Bio-Vascular Employee. Any individual who is an Employee of
---------------------
Bio-Vascular on the Distribution Date.
Vital Images Categories of Employees:
(i) Vital Images Terminee. Any individual formerly employed in
---------------------
the Vital Images Business whose employment was terminated
prior to the Distribution Date.
(ii) Vital Images Employee. Any individual who is an Employee of
---------------------
Vital Images on the Distribution Date.
ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation.
Existing Bio-Vascular Stock Option. Each unexercised option to
----------------------------------
purchase Bio-Vascular Common Stock outstanding as of the Record Date,
issued pursuant to any Bio-Vascular Option Plan, non-plan grant or in
connection with Bio-Vascular's assumption of Vital Images' obligations
under the Existing Vital Images Option Plans in the May 1994 merger
between Vital Images and Bio-Vascular.
Existing Vital Images Option Plans. The Vital Images,
----------------------------------
Incorporated 1990 Management Incentive Stock Option Plan and 1992
Stock Option Plan, as adopted by Vital Images prior to the May 1994
merger between Vital Images and Bio-Vascular.
2
<PAGE>
Medical/Dental Plan. A Welfare Plan providing health benefits to
-------------------
Employees of Bio-Vascular and their dependents, or to Employees of
Vital Images and their dependents, as described below:
(i) Bio-Vascular Medical/Dental Plans. The Bio-Vascular
---------------------------------
Medical/Dental Plans in effect as of the date hereof and
continued by Bio-Vascular after the Distribution Date.
(ii) Vital Images Medical/Dental Plans. The Medical/Dental Plans
---------------------------------
to be established by Vital Images in accordance with
Section 6.1 hereof.
Plan. Any plan, policy, arrangement, contract or agreement
----
providing compensation or benefits for any group of Employees or for
any individual Employee or the dependents or beneficiaries of any such
Employee whether formal or informal or written or unwritten, and
including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to
any Employee or the beneficiaries of any such Employee. The term
"Plan" as used in this Agreement does not include any contract,
agreement or understanding entered into by Bio-Vascular or Vital
Images relating to settlement of actual or potential employee-related
litigation claims.
Purchase Plan. A stock-based Plan meeting the requirements of
-------------
Section 423 of the Code. The following are specific Purchase Plans:
(i) Bio-Vascular Purchase Plan. The Bio-Vascular Employee Stock
--------------------------
Purchase Plan in effect as of the date hereof.
(ii) Vital Images Purchase Plan. The Vital Images Employee Stock
--------------------------
Purchase Plan to be adopted by Vital Images prior to the
Distribution Date pursuant to Section 5.2.
Retained Business. The surgical business of Bio-Vascular,
-----------------
involving the development, manufacturing and marketing of proprietary,
specialty medical products for use in thoracic, cardiac, neuro and
vascular surgery.
Service Credit. The period taken into account under any
--------------
Plan for purposes of determining length of service or plan
participation to satisfy eligibility, vesting, benefit accrual and
similar requirements under such Plan.
Qualified Beneficiary. An individual (or dependent thereof)
---------------------
who either (1) experiences a "qualifying event" (as that term is
defined in Code Section 4980B(f)(3) and ERISA Section 603) while a
participant in any Medical/Dental Plan, or (2) becomes a "qualified
beneficiary" (as that term is defined in Code Section 4980B(g)(1) and
ERISA Section 607(3)) under any Medical/Dental Plan, and who is
included in any one of the following categories:
3
<PAGE>
(i) Bio-Vascular Future Qualified Beneficiary. Any person who
-----------------------------------------
becomes a Qualified Beneficiary on or after the
Distribution Date under any Bio-Vascular Medical/Dental
Plan.
(ii) Bio-Vascular Current Qualified Beneficiary. Any Bio-
------------------------------------------
Vascular Terminee who on or before the Cutoff Date, was a
Qualified Beneficiary under any Bio-Vascular
Medical/Dental Plan.
(iii) Vital Images Future Qualified Beneficiary. Any person who
-----------------------------------------
becomes a Qualified Beneficiary after the Cutoff Date
under any Vital Images Medical/Dental Plan.
(iv) Vital Images Current Qualified Beneficiary. Any Vital
------------------------------------------
Images Terminee who on or before the Cutoff Date was a
Qualified Beneficiary under any Bio-Vascular
Medical/Dental Plan.
Vital Images Adjustment Plans. The Vital Images, Inc. Incentive Stock
-----------------------------
Option Adjustment Plan, 1992 Directors' Option Adjustment Plan and 1995
Stock Incentive Adjustment Plan to be adopted pursuant to Section 4.4
hereof for the purpose of enabling Vital Images to grant options to
purchase Vital Images Common Stock to the holders of Bio-Vascular Options
granted under the Bio-Vascular Option Plans. Each Vital Images Adjustment
Plan will "mirror" the material provisions of the corresponding Bio-
Vascular Option Plan, except that each Vital Images Adjustment Plan will
provide that: (i) the Distribution will not be deemed a "termination" of
the employment of any Bio-Vascular Employee for the purposes of the Plan,
and (ii) following the Distribution, termination of employment of any Bio-
Vascular Employee for the purposes of the Plan will be determined by
reference to employment by Bio-Vascular or any of its subsidiaries.
Vital Images Option. An option to acquire Vital Images Common Stock
-------------------
granted under any of the Existing Vital Images Option Plans, Vital Images
Adjustment Plans or any non-plan grant and granted pursuant to Section
4.5(b) hereof.
Welfare Plan. Any Plan that provides medical, health, disability,
------------
accident, life insurance, death, dental or any other welfare benefit,
including, without limitation, any post-employment benefit.
401(k) Retirement Plan. A defined contribution plan maintained
----------------------
pursuant to Section 401(k) or 401(a) of the Code for Employees and their
beneficiaries. The following are specific 401(k) Retirement Plans:
(i) Bio-Vascular 401(k) Plan. The Bio-Vascular 401(k)
------------------------
Retirement Plan and Trust, in effect as of the date hereof.
(ii) Vital Images 401(k) Plan. The Vital Images 401(k)
------------------------
Retirement Plan and Trust to be adopted by Vital Images
prior to the Distribution Date pursuant to Section 3.1
hereof.
4
<PAGE>
ARTICLE
2.
EMPLOYMENT AND CREDITS
2.1 Allocation of Responsibilities on Distribution Date. On the Distribution
---------------------------------------------------
Date, except to the extent retained or assumed by Bio-Vascular under this
Agreement or any other agreement related to the Distribution, Vital Images
shall retain or assume, as the case may be, sole responsibility as employer
for the Vital Images Employees, and shall cause any Vital Images Employee
that is then a party to any employment, change in control or other
employment-related agreement with Bio-Vascular to terminate such agreement
effective as of the Distribution Date. Except as otherwise provided in this
Agreement or in any other agreement between Bio-Vascular or Vital Images,
the assumption or retention of responsibility as employer by Vital Images
described in this Section 2.1 shall not, of itself, constitute a severance
or a termination of employment under any plan of severance, of income or
other Plan extension maintained by Bio-Vascular or Vital Images, and no
such severance, separation or termination shall be deemed to occur by
reason hereof.
2.2 Service Credits. For purposes of determining Service Credits under any
---------------
Plans, Vital Images shall credit each Vital Images Employee with such
Employee's Service Credits and original hire date as may be reflected in
the Bio-Vascular payroll system records as of the Distribution Date. Such
Service Credits and hire date shall continue to be maintained as described
herein for as long as the Employee does not terminate employment. Subject
to the provisions of ERISA, Vital Images may, in its sole discretion, make
such decisions as it deems appropriate with respect to determining Service
Credits for Vital Images Employees whose employment with Vital Images is
terminated following the Distribution Date but who are subsequently re-
employed by Vital Images.
ARTICLE
3.
401(k) RETIREMENT PLANS
3.1 Establishment of Vital Images 401(k) Plan. Effective as of the Distribution
-----------------------------------------
Date, Vital Images shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new Plan named the Vital
Images 401(k) Retirement Plan and Trust (the "Vital Images 401(k) Plan") in
such form as may be approved by Vital Images' Board of Directors, and
intended to qualify for tax-favored treatment under Section 401(a) and
401(k) of the Code and to be in compliance with the requirements of ERISA.
3.2 Continuation of Benefits. Following the Distribution Date, Vital Images
------------------------
will provide benefits under the Vital Images 401(k) Plan to all Vital
Images Employees who, immediately prior to the Distribution Date, were
participants in, or otherwise entitled to benefits under, the Bio-Vascular
401(k) Plan. All Vital Images Employees who wish to participate in the
Vital Images 401(k) Plan will be required to enroll in the Vital Images
401(k) Plan in accordance with its terms.
3.3 Transfer and Acceptance of Account Balances. As soon as practicable after
-------------------------------------------
the Distribution Date, Bio-Vascular shall cause the trustees of the Bio-
Vascular 401(k) Plan to transfer to the trustee or other funding agent of
the Vital Images 401(k) Plan the amounts (in cash, securities, other
property, plan loans, or a combination thereof) acceptable to the
administrator or trustee of
5
<PAGE>
the Vital Images 401(k) Plan representing the account balances of all Vital
Images Employees. Each such transfer shall comply with Section 414(l) of
the Code and the requirements of ERISA and the regulations promulgated
thereunder. Vital Images shall cause the trustees or other funding agent of
the Vital Images 401(k) Plan to accept the plan-to-plan transfer from the
Bio-Vascular 401(k) Plan trustees, and to credit the account of each Vital
Images Employee under the Vital Images 401(k) Plan with amounts transferred
on their behalf.
3.4 Bio-Vascular to Provide Information. Bio-Vascular shall provide Vital
-----------------------------------
Images, as soon as practicable after the Distribution Date with a list of
Vital Images Employees who, to the best knowledge of Bio-Vascular, were
participants in or otherwise entitled to benefits under the Bio-Vascular
401(k) Plan on the Cutoff Date, together with a listing of each
participant's Service Credits under the Bio-Vascular 401(k) Plan and a
listing of each such Vital Images Employee's account balance thereunder.
Bio-Vascular shall, as soon as practicable after the Distribution Date,
provide Vital Images with such additional information in the possession of
Bio-Vascular (and not already in the possession of Vital Images) as may be
reasonably requested by Vital Images and necessary for Vital Images to
administer effectively the Vital Images 401(k) Plan.
3.5 Regulatory Filings. Vital Images and Bio-Vascular shall, in connection with
------------------
the plan-to-plan transfer described in Section 3.3, cooperate in making any
and all appropriate filings required by the Commission or the INTERNAL
REVENUE SERVICE, or required under the Code, ERISA, or any applicable
securities laws and the regulations thereunder, and take all such action as
may be necessary and appropriate to cause such plan-to-plan transfer to
take place as soon as practicable after the Distribution Date or otherwise
when required by law.
ARTICLE
4.
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
4.1 Bio-Vascular Option Plans. Prior to the Distribution, Bio-Vascular will
-------------------------
take all action necessary and appropriate to effect amendments to the Bio-
Vascular Option Plans such that (i) the Distribution will not be deemed a
"termination" of the employment of any Vital Images Employee for the
purposes of such Plans, and (ii) following the Distribution, termination of
employment of any Vital Images Employee for the purposes of such Plans will
be determined by reference to employment by Vital Images or any of its
subsidiaries. Following the Distribution, Bio-Vascular shall continue the
Bio-Vascular Option Plans, as so amended, and shall continue to reserve
those shares of Bio-Vascular Common Stock already reserved for issuance
thereunder.
4.2 Existing Vital Images Option Plans. Prior to the Distribution, Vital Images
----------------------------------
shall take all action necessary and appropriate (i) to ratify the Existing
Vital Images Option Plans, and (ii) to the extent such plans have not been
approved by the shareholders of Vital Images, to present the Existing Vital
Images Option Plans to Bio-Vascular, as the sole shareholder of Vital
Images, for approval. Following the Distribution, Vital Images shall
continue the Existing Vital Images Option Plans, and shall continue to
reserve at least those shares of Vital Images Common Stock already reserved
for issuance thereunder.
4.3 Bio-Vascular Adjustment Plans. Prior to the Distribution Date, Bio-Vascular
-----------------------------
shall take, or cause to be taken, all action necessary and appropriate (i)
to ratify the adoption of the Bio-Vascular Adjustment Plans, and (ii) if
necessary, to present the Bio-Vascular Adjustment Plans to its
6
<PAGE>
shareholders for approval. Following the Distribution, Bio-Vascular shall
reserve for issuance under the Bio-Vascular Option Adjustment Plans the
number of shares of Bio-Vascular Common Stock already reserved for issuance
pursuant to obligations assumed under the Existing Vital Images Plans.
4.4 Vital Images Adjustment Plans. Prior to the Distribution Date, Vital Images
-----------------------------
shall take, or cause to be taken, all action necessary and appropriate (i)
to ratify the adoption of the Vital Images Adjustment Plans, and (ii) to
present the Vital Images Adjustment Plans to Bio-Vascular, as the sole
shareholder of Vital Images, for approval. To the extent authorized by Bio-
Vascular prior to the Distribution Date, Vital Images shall reserve for
issuance under each Vital Images Adjustment Plan such number of shares of
Vital Images Common Stock necessary to grant Options pursuant to Section
4.5(b) hereof; provided, however, that any such shares not used to grant
Vital Stock Options pursuant to Section 4.5(b) will not be available for
future awards thereunder.
4.5 Treatment of Existing Bio-Vascular Options. In connection with the
------------------------------------------
Distribution, each Existing Bio-Vascular Option will be converted into an
Adjusted Bio-Vascular Option and will entitle the grantee to receive a
grant of a Vital Images Option, as follows.
(a) Following the Distribution, each Existing Bio-Vascular Option will
survive as an Adjusted Bio-Vascular Option in accordance with the
terms of the Existing Bio-Vascular Option and the terms of (i) the
relevant non-plan grant, (ii) Bio-Vascular Option Plan, as amended
pursuant to Section 4.1 hereof, or (iii) Bio-Vascular Adjustment Plan,
as the case may be, except that the exercise price of, and number of
shares of Bio-Vascular Common Stock subject to, the Adjusted Bio-
Vascular Option will be determined as provided in Section 4.6 hereof.
As soon as practicable after the Distribution Date, Bio-Vascular will
enter into new option agreements with each grantee of an Adjusted Bio-
Vascular Option, reflecting the modifications required by this
Section.
(b) As soon as practicable after the Record Date and prior to the
Distribution Date, Vital Images shall grant, to each grantee of an
Existing Bio-Vascular Option, a Vital Images Option, under the
appropriate Vital Images Adjustment Plan, Existing Vital Images Option
Plan or pursuant to a non-plan grant, as the case may be, which option
will be subject to the same terms and conditions of the Existing Bio-
Vascular Option, except that the option will be exercisable to
purchase shares of Vital Images Common Stock and the exercise price
of, and number of shares of Vital Images Common Stock subject to, the
Vital Images Options shall be determined as provided in Section 4.6
hereof. As soon as practicable after the Distribution Date, Vital
Images will enter into new option agreements with each grantee of a
Vital Images Option, reflecting the grant pursuant to this Section.
4.6 Adjustment and Setting of Number of Shares and Exercise Prices.
--------------------------------------------------------------
(a) The number of shares of Bio-Vascular Common Stock subject to each
Adjusted Bio-Vascular Option will equal the number of shares of Bio-
Vascular Common Stock subject to the Existing Bio-Vascular Option with
respect to which the Adjusted Bio-Vascular Option was granted, and the
number of shares of Vital Images Common Stock subject to each Vital
Images Option will be determined by applying the Distribution Ratio to
the number of shares of Bio-Vascular Common Stock subject to the
Existing Bio-Vascular
7
<PAGE>
Option with respect to which the Vital Images Option was granted;
provided, however, that the number of shares subject to both the
Adjusted Bio-Vascular Option and the Vital Images Option will be
subject to such further adjustment by Bio-Vascular and Vital Images as
Bio-Vascular may deem necessary such that the aggregate "intrinsic
value" of such options, determined in the manner set forth in Section
4.6(b) below, will equal the "intrinsic value" of the Existing Bio-
Vascular Stock Option to which such options relate. In no event will
options to purchase any fractional shares of Bio-Vascular Common Stock
or Vital Images Common Stock be issued, nor will any cash be paid in
lieu thereof. Options will be issued for whole shares only, determined
by rounding down.
(b) The adjusted exercise price of each Adjusted Bio-Vascular Option and
of the related Vital Images Option shall be determined in such a
manner so that the aggregate "intrinsic value" of the Adjusted Bio-
Vascular Option and the Vital Images Option together will equal the
intrinsic value of the Existing Bio-Vascular Stock Option to which
such options relate. For the purposes of this Section 4.6, "intrinsic
value" means:
(i) with respect to each Existing Bio-Vascular Stock Option, the
difference between the exercise price and the last reported sale
price of Bio-Vascular Common Stock on the Cutoff Date (or, if
such date is not a trading day, the trading day immediately
preceding the Cutoff Date), as reported by the Nasdaq National
Market, multiplied by the number of shares covered;
(ii) with respect to each Adjusted Bio-Vascular Option, the
difference between the exercise price and the average of the
last reported sales prices of Bio-Vascular Common Stock on each
of the five (5) trading days immediately following the
Distribution Date, as reported by the Nasdaq National Market,
multiplied by the number of shares covered; and
(iii) with respect to each Vital Images Option, the difference between
the exercise price and the average of bid and asked prices of
Vital Images Common Stock reported by the Nasdaq SmallCap Market
or on the "over the counter market" averaged over the five (5)
trading days immediately following the Distribution Date,
multiplied by the number of shares covered.
4.7 Effect of the Distribution on Restricted Stock Awards. On the Distribution
-----------------------------------------------------
Date, each grantee of restricted shares of Bio-Vascular Common Stock shall
retain such shares and shall receive as part of the Distribution a number
of restricted shares of Vital Images Common Stock determined by applying
the Distribution Ratio to the number of restricted shares of Bio-Vascular
Common Stock as of the Record Date. In no event will any fractional shares
of restricted Vital Images Common Stock be granted, nor will any cash be
paid in lieu thereof. The restrictions on shares of restricted Bio-Vascular
Common Stock and Vital Images Common Stock granted to a Bio-Vascular
Employee shall be identical to the restrictions underlying the shares of
restricted Bio-Vascular Common Stock prior to the Distribution, and the
restrictions on shares of restricted Bio-Vascular Common Stock and Vital
Images Common Stock granted to a Vital Images Employee shall pertain to
continued employment by Vital Images, and shall otherwise mirror the
restriction on such Vital Images Employee's shares of restricted Bio-
Vascular Common Stock prior to the Distribution. Following the Distribution
Date, shares of restricted Bio-Vascular Common Stock will continue to be
held by Bio-Vascular and shares of Vital Images Common Stock will be held
by Vital Images pending lapse of such restrictions.
8
<PAGE>
4.8 Communication Regarding Termination Of Employment, Vesting And Lapse Of
-----------------------------------------------------------------------
Restrictions. Bio-Vascular shall promptly notify Vital Images of the
------------
termination of employment of any Bio-Vascular Employee holding Vital
Images Options or restricted shares of Vital Images Common Stock and of any
amendment to an Adjusted Bio-Vascular Option held by a Bio-Vascular
Employee holding a related Vital Images Option. Vital Images shall
promptly notify Bio-Vascular of the termination of employment of any Vital
Images Employee holding an Bio-Vascular Option or restricted shares of Bio-
Vascular Common Stock and of any amendment to a Vital Images Option held by
a Vital Images Employee holding a related Adjusted Bio-Vascular Stock
Option. Such notices with respect to termination shall specify the date of
termination, the reason for termination (e.g. for cause, without cause,
upon a change of control, etc.), whether the termination is with or without
written consent and the impact that such termination has on any outstanding
grant or award of options on restricted shares. Such notices with respect
to amendments to an Adjusted Bio-Vascular Option or a Vital Images Option
shall specify the amendment, the name of the Bio-Vascular Employee or Vital
Images Employee, as applicable, and such other information as the other
party shall reasonably require. Bio-Vascular agrees that each Adjusted Bio-
Vascular Option held by a Vital Images Employee whose related Vital Images
Option is amended following the Distribution Date shall be deemed amended
and shall be amended to the same extent as the related Vital Images Option
without further action. Vital Images agrees that each Vital Images Option
held by a Bio-Vascular Employee whose related Adjusted Bio-Vascular Option
is amended following the Distribution Date shall be deemed amended and
shall be amended to the same extent as the related Adjusted Bio-Vascular
Option without further action.
4.9 Determination of Consent to Termination of Employment Plans. Each party
-----------------------------------------------------------
agrees that the giving or withholding of consent to the termination of
employment of any Bio-Vascular Employee or Vital Images Employee, as the
case may be, shall be as determined by the party employing such person and
stated in the notice of termination as required by Section 4.8 hereof.
ARTICLE
5.
STOCK PURCHASE PLANS
5.1 Bio-Vascular Purchase Plan. The current six-month offering period for the
--------------------------
Bio-Vascular Purchase Plan shall close early on _____________, 1997, or
such other date preceding the Record Date as the administrator of the Bio-
Vascular Purchase Plan shall specify. As of such date, shares of Bio-
Vascular Common Stock shall be purchased for all eligible Bio-Vascular
Purchase Plan participants in accordance with the terms of the Bio-Vascular
Purchase Plan so that such shares will be issued and outstanding as of the
Record Date and will entitle the holders thereof to receive shares of Vital
Images Common Stock in the Distribution. The next six-month enrollment
period for the Bio-Vascular Purchase Plan shall begin on ______________,
1997, or such other date as the administrator shall specify following the
Distribution Date.
5.2 Vital Images Purchase Plan. Prior to the Distribution Date, Vital Images
--------------------------
shall take, or cause to be taken, all action necessary and appropriate (i)
to ratify the adoption of the Vital Images Purchase Plan, and (ii) to
present the Vital Images Purchase Plan to Bio-Vascular, as the sole
shareholder of Vital Images, for approval. The Vital Images Purchase Plan
will become effective as of the Distribution Date, and the initial offering
period thereunder will commence as
9
<PAGE>
of July 1, 1997, or such other date as the administrator of the Vital
Images Purchase Plan shall specify following the Distribution Date.
ARTICLE
6.
OTHER BENEFIT MATTERS
6.1 Medical/Dental Plan Liability and Coverage.
------------------------------------------
(a) Bio-Vascular Medical/Dental Plans. After the Distribution Date and
---------------------------------
until such time as Bio-Vascular decides in its sole discretion to
modify or terminate any Plan, Bio-Vascular shall continue the existing
Bio-Vascular Medical/Dental Plans and be responsible for providing
medical/dental coverage, including appropriate stop-loss insurance,
and assuming responsibility for the associated liabilities and accrued
obligations of these Plans relating to Bio-Vascular Employees and
their eligible dependents and beneficiaries under the terms of said
Plans. The Medical/Dental Plans to be continued by Bio-Vascular are
listed on Schedule 6.1(a) attached to and incorporated into this
Agreement.
(b) Vital Images Medical/Dental Plans. After the Distribution Date and
---------------------------------
until such time as Vital Images decides in its sole discretion to
modify or terminate any Plan, Vital Images shall be responsible for
providing Medical/Dental coverage and assuming responsibility for the
associated liabilities and accrued obligations of and relating to all
Vital Images Employees and their eligible dependents and beneficiaries
under the terms of said Plans who will be offered participation in the
Vital Images Medical/Dental Plan or plans on terms and conditions
deemed appropriate by Vital Images. Vital Images Employees and their
eligible dependents and beneficiaries under the terms of said Plans
shall have no preexisting condition limitation imposed other than that
which is or was imposed under their existing plan or plans, and they
will be credited with any expenses incurred toward deductibles,
out-of-pocket expenses, maximum benefit payments, and any benefit
usage toward plan limits that would have been applicable to the plan
in which they were enrolled prior to the Distribution. The
Medical/Dental Plans to be sponsored and continued by Vital Images are
listed on Schedule 6.1(b) attached to and incorporated into this
Agreement.
(c) Continuation Coverage Administration.
------------------------------------
(i) As of the Distribution Date, Bio-Vascular shall assume or retain
and shall be solely responsible for, or cause its insurance
carriers (including for this purpose HMOs and PPOs providing
coverage) to be responsible for, the administration of the
continuation coverage requirements imposed by Code Section 4980B
and ERISA Sections 601 through 608 as they relate to any Bio-
Vascular Current Qualified Beneficiary or any Bio-Vascular Future
Qualified Beneficiary. As of the Distribution Date, Bio-Vascular
shall assume or retain and shall be responsible for, or cause its
insurance carriers (including for this purpose HMOs and PPOs
providing coverage) to be responsible for, all liabilities and
obligations in connection with coverage to be provided, claims
incurred and premiums owed on or after the Cutoff Date under any
Bio-Vascular
10
<PAGE>
Medical/Dental Plan in respect of any Bio-Vascular Current
Qualified Beneficiary or any Bio-Vascular Future Qualified
Beneficiary.
(ii) As of the Distribution Date, Vital Images shall assume or retain
and shall be solely responsible for, or cause it insurance
carriers (including for this purpose HMOs and PPOs providing
coverage) to be responsible for, the administration of the
continuation coverage requirements imposed by Code Section 4980B
and ERISA Sections 601 through 608 as they relate to any Vital
Images Current Qualified Beneficiary or any Vital Images Future
Qualified Beneficiary. As of the Distribution Date, Vital Images
shall assume or retain and shall be responsible for, or cause its
insurance carriers (including for this purpose HMOs and PPOs
providing coverage) to be responsible for, all liabilities and
obligations in connection with coverage to be provided, claims
incurred and premiums owed on or after the Cutoff Date under any
Vital Images Medical/Dental Plan in respect of any Vital Images
Current Qualified Beneficiary or any Vital Images Future
Qualified Beneficiary.
(d) No Qualifying Event. The Distribution of Vital Images shares
-------------------
contemplated by this Agreement and described in the Distribution
Agreement shall not, by itself create a "qualifying event" (as
described in Code Section 4980B(f)(3) and ERISA Section 603).
(e) Refunds. In the event that subsequent to the Distribution Date,
-------
refunds are received from, or additional premium adjustments become
payable to, carriers providing health or medical insurance where such
amounts are the result of actual experience differing from that used
to compute premiums for any periods prior to the Distribution Date,
such refunds or obligations will be shared between Bio-Vascular and
Vital Images based on the relative percentages of Vital Images
employees and Bio-Vascular employees to the total of all such
employees based on the average number of employees during the period
to which the refund or obligation relates.
6.2 Vacation And Sick Pay Liabilities.
---------------------------------
(a) Effective on the Distribution Date, Bio-Vascular shall retain, as to
the Bio-Vascular Employees, and, Vital Images shall assume, as to the
Vital Images Employees, all accrued liabilities (whether vested or
unvested, and whether funded or unfunded) for vacation and sick leave
in respect of such employees as of the Cutoff Date. Bio-Vascular shall
be solely responsible for the payment of such vacation or sick leave
to Bio-Vascular Employees after the Cutoff Date and Vital Images shall
be solely responsible for the payment of such vacation or sick leave
to Vital Images Employees after the Cutoff Date. Each party shall
provide to its own Employees on the Distribution Date the same vested
and unvested balances of vacation and sick leave as credited to such
Employee on the Bio-Vascular payroll systems on the Cutoff Date. The
preceding sentence shall not be construed as in any way limiting the
right of either Bio-Vascular or Vital Images to change its vacation or
sick leave policies as it deems appropriate.
(b) Assets attributable to funded reserves for the vacation or sick leave
liabilities being divided in accordance with Section 6.2(a) (whether
held in a trust, a voluntary employees beneficiary association, or any
other funding vehicle) shall be allocated in an appropriate and
equitable manner between Bio-Vascular and Vital Images.
11
<PAGE>
6.3 Preservation Of Right To Amend Or Terminate Plans. Except as otherwise
-------------------------------------------------
expressly provided herein, no provision of this Agreement, including,
without limitation, the agreement of Bio-Vascular or Vital Images to make a
contribution or payment to or under any Plan herein referred to for any
period, shall be construed as a limitation on the right of Bio-Vascular or
Vital Images to amend such Plan or terminate its participation therein. No
provision of this Agreement shall be construed to create a right in any
Employee, or dependent or beneficiary of such Employee, under a Plan which
such person would not otherwise have under the terms of the Plan itself.
6.4 Notice of Costs. Bio-Vascular and Vital Images acknowledge that Bio-
---------------
Vascular and Vital Images may incur costs and expenses, including, but not
limited to, contributions to Plans and the payment of insurance premiums
arising from or related to any of the Plans that are, as set forth in this
Agreement, the responsibility of the other party hereto. Accordingly, Bio-
Vascular and Vital Images shall (i) give notice to the other party of the
costs to be incurred prior to payment and (ii) demand that the other party
which has the obligation to pay shall pay the cost and expense.
6.5 Payroll Reporting And Withholding.
---------------------------------
(a) Vital Images and Bio-Vascular hereby adopt the "alternative procedure"
for preparing and filing IRS Forms W-2 (Wage and Tax Statements), as
described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure
Vital Images as the successor employer shall provide all required
Forms W-2 to all Vital Images Employees reflecting all wages paid and
taxes withheld by both Bio-Vascular as the predecessor and Vital
Images as the successor employer for the entire year during which the
Distribution takes place. Bio-Vascular shall provide all required
Forms W-2 to all Bio-Vascular Employees reflecting all wages and taxes
paid and withheld by Bio-Vascular before, on and after the
Distribution Date. In connection with the aforesaid agreement under
Rev. Proc. 84-77, each Retained Bio-Vascular Employee or Vital Images
Employee shall be assigned for payroll reporting purposes to Bio-
Vascular or Vital Images, as the case may be.
(b) Vital Images and Bio-Vascular agree to adopt the alternative procedure
of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4 (Employee's
Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Bio-Vascular shall
provide to Vital Images as the successor employer all IRS Forms W-4
and W-5 on file with respect to each Vital Images Employee, and Vital
Images will honor these forms until such time, if any, that such Vital
Images Employee submits a revised form.
(c) With respect to Employees with garnishments, tax levies, child support
orders, qualified medical child support orders, and wage assignments
in effect with Bio-Vascular on the Cutoff Date, Vital Images with
respect to each Vital Images Employee and their dependents shall honor
such payroll deduction authorizations or court or governmental orders
applicable to Vital Images Plans, and will continue to make payroll
deductions and payments to any authorized payee, as specified by the
court or governmental order that was filed with Bio-Vascular.
Likewise, Bio-Vascular with respect to each Bio-Vascular Employee
shall honor such payroll deduction authorization or court or
governmental orders applicable to Bio-Vascular Plans and will continue
to make payroll
12
<PAGE>
deductions and payments to any authorized payee, as specified by the
court or governmental order that was filed with Bio-Vascular.
(d) Unless otherwise prohibited or provided by this Agreement or another
agreement entered into in connection with the Distribution, or by a
Plan document, with respect to Employees with authorizations for
payroll deductions in effect with Bio-Vascular on the Cutoff Date,
Vital Images as the successor employer will honor such payroll
deduction authorizations relating to each Vital Images Employee,
including, without limitation, scheduled loan repayments to the 401(k)
Retirement Plan and direct deposit of payroll, bonus advances and
types of authorized company receivables usually collectible through
payroll deductions, and shall not require that such Vital Images
Employee submit a new authorization to the extent that the type of
deduction by Vital Images does not differ from that made by Bio-
Vascular.
ARTICLE
7.
EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Bio-Vascular and Vital Images to the contrary, Bio-Vascular
and Vital Images understand and agree that:
7.1 Separate Employers. After the Distribution Date and the separation of
------------------
Employees into their respective companies, Bio-Vascular and Vital Images
will be separate and independent employers.
7.2 Employment Policies And Practices. Bio-Vascular and Vital Images may adopt,
---------------------------------
continue, modify or terminate such employment policies, compensation
practices, retirement plans, welfare benefit plans, and other employee
benefit plans or policies of any kind or description, as each may
determine, in its sole discretion, are necessary and appropriate.
7.3 Claims.
------
(a) This section is intended to allocate all liabilities for employment-
related claims involving Bio-Vascular or Vital Images including, but
not limited to, claims against either or both Bio-Vascular and Vital
Images and their respective officers, directors, agents and employees,
or against or by their respective employee benefit plans and plan
administrators and fiduciaries; provided, however, that this section
shall not apply to any indemnification between the parties for matters
and services contemplated in that certain Transition Services
Agreement between the parties, dated of even date herewith.
(b) An employment-related claim shall include any actual or threatened
lawsuit, arbitration, ERISA claim, or federal, state or local judicial
or administrative proceeding of whatever kind involving a demand by or
on behalf of or relating to Bio-Vascular Employees or Vital Images
Employees, or by or relating to any federal, state or local government
agency alleging liability against Bio-Vascular or Vital Images, or
against any employee health, welfare, deferred compensation or other
benefit plan and/or their respective officers, directors, agents,
employees, administrators, trustees and fiduciaries.
13
<PAGE>
(c) The duty of a party to indemnify, defend and hold harmless the other
party under this Section 7.3 shall include such duties, and be subject
to such procedures, as set forth in Article 5 of the Distribution
Agreement, as modified in this Section 7.3.
(d) With respect to pre-Distribution claims:
(i) Bio-Vascular shall indemnify, defend and hold harmless Vital
Images from any employment-related claims of a Retained Bio-
Vascular Employee arising from acts occurring on or before the
Cutoff Date.
(ii) Vital Images shall indemnify, defend and hold harmless Bio-
Vascular from any employment-related claims of a Vital Images
Employee arising from acts occurring on or before the Cutoff
Date.
(e) Where employment-related claims alleging or involving joint and
several liability asserted against Bio-Vascular and Vital Images are
not separately traceable to liabilities relating to Bio-Vascular
Employees or Vital Images Employees , any liability shall be appointed
between Bio-Vascular and Vital Images in accordance with the
percentage that each party's Employees represents of the combined
total number of Employees of both parties, as described below. The
percentage of the liability assumed by Bio-Vascular shall equal the
ratio of (i) the total number of Bio-Vascular Employees on the
Distribution Date to (ii) the combined total number of Bio-Vascular
Employees and Vital Images Employees on such date. The percentage of
the liability assumed by Vital Images shall equal the ratio of (i) the
total number of Vital Images Employees on the Distribution Date, to
(ii) the combined total number of Bio-Vascular Employees and Vital
Images Employees on such date. Each party will indemnify, defend and
hold harmless the other to the extent of the indemnifying party's
apportioned percentage determined in accordance herewith.
(f) Employment related claims arising from acts occurring after the
Distribution and division of the Employees between the parties and not
relating to, arising from, or in connection with the Distribution will
be the sole responsibility of Bio-Vascular as to Bio-Vascular
Employees and of Vital Images as to Vital Images Employees and each
will indemnify, defend, and hold harmless the other from employment-
related claims of the other company.
7.4 Funding Of Plans. Without limitation to the scope and application of
----------------
Section 7.3, any claims by or on behalf of Employees or any federal, state
or local government agency for alleged underfunding of, or failure to make
payments to, health and welfare funds based on acts or omissions occurring
on or before the Cutoff Date or arising from or in connection with the
Distribution, will be the sole responsibility of each party as to its own
employees (i.e., Bio-Vascular with respect to Bio-Vascular Employees and
Vital Images with respect to Vital Images Employees), and the responsible
party will indemnify, defend, and hold harmless the other from any such
claims.
7.5 Assumption Of Employment Tax Rates. Changes in state unemployment tax
----------------------------------
experience as of the Cutoff Date shall be handled as follows: In the event
an option exists to allocate state unemployment tax experience of Bio-
Vascular, the Bio-Vascular experience shall be transferred to Vital Images
if this results in the lowest aggregate unemployment tax costs for both
Bio-
14
<PAGE>
Vascular and Vital Images combined, and the Bio-Vascular experience shall
be retained by Bio-Vascular if this results in the lowest aggregate
unemployment tax costs for Bio-Vascular and Vital Images combined.
7.6 Intercompany Service Charge. Legal, professional, managerial,
---------------------------
administrative, clerical, consulting and support or production services
provided to one party by personnel of the other party, upon the request of
the first party or when such services are otherwise required by this
Agreement between Vital Images and Bio-Vascular, shall be charged to the
party receiving such services on commercially reasonable terms to be
negotiated (or in accordance with the provisions of the Transition Services
Agreement or any other applicable agreement between the parties).
7.7 Warn Claims. Before and after the Distribution Date, each party shall
-----------
comply in all material respects with the Worker Adjustment and Retraining
Act ("WARN"). Bio-Vascular shall be responsible for WARN claims relating to
Bio-Vascular Employees or to Employees who prior to the Distribution Date
were employed in the Retained Business. Vital Images shall be responsible
for WARN Claims relating to Vital Images Employees or to Employees who
prior to the Distribution Date were employed in the Vital Images Business.
Each party shall indemnify, defend and hold harmless the other in
connection with WARN claims for which the indemnitor is responsible and
which are brought against the indemnitee.
7.8 Employees On Leave Of Absence. After the Distribution Date, Bio-Vascular
-----------------------------
shall assume responsibility, if any, as employer for all Employees
returning from an approved leave of absence who prior to the Distribution
Date were employed in the Retained Business. After the Distribution Date,
Vital Images shall assume responsibility, if any, as employer for all
Employees returning from an approved leave of absence who prior to the
Distribution Date were employed in the Vital Images Business.
7.9 No Third-Party Beneficiary Rights. Neither this Agreement nor any other
---------------------------------
intercompany agreement between Vital Images and Bio-Vascular is intended to
nor does it create any third party contractual or other common law rights,
and no person shall be deemed a third-party beneficiary hereof or thereof
7.10 Attorney-Client Privilege. Consistent with the provisions of Section 6.6 of
-------------------------
the Distribution Agreement, the provisions herein requiring either party to
this Agreement to cooperate shall not be deemed to be a waiver of the
attorney/client privilege for either party or shall it require either party
to waive its attorney/client privilege.
ARTICLE
8.
DEFAULT
8.1 Default. If either party materially defaults hereunder, the nondefaulting
-------
party shall be entitled to all remedies provided in the Distribution
Agreement, including the arbitration of disputes set forth therein.
8.2 Force Majeure. Neither party will hold the other party responsible for a
-------------
delay in the performance of any obligation hereunder due to labor
disturbances, accidents, fires, floods, wars, riots, rebellions, blockages,
acts of governments, governmental requirements and regulations,
15
<PAGE>
restrictions imposed by law or any other similar conditions, beyond the
reasonable control and without the fault or negligence of such party, and
the time for performance by such party will be extended by the period of
such delay.
ARTICLE
9.
MISCELLANEOUS
9.1 Relationship of the Parties. Neither party is an agent of the other party
---------------------------
and neither party has any authority to bind the other party, transact any
business in the other party's name or on its behalf, or make any promises
or representations on behalf of the other party unless provided for in any
Exhibit or otherwise agreed to in writing. Each party will perform all of
its respective obligations under this Agreement as an independent
contractor, and no joint venture, partnership or other relationship will be
created or implied by this Agreement.
9.2 Entire Agreement. This Agreement contains the entire agreement among the
----------------
parties hereto with respect to the subject matter hereof and supersedes all
prior written or oral agreements between the parties relating to the
subject matter hereof.
9.3 Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of Minnesota (regardless
of the laws that might otherwise govern under applicable principles of
conflict of laws) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
9.4 Jurisdiction and Venue. Subject to the arbitration provisions of the
----------------------
Distribution Agreement, each party consents to the personal jurisdiction of
the state and federal courts located in the State of Minnesota and hereby
waives any argument that venue in any such forum is not convenient or
proper.
9.5 Notices. All notices, requests, demands and other communications under this
-------
Agreement shall be in writing and shall be deemed to have been duly given
(i) on the date of service if served personally on the party to whom notice
is given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United States
Postal Service, provided receipt of delivery has been confirmed; or (iv) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by registered or
certified mail, postage prepaid, properly addressed and return-receipt
requested, to the party as follows:
If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota
55114 Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
16
<PAGE>
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, MN 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8002
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
9.6 Modification of Agreement. No modification, amendment or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
9.7 Successors and Assigns. A party's rights and obligations hereunder may not
----------------------
be assigned or transferred without the prior written consent of the other
party hereto. Subject to the foregoing, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and shall survive any acquisition,
disposition or other corporate restructuring or transaction involving
either party.
9.8 Titles and Headings. The titles and headings to Articles and Sections
-------------------
herein are inserted for convenience of reference only and are not intended
to constitute a part of or to affect the meaning or interpretation of this
Agreement.
9.9 Severability. In case any one or more of the provisions contained in this
------------
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions hereof without including any of such
which may hereafter be declared invalid, void or unenforceable. In the
event that any such term, provision, covenant or restriction is hereafter
held to be invalid, void or unenforceable, the parties hereto agree to use
their best efforts to find and employ an alternate means to achieve the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction.
9.10 No Waiver. Neither the failure nor any delay on the part of any party
---------
hereto to exercise any right under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right preclude any
other or further exercise of the same or any other right, nor shall any
waiver of any right with respect to any occurrence be construed as a waiver
of such right with respect to any other occurrence.
9.11 Survival of Obligations. Notwithstanding anything in this Agreement or the
-----------------------
Distribution Agreement to the contrary, this Agreement shall survive the
consummation of the transactions contemplated by the Distribution
Agreement.
17
<PAGE>
9.12 Counterparts. This Agreement may be executed in one or more counterparts,
------------
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered as of the date first written above.
BIO-VASCULAR, INC.
By:______________________________________
Its:_____________________________________
VITAL IMAGES, INC.
By:______________________________________
Its:_____________________________________
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SCHEDULE 6.1(a)
[Medical/Dental Plans to be Sponsored and Continued by Bio-Vascular]
19
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SCHEDULE 6.1(b)
[Medical/Dental Plans to be Sponsored and Established by Vital Images]
20
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EXHIBIT 10.3
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (this "Agreement"), dated as of _____________, 1997,
is made and entered into by and between Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation
("Vital Images"). Capitalized terms used in this Agreement and not defined
herein will have the meaning given in that certain Distribution Agreement
between the parties, dated of even date herewith (the "Distribution Agreement").
RECITALS
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, and, as such, Bio-Vascular and Vital Images have joined in filing
consolidated federal Tax Returns (as defined below) and certain consolidated,
combined or unitary state, local or foreign Tax Returns; and
WHEREAS, Bio-Vascular and Vital Images have entered into the Distribution
Agreement, pursuant to which Bio-Vascular will distribute all of the issued and
outstanding shares of Vital Images Common Stock to Bio-Vascular's shareholders
in a transaction intended to qualify for tax-free treatment under Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code"), on such terms and
conditions as are contained therein; and
WHEREAS, following the Distribution, Bio-Vascular and Vital Images will be
operated as independent public companies, and Vital Images will no longer be a
wholly-owned subsidiary of Bio-Vascular; and
WHEREAS, Bio-Vascular and Vital Images wish to provide for (i) allocations
of, and indemnification against, certain liabilities for Taxes (as defined
below); (ii) the preparation and filing of Tax Returns on a basis consistent
with prior practice and the payment of Taxes with respect thereto; and (iii)
certain related matters.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound, Bio-Vascular and
Vital Images hereby agree as follows:
ARTICLE
1.
ADDITIONAL DEFINITIONS; CERTAIN TAX PERIODS
1.1. Additional Tax Definitions. As used in this Agreement, capitalized terms
defined immediately after their use shall have the respective meanings
thereby provided, and the following additional terms shall have the
following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Bio-Vascular" shall mean only Bio-Vascular, Inc., as a separate
legal entity, excluding Vital Images or other affiliates, and such
term as used herein is not intended to represent the entire Bio-
Vascular consolidated group of companies as such term is used for
financial reporting purposes.
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"Bio-Vascular Income Taxes" means, subject to Section 1.3, all
Income Taxes imposed on, assessed against, collected with respect to,
or measured by the net or gross income, profits, receipts, assets,
equity or other basis related to Bio-Vascular, or its respective
assets or operations, that arise in, or are attributable to, any and
all Pre-Closing Periods, excluding any Reserved Tax and excluding any
Vital Images Income Taxes.
"Income Tax" means any and all liability for any taxes imposed on
the income or assets of a corporation, including without limitation,
any liability under the Code and all federal, state, local, and
foreign income, alternative minimum, franchise, profits, gross
receipts and unitary taxes or similar taxes or other fees or
assessments imposed with respect thereto irrespective of the basis on
which such taxes are measured and any interest, penalties or additions
in respect of such tax.
"Pre-Closing Periods" means all taxable periods (i) ending on or
prior to the Distribution Date, and (ii) the portion to and including
the Distribution Date of any taxable period that begins on or before
the Distribution Date and ends after the Distribution Date.
"Post-Closing Periods" means all taxable periods (i) beginning
after the Distribution Date, and (ii) the portion after the
Distribution Date of any taxable period that begins on or before the
Distribution Date and ends after the Distribution Date.
"Reserved Tax" means an Income Tax liability separately accrued
or deferred on the balance sheet of Vital Images as of the
Distribution Date. The parties agree that Income Taxes shall be
accrued on such balance sheet in a manner consistent with past
practices.
"Tax" means Income Tax.
"Tax Return" means any return, report, information return or
other documents (including any related supporting schedules,
statements, or information) filed or required to be filed with any tax
authority or governmental entity in connection with the determination,
assessment or collection of any Income Taxes of any party or the
administration of any laws, regulations or administrative requirements
relating to any Taxes defined herein.
"Vital Images Income Taxes" means, subject to Section 1.3, (i)
all Income Taxes imposed on, assessed against, or collected with
respect to, Vital Images, as a separate legal entity, or its assets or
operations that arise in, or are attributable to, any and all Pre-
Closing Periods and Post-Closing Periods, and (ii) all Reserved Taxes.
"Vital Images Tax Returns" means all Tax Returns filed or
required to be filed by or with respect to Vital Images or its assets
or operations (including any consolidated, combined or unitary Tax
Returns to the extent they relate thereto).
1.2. Tax Periods Including Pre-Closing Period and Post-Closing Period Activity.
For purposes of determining Vital Images Income Taxes, for Tax periods that
begin on or prior to the Distribution Date and end after the Distribution
Date, such Income Taxes shall be determined on
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the basis of an interim "closing of the books" computation as of the end of
the Distribution Date and any net operating losses (or other tax
attributes) shall be subject to Section 1.3 hereof. With respect to the
Bio-Vascular federal consolidated income tax return for the taxable year
including the Distribution Date, appropriate allocation and cutoff of
income or loss shall be made as required in the federal consolidated income
tax return regulations. Any subsequent adjustments occurring with respect
to such period, including the Distribution Date, shall be appropriately
allocated to the Pre-Closing Period and the Post-Closing Period based on a
simulated Tax Return for each period.
1.3. Pre-Closing Period Net Operating Losses. Notwithstanding anything to the
contrary herein, the parties hereto agree that any net operating losses (or
other tax attributes) arising in any Pre-Closing Period of either party
will be available to either party to offset any taxable income for such
Pre-Closing Periods that may be generated by the other party and which may
be offset by such net operating losses (or other tax attributes) under
applicable federal or state law. The provisions of this Section 1.3 shall
apply to any net operating losses (or other tax attributes) existing on the
Distribution Date and any such net operating losses (or other tax
attributes) that may subsequently arise upon audit or examination of any
Pre-Closing Period. Under no circumstances shall either party be liable to
the other party under Article 2 or otherwise for their usage of any net
operating losses (or other tax attributes) generated by the other party and
arising in any Pre-Closing Period.
ARTICLE
2.
INDEMNIFICATION AND PAYMENT
2.1. Indemnification for and Payment of Income Taxes.
(a) Bio-Vascular shall pay when due, without setoff, and be responsible
for, all Bio-Vascular Income Taxes assessed against it by any
jurisdiction. Bio-Vascular shall indemnify and hold harmless Vital
Images against any and all Bio-Vascular Income Taxes incurred in
connection with the operation or enforcement of this Article 2.
(b) Vital Images shall pay when due, without setoff, and be responsible
for, all Vital Images Income Taxes assessed against it by any
jurisdiction, including, without limitation, any liability
subsequently imposed for Vital Images Income Taxes for Pre-Closing
Periods. Vital Images shall indemnify and hold harmless Bio-Vascular
and its affiliates against any and all Vital Images Income Taxes
incurred in connection with the operation or enforcement of this
Article 2.
(c) Bio-Vascular shall not be obligated to indemnify or hold harmless
Vital Images for any decrease to any net operating loss carryforward
or credit (or the carryforward of any other tax attributes) available
to Vital Images resulting from adjustments to any item of income,
deduction, credit or exclusion on Tax Returns for which Bio-Vascular
is responsible (including the Bio-Vascular Consolidated Returns, as
defined below).
(d) Vital Images shall not be obligated to indemnify or hold harmless Bio-
Vascular or its affiliates for any increase to any net operating loss
carryforward or credit (or the carryforward of any other tax
attributes) available to Vital Images.
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ARTICLE
3.
REFUNDS
3.1. Bio-Vascular Refunds. Vital Images shall promptly assign and remit (or
cause to be promptly assigned and remitted) to Bio-Vascular an amount equal
to any refunds of, or credits against, any Income Taxes received and
realized by Vital Images (including interest thereon, if any) to the extent
attributable to Bio-Vascular Income Taxes, other than a refund or credit
(or the right thereto) that is reflected on the balance sheet of Vital
Images as of the Distribution Date (a "Balance Sheet Refund").
3.2. Vital Images Refunds. Bio-Vascular shall promptly assign and remit (or
cause to be promptly assigned and remitted) to Vital Images an amount equal
to all Balance Sheet Refunds.
3.3. Carryback from a Vital Images Post-Closing Period Return to any Bio-
Vascular Separate, Consolidated or Combined Federal or State Tax Return.
Unless: (i) Bio-Vascular, in its sole and absolute discretion, consents to
do so; or (ii) such carryback is specifically required by law, Vital Images
shall not carry back any losses or credits accruing after the Distribution
Date in any Post-Closing Period to any Bio-Vascular separate, consolidated
or combined federal or state Tax Return. Vital Images shall make any
elections and take all such actions necessary to avoid and relinquish any
such carryback, pursuant to Code Section 172(b)(3) and, to the extent
feasible, any similar provision of any state, local or foreign law. Even if
such carryback is required by law, Bio-Vascular and its affiliates shall
make no payment to Vital Images, and Vital Images shall be entitled to no
refund to the extent that the use of such carryback prevented Bio-Vascular
or its affiliates from using a credit or loss which it would otherwise use
in the year or years to which the Vital Images' credit or loss is carried
back.
ARTICLE
4.
TAX RETURNS
4.1. Preparation and Filing.
(a) Bio-Vascular shall file or cause to be filed (upon execution thereof
by an authorized officer of Vital Images, which authorization will not
be unreasonably withheld) all Vital Images Tax Returns with respect to
all Tax periods of Vital Images ending on or prior to the Distribution
Date ("Vital Images Separate Pre-Closing Period Returns"), and,
including, without limitation, all Vital Images Tax Returns that are
(or are a part of) a consolidated or combined Tax Return that include
entities other than Vital Images, even if the Tax period with respect
to such other entities does not end on or prior to the Distribution
Date ("Bio-Vascular Consolidated Returns").
(b) Bio-Vascular shall prepare the Bio-Vascular Consolidated Returns (to
the extent they relate to Vital Images or its assets or operations)
and the Vital Images Separate Pre-Closing Period Returns in a manner
that: (i) is consistent with prior practice (including without
limitation as to Tax and accounting methods, conventions and
elections), and (ii) apportions items equitably from period to period
consistent with Section 1.2 hereof.
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Bio-Vascular shall cause the Bio-Vascular Consolidated Returns to
include and reflect the activities, transactions and operations of
Vital Images for all Pre-Closing Periods.
(c) Vital Images shall file or cause to be filed all Vital Images Tax
Returns required to be filed for all Post-Closing Periods (including
any period that begins on or prior to the Distribution Date but ends
after the Distribution Date), other than Vital Images Separate Pre-
Closing Period Returns and Bio-Vascular Consolidated Returns (the
"Vital Images Post-Closing Period Returns"). However, with respect to
a Vital Images Post-Closing Period Return that is for (i) Income Taxes
of Vital Images and (ii) a Tax year with respect to Vital Images that
begins on or prior to the Distribution Date (a "Vital Images Overlap
Return"), Vital Images shall (a) have a national "Big 6" accounting
firm prepare the Vital Images Overlap Return consistent with prior
practice, including, without limitation, as to Tax and accounting
methods, conventions and elections and (b) provide Bio-Vascular with
an opportunity to review and comment on such Tax Return at least four
weeks prior to the due date thereof, including extensions. The parties
shall use all reasonable efforts to resolve any disagreements with
respect thereto as soon as possible. If they cannot resolve the matter
prior to the due date for such Vital Images Overlap Return, including
extensions, Vital Images may nevertheless file such Tax Return.
Thereafter, the parties shall refer the matter to a mutually
acceptable accounting firm (other than the firm that prepared the
returns) of nationally recognized standing (an "Independent Firm"),
whose fees are to be borne 50% by Vital Images and 50% by Bio-
Vascular. The Independent Firm shall seek to resolve the matter as
soon as practicable. Upon the Independent Firm's determination, an
amended Vital Images Overlap Return shall be filed in accordance
therewith to the extent it differs materially from the Tax Return
originally filed.
(d) Vital Images, upon its request, shall be entitled to copies of Vital
Images Separate Pre-Closing Period Returns and Bio-Vascular
Consolidated Returns following the filing thereof to the extent they
relate to Vital Images.
4.2. Tax Return Payments. Amounts shown due on any Vital Images Tax Returns
shall be timely paid by the party responsible therefor as determined in
accordance with Article 2 of this Agreement (the "Responsible Party"),
irrespective of which party is obligated to prepare or file such Vital
Images Tax Return under this Article 4. The party obligated to file a
particular Vital Images Tax Return (the "Filing Party") has the right, but
not the obligation, unless it is the Responsible Party to pay the Tax shown
due thereon, in which case the Responsible Party shall immediately
reimburse the Filing Party for the payment of such Tax.
ARTICLE
5.
INFORMATION EXCHANGE AND CONFIDENTIALITY
5.1. Cooperation. Upon the reasonable request of any party to this Agreement,
the other party shall promptly provide the requesting party with such
cooperation and assistance, documents, and other information as may
reasonably be requested by such party in connection with: (i) the
preparation and filing of any original or amended Tax Return; (ii) the
conduct of any audit or other examination or any judicial or administrative
proceeding involving to any extent Taxes or Tax Returns within the scope of
this Agreement; or (iii) the verification by a party of an amount
5
<PAGE>
payable hereunder to, or receivable hereunder from, another party
(collectively, "Tax Data"). Such cooperation and assistance shall include,
without limitation: (i) the provision on demand of books, records, Tax
Returns, documentation or other information relating to any relevant Tax
Return; (ii) the execution of any document that may be necessary or
reasonably helpful in connection with the filing of any Tax Return, or in
connection with any audit, proceeding, suit or action of the type generally
referred to in the preceding sentence; (iii) the prompt and timely filing
of appropriate claims for refund; and (iv) the use of reasonable efforts to
obtain any documentation from a governmental authority or a third party
that may be necessary or helpful in connection with the foregoing
(collectively, "Tax Documentation"). Each party shall make its employees
and facilities available on a mutually convenient basis to facilitate such
cooperation.
5.2. Retention. The Tax Data and the Tax Documentation shall be retained until
the later of (i) the expiration of ninety (90) days after expiration of the
applicable statute of limitations (including any waivers or extensions
thereof for any Income Taxes or net operating loss carryovers available in
any tax year); (ii) eight (8) years after the Distribution Date; and (iii)
any retention period required by law or pursuant to any record retention
agreement; provided, however, that in the event an audit, examination,
investigation or other proceeding has been instituted prior to the
expiration of the applicable statute of limitations (or in the event of any
claim under this Agreement), such Tax Data and Tax Documentation shall be
retained until there is a final determination thereof and the time for any
appeal has expired.
5.3. Expenses. Subject only to the provisions of Article 6 of this Agreement,
each party shall cooperate in the manner described in this Article 5 at its
own expense.
5.4. Notification of Carryovers. Bio-Vascular will undertake reasonable
efforts to notify Vital Images of (i) any carryover of losses or credits
that could be partially or totally attributed to and carried over by Vital
Images pursuant to Treasury Regulations Section 1.1502-79 or any similar
law, rule or regulation; and (ii) any subsequent adjustment that could
affect any such item.
5.5. Notification to Shareholders. Bio-Vascular will undertake reasonable
efforts to provide each Bio-Vascular shareholder who receives Vital Images
Common Stock pursuant to the Distribution Agreement with the information
necessary to comply with the requirements of Code Section 355 and all
regulations thereunder which relate to the statements that are to be filed
by such shareholders with their federal income tax returns.
5.6. Confidentiality. Except as required by law or with the prior written
consent of the other party, all (i) Tax Returns; (ii) Tax Data; (iii) Tax
Documentation; (iv) similar documents, schedules, workpapers and items; and
(v) all information contained therein, which are within the scope of this
Agreement, shall be kept confidential by the parties hereto and their
representatives, shall not be disclosed to any other person or entity and
shall be used only for the purposes provided herein.
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ARTICLE
6.
CONTESTS AND AUDITS
6.1. Notice and Cooperation.
-----------------------
(a) If any claim, demand, assessment (including a notice of proposed
assessment) or other assertion, whether oral or written, is made for
Taxes ("Tax Claim") against a party entitled to indemnification with
respect thereto pursuant to this Agreement (an "Indemnitee") or if the
Indemnitee receives any notice, whether oral or written, from any
jurisdiction with respect to any current or future audit, examination,
investigation or other proceeding ("Proceeding"), the Indemnitee shall
promptly notify the party obligated to so indemnify the Indemnitee
(the "Indemnitor") of such Tax Claim or notice of Proceeding. If an
Indemnitor receives notice of a Tax Claim or notice of Proceeding,
whether oral or written, for which the Indemnitor is responsible under
this Agreement, such Indemnitor shall promptly notify the Indemnitee
thereof if such Tax Claim or Proceeding could directly or indirectly
affect (adversely or otherwise) any Indemnitee, determined without
regard to this Agreement.
(b) The party controlling the defense, settlement or compromise of any
Proceeding or any Tax Claim with respect to a Tax Return or any Income
Tax (as determined pursuant to Section 6.2) shall keep the other party
hereto duly informed of the progress thereof to the extent such
Proceeding or Tax Claim could directly or indirectly affect (adversely
or otherwise) such other party, determined without regard to this
Agreement.
(c) If the Indemnitor controls the defense, settlement or compromise of
any Proceeding or Tax Claim for which it is responsible, the
Indemnitee shall nevertheless cooperate in such defense, settlement or
compromise as and to the extent reasonably requested by Indemnitor.
Such cooperation shall be at Indemnitor's expense (on a current
basis), including all liabilities, costs and expenses (including
reasonable attorneys' fees and accounting fees but excluding in-house
legal or tax assistance) incurred in connection with such cooperation
and authorized by Indemnitor.
(d) If the Indemnitor does not control the defense, settlement or
compromise of any Proceeding or Tax Claim for which it is responsible,
it shall nevertheless (i) cooperate at its own expense in such
defense, settlement or compromise to the extent reasonably requested
by Indemnitee; and (ii) indemnify (on a current basis) Indemnitee
against any reasonable liabilities, costs and expenses (including
reasonable attorneys' and accounting fees but excluding in-house legal
or tax assistance) arising out of, or incident to, the Proceeding or
Tax Claim, including without limitation those incurred in connection
with the defense, settlement or compromise thereof.
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6.2. Control.
-------
(a) Except as otherwise provided in Section 6.2(b) or Section 6.3 hereof,
the Indemnitor shall have the right to control the defense, settlement
or compromise of any Proceeding or Tax Claim to the extent it is
responsible therefor pursuant to Article 2 of this Agreement.
(b) Notwithstanding the provisions of Section 6.2(a) hereof (and subject
to the provisions of Section 6.3 hereof):
(i) an Indemnitee (in lieu of the Indemnitor) shall have the right
(but not the obligation) to control the defense, compromise or
settlement of any Proceeding or Tax Claim if the Indemnitor
fails to do so or requests the Indemnitee to do so;
(ii) an Indemnitee (in lieu of the Indemnitor) shall have the right
(but not the obligation) to control the defense, compromise or
settlement of any Proceeding or Tax Claim if the Indemnitor is
(a) the subject of a voluntary bankruptcy, (b) an adjudicated
bankrupt, or (c) the subject of an involuntary petition in
bankruptcy that has been filed and which has not been discharged
within ninety days;
(iii) Bio-Vascular shall control the defense, settlement or compromise
of any Proceeding or Tax Claim with respect to any Bio-Vascular
Consolidated Return and any Vital Images Separate Pre-Closing
Period Return; and
(iv) Vital Images shall control the defense, settlement or compromise
of any Proceeding or Tax Claim with respect to any Vital Images
Post-Closing Period Returns, including any Vital Images Overlap
Returns (but exclusive of any Vital Images Separate Pre-Closing
Period Returns). With respect to Vital Images Overlap Returns,
Bio-Vascular is entitled, at its own expense, to attend meetings
or conferences with the Tax authorities and to receive copies of
all relevant correspondence.
6.3. Approval.
--------
(a) The Indemnitee shall not agree to a settlement or compromise of any
Proceeding or Tax Claim without the prior written consent of the
Indemnitor (which consent shall not be unreasonably withheld) if such
settlement or compromise will result in an obligation of the
Indemnitor pursuant to this Agreement.
(b) Vital Images shall not agree to a settlement or compromise of any
Proceeding or Tax Claim with respect to a Vital Images Post-Closing
Period Return (including a Vital Images Overlap Return) involving a
Tax period beginning prior to the Distribution Date without the prior
written consent of Bio-Vascular, which consent shall not be
unreasonably withheld.
(c) A party receiving a written request for consent pursuant to this
Section 6.3 shall respond as soon as practicable and in no event after
the period of time beginning ten (10) working days prior to the
expiration of the period for appealing the assessment or claim. The
parties shall seek to resolve any dispute with respect thereto as
quickly as possible.
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However, in the event the parties are unable to resolve such dispute
promptly, the matter shall be referred to the Independent Party for
resolution.
ARTICLE
7.
MISCELLANEOUS
7.1. Effectiveness and Term. This Agreement shall be effective from and after
the Distribution Date and shall survive until the later of: (i) ninety (90)
days after the expiration of any applicable statute of limitations
(including any waivers or extensions) related to any Income Taxes or net
operating loss carryovers to any taxable year, or (ii) the final conclusion
of any Proceeding, including any applicable litigation and appeals of any
liability for Taxes; provided, however, that this Agreement shall terminate
immediately upon a termination of the Distribution Agreement.
7.2. Entire Agreement. This Agreement contains the entire agreement among the
parties hereto with respect to the subject matter hereof. This Agreement
terminates and supersedes, on a prospective basis only, all Tax agreements
(other than this Agreement) between Bio-Vascular and Vital Images (or any
other predecessor thereof). However, nothing in the preceding sentence
shall limit or reduce (i) the obligation of Vital Images for Reserved Taxes
as separately accrued on the balance sheet of Vital Images as of the
Distribution Date or (ii) the right of Vital Images to any Balance Sheet
Refund.
7.3. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Minnesota (regardless
of the laws that might otherwise govern under applicable principles of
conflict of laws) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
7.4. Jurisdiction and Venue. Subject to the arbitration provisions of the
Distribution Agreement, each party consents to the personal jurisdiction of
the state and federal courts located in the State of Minnesota and hereby
waives any argument that venue in any such forum is not convenient or
proper.
7.5. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly
given (i) on the date of service if served personally on the party to whom
notice is given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United States
Postal Service, provided receipt of delivery has been confirmed; or (iv) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by registered or
certified mail, postage prepaid, properly addressed and return-receipt
requested, to the party as follows:
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If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota 55114
Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, MN 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8010
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
7.6. Modification of Agreement. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
7.7. Successors and Assigns. A party's rights and obligations hereunder may
not be assigned or transferred without the prior written consent of the
other party hereto. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, and shall survive any
acquisition, disposition or other corporate restructuring or transaction
involving either party.
7.8. No Third-Party Beneficiaries. This Agreement is solely for the benefit of
the parties to this Agreement and should not be deemed to confer upon
third parties any remedy, claim, liability, reimbursement, claim of action
or other right in excess of those existing without this Agreement.
7.9. Titles and Headings. The titles and headings to Articles and Sections
herein are inserted for convenience of reference only and are not intended
to constitute a part of or to affect the meaning or interpretation of this
Agreement.
7.10. Severability. In case any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions hereof without including any of
such which may hereafter be declared invalid, void or unenforceable. In
the event that any such term, provision, covenant or restriction is
hereafter held to be invalid, void or unenforceable, the parties hereto
agree to use their best efforts to find and employ an alternate means to
achieve the same or substantially the same result as that contemplated by
such term, provision, covenant or restriction.
7.11. No Waiver. Neither the failure nor any delay on the part of any party
hereto to exercise any right under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
preclude any other or further exercise of the same or any other right, nor
shall any waiver of any right with respect to any occurrence be construed
as a waiver of such right with respect to any other occurrence.
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7.12. Survival of Obligations. Notwithstanding anything in this Agreement or the
Distribution Agreement to the contrary, this Agreement shall survive the
consummation of the transactions contemplated by the Distribution
Agreement and shall continue throughout the period ending on the later of
(i) ninety (90) days after the expiration of all applicable statutes of
limitation (including extensions), or (ii) the final determination of (and
the expiration of the time to appeal) any Proceeding relating to Taxes or
Tax matters covered by (or any claim under) this Agreement and the payment
of any obligation arising thereunder.
7.13. Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered as of the date first written above.
BIO-VASCULAR, INC.
By:
----------------------------------------
Its:
----------------------------------------
VITAL IMAGES, INC.
By:
----------------------------------------
Its:
----------------------------------------
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EXHIBIT 10.4
TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT (this "Agreement"), dated as of _____, 1997,
is made and entered into by and between Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation
("Vital Images"). Capitalized terms used in this Agreement and not otherwise
defined herein will have the meaning given in that certain Distribution
Agreement between the parties, dated of even date herewith (the "Distribution
Agreement").
RECITALS
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, and as such, currently relies on Bio-Vascular for the performance of
certain corporate services;
WHEREAS, Bio-Vascular and Vital Images have entered into the Distribution
Agreement, pursuant to which Bio-Vascular will distribute all of the issued and
outstanding shares of Vital Images Common Stock to its shareholders, on such
terms and conditions as are contained therein;
WHEREAS, following the Distribution, Bio-Vascular and Vital Images will be
operated as independent public companies, and Vital Images will no longer be a
wholly-owned subsidiary of Bio-Vascular; and
WHEREAS, Bio-Vascular and Vital Images wish to provide for the continuation
of certain services to be provided by Bio-Vascular to Vital Images for a period
following the Distribution, in connection with Vital Images' transition to an
independent public company.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound, Bio-Vascular and
Vital Images hereby agree as follows:
ARTICLE
1.
SERVICES
1.1. Initial Services. Subject to the terms and conditions of this Agreement,
Bio-Vascular will provide or cause to be provided to Vital Images the
following services (the "Initial Services"), each as more fully described
in the Exhibits to this Agreement:
(i) Accounting
(ii) Finance
(iii) Human Resources
(iv) Regulatory Matters
1.2. Additional Services.
(a) From time to time, Bio-Vascular and Vital Images may identify
additional services that Bio-Vascular will provide to Vital Images in
accordance with this Agreement ("Additional Services" and, together
with the Initial Services, the "Services"). The parties will enter
into and execute a written Exhibit with respect to each Additional
Service, setting forth a description of the Additional Service, the
time period during
<PAGE>
which Bio-Vascular will provide the Additional Service, and where the
parties can so determine, the fee Vital Images will pay Bio-Vascular
for such Additional Service.
(b) Bio-Vascular agrees to perform, or to cause its agents or
subcontractors to perform, at fees determined pursuant to Section 3.1,
any Additional Service that: (i) Bio-Vascular provided immediately
prior to the Distribution Date and that Vital Images reasonably
believes was inadvertently or unintentionally omitted from the Initial
Services; or (ii) is essential to effectuate an orderly transition
under the Distribution Agreement, unless such performance would
significantly disrupt Bio-Vascular's operations or materially increase
the scope of Bio-Vascular's responsibility under this Agreement. If
Bio-Vascular reasonably believes the performance of Additional
Services required under subparagraphs (i) or (ii) would significantly
disrupt its operations or materially increase the scope of its
responsibility under this Agreement, Bio-Vascular and Vital Images
agree to negotiate in good faith the terms and conditions of such
Additional Services, but in no event will Bio-Vascular be obligated to
provide such Additional Services if the parties are unable to agree
upon acceptable terms and conditions for such Additional Services.
1.3. Subcontracting. Vital Images understands that, prior to the date of this
Agreement, Bio-Vascular may have subcontracted with one or more third
parties for services in connection with all, or portions of, the Services
to be provided hereunder. Bio-Vascular reserves the right to continue to
subcontract with third parties for Services or to enter into new
subcontract relationships for any Services; provided, however, that any
such subcontracting relationship will not relieve Bio-Vascular of any
obligation to provide Services hereunder. Bio-Vascular will charge Vital
Images for the actual cost to Bio-Vascular, without mark-up, of any such
third party consultants, associated firms, or other subcontractors used in
connection with the Services.
1.4. Excluded Services. Unless otherwise set forth in any Exhibit or in any
other writing, it is understood and agreed that Bio-Vascular will not
provide any legal or independent audit services to Vital Images, or any
other services not specifically provided for in this Agreement.
1.5. Transitional Nature of Services. Vital Images understands that the Services
are intended only to be transitional in nature, and are furnished by Bio-
Vascular solely for the purpose of accommodating Vital Images in connection
with the Distribution. Vital Images understands that Bio-Vascular is not in
the business of providing the Services and has no long-term interest in
continuing this Agreement. Vital Images hereby covenants and agrees to
undertake such actions as may be necessary to phase out the Services
provided by Bio-Vascular as soon as reasonably practicable, which actions
may include, but are not limited to, hiring appropriate personnel to
provide the Services within its own internal organization, or entering into
agreements with third parties for the provision of the Services.
1.6. Additional Resources. Except as provided in an Exhibit for a specific
Service, in providing the Services, Bio-Vascular will not be obligated to:
(i) hire any additional employees; (ii) maintain the employment of any
specific employee; or (iii) purchase, lease or license any additional
equipment or software.
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ARTICLE
2.
TERM AND RENEWAL
2.1. Term of Agreement and Services. The term of this Agreement will commence on
the Distribution Date and will continue so long as Services are provided
hereunder. Unless otherwise provided in the relevant Exhibit, the term of
each Service will commence on the Distribution Date and expire on the date
occurring six (6) months thereafter, subject to extension as provided in
Section 2.2.
2.2. Extension. The parties may, upon mutual written agreement, extend the term
of any or all of the Services for an additional period of time, as provided
in this Section. In the event Vital Images desires to extend the term of
any Service, Vital Images will provide Bio-Vascular with written notice at
least thirty (30) days in advance of the expiration of the then-current
Service term. Such notice will specify the Service, the period of time for
which the Service is proposed to be extended, and a description of any
requested changes to the terms of such Service. Bio-Vascular will give
return notice to Vital Images not more than fifteen (15) days thereafter,
indicating whether Bio-Vascular will agree to such extension or any other
changes to terms and conditions of the relevant Service. Any extension of
the term of any Service, or any other change in the terms and conditions of
any Service, will only be given effect if set forth in a written amendment
to the relevant Exhibit, executed on behalf of both parties.
ARTICLE
3.
COMPENSATION
3.1. Compensation. Vital Images will compensate Bio-Vascular for each Service as
set forth in the relevant Exhibit, or any effective amendment thereto. If
no fee is specified for a particular Service, Bio-Vascular will be
compensated for the total cost to Bio-Vascular of providing such Service.
For the purposes of this Agreement, "total cost" will be defined as all
direct and indirect costs Bio-Vascular incurs as a result of supplying the
Service to Vital Images, calculated, in Bio-Vascular's discretion, on the
basis of any of the following methods: (i) usage by Vital Images; (ii) Bio-
Vascular allocations based upon Bio-Vascular's standard accounting
practices; or (iii) Bio-Vascular management estimates of Services provided
to Vital Images.
3.2. Billing and Payment Terms. Bio-Vascular will invoice Vital Images each
month for all Services delivered during the immediately preceding month,
and Vital Images will pay each such invoice within thirty (30) days after
the date thereof. Invoices not paid within such thirty (30) day period will
accumulate interest at the annual rate of eighteen percent (18%).
ARTICLE
4.
INTERRUPTIONS IN SERVICES
4.1. Interruptions. Bio-Vascular will endeavor to provide uninterrupted Services
through the term of this Agreement. In the event, however, that Bio-
Vascular or any of its subcontractors or agents are wholly or partially
prevented from providing Service by reason of any Force Majeure event set
forth in Section 13.1 hereof, or if Bio-Vascular deems it necessary to
suspend delivery of any Service hereunder for purposes of inspection,
maintenance, repair, or replacement of equipment,
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parts or structures, Vital Images agrees that Bio-Vascular will not be
obligated to deliver such Service during such periods, provided that Bio-
Vascular has given, when feasible, reasonable written notice of the
interruption within a reasonable period of time, explaining the reason,
purpose and likely duration thereof, and provided further, that with
respect to any scheduled interruptions or maintenance, Bio-Vascular will
have provided, when feasible, reasonable advance notice thereof. If any
such interruption has a significant negative impact on Vital Images'
business operations and Bio-Vascular cannot readily reinstate the Service
involved, Bio-Vascular will use reasonable efforts to assist Vital Images
in securing an alternate provider in order to minimize the impact of the
interruption on Vital Images.
ARTICLE
5.
PERSONNEL
5.1. Supervision and Compensation. Bio-Vascular will employ, pay, supervise,
direct and discharge all Bio-Vascular personnel providing Services. Bio-
Vascular will be solely responsible for the payment of benefits and any
other direct and indirect compensation for Bio-Vascular personnel assigned
to perform Services. Bio-Vascular also agrees to be responsible for the
employees' worker's compensation insurance, employment taxes and other
employer liabilities relating to such personnel.
5.2. Selection of Personnel. Bio-Vascular will be solely responsible for
selecting and assigning personnel to perform Services, and will instruct
such personnel to perform Services in a timely, efficient and competent
manner. Vital Images will have the right to request that Bio-Vascular
replace personnel who do not perform the Services properly and in
accordance with reasonable technical or general work standards.
5.3. Standard of Care. Notwithstanding any other provision of this Agreement, it
is understood and agreed that Bio-Vascular is not in the business of
providing the Services and that the standard of care to which Bio-Vascular
and any Bio-Vascular employees or agents performing Services hereunder
shall be accountable shall be the standard of care used by Bio-Vascular in
furnishing comparable services to its own internal organization. Under no
circumstances will Vital Images hold Bio-Vascular or its employees or
agents accountable to a greater standard of care or one that is appropriate
for a party in the business of furnishing similar services.
ARTICLE
6.
INGRESS AND EGRESS
6.1. Right of Ingress and Egress. Bio-Vascular will at all times during the
term of this Agreement have the right of ingress to, and egress from, the
facilities and premises of Vital Images for any purposes in connection with
the delivery of Services, the exercise of any right under this Agreement or
the performance of any obligations required by this Agreement, subject to
reasonable safety and security policies and practices implemented by Vital
Images.
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ARTICLE
7.
CONFIDENTIALITY
7.1. Confidential Information.
(a) Each of Bio-Vascular and Vital Images will hold, and will cause its
officers, employees, agents, consultants, advisors and Affiliates to
hold, in strict confidence, and not to disclose, unless compelled to
disclose by judicial or administrative process or, in the opinion of
its independent legal counsel, by other requirements of law, all
confidential information concerning the other party.
(b) For purposes of this Section 7.1, confidential information about a
particular party (referred to herein as the "first party") shall mean
information known by the other party on the Distribution Date and
reasonably understood by the other party to be confidential and
related to the first party's business interests, or disclosed
confidentially by the first party to the other party after the
Distribution Date under the terms and for purposes of this Agreement
or any of the Related Agreements, except for:
(i) information learned by the other party for the first time after
the Distribution Date, but prior to any disclosure by the first
party;
(ii) information which is or becomes publicly available through no act
of the other party, from and after the date of public
availability;
(iii) information disclosed to the other party by a third party,
provided: (A) under the circumstances of disclosure the other
party does not have a duty of non-disclosure owed to such third
party; (B) the third party's disclosure is not violative of a
duty of non-disclosure owed to another, including the first
party; and (C) the disclosure by the third party is not otherwise
unlawful; and
(iv) information developed by the other party independent of any
confidential information of the first party which is known by the
other party on the Distribution Date and/or disclosed by the
first party thereafter.
(c) The foregoing restrictions will expire with respect to business
information which is confidential information five (5) years after the
date of disclosure of such information, unless and to the extent the
parties agree to a longer period for the foregoing restrictions with
respect to specific categories of business information which is
confidential information in which case the foregoing restrictions
shall expire with respect to such information on the expiration of
such longer period. The date of disclosure in the case of confidential
business information known by a party on the Distribution Date shall
be the Distribution Date. Each of Bio-Vascular and Vital Images shall
not disclose to another, or use, except for purposes of fulfilling
their respective obligations under this Agreement, any business
information which is confidential information of Vital Images or
confidential information of Bio-Vascular, respectively. The foregoing
restrictions shall not expire until such time and to the extent that
such information ceases to be confidential information.
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(d) Each party will protect confidential information hereunder by using
the same degree of care, but no less than a reasonable degree of care,
to prevent the unauthorized disclosure of the other party's
confidential information as the party uses to protect its own
confidential information.
(e) Each party shall ensure that its Affiliates, sublicensees and other
transferees agree to be bound by the same restrictions on use and
disclosure of confidential information as set forth herein prior to
disclosure of confidential information of the other party to such
persons.
ARTICLE
8.
DISCLAIMER AND LIMITATION OF LIABILITY
8.1. Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
BIO-VASCULAR MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
SERVICES TO BE PROVIDED UNDER THIS AGREEMENT.
8.2. Limitation of Direct Damages. In the event of any performance or non-
performance under this Agreement which results in direct damages to Vital
Images, Bio-Vascular's maximum, cumulative and sole liability to Vital
Images for such direct damages will be limited by the total amount of fees
paid by Vital Images to Bio-Vascular, as of the date of the performance or
non-performance giving rise to the damage, with respect to the Service
giving rise to such direct damages. Vital Images acknowledges that
compensation up to such amount constitutes fair and reasonable compensation
for any direct damages that may be suffered or incurred by Vital Images.
Notice of any claim for direct damages must be made within two years of the
date of termination of the Service giving rise to the claim, and must
specify the amount of damages claimed and a description of the action and
the service giving rise to the claim.
8.3. Limitation of Consequential Damages. EXCEPT AS PROVIDED IN ARTICLE 9
HEREOF, BIO-VASCULAR WILL NOT, UNDER ANY CIRCUMSTANCES, BE LIABLE TO VITAL
IMAGES OR ANY OTHER PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR
REVENUE) RESULTING OR ARISING FROM THIS AGREEMENT, ANY PERFORMANCE OR
NONPERFORMANCE UNDER THIS AGREEMENT OR TERMINATION OF THIS AGREEMENT. This
limitation applies regardless of whether the damages or other relief are
sought based on breach of warranty, breach of contract, negligence, strict
liability in tort or any other legal or equitable theory, and regardless of
whether Bio-Vascular was made aware of the possibility of such damages.
ARTICLE
9.
INDEMNIFICATION
9.1. Indemnification by Vital Images. Vital Images agrees to indemnify, defend
and hold harmless Bio-Vascular, its directors, officers, employees, agents
and representatives from any and all third-party claims, actions, demands,
judgments, losses, costs, expenses, damages and liabilities
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(including but not limited to reasonable attorneys fees and other expenses
of litigation) based upon, or arising out of, damage or injury to persons
or property caused by, attributable to or arising in connection with Bio-
Vascular's performance, non-performance or delayed performance of Services
under this Agreement; provided, however, that in no event will Vital Images
be required to indemnify and hold harmless Bio-Vascular in the event
damages are attributable to Bio-Vascular's fraud, intentional criminal
misconduct or gross negligence. Bio-Vascular agrees to indemnify, defend
and hold harmless Vital Images in respect of all liabilities related to,
arising from, asserted against or associated with such fraudulent,
intentionally criminal, or grossly negligent conduct.
9.2. Procedure. If Bio-Vascular intends to claim indemnification under Section
9.1, Bio-Vascular will promptly notify Vital Images in writing of any such
claim, tender to Vital Images the right to defend or settle such claim at
Vital Images' expense, and reasonably cooperate with Vital Images in
defending or settling any such claim. At its expense, Bio-Vascular may be
represented by, and actively participate through, counsel of its choice in
the defense or settlement of any such claim. In any event, Vital Images may
not settle any claim under Section 9.1 without the prior written consent of
Bio-Vascular, which consent will no be unreasonably withheld or delayed.
Vital Images will have no liability whatsoever with respect to claims which
Bio-Vascular or its independent counsel settle without the prior consent of
Vital Images. Vital Images' agrees that its indemnification or obligations
under Section 9.1 will survive termination of this Agreement.
Notwithstanding the foregoing, but subject to Article 8 hereof, Vital
Images will have the right to pursue any and all claims, whether at law or
in equity, that Vital Images may have against Bio-Vascular, its successors
in interest, permitted assigns, officers, directors, employees, agents,
representatives and persons and entities acting on its behalf based upon,
arising out of or in connection with the performance, non-performance or
delayed performance of the Services or any acts or omissions relating
thereto.
ARTICLE
10.
RECORDS AND INSPECTION RIGHTS
10.1. Records. Bio-Vascular agrees to maintain accurate records arising from or
related to the Services, including, but not limited to, accounting records
and documentation produced in connection with the Services.
10.2. Right to Audit. Bio-Vascular grants Vital Images the right to have Bio-
Vascular's cost records audited by an independent certified public
accountant selected by Vital Images and approved by Bio-Vascular. The
independent certified public accountant will agree to treat all
information disclosed in connection with any such audit as confidential
and will only disclose to Vital Images whether or not the costs Bio-
Vascular billed to Vital Images were in accordance with this Agreement.
Vital Images may request an audit no more than once each calendar year,
and is responsible for all costs of the auditor. If the accountant
determines that the costs were inaccurate, then the Bio-Vascular will
adjust the cost accordingly.
10.3. Pricing Adjustments. In the event of a tax audit adjustment relating to
the pricing of any or all Services provided pursuant to this Agreement in
which a taxing authority determines that any of the fees, individually or
in combination, did not result in an arm's-length payment, then the
parties may agree to make corresponding adjustments to the charges in
question for such period
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to the extent necessary to achieve arm's-length pricing. Bio-Vascular and
Vital Images agree to reflect any adjustment made pursuant to this Section
10.3 in their official books and records, and the resulting overpayment or
underpayment will create an obligation to be paid by the owing party.
ARTICLE
11.
TERMINATION
11.1. Termination by Either Party. This Agreement, or any Service provided
hereunder, may be terminated by either party upon written notice to the
other party if:
(a) the other party fails to perform or otherwise breaches a material
obligation under this Agreement; provided, however, that such party
failing to perform or otherwise breaching shall have thirty (30) days
from the date notice of intention to terminate is received to cure the
failure or breach, following which time this Agreement or Service
shall terminate if the failure or breach has not been cured;
(b) the other party makes a general assignment for the benefit of
creditors, becomes insolvent, a receiver is appointed, or a court
approves reorganization or arrangement proceedings;
(c) performance of this Agreement or any Service to be provided hereunder
has been rendered impossible for a period of three (3) consecutive
months by reason of the occurrence of any of the events described in
Section 13.1 hereof or if any other event occurs which can reasonably
be determined to permanently prevent the performance of this Agreement
or any Service; or
(d) during any-agreed upon renewal term, either party so desires at any
time, upon thirty (30) days advance written notice of intention to
terminate.
11.2. Termination Notices. Any termination notice will specify in detail the
Service(s) to be terminated and the effective date of termination.
11.3. Consequences of Termination. In the event a party terminates this
Agreement or any Service for any reason:
(a) Upon request, each party will return to the other party all tangible
personal property owned by the other party in their possession as of
the effective date of termination;
(b) Vital Images agrees to be responsible to Bio-Vascular for reasonable
and proper termination charges which will include all reasonable
cancellation costs incurred by Bio-Vascular or any costs for materials
or equipment reasonably acquired by Bio-Vascular in connection with
the provision of Service(s) in the event of: (i) termination by Vital
Images without cause; or (ii) termination by Bio-Vascular with cause.
(c) Vital Images will remain liable for payment to Bio-Vascular for
Services furnished prior to the effective date of termination.
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11.4. Services Provided After Termination/Expiration. Any Service(s) furnished
by Bio-Vascular and received by Vital Images after the termination or
expiration of this Agreement or any individual Service shall be governed
by the provisions of this Agreement. The furnishing or receipt of any
post-termination or post-expiration Service will not otherwise extend the
term of this Agreement, or any individual Service.
ARTICLE
12.
DISPUTE RESOLUTION
12.1. Procedures. If a dispute, controversy or claim (collectively, a "Dispute")
between Bio-Vascular and Vital Images arises out of or relates to this
Agreement, Bio-Vascular and Vital Images agree to use the following
procedures, in lieu of either party pursuing other available remedies and
as the sole remedy (expect as provided in Section 12.4 below), to resolve
the Dispute.
12.2. Initiation. A party seeking to initiate the procedures will give written
notice to the other party, briefly describing the nature of the Dispute.
The parties will hold a meeting within ten (10) days of the receipt of
such notice, attended by individuals with decision-making authority
regarding the Dispute, to attempt in good faith to negotiate a resolution
of the Dispute.
12.3. Submission to Arbitration. If, within thirty (30) days after such meeting,
the parties have not succeeded in negotiating a resolution of the Dispute,
they agree to submit the Dispute to binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association,
by a sole arbitrator selected by the parties. The arbitration proceeding
will be held in St. Paul, Minnesota, will be governed by the Minnesota
equivalent of the Federal Arbitration Act, 9 U.S.C. (S)(S) 1-16, and
judgment upon the award rendered by the arbitrator may be entered by any
court having jurisdiction thereof. The costs of arbitration may be
apportioned between Bio-Vascular and Vital Images by the arbitrator in
such manner as the arbitrator deems reasonable, taking into account the
circumstances of the Dispute, the conduct of each of the parties during
the proceeding, and the result of the arbitration.
12.4. Equitable Relief. Nothing herein will preclude either party from taking
whatever actions are necessary to prevent any immediate, irreparable harm
to its interests, including multiple breaches of this Agreement by the
other party. Otherwise, the parties agree to fully exhaust these
procedures prior to the initiating litigation. Either party may seek
specific enforcement of any arbitrator's decision under this Article.
12.5. Consolidation. The arbitrator may consolidate an arbitration under this
Agreement with any arbitration arising under or relating to the Related
Agreements or any other agreement between the parties entered into
pursuant to the Distribution Agreement, as the case may be, if the subject
of the Disputes thereunder arise out of or relate essentially to the same
set of facts or transactions. Such consolidated arbitration will be
determined by the arbitrator appointed for the arbitration proceeding that
was commenced first in time.
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ARTICLE
13.
MISCELLANEOUS
13.1. Force Majeure. Neither party will hold the other party responsible for a
delay in the performance of any obligation hereunder due to labor
disturbances, accidents, fires, floods, wars, riots, rebellions,
blockages, acts of governments, governmental requirements and
regulations, restrictions imposed by law or any other similar conditions,
beyond the reasonable control and without the fault or negligence of such
party, and the time for performance by such party will be extended by the
period of such delay. Notwithstanding the foregoing, in no event will
Vital Images be relieved of its payment obligations to Bio-Vascular for
Services delivered, regardless of cause.
13.2. Relationship of the Parties. Neither party is an agent of the other party
and neither party has any authority to bind the other party, transact any
business in the other party's name or on its behalf, or make any promises
or representations on behalf of the other party unless provided for in
any Exhibit or otherwise agreed to in writing. Each party will perform
all of its respective obligations under this Agreement as an independent
contractor, and no joint venture, partnership or other relationship will
be created or implied by this Agreement.
13.3. Entire Agreement. This Agreement, and the Exhibits the Agreement refers
to and which are incorporated into and made a part of this Agreement by
reference, constitute the entire agreement between Bio-Vascular and Vital
Images relating to the subject matter hereof, and, with the exception of
the Distribution Agreement, the Tax Sharing Agreement and any other
Related Agreements, there are no further agreements or understandings,
written or oral, between the parties with respect to such subject matter.
13.4. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Minnesota
(regardless of the laws that might otherwise govern under applicable
principles of conflict of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and
remedies.
13.5. Jurisdiction and Venue. Subject to the arbitration provisions of this
Agreement, each party consents to the personal jurisdiction of the state
and federal courts located in the State of Minnesota and hereby waives
any argument that venue in any such forum is not convenient or proper.
13.6. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly
given (i) on the date of service if served personally on the party to
whom notice is given; (ii) on the day of transmission if sent via
facsimile transmission to the facsimile number given below, provided
telephonic confirmation of receipt is obtained promptly after completion
of transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United
States Postal Service, provided receipt of delivery has been confirmed;
or (iv) on the fifth day after mailing, provided receipt of delivery is
confirmed, if mailed to the party to whom notice is to be given, by
registered or certified mail, postage prepaid, properly addressed and
return-receipt requested, to the party as follows:
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If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota 55114
Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8010
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
13.7. Modification of Agreement. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless the same shall be
in writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
13.8. Successors and Assigns. Except as provided in Section 1.3 with respect to
subcontracting, a party's rights and obligations hereunder may not be
assigned or transferred without the prior written consent of the other
party hereto. Subject to the foregoing, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and shall survive any acquisition,
disposition or other corporate restructuring or transaction involving
either party.
13.9. No Third-Party Beneficiaries. This Agreement is solely for the benefit of
the parties to this Agreement and should not be deemed to confer upon
third parties any remedy, claim, liability, reimbursement, claim of
action or other right in excess of those existing without this Agreement.
13.10. Titles and Headings. The titles and headings to Articles and Sections
herein are inserted for convenience of reference only and are not
intended to constitute a part of or to affect the meaning or
interpretation of this Agreement.
13.11. Severability. In case any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions hereof without including
any of such which may hereafter be declared invalid, void or
unenforceable. In the event that any such term, provision, covenant or
restriction is hereafter held to be invalid, void or unenforceable, the
parties hereto agree to use their best efforts to find and employ an
alternate means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction.
13.12. No Waiver. Neither the failure nor any delay on the part of any party
hereto to exercise any right under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
preclude any other or further exercise of the same or any other right,
nor shall any
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waiver of any right with respect to any occurrence be construed as a
waiver of such right with respect to any other occurrence.
13.13. Survival of Provisions. The representations, warranties and covenants
contained herein will survive termination or expiration of this Agreement
to the full extent necessary to protect the party in whose favor they
run.
13.14. Conflicting Provisions. In the event any provision of any Exhibit
conflicts with the provisions of this Agreement, the provisions of this
Agreement will be controlling.
13.15. Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered as of the date first written above.
BIO-VASCULAR, INC.
By:
-------------------------------------
Its:
------------------------------------
VITAL IMAGES, INC.
By:
-------------------------------------
Its:
------------------------------------
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EXHIBIT A
Service
-------
Accounting
Description of Service
----------------------
Bio-Vascular will provide Vital Images with transitional accounting support
including, but not limited to, supporting Vital Images' transition in the
following accounting functions: (i) payroll; (ii) accounting records; (iii)
creating and maintaining financial statements; (iv) cash flow management; (v)
accounts receivable; (vi) accounts payable; and (vii) state and federal
taxation.
<PAGE>
EXHIBIT B
Service
-------
Finance
Description of Service
----------------------
Bio-Vascular will provide Vital Images with transitional finance support
including, but not limited to, supporting Vital Images' transition in the
following finance functions: (i) investment and working capital management; (ii)
financial reporting; (iii) budgeting, and (iv) Nasdaq SmallCap Market compliance
and other securities regulation compliance matters.
<PAGE>
EXHIBIT C
Service
-------
Human Resources
Description of Service
----------------------
Bio-Vascular will provide Vital Images with transitional human resources support
including, but not limited to, supporting Vital Images' transition in the
following human resources functions: (i) procedures attendant to employment of
personnel; (ii) documents relevant to employees and employment matters in
general; (iii) policies relevant to employees and employment matters in general;
and (iv) compensation and benefits issues.
<PAGE>
EXHIBIT D
Service
-------
Regulatory Matters
Description of Service
----------------------
No specific transitional support services are anticipated at this time, except
for general consultation regarding the establishment of regulatory affairs
capabilities for Vital Images and providing assistance in connection with any
state, federal, foreign or other regulatory bodies including, but not limited
to, the U.S. Securities and Exchange Commission or the Food and Drug
Administration that may arise in the time between the Distribution Date and the
establishment of such capabilities, which period is not expected to exceed six
(6) months.
<PAGE>
EXHIBIT 10.5
VITAL IMAGES, INC.
INCENTIVE STOCK OPTION ADJUSTMENT PLAN
1. Background; Purpose of Plan.
---------------------------
a. Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of ___________, 1997 (the
"Distribution Agreement"), between the Company and Bio-Vascular, Inc.,
a Minnesota corporation ("Bio-Vascular"), pursuant to which Bio-
Vascular will distribute (the "Distribution") all of the outstanding
shares of the Company's common stock to Bio-Vascular's shareholders of
record on the Record Date (as defined in the Distribution Agreement).
In connection with the Distribution, each holder of an option to
purchase Bio-Vascular common stock (a "Bio-Vascular Option") as of the
Record Date will be entitled to retain such Bio-Vascular Option,
provided that such Bio-Vascular Option will be adjusted to reflect the
Distribution (an "Adjusted Bio-Vascular Option"). In addition, as of
the Record Date, each holder of a Bio-Vascular Option will also be
entitled to receive an option to purchase Company common stock that
will be adjusted to reflect the Distribution (an "Adjusted Company
Option").
b. Pursuant to the terms and conditions of the applicable plans under
which the Bio-Vascular Options were initially granted, the exercise
price and number of shares covered by each Adjusted Bio-Vascular
Option, as well as the exercise price and number of shares covered by
each Adjusted Company Option, will be determined according to a
formula, set forth in the Employee Benefits Agreement entered into
between Bio-Vascular and the Company, that is based on the relative
fair market trading values of Bio-Vascular common stock and Company
common stock during the first five trading days following the
Distribution Date (as defined in the Distribution Agreement). Pursuant
to this formula, these adjustments will be made in such a manner that
the aggregate "intrinsic value," or difference between fair market
value and exercise price, of the Adjusted Bio-Vascular Option and
Adjusted Company Option will equal the pre-Distribution "intrinsic
value" of the Bio-Vascular Option with respect to which the adjustment
and grant were made.
c. In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option
with respect to which it is granted, Adjusted Company Options will be
granted under the terms of a corresponding "mirror" plan of the
Company. With respect to Bio-Vascular Options granted under the Bio-
Vascular Incentive Stock Option Plan As Amended, this Vital Images,
Inc. Incentive Stock Option Adjustment Plan (the "Plan") will serve as
such a "mirror" plan. Accordingly, the sole purpose of this Plan is to
provide for the grant of such Adjusted Company Options, and no
additional option grants of any kind will be granted under this Plan.
2. Administration.
--------------
This Plan shall be administered by a Committee appointed by the Board
of Directors of the Company (hereinafter referred to as the "Committee").
The Committee shall consist of two or more directors who are not employees
of the Company and who qualify as "non-employee directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of
1934. Committee members shall be appointed from time to time by the Board,
and shall serve at the pleasure of the Board. In the
<PAGE>
absence of any such appointment, the Board of Directors of the Company shall
constitute the Committee. Subject to such orders and resolutions not
inconsistent with the provisions of this Plan as may from time to time be issued
or adopted by the Board of Directors, the Committee shall have full power and
authority to interpret the Plan and, to the extent contemplated herein, shall
exercise the discretion granted to it (i) to determine the purchase price of the
shares of Common Stock covered by each option, (ii) to determine the persons to
whom and the time or times at which such options shall be granted and the number
of shares to be subject to each option, (iii) to determine the terms of exercise
of each option, (iv) to interpret the Plan, (v) to prescribe, amend, and rescind
rules and regulations relating to the Plan, (vi) to determine the terms and
provisions (and amendments thereof) of each agreement under this Plan (which
agreements need not be identical), and (vii) to make all other determinations
necessary or advisable for the administration of the Plan.
All decisions, determinations and selections made by the Committee pursuant
to the provisions of the Plan and applicable existing orders and resolutions of
the Board of Directors shall be final. Each option granted shall be evidenced by
a written agreement containing such terms and conditions as may be approved by
the Committee and which shall not be inconsistent with the Plan and the orders
and resolutions of the Board of Directors with respect thereto.
The Committee and the group of individuals (the "Bio-Vascular Committee")
administering the Bio-Vascular Incentive Stock Option Plan As Amended (the "Bio-
Vascular Option Plan") will reasonably cooperate and communicate with each other
to promote the purposes of the Plan.
3. Eligibility and Participation.
-----------------------------
All of the Company's employees shall be eligible to receive options under
the Plan, including officers and members of the Company's Board of Directors who
are full-time employees of the Company. In addition, persons who hold
outstanding Bio-Vascular Options under the Bio-Vascular Option Plan as of the
Record Date will be eligible to participate in the Plan. The Committee shall
allot to such participants options to purchase shares in such amounts as the
Committee shall determine; provided, however, that no participant shall be
allotted an option for any greater number of shares than would result in such
participant owning, directly or indirectly, more than 10% of the total combined
voting power or value of the stock of the Company or any of its subsidiaries
unless the option price is at least 110% of the market value of the stock on the
date of grant, and the option is by its terms not exercisable after five (5)
years from the date of grant.
4. Shares Subject to the Plan.
--------------------------
Subject to adjustments as provided in Section 5 herein, an aggregate of
50,000 shares of common stock, $.01 par value of the Company shall be subject to
this Plan, either from authorized, but unissued shares, or shares reacquired by
the Company, including shares purchased in the open market or any combination
thereof. Such number and kind of shares shall be appropriately adjusted in the
event of any one or more stock splits or stock dividends hereafter paid or
declared with respect to such stock. If, prior to the termination of the Plan,
shares issued pursuant to this Plan are repurchased, such repurchased shares
shall again become available for issuance under the Plan.
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares for option by termination of expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
<PAGE>
5. Adjustments Upon Changes in Capitalization.
------------------------------------------
Notwithstanding any limitations set forth in Section 4 hereof, in the event
of a merger, consolidation, reorganization, stock dividend, stock split, or
other change in corporate structure or capitalization affecting the Common
Shares of the Company occurring after the Distribution Date, such appropriate
adjustments shall be made in the maximum number of shares available under the
Plan or to any one individual and in the number, kind, option price, etc., of
shares subject to options granted under the Plan as may be determined by the
Committee.
6. Terms and Conditions of Options.
-------------------------------
The Committee shall have the power, subject to the limitations contained in
this Plan, to prescribe any terms and conditions in respect of the granting or
exercise of any option under this Plan and, in particular, shall prescribe the
following terms and conditions:
a. Each option shall state the number of shares to which it pertains.
b. Each option shall be granted within ten (10) years of the date the
Bio-Vascular Option Plan was adopted by the Board of Directors of Bio-
Vascular.
c. The Committee, in its sole discretion, except with respect to employees
that own directly or indirectly more than 10% of the total combined voting
power or value of the stock of the Company or any of its subsidiaries, in
which case the option price shall be at least 110% of the market value of
the common stock on the date of grant, shall determine the price at which
shares shall be sold to participants hereunder, provided that such price
shall be payable at the time the shares are sold hereunder in cash or in
equivalent value (determined as of the date tendered) in an amount equal to
100% of the fair market value of the common stock on the date of grant.
If the Company common stock is listed on a national exchange or quoted in
the National Market System, fair market value shall be equal to the closing
price for the Company common stock as reported by the Wall Street Journal
(or other accurate reporter of market activity) for the business day
preceding the day on which the option was issued. If the Company common
stock is reported in the National Association of Securities Dealers
Automated Quotation System, fair market value shall be the average of the
bid and asked prices for the business day preceding the day on which the
option was issued. Except as specifically provided herein, determination of
the price at which shares shall be sold to participants shall be determined
by the Committee with reliance upon such appraisal(s) or other data as the
Committee may deem appropriate. Payment for shares upon exercise of any
option under this Plan with previously acquired shares of the Company shall
be subject to all applicable rules of the federal or state agencies having
appropriate jurisdiction, if any, and such shares shall be valued at fair
market value as of the date of exercise of the option.
d. If so designated by the Committee, options granted pursuant to this Plan
are intended to qualify for long-term capital gains tax treatment under the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended.
Eligibility for such tax treatment requires that the stock be held at least
one (1) year from date of exercise of the option and at least
<PAGE>
two (2) years from the date the option is granted.
e. An option shall be exercised when written notice of such exercise has been
given to the Company at its principal business office by the person
entitled to exercise the option and full payment for shares, as defined
herein, with respect to which the option is exercised has been received by
the Company. Until the stock certificates are issued, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to optioned shares notwithstanding the exercise of the Option.
f. Except as provided in this Section, an option may be exercised only by the
optionee while such optionee is, and has continually been, since the date
of the grant of the option, an employee of the Employer or within three (3)
months following termination of employment for reasons other than death,
disability or termination of employment for gross and willful misconduct or
voluntary resignation. If the continuous employment of an optionee
terminates by reason of death, an option granted hereunder held by the
deceased employee which is eligible for exercise as of the death may be
exercised within one (1) year following the date of death, but in no event
later than ten (10) years after the date of grant of such option by the
person or persons to whom the participant's rights under such option shall
have passed by will or by applicable laws of descent and distribution. If
the continuous employment of an optionee terminates by reason of
disability, such option(s) as the disabled employee would be entitled to
exercise as of the date of termination of employment must be exercised
within one (1) year following the date of termination, but in no event
later than ten (10) years after the date of grant of such option. In the
event that an optionee shall cease to be employed by the Employer by reason
of his voluntary resignation or his gross and willful misconduct during the
course of his employment, including but not limited to dishonesty, fraud,
failure to perform his duties, or other conduct adverse to the Company's or
Bio-Vascular's interests as the case may be, the option shall be terminated
as of the termination of employment. The transfer by a participant of
employment or other service from one Employer or its subsidiaries to the
other Employer or its subsidiaries will not be deemed to constitute a
termination of employment or other service for purposes of this Plan.
g. The aggregate fair market value (determined as of the time the option is
granted) of the common stock with respect to which options are exercisable
for the first time by the holder during any calendar year shall not exceed
$100,000.
7. Issuance of Options.
-------------------
Whenever the Committee shall designate a participant for the receipt of an
option, the Secretary (or if the Secretary is himself the recipient, the
President) of the Company shall forthwith send notice thereof to the
participant, in such form as the Committee shall approve, stating the number of
shares optioned to the participant and the price per share thereof. The date of
grant of the option to such participant shall be determined by the Committee, in
its discretion and consistent with the purpose of this Plan. Thereafter, the
Company shall issue to the participant an option instrument in such form as
deemed necessary or appropriate by the Committee.
8. Options Not Transferable.
------------------------
Options under the Plan may not be sold, pledged, assigned or transferred in
any manner, other
<PAGE>
than as provided in Section 6(f) and may be exercised during the lifetime of an
optionee only by such optionee.
9. Amendment or Termination of the Plan.
------------------------------------
The Board of Directors of the Company may amend this Plan from time to time
as it may deem advisable. No amendment of the Plan, however, shall, without
shareholder approval, increase the maximum number of shares under the Plan as
provided in Section 4, or decrease the minimum option price provided in Section
6. Except as provided in Section 5, the Board shall not alter or impair any
option theretofore granted under the Plan without the consent of the holder of
the option. The Board of Directors may at any time terminate the Plan, provided
that any such termination of the Plan shall not adversely affect options already
granted and such options shall remain in full force and effect as if the Plan
had not been terminated.
10. Agreement and Representations of Participants.
---------------------------------------------
As a condition to the exercise of any option or portion thereof, the
Company may require the person exercising such option to represent and warrant
at the time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
under the Securities Act of 1933 or any other applicable law, regulation or rule
of any governmental agency.
In the event legal counsel to the Company renders an opinion to the Company
that shares for options exercised pursuant to this Plan cannot be issued to the
optionee because such action would violate any applicable federal or state
securities laws, then, in that event, the optionee agrees that the Company shall
not be required to issue said shares to the optionee and shall have no liability
to the optionee other than the return to optionee of amounts tendered to the
Company upon exercise of the option.
11. Definitions.
-----------
As used herein the following definitions shall apply:
a. "Continuous employment" shall mean employment without interruption
with the Employer. Employment shall not be considered interrupted in
the case of sick leave, military leave or any other leave of absence
approved by the Employer.
b. "Employer" means the Company if the participant renders employment or
other services to the Company or any subsidiary of the Company and
means Bio-Vascular if the Participant renders employment or other
services to Bio-Vascular or any subsidiary of Bio-Vascular.
c. "Option" shall mean a stock option granted pursuant to the Plan.
d. "Stockholder" shall mean the holders of outstanding shares of the
common stock of the Company.
12. Effective Date and Termination of the Plan.
------------------------------------------
The Plan shall become effective as of the Distribution Date. The Plan
shall terminate on the earlier of:
<PAGE>
a. The date when all the common shares available under the Plan shall
have been acquired through the exercise of options granted under the
Plan; or
b. Ten (10) years after the date of adoption by the Board of Directors of
Bio-Vascular, of the Bio-Vascular Option Plan; or
c. Such other date as the Board of Directors of the Company may
determine.
13. Form of Option.
--------------
Options shall be issued in such form as deemed necessary or appropriate by
the Committee.
<PAGE>
EXHIBIT 10.6
VITAL IMAGES, INCORPORATED
1990 MANAGEMENT INCENTIVE STOCK OPTION PLAN
1. Purpose of Plan. The purposes of this Plan, which shall be known as the
1990 Management Incentive Stock Option Plan and is hereinafter referred to as
the "Plan", are (i) to provide incentives for officers, directors, and key
employees of Vital Images, Incorporated (the "Company") by encouraging their
ownership of the Common Stock of the Company (collectively, the "Stock") and
(ii) to aid the Company in retaining such officers, directors, and key employees
upon whose efforts the Company's success and future growth depends and in
attracting other officers, directors and key employees.
2. Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors (the "Committee"), as hereinafter provided.
The Committee shall be appointed from time to time by the Board of
Directors and shall consist of not fewer than three of its members. However, if
the Board of Directors shall at any time consist of three members or less, then
such committee shall consist of the entire Board of Directors. Members of the
Board of Directors who serve on the Committee shall be eligible to participate
in the Plan. The Board of Directors shall designate one of the members of the
Committee as its Chairman. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members and the Committee's determinations shall constitute recommendations to
the Board of Directors which the Board shall have discretion to act upon. Any
decision or determination reduced to writing and signed by all members of the
Committee shall be as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary (who need
not be a member of the Committee).
For purposes of administration, the Committee, subject to the terms of
the Plan, shall have authority to establish such rules and regulations, make
such determinations and interpretations, as it deems necessary or advisable, and
all determinations and interpretations approved by the Board shall be final,
conclusive and binding on all persons, including persons granted options
hereunder ("Optionees") and their legal representatives and beneficiaries.
No member of the Committee or the Board of Directors shall be liable for
any act or omission with respect to his service on the Committee or with respect
to the Plan, if he acts in good faith and in a manner he reasonably believes to
be in or not opposed to the best interests of the Company.
3. Stock Available for Options. There shall be available for options under
the Plan a total of 200,000 shares of Common Stock, subject to any adjustments
which may be made pursuant to Section 5(g). Shares of Stock with respect to
which options are granted pursuant to the Plan may be either authorized and
unissued shares, or previously issued shares held in the
<PAGE>
treasury of the Company, or both. Shares of Stock covered by options which have
terminated or expired prior to exercise shall not be available for further
options hereunder.
4. Eligibility. Options under the Plan shall be granted to officers,
directors or key employees of the Company ("Management"). Options may be granted
to eligible members of Management whether or not they hold or have held options
previously granted under the Plan or otherwise granted or assumed by the
Company.
5. Terms and Conditions of Options. The Committee shall, in its discretion,
prescribe (for approval or rejection by the Board of Directors) the terms and
conditions of the options to be granted hereunder which shall be evidenced by an
option agreement, which terms and conditions need not be the same in each case,
subject to the following:
a. Number of Shares. Each option shall state the number of shares of
Common Stock to which it pertains.
b. Option Price. Each option shall state the price at which each
share of Stock covered by an option granted under the Plan shall
be purchased, which may be more or less than the then fair market
value of the Company's stock.
c. Option Period. The period for exercise of an option (the "Option
Period") shall in no event be more than ten years from the date on
which the option is granted. With respect to each person who is
granted options under this Plan, the Committee and the Board shall
have the right, among other things, to determine that his right to
exercise such options shall vest, ratably, monthly or annually, or
otherwise, over a determined period (the "Vesting Period"), except
as provided in Section 5(e), commencing on the date of grant. Any
shares of Stock not purchased as the right to exercise ratably
accrues may be purchased thereafter at any time before the
expiration of the Option Period except as provided in Section
5(e).
d. Exercise of Options. In order to exercise an option, the holder
thereof (the "Optionee") shall deliver to Company written notice
specifying the number of shares of Common Stock to be purchased,
and unless otherwise determined, together with a certified or bank
cashier's check payable to the order of the Company in the full
amount of the purchase price therefor. An Optionee shall not have
any rights of a stockholder until the shares of Stock are issued
to him. An option may not be exercised for less than the lessor of
(i) ten shares of Stock, or (ii) the number of shares of Stock
remaining subject to such option.
e. Effect of Termination of Employment or Directorship.
Notwithstanding anything to the contrary in this Plan or any
option agreement issued hereunder, for employees of the Company
whose positions of employment terminate within two years of the
commencement of such employment
2
<PAGE>
with the Company, and for directors of the Company serving solely
as a director (where such persons are not employees of the
Company) whose position as a director terminates within two years
of the commencement of such position, after such Optionee has
ceased (for any reason) to be in the employ of the Company, or
ceased (for any reason) to be a director of the Company if he is
serving solely as a director, options may only be exercised within
a period of 90 days after such termination and only by payment of
the purchase price for all stock under option in cash or by
certified check.
Nothing in the Plan or in any option granted pursuant to the
Plan shall be construed to confer on any individual any right to
continue in the employ of the Company or interfere in any way with
the right of the Company to terminate his employment at any time.
f. Nontransferability of Options. During the lifetime of an Optionee,
options held by such Optionee shall be exercisable only by him. No
option shall be transferable other than by will or the laws of
descent and distribution.
g. Adjustments for Change in Stock Subject to Plan and Other Events.
Except as otherwise may be provided in the Option Agreement in the
event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, consolidation, merger (other than
a merger or consolidation which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares), any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any
person or group of all or a majority of the then outstanding
voting securities of the Company, rights offering, or any other
change in the corporate structure or rights with respect to any
shares of the Company, the Committee shall make such adjustments,
if any, in the number and kind of shares of Stock subject to the
Plan, in the number and kind of shares covered by outstanding
options, and/or in the option price per share to provide that the
Optionee shall have the right following such event, during the
period that such options shall be exercisable, to exercise such
options for the kind and amount of securities, cash and other
property receivable upon such event by a holder of the number and
kind of shares of Stock for which such options might have been
exercised immediately prior to such event.
The provisions of this paragraph (g) shall apply to any
outstanding options but in no event shall any option be
exercisable after the date of termination of the exercise period
of such option specified in Sections 5(c).
3
<PAGE>
h. Registration. Listing and Qualification of Shares of
Stock/Shareholders Agreement. Each option shall be subject to the
requirements that if at any time the Stock covered thereby is not
registered, listed or qualified upon any securities exchange or
under any federal or state law, and (1) if the Board of Directors
shall determine that such registration, listing or qualification
or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with,
the granting of such option or the purchase of shares of Stock
thereunder, no such option may be exercised unless and until such
registration, listing, qualification, consent or approval shall
have been effected or obtained free of any conditions not
acceptable to the Board of Directors, or (2) if the Board of
Directors shall determine that such registration, listing or
qualification or the consent or approval of any governmental
regulatory body is not necessary and/or not desirable as a
condition of, or in connection with, the granting of such option
or the purchase of shares of Stock thereunder, the Board of
Directors may impose any conditions upon the exercise of such
options as it shall deem necessary or desirable in view of such
determination and no such option may be exercised unless and until
such conditions have been satisfied. Without limiting the
foregoing, the Company may require that any person exercising an
option shall make such representations and agreements and furnish
such information as the Company deems appropriate to assure
compliance with the foregoing or any other applicable legal
requirement. Each option shall also be subject to the Optionee, on
exercise of such option, being required to execute a Shareholders'
Agreement in form and substance satisfactory to the Board of
Directors, providing for a right of first refusal in favor of the
Company and/or certain of its shareholders in connection with the
transfer of Stock and such other provisions as shall be determined
by the Board.
i. Withholding of Taxes. No option may be exercised unless the
Optionee has paid, or has made provision satisfactory to the
Committee for payment of, Federal, state and local income taxes,
or any other taxes (other than stock transfer taxes) which the
Company may be obligated to collect as a result of the issue or
transfer of shares of Stock upon the exercise of an option.
j. Other Terms and Conditions. The Committee may impose such other
terms and conditions, not inconsistent with the terms hereof, on
the grant or exercise of options, as it deems advisable.
6. Amendment and Termination. Unless the Plan shall theretofore have been
terminated as hereinafter provided, the Plan shall terminate on, and no option
shall be granted hereunder after, January 1, 2000; provided, however, that the
Board of Directors may at any time
4
<PAGE>
prior to that date terminate the Plan. The Board of Directors may at any time
amend the Plan. No termination or amendment of the Plan may, without the consent
of an Optionee, adversely affect the rights of such Optionee with respect to any
option held by such Optionee.
7. Other Actions. Nothing contained in the Plan shall be construed to limit
the authority of the Company to exercise its corporate rights and powers,
including but not limited to, the right of the Company to grant options for
proper corporate purposes other than under the Plan to any officer, director,
employee or other person, firm, corporation or association.
5
<PAGE>
EXHIBIT 10.7
VITAL IMAGES, INC.
1992 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1992 Stock Option Plan of
Vital Images, Incorporated (the "Company") are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the "Employees" and "Consultants" of the Company and to
promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a) "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.
b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
c) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
d) "Common Stock" shall mean the Common Stock of the Company.
e) "Company" shall mean Vital Images, Incorporated, an Iowa
corporation.
f) "Consultant" shall mean any person who is engaged by the Company
or any Parent or Subsidiary to render consulting services and is compensated for
such consulting services, and any director of the Company whether compensated
for such services or not; provided that if and in the event the Company
registers any class of any equity security pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
g) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
h) "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
<PAGE>
i) "Incentive Stock Option" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422A of the Code.
j) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
k) "Option" shall mean a stock option granted pursuant to the Plan.
l) "Optioned Stock" shall mean the Common Stock subject to an
Option.
m) "Optionee" shall mean an Employee or Consultant who receives an
Option.
n) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Code.
o) "Plan" shall mean this 1988 Stock Option Plan.
p) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
q) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 425(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 500,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant or sale under the Plan.
4. Administration of the Plan.
a) Procedure. The Plan shall be administered by the Board of
Directors of the Company.
(i) Subject to subparagraph (ii), the Board of Directors (by
action of a majority of the Directors in office when the Committee is appointed)
may appoint a Committee consisting of not less than two members of the Board of
Directors, subject to such terms and conditions as the Board of Directors may
prescribe. Subject to the conditions otherwise herein stated, the Committee
shall have the authority to administer the Plan on behalf of the Board of
Directors, except as prohibited by law under Iowa Code 490.825. Specifically,
among others
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matters enumerated in Iowa Code 490.825, the Committee, pursuant to section
490.825.5.h., shall not authorize or approve the issuance or sale or contract
for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except that the
Board of Directors may authorize the Committee to do so within limits as may be
specifically prescribed by the Board of Directors. Rather, the Board itself
shall have authority for and exercise approval of all such matters contemplated
in section 490.825.5.h. Once appointed, the Committee shall continue to serve
until otherwise directed by the Board of Directors. Members of the Board who are
either eligible for Options or have been granted Options may vote on any matters
affecting the administration of the Plan or the grant of any Options pursuant to
the Plan, except that no such member shall act upon the granting of an Option to
himself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board during which action is taken with respect to
the granting of Options to him.
(ii) Notwithstanding the foregoing subparagraph (i), if and in
any event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, from the effective date of such registration
until six months after the termination of such registration, any grants of
Options to officers or directors shall only be made by the Board of Directors'
provided, however, that if a majority of the Board of Directors is eligible to
participate in this Plan or any other stock option or other stock plan of the
Company or any of its affiliates, or has been eligible at any time within the
preceding year, any grants of Options to directors must be made by, or only in
accordance with the recommendation of, a Committee consisting of three or more
persons, who may but need not be directors or employees of the Company,
appointed by the Board of Directors and having full authority to act in the
matter, none of whom is eligible to participate in this Plan or any other stock
option or other stock plan of the Company or any of its affiliates, or has been
eligible at any time within the preceding year. Any Committee administering the
Plan with respect to grants to officers who are not also directors shall conform
to the requirements of the preceding sentence. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
(iii) Subject to the foregoing subparagraphs (i) and (ii), from
time to time the Board of Directors may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer the Plan.
b) Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options or Nonstatutory Stock Options; (ii) upon review of relevant information
and in accordance with Section 8(b) of the Plan, to determine the fair market
value of the Common Stock; (iii) to determine the exercise price per share of
Options to be granted, which exercise price shall be determined in accordance
with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to
whom, and the time or times at which, Options shall be granted and the number of
shares to be represented by each Option; (v) to interpret the Plan; (vi) to
determine the terms and provisions of each Option granted (which need not be
identical) and, with the consent of the holder thereof, modify or
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amend each Option; (viii) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option, consistent with the provisions of
Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Board; and (x) to make all other determinations deemed necessary
or advisable for the administration of the Plan.
c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. Eligibility.
a) Nonstatutory Stock Options may be granted only to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options granted to such Employee
by the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock Options
during any calendar year.
c) Section 5(b) of the Plan shall apply only to an Incentive Stock
Option evidenced by an "Incentive Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall qualify as an
incentive stock option. Section 5(b) of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
Nonstatutory Stock Option.
d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to terminate
his employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Incentive Stock Option shall be ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Incentive Stock Option Agreement. The term of each Nonstatutory
Stock Option shall be ten (10) years and one (1) day from the date of grant
thereof or such shorter term as may be provided in the Nonstatutory Stock Option
Agreement. However, in the case of an Option granted to an
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Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, (a) if the Option is an Incentive Stock
Option, the term of the Option shall be five (5) years from the date of grant
thereof or such shorter term as may be provided in the Incentive Stock Option
Agreement, or (b) if the Option is a Nonstatutory Stock Option, the term of the
Option shall be five (5) years and one (1) day from the date of grant thereof or
such shorter term as may be provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
fair market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the fair market value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the fair market value per Share on the date of
grant.
(iii) In the case of an Option granted on or after the effective
date of registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the termination of
such registration, the per Share exercise price shall be no less than 100% of
the fair market value per Share on the date of grant.
b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per share shall be the mean of the bid and
asked prices (or the closing price per share if the Common Stock is listed on
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System) or, in the event the Common Stock is listed on a stock
exchange, the fair market value per Share shall be the closing price on such
exchange on the date of grant of the Option, as reported in the Wall Street
Journal.
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c) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Board and may consist entirely of cash, check, promissory note, other Shares
of Common Stock having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under the Iowa Business Corporation Act. In making its determination
as to the type of consideration to accept, the Board shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
9. Exercise of Option.
a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
b) Termination of Status as an Employee or Consultant. In the event
of termination of an Optionee's Continuous Status as an Employee or Consultant
(as the case may be), such Optionee may, but only within thirty (30) days (or
such other period of time, not exceeding three (3) months in the case of an
Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock
Option, as is determined by the Board, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), exercise his
Option to the extent that he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the
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Option at the date of such termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option
shall terminate.
c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his total and permanent disability (as
defined in Section 22(e) (3) of the Internal Revenue Code), he may, but only
within six (6) months (or such other period of time not exceeding twelve (12)
months as is determined by the Board, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) from the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), exercise his
Option to the extent he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the Option at
the date of termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within three (3) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as an Employee or Consultant three (3) months after the date of death,
subject to the limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such period of time not
exceeding three (3) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Status as an Employee
or Consultant, the Option may be exercised, at any time within three (3) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination.
10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the
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price per share of Common Stock covered by each such outstanding Option, shall
be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to the number or prices of shares of Common Stock subject to an
Option.
In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days prior to
such proposed action. To the extent it has not been previously exercised, the
Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Board determines, in the exercise of its sole
discretion and in lieu of such assumption or substitution, that the Optionee
shall have the right to exercise the Option as to all of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable. If
the Board makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger, the Board shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
date of such notice, and the Option will terminate upon the expiration of such
period.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. Amendment and Termination of the Plan.
a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 17 of the
Plan:
(i) any increase in the number of shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
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(iii) if the Company has a class of equity securities registered
under Section 12 of the Exchange Act at the time of such revision or amendment,
any material increase in the benefits accruing to the participants under the
Plan.
b) Shareholder Approval. If any amendment requiring shareholder
approval under Section 13 (a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 17 of the Plan.
c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval.
a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. If such
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shareholder approval is obtained at a duly held shareholders' meeting, it must
be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the Company or if such shareholder approval is obtained by
written consent, it must be obtained by the unanimous written consent of all
shareholders of the Company; provided, however, that approval at a meeting or by
written consent may be obtained by a lesser degree of shareholder approval if
the Board determines, in its discretion after consultation with the Company's
legal counsel, that such a lesser degree of shareholder approval will comply
with all applicable laws and will not adversely affect the qualification of the
Plan under Section 422A of the Code.
b) If and in the event that the Company registers any class of
equity securities pursuant to Section 12 of the Exchange Act, any required
approvals of the shareholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
c) If any required approval by the shareholders of the Plan itself
or of any amendment thereto is solicited at any time otherwise than in the
manner described in Section 17(b) hereof, then the Company shall, at or prior to
the first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the
plan substantially the same information which would be required (if proxies to
be voted with respect to approval or disapproval of the Plan or amendment were
then being solicited) by the rules and regulations in effect under Section 14(a)
of the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date of which such information is first
sent or given to shareholders.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
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EXHIBIT 10.8
VITAL IMAGES, INC.
1992 DIRECTORS' OPTION ADJUSTMENT PLAN
1. Background: Purpose of Plan.
(a) Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of ____________________, 1997 (the
"Distribution Agreement"), between the Company and Bio-Vascular, Inc., a
Minnesota corporation ("Bio-Vascular"), pursuant to which Bio-Vascular will
distribute (the "Distribution") all of the outstanding shares of the Company's
common stock to Bio-Vascular's shareholders of record on the Record Date (as
defined in the Distribution Agreement). In connection with the Distribution,
each holder of an option to purchase Bio-Vascular common stock (a "Bio-Vascular
Option") as of the Record Date will be entitled to retain such Bio-Vascular
Option, provided that such Bio-Vascular Option will be adjusted to reflect the
Distribution (an "Adjusted Bio-Vascular Option"). In addition, as of the Record
Date, each holder of a Bio-Vascular Option will also be entitled to receive an
option to purchase Company common stock that will be adjusted to reflect the
Distribution (an "Adjusted Company Option").
(b) Pursuant to the terms and conditions of the applicable plans
under which the Bio-Vascular Options were initially granted, the exercise price
and number of shares covered by each Adjusted Bio-Vascular Option, as well as
the exercise price and number of shares covered by each Adjusted Company Option,
will be determined according to a formula, set forth in the Employee Benefits
Agreement entered into between Bio-Vascular and the Company, that is based on
the relative fair market trading values of Bio-Vascular common stock and Company
common stock during the first five trading days following the Distribution Date
(as defined in the Distribution Agreement). Pursuant to this formula, these
adjustments will be made in such a manner that the aggregate "intrinsic value,"
or difference between fair market value and exercise price, of the Adjusted
Bio-Vascular Option and Adjusted Company Option will equal the pre-Distribution
"intrinsic value" of the Bio-Vascular Option with respect to which the
adjustment and grant were made.
(c) In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option with
respect to which it is granted, Adjusted Company Options will be granted under
the terms of a corresponding "mirror" plan of the Company. With respect to
Bio-Vascular Options granted under the Bio-Vascular, Inc. 1992 Directors' Option
Plan, this Vital Images, Inc. 1992 Directors' Option Adjustment Plan (the
"Plan") will serve as such a "mirror" plan. Accordingly, the sole purpose of
this Plan is to provide for the grant of such Adjusted Company Options, and no
additional option grants of any kind will be granted under this Plan.
2. Definitions. Except as otherwise set forth herein, the following
terms will have the meanings set forth below, unless the context clearly
otherwise requires:
(a) "Bio-Vascular Committee" means the group of individuals
administering the Bio-Vascular, Inc. 1992 Directors' Option Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Common Stock" shall mean the Common Stock of the Company.
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(d) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director. Continuous Status as a
Director shall not be considered interrupted in the case of sick leave, military
leave, or any other leave of absence approved by the Board of Directors of
Bio-Vascular.
(e) "Director" shall mean a member of the Board of Directors of
Bio-Vascular.
(f) "Eligible Recipients" means any non-employee directors of
Bio-Vascular who hold outstanding Bio-Vascular Options as of the Record Date.
(g) "Employee" shall mean any person, including officers and
Directors, employed by Bio-Vascular or any Parent of Subsidiary of Bio-Vascular.
The payment of a director's fee by Bio-Vascular shall not be sufficient in and
of itself to constitute "employment" by Bio-Vascular.
(h) "Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
(i) "Option" shall mean an option granted pursuant to the Plan.
(j) "Option Stock" shall mean the Common Stock subject to an Option.
(k) "Option Holder" shall mean an Outside Director who receives an
Option.
(l) "Outside Director" shall mean a Director who is not an Employee
but who is an Eligible Recipient.
(m) "Parent" shall mean a "parent corporation" whether now or
hereafter existing, as defined in Section 424(e) of the Internal Revenue Code of
1986, as amended.
(n) "Pool" shall mean the maximum number of shares which may be
available for issuance and sale under Options granted under the Plan.
(o) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code
of 1986, as amended.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be issued and sold
under the Plan is 157,000 shares of Common Stock. The shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required or provided herein,
the Plan shall be administered by the Board of Directors of the Company.
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(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and non-discretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the determine
the number of Shares to be covered by Options granted to Outside Directors;
provided, however, that nothing in this Plan shall be construed to prevent
an Outside Director from declining to receive an Option under this Plan.
(ii) Each Outside Director shall be granted an Option to
purchase Shares on such terms and in such amounts as determined pursuant
to Section 1 of this Plan and the agreements discussed therein (including
but not limited to the Bio-Vascular, Inc. 1992 Directors' Option Plan),
decreased or increased as provided in Section 11 hereof.
(iii) Notwithstanding the provisions of subsection (ii) hereof,
in the event that a grant would cause the number of Shares subject to
outstanding Options held by Outside Directors plus Shares previously
purchased upon exercise of Options by Outside Directors to exceed the Pool,
then each such automatic grant shall be for that number of Shares
determined by dividing the total number of Shares remaining available for
grant by the number of Outside Directors on the automatic grant date. Any
further grants shall then be deferred until such time, if any, as
additional Shares become available for grant under the Plan through action
of the shareholders to increase the number of Shares which may be issued
under the Plan or through cancellation or expiration of Options previously
granted hereunder.
(iv) The terms of an Option granted hereunder shall be as
follows:
(A) The term of the Option shall be eight (8) years.
(B) The Option shall be exercisable only while the
Outside Director remains a Director of Bio-Vascular, except as set
forth in Sections 9(c) and 9(d) hereof. Once exercisable as provided
in (iv) (D) below, such Option should thereafter be exercisable for a
period of five (5) years.
(C) The exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Option.
(D) The Option shall become exercisable in installments
cumulatively with respect to one-third of such Option (or one-third of
such Option increased or decreased as provided in Section 11 hereof)
on the second, third, and fourth October 31 following the date of
grant of such Option; provided, however, that no Option may be
exercisable unless and until this Plan has been approved by the
shareholders of the Company in accordance with Section 17 of the Plan.
(c) Powers of the Board. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any
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instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Option Holders
and any other holders of any Options granted under the Plan.
(e) Cooperation Between Board and Bio-Vascular Committee. The Board
and the Bio-Vascular Committee will reasonably cooperate and communicate with
each other to promote the purposes of the Plan.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof.
The Plan shall not confer upon any Option Holder any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the Director
or Bio-Vascular may have to terminate his directorship at any tim.
6. Term of Plan. The Plan shall be effective as of the Distribution
Date. It shall continue in effect until May 21, 2002, unless sooner terminated
under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be eight (8) years from
the date of grant hereof.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
the Board in its discretion; provided, however, that where there is a public
market for the Common Stock, the fair market value per Share shall be the mean
of the closing bid price of the Common Stock in the over-the-counter market on
the date of grant, as reported in the Wall Street Journal (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System) or, in the event the Common Stock
is traded on the NASDAQ National Market System or listed on a stock exchange,
the fair market value per share shall be the closing price on such system or
exchange on the date of grant of the Option, as reported in Wall Street Journal.
(c) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may be exercised until the completion of a service period, including any
requirement that the Option Holder hold any shares acquired pursuant to exercise
of an Option for at least six months after exercise.
(d) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash or
check, or any combination of such methods of payment.
9. Exercise of Option.
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(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(d) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Option Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Option Holder as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as a Director. If an Outside Director
ceases to serve as a Director, he may, but only within ninety (90) days after
the date he ceases to be a Director, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise an Option at the date of such termination, or if
he does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(c) Disability of Option Holder. Notwithstanding the provisions of
Section 9(b) above, in the event a Director is unable to continue his service as
a Director as a result of his total and permanent disability (as defined in
Section 22(e)(3) of the Internal Revenue Code), he may, but only within ninety
(90) days from the date of termination of such service, exercise his Option to
the extent he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) Death of Option Holder. In the event of the death of an Option
Holder.
(i) during the term of the Option when such Option Holder was,
at the time of his death, a Director and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within one year following the date of death, by the
Option Holder's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that existed at the date of death.
(ii) within ninety (90) days after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within ninety
(90) days following the date of death, by the Option Holder's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
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10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Option Holder, only by the Option Holder.
11. Adjustments Upon Changed in Capitalization or Merger. Certain
adjustments shall be made in the event that any of the following occur following
the Distribution Date:
(a) Stock Splits. Subject to any required action by the shareholders
of the Company, the number of Shares subject to Options, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or her
option as to all or any part of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to the provisions of paragraph (d)
hereof, in the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company, each
outstanding Option shall be assumed or an equivalent option or right shall be
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation does not
agree to assume the Option or to substitute an equivalent option or right, the
Administrator shall, in lieu of such assumption or substitution, provide for the
Optionee to have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which it would not otherwise be exercisable. If
the Administrator makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee that the Option shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option will terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase, for each Share of Optioned
Stock subject to the Option immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common
stock of the successor corporation or its Parent, the Administrator may, with
consent of the successor corporation and the
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participant, provide for the consideration to be received upon the exercise of
the Option, for each Share of Optioned Stock subject to the Option, to be solely
common stock of the successor corporation or its Parent equal in Fair Market
Value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
(d) Change in Control. In the event of a "Change in Control" of the
Company, as defined in paragraph (e) below, then the following acceleration and
valuation provisions shall apply:
(i) Except as otherwise determined by the Board, in its
discretion, prior to the occurrence of a Change in Control, any Options
outstanding on the date such Change in Control is determined to have
occurred that are not yet exercisable and vested on such date shall become
fully exercisable and vested;
(ii) Except as otherwise determined by the Board, in its
discretion, prior the occurrence of a Change in Control, the value of all
outstanding Options, to the extent they are exercisable and vested (including
Options that shall become exercisable and vested pursuant to subparagraph (i)
above), shall be cashed out at the Change in Control Price, (reduced by the
exercise price applicable to such Options). The cash out proceeds shall be paid
to the Optionee or, in the event of death of an Optionee prior to payment, to
the estate of the Optionee or to a person who acquired the right to exercise the
Option by bequest or inheritance.
(e) Definition of "Change in Control". For purposes of this Section
11 a "Change in Control" means the happening of any of the following, provided
that it occurs after the Distribution Date:
(i) When any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, a Subsidiary or a
Company employee benefit plan, including any trustee of such plan acting as
trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities; or
(ii) the occurrence of a transaction requiring shareholder
approval, and involving the sale of all or substantially all of the assets
of the Company or the merger of the Company with or into another
corporation.
(f) Change in Control Price. For purposes of this Section 11, "Change
in Control Price" shall be, as determined by the Board, (i) the highest Fair
Market Value of a Share within the 60 day period immediately preceding the date
of determination of the Change in Control Price by the Board (the "60-Day
Period"), or (ii) the highest price paid or offered per Share, as determined by
the Board, in any bona fide transaction or bona fide offer related to the Change
in Control of the Company, at any time within the 60-Day Period, or (iii) some
lower price as the Board, in its discretion, determines to be a reasonable
estimate of the fair market value of a Share.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
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(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 17 of the
Plan:
(i) any increase in the number of Shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options;
(iii) any material increase in the benefits accruing to
participants under the Plan; or
(iv) any change in the number of shares subject to Options to
be granted hereunder or in the terms thereof as set forth in Section 4(b)
hereof, other than in connection with an adjustment under Section 11 of the
Plan.
(b) Shareholder Approval. Shareholder approval of any amendment
requiring shareholder approval under Section 13(a) of the Plan shall be
solicited as described in Section 17 of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Option
Holder and the Board, which agreement must be in writing and signed by the
Option Holder and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option an the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchases only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Share as shall be
sufficient to satisfy the requirements of the Plan; provided, however, that the
Company shall be under no obligation to increase the maximum number of shares
subject to the Plan as provided in Section 3.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Options or Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Options or Shares as to which such requisite authority shall not have
been obtained.
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16. Option Agreement. Options shall be evidenced by written Option
Agreements in such form as the Board shall approve.
17. Shareholder Approval.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company or any successor corporation which may assume this
Plan and any outstanding Options at or prior to the first annual meeting of
shareholders held subsequent to the granting of an Option hereunder. If such
shareholder approval is obtained at a duly held shareholders' meeting, it may be
obtained by the affirmative vote of the holders of a majority of the outstanding
shares of the Company present or represented and entitled to vote thereon (or
such greater number as required by the Company's Articles, Bylaws, or state of
incorporation). If such shareholder approval is obtained by written consent, it
may be obtained by the written consent of the holders of a majority of the
outstanding shares of the Company (or such greater number as required by the
Company's Articles, Bylaws or state of incorporation).
(b) Any required approval of the shareholders of the Company shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act
and the rules and regulations promulgated thereunder.
18. Information to Optionees. The Company shall provide to each Option
Holder, during the period for which such Option Holder has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company.
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EXHIBIT 10.9
VITAL IMAGES, INC.
1995 STOCK INCENTIVE ADJUSTMENT PLAN
1. Background; Purpose of Plan.
(a) Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of_________, 1997 (the "Distribution
Agreement"), between the Company and Bio-Vascular, Inc., a Minnesota corporation
("Bio-Vascular"), pursuant to which Bio-Vascular will distribute (the
"Distribution") all of the outstanding shares of the Company's common stock to
Bio-Vascular's shareholders of record on the Record Date (as defined in the
Distribution Agreement). In connection with the Distribution, each holder of an
option to purchase Bio-Vascular common stock (a "Bio-Vascular Option") as of the
Record Date will be entitled to retain such Bio-Vascular Option, provided that
such Bio-Vascular Option will be adjusted to reflect the Distribution (an
"Adjusted Bio-Vascular Option"). In addition, as of the Record Date, each holder
of a Bio-Vascular Option will also be entitled to receive an option to purchase
Company common stock that will be adjusted to reflect the Distribution (an
"Adjusted Company Option").
(b) Pursuant to the terms and conditions of the applicable plans under
which the Bio-Vascular Options were initially granted, the exercise price and
number of shares covered by each Adjusted Bio-Vascular Option, as well as the
exercise price and number of shares covered by each Adjusted Company Option,
will be determined according to a formula, set forth in the Employee Benefits
Agreement entered into between Bio-Vascular and the Company, that is based on
the relative fair market trading values of Bio-Vascular common stock and Company
common stock during the first five trading days following the Distribution Date
(as defined in the Distribution Agreement). Pursuant to this formula, these
adjustments will be made in such a manner that the aggregate "intrinsic value,"
or difference between fair market value and exercise price, of the Adjusted Bio-
Vascular Option and Adjusted Company Option will equal the pre-Distribution
"intrinsic value" of the Bio-Vascular Option with respect to which the
adjustments and grant were made.
(c) In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option with
respect to which it is granted, Adjusted Company Options will be granted under
the terms of a corresponding "mirror" plan of the Company. With respect to Bio-
Vascular Options granted under the Bio-Vascular, Inc. 1995 Stock Incentive Plan,
this Vital Images, Inc. 1995 Stock Incentive Adjustment Plan (the "Plan") will
serve as such a "mirror" plan. Accordingly, the sole purpose of this Plan is to
provide for the grant of such Adjusted Company Options, and no additional option
grants of any kind will be granted under this Plan.
2. Definitions. Except as otherwise set forth herein, the following terms
will have the meanings set forth below, unless the context clearly otherwise
requires:
(a) "Bio-Vascular Committee" means the group of individuals
administering the Bio-Vascular, Inc. 1995 Stock Incentive Plan.
(b) "Board" means the Board of Directors of the Company.
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(c) "Broker Exercise Notice" means a written notice pursuant to which
a Participant upon, upon exercise of an Option, irrevocably instructs a broker
or dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
(d) "Change in Control" means an event described in Section 12(a)
of the Plan.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the group of individuals administering the Plan,
as provided in Section 3 of the Plan.
(g) "Common Stock" means the common stock of the Company, par value
$.01 per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4(c) of
the Plan.
(h) "Disability" means the disability of the Participant such as
would entitle the Participant to receive disability income benefits pursuant to
the long-term disability plan of the Employer or any Subsidiary of the Employer
then covering the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within the
meaning of Section 22(e)(3) of the Code.
(i) "Eligible Recipients" means any employees, and any non-employee
directors, consultants and independent contractors, of Bio-Vascular or any
Subsidiary of Bio-Vascular who hold outstanding Bio-Vascular Options as of the
Record Date.
(j) "Employer" means the Company if the Participant renders
employment or other services to the Company or any Subsidiary of the Company
and means Bio-Vascular if the Participant renders employment or other services
to Bio-Vascular or any Subsidiary of Bio-Vascular.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, with respect to the Common Stock, the
following:
(1) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the
Nasdaq National Market, the closing price of the Common Stock on such
exchange or reported by the Nasdaq National Market as of such date
(or, if no shares were traded on such day, as of the next preceding
day on which there was such a trade).
(2) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market, and bid
and asked prices therefor in the over-the-counter market are reported
by the Nasdaq SmallCap Market or the National Quotation Bureau, Inc.
(or any comparable reporting service), the mean of the closing bid and
asked prices as of such date, as so reported by the Nasdaq SmallCap
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Market, or, if not so reported thereon, as reported by the National
Quotation Bureau, Inc. (or such comparable reporting service).
(3) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market, and
such bid and asked prices are not so reported, such price as the
Committee determines in good faith in the exercise of its reasonable
discretion. The Committee shall not be required to obtain an
appraisal within six months of the adoption of the Plan. The
Committee's determination as to the current value of the Common Stock
shall be final, conclusive and binding for all purposes and on all
persons, including, without limitation, the Company, the shareholders
of the Company, the Participants and their respective successors-in-
interest. No member of the Board or of the Committee shall be liable
for any determination regarding current value of the Common Stock that
is made in good faith.
(m) "Incentive Award" means an Option, Restricted Stock Award,
Performance Unit or Stock Bonus granted to an Eligible Recipient pursuant
to the Plan.
(n) "Incentive Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422
of the Code.
(o) "Non-Statutory Stock Option" means a right to purchase Common
Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan
that does not qualify as an Incentive Stock Option.
(p) "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
(q) "Participant" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
(r) "Performance Unit" means a right granted to an Eligible Recipient
pursuant to Section 8 of the Plan to receive a payment from the Company,
in the form of stock, cash or a combination of both, upon the achievement
of established performance or other goals.
(s) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive Award,
that are to be issued upon the grant, exercise or vesting of such Incentive
Award.
(t) "Restricted Stock Award" means an award of Common Stock granted to
an Eligible Recipient pursuant to Section 7 of the Plan that is subject to
the restrictions on transferability and the risk of forfeiture imposed by
the provisions of such Section 7.
(u) "Retirement" means termination of employment or service pursuant
to and in accordance with the regular (or, if approved by the Board of
Directors of the Employer for purposes of the Plan, early)
retirement/pension plan or practice of the Company, Bio-Vascular, or any
Subsidiary of the Company or Bio-Vascular then covering the Participant,
provided that if the Participant is not covered by any such plan or
practice, the Participant will be deemed to be covered by the Company's or
Bio-Vascular's plan or practice, depending on which company serves as the
Participant's employer, for purposes of this determination.
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(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Stock Bonus" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 9 of the Plan.
(x) "Subsidiary" means (i) when used in reference to the Company, any
entity that is directly or indirectly controlled by the Company or any
entity in which the Company has a significant equity interest, as
determined by the Committee or (ii) when used in reference to Bio-Vascular,
any entity that is directly or indirectly controlled by Bio-Vascular or any
entity in which Bio-Vascular has a significant equity interest, as
determined by the Committee.
(y) "Tax Date" means the date any withholding tax obligation arises
under the Code for a Participant with respect to an Incentive Award.
3. Plan Administration.
(a) The Committee. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will
be administered by a committee (the "Committee") consisting solely of not
less than two members of the Board who are "non-employee directors" within
the meaning of Rule 16b-3 under the Exchange Act. To the extent consistent
with corporate law, the Committee may delegate to any officers of the
Company the duties, power and authority of the Committee under the Plan
pursuant to such conditions or limitations as the Committee may establish;
provided, however, that only the Committee may exercise such duties, power
and authority with respect to Eligible Recipients who are subject to
Section 16 of the Exchange Act. Each determination, interpretation or other
action made or taken by the Committee pursuant to the provisions of the
Plan will be conclusive and binding for all purposes and on all persons,
and no member of the Committee will be liable for any action or
determination made in good faith with respect to the Plan or any Incentive
Award granted under the Plan.
(b) Authority of the Committee.
(1) In accordance with and subject to the provisions of the Plan,
the Committee will have the authority to determine all provisions of
Incentive Awards as the Committee may deem necessary or desirable and
as consistent with the terms of the Plan, including, without
limitation, the following: (A) the Eligible Recipients to be selected
as Participants; (B) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, any exercise price, the
manner in which Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with other
Incentive Awards) and the form of written agreement, if any,
evidencing such Incentive Award; (C) the time or times when Incentive
Awards will be granted; (D) the duration of each Incentive Award;
and (E) the restrictions and other conditions to which the payment or
vesting of Incentive Awards may be subject. In addition, the Committee
will have the authority under the Plan in its sole discretion to pay
the economic value of any Incentive Award in the form of cash, Common
Stock or any combination of both.
(2) The Committee will have the authority under the Plan to amend
or modify the terms of any outstanding Incentive Award in any manner,
including, without
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limitation, the authority to modify the number of shares or other
terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting or otherwise
terminate any restrictions relating to an Incentive Award, accept the
surrender of any outstanding Incentive Award or, to the extent not
previously exercised or vested, authorize the grant of new Incentive
Awards in substitution for surrendered Incentive Awards; provided,
however that the amended or modified terms are permitted by the Plan
as then in effect and that any Participant adversely affected by such
amended or modified terms has consented to such amendment or
modification. No amendment or modification to an Incentive Award,
however, whether pursuant to this Section 3(b) or any other provisions
of the Plan, will be deemed to be a regrant of such Incentive Award
for purposes of this Plan.
(3) In the event of (A) any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering,
extraordinary dividend or divestiture (including a spin-off) or any
other change in corporate structure or shares, (B) any purchase,
acquisition, sale or disposition of a significant amount of assets or
a significant business, (C) any change in accounting principles or
practices, or (D) any other similar change, in each case with respect
to the Company or any other entity whose performance is relevant to
the grant or vesting of an Incentive Award, the Committee (or, if the
Company is not the surviving corporation in any such transaction, the
board of directors of the surviving corporation) may, without the
consent of any affected Participant, amend or modify the vesting
criteria of any outstanding Incentive Award that is based in whole or
in part on the financial performance of the Company (or any Subsidiary
or division thereof) or such other entity so as equitably to reflect
such event, with the desired result that the criteria for evaluating
such financial performance of the Company or such other entity will
be substantially the same (in the sole discretion of the Committee or
the board of directors of the surviving corporation) following such
event as prior to such event; provided, however, that the amended or
modified terms are permitted by the Plan as then in effect.
(c) Cooperation Between Committees. The Committee and the Bio-Vascular
Committee will reasonably cooperate and communicate with each other to
promote the purposes of the Plan.
4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as
provided in Section 4(c) of the Plan, the maximum number of shares of
Common Stock that will be available for issuance under the Plan will be
205,000 shares of Common Stock. Notwithstanding any other provisions of
the Plan to the contrary, no Participant in the Plan may be granted any
Options, or any other Incentive Awards with a value based solely on an
increase in the value of the Common Stock after the date of grant, relating
to more than 50,000 shares of Common Stock in the aggregate in any fiscal
year of the Company (subject to adjustment as provided in Section 4(c) of
the Plan); provided, however, that a Participant who is first appointed or
elected as an officer, hired as an employee or retained as a consultant by
the Company or who receives a promotion that results in an increase in
responsibilities or duties may be granted, during the fiscal year of such
appointment, election, hiring, retention or promotion, Options or such
other Incentive Awards relating to up to 200,000 shares of Common Stock
(subject to adjustment as provided in Section 4(c) of the Plan).
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(b) Accounting for Incentive Awards. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards
will be applied to reduce the maximum number of shares of Common Stock
remaining available for issuance under the Plan. Any shares of Common Stock
that are subject to an Incentive Award that lapses, expires, is forfeited
or for any reason is terminated unexercised or unvested and any shares of
Common Stock that are subject to an Incentive Award that is settled or paid
in cash or any form other than shares of Common Stock will automatically
again become available for issuance under the Plan. Any shares of Common
Stock that constitute the forfeited portion of a Restricted Stock Award,
however, will not become available for further issuance under the Plan.
(c) Adjustments to Shares and Incentive Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares,
rights offering, divestiture or extraordinary dividend (including a spin-
off) or any other change in the corporate structure or shares of the
Company, the Committee (or, if the Company is not the surviving corporation
in any such transaction, the board of directors of the surviving
corporation) will make appropriate adjustment (which determination will be
conclusive) as to the number and kind of securities available for issuance
under the Plan and, in order to prevent dilution or enlargement of the
rights of Participants, the number, kind and, where applicable, exercise
price of securities subject to outstanding Incentive Awards.
5. Participation. Participants in the Plan will be those Eligible
Recipients who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of economic
objectives of the Company or its Subsidiaries. Eligible Recipients may be
granted from time to time one or more Incentive Awards, singly or in combination
or in tandem with other Incentive Awards, as may be determined by the Committee
in its sole discretion. Incentive Awards will be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date will be the
date of any related agreement with the Participant.
6. Options.
(a) Grant. An Eligible Recipient may be granted one or more Options
under the Plan, and such Options will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may
designate whether an Option is to be considered an Incentive Stock Option
or a Non-Statutory Stock Option. To the extent that any Incentive Stock
Option granted under the Plan ceases for any reason to qualify as an
"incentive stock option" for purposes of Section 422 of the Code, such
Incentive Stock Option will continue to be outstanding for purposes of the
Plan but will thereafter be deemed to be a Non-Statutory Stock Option.
(b) Exercise Price. The per share price to be paid by a Participant
upon exercise of an Option will be determined by the Committee in its
discretion at the time of the Option grant, provided that (i) such price
will not be less than 100% of the Fair Market Value of one share of Common
Stock on the date of grant with respect to an Incentive Stock Option (110%
of the Fair Market Value if, at the time the Incentive Stock Option is
granted, the Participant owns, directly or indirectly, more than 10% of the
total combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation of the Company), and (ii) such price will
not be less than 85% of the Fair Market Value of one share of Common Stock
on the date of grant with respect to a Non-Statutory Stock Option.
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(c) Exercisability and Duration. An Option will become exercisable at
such times and in such installments as may be determined by the Committee
in its sole discretion at the time of grant; provided however, that no
Option may be exercisable after 10 years from its date of grant.
(d) Payment of Exercise Price. The total purchase price of the shares
to be purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee, in its sole discretion and upon terms and conditions established
by the Committee, may allow such payments to be made, in whole or in part,
by tender of a Broker Exercise Notice, Previously Acquired Shares, a
promissory note (on terms acceptable to the Committee in its sole
discretion) or by a combination of such methods.
(e) Manner of Exercise. An Option may be exercised by a Participant
in whole or in part from time to time, subject to the conditions contained
in the Plan and in the agreement evidencing such Option, by delivery in
person by facsimile or electronic transmission or through the mail of
written notice of exercise to the Company (Attention: Secretary) at its
principal executive office in Minneapolis, Minnesota and by paying in full
the total exercise price for the shares of Common Stock to be purchased in
accordance with Section 6(d) of the Plan.
7. Restricted Stock Awards.
(a) Grant. An Eligible Recipient may be granted one or more
Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Committee may impose such restrictions or conditions, not inconsistent with the
provisions of the Plan, to the vesting of such Restricted Stock Awards as it
deems appropriate, including, without limitation, that the Participant remain in
the continuous employ or service of the Company, Bio-Vascular or any Subsidiary
of the Company or Bio-Vascular for a certain period or that the Participant or
the Company, Bio-Vascular or any Subsidiary of the Company or Bio-Vascular
satisfy certain performance goals or criteria.
(b) Rights as a Shareholder; Transferability. Except as provided in
Sections 7(a), 7(c) and 13(c) of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 7 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
(c) Dividends and Distributions. Unless the Committee determines
otherwise in its sole discretion (either in the agreement evidencing the
Restricted Stock Award at the time of grant or at any time after the grant of
the Restricted Stock Award), any dividends or distributions (including regular
quarterly cash dividends) paid with respect to shares of Common Stock subject to
the unvested portion of a Restricted Stock Award will be subject to the same
restrictions as the shares to which such dividends or distributions relate. In
the event the Committee determines not to pay such dividends or distributions
currently, the Committee will determine in its sole discretion whether any
interest will be paid on such dividends or distributions. In addition, the
Committee in its sole discretion may require such dividends and distributions to
be reinvested (and in such case the Participants consent to such reinvestment)
in shares of Common Stock that will be subject to the same restrictions as the
shares to which such dividends or distributions relate.
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(d) Enforcement of Restrictions. To enforce the restrictions referred
to in this Section 7, the Committee may place a legend on the stock
certificates referring to such restrictions and may require the
Participant, until the restrictions have lapsed, to keep the stock
certificates, together with duly endorsed stock powers, in the custody of
the Company or its transfer agent or to maintain evidence of stock
ownership, together with duly endorsed stock powers, in a certificateless
book-entry stock account with the Company's transfer agent.
8. Performance Units. An Eligible Recipient may be granted one or more
Performance Units under the Plan, and such Performance Units will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Performance Units as it deems appropriate,
including, without limitation, that the Participant remain in the continuous
employ or service of the Company, Bio-Vascular or any Subsidiary of the Company
or Bio-Vascular for a certain period or that the Participant or the Company,
Bio-Vascular or any Subsidiary of the Company or Bio-Vascular satisfy certain
performance goals or criteria. The Committee will have the sole discretion
either to determine the form in which payment of the economic value of vested
Performance Units will be made to the Participant (i.e., cash, Common Stock or
any combination thereof) or to consent to or disapprove the election by the
Participant of the form of such payment.
9. Stock Bonuses. An Eligible Recipient may be granted one or more Stock
Bonuses under the Plan, and such Stock Bonuses will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee. The Participant will have all voting, dividend,
liquidation and other rights with respect to the shares of Common Stock issued
to a Participant as a Stock Bonus under this Section 9 upon the Participant
becoming the holder of record of such shares; provided, however, that the
Committee may impose such restrictions on the assignment or transfer of a Stock
Bonus as it deems appropriate.
10. Effect of Termination of Employment or Other Service. The transfer by a
Participant of employment or other service from one Employer or its Subsidiaries
to the other Employer or its Subsidiaries will not be deemed to constitute a
termination of employment or other service for purposes of this Plan.
(a) Termination Due to Death Disability or Retirement. In the event a
Participant's employment or other service with the Employer and all of its
Subsidiaries is terminated by reason of death, Disability or Retirement:
(1) A11 outstanding Options then held by the Participant will
become immediately exercisable in full and will remain exercisable for
a period of one year (three months in the case of Retirement) after
such termination (but in no event after the expiration date of any
such Option);
(2) All Restricted Stock Awards then held by the Participant will
become fully vested; and
(3) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined
by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
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(b) Termination for Reasons Other than Death, Disability or
Retirement.
(1) In the event a Participant's employment or other service is
terminated with an Employer and all of its Subsidiaries for any reason
other than death, Disability or Retirement, or a Participant is in the
employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Employer (unless the Participant continues in the
employ or service of either Employer or any Subsidiary thereof), all
rights of the Participant under the Plan and any agreements
evidencing an Incentive Award will immediately terminated without
notice of any kind, and no Options then held by the Participant will
thereafter be exercisable, all Restricted Stock Awards then held by
the Participant that have not vested will be terminated and forfeited,
and all Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing
such Performance Units or Stock Bonuses; provided, however, that if
such termination is due to any reason other than termination by the
Employer for "cause," all outstanding Options then held by such
Participant will remain exercisable to the extent exercisable as of
such termination for a period of three months after such termination
(but in no event after the expiration date of any such Option).
(2) For purposes of this Section 10(b), "cause" (as determined by
(x) the Committee if the Employer is the Company or a Subsidiary of
the Company or (y) the Bio-Vascular Committee if the Employer is Bio-
Vascular or a Subsidiary of Bio-Vascular) will be as defined in any
employment or other agreement or policy applicable to the Participant
or, if no such agreement or policy exists, will mean (A) dishonesty,
fraud, misrepresentation, embezzlement or deliberate injury or
attempted injury, in each case related to the Employer or any
Subsidiary, (B) any unlawful or criminal activity of a serious nature,
(C) any intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Participant's overall duties, or (D) any material breach of any
employment, service, confidentiality or noncompete agreement entered
into with the Employer or any Subsidiary.
(c) Modification of Rights Upon Termination. Notwithstanding the other
provisions of this Section 10, upon a Participant's termination of
employment or other service with the Employer and all Subsidiaries, the
Committee may, in its sole discretion (which may be exercised at any time
on or after the date of grant, including following such termination), cause
Options (or any part thereof) then held by such Participant to become or
continue to become exercisable and/or remain exercisable following such
termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest
and/or continue to vest or become free of transfer restrictions, as the
case may be, following such termination of employment or service, in each
case in the manner determined by the Committee; provided, however, that no
Option may remain exercisable beyond its expiration date.
(d) Breach of Confidentiality or Noncompete Agreements.
Notwithstanding anything in the Plan to the contrary, in the event that a
Participant materially breaches the terms of any confidentiality or
noncompete agreement entered into with the Employer or any Subsidiary,
whether such breach occurs before or after termination of such
Participant's employment or other service with the Employer or any
Subsidiary, the Committee or the Bio-Vascular Committee, as the case may
be, in its sole discretion may immediately terminate all rights of the
Participant
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under the Plan and any agreements evidencing an Incentive Award then held
by the Participant without notice of any kind.
(e) Date of Termination of Employment or Other Service. Unless the
Committee or the Bio-Vascular Committee, as the case may be, otherwise
determines in its sole discretion, a Participant's employment or other
service will, for purposes of the Plan, be deemed to have terminated on the
date recorded on the personnel or other records of the Employer or any
Subsidiary for which the Participant provides employment or other service,
as determined by the Committee or the Bio-Vascular Committee, as the case
may be, in its sole discretion based upon such records.
11. Payment of Withholding Taxes.
(a) General Rules. The Employer is entitled to (i) withhold and deduct
from future wages of the Participant (or from other amounts that may be due
and owing to the Participant from the Employer or a Subsidiary of the
Employer), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any and all federal, state and local
withholding and employment-related tax requirements attributable to an
Incentive Award, including, without limitation, the grant, exercise or
vesting of, or payment of dividends with respect to, an Incentive Award or
a disqualifying disposition of stock received upon exercise of an Incentive
Stock Option, or (ii) require the Participant promptly to remit the amount
of such withholding to the Employer before taking any action, including
causing the issuance of any shares of Common Stock, with respect to an
Incentive Award.
(b) Special Rules. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 11(a) of the Plan by electing
to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole
discretion), or by a combination of such methods.
(c) Cooperation with the Bio-Vascular Committee. Pursuant to the Tax
Sharing Agreement (as defined in the Distribution Agreement) by and between
the Company and Bio-Vascular, the Committee will reasonably cooperate and
communicate with the Bio-Vascular Committee to ensure that the
withholdings, deductions, other collection arrangements, remittances or
tenders set forth in this Section 11 are made, administered, confirmed or
otherwise overseen by the Company or Bio-Vascular.
12. Change in Control.
(a) Change in Control. For purposes of this Section 12, a "Change in
Control" of the Company will mean the following, provided that it occurs
after the Distribution Date:
(1) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company,
(2) the approval by the shareholders of the Company of any plan
or proposal for the liquidation or dissolution of the Company;
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(3) a merger or consolidation to which the Company is a party if
the shareholders of the Company immediately prior to the effective
date of such merger or consolidation have "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act), immediately following
the effective date of such merger or consolidation, of securities of
the surviving corporation representing (A) more than 50%, but not
more than 80%, of the combined voting power of the surviving
corporation's then outstanding securities ordinarily having the right
to vote at elections of directors, unless such merger or consolidation
has been approved in advance by the Incumbent Directors (as defined in
Section 12(b) below), or (B) 50% or less of the combined voting
power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors
(regardless of any approval by the Incumbent Directors);
(4) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (B) 50% or more of the
combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors
(regardless of any approval by the Incumbent Directors);
(5) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(6) any other change in control of the Company of a nature that
would be required to be reported pursuant to Section 13 or 15(d) of
the Exchange Act, whether or not the Company is then subject to such
reporting requirements.
(b) Incumbent Directors. For purposes of this Section 12, "Incumbent
Directors" of the Company will mean any individuals who are members of the
Board on the Distribution Date and any individual who subsequently becomes
a member of the Board whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of
the Incumbent Directors (either by specific vote or by approval of the
Company's proxy statement in which such individual is named as a nominee
for director without objection to such nomination).
(c) Acceleration of Vesting. Without limiting the authority of the
Committee under Section 3(b) of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its
sole discretion either in an agreement evidencing an Incentive Award at the
time of grant or at any time after the grant of an Incentive Award, (i) all
Options will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
Participants to whom such Options have been granted remain in the employ
or service of the Company, Bio-Vascular or any Subsidiary of the Company or
Bio-Vascular; (ii) all outstanding Restricted Stock Awards will become
immediately fully vested; and (iii) all Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the
manner determined by the Committee and set forth in the agreement
evidencing such Performance Unit or Stock Bonuses.
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(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole
discretion either in an agreement evidencing an Incentive Award at the
time of grant or at any time after the grant of an Incentive Award, and
without the consent of any Participant effected thereby, may determine that
some or all Participants holding outstanding Options will receive, with
respect to some or all of the shares of Common Stock subject to such
Options, as of the effective date of any such Change in Control of the
Company, cash in an amount equal to the excess of the Fair Market Value of
such shares immediately prior to the effective date of such Change in
Control of the Company over the exercise price per share of such Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything
in Section 12(c) or 12(d) of the Plan to the contrary, if, with respect to
a Participant, the acceleration of the vesting of an Incentive Award as
provided in Section 12(c) or the payment of cash in exchange for all or
part of an Incentive Award as provided in Section 12(d) (which acceleration
or payment could be deemed a "payment" within the meaning of Section
280G(b)(2) of the Code), together with any other "payments" which such
Participant has the right to receive from the Company or any corporation
that is a member of an "affiliated group" (as defined in Section 1504(a)
of the Code without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the "payments" to such Participant
pursuant to Section 12(c) or 12(d) of the Plan will be reduced to the
largest amount as will result in no portion of such "payments" being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if a Participant is subject to a separate agreement with the
Company or a Subsidiary of the Company that expressly addresses the
potential application of Sections 280G or 4999 of the Code (including,
without limitation, that "payments" under such agreement or otherwise will
not be reduced or that the Participant will have the discretion to
determine which "payments" will be reduced), then the limitations of this
Section 12(e) will not apply, and any "payments" to a Participant pursuant
to Section 12(c) or 12(d) of the Plan will be treated as "payments" arising
under such separate agreement.
13. Rights of Eligible Recipients and Participants; Transferability.
(a) Employment or Service. Nothing in the Plan will interfere with or
limit in any way the right of the Employer or any Subsidiary of the
Employer to terminate the employment or service of any Eligible Recipient
or Participant at any time, nor confer upon any Eligible Recipient or
Participant any right to continue in the employ or service of the Employer
or any Subsidiary of the Employer.
(b) Rights as a Shareholder. As a holder of Incentive Awards (other
than Restricted Stock Awards and Stock Bonuses), a Participant will have no
rights as a shareholder unless and until such Incentive Awards are
exercised for, or paid in the form of, shares of Common Stock and the
Participant becomes the holder of record of such shares. Except as
otherwise provided in the Plan, no adjustment will be made for dividends or
distributions with respect to such Incentive Awards as to which there is a
record date preceding the date the Participant becomes the holder of record
of such shares, except as the Committee may determine in its discretion.
(c) Restrictions on Transfer. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by
the Plan, no right or interest of any Participant in an Incentive Award
prior to the exercise or vesting of such Incentive Award
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will be assignable or transferable, or subjected to any lien, during the
lifetime of the Participant, either voluntarily or involuntarily, directly
or indirectly, by operation of law or otherwise. A Participant will,
however, be entitled to designate a beneficiary to receive an Incentive
Award upon such Participant's death, and in the event of a Participant's
death, payment of any amounts due under the Plan will be made to, and
exercise of any Options (to the extent permitted pursuant to Section 10 of
the Plan) may be made by, the Participant's legal representatives, heirs
and legatees.
(d) Non-Exclusivity of the Plan. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company, Bio-Vascular or any Subsidiary of the Company or
Bio-Vascular or create any limitations on the power or authority of the
Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
14. Securities Law and Other Restrictions. Notwithstanding any other
provision of the Plan or any agreements entered into pursuant to the Plan, the
Company will not be required to issue any shares of Common Stock under this
Plan, and a Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to Incentive Awards granted under the
Plan, unless (i) there is in effect with respect to such shares a registration
statement under the Securities Act and any applicable state securities laws or
an exemption from such registration under the Securities Act and applicable
state securities laws, and (ii) there has been obtained any other consent,
approval or permit from any other regulatory body which the Committee, in its
sole discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or agreements
from the parties involved, and the placement of any legends on certificates
representing shares of Common Stock, as may be deemed necessary or advisable by
the Company in order to comply with such securities law or other restrictions.
15. Plan Amendment, Modification and Termination. The Board may suspend or
terminate the Plan or any portion thereof at any time, and may amend the Plan
from time to time in such respects as the Board may deem advisable in order that
Incentive Awards under the Plan will conform to any change in applicable laws or
regulations or in any other respect the Board may deem to be in the best
interests of the Company; provided, however, that no amendments to the Plan will
be effective without approval of the stockholders of the Company if stockholder
approval of the amendment is then required pursuant to Rule 16b-3 under the
Exchange Act, Section 422 of the Code or the rules of any stock exchange or
Nasdaq. No termination, suspension or amendment of the Plan may adversely affect
any outstanding Incentive Award without the consent of the affected Participant;
provided, however, that this sentence will not impair the right of the
Committee to take whatever action it deems appropriate under Sections 4(c) and
12 of the Plan.
16. Effective Date and Duration of the Plan. The Plan is effective as of
the Distribution Date. The Plan will terminate at midnight on December 18, 2005,
and may be terminated prior to such time to by Board action, and no Incentive
Award will be granted after such termination. Incentive Awards outstanding upon
termination of the Plan may continue to be exercised, or become free of
restrictions, in accordance with their terms.
17. Miscellaneous.
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(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company and the
Participants.
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EXHIBIT 10.10
VITAL IMAGES, INC.
EMPLOYEE STOCK PURCHASE PLAN
Section 1. Purpose. The purpose of this Employee Stock Purchase Plan (the
"Plan") is to advance the interests of Vital Images, Inc. (the "Company") and
its shareholders by providing Employees of the Company and its Designated
Subsidiaries (as defined in Section 2(e) below) with an opportunity to acquire
an ownership interest in the Company through the purchase of Common Stock of the
Company on favorable terms through payroll deductions. It is the intention of
the Company that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of Section 423 of the
Code.
Section 2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Common Stock" means the common stock, par value $.01 per share, of the
Company, or the number and kind of shares of stock or other securities into
which such common stock may be changed in accordance with Section 13 of the
Plan.
(c) "Committee" means the entity administering the Plan, as provided in
Section 3 below.
(d) "Compensation" means regular straight-time earnings and commissions
that are included in regular compensation, excluding all other amounts such as
amounts attributable to overtime, shift premium, incentive compensation and
bonuses (except to the extent that the inclusion of any such item is
specifically directed by the Committee), determined in a manner consistent with
the requirements of Section 423 of the Code, as provided in Section 1 above.
(e) "Designated Subsidiary" means a Subsidiary that has been designated by
the Board from time to time, in its sole discretion, as eligible to participate
in the Plan.
(f) "Employee" means any person, including an officer, who is employed by
the Company or one of its Designated Subsidiaries, exclusive of any such person
whose customary employment with the Company or a Designated Subsidiary is for 20
hours or less per week.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Fair Market Value" means, with respect to the Common Stock, as of any
date:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on The Nasdaq
National Market, the average of the reported high and low sale prices of
the Common Stock on such exchange or by The Nasdaq National Market as of
such date (or, if no shares were traded on such day, as of the next
preceding day on which there was such a trade); or
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on The Nasdaq National Market, and bid and
asked prices therefor in the over-the-counter market are reported by The
Nasdaq SmallCap Market or the National Quotation Bureau, Inc. (or any
comparable reporting service), the average of the closing bid and asked
prices as of such date, as so reported by The Nasdaq SmallCap Market, or,
if not so reported
<PAGE>
thereon, as reported by the National Quotation Bureau, Inc. (or such
comparable reporting service); or
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on The Nasdaq National Market, and such bid
and asked prices are not so reported, such price as the Committee
determines in its sole discretion, but in a manner acceptable under Section
423 of the Code.
(i) "Offering" means any of the offerings to Participants of options to
purchase Common Stock under the Plan, each continuing for six months, as
described in Section 5 below.
(j) "Offering Date" means the first day of the period of an Offering under
the Plan, as described in Section 5 below.
(k) "Option Price" is defined in Section 8 below.
(l) "Participant" means an eligible Employee who elects to participate in
the Plan pursuant to Section 6 below.
(m) "Securities Act" means the Securities Act of 1933, as amended.
(n) "Subsidiary" means any subsidiary corporation of the Company within the
meaning of Section 424(f) of the Code.
(o) "Termination Date" means the last day of the period of an Offering
under the Plan, as described in Section 5 below.
Section 3. Administration. So long as the Company has a class of its
equity securities registered under Section 12 of the Exchange Act, the Plan will
be administered by (i) the Board or (ii) a committee (the "Committee")
consisting solely of not less than two members of the Board who are not
employees of the Company (for purposes of this Plan and with respect to the
administration of the Plan, references hereinafter to the Committee shall mean
either the Committee, or if the Board has not appointed the Committee, the
Board). Members of the Committee may be appointed from time to time by the
Board, shall serve at the pleasure of the Board, and may resign at any time upon
written notice to the Board. A majority of the members of the Committee shall
constitute a quorum. The Committee shall act by majority approval of the members
and shall keep minutes of its meetings. Action of the Committee may be taken
without a meeting if unanimous written consent is given. Copies of minutes of
the Committee's meetings and of its actions by written consent shall be kept
with the corporate records of the Company. In accordance with and subject to the
provisions of the Plan, the Committee shall have authority to make, administer
and interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision or action in connection with construction,
interpretation, administration or application of the Plan shall be final,
conclusive and binding upon all Participants and any and all persons claiming
under or through any Participant. No member of the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
option granted under the Plan.
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Section 4. Eligibility.
(a) With respect to an Offering, any Employee who is employed by the
Company immediately prior to the Offering Date of the Offering shall be eligible
to participate in the Plan, beginning with the Offering commencing on such
Offering Date, subject to the limitations imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan if:
(i) immediately after the grant, such Employee (or any other person
whose stock ownership would be attributed to such Employee pursuant to
Section 424(d) of the Code) would own shares of Common Stock and/or hold
outstanding options to purchase shares of Common Stock possessing 5% or
more of the total combined voting power or value of all classes of shares
of the Company or of any Subsidiary; or
(ii) the amount of payroll deductions that the Employee has elected
to have withheld under such option (pursuant to Section 7 below) would
permit the Employee to purchase shares of Common Stock under all "employee
stock purchase plans" (within the meaning of Section 423 of the Code) of
the Company and its Subsidiaries to accrue (that is, become exercisable) at
a rate that exceeds $25,000 of the Fair Market Value of such shares of
Common Stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
Section 5. Offerings. Options to purchase shares of Common Stock shall be
offered to Participants under the Plan through a continuous series of Offerings,
each continuing for three months, and each of which shall commence on January 1,
April 1, July 1 and October 1 of each year, as the case may be (the "Offering
Date"), and shall terminate on March 31, June 30, September 30 and December 31
of such year, as the case may be (the "Termination Date"). The first Offering
under the Plan shall have an Offering Date of July 1, 1997 and a Termination
Date of September 30, 1997. Offerings under the Plan shall continue until either
(a) the Committee decides, in its sole discretion, that no further Offerings
shall be made because the Common Stock remaining available under the Plan is
insufficient to make an Offering to all eligible Employees, or (b) the Plan is
terminated in accordance with Section 17 below.
Section 6. Participation.
(a) Participation in the Plan by an eligible Employee is voluntary. An
eligible Employee may become a Participant in the Plan by completing a
subscription agreement authorizing payroll deductions on the form provided by
the Company (the "Participation Form") and filing the Participation Form with
the Company's Chief Financial Officer not less than 15 days before the Offering
Date of the first Offering in which the Participant wishes to participate.
(b) Except as provided in Section 7(a) below, payroll deductions for a
Participant shall begin with the first payroll following the applicable Offering
Date, and shall continue until the termination date of the Plan, subject to
earlier termination by the Participant as provided in Section 11 below or
increases or decreases by the Participant in the amount of payroll deductions as
provided in Section 7(c) below.
Section 7. Payroll Deductions.
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(a) By completing and filing a Participation Form, a Participant shall
elect to have payroll deductions made from his total Compensation (in whole
percentages from 1% to a maximum of 10% of his total Compensation) on each
payday during the time he is a Participant in the Plan in such amount as he
shall designate on the Participation Form; provided, however, that no
Participant's payroll deductions shall be less than $10.00 per pay period.
(b) All payroll deductions authorized by a Participant shall be credited
to an account established under the Plan for the Participant. The monies
represented by such account shall be held as part of the Company's general
assets, usable for any corporate purpose, and the Company shall not be obligated
to segregate such monies. A Participant may not make any separate cash payment
or contribution to such account.
(c) No increases or decreases of the amount of payroll deductions for a
Participant may be made during an Offering. A Participant may increase or
decrease the amount of his payroll deductions under the Plan for subsequent
Offerings by completing an amended Participation Form and filing it with the
Company's Chief Financial Officer not less than 15 days prior to the Offering
date as of which such increase or decrease is to be effective.
(d) A Participant may discontinue his participation in the Plan at any
time as provided in Section 11 below.
Section 8. Grant of Option. On each Offering Date, each eligible Employee
who is then a Participant shall be granted (by operation of the Plan) an option
to purchase (at the Option Price) as many full shares of Common Stock as he will
be able to purchase with (a) the payroll deductions credited to his account
during his participation in the Offering beginning on such Offering Date and (b)
the balance (if any) carried forward from the Employee's payroll deduction
account from the preceding Offering. Notwithstanding the foregoing, in no event
may the number of shares purchased by any Employee during an Offering exceed
[250] shares of Common Stock. The option price per share of such shares (the
"Option Price") shall be the lower of (a) 85% of the Fair Market Value of one
share of Common Stock on the Offering Date, or (b) 85% of the Fair Market Value
of one share of Common Stock on the Termination Date.
Section 9. Exercise of Option.
(a) Unless a Participant gives written notice to the Company as provided
in Section 9(d) below or withdraws from the Plan pursuant to Section 11 below,
the Participant's option for the purchase of shares of Common Stock granted for
an Offering will be exercised automatically at the Termination Date of such
Offering for the purchase of the number of full shares of Common Stock that the
accumulated payroll deductions in his account on such Termination Date will
purchase at the applicable Option Price.
(b) A Participant may purchase only one or more full shares in connection
with the automatic exercise of an option granted for any Offering. That portion
of any balance remaining in a Participant's payroll deduction account at the
close of business on the Termination Date of any Offering that is less than the
purchase price of one full share will be carried forward into the Participant's
payroll deduction account for the following Offering. In no event will the
balance carried forward be equal to or greater than the purchase price of one
share on the Termination Date of an Offering. Notwithstanding the foregoing, the
Committee may determine, in its sole discretion, that in lieu of carrying such
cash balances forward, such balances will be deemed to have purchased such
number of fractional shares of Common
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<PAGE>
Stock as then would be purchasable at the applicable Option Price, with such
fractional shares calculated to the fourth (4th) decimal place.
(c) No Participant (or any person claiming through such Participant) shall
have any interest in any Common Stock subject to an option under the Plan, and
no Participant shall have any rights as a shareholder of the Company with
respect to any shares of Common Stock subject to an option under the Plan, until
such option has been exercised, at which point such interest shall be limited to
the interest of a purchaser of the Common Stock purchased upon such exercise
pending the delivery or credit of such Common Stock in accordance with Section
10 below. During his lifetime, a Participant's option to purchase shares of
Common Stock under the Plan is exercisable only by him.
(d) By written notice to the Company prior to the Termination Date of any
Offering, a Participant may elect, effective on such Termination Date, to:
(i) withdraw all of the accumulated payroll deductions in his
account as of the Termination Date (which withdrawal may, but need not,
also constitute a notice of termination and withdrawal pursuant to Section
11(a)); or
(ii) exercise his option for a specified number of full shares (but
not less than five) that is less than the number of full shares of Common
Stock that the accumulated payroll deductions in his account will purchase
on the Termination Date of the Offering at the applicable Option Price, and
withdraw the balance in his payroll deduction account.
Section 10. Delivery.
(a) Except as provided in paragraph (b) below, as promptly as practicable
after the Termination Date of each Offering, the Company will deliver to each
Participant, as appropriate, either:
(i) (A) a certificate representing the shares of Common Stock
purchased upon exercise of his option granted for such Offering, registered
in the name of the Participant or, if the Participant so directs on his
Participation Form, in the names of the Participant and his spouse, and (B)
if the Participant makes an election pursuant to Section 9(d)(ii), a check
in the amount of the balance of any payroll deductions credited to his
account that were not used for the purchase of Common Stock; or
(ii) if the Participant makes an election pursuant to Section 9(d)(i)
for the Offering, a cash payment equal to the total of the payroll
deductions credited to his account.
(b) Notwithstanding Section 10(a) above, in lieu of delivering
certificates to each of the Participants with respect to shares of Common Stock
purchased in connection with an Offering, the Company may deliver a certificate
to a third party representing an aggregate of all of the shares of Common Stock
purchased in connection with the Offering (including an aggregate of all of the
fractional shares deemed to have been purchased pursuant to Section 9(b), if
applicable) rounded down to the nearest full share, plus cash in an amount equal
to the Option Price multiplied by any remaining fractional share deemed to have
been purchased pursuant to Section 9(b), if applicable, which shares will be
held for the benefit of the Participants in accordance with their respective
interests, and will deliver a statement of account to each Participant
indicating the number of shares of Common Stock purchased by that Participant in
connection with that Offering. If shares are held for the benefit of
Participants, all full shares purchased and fractional shares deemed to have
been purchased by a Participant in an Offering
5
<PAGE>
and in any subsequent Offerings will accumulate for the benefit of the
Participant until the Participant's withdrawal or termination pursuant to
Section 11.
Section 11. Withdrawal; Termination of Employment.
(a) A Participant may terminate his participation in the Plan and withdraw
all, but not less than all, the payroll deductions credited to his account under
the Plan at any time prior to the Termination Date of an Offering, for such
Offering, by giving written notice to the Company. Such notice shall state that
the Participant wishes to terminate his involvement in the Plan, specify a
termination date and request the withdrawal of all of the Participant's payroll
deductions held under the Plan. All of the Participant's payroll deductions
credited to his account will be paid to him as soon as practicable after the
termination date specified in the notice of termination and withdrawal (or, if
no such date is specified, as soon as practical after receipt of his notice of
termination and withdrawal), and his option for such Offering will be
automatically canceled, and no further payroll deductions for the purchase of
shares of Common Stock will be made for such Offering or for any subsequent
Offering, except in accordance with a new Participation Form filed by the
Participant pursuant to Section 6 above. If shares are held for the benefit of
Participants pursuant to Section 10(b), then on the withdrawal and termination
of a Participant's participation in the Plan, the Participant will be entitled
to receive, at the Participant's option, (i) cash equal to the Fair Market Value
of all full shares of Common Stock and any fractional share deemed purchased
pursuant to Section 9(b) then held for the benefit of the Participant; or (ii) a
certificate representing the number of full shares of Common Stock held for the
benefit of the Participant plus cash in an amount equal to the Fair Market Value
of any remaining fractional shares deemed to have been purchased. In any event,
Fair Market Value will be determined as of the termination date specified in the
notice of termination and withdrawal (or, if no such date is specified, as of
the date the notice of termination and withdrawal is received), and such
certificate will be delivered and such amounts paid as soon thereafter as
practicable.
(b) Upon termination of a Participant's employment for any reason,
including retirement or death, the payroll deductions accumulated in his account
will be returned to him as soon as practicable after such termination or, in the
case of his death, to the person or persons entitled thereto under Section 14
below, and his option will be automatically canceled. If shares are held for the
benefit of Participants pursuant to Section 10(b), then upon the termination of
a Participant's employment for any reason, including retirement or death, the
Participant, or, in the case of death, his Designated Beneficiary (if allowed by
the Committee) or the executor or administrator of the Participant's estate will
be entitled to receive, at their option, (i) cash equal to the Fair Market Value
of all full shares of Common Stock and any fractional share deemed purchased
pursuant to Section 9(b) then held for the benefit of the Participant; or (ii) a
certificate representing the number of full shares of Common Stock held for the
benefit of the Participant plus cash in an amount equal to the Fair Market Value
of any remaining fractional share deemed to have been purchased. In any event,
Fair Market Value will be determined as of such termination and such certificate
will be delivered and such amounts paid as soon thereafter as practicable. For
purposes of the Plan, the termination date of employment shall be the
Participant's last date of actual employment and shall not include any period
during which such Participant receives any severance payments. A transfer of
employment between the Company and a Designated Subsidiary or between one
Designated Subsidiary and another Designated Subsidiary, or absence or leave
approved by the Company, shall not be deemed a termination of employment under
this Section 11(b).
(c) A Participant's termination and withdrawal pursuant to Section 11(a)
above will not have any effect upon his eligibility to participate in a
subsequent Offering by completing and filing a new Participation Form pursuant
to Section 6 above or in any similar plan that may hereafter be adopted by the
Company.
6
<PAGE>
Section 12. Interest. No interest shall accrue on a Participant's payroll
deductions under the Plan.
Section 13. Stock Subject to the Plan.
(a) The maximum number of shares of Common Stock that shall be reserved for
sale under the Plan shall be 200,000 shares, subject to adjustment upon changes
in capitalization of the Company as provided in Section 13(b) below. The shares
to be sold to Participants under the Plan may be, at the election of the
Company, either treasury shares (if applicable) or shares authorized but
unissued. If the total number of shares of Common Stock that would otherwise be
subject to options granted pursuant to Section 8 above on any Termination Date
exceeds the number of shares then available under the Plan (after deduction of
all shares for which options have been exercised or are then outstanding), the
Company shall make a pro rata allocation of the shares of Common Stock remaining
available for issuance in as uniform and equitable a manner as is practicable.
In such event, the Company shall give written notice of such reduction of the
number of shares subject to the option to each Participant affected thereby and
shall return any funds accumulated in each Participant's account that are in
excess of the funds need to purchase the shares of Common Stock in that
Participant's account as soon as practicable after the Termination Date of such
Offering.
(b) If any option under the Plan is exercised after any Common Stock
dividend, split-up, recapitalization, merger, consolidation, combination or
exchange of Common Stock or the like, occurring after the shareholders of the
Company approve the Plan, the number of shares of Common Stock to which such
option shall be applicable and the Option Price for such Common Stock shall be
appropriately adjusted by the Company.
(c) If Participants are deemed to have purchased fractional shares of
Common Stock pursuant to Section 9(b), the aggregate of such fractional share
interests at any given time will be applied to reduce the maximum number of
shares of Common Stock remaining available for issuance under the Plan;
provided, however, that any fractional shares that are paid out to a Participant
in cash pursuant to Section 11 will automatically again become available for
issuance under the Plan.
Section 14. Designation of Beneficiary.
(a) In the discretion of the Committee, a Participant may file a written
designation of a beneficiary who is to receive shares of Common Stock and/or
cash, if any, from the Participant's account under the Plan in the event of such
Participant's death at a time when cash or shares of Common Stock are held for
his account.
(b) Such designation of beneficiary may be changed by the Participant at
any time by written notice given to the Company's Chief Financial Officer. In
the event of the death of a Participant in the absence of a valid designation of
a beneficiary who is living at the time of such Participant's death, the Company
shall deliver such shares of Common Stock and/or cash to the executor or
administrator of the estate of the Participant; or, if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such shares of Common Stock and/or cash to the
spouse or to any one or more dependents or relatives of the Participant; or, if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
Section 15. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws
7
<PAGE>
of descent and distribution, or as provided in Section 14 above) by the
Participant. Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may treat such act
as an election to withdraw funds in accordance with Section 11(a) above.
Section 16. Share Transfer Restrictions.
(a) Shares of Common Stock shall not be issued under the Plan unless such
issuance is either registered under the Securities Act and applicable state
securities laws or is exempt from such registrations.
(b) Shares of Common Stock issued under the Plan may not be sold, assigned,
transferred, pledged, encumbered, or otherwise disposed of (whether voluntarily
or involuntarily) except pursuant to registration under the Securities Act and
applicable state securities laws, or pursuant to exemptions from such
registrations.
(c) Each certificate representing shares of Common Stock issued under the
Plan to a Participant who is subject to Section 16 of the Exchange Act shall be
stamped with a legend in substantially the following form, unless the Committee,
in its sole discretion, determines not to require such a legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMITTEE.
Section 17. Amendment or Termination. The Plan may be amended by the Board
from time to time to the extent that the Board deems necessary or appropriate in
light of, and consistent with, Section 423 of the Code; provided, however, that
no such amendment shall be effective, without approval of the shareholders of
the Company, if shareholder approval of such amendment is then required pursuant
to Rule 16b-3 under the Exchange Act or any successor rule or Section 423 of the
Code. The Board also may terminate the Plan or the granting of options pursuant
to the Plan at any time; provided, however, that the Board shall not have the
right to modify, cancel, or amend any outstanding option granted pursuant to the
Plan before such termination unless each Participant consents in writing to such
modification, amendment or cancellation.
Section 18. Notices. All notices or other communications by a Participant
to the Company in connection with the Plan shall be deemed to have been duly
given when received by the Company's Chief Financial Officer or by any other
person designated by the Company for the receipt of such notices or other
communications, in the form and at the location specified by the Company.
Section 19. Effective Date of Plan. The Plan shall be effective upon the
consummation of the distribution of the shares of the Company's Common Stock by
Bio-Vascular, Inc. ("Bio-Vascular") in connection with the spin-off of the
Company from Bio-Vascular. The distribution was consummated on __________, 1997.
Section 20. Miscellaneous. The headings to Sections in the Plan have been
included for convenience of reference only. The masculine pronoun shall include
the feminine and the singular the plural, whenever appropriate. Except as
otherwise expressly indicated, all references to Sections in the Plan shall be
to Sections of the Plan. The Plan shall be interpreted and construed in
accordance with the laws of the State of Minnesota.
8
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Approved by the Company's Board of Directors: (Date).
Approved by the Company's shareholders: (Date).
9
<PAGE>
VITAL IMAGES, INC.
EMPLOYEE STOCK PURCHASE PLAN
PAYROLL DEDUCTION AUTHORIZATION FORM AND SUBSCRIPTION AGREEMENT
______ Original Application
______ Change in Payroll Deduction Amount
1. ___________________________________ hereby elects to participate in the
Vital Images, Inc. Employee Stock Purchase Plan (the "Plan") and subscribes
to purchase shares of the Company's Common Stock (the "Shares") in
accordance with this Agreement and the Plan.
2. I hereby authorize payroll deductions, beginning ____________, 19__, from
each paycheck in the amount of $_______________ (may not exceed 10% of
total compensation on each payday) in accordance with the Plan.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares in accordance with the Plan, and that shares will be
purchased for me automatically at the end of each six-month offering period
under the Plan unless I withdraw my accumulated payroll deductions,
withdraw from the Plan, or both, by giving written notice to the Company
prior to the end of the offering period, as provided in the Plan.
4. Shares purchased for me under the Plan should be issued or held in an
account in the name(s) of:
_______________________________________________
(name(s))
_______________________________________________
(address)
_______________________________________________
_______________________________________________
(social security number)
5. I understand that if I dispose of any Shares received by me pursuant to the
Plan within two years after the first day of the offering period during
which I purchased such Shares, I may be treated for federal income tax
purposes as having received ordinary income at the time of such disposition
in an amount equal to the excess of the fair market value of the Shares at
the time such Shares were delivered to me over the option price paid for
the Shares. I hereby agree to notify the Company in writing within 30 days
after the date of any such disposition. However, if I dispose of such
shares at any time after the expiration of the two-year holding period, I
understand that I will be treated for federal income tax purposes as having
received income only
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at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of (a)
the excess of the fair market value of the Shares at the time of such
disposition over the amount paid for the Shares under the option, or (b)
the excess of the fair market value of the Shares over the option price,
measured as if the option had been exercised on the first day of the
offering period during which I purchased such shares. The remainder of the
gain, if any, recognized on such disposition will be taxed at capital gains
rates.
6. I have read the current prospectus for the Vital Images, Inc. Employee
Stock Purchase Plan.
Date:
----------------- -------------------------------------
Signature of Employee
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EXHIBIT 10.11
VITAL IMAGES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
Section 1. Purpose of Plan. The purpose of the Vital Images, Inc. 1997
Stock Option and Incentive Plan (the "Plan") is to advance the interests of
Vital Images, Inc. (the "Company") and its shareholders by enabling the Company
and its Subsidiaries to attract and retain persons of ability to perform
services for the Company and its Subsidiaries by providing an incentive to such
individuals through equity participation in the Company and by rewarding such
individuals who contribute to the achievement by the Company of its economic
objectives.
Section 2. Definitions. The following terms will have the meanings set
forth below, unless the context clearly otherwise requires:
(a) "Board" means the Board of Directors of the Company.
(b) "Broker Exercise Notice" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or
any related withholding tax obligations and remit such sums to the Company
and directs the Company to deliver stock certificates to be issued upon
such exercise directly to such broker or dealer.
(c) "Change in Control" means an event described in Section 12(a) of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
(f) "Common Stock" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4(c)
of the Plan.
(g) "Disability" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to
the long-term disability plan of the Company or Subsidiary then covering
the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within
the meaning of Section 22(e)(3) of the Code.
(h) "Eligible Recipients" means all employees of the Company or any
Subsidiary and any directors, consultants and independent contractors of
the Company or any Subsidiary.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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(j) "Fair Market Value" means, with respect to the Common Stock, the following:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the
Nasdaq National Market or on the Nasdaq SmallCap Market, the closing
price of the Common Stock on such exchange or reported by the Nasdaq
National Market or the Nasdaq SmallCap Market as of such date (or, if
no shares were traded on such day, as of the next preceding day on
which there was such a trade).
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market or the
Nasdaq SmallCap Market, and bid and asked prices therefor in the over-
the-counter market are reported by the National Quotation Bureau, Inc.
(or any comparable reporting service), the mean of the closing bid and
asked prices as of such date, as so reported by the National Quotation
Bureau, Inc. (or such comparable reporting service).
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market, and
such bid and asked prices are not so reported, such price as the
Committee determines in good faith in the exercise of its reasonable
discretion. The Committee shall not be required to obtain an
appraisal within six months of the adoption of the Plan. The
Committee's determination as to the current value of the Common Stock
shall be final, conclusive and binding for all purposes and on all
persons, including, without limitation, the Company, the shareholders
of the Company, the Participants and their respective successors-in-
interest. No member of the Board of the Committee shall be liable for
any determination regarding current value of the Common Stock that is
made in good faith.
(k) "Incentive Award" means an Option, Restricted Stock Award, Performance
Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan.
(l) "Incentive Stock Option" means a right to purchase Common Stock granted
to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies
as an "incentive stock option" within the meaning of Section 422 of the
Code.
(m) "Non-Statutory Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
does not qualify as an Incentive Stock Option.
(n) "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
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(o) "Participant" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
(p) "Performance Unit" means a right granted to an Eligible Recipient
pursuant to Section 8 of the Plan to receive a payment from the Company, in
the form of stock, cash or a combination of both, upon the achievement of
established performance or other goals.
(q) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive Award,
that are to be issued upon the grant, exercise or vesting of such Incentive
Award.
(r) "Restricted Stock Award" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 7 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 7.
(s) "Retirement" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board for
purposes of the Plan, early) retirement/pension plan or practice of the
Company or Subsidiary then covering the Participant, provided that if the
Participant is not covered by any such plan or practice, the Participant
will be deemed to be covered by the Company's plan or practice for purposes
of this determination.
(s) "Securities Act" means the Securities Act of 1933, as amended.
(u) "Stock Bonus" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 9 of the Plan.
(v) "Subsidiary" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Committee.
(w) "Tax Date" means the date any withholding tax obligation arises under
the Code for a Participant with respect to an Incentive Award.
Section 3. Plan Administration.
(a) The Committee. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will
be administered by (i) the Board or (ii) a committee (the "Committee")
consisting solely of not less than two members of the Board who are not
employees of the Company (for purposes of this Plan and with respect to the
administration of this Plan, references hereinafter to the Committee shall
mean either the Committee, or if the Board has not appointed a Committee,
the Board.) To the extent consistent with corporate law, the Committee may
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delegate to any officers of the Company the duties, power and authority of
the Committee under the Plan pursuant to such conditions or limitations as
the Committee may establish; provided, however, that only the Committee may
exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. Each
determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan will be conclusive and
binding for all purposes and on all persons, and no member of the Committee
will be liable for any action or determination made in good faith with
respect to the Plan or any Incentive Award granted under the Plan.
(b) Authority of the Committee.
(i) In accordance with and subject to the provisions of the Plan, the
Committee will have the authority to determine all provisions of
Incentive Awards as the Committee may deem necessary or desirable and
as consistent with the terms of the Plan, including, without
limitation, the following: (A) the Eligible Recipients to be selected
as Participants; (B) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, any exercise price, the
manner in which Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with other
Incentive Awards) and the form of written agreement, if any,
evidencing such Incentive Award; (C) the time or times when Incentive
Awards will be granted; (D) the duration of each Incentive Award; and
(E) the restrictions and other conditions to which the payment or
vesting of Incentive Awards may be subject. In addition, the
Committee will have the authority under the Plan in its sole
discretion to pay the economic value of any Incentive Award in the
form of cash, Common Stock or any combination of both.
(ii) The Committee will have the authority under the Plan to amend or
modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of
shares or other terms and conditions of an Incentive Award, extend the
term of an Incentive Award, accelerate the exercisability or vesting
or otherwise terminate any restrictions relating to an Incentive
Award, accept the surrender of any outstanding Incentive Award or, to
the extent not previously exercised or vested, authorize the grant of
new Incentive Awards in substitution for surrendered Incentive Awards;
provided, however that the amended or modified terms are permitted by
the Plan as then in effect and that any Participant adversely affected
by such amended or modified terms has consented to such amendment or
modification. No amendment or modification to an Incentive Award,
however, whether pursuant to this Section 3(b) or any other provisions
of the Plan, will be deemed to be a regrant of such Incentive Award
for purposes of this Plan.
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(iii) In the event of (A) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend
or divestiture (including a spin-off) or any other change in corporate
structure or shares, (B) any purchase, acquisition, sale or
disposition of a significant amount of assets or a significant
business, (C) any change in accounting principles or practices, or (D)
any other similar change, in each case with respect to the Company or
any other entity whose performance is relevant to the grant or vesting
of an Incentive Award, the Committee (or, if the Company is not the
surviving corporation in any such transaction, the board of directors
of the surviving corporation) may, without the consent of any affected
Participant, amend or modify the vesting criteria of any outstanding
Incentive Award that is based in whole or in part on the financial
performance of the Company (or any Subsidiary or division thereof) or
such other entity so as equitably to reflect such event, with the
desired result that the criteria for evaluating such financial
performance of the Company or such other entity will be substantially
the same (in the sole discretion of the Committee or the board of
directors of the surviving corporation) following such event as prior
to such event; provided, however, that the amended or modified terms
are permitted by the Plan as then in effect.
Section 4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as provided
in Section 4(c) of the Plan, the maximum number of shares of Common Stock
that will be available for issuance under the Plan will be 675,000 shares
of Common Stock.
(b) Accounting for Incentive Awards. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards
will be applied to reduce the maximum number of shares of Common Stock
remaining available for issuance under the Plan. Any shares of Common
Stock that are subject to an Incentive Award that lapses, expires, is
forfeited or for any reason is terminated unexercised or unvested and any
shares of Common Stock that are subject to an Incentive Award that is
settled or paid in cash or any form other than shares of Common Stock will
automatically again become available for issuance under the Plan. Any
shares of Common Stock that constitute the forfeited portion of a
Restricted Stock Award, however, will not become available for further
issuance under the Plan.
(c) Adjustments to Shares and Incentive Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares,
rights offering, divestiture or extraordinary dividend (including a spin-
off) or any other change in the corporate structure or shares of the
Company, the Committee (or, if the Company is not the surviving corporation
in any such transaction, the board of directors of the surviving
corporation) will make appropriate adjustment (which determination will be
conclusive) as to the number and
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kind of securities available for issuance under the Plan and, in order to
prevent dilution or enlargement of the rights of Participants, the number,
kind and, where applicable, exercise price of securities subject to
outstanding Incentive Awards.
Section 5. Participation. Participants in the Plan will be those Eligible
Recipients who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of economic
objectives of the Company or its Subsidiaries. Eligible Recipients may be
granted from time to time one or more Incentive Awards, singly or in combination
or in tandem with other Incentive Awards, as may be determined by the Committee
in its sole discretion. Incentive Awards will be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date will be the
date of any related agreement with the Participant.
Section 6. Options.
(a) Grant. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by
the Committee in its sole discretion. The Committee may designate whether
an Option is to be considered an Incentive Stock Option or a Non-Statutory
Stock Option. To the extent that any Incentive Stock Option granted under
the Plan ceases for any reason to qualify as an "incentive stock option"
for purposes of Section 422 of the Code, such Incentive Stock Option will
continue to be outstanding for purposes of the Plan but will thereafter be
deemed to be a Non-Statutory Stock Option.
(b) Exercise Price. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion
at the time of the Option grant, provided that (i) such price will not be
less than 100% of the Fair Market Value of one share of Common Stock on the
date of grant with respect to an Incentive Stock Option (110% of the Fair
Market Value if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly, more than 10% of the total
combined voting power of all classes of stock of the Company or any parent
or subsidiary corporation of the Company), and (ii) such price will not be
less than 85% of the Fair Market Value of one share of Common Stock on the
date of grant with respect to a Non-Statutory Stock Option.
(c) Exercisability and Duration. An Option will become exercisable at
such times and in such installments as may be determined by the Committee
in its sole discretion at the time of grant; provided, however, that no
Option may be exercisable after 10 years from its date of grant.
(d) Payment of Exercise Price. The total purchase price of the shares to
be purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee, in its sole discretion and
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upon terms and conditions established by the Committee, may allow such
payments to be made, in whole or in part, by tender of a Broker Exercise
Notice, Previously Acquired Shares, a promissory note (on terms acceptable
to the Committee in its sole discretion) or by a combination of such
methods.
(e) Manner of Exercise. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in
the Plan and in the agreement evidencing such Option, by delivery in
person, by facsimile or electronic transmission or through the mail of
written notice of exercise to the Company (Attention: Secretary) at its
principal executive office in Minneapolis, Minnesota and by paying in full
the total exercise price for the shares of Common Stock to be purchased in
accordance with Section 6(d) of the Plan.
Section 7. Restricted Stock Awards.
(a) Grant. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be
subject to such terms and conditions, consistent with the other provisions
of the Plan, as may be determined by the Committee in its sole discretion.
The Committee may impose such restrictions or conditions, not inconsistent
with the provisions of the Plan, to the vesting of such Restricted Stock
Awards as it deems appropriate, including, without limitation, that the
Participant remain in the continuous employ or service of the Company or a
Subsidiary for a certain period or that the Participant or the Company (or
any Subsidiary or division thereof) satisfy certain performance goals or
criteria.
(b) Rights as a Shareholder; Transferability. Except as provided in
Sections 7(a), 7(c) and 12(c) of the Plan, a Participant will have all
voting, dividend, liquidation and other rights with respect to shares of
Common Stock issued to the Participant as a Restricted Stock Award under
this Section 7 upon the Participant becoming the holder of record of such
shares as if such Participant were a holder of record of shares of
unrestricted Common Stock.
(c) Dividends and Distributions. Unless the Committee determines
otherwise in its sole discretion (either in the agreement evidencing the
Restricted Stock Award at the time of grant or at any time after the grant
of the Restricted Stock Award), any dividends or distributions (including
regular quarterly cash dividends) paid with respect to shares of Common
Stock subject to the unvested portion of a Restricted Stock Award will be
subject to the same restrictions as the shares to which such dividends or
distributions relate. In the event the Committee determines not to pay such
dividends or distributions currently, the Committee will determine in its
sole discretion whether any interest will be paid on such dividends or
distributions. In addition, the Committee in its sole discretion may
require such dividends and distributions to be reinvested (and in such case
the Participants consent to such reinvestment) in shares of Common Stock
that will be
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subject to the same restrictions as the shares to which such dividends or
distributions relate.
(d) Enforcement of Restrictions. To enforce the restrictions referred to
in this Section 7, the Committee may place a legend on the stock
certificates referring to such restrictions and may require the
Participant, until the restrictions have lapsed, to keep the stock
certificates, together with duly endorsed stock powers, in the custody of
the Company or its transfer agent or to maintain evidence of stock
ownership, together with duly endorsed stock powers, in a certificateless
book-entry stock account with the Company's transfer agent.
Section 8. Performance Units. An Eligible Recipient may be granted one or
more Performance Units under the Plan, and such Performance Units will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Committee may impose such restrictions or conditions, not inconsistent with the
provisions of the Plan, to the vesting of such Performance Units as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or any Subsidiary for a certain
period or that the Participant or the Company (or any Subsidiary or division
thereof) satisfy certain performance goals or criteria. The Committee will have
the sole discretion either to determine the form in which payment of the
economic value of vested Performance Units will be made to the Participant
(i.e., cash, Common Stock or any combination thereof) or to consent to or
disapprove the election by the Participant of the form of such payment.
Section 9. Stock Bonuses. An Eligible Recipient may be granted one or
more Stock Bonuses under the Plan, and such Stock Bonuses will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee. The Participant will have all voting,
dividend, liquidation and other rights with respect to the shares of Common
Stock issued to a Participant as a Stock Bonus under this Section 9 upon the
Participant becoming the holder of record of such shares; provided, however,
that the Committee may impose such restrictions on the assignment or transfer of
a Stock Bonus as it deems appropriate.
Section 10. Effect of Termination of Employment or Other Service.
(a) Termination Due to Death, Disability or Retirement. In the event a
Participant's employment or other service with the Company and all
Subsidiaries is terminated by reason of death, Disability or Retirement:
(i) All outstanding Options then held by the Participant will become
immediately exercisable in full and will remain exercisable for a
period of one year (three months in the case of Retirement) after such
termination (but in no event after the expiration date of any such
Option);
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(ii) All Restricted Stock Awards then held by the Participant will
become fully vested; and
(iii) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined
by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
(b) Termination for Reasons Other than Death, Disability or Retirement.
(i) In the event a Participant's employment or other service is
terminated with the Company and all Subsidiaries for any reason other
than death, Disability or Retirement, or a Participant is in the
employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Company (unless the Participant continues in the
employ or service of the Company or another Subsidiary), all rights of
the Participant under the Plan and any agreements evidencing an
Incentive Award will immediately terminate without notice of any kind,
and no Options then held by the Participant will thereafter be
exercisable, all Restricted Stock Awards then held by the Participant
that have not vested will be terminated and forfeited, and all
Performance Units and Stock Bonuses then held by the Participant will
vest and/or continue to vest in the manner determined by the Committee
and set forth in the agreement evidencing such Performance Units or
Stock Bonuses; provided, however, that if such termination is due to
any reason other than termination by the Company or any Subsidiary for
"cause," all outstanding Options then held by such Participant will
remain exercisable to the extent exercisable as of such termination
for a period of three months after such termination (but in no event
after the expiration date of any such Option).
(ii) For purposes of this Section 10(b), "cause" (as determined by
the Committee) will be as defined in any employment or other agreement
or policy applicable to the Participant or, if no such agreement or
policy exists, will mean (A) dishonesty, fraud, misrepresentation,
embezzlement or deliberate injury or attempted injury, in each case
related to the Company or any Subsidiary, (B) any unlawful or criminal
activity of a serious nature, (C) any intentional and deliberate
breach of a duty or duties that, individually or in the aggregate, are
material in relation to the Participant's overall duties, or (D) any
material breach of any employment, service, confidentiality or
noncompete agreement entered into with the Company or any Subsidiary.
(c) Modification of Rights Upon Termination. Notwithstanding the other
provisions of this Section 10, upon a Participant's termination of
employment or other service with the Company and all Subsidiaries, the
Committee may, in its sole discretion (which may be exercised at any time
on or after the date of grant, including following such termination), cause
Options (or any part thereof) then held by such Participant to become or
continue to become exercisable and/or remain exercisable following such
termination
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of employment or service and Restricted Stock Awards, Performance Units and
Stock Bonuses then held by such Participant to vest and/or continue to vest
or become free of transfer restrictions, as the case may be, following such
termination of employment or service, in each case in the manner determined
by the Committee; provided, however, that no Option may remain exercisable
beyond its expiration date.
(d) Breach of Confidentiality or Noncompete Agreements. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant
materially breaches the terms of any confidentiality or noncompete
agreement entered into with the Company or any Subsidiary, whether such
breach occurs before or after termination of such Participant's employment
or other service with the Company or any Subsidiary, the Committee in its
sole discretion may immediately terminate all rights of the Participant
under the Plan and any agreements evidencing an Incentive Award then held
by the Participant without notice of any kind.
(e) Date of Termination of Employment or Other Service. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to
have terminated on the date recorded on the personnel or other records of
the Company or the Subsidiary for which the Participant provides employment
or other service, as determined by the Committee in its sole discretion
based upon such records.
Section 11. Payment of Withholding Taxes.
(a) General Rules. The Company is entitled to (i) withhold and deduct
from future wages of the Participant (or from other amounts that may be due
and owing to the Participant from the Company or a Subsidiary), or make
other arrangements for the collection of, all legally required amounts
necessary to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or
payment of dividends with respect to, an Incentive Award or a disqualifying
disposition of stock received upon exercise of an Incentive Stock Option,
or (ii) require the Participant promptly to remit the amount of such
withholding to the Company before taking any action, including issuing any
shares of Common Stock, with respect to an Incentive Award.
(b) Special Rules. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 11(a) of the Plan by electing
to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole
discretion), or by a combination of such methods.
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Section 12. Change in Control.
(a) Change in Control. For purposes of this Section 12, a "Change in
Control" of the Company will mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company,
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the Company is a party if
the shareholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), immediately following the
effective date of such merger or consolidation, of securities of the
surviving corporation representing (A) more than 50%, but not more
than 80%, of the combined voting power of the surviving corporation's
then outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been
approved in advance by the Incumbent Directors (as defined in Section
12(b) below), or (B) 50% or less of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(iv) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (B) 50% or more of the combined
voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(vi) any other change in control of the Company of a nature that
would be required to be reported pursuant to Section 13 or 15(d) of
the Exchange Act, whether or not the Company is then subject to such
reporting requirements.
(b) Incumbent Directors. For purposes of this Section 12, "Incumbent
Directors" of the Company will mean any individuals who are members of the
Board on the effective
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date of the Plan and any individual who subsequently becomes a member of
the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
Incumbent Directors (either by specific vote or by approval of the
Company's proxy statement in which such individual is named as a nominee
for director without objection to such nomination).
(c) Acceleration of Vesting. Without limiting the authority of the
Committee under Section 3(b) of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its
sole discretion either in an agreement evidencing an Incentive Award at the
time of grant or at any time after the grant of an Incentive Award, (i) all
Options will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
Participants to whom such Options have been granted remain in the employ or
service of the Company or any Subsidiary; (ii) all outstanding Restricted
Stock Awards will become immediately fully vested; and (iii) all
Performance Units and Stock Bonuses then held by the Participant will vest
and/or continue to vest in the manner determined by the Committee and set
forth in the agreement evidencing such Performance Unit or Stock Bonuses.
(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole
discretion either in an agreement evidencing an Incentive Award at the time
of grant or at any time after the grant of an Incentive Award, and without
the consent of any Participant effected thereby, may determine that some or
all Participants holding outstanding Options will receive, with respect to
some or all of the shares of Common Stock subject to such Options, as of
the effective date of any such Change in Control of the Company, cash in an
amount equal to the excess of the Fair Market Value of such shares
immediately prior to the effective date of such Change in Control of the
Company over the exercise price per share of such Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything in
Section 12(c) or 12(d) of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as
provided in Section 12(c) or the payment of cash in exchange for all or
part of an Incentive Award as provided in Section 12(d) (which acceleration
or payment could be deemed a "payment" within the meaning of Section
280G(b)(2) of the Code), together with any other "payments" which such
Participant has the right to receive from the Company or any corporation
that is a member of an "affiliated group" (as defined in Section 1504(a) of
the Code without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the "payments" to such Participant
pursuant to Section 12(c) or 12(d) of the Plan will be reduced to the
largest amount as will result in no portion of such "payments" being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if a Participant is subject to a separate agreement with the
Company or a Subsidiary that
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expressly addresses the potential application of Sections 280G or 4999 of
the Code (including, without limitation, that "payments" under such
agreement or otherwise will not be reduced or that the Participant will
have the discretion to determine which "payments" will be reduced), then
the limitations of this Section 12(e) will not apply, and any "payments" to
a Participant pursuant to Section 12(c) or 12(d) of the Plan will be
treated as "payments" arising under such separate agreement.
Section 13. Rights of Eligible Recipients and Participants;
Transferability.
(a) Employment or Service. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate
the employment or service of any Eligible Recipient or Participant at any
time, nor confer upon any Eligible Recipient or Participant any right to
continue in the employ or service of the Company or any Subsidiary.
(b) Rights as a Shareholder. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no
rights as a shareholder unless and until such Incentive Awards are
exercised for, or paid in the form of, shares of Common Stock and the
Participant becomes the holder of record of such shares. Except as
otherwise provided in the Plan, no adjustment will be made for dividends or
distributions with respect to such Incentive Awards as to which there is a
record date preceding the date the Participant becomes the holder of record
of such shares, except as the Committee may determine in its discretion.
(c) Restrictions on Transfer. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, no right or interest of any Participant in an Incentive Award prior
to the exercise or vesting of such Incentive Award will be assignable or
transferable, or subjected to any lien, during the lifetime of the
Participant, either voluntarily or involuntarily, directly or indirectly,
by operation of law or otherwise. A Participant will, however, be entitled
to designate a beneficiary to receive an Incentive Award upon such
Participant's death, and in the event of a Participant's death, payment of
any amounts due under the Plan will be made to, and exercise of any Options
(to the extent permitted pursuant to Section 10 of the Plan) may be made
by, the Participant's legal representatives, heirs and legatees.
(d) Non-Exclusivity of the Plan. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company or create any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as
the Board may deem necessary or desirable.
Section 14. Securities Law and Other Restrictions. Notwithstanding any
other provision of the Plan or any agreements entered into pursuant to the Plan,
the Company will not be required to issue any shares of Common Stock under this
Plan, and a Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to
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Incentive Awards granted under the Plan, unless (i) there is in effect with
respect to such shares a registration statement under the Securities Act and any
applicable state securities laws or an exemption from such registration under
the Securities Act and applicable state securities laws, and (ii) there has been
obtained any other consent, approval or permit from any other regulatory body
which the Committee, in its sole discretion, deems necessary or advisable. The
Company may condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the placement of
any legends on certificates representing shares of Common Stock, as may be
deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
Section 15. Plan Amendment, Modification and Termination. The Board may
suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such respects as the Board may deem advisable in
order that Incentive Awards under the Plan will conform to any change in
applicable laws or regulations or in any other respect the Board may deem to be
in the best interests of the Company; provided, however, that no amendments to
the Plan will be effective without approval of the stockholders of the Company
if stockholder approval of the amendment is then required under the Exchange
Act, Section 422 of the Code or the rules of any stock exchange or Nasdaq. No
termination, suspension or amendment of the Plan may adversely affect any
outstanding Incentive Award without the consent of the affected Participant;
provided, however, that this sentence will not impair the right of the Committee
to take whatever action it deems appropriate under Sections 4(c) and 12 of the
Plan.
Section 16. Effective Date and Duration of the Plan. The Plan was adopted
by the Board and sole shareholder of the Company on __________, 1997, and is
effective as of the consummation of the distribution of the Company's Common
Stock by Bio-Vascular, Inc. ("Bio-Vascular") to the shareholder of Bio-Vascular.
The Plan will terminate at midnight on ___________, 2007, and may be terminated
prior to such time to by Board action, and no Incentive Award will be granted
after such termination. Incentive Awards outstanding upon termination of the
Plan may continue to be exercised, or become free of restrictions, in accordance
with their terms.
Section 17. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company and the
Participants.
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EXHIBIT 10.12
VITAL IMAGES, INC.
1997 DIRECTOR STOCK OPTION PLAN
Section 1. Purpose of Plan. The purpose of the Vital Images, Inc. 1997
Director Stock Option Plan (the "Plan") is to advance the interests of Vital
Images, Inc. (the "Company") and its shareholders by enabling the Company to
attract and retain persons of ability to serve as directors of the Company and
by providing an incentive to such individuals through equity participation in
the Company.
Section 2. Definitions. The following terms will have the meanings set forth
below, unless the context clearly otherwise requires:
(a) "Board" means the Board of Directors of the Company.
(b) "Broker Exercise Notice" means a written notice pursuant to which an
Option Holder, upon exercise of an Option, irrevocably instructs a broker
or dealer to sell a sufficient number of shares or loan a sufficient amount
of money to pay all or a portion of the exercise price of the Option and/or
any related withholding tax obligations and remit such sums to the Company
and directs the Company to deliver stock certificates to be issued upon
such exercise directly to such broker or dealer.
(c) "Change in Control" means an event described in Section 7(a) of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4(c)
of the Plan.
(f) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director. Continuous Status as
a Director shall not be considered as interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the Board.
(g) "Director" shall mean a member of the Board of Directors of the
Company.
(h) "Disability" means the permanent and total disability of the
Participant within the meaning of Section 22(e)(3) of the Code.
(i) "Distribution Date" means the effective date of the distribution of
the Company's outstanding common stock to the shareholders of Bio-Vascular,
Inc.
(j) "Employee" means any person, including officers and Directors, employed
by the Company or any Subsidiary. The payment of director's fees by the
Company shall not be sufficient to constitute employment by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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(l) "Fair Market Value" means, with respect to the Common Stock,
the following:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the
Nasdaq National Market or Nasdaq SmallCap Market, the closing price of
the Common Stock on such exchange or reported by the Nasdaq National
Market or Nasdaq SmallCap Market as of such date (or, if no shares
were traded on such day, as of the next preceding day on which there
was such a trade).
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market or the
Nasdaq SmallCap Market, and bid and asked prices therefor in the over-
the-counter market are reported by the the National Quotation Bureau,
Inc. (or any comparable reporting service), the mean of the closing
bid and asked prices as of such date, as so reported by the National
Quotation Bureau, Inc. (or such comparable reporting service).
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market or
Nasdaq SmallCap Market, and such bid and asked prices are not so
reported, such price as the Committee determines in good faith in the
exercise of its reasonable discretion.
(m) "Non-employee Director" means a Director who is not an Employee of the
Company.
(n) "Option" means an Option granted pursuant to the Plan.
(o) "Option Stock" shall mean the Common Stock subject to an Option.
(p) "Option Holder" shall mean a Director who receives an Option under this
Plan.
(q) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Option Holder or, with respect to any Option, that are
to be issued upon the exercise of such Option.
(r) "Securities Act" means the Securities Act of 1933, as amended.
(s) "Subsidiary" means any entity that is directly or indirectly controlled
by the Company or any entity in which the Company has a significant equity
interest, as determined by the Board.
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Section 3. Plan Administration.
(a) The Administration by the Board. The Plan will be administered by the
Board of Directors of the Company. Each determination, interpretation or
other action made or taken by the Board pursuant to the provisions of the
Plan will be conclusive and binding for all purposes and on all persons,
and no member of the Board will be liable for any action or determination
made in good faith with respect to the Plan or any Option granted under the
Plan.
(b) Authority of the Board.
(i) In accordance with and subject to the provisions of the Plan,
the Board will have the authority to determine all provisions of
Options (except for Options granted pursuant to Section 5(a)) as the
Board may deem necessary or desirable and as consistent with the terms
of the Plan, including, without limitation, the following: (A) the
Directors to be granted Options; (B) the nature and extent of the
Options to be made to each Option Holder (including the number of
shares of Common Stock to be subject to each Option, any exercise
price, the manner in which Options will vest or become exercisable and
whether Options will be granted in tandem with other Options) and the
form of written agreement, if any, evidencing such Option; (C) the
time or times when Options will be granted; (D) the duration of each
Option; and (E) the restrictions and other conditions to which the
payment or vesting of Options may be subject.
(ii) The Board will have the authority under the Plan to amend or
modify the terms of any outstanding Option in any manner, including,
without limitation, the authority to modify the number of shares or
other terms and conditions of an Option, extend the term of an Option,
accelerate the exercisability or vesting or otherwise terminate any
restrictions relating to an Option, accept the surrender of any
outstanding Option or, to the extent not previously exercised or
vested, authorize the grant of new Options in substitution for
surrendered Options; provided, however that the amended or modified
terms are permitted by the Plan as then in effect and that any Option
Holder adversely affected by such amended or modified terms has
consented to such amendment or modification. No amendment or
modification to an Option, however, whether pursuant to this Section
3(b) or any other provisions of the Plan, will be deemed to be a
regrant of such Option for purposes of this Plan.
Section 4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as provided
in Section 4(c) of the Plan, the maximum number of shares of Common Stock
that will be available for issuance under the Plan will be 75,000 shares of
Common Stock.
(b) Accounting for Options. Shares of Common Stock that are issued under
the Plan or that are subject to outstanding Options will be applied to
reduce the maximum number of shares of Common Stock remaining available for
issuance under the Plan. Any shares
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of Common Stock that are subject to an Option that lapses, expires, is
forfeited or for any reason is terminated unexercised or unvested and any
shares of Common Stock that are subject to an Option that is settled or
paid in cash or any form other than shares of Common Stock will
automatically again become available for issuance under the Plan.
(c) Adjustments to Shares and Option Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares,
rights offering, divestiture or extraordinary dividend (including a spin-
off) or any other change in the corporate structure or shares of the
Company, the Board (or, if the Company is not the surviving corporation in
any such transaction, the board of directors of the surviving corporation)
will make appropriate adjustment (which determination will be conclusive)
as to the number and kind of securities available for issuance under the
Plan and, in order to prevent dilution or enlargement of the rights of
Option Holders, the number, kind and, where applicable, exercise price of
securities subject to outstanding Options.
Section 5. Automatic Grants of Options to Non-employee Directors.
(a) Automatic Option Grants. Under the Plan, each Non-employee Director
will automatically be granted Options to purchase shares of Common Stock as
follows:
(i) Initial Option Grants. Each current and future Non-employee
Director will be granted an initial Option (the "Initial Grant") as
follows:
A. Current Non-Employee Directors. Each person appointed to
serve as a Non-employee Director effective as of the Distribution
Date shall automatically be granted an Option on such date to
purchase 15,000 shares of Common Stock.
B. Future Non-Employee Directors. Each person who is first
elected or appointed to serve as a Non-employee Director after
the Distribution Date will automatically be granted an Option on
the date of his or her initial election or appointment to the
Company's Board of Directors to purchase 15,000 shares of Common
Stock.
(ii) Additional Option Grants. Each Non-employee Director will
automatically be granted an additional Option to purchase shares of
Common Stock as follows:
A. On the third anniversary date of the Initial Grant to a Non-
employee Director under the Plan, such Non-employee Director will
automatically be granted an additional Option to purchase 15,000
shares of Common Stock (the "Second Option"); provided such
person is a Non-employee Director on such date.
B. Thereafter, on the third anniversary of the Second Option,
and on each successive third anniversary thereof, such Non-
employee Director will automatically be granted an additional
Option to purchase 15,000
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shares of Common Stock; provided such person is a Non-employee
Director on such date..
(iii) Notwithstanding the provisions of this Section 5(a), in the
event that a grant would cause the number of shares subject to
outstanding Options held by Directors plus shares of Common Stock
previously purchased upon exercise of Options by Directors to exceed
the number of shares set forth in Section 4(a), then each such
automatic grant shall be for that number of shares determined by
dividing the total number of shares remaining available for grant by
the number of Directors on an automatic grant date. Any further
grants shall then be deferred until such time, if any, as additional
shares of Common Stock become available for grant under the Plan
through action of the shareholders to increase the number of shares
which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(iv) Vesting, Exercisability and Expiration. All Options granted
under Section 5(a) shall vest and become exercisable in cumulative
installments with respect to one-third of such Option on the second,
third and fourth December 31 following the date of grant of such
option. All Options granted under this Section 5(a) shall expire
eight (8) years after the date of grant.
(v) Exercise Price. The exercise price of Options granted under the
Plan shall be 100% of the fair market value of one share of Common
Stock on the date of grant.
(b) Discretionary Grants. In addition to the Options granted pursuant to
Section 5(a), a Director may be granted one or more Options under the Plan,
and such Options will be subject to such terms and conditions, consistent
with the other provisions of the Plan, as may be determined by the Board in
its sole discretion.
(i) Exercise Price. The per share price to be paid by an Option
Holder upon exercise of an Option granted pursuant to this Section
5(b) will be determined by the Board in its discretion at the time of
the Option grant, provided that (i) such price will not be less than
100% of the Fair Market Value of one share of Common Stock on the date
of grant.
(ii) Exercisability and Duration. An Option granted pursuant to this
Section 5(b) will become exercisable at such times and in such
installments as may be determined by the Board in its sole discretion
at the time of grant; provided, however, that no Option may be
exercisable after eight (8) years from its date of grant.
(c) Payment of Exercise Price. The total purchase price of the shares to
be purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Board, in its sole discretion and upon terms and conditions established by
the Board, may allow such payments to be made, in whole or in part, by
tender of a Broker Exercise Notice, Previously Acquired Shares, a
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promissory note (on terms acceptable to the Board in its sole discretion)
or by a combination of such methods.
(d) Manner of Exercise. An Option may be exercised by an Option Holder in
whole or in part from time to time, subject to the conditions contained in
the Plan and in the agreement evidencing such Option, by delivery in
person, by facsimile or electronic transmission or through the mail of
written notice of exercise to the Company (Attention: Chief Financial
Officer) at its principal executive office in Minneapolis, Minnesota and by
paying in full the total exercise price for the shares of Common Stock to
be purchased in accordance with Section 5(c) of the Plan.
Section 6. Effect of Termination of Service as a Director.
(a) Termination of Status as a Director. If a Director ceases to serve as
a Director, he may, but only within ninety (90) days after the date he
ceases to be a Director of the Company, exercise his Option to the extent
that he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise an Option at the date of
such termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(b) Disability of Option Holder. Notwithstanding the provisions of Section
6(a) above, in the event a Director is unable to continue his service as a
Director with the Company as a result of his total and permanent disability
(as defined in Section 22(e)(3) of the Internal Revenue Code), he may, buy
only within ninety (90) days from the date of termination of such service,
exercise his Option to the extent he was entitled to exercise it at the
date of such termination. To the extent that he was not entitled to
exercise the Option at the date of termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Death of Option Holder. In the event of the death of an Option Holder:
(i) during the term of the Option when such Option Holder was, at
the time of his death, a Director of the Company and who shall have
been in Continuous Status as a Director since the date of grant of the
Option, the Option may be exercised, at any time within one year
following the date of death, by the Option Holder's estate or by a
person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that
existed at the date of death.
(ii) within ninety (90) days after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within
ninety (90) days following the date of death, by the Option Holder's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
Section 7. Change in Control.
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(a) Change in Control. For purposes of this Section 7, a "Change in
Control" of the Company will mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company,
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the Company is a party if
the shareholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), immediately following the
effective date of such merger or consolidation, of securities of the
surviving corporation representing (A) more than 50%, but not more
than 80%, of the combined voting power of the surviving corporation's
then outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been
approved in advance by the Incumbent Directors (as defined in Section
7(b) below), or (B) 50% or less of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(iv) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (B) 50% or more of the combined
voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(vi) any other change in control of the Company of a nature that
would be required to be reported pursuant to Section 13 or 15(d) of
the Exchange Act, whether or not the Company is then subject to such
reporting requirements.
(b) Incumbent Directors. For purposes of this Section 7, "Incumbent
Directors" of the Company will mean any individuals who are members of the
Board on the effective date of the Plan and any individual who subsequently
becomes a member of the Board whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the Incumbent Directors (either by specific vote or by approval of the
Company's proxy statement in which such individual is named as a nominee
for director without objection to such nomination).
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(c) Acceleration of Vesting. Without limiting the authority of the Board
under Section 3(b) of the Plan, if a Change in Control of the Company
occurs, then, unless otherwise provided by the Board in its sole discretion
either in an agreement evidencing an Option at the time of grant or at any
time after the grant of an Option, all Options will become immediately
exercisable in full and will remain exercisable for the remainder of their
terms, regardless of whether the Option Holders to whom such Options have
been granted remain in the employ or service of the Company or any
Subsidiary.
(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Board, if approved by the Board in its sole discretion
either in an agreement evidencing an Option at the time of grant or at any
time after the grant of an Option, and without the consent of any Option
Holder effected thereby, may determine that some or all Option Holders
holding outstanding Options will receive, with respect to some or all of
the shares of Common Stock subject to such Options, as of the effective
date of any such Change in Control of the Company, cash in an amount equal
to the excess of the Fair Market Value of such shares immediately prior to
the effective date of such Change in Control of the Company over the
exercise price per share of such Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything in
Section 7(c) or 7(d) of the Plan to the contrary, if, with respect to an
Option Holder, the acceleration of the vesting of an Option as provided in
Section 7(c) or the payment of cash in exchange for all or part of an
Option as provided in Section 7(d) (which acceleration or payment could be
deemed a "payment" within the meaning of Section 280G(b)(2) of the Code),
together with any other "payments" which such Option Holder has the right
to receive from the Company or any corporation that is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code without
regard to Section 1504(b) of the Code) of which the Company is a member,
would constitute a "parachute payment" (as defined in Section 280G(b)(2) of
the Code), then the "payments" to such Option Holder pursuant to Section
7(c) or 7(d) of the Plan will be reduced to the largest amount as will
result in no portion of such "payments" being subject to the excise tax
imposed by Section 4999 of the Code; provided, however, that if a Option
Holder is subject to a separate agreement with the Company or a Subsidiary
that expressly addresses the potential application of Sections 280G or 4999
of the Code (including, without limitation, that "payments" under such
agreement or otherwise will not be reduced or that the Option Holder will
have the discretion to determine which "payments" will be reduced), then
the limitations of this Section 7(e) will not apply, and any "payments" to
a Option Holder pursuant to Section 7(c) or 7(d) of the Plan will be
treated as "payments" arising under such separate agreement.
Section 8. Rights of Option Holders; Transferability.
(a) Service as a Director. Nothing in the Plan will interfere with or
limit in any way the right of the Company to terminate the directorship of
any Director at any time, nor confer upon any Director any right to
continue to serve as a director of the Company.
(b) Rights as a Shareholder. As a holder of Options an Option Holder will
have no rights as a shareholder unless and until such Options are exercised
for, or paid in the
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form of, shares of Common Stock and the Option Holder becomes the holder of
record of such shares. Except as otherwise provided in the Plan, no
adjustment will be made for dividends or distributions with respect to such
Options as to which there is a record date preceding the date the Option
Holder becomes the holder of record of such shares, except as the Board may
determine in its discretion.
(c) Restrictions on Transfer. Options granted under this Plan shall not be
assignable or transferable during the lifetime of the Director, either
voluntarily or involuntarily. Options shall be exercisable during a
Director's lifetime only by such Director. In the event of the death of a
Director, such Option may be transferred by will or the laws of descent and
distribution and may only be exercised by the executors or administrators
of such Director's estate or by the person or persons to whom such
Director's rights under the Option shall pass by the Director's will or the
laws of descent and distribution.
Section 9. Securities Law and Other Restrictions. Notwithstanding any other
provision of the Plan or any agreements entered into pursuant to the Plan, the
Company will not be required to issue any shares of Common Stock under this
Plan, and an Option Holder may not sell, assign, transfer or otherwise dispose
of shares of Common Stock issued pursuant to Options granted under the Plan,
unless (i) there is in effect with respect to such shares a registration
statement under the Securities Act and any applicable state securities laws or
an exemption from such registration under the Securities Act and applicable
state securities laws, and (ii) there has been obtained any other consent,
approval or permit from any other regulatory body which the Board, in its sole
discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or agreements
from the parties involved, and the placement of any legends on certificates
representing shares of Common Stock, as may be deemed necessary or advisable by
the Company in order to comply with such securities law or other restrictions.
Section 10. Plan Amendment, Modification and Termination. The Board may
suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such respects as the Board may deem advisable in
order that Options under the Plan will conform to any change in applicable laws
or regulations or in any other respect the Board may deem to be in the best
interests of the Company; provided, however, that no amendments to the Plan will
be effective without approval of the stockholders of the Company if stockholder
approval of the amendment is then required under the Exchange Act or the rules
of any stock exchange or Nasdaq. No termination, suspension or amendment of the
Plan may adversely affect any outstanding Option without the consent of the
affected Option Holder; provided, however, that this sentence will not impair
the right of the Board to take whatever action it deems appropriate under
Sections 4(c) and 7 of the Plan.
Section 11. Effective Date and Duration of the Plan. The Plan was adopted by
the Board and shareholder of the Company on ___________, 1997, and is effective
as of the Distribution Date. The Plan will terminate at midnight on
___________, 2007, and may be terminated prior to such time to by Board action,
and no Option will be granted after such termination. Options outstanding upon
termination of the Plan may continue to be exercised, or become free of
restrictions, in accordance with their terms.
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Section 12. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Option Holders.
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EXHIBIT 10.13
VITAL IMAGES, INC.
STOCK OPTION ADJUSTMENT AGREEMENT
THIS AGREEMENT is dated [INSERT RECORD DATE], 1997, and is entered
into by and between Vital Images, Inc., a Minnesota corporation (the "Company"),
and Andrew Weiss (the "Optionee").
WHEREAS, the Background and Purpose of this Agreement are as follows:
(a) Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of ___________, 1997 (the "Distribution
Agreement"), between the Company and Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), pursuant to which Bio-Vascular will
distribute (the "Distribution") all of the outstanding shares of the
Company's common stock to Bio-Vascular's shareholders of record on the
Record Date (as defined in the Distribution Agreement). In connection with
the Distribution, each holder of an option to purchase Bio-Vascular common
stock (a "Bio-Vascular Option") as of the Record Date will be entitled to
retain such Bio-Vascular Option, provided that such Bio-Vascular Option
will be adjusted to reflect the Distribution (an "Adjusted Bio-Vascular
Option"). In addition, as of the Record Date, each holder of a Bio-Vascular
Option will also be entitled to receive an option to purchase Company
common stock that will be adjusted to reflect the Distribution (an
"Adjusted Company Option").
(b) Pursuant to the terms and conditions of the applicable plans or
agreements under which the Bio-Vascular Options were initially granted, the
exercise price and number of shares covered by each Adjusted Bio-Vascular
Option, as well as the exercise price and number of shares covered by each
Adjusted Company Option, will be determined according to a formula, set
forth in the Employee Benefits Agreement entered into between Bio-Vascular
and the Company, that is based on the relative fair market trading values
of Bio-Vascular common stock and Company common stock during the first five
trading days following the Distribution Date (as defined in the
Distribution Agreement). Pursuant to this formula, these adjustments will
be made in such a manner that the aggregate "intrinsic value," or
difference between fair market value and exercise price, of the Adjusted
Bio-Vascular Option and Adjusted Company Option will equal the pre-
Distribution "intrinsic value" of the Bio-Vascular Option with respect to
which the adjustment and grant were made.
(c) In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option with
respect to which it is granted, Adjusted Company Options will be granted
under the terms of a corresponding "mirror" plan or agreement of the
Company. With respect to Bio-Vascular Options granted under the Stock
Option Agreement by and between Bio-Vascular and the Optionee dated
December 18, 1995 (the "Bio-Vascular Weiss Option Agreement"), this Vital
Images, Inc. Weiss Option Adjustment Agreement by and between the Company
and the Optionee (the "Weiss Adjustment Agreement") will serve as such a
"mirror" agreement.
WHEREAS, the Board of Directors of the Company and the Bio-Vascular
Committee (as defined in Section 10 hereof) will reasonably cooperate and
communicate with each other to promote the purposes of the Weiss Adjustment
Agreement.
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STOCK OPTION ADJUSTMENT AGREEMENT
Page 2
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Subject to the terms and conditions herein stated, the
Company hereby grants to the Optionee an option to purchase all or any part
of 100,000 shares of common stock of the Company at a per share price equal
to the fair market value of the Stock as of the date of grant of the option
represented by this Weiss Adjustment Agreement (as determined by the Board
of Directors of the Company).
2. Exercisability. This Option shall be exercisable only if the Distribution
occurs, and only on or after the Distribution Date. Assuming the
Distribution occurs on or before October 25, 1997, the Option shall be
exercisable and shall expire according to the following schedule:
<TABLE>
<CAPTION>
I. II. III.
Date Option Becomes
Exercisable as to Shares in Date of Expiration as to Shares
Number of Shares Column I in Column I
- ----------------- --------------------------- -------------------------------
<S> <C> <C>
20,000 Distribution Date 10/25/03
20,000 10/25/97 10/25/04
20,000 10/25/98 10/25/05
20,000 10/25/99 10/25/06
20,000 10/25/00 10/25/07
</TABLE>
This Option shall remain exercisable as set forth above, unless this option
has expired or terminated earlier in accordance with the provisions hereof,
and Shares as to which this Option becomes exercisable may be purchased at
any time prior to the expiration of this Option with respect to such
Shares.
Notwithstanding the foregoing, in the event the Optionee's employment or
other service with the Employer (as defined in Section 10 hereof) and all
of its Subsidiaries is terminated by reason of the Optionee's resignation
or removal, this option shall expire and terminate as to all portions
hereof which have not become exercisable as of the date of such resignation
or removal; provided, however, that the transfer by the Optionee of
employment or other service from one Employer or its Subsidiaries to the
other Employer or its Subsidiaries will not be deemed to constitute a
termination of employment or other service for purposes of this Weiss
Adjustment Agreement.
3. Exercise of Option. This Option may be exercised by delivering ten (10)
days prior written notice to the Company, stating the number of shares of
common stock with respect to which this Option is being exercised, together
with payments of the purchase price of the shares. Such purchase price
shall be payable in cash, by certified or bank cashier's check, or by such
other method as the Company in its sole discretion may accept. Not less
than twenty-five (25) shares of the common stock as to which this Option is
exercisable may be purchased at any one time unless the number of shares
purchased is the total number remaining to be purchased under this Option.
4. Nontransferability; Death of Optionee. This Option shall not be
transferable except by Will or by the laws of descent and distribution and
shall be exercisable only by the Optionee during the
<PAGE>
STOCK OPTION ADJUSTMENT AGREEMENT
Page 3
Optionee's lifetime. If the Optionee dies during the term of this Weiss
Adjustment Agreement, this Option shall expire six months after the
Optionee's death. After the Optionee's death but before such expiration,
the persons to whom the Optionee's rights under this Option shall have
passed by Will or by the applicable laws of descent and distribution shall
have the right to exercise this Option to the extent that the Optionee had
the right to do so as of the date of his death.
5. Privilege of Stock Ownership. The Optionee shall have no rights as a
stockholder with respect to the shares of common stock subject to this
Option until the date of issuance of certificates representing the shares
to the Optionee.
6. Notification of Sale. The Optionee, or any person acquiring shares upon
exercise of this Option, shall notify the Company prior to any sale or
disposition of such shares.
7. Changes in Capital Structure. In the event of changes in the outstanding
common stock of the Company by reason of any stock dividend, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, separation, reorganization or
liquidation, or similar corporate event, an appropriate adjustment shall be
made in the number and kind of shares which the Optionee shall receive upon
exercising this Option and with respect to the aggregate price to be paid
upon such exercise.
8. Restriction on Issuing Shares. The exercise of this Option shall be subject
to the condition that if any time the Company determines in its discretion
that (a) the satisfaction of withholding tax or other withholding
liabilities, or (b) the listing, registration or qualification of any of
the shares of common stock deliverable upon exercise of this Option upon
any securities exchange or pursuant to any state or federal law, or (c) the
consent or approval of any regulatory body is necessary or desirable as a
condition of, or in connection with, the exercise of this Option or in
connection with the delivery or purchase of the common stock, then in any
such event, exercise of this Option shall not be effective unless such
withholding, listing, registration, qualification, consent or approval
shall have been effected or obtained to the satisfaction of the Company.
9. Investment Purpose. No shares of common stock of the Company shall be
issued to the Optionee under this Weiss Adjustment Agreement unless and
until there has been compliance, in the opinion of the counsel to the
Company, with all applicable legal requirements, including without
limitation those related to securities laws and stock exchange listing
requirements. As a condition of the issuance of any shares of common stock
to the Optionee, the Company may require the Optionee to (a) represent that
the shares are being acquired for investment and not for resale and to make
such other representations as the Company shall deem necessary or
appropriate to qualify the issuance of the shares as exempt from the
provisions of the Securities Act of 1933, as amended, and any other
applicable securities laws, and (b) represent that the Optionee will not
dispose of the shares acquired pursuant to this Weiss Adjustment Agreement
in violation of the provisions of the Securities Act of 1933, as amended,
or any other applicable securities laws. The Optionee hereby acknowledges
that any stock certificate representing shares of common stock issued
pursuant to this Weiss Adjustment Agreement will bear a legend or legends
making appropriate reference to the restrictions imposed under applicable
securities laws and this Weiss Adjustment Agreement.
10. Definitions. Except as otherwise set forth herein, the following terms
will have the meanings set forth below, unless the context clearly
otherwise requires:
<PAGE>
STOCK OPTION ADJUSTMENT AGREEMENT
Page 4
(a) "Bio-Vascular Committee" means the group of individuals
administering the Bio-Vascular Weiss Option Agreement.
(b) "Employer" means the Company if the Optionee renders employment or
other services to the Company or any Subsidiary of the Company and means
Bio-Vascular if the Optionee renders employment or other services to Bio-
Vascular or any Subsidiary of Bio-Vascular.
(c) "Subsidiary" means (i) when used in reference to the Company, any
entity that is directly or indirectly controlled by the Company or any
entity in which the Company has a significant equity interest, as
determined by the Board of Directors of the Company or (ii) when used in
reference to Bio-Vascular, any entity that is directly or indirectly
controlled by Bio-Vascular or any entity in which Bio-Vascular has a
significant equity interest as determined by the Board of Directors or Bio-
Vascular.
IN WITNESS WHEREOF, the parties hereto have executed this Weiss Adjustment
Agreement as of [RECORD DATE], 1997.
VITAL IMAGES, INC.
By:
----------------------
Chairman of the Board
"OPTIONEE"
------------------------
Andrew Weiss
<PAGE>
EXHIBIT 10.14
VOXELGEO(R) LICENSE AGREEMENT
THIS LICENSE AGREEMENT, made and entered into this 25th day of August,
1995, by and between VITAL IMAGES, INC., an Iowa corporation with its principal
office located at 505 North 4th Street, Fairfield, Iowa 52556 (hereinafter
referred to as the "Licensor"), and COGNISEIS DEVELOPMENT, INC., a Delaware
corporation with its principal office located at 2401 Portsmouth, Houston, Texas
77098-3903 (hereinafter referred to as the "Licensee").
BACKGROUND
FIRST. Licensor has developed and owns all right, title and interest in and
to certain 3D volume interpretation software commonly referred to as the
VoxelGeo(R) software (hereinafter more fully described and defined as the
"Software").
SECOND. Licensor is the owner of the VoxelGeo(R) trademark and the
corresponding federal trademark registration (hereinafter more fully described
and defined as the "Licensed Trademark").
THIRD. Subject to the terms and upon conditions herein contained, Licensee
desires to obtain the exclusive right to use the Software and the Licensed
Trademark in the Licensed Field of Use (as that term is hereinafter defined),
and Licensor desires to grant such right to Licensee.
FOURTH. Licensor has entered into certain license agreements, maintenance
contracts and CDDI Agreements (as that term is hereinafter defined) relating to
the use, maintenance and development of the Software in connection with the
Licensed Field of Use and Licensee desires to obtain all of Licensor's rights
and assume all of Licensor's obligations under such contracts, and Licensor
desires to assign such rights to Licensee, all subject to the terms and
conditions herein contained.
NOW, THEREFORE, in consideration of the foregoing recitals and further in
consideration of the mutual covenants, conditions and agreements contained in
this Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree and undertake as follows:
ARTICLE I
DEFINITIONS
1. DEFINITIONS. As used herein, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
a. Acceptance Period. "Acceptance Period" shall have the meaning set
forth in Article III, Section 3 hereof.
<PAGE>
b. Agreement. "Agreement" shall mean this License Agreement (together
with all exhibits, schedules, attachments and addenda) as the same may
be amended, modified or supplemented from time to time.
c. CDDI. "CDDI" shall have the meaning set forth in Article VIII,
Section 3.a.
d. CDDI Agreements. "CDDI Agreements" shall have the meaning set forth
in Article VIII, Section 3.a. hereof.
e. Deliverables. "Deliverables" shall have the meaning set forth in
Article III, Section 1 hereof.
f. Derivative Software Products. "Derivative Software Products" shall
mean any and all software products subsequently developed by Licensee
that incorporate the Source Code or any portion thereof other than the
following existing software products currently offered by Licensee
(even if such software products subsequently incorporate the Source
Code or source code from software derived from the Source Code as an
upgrade): the 2D and 3D versions of each of the following
applications: Focus; Disco; GeoSec; GeoStrat; and well log
interpretation software products based upon DLPS.
g. Effective Date. "Effective Date" shall mean the date first written
above.
h. Existing Licenses. "Existing Licenses" shall have the meaning set
forth in Article VIII, Section 2.a. hereof.
i. Existing Maintenance Contracts. "Existing Maintenance Contracts"
shall have the meaning set forth in Article VIII, Section 2.a. hereof.
j. Functional Specifications. "Functional Specifications" shall have
the meaning set forth in Article IX, Section 1.e. hereof.
k. Initial License Period. "Initial License Period" shall mean the time
period ending on the earlier of (i) January 1, 2001; or (ii) such time
as the aggregate royalties actually paid by Licensee to Licensor
(exclusive of the up-front license fee payable by Licensee pursuant to
Section 1 of Article IV) equals Two Million and no/100 Dollars
($2,000,000.00).
l. Licensed Field of Use. "Licensed Field of Use" shall mean use of the
Software and the Licensed Trademark in connection with visualizing and
interpreting seismic and other subsurface (earth and water)
information.
m. Licensed Trademark. "Licensed Trademark" shall mean the VoxelGeo(R)
trademark and corresponding U.S. Registration No. 1,793,534 covering
the VoxelGeo(R) trademark.
2
<PAGE>
n. Maintenance Services. "Maintenance Services" shall have the meaning
set forth in Article VII, Section 2 hereof.
o. Marketing Agreement. "Marketing Agreement" shall have the meaning
set forth in Article VIII, Section 1 hereof.
p. Net Receipts. "Net Receipts" shall mean all gross revenues received
by Licensee in connection with the licensing, sale, use or other
exploitation of the Software and/or Derivative Software Products less
(i) all normal trade discounts actually allowed by Licensee; (ii) all
sales, use and similar taxes included in such gross revenues; (iii)
all freight charges, agent's fees and other third party charges
included in such gross revenues; and (iv) royalties on such gross
revenues actually paid by Licensee to a third party.
q. Software. "Software" shall mean the 3D volume interpretation
software commonly referred to as the VoxelGeo(R) software that is
owned by Licensor and all documentation related thereto, including,
without limitation, the object code for such software and the Source
Code, all as they exist as of the Effective Date.
r. Source Code. Source Code shall mean the high level code that forms
the source program for the Software, which, when completed, becomes
the machine language object program for the Software.
s. Warranty Period. "Warranty Period" shall have the meaning set forth
in Article IX, Section 1.e. hereof.
2. RELATED DOCUMENTS. All of the terms defined in this Agreement shall have
the defined meanings when used in any exhibit, schedule, attachment or
addendum hereto or in any document made or otherwise delivered pursuant to
this Agreement, unless the context otherwise requires.
ARTICLE II
GRANT OF LICENSE
1. LICENSE. Upon the terms and conditions set forth herein, Licensor hereby
grants to Licensee, and Licensee hereby accepts, a worldwide, perpetual,
exclusive license to use the Licensed Trademark in connection with the
Software in the Licensed Field of Use and to use, modify and sublicense the
Software in the Licensed Field of Use.
2. SUBLICENSES.
a. Licensee shall not grant any sublicenses with respect to the Licensed
Trademark, the Software and/or Derivative Software Products except
upon terms and conditions that are consistent with the licenses
granted to Licensee by Licensor pursuant to this Agreement.
3
<PAGE>
b. During the five (5) year period immediately following the Effective
Date, all sublicenses to end-users by Licensee for the Software and/or
Derivative Software Products shall be in object-code-form only, except
(i) Licensee may, at its discretion, agree to an escrow arrangement
whereby the end-user may obtain the Source Code in the event of a
bankruptcy proceeding involving Licensee or other events of default by
Licensee as are customary in source code escrow agreements used in the
software industry; and (ii) Licensee may provide the Source Code to
end-users upon the prior written consent of Licensor, which consent
will not be unreasonably withheld, subject to use restrictions,
security procedures and confidentiality obligations reasonably
acceptable to Licensor.
3. USE OUTSIDE OF LICENSED FIELD OF USE. Licensee shall not use the Licensed
Trademark and/or the Software (or any portion thereof) outside of the
Licensed Field of Use, and any and all uses by Licensee of the Licensed
Trademark and/or the Software outside of the Licensed Field of Use are
strictly prohibited. Licensee acknowledges and agrees that Licensor has and
will continue to use the Source Code and/or grant licenses for the use of
the Source Code outside of the Licensed Field of Use.
ARTICLE III
DELIVERY AND ACCEPTANCE
1. DELIVERABLES. Upon execution of this Agreement by both parties hereto,
Licensor shall promptly deliver to Licensee a copy of the Source Code and
all existing user and programmer documentation relating to the Software, as
more fully described on Exhibit A attached hereto (collectively, the
"Deliverables").
2. SHIPMENT AND RISK OF LOSS. The Deliverables shall be shipped to Licensee
F.O.B. Licensee's receiving point, and thereupon Licensee shall assume the
risk of loss therefor.
3. ACCEPTANCE. Licensee shall have thirty (30) days after receipt of all
Deliverables (the "Acceptance Period") to accept or reject the Software.
Licensee agrees to accept the Software upon the successful (i) loading of
VoxelGeo(R) 2.0 code; (ii) compiling of VoxelGeo(R) 2.0 software; and (iii)
execution of mutually acceptable standard reliability demonstrations on the
hardware of Licensee at Licensee's location using the compiled object code.
Licensee hereby represents to Licensor that Licensee currently possesses
the hardware and software environment necessary to build and run the
Software, as more fully described on Exhibit B attached hereto. Licensee
shall notify Licensor in writing of acceptance or rejection within the
Acceptance Period. In the event the Software is rejected by Licensee, all
Deliverables shall be returned by Licensee to Licensor, at Licensee's
expense, and this Agreement shall be automatically terminated and of no
further force and effect except as provided in Article XI, Section 2
hereof.
4
<PAGE>
ARTICLE IV
LICENSE FEE; ROYALTIES
1. LICENSE FEE. Licensee shall pay to Licensor a license fee in the amount of
One Million Five Hundred Thousand and no/100 Dollars ($1,500,000.00), which
shall be paid in full by wire transfer, pursuant to wire transfer
instructions provided to Licensee by Licensor, within two (2) business days
following acceptance of the Software by Licensee in accordance with the
terms and conditions set forth in Article III, Section 3 above. Such
license fee shall not be deemed an advance of royalties and shall not be
recoupable from royalty payments due to Licensor pursuant to this Article
IV.
2. ROYALTY AMOUNT. Subject to Section 3 of this Article IV, Licensee shall
pay Licensor a royalty on all Net Receipts received by Licensee in
connection with the licensing or use of the Software or any Derivative
Software Products in accordance with the following schedule:
<TABLE>
<CAPTION>
Royalty as a Percentage of
Net Receipts Received by
Licensee During the
Calendar Year Applicable Calendar Year
- ------------- --------------------------
<S> <C>
1995 None
1996 15% on all Net Receipts in excess
of $2,000,000.00
1997 15% on all Net Receipts
1998 15% on all Net Receipts
1999 10% on all Net Receipts
2000 5% on all Net Receipts
</TABLE>
3. LIMITATION ON ROYALTY OBLIGATION. The obligation of Licensee to pay
royalties to Licensor in accordance with Section 2 of this Article IV shall
cease on the earlier of (i) January 1, 2001, or (ii) such time as the
aggregate royalties actually paid by Licensee to Licensor (exclusive of the
up-front license fee payable by Licensee pursuant to Section 1 of this
Article IV) equals Two Million and no/100 Dollars ($2,000,000.00), and
thereafter the licenses granted to Licensee hereunder shall be deemed to be
fully paid. Licensor agrees that Licensee shall not be obligated to make
royalty payments with respect to any revenues received by Licensee in
connection with the following existing software products currently offered
by Licensee (even if such software products
5
<PAGE>
subsequently incorporate the Source Code or source code from software
derived from the Source Code as an upgrade): the 2D and 3D versions of each
of the following applications: Focus; Disco; GeoSec; GeoStrat and well log
interpretation software products based upon DLPS.
4. MARKETING OF SOFTWARE BY LICENSEE. Licensee shall use its good faith best
efforts to promote, market and sublicense the Software worldwide at all
times during which Licensee is obligated to make royalty payments to
Licensor hereunder.
5. ACCOUNTING. Until the earlier of (i) March 31, 2001, or (ii) such time as
the aggregate royalties actually paid by Licensee to Licensor (exclusive of
the up-front license fee payable by Licensee pursuant to section 1 of this
Article IV) equals Two Million and no/100 Dollars ($2,000,000.00), Licensee
shall provide Licensor within thirty (30) days following the end of each
calendar quarter with an accounting of all Net Receipts during the
immediately preceding calendar quarter.
6. TERMS OF PAYMENT. All royalties under this Agreement shall be paid in
United States currency. Royalty payments due to Licensor pursuant to
Section 2 of this Article IV shall be paid by Licensee within thirty (30)
days following the end of each calendar quarter based upon the total Net
Receipts during the immediately preceding calendar quarter.
7. MAINTENANCE AND INSPECTION OF RECORDS. Until the earlier of (i) March 31,
2001, or (ii) such time as the aggregate royalties actually paid by
Licensee to Licensor (exclusive of the up-front license fee payable by
Licensee pursuant to section 1 of this Article IV) equals Two Million and
no/100 Dollars ($2,000,000.00), Licensee will maintain records of all Net
Receipts. Licensor shall have the right, through a certified public
accountant, to inspect all the books and records of Licensee relating to
all Net Receipts subject to this Agreement, but such inspection may not be
made more frequently than annually. The cost of such inspection shall be
borne by Licensor; provided, however, that Licensee shall reimburse
Licensor for the reasonable costs of such inspection in the event there is
a discrepancy between the amount of royalties due Licensor under the terms
of this Agreement and the amount of royalties actually paid by Licensee to
Licensor for the time period corresponding to such inspection of records
that exceeds five percent (5%) of the amount of royalties actually due.
ARTICLE V
MODIFICATIONS OF SOFTWARE
1. MODIFICATION. Licensee may modify the Software and merge it into existing
software; provided, however, that (i) such modified Software and resulting
merged software shall be deemed to be Software under this Agreement and
shall be subject to all of the terms and conditions hereof; and (ii)
Licensor agrees that Licensee shall not be obligated to make royalty
payments with respect to any revenues received by Licensee in connection
with the following existing software products currently offered by Licensee
(even if such software products subsequently incorporate the Source Code or
source code
6
<PAGE>
from software derived from the Source Code as an upgrade): the 2D and 3D
versions of each of the following applications: Focus; Disco; GeoSec;
GeoStrat and well log interpretation software products based upon DLPS.
2. FUTURE ENHANCEMENTS. All future modifications and enhancements to the
Software by Licensee shall be owned by Licensee. Likewise, any future
enhancements or modifications to the Software made by Licensor shall be the
sole property of Licensor and shall not be subject to this Agreement except
as otherwise provided under Article VII, Section 6 hereof.
ARTICLE VI
PROPRIETARY RIGHTS
1. PROPRIETARY RIGHTS. Licensee acknowledges that Licensor claims the
Licensed Trademark and the Software are the exclusive property of Licensor
and that the Source Code constitutes a valuable trade secret of Licensor.
Licensee shall take all reasonable security measures to protect the Source
Code and, except as otherwise provided in clause (i) of Section 2 of
Article II of this Agreement, Licensee shall not disclose or make available
the Source Code to third parties without Licensor's prior written consent.
In any event, prior to delivery of the Source Code by Licensee to any third
party in accordance with the terms and conditions of this Agreement, for
any purpose whatsoever, Licensee shall obtain a written confidentiality and
nondisclosure agreement from such third party and a license agreement from
such third party upon terms and conditions that are no less restrictive
than the terms and conditions of this Agreement. Licensee shall enforce any
and all terms and conditions of all confidentiality and non-disclosure
agreements and license agreements that are entered into by Licensee
pursuant to the preceding sentence, at its own expense, and shall notify
Licensor of any knowledge of infringement of Licensor's intellectual
property rights by any third party. Licensee understands that any
unauthorized use by it of the Licensed Trademark, the Software and/or the
Source Code may constitute an infringement of copyright, trademark, trade
secret or patent rights of Licensor.
2. RIGHTS RESERVED. All rights in the Licensed Trademark and the Software,
other than those granted by this Agreement, are hereby reserved by
Licensor.
3. PROTECTION OF PROPRIETARY RIGHTS. Licensee shall insure that Licensor's
copyright notice is replicated on all copies of the Software and/or
Derivative Software Products produced by Licensee or its sublicensees,
including any and all copies of modifications made in accordance with
Article V, Section 1 hereof. Licensee shall assist Licensor, to the extent
reasonably requested by Licensor, in the procurement of any protection or
defense of any of Licensor's rights to (i) trademarks; (ii) copyright(s);
or (iii) patents owned by Licensor that relate to the subject matter of
this Agreement.
4. PROPRIETARY RIGHTS INDEMNITY. Licensor shall indemnify, hold harmless and
defend Licensee, its agents, officers and employees against any and all
claims made against Licensee that use of the Licensed Trademark and/or the
Software infringes any
7
<PAGE>
license, patent, copyright, trademark, trade secret or other proprietary
right, and hold Licensee harmless against any and all damages, judgments
and attorneys' fees arising out of the foregoing; provided, however, that
Licensee shall give Licensor prompt written notice of such claims and that
such indemnity shall not extend to modifications of the Software made by
Licensee or its sublicensees.
ARTICLE VII
MAINTENANCE
1. LICENSEE'S OPTION. Licensee shall have the option to receive from Licensor
maintenance services relating to the Rendering Engine portion only of the
Software (hereinafter more fully described and defined as the "Maintenance
Services") upon the terms and conditions set forth in this Article VII.
Such option shall be exercised by Licensee by the giving of prior written
notice to Licensor specifying that Licensee wishes to receive Maintenance
Services. Licensee's option to receive Maintenance Services pursuant to
this Article VII shall expire and become null and void thirty (30) days
following expiration of the Warranty Period if such right had not
previously been exercised by Licensee.
2. MAINTENANCE SERVICES. Licensor shall provide Maintenance Services to
Licensee only if Licensee has exercised its option to receive Maintenance
Services in accordance with Section 1 of this Article VII. Such Maintenance
Services shall consist of consulting services and error correction
services. Such services are referred to herein as the "Maintenance
Services." Solely for the purposes of Sections 2 and 3 of this Article VII,
the term "Software" shall mean only the Rendering Engine portion of the
Software. Error correction services provided by Licensor shall consist of
any necessary changes made to the Source Code, as originally delivered to
Licensee, in order to correct or remove any bug, malfunction or other
defect that prevents the Software from performing in accordance with the
Functional Specifications. In the event Licensee detects any error, defect
or nonconformity in the Software, Licensor shall furnish off-site telephone
support, in the form of consultations, assistance and advice on the use or
maintenance of the Software, within twenty-four (24) hours of Licensee's
request therefor. In the event that such problem in the Software is not
corrected within seventy-two (72) hours of initiation of such off-site
telephone support, Licensee shall submit to Licensor a listing of the
output and all such other data that Licensor may reasonably request in
order to reproduce operating conditions similar to those present when the
error, defect or nonconformity was discovered. In the event that such
problem is not corrected within five (5) business days after Licensor
receives from Licensee a listing of output and other data, Licensor shall
within the next seventy-two (72) hours provide on-site service.
3. RESPONSIBILITIES OF LICENSEE. Licensee shall notify Licensor immediately
following the discovery of any error, defect or nonconformity in the
Software. The periods within which Licensor is obligated herein to provide
support shall not commence until such time as Licensor receives
notification of such error, defect or nonconformity from Licensee.
Licensee, upon detection of any error, defect or nonconformity in the
8
<PAGE>
Software shall, if requested to do so by Licensor, submit to Licensor a
listing of output and any such other data that Licensor may reasonably
request in order to reproduce operating conditions similar to those present
when the error occurred or the defect or nonconformity was discovered, as
the case may be.
4. MAINTENANCE FEES. In consideration for the Maintenance Services, Licensee
shall pay Licensor a monthly fee of $5,000.00 (payable on or before the
15th of each calendar month during which services are to be rendered to
Licensee by Licensor).
5. TERM. Subject to Article XI hereof, in the event Licensee exercises its
option to receive Maintenance Services with respect to the Rendering
Engine, Licensor will render Maintenance Services for the Rendering Engine
for a period of one year. Thereafter, Licensor's obligations to render
Maintenance Services for the Rendering Engine, and Licensee's obligations
to pay for such services, shall automatically be renewed for an additional
period of one year; provided, however, that either party may prevent the
automatic renewal of such obligations by written notice to the other given
at least thirty (30) days prior to expiration of the initial one-year term
set forth in the preceding sentence.
6. ENHANCEMENTS. Licensor may from time to time make enhancements to the
Software. Any such enhancements shall be owned by Licensor, but any
enhancements made by Licensor during such time as Licensee is paying
Licensor a maintenance fee under this Article VII shall be made available
to Licensee, at no additional cost, and shall be subject to the terms and
conditions of this Agreement; provided, however, that Licensee has fully
complied with all the terms and conditions of this Agreement.
ARTICLE VIII
RELATED AGREEMENTS
1. EXISTING MARKETING AGREEMENT. Upon the Effective Date, that certain
Marketing Agreement dated as of August 1, 1994, between Licensor and
Licensee, as amended to date (the "Marketing Agreement"), shall be deemed
terminated and of no further force and effect. Notwithstanding termination
of the Marketing Agreement upon the Effective Date, (i) all provisions
therein relating to confidentiality, proprietary property, copyrights,
trademarks and patents shall remain in full force and effect; (ii) each of
the parties shall be required to carry out any provision thereof that
contemplates performance subsequent to termination of the Marketing
Agreement; and (iii) such termination shall not affect any liability or
other obligation that shall have accrued prior to such termination,
including, but not limited to, any liability for loss or damage on account
of a prior default or claims for compensation for any period prior to such
termination.
2. EXISTING LICENSES AND MAINTENANCE AGREEMENTS.
a. Copies; Offset Against License Fee. Set forth on Exhibit C attached
hereto is a listing of all existing License Agreements between
Licensor and/or Licensee and
9
<PAGE>
end-users for use of the Software ("Existing Licenses") and set forth
on Exhibit D attached hereto is a listing of all end-users that have
agreements with Licensor for maintenance of the Software (the
"Existing Maintenance Contracts"). Licensor shall supply Licensee with
copies of all Existing Licenses that have been initiated by Licensor
and copies of purchase orders from end-users relating to the Existing
Maintenance Contracts. Licensee shall be entitled to offset the
license fee payable by Licensee to Licensor pursuant to Article IV,
Section 1 hereof by an amount equal to Licensor's portion of unearned
maintenance fees under Existing Maintenance Contracts (for example, if
an annual Maintenance Contract has three months left on its term, then
Licensee will be entitled to a credit for 25% of Licensor's share of
such maintenance fees as such share is determined pursuant to the
Marketing Agreement).
b. Assignment and Assumption. Licensor hereby assigns to Licensee all of
Licensor's right, title and interest in and to the Existing Licenses
and the Existing Maintenance Contracts and Licensee hereby accepts
such assignment. Licensee hereby further assumes and agrees to be
bound by all the remaining terms of the Existing Licenses and the
Existing Maintenance Contracts as if Licensee was an original party
thereto. To the extent that any Existing License or Existing
Maintenance Contract for which assignment to Licensee is provided
herein is not assignable without the consent of another party, this
Agreement shall not constitute an assignment or an attempted
assignment thereof if such assignment of attempted assignment would
constitute a breach thereof. Licensor and Licensee agree to use their
reasonable best efforts to obtain the consent of such other party to
the assignment of any such Existing License and/or Existing
Maintenance Contract to Licensee in all cases in which such consent is
or may be required for such assignment. If any such consent shall not
be obtained, Licensor agrees to cooperate with Licensee in any
reasonable arrangement designed to provide for Licensee the benefits
intended to be assigned to Licensee under the relevant Existing
License or Existing Maintenance Contract, including enforcement, at
the cost and for the account of Licensee, of any and all rights of
Licensor against the other party thereto arising out of the breach or
cancellation thereof by such other party or otherwise. If and to the
extent that such arrangement cannot be made, Licensee, upon notice to
Licensor, shall have no obligation with respect to any such Existing
License and/or Existing Maintenance Contract, as the case may be, and
any such Existing License and/or Existing Maintenance Contract shall
not be deemed to have been assigned hereunder.
3. CUSTOMER DIRECTED DEVELOPMENT INITIATIVE.
a. Copies; Offset Against License Fee. Set forth on Exhibit E attached
hereto is a listing of all Customer Directed Development Initiative
("CDDI") Agreements between certain oil companies and Licensor (the
"CDDI Agreements"). Prior to expiration of the Acceptance Period,
Licensor shall supply Licensee with copies of all the CDDI Agreements.
Licensee shall be entitled to offset the license fee
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<PAGE>
payable by Licensee to Licensor pursuant to Article IV, Section 1
hereof by an amount equal to the unearned portion of fees previously
collected by Licensor from CDDI members.
b. Assignment and Assumption. Licensor hereby assigns to Licensee all of
Licensor's right, title and interest in and to the CDDI Agreements and
Licensee hereby accepts such assignment. Licensee hereby further
assumes and agrees to be bound by all the remaining terms of the CDDI
Agreements as if Licensee was an original party thereto. To the extent
that any CDDI Agreement for which assignment to Licensee is provided
herein is not assignable without the consent of another party, this
Agreement shall not constitute an assignment or an attempted
assignment thereof if such assignment of attempted assignment would
constitute a breach thereof. Licensor and Licensee agree to use their
reasonable best efforts to obtain the consent of such other party to
the assignment of any such CDDI Agreement to Licensee in all cases in
which such consent is or may be required for such assignment. If any
such consent shall not be obtained, Licensor agrees to cooperate with
Licensee in any reasonable arrangement designed to provide for
Licensee the benefits intended to be assigned to Licensee under the
relevant CDDI Agreement, including enforcement, at the cost and for
the account of Licensee, of any and all rights of Licensor against the
other party thereto arising out of the breach or cancellation thereof
by such other party or otherwise. If and to the extent that such
arrangement cannot be made, Licensee, upon notice to Licensor, shall
have no obligation with respect to any such CDDI Agreement, as the
case may be, and any such CDDI Agreement shall not be deemed to have
been assigned hereunder.
ARTICLE IX
WARRANTIES
1. WARRANTIES OF LICENSOR. Licensor hereby represents and warrants only to
Licensee that:
a. Neither the Licensed Trademark nor the Software infringe any patent,
copyright, trade secret or other proprietary right of any third party;
b. Licensor has the sole right to grant licenses for use of the Licensed
Trademark and the Software and has not heretofore granted any rights
in the Licensed Trademark or the Software that would interfere with
any rights granted Licensee under this Agreement;
c. Licensor has the right to enter into this Agreement, to grant to
Licensee the rights and licenses set forth herein, and to perform all
obligations of this Agreement;
d. Execution, delivery and performance of this Agreement by Licensor will
not constitute a breach of any agreement, judgment, award, law, rule
or regulation to which Licensor is bound; and
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e. During the sixty (60) day period following the Effective Date (the
"Warranty Period"), Licensor will provide consulting services to
Licensee relating to the Software free of charge (other than
reimbursement for pre-approved out-of-pocket expenses), and Licensor
warrants that during the Warranty Period the Software will conform to
the performance capabilities, characteristics, specifications,
functions and other descriptions and standards applicable thereto as
set forth in the functional specifications set forth in the
VoxelGeo(R) 2.0 User Guide, copyright July 1995 (the "Functional
Specifications").
2. LIMITATION OF WARRANTIES. Licensor shall not be liable to Licensee for the
warranty provisions of this Agreement to the extent of modifications made
to the Software by Licensee or sublicensees of Licensee or to the extent
the media for the Software is subject to misuse, abuse or abnormal use by
Licensee or sublicensees of Licensee. EXCEPT AS EXPRESSLY SET FORTH IN
SECTION 1 OF THIS ARTICLE IX, LICENSOR MAKES NO EXPRESS OR IMPLIED
WARRANTIES RELATING TO THE SOFTWARE OR ITS USE OR FUNCTIONALITY, AND
SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
3. REMEDIES. Licensee's sole remedy for any breach of the warranties contained
in Article IX, Section 1.e. is repair or correction of any programming
deficiencies that result in documented errors or obvious Software
malfunctions. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY,
LICENSOR SHALL UNDER NO CIRCUMSTANCES BE LIABLE TO LICENSEE OR ANY THIRD
PARTY FOR SPECIAL INCIDENTAL, CONSEQUENTIAL, OR EXEMPLARY DAMAGES OF ANY
NATURE WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, COMMERCIAL LOSS FROM ANY
CAUSE, BUSINESS INTERRUPTION OF ANY NATURE, LOSS OF PROFITS, OR PERSONAL
INJURY ARISING OUT OF LICENSOR'S ALLEGED OR ACTUAL FAILURE TO COMPLY WITH
ALL OR ANY OF THE PROVISIONS OF THIS AGREEMENT AND/OR THE FAILURE OF THE
SOFTWARE TO PERFORM AS SPECIFIED OR WARRANTED, EVEN IF LICENSOR SHALL HAVE
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
4. WARRANTIES OF LICENSEE. Licensee hereby represents and warrants that:
a. Licensee has the full right, power and authority to enter into and
perform its obligations under this Agreement;
b. Execution, deliver and performance of this Agreement by Licensee will
not constitute a breach of any agreement, judgment, award, law, rule
or regulation to which Licensee is bound; and
c. To the best of Licensee's knowledge, neither the Licensed Trademark
nor the Software infringe any patent, copyright, trade secret or other
proprietary right of any third party.
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ARTICLE X
NONCOMPETE OBLIGATIONS
1. LICENSEE'S COVENANT NOT TO COMPETE. From the Effective Date and for a
period of five (5) years thereafter, Licensee shall not, either directly or
indirectly, grant any licenses under, or provide any services relating to,
the Software or any other software that is based upon the Voxel technology
to any corporation, partnership, person, firm or other business that is
selling goods or rendering services that is engaged in the medical market.
Licensee agrees that any breach of the covenant set forth in the preceding
sentence will cause Licensor irreparable harm for which there is no
adequate remedy at law, and, without limiting whatever other rights and
remedies Licensor may have under this Agreement, Licensee consents to the
issuance of an injunction in favor of Licensor enjoining the breach of any
of the aforesaid covenants by any court of competent jurisdiction. If the
aforesaid covenant is held to be unenforceable because of the scope or
duration of such covenant or the area covered thereby, the parties agree
that the court making such determination shall have the power to reduce the
scope, duration and/or area of such covenant to the extent that allows the
maximum scope, duration and/or area permitted by applicable law.
2. LICENSOR'S COVENANT NOT TO COMPETE. From the Effective Date and for a
period of five (5) years thereafter and so long as Licensee is in full and
timely compliance with this Agreement, Licensor shall not, either directly
or indirectly:
a. own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be employed by, or act as
consultant or adviser to, or be connected in any manner with, any
corporation, partnership, person, firm or other business that is
engaged in the gas, oil or mineral exploration industries; or
b. call upon, solicit, divert, attempt to take away or continue any
business relationship with any of the present customers or present or
future customers or business of Licensee in the gas, oil or
exploration industries; or
c. employ or offer employment to any person who was employed by Licensee
unless such person shall have ceased to be employed by Licensee for a
period of at least six (6) months.
Licensor agrees that any breach of covenants (a), (b) or (c) above will
cause Licensee irreparable harm for which there is no adequate remedy at law,
and, without limiting whatever other rights and remedies Licensee may have under
this Agreement, Licensor consents to the issuance of an injunction in favor of
Licensee enjoining the breach of any of the aforesaid covenants by any court of
competent jurisdiction. If any or all of the aforesaid covenants are held to be
unenforceable because of the scope or duration of such covenant or the area
covered thereby, the parties agree that the court making such determination
shall have the power to reduce the scope, duration and/or area of such covenant
to the extent that allows the maximum scope, duration and/or area permitted by
applicable law.
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ARTICLE XI
TERMINATION
1. TERMINATION. This Agreement may be terminated upon the occurrence of one or
more of the following events, and the terminating party shall not be liable
to the other party for the proper exercise of such right:
a. Rejection of Software. This Agreement shall automatically terminate
and be of no further force and effect in the event the Software is
rejected by Licensee in accordance with Article III, Section 3 hereof.
b. Option to Terminate. This Agreement may be terminated at the option of
the non-defaulting party upon the material breach of one of the
parties of their obligation to perform or comply with the terms and
conditions of this Agreement, or on the mutual written consent of both
parties hereto, or as otherwise hereinafter set forth. In the event of
the parties finds the other in material breach of this Agreement,
notice of such breach shall be sent to the defaulting party in
writing. If the breach continues for thirty (30) days after receipt by
the defaulting party of the notice, the Agreement shall be
automatically terminated.
c. Events of Automatic Termination. This Agreement shall terminate
immediately and automatically upon the filing of a petition in
bankruptcy under the United States Bankruptcy Code (or any future
federal bankruptcy act) by or against Licensee and such petition shall
not be discharged or denied within thirty (30) days after the filing
thereof.
2. EFFECT OF TERMINATION. Upon termination of this Agreement for whatever
reason, all provisions relating to confidentiality, proprietary property,
copyrights, trademarks and patents shall remain in full force and effect,
and Licensee shall return the Software and all copies in Licensee's
possession and control to Licensor. Notwithstanding the termination or
expiration of this Agreement, each of the parties hereto shall be required
to carry out any provision hereof that contemplates performance subsequent
to such termination; and such termination shall not affect any liability or
other obligation that shall have accrued prior to such termination,
including, but not limited to, any liability for loss of damage on account
of a prior default. Any rights and remedies herein provided shall be
cumulative and in addition to all rights and remedies available at law and
in equity.
ARTICLE XII
MISCELLANEOUS PROVISIONS
1. BENEFIT. Except as otherwise provided herein, this Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their
respective heirs, executors, administrators, representatives, successors
and assigns.
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<PAGE>
2. NO ASSIGNMENT. During the Initial License Period, except as otherwise
expressly provided in this Agreement, this Agreement and all rights and
licenses granted or obligations incurred hereunder may not be assigned or
transferred by either party without the prior written consent of the other
party, and any such attempted assignment or transfer shall be void and of
no force or effect. Nothing contained in this Section 2 of Article XII
prohibits Licensee from merging with an affiliated entity or prevents
Licensee from selling substantially all of its business assets to an
affiliated entity and such events shall not constitute a breach of this
Section 2 of Article XII.
3. EQUITABLE RELIEF. The parties hereto agree that any breach of any of the
terms or covenants of this Agreement will cause the non-breaching party
irreparable harm for which there is no adequate remedy at law, and the
parties hereto consent to the issuance of any injunction or other equitable
relief in favor of the non-breaching party enjoining the breach of any such
covenant or term. In no manner or affect shall this provision of this
Agreement preclude the non-breaching party from exercising any right or
remedy to which the non-breaching party may be entitled, at law or in
equity, by reason of a breach of any term or covenant of this Agreement.
4. ARBITRATION. Except for claims for equitable relief in accordance with
Section 3 of this Article XII, any dispute, controversy or claim arising
out of or relating to this Agreement, or the breach, termination or
invalidity thereof, shall be finally settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association in effect on the date of the Agreement, and judgment upon the
award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof. The place of arbitration shall be Minneapolis,
Minnesota.
5. ATTORNEYS' FEES AND COSTS. The party prevailing in any legal action
(including arbitration) arising under or relating to this Agreement, shall
be entitled to recover from the other party all of its costs and expenses,
including, without limitation, reasonable attorneys' fees.
6. WAIVER, MODIFICATION OR AMENDMENT. Unless otherwise expressly provided in
this Agreement and any documents expressly referred to herein, no waiver,
modification or amendment of any term, condition or provision of this
Agreement shall be valid, binding or of any effect unless made in writing,
expressly referring to this Agreement, signed by or on behalf of the
parties hereto, and specifying with particularity the nature and extent of
such waiver, modification or amendment. Any waiver by any party of any
provision hereof shall not affect or impair any other provision hereof. The
failure of either party to enforce at any time any of the provisions of
this Agreement shall not be construed to be a waiver of the right of such
party to subsequently enforce any such provisions.
7. NOTICES. All notices or other communications given under or in connection
with this Agreement shall be in writing and shall be considered to be
delivered when personally delivered or five (5) days after delivery to a
company or governmental entity providing
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delivery services in the ordinary course of business which guarantees delivery
within such five-(5) day period, with the delivery charge prepaid, addressed to
the proper party at its principal office as set forth above, or to such other
address as such party may hereafter designate by written notice to the other
party given pursuant to this paragraph.
8. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but together which shall
constitute one and the same instrument.
9. LEGAL RELATIONSHIP. Licensee and Licensor hereby acknowledge and agree that
nothing contained in this Agreement shall be deemed to create an
employment, agency, franchise, or other relationship between Licensee and
Licensor for any purpose whatsoever and that no relationship is intended or
created hereby other than the relationship of independent contractors.
Neither party shall have the right or authority to assume or create any
obligation or responsibility, express or implied, on behalf of, on account
of, or in the name of the other party, or to legally bind the other party
in any manner whatsoever.
10. HEADINGS. Section headings used herein are for convenience only and shall
not be construed to be a part of this Agreement or as a limitation of the
scope of the particular sections to which such headings refer.
11. INTERPRETATION AND SEVERANCE. The provisions of this Agreement shall be
applied and interpreted in a manner consistent with each other so as to
carry out the purposes and intent of the parties hereto, but if for any
reason any provision hereof is determined to be unenforceable or invalid,
such provision or such part hereof as may be unenforceable or invalid shall
be deemed severed from this Agreement, and the remaining provisions shall
be carried out with the same force and effect as if the provision or part
thereof had not been a part of this Agreement.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Iowa, and any proceedings for
enforcement hereof shall be brought in federal or state courts located in
Iowa. Licensor and Licensee consent and submit to the jurisdiction of said
courts and agree that service of process may be made by publication, by
registered or certified mail or in any manner provided under Iowa or
applicable federal law. Nothing herein shall prevent a party hereto from
joining the other party as additional defendants or third-party defendants
in any suit brought by or against such party in another forum if any issue
in said suit relates to the matters referred to herein.
13. ENTIRE AGREEMENT. This Agreement, including any exhibits attached hereto or
documents expressly referred to herein, contains the entire agreement
between Licensee and Licensor and supersedes and cancels any and all other
agreements, whether oral or in writing, between Licensee and Licensor with
respect to the matters referred to herein.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
LICENSOR: LICENSEE:
VITAL IMAGES, INC. COGNISEIS DEVELOPMENT, INC.
By: /S/ VINCENT ARGIRO By: /S/ PATRICK H. POE
----------------------------- -----------------------------
Vincent Argiro, President Patrick H. Poe, President
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EXHIBIT A
---------
DELIVERABLES
. All source code, user documentation, programmer documentation and supporting
files necessary to build VoxelGeo 2.0 on magnetic tape.
. Product Definition Statements and draft Software Requirement Specifications
for VoxelGeo 2.1 (planned release October 1995), and VoxelGeo 2.5 (planned
release March 1996).
. Copies of Existing Licenses that have been initiated by Licensor,
. Copies of CDDI Agreements.
. Copies of purchase orders from end-users relating to Existing Maintenance
Contracts.
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EXHIBIT B
---------
SUPPORTED ENVIRONMENT
The hardware/software environment necessary for Licensee to build VoxelGeo 2.0
consists of:
. Silicon Graphics Indy, Indigo2 or Onyx workstation with at least 64MB of RAM
and 200MB of free disk space running the IRIX 5.3 operating system.
. Silicon Graphics development tools and libraries as follows:
- IRIS Development Option for IRIX 5.3
- C++ 4.0 for IRIX 5.3
- OpenInventor 3D Toolkit Development Option for IRIX 5.3
- Digital Media Development Software Libraries
- Quick Time 1.0 Compressor Library
The hardware/software environment necessary for Licensee to run VoxelGeo 2.0
consists of:
. Silicon Graphics Indy XZ, Indigo2 XZ or EX, Crimson RE or Onyx VTX or RE2
workstation with at least 96MB of RAM and 200MB of free disk space.
- For Indy XZ and Indigo2 XZ or EX, SGI patch 158 to IRIX 5.3 is required
- For Crimson RE or Onyx VTX or RE2, SGI patch 154 to IRIX 5.3 is required
19
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EXHIBIT C
---------
LISTING OF EXISTING LICENSES
(ATTACHED)
20
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EXHIBIT D
---------
LISTING OF EXISTING MAINTENANCE CONTRACTS
(ATTACHED)
21
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EXHIBIT E
---------
LISTING OF CDDI AGREEMENTS
(ATTACHED)
22
<PAGE>
EXHIBIT 10.15
COMMERCIAL LEASE
THIS AGREEMENT, made this day of , 1993 by and between the
Douglas Greenfield IRA Trust, as Landlord, and Vital Images, Inc., as Tenant:
WITNESSETH: That the said Landlord does hereby demise and lease to Tenant and
Tenant does hereby hire for Landlord the following described premises:
The South Eighty-two (82) feet of Lots Nine (9) and Ten (10) in Block
Eighteen (18), Henn. Williams. and Company's Addition to the City of
Fairfield, Jefferson County, Iowa (located at 505 North Fourth Street).
Tenant will be leasing the entire building.
together with all appurtenances thereto and with easements of ingress and agrees
necessary and adequate for the conduct of Tenant's business as hereinafter
described. for the term of forty-eight (48) months, running and including the
1st day of June, 1993. for the use in Tenant's regular business of computer
software development and marketing or in any other legitimate business, subject
to the terms and conditions of this lease.
AMOUNT OF RENTAL Tenant covenants to pay Landlord at Landlord's address at 808
North 'B' Street, Fairfield, Iowa 52556, or such other place as Landlord shall
designate in writing as rent for said premises, the sum of $5,695 per month
payable in advance commencing on June 1. 1993. Commencing on January 1, 1994.
Tenant shall pay $5,945 per month, payable in advance. Commencing on June 1,
1994, Tenant shall pay $6,195 for remainder of lease period.
COST OF LIVING ADJUSTMENT The aforementioned rent shall increase at 7 percent
per lease period at the time of renewal if Tenant exercises option to renew
lease.
OPTION OF RENEWAL Tenant shall have the option to extend this lease for one
lease period (four years) by giving Landlord written notice of this option to
extend 60 days prior to the termination of any lease period.
SECURITY DEPOSIT A security deposit of $1,500 shall be held by the Landlord as
security against rent due, damage, failure to fulfill rental obligations, and
abandonment by Tenant, and the excess will be returned within 14 days after
tenant terminates their tenancy, moves out, and demands its return.
In addition to the above, Landlord and Tenant mutually covenant and agree
as follows:
TENANT'S MAINTENANCE AND REPAIR OF PREMISES Except as hereinafter provided
Tenant shall maintain and keep the interior of the premises in good repair, free
of refuse and rubbish, and be responsible for all janitorial services. including
trash removal, and shall return the same at the expiration or termination of
this lease in as good condition as received by Tenant, ordinary wear and tear
excepted. Landlord requires Tenant to use chair mats with all desk chairs.
Tenant is required to turn lights off after business hours with the exception of
necessary security lights. If alterations, additions, and/or installations have
been made by Tenant as
<PAGE>
provided for in this lease, Tenant shall not be required to restore the premises
to the condition in which they were prior to such alterations, additions and/or
installations except as hereinafter provided. Tenant shall keep sidewalks and
steps free of snow and ice for safe usage for Tenant's personnel, guests and
customers.
TENANT'S ALTERATIONS, ADDITIONS, INSTALLATIONS, AND REMOVAL THEREOF Tenant may,
at Its own expense, either at the commencement of or during the term of this
lease, make such alterations in and/or additions to the leased premises
including alterations as may be necessary to fit the same for its business, only
upon first obtaining the written approval of Landlord as to the additions and/or
alterations as well as the materials to be used and the manner of making such
alterations and/or additions. Landlord has the right to withhold approval,
without cause, of alterations and/or additions proposed to be made by Tenant.
All alterations, additions, or installations shall become the property of
Landlord without liability on Landlord's part to pay for the same excluding
equipment.
LANDLORD'S MAINTENANCE AND REPAIR OF PREMISES Landlord shall, without expense
to Tenant, maintain and make all necessary repairs to the foundations, load
bearing walls, furnace, water heater, air conditioner, roof. gutter, downspouts,
water mains, gas and sewer lines, sidewalks, and parking lot, on or appurtenant
to the leased premises, upon Landlord reasonably determining the necessity
therefore.
UTILITIES Tenant shall pay all charges for water, gas and electricity, and all
other utilities consumed by Tenant upon the leased premises.
PARKING The tenants in the top two floors are assigned the parking area on the
west side of the building only. The tenants in the ground floor are assigned
the parking on the south side of the building only.
OBSERVANCE OF LAWS Tenant shall duly obey and comply with all public laws,
ordinances, rules or regulations related to the use of the leased premises, and
shall maintain its business in such a manner as will increase insurance rates of
Landlord on premises.
DAMAGE BY FIRE, ETC. Damage Repairable Within One Hundred Eighty (180) Days.
In the event the said premises shall be damaged by fire, storm, water, or other
unavoidable cause to an extent repairable in the reasonable judgment of Landlord
within one hundred eighty (180) days from the date of such damage, Landlord
shall forthwith proceed to repair such damage. During the period of repair,
Tenant's rent shall abate in whole or in part depending upon the use of said
premises for the normal purposes of Tenant's business. In the event that
Landlord shall fail to promptly commence repair of such damage, or having
commenced the same shall fail to prosecute such repair to completion with due
diligence after notice from Tenant, Tenant may at Tenant's option upon fifteen
(15) days written notice to Landlord, make or complete such repair and deduct
the cost thereof from the next ensuing installment or installments of rent
payable under this lease.
2
<PAGE>
Damage Not Repairable Within One Hundred Eighty (180) Days. In the event
the said premises shall be damaged by fire, storm, water, or other unavoidable
cause, to an extent not reasonably repairable within one hundred eighty (180)
days from the date of such damage in the judgment of the Landlord this lease
shall terminate as of the date of such damage.
SIDEWALK ENCUMBRANCES Tenant shall neither encumber nor obstruct the sidewalk
in front of, or any entrance to, the building on the leased premises.
SIGNS Tenant shall have the right to erect, affix, or display such sign or sign
advertising the business as Tenant may consider necessary or desirable, subject
to approval by Landlord, and that same is in conformity with other signs of
tenants of neighboring property, subject to all applicable municipal ordinances
and regulations with respect thereto.
TERMINATION BY REASON OF DEFAULT In the event that either of the parties hereto
shall fail to perform any covenant required to be performed by such party under
the terms and provisions of this lease, including Tenant's covenant to pay rent,
and such failure shall continue unremedied or uncorrected for a period of
fifteen (15) days after the service of written notice upon such party by the
other party hereto, specifying such failure, this lease may be terminated, at
the option of the party serving such notice, at the expiration of such period of
fifteen (15) days; provided, however, that such termination shall not relieve
the party so failing from liability to the other party for such damages as may
be suffered by reason of such failure.
CONDEMNATION In the event that the leased premises shall be taken for public
use by the city, state, federal government, public authority or other
corporation having the power of eminent domain, then this lease shall terminate
as of the date on which possession thereof shall be taken for such public use,
or, at the option of the Tenant, as of the date on which the premises shall
become unsuitable for Tenant's regular business by reason of such taking. If
only a part of the lease premises shall be taken and Tenant shall remain a
tenant of the building, the rent shall be abated proportionately.
ASSIGNMENT Tenant may not assign this lease or sublet the premises or any part
thereof without the written consent of Landlord which shall not be unreasonably
withheld. If any assignment or sublease is made by Tenant with Landlord's
consent, Tenant shall remain liable as surety under the terms hereof
notwithstanding such assignment or sublease. Landlord has granted consent to
allow Tenant to sublease the ground floor of the building for the initial year
of the lease or part thereof, Sublease may be to any one or more persons.
Landlord shall be permitted to assign this lease.
TAXES Landlord shall pay all taxes, assessments, and charges which shall be
assessed and levied upon the leased premises or any part thereof during this
said term as they become due.
TENANT'S LIABILITY INSURANCE During the term of this lease, Tenant at his own
expense shall carry public liability insurance reasonably sufficient to protect
Tenant from liability.
3
<PAGE>
DISPUTE BY ARBITRATION With the exception of actions seeking injunctive relief
which may also be brought in any court of competent jurisdiction, any disputes
hereunder shall be settled by arbitration in Fairfield, Iowa in accordance with
the Commercial Arbitration Rules of the American Arbitration association, and
judgment thereon may be entered in any court of competent jurisdiction.
LANDLORD'S RIGHT TO ENTER PREMISES Tenant shall permit Landlord and Landlord's
agents to enter at all reasonable times to view the state and condition of the
premises or to make such alterations or repairs therein as may be necessary for
the safety and preservation thereof, or for any other reasonable purposes.
Tenant shall also permit Landlord or Landlord's agents, on or after Sixty (60)
days next preceding the expiration of the term of this lease to show the
premises to prospective tenants at reasonable times, and to place notices on the
front of said premises, or on any part thereof, offering the premises for lease
or for sale.
TERMINATION OF LEASE Signing of this lease terminates any previous lease
between Landlord and Tenant as of June 1, 1993.
QUIET ENJOYMENT Upon the Tenant performing its obligations under this lease,
Tenant shall peaceably hold and enjoy the determined premises of the term of
this lease free from molestation, eviction, or disturbance by the Landlord.
ATTORNMENT AGREEMENT If any mortgages presently exist on the property, Landlord
will obtain an attornment agreement from the mortgagee within 45 days whereby
the mortgagee agrees to recognize this lease if it succeeds to possession of the
property. Tenant will have the right to record a short form of the lease if
Tenant deems it necessary to protect its lease as against failed mortgages.
AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and agreement herein
contained shall inure to the benefit of and be equally binding upon the
respective executors, administrators, heirs, successors and assigns of the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this lease the day and year
first above written.
TENANT LANDLORD
------ --------
VITAL IMAGES, INC.
/s/ Elizabeth Kohler /s/ Douglas W. Greenfield
- ----------------------------- ------------------------------
AUTHORIZED OFFICER WITH POWER DOUGLAS W. GREENFIELD
AND AUTHORITY TO BIND ABOVE
COMPANY
4
<PAGE>
EXHIBIT 10.16
LEASE AGREEMENT
BY AND BETWEEN
ACKY-3100 LAKE LIMITED PARTNERSHIP
AND
VITAL IMAGES, INC.
January 31, 1997
<PAGE>
TABLE OF CONTENTS
1. LEASE OF PREMISES
2. DEFINITIONS
3. EXHIBITS AND ADDENDA
4. DELIVERY OF POSSESSION
5. RENT
6. PROJECT OPERATING COSTS
7. INTEREST AND LATE CHARGES
8. SECURITY DEPOSIT
9. UTILITY SERVICES
10. TENANT'S USE OF THE PREMISES
11. CONDITION OF THE PREMISES
12. CONSTRUCTION, REPAIRS AND MAINTENANCE
13. ALTERATIONS AND ADDITIONS
14. LEASEHOLD IMPROVEMENT; SECURITY INTEREST
15. RULES AND REGULATIONS
16. CERTAIN RIGHTS RESERVED BY LANDLORD
17. ASSIGNMENT AND SUBLETTING
18. HOLDING OVER
19. SURRENDER OF PREMISES
20. DESTRUCTION OR DAMAGE
21. EMINENT DOMAIN
22. INDEMNIFICATION
23. INSURANCE
24. WAIVER OF SUBROGATION
25. SUBORDINATION AND ATTORNMENT
26. TENANT ESTOPPEL CERTIFICATES
27. TRANSFER OF LANDLORD'S INTEREST
28. DEFAULT
29. BROKERAGE FEES
30. NOTICES
31. QUIET ENJOYMENT
32. OBSERVANCE OF LAW
33. FORCE MAJEURE
34. CURING TENANT'S DEFAULTS
35. SIGN CONTROL
36. HAZARDOUS SUBSTANCES
37. RELOCATION OF PREMISES - INTENTIONALLY
DELETED
38. PUBLIC ACCOMMODATIONS LAWS
39. MISCELLANEOUS
<PAGE>
THE VITAL IMAGES, INC. LEASE
This Lease between Acky-3100 Lake Limited Partnership, a Minnesota limited
partnership, ("Landlord"), and Vital Images, Inc., an Iowa corporation
("Tenant"), is dated as of January 31, 1997.
1. LEASE OF PREMISES
In consideration of the Rent (as defined in Section 5.01) and the provisions of
this Lease, Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown on the floor plan attached hereto as Exhibit A, and further
described in Section 2.01. The Premises are located within the Building and
Project described in Section 2.13. Tenant shall have the nonexclusive right
(unless otherwise provided herein) in common with Landlord, other tenants,
subtenants and invitees to use the Common Areas (as defined in Section 2.10).
2. DEFINITIONS
As used in this Lease, the following terms shall have the following meanings:
2.01 Premises: (a) Premises A: that portion of the Building on the first (1st)
floor containing approximately 10,370 square feet of Rentable Areas, shown
on Exhibit "A", located in and known as Lake Pointe Corporate Centre; (b)
Premises B: that portion of the Building on the second (2nd) floor
containing approximately 3,846 square feet of Rentable Area shown on
Exhibit "A", located in and known as Lake Pointe Corporate Centre (Premises
A and Premises B are collectively referred to herein as the "Premises").
2.02 Commencement Date:
(a) Premises A - February 10, 1997
(b) Premises B - September 1, 1997
2.03 Expiration Date: January 31, 2002, unless otherwise extended or sooner
terminated in accordance with the provisions of this Lease.
2.04 Term: The period commencing on the Commencement Date and expiring at
midnight of the Expiration Date or as extended by the exercise of any
option to extend the Term.
2.05 Security Deposit (Section 8): $150,000.00.
2.06 Intentionally deleted.
2.07 Monthly Installments of Base Rent:
<TABLE>
Period Rental Rate Per Monthly Installments
Square Foot
<S> <C> <C>
2/10/97-8/31/97 $9.50 $8,209.58
9/1/97-1/31/98 $9.50 $11,254.33
2/1/98-1/31/99 $9.88 $11,704.51
2/1/99-1/31/00 $10.28 $12,178.37
2/1/00-1/31/01 $10.69 $12,664.09
2/1/01-1/31/02 $11.11 $13,161.64
</TABLE>
<PAGE>
2.08 Monthly Installments of Improvements Rent:
<TABLE>
<CAPTION>
Period Rental Rate Per Monthly Installments
Square Foot
<S> <C> <C>
2/1/97-8/31/97 $1.50 $1,296.25
9/1/97-1/31/02 $1.50 $1,777.00
</TABLE>
2.09 Tenant's Proportionate Share: 21.6% as of the Commencement Date for
Premises A and 29.6% as of the Commencement Date for Premises B.
Tenant's Proportionate Share shall equal a fraction, the numerator of
which is the Rentable Area of the Premises, and the denominator of
which is the Rentable Area of the Building, as determined by Landlord
from time to time. Should the area of the Premises or of the Building
change, such share shall be adjusted and shall equal a fraction, the
numerator of which is the Rentable Area of the Premises, and the
denominator of which is the Rentable Area of the Building, as
determined by Landlord from time to time.
2.10 Common Area: All areas designated by Landlord for common use or
benefit of all tenants, their customers or invitees within the
Building and Project, including but not limited to, parking lots,
landscaped and vacant areas, drainage ditches, passages for trucks and
automobiles, areaways, roads, walks, curbs, corridors, malls, roof,
lanes and arcades together with public facilities such as building
lobbies, restrooms, comfort rooms, lounges, drinking fountains,
toilets, stairs, ramps, elevators, shelters, porches, bus stations and
loading docks, with facilities appurtenant to each. The Common Area
shall not include commercial areas intended for renting or roads
maintained by public authority. Landlord may expand, contract or
change said Common Area from time to time as Landlord deems desirable,
with a view to the improvement of the convenience and use of Common
Area by tenants, their employees and customers.
2.11 Estimated Project Operating Cost: $5.30 psf per annum.
2.12 Estimated Real Estate Taxes: $1.45 psf per annum.
2.13 Project: The building of which the Premises are a part (the
"Building") and any other buildings or improvements on the real
property (the "Property") located at 3100 West Lake Street,
Minneapolis, MN 55416-4510 and further depicted on Exhibit B. The
project is known as Lake Pointe Corporate Centre.
2.14 Rentable Area: As to the Premises, the number of rentable square feet
of floor area as may from time to time be subject to lease by Tenant
and, as to the Project, the number of rentable square feet of floor
area as may from time to time be subject to lease or available for
leasing in the Project, in each case, as determined by Landlord and
applied on a consistent basis throughout the Project.
2.15 Parking: Tenant shall be permitted, at no additional cost, to park 4
cars per 1,000 square feet of Rentable Area of the Premises on a non-
exclusive basis in the area(s) designated by Landlord for parking.
Tenant shall abide by any and all parking regulations and rules
established from time to time by Landlord.
2.16 Landlord's Mailing Address: Acky-3100 Lake Limited Partnership, 3100
West Lake Street, Suite 100, Minneapolis, Minnesota 55416-4510.
With a copy to the Building Manager: Ackerberg Properties, Inc., 3100
West Lake Street, Suite 100, Minneapolis, MN 55416-4510.
2.17 Tenant's Mailing Address: Vital Images, Inc., 3100 West Lake Street,
Suite 100, Minneapolis, Minnesota 55416-4510.
2.18 Tenant's Work: shall have the meaning set forth on Exhibit C attached
hereto.
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<PAGE>
2.19 Projected Delivery Date: shall be February 10, 1997 with respect to
Premises A and not later than September 1, 1997 with respect to
Premises B.
2.20 State: The State of Minnesota.
2.21 Tenant's Use Clause (Article 10): General office use
2.22 Broker(s)
Landlord's: Ackerberg Properties, Inc.
Tenant's: Garfield Clark & Associates
3. EXHIBITS AND ADDENDA
The exhibits and addenda listed below (unless lined out) are incorporated by
reference in this Lease:
<TABLE>
<CAPTION>
<S> <C>
Addendum 1 Option to Extend Term
Addendum 2 Option to Expand
Addendum 3 Right of First Offer
Addendum 4 Termination Option
Exhibit A Floor Plan showing the Premises.
Exhibit B Site Plan of the Project / Legal Description.
Exhibit C Tenant's Work.
Exhibit D General Specifications for Tenant's Alterations or Improvements
</TABLE>
4. DELIVERY OF POSSESSION
If Landlord does not deliver possession ("Deliver Possession") of Premises A or
Premises B to Tenant on the applicable Commencement Date, Landlord shall not be
liable for such failure, the Expiration Date shall not change and the validity
of this Lease shall not be impaired, but Rent with respect to Premises A or
Premises B, as the case may be, shall be abated until delivery of possession.
"Delivery of possession" shall be deemed to occur on the date Landlord notifies
Tenant that Premises A or Premises B, as the case may be, are ready for
occupancy. If Landlord permits Tenant to enter into possession of either
Premises A or Premises B before the applicable Commencement Date, such
possession shall be subject to the provisions of this Lease, including, without
limitation, the payment of Rent. Notwithstanding the foregoing, if for any
reason Landlord is unable to Deliver Possession of Premises A or Premises B to
Tenant on or prior to the date falling sixty (60) days following the applicable
Commencement Date and such failure does not result either from Force Majeure
Events (as defined in Section 9.05 below) or Tenant caused delays, then (a)
Landlord shall not be subject to any liability therefor and (b) such delay and
Landlord's ability to Deliver Possession shall not effect either the validity of
this Lease or the obligations of either Landlord or Tenant hereunder or be
deemed to extend the Expiration Date; provided, however, that under such
circumstances Tenant shall have the right to terminate this Lease, by giving
written notice of the same to Landlord at any time following the end of such 60-
day period and prior to the first to occur of (a) the thirtieth (30th) day
following the end of such 60-day period and (b) the date Landlord does Deliver
Possession which termination shall be effective upon receipt of such notice.
5. RENT
5.01 Definition of Rent. All costs (other than Base Rent and Improvement
Rent) which Tenant is required or agrees to pay to Landlord under this
Lease shall be deemed additional rent (which, together with the Base
Rent and Improvement Rent is sometimes referred to as "Rent"). Rent
shall be paid to the Landlord or at such place as Landlord may from
time to time designate in writing, without any prior demand therefor
and without deduction or offset, in lawful money of the United States
of America.
5.02 Payment of Rent. The monthly installments of Rent shall be payable in
advance on or before the first day of each calendar month of the Term.
If the Term begins (or ends) on other than the first (or
3
<PAGE>
last) day of a calendar month, the Rent for the partial month shall be
prorated on a per diem basis. Tenant shall pay Landlord the first
Monthly Installment of Rent when Tenant executes the Lease.
5.03 Allocation of Payments. Any payment by Tenant of an amount less than
the Rent provided for in this Lease shall be applied to the earliest
due Rent. No endorsement on any check or acceptance of any payment
shall be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover
the balance of the Rent or pursue any other remedy provided for in
this Lease.
6. PROJECT OPERATING COSTS
6.01 Definition of Project Operating Costs. Tenant agrees to pay as Rent,
Tenant's Proportionate Share of all costs, expenses and obligations
attributable to the Project and its operation (the "Project Operating
Costs") as provided below. The term "Project Operating Costs" shall
include all those items described in the following subparagraphs a.
and b.
a. All taxes, assessments, water and sewer charges and other similar
governmental charges due and payable on or attributable to the
Building or Project or their operation, including without
limitation, (1) real property taxes or assessments due and
payable against the Building or Project ("Real Estate Taxes"),
(2) any and all costs, including attorney's fees, incurred by
Landlord in contesting the amount of any taxes or assessments
levied against the Building or the Project provided any refunds
resulting from such contest shall be credited against Project
Operating Costs in the year received, and (3) any tax measured by
gross rentals received from the leasing of the Premises, Building
or Project, excluding any net income, franchise, capital stock,
estate or inheritance taxes imposed by the State or federal
government or their agencies, branches or departments; provided
that if at any time during the Term any governmental entity
levies, assesses or imposes on Landlord any (i) general or
special, ad valorem or specific, excise, capital levy or other
charge directly on the Rent received under this Lease or on the
rent received under any other leases of space in the Building or
Project, or (ii) any license fee, excise or franchise tax, or
charge measured by or based, in whole or in part, upon such rent,
or (iii) any transfer, transaction, or similar tax, or
assessment, based directly or indirectly upon the transaction
represented by this Lease, or (iv) any occupancy, use, per capita
or other tax or charge based directly or indirectly upon the use
or occupancy of the Premises or other premises within the
Building or Project, then any such taxes, assessments, levies and
charges shall be deemed to be included in the term Project
Operating Costs. For purposes of this subsection, if any
assessment is payable in installments, Tenant shall only be
obligated to pay its Proportionate Share of any such assessment
over the maximum number of installments permitted by the
assessing authority and shall only be liable for any such
installments due during the Term as and when such installments
become due and payable. Tenant shall not be liable for any such
installments that are due either before or after the Term;
provided, however, that Tenant's liability for Real Estate Taxes
(including assessments payable in installments) shall be prorated
for the years in which this Lease commences and terminates.
b. The total cost incurred by Landlord in owning, operating, and
maintaining the Project, in a manner deemed by Landlord
reasonable and appropriate and for the best interests of the
tenants of the Project, including, without limitation, management
fees (not to exceed 5% of gross receipts of the Project), all
costs and expenses (relating to the land, Common Area and
improvements) of operating, maintaining, repairing, lighting,
cleaning, painting, striping, inspecting, insuring (including but
not limited to liability insurance for personal injury, death and
property damage, insurance against fire, theft or other
casualties, worker's compensation insurance, insurance covering
personnel engaged in the operation, administration, maintenance
and repair of the Project, insurance against liability for
defamation and claims of false arrest, and Landlord's plate glass
insurance), removing of
4
<PAGE>
snow, ice, debris and surface water, renting of music, regulation
of traffic, pest control, utilities, janitorial service, window
washing, sewer and security (including the cost of uniforms,
equipment and all employment taxes, electronic intrusion and fire
control devices and telephone monitoring and alert systems),
complying with laws and regulations (including improvements or
changes required by new laws or regulations), costs associated
with a transportation demand management program, costs of
replacing or retrofitting HVAC systems to comply with laws or
regulations, charges related to indoor air quality control, fees
for permits and licenses, reasonable fees of attorneys,
accountants and other professionals, employment costs in
connection with the Project, as well as all costs and expenses of
repairs and replacement of gutters, downspouts, roofs, building
service equipment, paving, curbs, sidewalks, walkways, roadways,
parking surfaces, landscaping, drainage, equipment and fixtures.
It is the intention of Landlord and Tenant that this Lease be
fully net to Landlord; and accordingly Project Operating Costs
shall include all costs and expenses incurred by Landlord in
connection with the Project except for costs of leasing to
tenants, initial or expansion capital construction costs,
depreciation of initial or expansion capital construction costs,
and interest on money borrowed for such construction costs.
Notwithstanding anything contained in this Article 6 to the
contrary, any Project Operating Costs which are properly charged
to a capital account shall not be included in Project Operating
Costs in a single year but shall instead be amortized over their
useful lives, as determined by Landlord in accordance with
generally accepted accounting principles, and only the annual
amortization amount together with interest at the rate of nine
percent (9%) per annum shall be included in Project Operating
Costs for a particular year.
c. If the Project does not have ninety-five percent (95%) occupancy
during an entire calendar year, then the variable cost component
of Project Operating Costs (i.e. the component of Project
Operating Costs that may vary depending upon the occupancy level
of the Project) shall be equitably adjusted so that the total
amount of Project Operating Costs equals the total amount which
would have been paid or incurred by Landlord had the Project been
ninety-five percent (95%) occupied for the entire calendar year.
In no event shall the Landlord be entitled to receive from Tenant
and any other tenants in the Project an aggregate amount in
excess of the actual Project Operating Costs as a result of the
foregoing provisions.
6.02 Payment of Project Operating Costs. Tenant's Proportionate Share of
Project Operating Costs shall be payable by Tenant to Landlord as
follows:
a. To provide for current payments of Tenant's Proportionate Share
of Project Operating Costs, Tenant shall pay as additional rent,
an amount equal to Tenant's Proportionate Share of the Project
Operating Costs payable during each calendar year, as estimated
by Landlord from time to time. Such payments shall be made in
monthly installments, commencing on the first day of the month
following the month in which Landlord notifies Tenant of the
amount it is to pay hereunder and continuing until the first day
of the month following the month in which Landlord gives Tenant a
new notice of estimated Project Operating Costs.
b. On or before April 1 of each calendar year (or as soon thereafter
as is practical), Landlord shall deliver to Tenant a statement
setting forth Tenant's Proportionate Share of the actual Project
Operating Costs for the preceding calendar year. If Tenant's
Proportionate Share of the actual Project Operating costs for the
previous calendar year exceeds the total of the monthly payments
made by Tenant for such year, Tenant shall pay Landlord the
amount of the deficiency within thirty (30) days of the receipt
of the statement. If such total exceeds Tenant's Proportionate
Share of the actual Project Operating Costs for such calendar
year, the Landlord shall credit against Tenant's next ensuing
monthly installment(s) of Rent an amount equal to the difference
until the credit is exhausted. If a credit is due from Landlord
5
<PAGE>
on the Expiration Date, Landlord shall pay Tenant the amount of
the credit on or before the next succeeding April 1. The
obligations of Tenant and Landlord to make payments required
under this Section 6.02 shall survive the Expiration Date.
c. Tenant's Proportionate Share of Expenses in any lease year having
less than 365 days shall be prorated on a daily basis.
d. If any dispute arises as to the amount of any additional rent due
hereunder, Tenant shall have the right after reasonable notice
and at reasonable times to inspect Landlord's accounting records
at Landlord's accounting office and, if after such inspection
Tenant still disputes the amount of additional rent owed, a
certification as to the proper amount shall be made by Landlord's
certified public accountant, which certification shall be final
and conclusive. Tenant agrees to pay the cost of such
certification unless it is determined that Landlord's original
statement overstated Project Operating Costs by more than five
percent (5%).
6.03 Other Taxes Payable by Tenant. Tenant shall reimburse Landlord upon
demand for all taxes payable by Landlord (other than net income taxes)
which are not otherwise reimbursable under this Lease, whether or not
now customary or within the contemplation of the parties, where such
taxes are upon, measured by or reasonably attributable to (a) the cost
or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises, or the cost or value of any
leasehold improvements made to the Premises, regardless of whether
title to such improvements is held by Tenant or Landlord; (b) the
gross or net Rent payable under this Lease, including, without
limitation, any rental or gross receipts tax levied by any taxing
authority with respect to the receipt of the Rent hereunder; (c) the
possession, leasing, operation, management, maintenance, alteration,
repair, use or occupancy by Tenant of the Premises or any portion
thereof; or (d) this transaction or any document to which Tenant is a
party creating or transferring an interest in the Premises.
7. INTEREST AND LATE CHARGES
If Tenant fails to pay any Rent or other charges under the terms of this Lease
within seven (7) days after the due date, the unpaid amounts shall bear interest
from the due date at the lesser of fifteen percent (15%) per annum or the
maximum rate then allowed by law. Tenant acknowledges that the late payment of
Rent will cause Landlord to lose the use of that money and incur costs and
expenses not contemplated under this Lease, including without limitation,
mortgage penalties, collection costs and accounting expenses, the exact amount
of which is extremely difficult to ascertain. Therefore, in addition to
interest, if any Rent is not received by Landlord within seven (7) days from the
date it is due, Tenant shall pay Landlord a late charge equal to five percent
(5%) of such amount. Landlord and Tenant agree that this late charge represents
a reasonable estimate of such costs and expenses and is fair compensation to
Landlord for the loss suffered from such non-payment by Tenant.
8. SECURITY DEPOSIT
8.01 Subject to the provisions of Section 8.04 below, Tenant agrees to
deposit with Landlord the Security Deposit set forth at Section 2.05
upon execution of this Lease, as security for Tenant's performance of
its obligations under this Lease. Landlord and Tenant agree that the
Security Deposit may be commingled with other funds of Landlord but
Landlord agrees to invest the Security Deposit in an interest bearing
money market account, certificate of deposit, or similar investment
vehicle or pay interest on the Security Deposit as if so invested. Any
interest earned on the Security Deposit shall be deemed part of the
"Security Deposit" for purposes of this Lease. Notwithstanding the
foregoing, Tenant has the option of posting the Security Deposit with
Landlord in the form of a Letter of Credit (as defined herein). As
used herein, the term "Letter of Credit" shall mean an unconditional
letter of credit in favor of Landlord and issued by a bank and in such
form as is satisfactory to Landlord. If Tenant so elects to post a
Letter of Credit as the Security Deposit, Tenant shall deposit with
Landlord not less than thirty (30) days prior to the expiration of the
Letter of Credit (and not less than thirty (30) days prior to the
expiration date of each renewal Letter of Credit deposited by Tenant
6
<PAGE>
hereunder), a renewal Letter of Credit in form and content identical
to the original Letter of Credit deposited hereunder. If Tenant fails
to so deposit any such renewal Letter of Credit on or before the date
such deposit is to be made and does not cure such failure within five
(5) days after notice thereof from Landlord, Landlord may draw the
entire proceeds of the Letter of Credit then on deposit with
Landlord and the proceeds so drawn shall comprise the Security Deposit
and shall be held and applied by Landlord in accordance with the
provisions of this Lease. In the event Tenant fails to perform any of
its obligations under this Lease, Landlord may draw the proceeds of
the Letter of Credit (insofar as the same constitute the Security
Deposit) and apply such proceeds in accordance with the provisions of
Section 8.02 of this Lease.
8.02 If Tenant fails to pay Rent or any other amount when due, or fails to
perform any of the terms hereof and such failure extends beyond any
notice and cure periods provided in this Lease, Landlord may use all
or any portion of the Security Deposit for amounts then due and
unpaid, for payment of any amount for which Landlord has become
obligated as a result of Tenant's default, and for any loss sustained
by Landlord as a result of Tenant's default. Landlord may use this
deposit without prejudice to any other remedy Landlord may have. If
Landlord uses any of the Security Deposit, Tenant shall, within
fifteen (15) days after written demand therefor, restore the Security
Deposit to the full amount originally deposited; Tenant's failure to
do so shall constitute an act of default hereunder and Landlord shall
have the right to exercise any remedy provided for in Article 28.
Within thirty (30) days after the Term has expired or Tenant has
vacated the Premises, whichever shall last occur, and provided Tenant
is not then in default on any of its obligations hereunder, Landlord
shall return the Security Deposit to Tenant. If Landlord sells its
interest in the Premises, Landlord may deliver the Security Deposit to
the purchaser of Landlord's interest and thereupon be relieved of any
further liability or obligation with respect to the Security Deposit.
8.03 Notwithstanding the foregoing, in the event Tenant is not then in
default on any of its obligations hereunder and has not theretofore
defaulted, then effective as of the third (3rd) anniversary of the
Commencement Date for Premises A, the Security Deposit shall be
reduced by $50,000.00 (i.e., the remaining Security Deposit shall
equal $100,000.00) and, accordingly, (a) if the Security Deposit is in
the form of cash, Landlord shall return $50,000.00 to Tenant within
thirty (30) days after the third (3rd) anniversary of the Commencement
Date for Premises A or (b) if a Letter of Credit is posted as the
Security Deposit, Tenant may replace the Letter of Credit with a
Letter of Credit in the amount of $100,000.00 on or after the third
(3rd) anniversary of the Commencement Date for Premises A in
accordance with the provisions of Section 8.01 regarding replacement
of a Letter of Credit.
8.04 Notwithstanding the foregoing provision of this Article 8, if at any
time during the Term, (a) Tenant is not in default on any of its
obligations hereunder and has not therefore defaulted, and (b)
Tenant's "net worth" is in excess of $1,000,000.00 and Tenant has, in
the aggregate, cash on hand and marketable securities in excess of
$3,000,000.00 (the "Security Deposit Release Requirements"), then
Landlord shall return the Security Deposit to Tenant within thirty
(30) days after Tenant's satisfaction of the Security Deposit Release
Requirements; provided, however, that if at any time during the Term
Landlord determines that the Security Deposit Release Requirements are
no longer satisfied, Tenant shall be required within ten (10) days
after notice of the same from Landlord to post the Security Deposit in
accordance with the foregoing provisions of this Article 8. In
connection with Landlord's ability to determine whether the Security
Deposit Release Requirements are satisfied on an ongoing basis, (a) if
Tenant is a publicly held corporation, Tenant agrees to furnish
Landlord (i) on a quarterly basis during the Term its current 10 Q
statement filed with the Securities and Exchange Commission ("SEC")
which shall include unaudited financial statements certified as true
and correct by the chief financial officer of Tenant and (ii) on an
annual basis during the Term its current 10 K filed with the SEC which
shall include its current audited financial statements together with
an opinion from a nationally recognized firm of certified public
accountants that the same are true and correct or ((b) if Tenant is
not a publicly held corporation. Tenant shall furnish Landlord (i) on
a quarterly basis during the Term its current unaudited financial
statements certified as true and
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<PAGE>
correct by the chief financial officer of Tenant and (ii) on an annual
basis during the Term its current audited financial statements
certified as true and correct by a nationally recognized firm of
certified public accountants; it being further understood that if
Tenant fails to timely and properly furnish Landlord with financial
statements in accordance with the terms and conditions of this
sentence, the same shall constitute a failure by Tenant to satisfy the
Security Deposit Release Requirements. Landlord acknowledges that as
of the date hereof Tenant has satisfied the Security Deposit Release
Requirements and accordingly shall have no duty to post the Security
Deposit unless and until Landlord determines that the Security Deposit
Release Requirements are no longer satisfied.
9. UTILITY SERVICES
- -- ----------------
9.01 Electricity, Gas, Water and Sewer. Landlord agrees to provide mains,
conduits and other facilities to supply gas, water, sewer and
electricity to the Premises. Tenant shall pay as part of Tenant's
Proportionate Share of Project Operating Costs for all electricity,
gas, water, rubbish removal and other utilities used in the Project
(including the Premises).
9.02 Heating, Air Conditioning and Ventilating. Landlord agrees at its own
cost to provide a building standard system designed to heat, air
condition and ventilate the Premises, the Common Areas and other
occupied Areas of the Project. Tenant agrees to accept and use such
heating, air conditioning and ventilation system in the Premises and
to allow Landlord access to maintain, repair and replace the system
and all other HVAC equipment serving the Project, including equipment
serving other tenants, and such cost shall be considered part of
Project Operating Costs, subject to reimbursement from Tenant in the
amount of Tenant's Proportionate Share. The HVAC costs shall reflect
all costs and expenses of full operation between the hours of 7:00
a.m. - 6:00 p.m. Monday through Friday and 9:00 a.m. - 12:00 p.m.
Saturday. Should Tenant require additional HVAC outside these hours,
Tenant shall pay an additional charge for such service on an hourly
basis (at Landlord's actual cost) as additional Rent. Such charge
shall be determined by Landlord and transmitted to Tenant in writing,
which writing shall include a reasonable breakdown of such charge.
9.03 Rubbish Removal. Landlord shall be responsible for contracting for all
removal of trash, rubbish, debris and recyclables generated by Tenant.
Tenant shall be required to pay rubbish removal and recycling fees
through Project Operating Costs based on Tenant's Proportionate Share.
Upon written notice from Landlord that such a program has been
implemented, Tenant shall participate and fully cooperate with any
recycling program instituted by Landlord. If Tenant fails to do so,
Tenant shall pay a penalty equal to $.25 (twenty-five cents) per
square foot of Rentable Area in the Premises per year, prorated for
the period of non-compliance.
9.04 Discontinuance of Service. Whenever any bills for rent, operating
costs, real estate taxes or any other service, are not paid by Tenant
prior to the expiration of any applicable notice and cure periods
provided in this Lease, Landlord reserves the right upon notice to
Tenant to discontinue service, without liability to Tenant. No such
action by Landlord, or notice thereof, shall be construed as an
eviction or disturbance of possession or as an election by Landlord to
terminate this Lease.
9.05 Interruption of Service. Landlord shall not be liable in damages or
otherwise if any utility service or other service to the Premises
shall be interrupted or impaired by fire, accident, riot, strike, act
of God, the making of necessary repairs or improvements or by any
causes beyond Landlord's control (collectively, "Force Majeure
Events"); provided, however, if as a result of any such interruption
or impairment (unless such interruption or impairment is due to the
act or neglect of Tenant, its agents, contractors or employees or
Force Majeure Events) (a) the Premises are rendered untenantable for a
period in excess of three (3) consecutive Business Days (as
hereinafter defined) and (b) Tenant is unable to and does not occupy
the Premises during such period of untenantability, then, in such
event Base Rent shall abate on a per diem basis for the period
beginning on the fourth (4th) Business Day of continuous
untenantability and ending on the date the Premises are again rendered
tenantable. As
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used in this Lease, the term "Business Day" shall mean each calendar
day occurring within the Term except for Saturdays, Sundays and
holidays.
9.06 Compliance with Laws. Tenant shall comply with all present and future
laws, ordinances, rules, regulations, or governmental or quasi-
governmental directives (including without limitation those
requirements of the Occupational Safety and Health Administration
that relate to Tenant's specific use and occupancy of the Premises)
regarding the indoor air quality of the Premises and the maintenance
of any heating, ventilating, and air conditioning equipment or
system for which the Tenant is responsible pursuant to this Lease.
10. TENANT'S USE OF THE PREMISES
- --- ----------------------------
10.1 Permitted Use. Tenant shall use the Premises solely for the purposes
set forth at Section 2.21. Tenant shall not conduct or permit
auctions or sheriff's sales at the Property. Tenant shall not grant
any concession, license or permission to any third party to sell
merchandise or services in the Premises.
10.02 Manner of Use. Tenant shall not use or occupy the Premises in
violation of any law or restriction affecting the Building or
Project, and shall immediately discontinue any use of the Premises
which is declared by any governmental authority to be a violation of
law or the certificate of occupancy. Tenant shall, at Tenant's own
cost and expense, comply with all laws, regulations, or directions
of any governmental or quasi-governmental agency or authority which
shall impose any duty upon Tenant or Landlord with respect to the
Premises due to Tenant's specific use or occupation thereof or any
additions or alterations made to the Premises by or on behalf of
Tenant. Tenant shall not do or permit to be done anything which will
invalidate or increase the cost of any fire, extended coverage or
other insurance policy covering the Building or Project, and shall
comply with all rules, orders, and recommendations. Tenant shall
reimburse Landlord for any additional premium charged for such
policy by reason of Tenant's failure to comply with the provisions
of this Article. Tenant shall not do or permit anything to be done
on or about the Premises which will interfere with the rights of
other tenants or occupants of the Building or of the Project, or
injure or annoy them, or use or allow the Premises to be used for
any unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant
shall not commit or suffer to be committed any waste in or upon the
Premises.
11. CONDITION OF THE PREMISES
- --- -------------------------
Landlord shall deliver the Premises "broom clean" and in an "AS-IS WHERE-IS"
condition. No promise of Landlord to alter, remodel, repair or improve the
Premises, the Building or the Project and no representation, express or implied,
respecting any matter or thing relating to the Premises, Building, Project or
this Lease (including, without limitation, the condition of the Premises, the
Building or the Project) have been made to Tenant by Landlord or its Broker or
Sales Agent, other than as may be contained herein.
12. CONSTRUCTION, REPAIRS AND MAINTENANCE
- --- -------------------------------------
12.01 Landlord's Obligations.
----------------------
a. Landlord shall, in a manner consistent with other similar first-
class office buildings in the Minneapolis-St. Paul metropolitan
area, maintain the Common Areas, the roof, the foundations, the
four outer walls, downspouts and gutters of the Building and, to
the point the same are solely serving the Premises or the
premises of other tenants or other occupants of the Project, the
plumbing, sewage and heating, air conditioning and ventilating
systems, in good repair, ordinary wear and tear excepted. Except
as otherwise expressly provided in this Lease, Landlord shall
have no liability to Tenant nor shall Tenant's obligations under
this Lease be reduced or abated by reason of any inconvenience,
annoyance, interruption or injury to business arising from
Landlord's making any repairs or changes which Landlord is
required or permitted by this Lease or required by law to make to
any portion of the Project.
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Landlord shall nevertheless use reasonable efforts to minimize
any interference with Tenant's business in the Premises.
b. Except as otherwise expressly provided herein, Landlord shall not
be liable for any loss or damage that may be caused by persons
occupying adjoining premises or any part of the Building, or any
person present in the Project for any other purpose or for any
loss from burst, stopped or leaking water, gas, sewer, sprinkler
or steam pipes or plumbing fixtures, or from any failure of or
defect in any electric line, circuit or facility.
12.02 Tenant's Obligations.
--------------------
a. Tenant at Tenant's sole expense shall: 1) maintain the Premises
in a clean, orderly and sanitary condition; 2) keep any trash
temporarily stored in the Premises in accordance with local codes
and removed on a regular basis to such location as Landlord may
determine; 3) keep all mechanical apparatus installed by Tenant
free of material vibration and noise which may be transmitted
beyond the Premises; 4) comply with all laws, ordinances, rules
and regulations of governmental authorities; 5) maintain the
Premises in good order, condition and repair, including the
surfaces of the ceilings, walls and floors, all doors, all
windows, all plumbing, pipes and fixtures, electrical wiring,
switches and fixtures located within or solely serving the
Premises, Building Standard furnishings, and special items and
equipment installed by or at the expense of Tenant.
b. Tenant shall be responsible for all repairs and alterations in
and to the Premises, Building and Project and the facilities and
systems thereof, the need for which arises out of: 1) Tenant's
use or occupancy of the Premises; 2) the installation, removal,
use or operation of Tenant's Property (as defined in Article 13)
in the Premises; 3) the moving of Tenant's Property into or out
of the Building; or 4) the act, misuse or negligence of Tenant,
its agents, contractors, employees or invitees.
c. If Tenant fails to maintain the Premises in good order and repair
as required pursuant to the terms of this Lease, Landlord shall
give Tenant notice to correct the condition. If Tenant fails to
commence such work promptly, then Landlord shall have the right
to do such acts and expend such funds as are reasonably necessary
to perform the same at the expense of Tenant. Any amount so
expended by Landlord shall be paid by Tenant with interest at the
lesser of fifteen percent (15%) per annum or the maximum rate
then allowed by law. Landlord shall have no liability to Tenant
as a result of performing any such work.
d. Tenant shall not: 1) place or maintain any merchandise or other
objects outside the perimeter of the Premises; 2) use or permit
the use of any loud speakers, flashing, moving and/or rotating
lights, sound amplifiers, musical instruments, or television or
radio broadcasts which are in any manner audible or visible
outside the Premises; 3) permit accumulations of garbage or other
refuse within the Premises; 4) permit odors to emanate from the
Premises; 5) distribute advertising in or upon any automobiles in
the Common Areas; 6) permit the parking of delivery vehicles so
as to interfere with the use of any driveway, walk, parking area
or other Common Areas in the Project; 7) receive or ship articles
of any kind except through service facilities designated by
Landlord; 8) overload the electrical wiring serving the Premises,
and will install any additional electrical wiring which may be
required at its expense.
12.03 No Offset. Tenant shall not have the right to make repairs at
Landlord's expense or, except as expressly provided in Section 9.05
above, to offset the cost of repairs against Rent or to terminate
this Lease because of Landlord's failure to keep the Premises in
good order, condition and repair.
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12.04 Load and Equipment Limits. Tenant shall not place a load upon any
floor of the Premises which exceeds the load per square foot which
such floor was designed to carry, as determined by Landlord or
Landlord's structural engineer. The cost of any such determination by
Landlord's structural engineers shall be paid for by Tenant upon
demand. Tenant shall not install machinery or mechanical equipment
which cause noise or vibration to such a degree as to be
objectionable to Landlord or other Building tenants.
13. ALTERATIONS AND ADDITIONS
- -------------------------------
13.01 Tenant shall not make any addition or alterations to the Premises without
obtaining the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion or may be conditioned on Tenant's
removing any such additions or alterations upon the expiration of the Term
and restoring the Premises to the same condition as on the date Tenant
took possession or on other requirements of Landlord. All work shall be
done in a good and workmanlike manner by licensed personnel approved by
Landlord (which approval shall not be unreasonably withheld).
Notwithstanding the foregoing but subject to the remaining provisions of
this Article 13 and provided Tenant obtains Landlord's prior written
approval of the contractors with whom Tenant intends to contract (which
approval shall not be unreasonably withheld), Tenant may, without
Landlord's prior written consent (except for Landlord's prior written
approval of Tenant's contractors as aforesaid), make or cause to be made
non-mechanical, non-electrical and non-structural additions or alterations
to the Premises, the cost of which, in the aggregate, do not exceed the
sum of $10,000.00 in any calendar year.
13.02 Tenant shall pay the costs of any work done on the Premises pursuant
to Section 13.01, and shall keep the Premises, Building and Project
free and clear of liens of any kind. Tenant shall indemnify, defend
against and keep Landlord free and harmless from all liability,
loss, damage, costs, attorneys' fees and any other expense incurred
on account of claims by a person performing work or furnishing
materials or supplies for Tenant or any person claiming under
Tenant.
13.03 Tenant shall keep Tenant's leasehold interest free and clear of all
attachment or judgment liens. Before the actual commencement of any
work Tenant shall give Landlord sufficient notice to enable Landlord
to post notices of non-responsibility for the proper protection of
Landlord's interest, and Landlord shall have the right to enter the
Premises and post such notices at any reasonable time.
13.04 With respect to any additions or alterations (or series of related
additions or alterations) costing in excess of $20,000.00, Landlord
may require, at Landlord's sole option, that Tenant provide at
Tenant's expense, a lien and completion bond at least one and one-
half (1-1/2) times the total estimated cost of such additions or
alterations to protect Landlord against liens and to insure timely
completion of the work.
13.05 Unless their removal is required by Landlord as provided in Section
13.01, all additions or alterations shall become the property of
Landlord upon the expiration of the Term; provided, however,
Tenant's moveable equipment, machinery and trade fixtures shall
remain the property of Tenant and, may be removed, subject to the
provisions of Section 14.02.
14. LEASEHOLD IMPROVEMENT; TENANT'S PROPERTY; SECURITY INTEREST
- ----------------------------------------------------------------
14.01 All fixtures, equipment, and improvements attached to or built into
the Premises, whether or not by or at the expense of Tenant, shall
be and remain a part of the Premises, shall be the property of
Landlord and shall not be removed by Tenant except as expressly
provided in Section 14.02.
14.02 All movable partitions, business and trade fixtures, machinery and
equipment, communications equipment and office equipment located in
the Premises and acquired by or for the account of Tenant, without
expense to Landlord and all furniture and other articles of movable
personal property owned by Tenant ("Tenant's Property") shall be and
shall remain the property of Tenant and, provided Tenant is not then
in default under the terms and provisions of this Lease, may be
removed
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by Tenant at any time during the Term. Tenant shall promptly repair
any damage to the Premises or to the Building resulting from such
removal.
15. RULES AND REGULATIONS
- --------------------------
15.01 Upon notice thereof, Tenant agrees to comply with all rules and
regulations for the safe, efficient and lawful operation of the
Project as Landlord may from time to time make.
16. CERTAIN RIGHTS RESERVED BY LANDLORD
- ----------------------------------------
16.01 Landlord reserves the following rights, exercisable without
liability to Tenant:
a. To name the Building and Project and to change the name or
street address of the Building or Project (provided that, unless
the same arises due to changes in law, Landlord agrees to
reimburse Tenant for the actual cost of reasonable quantities of
stationery and business cards rendered unusable by any such
change in name or street address);
b. To approve all signs on the exterior or interior of the Building
and Project;
c. To have pass keys to the Premises and all doors within the
Premises, excluding Tenant's vaults and safes;
d. On reasonable prior notice to Tenant, to inspect the Premises,
and to show the Premises to any prospective purchaser or
mortgagee of the Project, or to others having an interest in the
Project or Landlord, and during the last six months of the Term,
to show the Premises to prospective tenants thereof; and
e. Upon advance notice (which may be verbal) to Tenant (except in
the case of emergencies and for standard janitorial and
mechanical services), to enter the Premises to make inspections,
repairs, alterations, or additions to the Premises or the
Building and to take all steps as may be necessary or desirable
for the safety, protection, maintenance or preservation of the
Premises or the Building or Landlord's interest therein, or as
may be necessary for the operation or improvement of the
Building or in order to comply with laws or requirements of
governmental or other authority. Landlord shall not be liable to
Tenant in connection with any such entry; provided, however,
that Landlord agrees to use commercially reasonable efforts
(except in an emergency) to minimize interference with Tenant's
business in the Premises in the course of any such entry.
17. ASSIGNMENT AND SUBLETTING
- ------------------------------
17.01 Tenant shall not assign this Lease or sublet all or any part of the
Premises without the prior written consent of Landlord, which
consent may be withheld at Landlord's sole discretion. If Tenant is
a corporation, partnership or limited liability entity, any
cumulative transfer of fifty percent (50%) or greater interest in
such entity shall be considered an assignment and shall require the
consent of Landlord as described herein. Fifty percent (50%) of any
sums or other economic consideration received by Tenant as a result
of such assignment or subletting, however denominated under the
assignment or sublease, which exceed, in the aggregate: 1) the total
sums which Tenant is obligated to pay Landlord under this Lease
(prorated to reflect obligations allocable to any portion of the
Premises subleased); plus 2) any real estate brokerage commissions
or fees payable in connection with such assignment or subletting,
shall be paid to Landlord as additional Rent under this Lease
without affecting or reducing any other obligations of Tenant
hereunder.
17.02 Notwithstanding the provisions of Section 17.01, Tenant may assign
this Lease or sublet the Premises or any portion thereof, without
Landlord's consent to any corporation which controls, is controlled
by or is under common control with Tenant, or to any corporation
resulting from a merger or consolidation with Tenant, or to any
person or entity which acquires all the assets and obligations of
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Tenant's business. Without limiting the foregoing, and
notwithstanding anything to the contrary contained herein, Landlord
acknowledges that (i) as of the date of this Lease, Tenant is a
wholly-owned subsidiary of Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), (ii) within the next several months,
Bio-Vascular expects to consummate a spin-off of Tenant, and (iii)
in connection with such spin-off, Tenant will be re-organized as a
Minnesota corporation, retaining its corporate name "Vital Images,
Inc." ("Post Spin-Off Vital"). Landlord agrees that, for purposes of
this Lease, including without limitation all Addenda attached
hereto, the above-described spin-off transaction shall not
constitute an assignment, sublease or transfer of Tenant's interest
in this Lease, and that Post Spin-Off Vital shall, for all purposes
under this Lease, be deemed to be the "Tenant". Additionally,
notwithstanding the foregoing provisions of this Article 17, so long
as Tenant is a publicly traded company, the sale or transfer of
stock in Tenant shall not be deemed an assignment or other transfer
of Tenant's interest in this Lease.
Landlord further agrees that Post Spin-Off Vital, and any sublessee
or assignee permitted under this Section 17.02 shall, for purposes
of the rights and options available to Tenant pursuant to this Lease
including the Addenda attached hereto, be deemed to be the "Tenant"
under this Lease, as if the same was the original Tenant named
herein, and all of such rights and options shall be available to
Post Spin-Off Vital and any such sublessee or assignee to the same
degree as they are available to Tenant.
17.03 No subletting or assignment shall relieve Tenant of the obligation
to pay Rent and to perform all other obligations under this Lease.
In the event of default by an assignee or subtenant of Tenant or any
successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity
of exhausting remedies against such assignee, subtenant or
successor.
17.04 If Tenant requests the consent of Landlord to any assignment or
subletting, then Tenant shall, upon demand, pay Landlord any
attorneys' fees reasonably incurred by Landlord in considering such
act or request (not to exceed $2,500.00 in any one instance).
18. HOLDING OVER
- -----------------
If after expiration of the Term, Tenant remains in possession of the Premises,
Tenant shall, at Landlord's option, become a tenant from month to month only,
upon all the provisions of this Lease (except as to term and Base Rent), but the
"Monthly Installments of Base Rent" payable by Tenant shall be increased to one
hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by
Tenant at the expiration of the Term. Such monthly rent shall be payable in
advance on or before the first day of each month. The foregoing shall not be
construed as a consent by Landlord to any such holding over or as a waiver by
Landlord of its right to reacquire its possession of the Premises through
summary proceedings or to recover damages arising from such holdover.
19. SURRENDER OF PREMISES
- --------------------------
19.01 Tenant shall surrender the Premises to Landlord on the Expiration
Date or upon earlier termination of this Lease, in clean condition
and in as good condition as when Tenant took possession, except for
reasonable wear and tear, loss by fire or other casualty, or loss by
condemnation. Tenant shall remove Tenant's Property on or before the
Expiration Date and promptly repair all damage to the Premises or
Building caused by such removal or by Tenant's use of the Premises.
On the Expiration Date Tenant shall surrender all keys to the
Premises.
19.02 If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise pursuant to the terms and conditions of
this Lease, any of Tenant's Property left on the Premises shall be
deemed to be abandoned, and, at Landlord's option, title shall pass
to Landlord under this Lease as by a quit-claim bill of sale. If
Landlord elects to remove all or any part of such Tenant's Property,
the cost of removal, including repairing any damage to the Premises
or Building caused by such removal, shall be paid by Tenant.
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19.03 No act of Landlord, including the acceptance of keys to the
Premises, shall constitute an acceptance of the surrender of the
Premises before the expiration of the Term. Only a written notice
from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish a termination of the Lease.
19.04 Without limitation of any other rights or remedies of Landlord
hereunder, Tenant shall be responsible for all consequential damages
to Landlord as a result of Tenant's failure to surrender the
Premises within sixty (60) days after the expiration or earlier
termination of the Term and otherwise in accordance with this Lease
(such 60-day period to be reduced to thirty [30] days if Landlord
notifies Tenant in writing that it requires the Premises for another
tenant or occupant), and this clause shall survive the termination
of the Lease.
20. DESTRUCTION OR DAMAGE
- --------------------------
20.01 If the Premises is damaged by fire, earthquake, act of God, the
elements or other casualty, Landlord shall repair such damage and
this Lease shall remain in full force and effect; provided, however,
that if (a) the Building is so damaged as to require repairs to the
Building exceeding fifty percent (50%) of the full insurable value
of the Building, (b) the damage occurs less than two (2) years prior
to the Expiration Date, exclusive of any renewal periods, or (c)
Landlord does not for any reason (including, without limitation, by
reason of the terms of any mortgage or other loan document) receive
sufficient insurance proceeds to restore the Project (including the
Premises) in its entirety, then, in any such case, Landlord shall
have the right to terminate this Lease by giving Tenant written
notice thereof within sixty (60) days after the date of such
casualty, in which case this Lease shall terminate as of the date of
such notice; provided, however, that if Landlord elects to so
terminate pursuant to clause (b) above and Tenant exercises any
available extension option within ten (10) days after receipt of
such termination notice, then such termination shall be deemed null
and void and of no further force and effect. If such damage is not
the result of the negligence or willful misconduct of Tenant or
Tenant's agents, employees, contractors, licensees or invitees, the
Base Rent shall be abated to the extent Tenant's use of the Premises
is impaired, commencing with the date of damage and continuing until
completion of the repairs required of Landlord under Section 20.02.
Furthermore, if such repairs cannot, in Landlord's reasonable
opinion, be made within one hundred eighty (180) days after the date
of such damage, Landlord shall so notify Tenant within thirty (30)
days after the date of such damage and in such case Tenant shall
have the right, by written notice given to Landlord within fifteen
(15) days after the date Landlord's notice is given to Tenant, to
terminate this Lease as the date of such fire or other casualty.
Additionally, if any such damage or casualty renders all or a
substantial portion of the Premises untenantable and the same occurs
less than two (2) years prior to the Expiration Date, then Tenant
shall have the right to terminate this Lease by giving written
notice thereof to Landlord within fifteen (15) days after the date
of such casualty, in which case this Lease shall terminate as of the
date of such notice. Notwithstanding anything contained in this
Section 20.01 to the contrary, if any such damage or casualty
renders all or a substantial portion of the Premises untenantable
and Landlord proceeds to repair and restore the Premises pursuant to
this Article 20 but, subject to matters beyond Landlord's reasonable
control, does not in fact substantially complete said repairs and
restorations as to render a substantial portion of the Premises
tenantable within two hundred ten (210) days from the date such
damage occurred, then either Landlord or Tenant shall have the right
to terminate this Lease by giving notice to the other at any time
following the expiration of said two hundred ten (210) day period,
which termination shall be effective as of the date such notice is
received; provided, however, that if Landlord is able to
substantially complete such repairs and restorations so as to render
the Premises tenantable on or prior to the date on which Landlord
receives Tenant's termination notice as aforesaid, then Landlord and
Tenant shall no longer have the right to terminate this Lease in
accordance with the provisions of this Section 20.01 and any
termination notice received by either party after the date Landlord
is able to substantially complete such repairs and restorations
shall be of no force and effect.
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20.02 If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Premises
(exclusive of any alterations, additions or improvements made to the
Premises by Tenant which shall be promptly repaired by Tenant, at
its sole cost and expense). Landlord and Tenant agree to use
reasonable efforts to cooperate and coordinate any repairs or
restoration to the Premises that are required pursuant to this
Article. Tenant shall be responsible at its sole cost and expense
for the repair, restoration and replacement of any other Leasehold
Improvements and Tenant's Property. Landlord shall not be liable for
any loss of business inconvenience or annoyance arising from any
repair or restoration of any portion of the Premises, Building or
Project as a result of any damage from fire or other casualty.
21. EMINENT DOMAIN
- -------------------
21.01 If the whole of the Building or Premises is lawfully taken by
condemnation or under threat thereof or in any other manner for any
public or quasi-public purpose this Lease shall terminate as of the
date of such taking, and Rent shall be prorated to such date. If
less than the whole of the Building or Premises is so taken, this
Lease shall be unaffected by such taking, provided that: a) Tenant
shall have the right to terminate this Lease by notice to Landlord
given within ninety (90) days after the date of such taking if a
significant portion of the Premises is taken and the remaining area
of the Premises is not reasonably sufficient, in Tenant's reasonable
business judgment, for Tenant to continue operation of its business,
and Landlord shall have the right to terminate this Lease by notice
to Tenant given within ninety (90) days after the date of such
taking. If either Landlord or Tenant so elects to terminate this
Lease, the Lease shall terminate on the thirtieth (30th) day after
either such notice. The Rent shall be prorated to the date of
termination, If this Lease continues in force upon such partial
taking, the Base Rent and Tenant's Proportionate Share shall be
equitably adjusted according to the remaining Rentable Area of the
Premises and Project.
21.02 In the event of any taking, partial or whole, all of the proceeds of
any award, judgment or settlement payable by the condemning
authority shall be the exclusive property of Landlord. Tenant,
however, shall have the right, to the extent that Landlord's award
is not reduced or prejudiced, to claim from the condemning authority
(but not from Landlord) such compensation as may be recoverable by
Tenant in its own right for relocation expenses and damage to
Tenant's personal property.
21.03 In the event of a partial taking of the Premises, or transfer under
threat thereof, which does not result in a termination of this
Lease, Landlord shall restore the remaining portion of the Premises
as nearly as practicable to its condition prior to the condemnation
or taking (exclusive of any alterations, additions or improvements
made to the Premises by Tenant which shall be promptly restored by
Tenant, at its sole cost and expense). Landlord and Tenant agree to
use reasonable efforts to cooperate and coordinate any repairs or
restoration to the Premises that are required pursuant to this
Article.
22. INDEMNIFICATION
- --------------------
22.01 Tenant shall indemnify and hold Landlord harmless against and from
liability and claims of any kind for loss or damage to property of
Tenant or any other person, or for any injury to or death of any
person, arising out of: a) Tenant's use and occupancy of the
Premises, or any work, activity or other things allowed by Tenant to
be done in or about the Premises; b) any breach or default by Tenant
of any of Tenant's obligations under this Lease; or c) any negligent
or otherwise tortious act or omission of Tenant, its agents,
employees, invitees or contractors. Tenant shall at Tenant's
expense, and by counsel satisfactory to Landlord, defend Landlord in
any action arising from any such claim and shall indemnify Landlord
against all costs, attorneys' fees, expert witness fees and any
other expenses incurred in such action. As a material part of the
consideration for Landlord's execution of this Lease, Tenant hereby
assumes all risk of damage or injury to any person or property in or
about the Premises from any cause which is coverable by standard
"all risk" property insurance policy.
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22.02 Except with respect to matters arising solely as a result of
Landlord's negligence or willful misconduct, Landlord shall not be
liable for injury or damage which may be sustained by the person or
property of Tenant, its employees, invitees or customers, or any
other person in or about the Premises, caused by or resulting from
fire, steam, electricity, gas, water or rain which may leak or flow
from or into any part of the Premises, or from the breakage,
leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, whether
such damage or injury results from conditions arising upon the
Premises or upon other portions of the Building or Project or from
other sources. Landlord shall not be liable for any damages arising
from any act or omission of any other tenant of the Building or
Project.
22.03 Except with respect to matters which result from the negligence or
willful misconduct of any one or more of Tenant, its officers,
directors, agents, contractors, employees or invitees, Landlord
agrees to indemnify, defend and hold Tenant harmless against and
from liability and claims of any kind (including reasonable
attorney's fees and court costs) for loss or damage to property of
Tenant, or for any injury to or death of any person occurring in or
about the Common Area which arises out of Landlord's operation of
the Project or the wrongful acts or omissions of Landlord, its
agents, employees, invitees or contractors.
23. INSURANCE
- --------------
23.01 All insurance required to be carried by Tenant hereunder shall be
issued by responsible insurance companies acceptable to Landlord and
Landlord's lender and qualified to do business in the State. Each
policy shall name Landlord, and any mortgagee of Landlord of which
Tenant has been notified in writing, as an additional insured. Each
policy shall contain: a) a cross-liability endorsement; b) a
provision that such policy shall be primary and non-contributing
with respect to any policies carried by Landlord and that any
coverage carried by Landlord shall be excess insurance; and c) a
waiver by the insurer of any right of subrogation against Landlord,
its agents, employees and representatives, which arises under such
policy or by reason of any act or omission of Landlord, its agents,
employees or representatives. A certificate of the insurer
evidencing the existence and amount of each insurance policy
required hereunder shall be delivered to Landlord before the date
Tenant is first given the right of possession of the Premises, and
thereafter within thirty (30) days after any demand by Landlord
therefor. No such policy shall be cancelable, except after twenty
(20) days written notice to Landlord and Landlord's lender. Tenant
shall furnish Landlord with renewals or "binders" of any such policy
at least ten (10) days prior to the expiration thereof. Tenant
agrees that if Tenant does not take out and maintain such insurance,
Landlord may (but shall not be required to) procure insurance on
Tenant's behalf and charge the Tenant the premiums together with a
fifteen percent (15%) handling charge, payable upon demand. Tenant
shall have the right to provide such insurance coverage pursuant to
blanket policies, provided such blanket policies expressly afford
coverage to the Premises, Landlord, Landlord's mortgagee and Tenant
as required by this Lease.
23.02 Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall
maintain in effect policies of casualty insurance covering: a) fire
and extended coverage insurance, including protection against
vandalism and malicious mischief, plus "all-risk" endorsements
insuring all Leasehold Improvements (including any alterations,
additions or improvements as may be made by Tenant pursuant to the
provisions of Article 13 hereof); b) trade fixtures, merchandise and
other personal property; and c) Tenant's plate glass insurance on
the storefront of Premises. The proceeds of such insurance shall be
used for the repair or replacement of the property so insured.
23.03 Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall
maintain in effect workers' compensation insurance as required by
law and comprehensive public liability and property damage insurance
with respect to the construction of improvements on the Premises,
the operation of the Premises and the operations of Tenant in or
about the Premises providing personal injury and broad form property
damage coverage
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for not less than Two Million Dollars ($2,000,000.00) combined
single limit for bodily injury, death and property damage liability.
23.04 Landlord shall at all times during the Term carry fire and extended
coverage property insurance in an amount equal to at least eighty
percent (80%) of the full replacement value of the Project.
24. WAIVER OF SUBROGATION
- --------------------------
Landlord and Tenant each hereby waive all rights of recovery against the other
and against the officers, employees, agents and representatives of the other, on
account of loss by or damage to the waiving party of its property or the
property of others under its control, to the extent that such loss or damage is
insured against under any fire and extended coverage insurance policy which
either may have (or be required to have under the terms of this Lease) in force
at the time of the loss or damage. Tenant shall give notice to its insurance
carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
25. SUBORDINATION AND ATTORNMENT
- ---------------------------------
This Lease, and the rights of Tenant hereunder, are and shall be subordinate to
the interests of (i) all present and future ground leases and master leases of
all or any part of the Project or Property; (ii) present and future mortgages
and deeds of trust encumbering all or any part of the Project or Property; (iii)
any past and future advances made under any such mortgages or deeds of trust;
and (iv) all renewals, modifications, replacements and extensions of any such
ground leases, master leases, mortgages and deeds of trust; provided, however,
that any lessor under any such ground lease or master lease or any mortgagee or
beneficiary under any such mortgage or deed of trust shall have the right to
elect, by written notice given to Tenant, to have this Lease made superior in
whole or in part to any such ground lease, master lease, mortgage or deed of
trust. Within twenty (20) days after written demand therefor, Tenant shall
execute, acknowledge and deliver any instruments reasonably requested by
Landlord or any such lessor, mortgagee or beneficiary to effectuate the purposes
of this Article 25 so long as the same provides that Tenant's possession of the
Premises shall not be disturbed in the event of a foreclosure or deed-in-lieu of
foreclosure unless Tenant is in default under the terms and provisions of this
Lease. In the event of any foreclosure sale, transfer in lieu of foreclosure or
termination of any lease in which Landlord is lessee, Tenant shall attorn to the
purchaser, transferee or lessor as the case may be, and recognize that party as
Landlord under this Lease.
26. TENANT ESTOPPEL CERTIFICATES
- ---------------------------------
Within ten (10) days after written request from Landlord, Tenant shall execute
and deliver a written statement certifying that this Lease is unmodified and in
full force and effect, or is in full force and effect as modified and stating
the modifications; the amount of and the date to which Rent has been paid in
advance; the amount of any security deposited with Landlord; and that Landlord
is not in default hereunder or, if Landlord is claimed to be in default, stating
the nature of any claimed default. Any such statement may be relied upon by a
purchaser, assignee or lender. Tenant's failure to execute and deliver such
statement within the time required shall at Landlord's election be a default
under this Lease and shall also be conclusive upon Tenant that this Lease is in
full force and effect and has not been modified except as represented by
Landlord in good faith; that there are no uncured defaults in Landlord's
performance and that Tenant has no right of offset, counterclaim or deduction
against Rent.
27. TRANSFER OF LANDLORD'S INTEREST
- ------------------------------------
In the event of any sale or transfer by Landlord of the Premises, Building or
Project, and assignment of this Lease by Landlord, Landlord shall be and is
hereby entirely freed and relieved of any and all liability and obligations
contained in or derived from this Lease occurring after the consummation of such
sale or transfer. If any security deposit or prepaid Rent has been paid by
Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's
successor and Landlord shall be relieved of any and all further liability with
respect thereto.
28. DEFAULT
- ------------
28.01 Events of Default. The occurrence of any one or more of the
following matters constitutes a Default by Tenant under this Lease:
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a. Failure by Tenant to pay Rent or any other amounts required
under this Lease within seven (7) days after notice of failure
to pay on the due date (provided, however, that Landlord shall
not be required to furnish Tenant with notice of Tenant's
failure to pay Rent or any other amounts required under this
Lease more than twice per calendar year and thereafter Tenant's
failure to pay Rent or any other amounts required under this
Lease as and when due shall constitute a Default by Tenant under
this Lease without any requirement of notice);
b. Failure by Tenant to observe or perform any other provision of
this Lease, if such failure continues for thirty (30) days after
notice thereof from Landlord to Tenant unless such non-monetary
default cannot reasonably be cured within such thirty (30) day
period, in which case Tenant shall have such additional time as
is reasonably necessary to cure such default provided that
Tenant commences such cure within the initial 30-day period and
diligently pursues the same to completion thereafter;
c. The levy upon, under writ of execution or the attachment by
legal process of, the leasehold interest of Tenant;
d. Tenant vacates or abandons the Premises or fails to take
possession of the Premises within thirty (30) days after the
same becomes available for occupancy whether or not Tenant
continues to pay Rent due under this Lease;
e. Tenant becomes insolvent or bankrupt or admits in writing its
inability to pay its debts as they mature, or makes an
assignment for the benefit of creditors, or consents to the
appointment of a trustee or receiver for Tenant or for the major
part of its property;
f. A trustee or receiver is appointed for Tenant or for the major
part of its property; or
g. Any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceeding, or other proceeding for relief under any
bankruptcy law, or similar law for the relief of debtors, is
instituted by Tenant or against Tenant and is allowed against
it, or is consented to by it or is not dismissed within sixty
(60) days after such institution.
28.02 Rights and Remedies of Landlord. If a Default occurs, Landlord shall
have the rights and remedies hereinafter set forth, which shall be
distinct, separate and cumulative and shall not operate to exclude
or deprive Landlord of any other right or remedy allowed it by law:
a. Landlord may terminate this Lease by giving to Tenant notice of
Landlord's election to do so and all right, title and interest
of Tenant hereunder shall expire, on the date stated in such
notice;
b. Landlord may terminate the right of Tenant to possession of the
Premises without terminating this Lease by giving notice to
Tenant that Tenant's right to possession shall end on the date
stated in such notice;
c. Landlord may enforce the provisions of this Lease and may
enforce and protect the rights of Landlord hereunder by a suit
for the specific performance of any covenant contained herein,
or for the enforcement of any other appropriate legal remedy,
including recovery of all amounts due or to become due from
Tenant under any of the provisions of this Lease.
28.03 Right to Re-Enter. If Landlord exercises any of the remedies
provided in Section 28.02, Tenant shall vacate the Premises and
immediately deliver possession thereof to Landlord, and Landlord may
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reenter and take complete possession of the Premises, full and
complete license to do so being hereby granted to Landlord, and
Landlord may remove all occupants and property therefrom, without
being deemed guilty in any manner of trespass, eviction or forcible
entry and without relinquishing Landlord's right to Rent or any
other right given to Landlord hereunder.
28.04 Current Damages. If Landlord terminates the right of Tenant to
possession of the Premises without terminating this Lease, Landlord
shall have the right to immediate recovery of all amounts then due
hereunder. Such termination of possession shall not release Tenant,
in whole or in part, from Tenant's obligation to pay Rent hereunder
for the full Term, and Landlord shall have the right to recover from
Tenant, and Tenant shall remain liable for, all Rent and any other
sums accruing under this Lease during the period from the date of
such notice of termination of possession to the stated end of the
Term. Landlord may relet the Premises or any part thereof for the
account of Tenant upon such terms as Landlord shall determine and
may collect the rents from such reletting. Landlord shall not be
required to accept any tenant offered by Tenant or to observe any
instructions given by Tenant relative to such reletting. Landlord
may make repairs, alterations and additions in or to the Premises
and redecorate the same to the extent deemed by Landlord necessary
or desirable and change the locks to the Premises. Tenant upon
demand shall pay the cost of all of the foregoing together with
Landlord's expenses of reletting. The rents from any such reletting
shall be applied first to the payment of the expenses of re-entry,
reletting, redecoration, repair and alterations and second to the
payment of Rent to be paid by Tenant. Any excess shall be credited
against the amount of Rent which becomes due and payable hereunder
Any such excess shall belong to Landlord solely. No such reentry or
repossession, repairs, alterations and additions, or reletting shall
be construed as an election on Landlord's part to terminate this
Lease, unless a written notice of such intention is given to Tenant,
or shall operate to release Tenant in whole or in part from any of
Tenant's obligations hereunder. Landlord may sue and recover
judgment for any deficiencies remaining after the application of the
proceeds of any such reletting.
28.05 Final Damages. If this Lease is terminated by Landlord pursuant to
Section 28.02, Landlord shall be entitled to recover from Tenant and
Tenant shall pay all Rent accrued and unpaid for the period up to
and including such termination date, as well as all other additional
sums for which Tenant is liable under this Lease, and all costs,
including court costs and attorneys' fees incurred by Landlord in
the enforcement of its rights and remedies hereunder. Landlord shall
be entitled to recover as damages a) the unamortized portion of
Landlord's contribution to the cost of tenant improvements and
alterations, if any, installed by either Landlord or Tenant pursuant
to this Lease, b) the aggregate Rents which would have been payable
after the termination date had this Lease not been terminated, less
the rental value of the Premises for said period (provided, however,
that if the rental value exceeds the value of the Rent provided to
be paid by Tenant for the balance of the Term of the Lease, Landlord
shall have no obligation to pay Tenant the excess or any part
thereof) and c) any damages in addition thereto, including
reasonable attorneys' fees and court costs, which Landlord sustains
as a result of the breach of any of the covenants of this Lease
other than for the payment of Rent.
28.06 Removal of Personal Property. All property of Tenant removed from
the Premises by Landlord pursuant to any provision of this Lease or
applicable law may be handled, removed or stored by Landlord at the
cost and expense of Tenant, and Landlord shall not be responsible
for the value, preservation or safekeeping thereof. Tenant shall pay
Landlord for all expenses incurred by Landlord with respect to such
removal and storage. All such property not removed from the Premises
or retaken from storage by Tenant within thirty (30) days after the
end of the Term, however terminated, shall be conclusively deemed to
have been conveyed by Tenant to Landlord as by quit-claim bill of
sale.
28.07 Attorneys' Fees. In the event the parties hereto become involved in
any proceeding to enforce this Lease or the rights, duties or
obligations hereunder, the prevailing party in such proceeding shall
be entitled to receive, as part of any award, reasonable attorney's
fees.
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28.08 No Waiver. No delay or omission in the exercise of any right or
remedy of Landlord upon any Default by Tenant shall impair such
right or remedy or be construed as a waiver of such default. The
receipt and acceptance by Landlord of delinquent Rent shall not
constitute a waiver. Any waiver by Landlord of any default must be
in writing and shall not be a waiver of any other default concerning
any other provision of the Lease.
29. BROKERAGE FEES
Tenant warrants and represents that it has not dealt with any real estate broker
or agent in connection with this Lease or its negotiation except those noted in
Section 2.22. Tenant shall indemnify Landlord from any expense or liability
(including costs of suit and reasonable attorneys' fees) for any compensation,
commission or fees claimed by any other real estate broker or agent in
connection with this Lease that is claiming by, through or under Tenant.
30. NOTICES
All notices, required to be given under this Lease shall be in writing and
deemed duly served or given if personally delivered or sent by certified or
registered U.S. mail, postage prepaid, and addressed if to Landlord, to
Landlord's Mailing Address; and if to Tenant, to Tenant's Mailing Address or if
delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time
to time by notice to the other designate another place for receipt of future
notices. Any notice shall be deemed to have been served at the time the same was
posted.
31. QUIET ENJOYMENT
Landlord covenants that it has the right to enter into this Lease, and that
Tenant, upon paying the Rent and performing all of its obligations under this
Lease, shall quietly enjoy the Premises, subject to the terms of this Lease and
to any mortgage, lease, or other agreement to which this Lease may be
subordinate.
32. OBSERVANCE OF LAW
Tenant shall, at its sole cost and expense, promptly comply with all laws and
governmental regulations or requirements now in force or which may hereafter be
in force, and with the requirements of any board of fire insurance underwriters
or other similar bodies now or hereafter constituted, relating to the occupancy
of the Premises, excluding structural changes not required as a result of
Tenant's specific use or occupation of the Premises, the Building and the
Project or any alterations or additions made to the Premises by Tenant.
33. FORCE MAJEURE
Any prevention or delay of work to be performed by Landlord or Tenant which is
due to strikes, labor disputes, inability to obtain labor, materials, equipment
or reasonable substitutes therefor, acts of God, governmental restrictions or
regulations, judicial orders, hostile government actions, civil commotion, fire
or other casualty, or other causes beyond the reasonable control of the party
obligated to perform hereunder, shall excuse performance of the work by that
party for a period equal to the duration of that prevention or delay. Nothing in
this Article 33 shall excuse or delay Tenant's obligation to pay Rent or other
charges under this Lease.
34. CURING TENANT'S DEFAULTS
If Tenant defaults in the performance of any of its obligations under this
Lease, Landlord may (but shall not be obligated to) without waiving such
default, perform the same at the expense of Tenant. Tenant shall pay Landlord
all costs of such performance promptly upon receipt of a bill therefor.
35. SIGN CONTROL
Tenant shall not affix, paint, erect or inscribe any sign, projection, awning,
signal or advertisement of any kind to any part of the Premises, Building or
Project, including without limitation, the inside or outside of windows or
doors, without the written consent of Landlord. Landlord shall have the right to
remove any signs or other matter, installed without Landlord's permission,
without being liable to Tenant for such removal, and to charge the cost of
removal to Tenant. Notwithstanding the foregoing, in the event that any tenant
of the Building other than ReMax (or its successors or assigns) is given
exterior signage on the Building or Project, then, so long as Tenant is not in
default hereunder and this Lease is in full force and effect, Tenant shall be
afforded rights to exterior signage under the same terms and
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conditions as such other tenant; provided that the size of any such signage
afforded to Tenant and such other tenant(s) of the Building shall be based pro
rata upon the sizes of their respective premises.
36. HAZARDOUS SUBSTANCES
36.01 Defined Terms.
a. "Claim" shall mean and include any demand, cause of action,
proceeding or suit for any one or more of the following: 1)
actual or punitive damages, losses, injuries to person or
property, damages to natural resources, fines, penalties.
interest, contribution or settlement; 2) the costs of site
investigations, feasibility studies, information requests,
health or risk assessments, or Response (as hereinafter defined)
actions; and 3) enforcing insurance, contribution or
indemnification agreements.
b. "Environmental Laws" shall mean and include all federal, state
and local statutes, ordinances, regulations and rules relating
to environmental quality, health, safety, contamination and
clean-up, including, without limitation, the Clean Air Act, 42
U.S. C. Section 7401 et seq.; the Clean Water Act, 33 U.S.C.
Section 1251 et seq. and the Water Quality Act of 1987; the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), 7
U.S.C. Section 136 et seq.; the Marine Protection, Research, and
Sanctuaries Act, 33 U.S.C., Section 1401 et seq.; the National
Environmental Policy Act, 42 U.S.C. Section 4321 et seq.; the
Noise Control Act, 42 U.S.C. Section 4901 et seq.; the
Occupational Safety and Health Act, 29 U.S.C. Section 651 et
seq.; the Resource Conservation and Recovery Act ("RCRA"), 42
U.S.C. Section 6901 et seq., as amended by the Hazardous and
Solid Waste Amendments of 1984; the Safe Drinking Water Act, 42
U.S.C. Section 300f et seq.; the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C.
Section 9601 et seq., as amended by the Superfund Amendments and
Reauthorization Act; the Emergency Planning and Community Right-
to-Know Act, and Radon Gas and Indoor Air Quality Research Act;
the Toxic Substances Control Act ("TSCA"), 15 U.S.C. Section
2601 et seq.; the Atomic Energy Act, 42 U.S.C. Section 2011 et
seq.; the Nuclear Waste Policy Act of 1982, 42 U.S.C. Section
10101 et seq.; the Minnesota Environmental Response and
Liability Act ("MERLA"), Minn. Stat. Ch. 115B; and the state
superlien and environmental clean-up statutes, with implementing
regulations and guidelines, as amended from time to time.
Environmental Laws shall also include all state, regional,
county, municipal and other local laws, regulations, and
ordinances insofar as they are equivalent or similar to the
federal laws recited above or purport to regulate Hazardous
Materials (as hereinafter defined).
c. "Hazardous Materials" shall mean and include the following,
including mixtures thereof: any hazardous substance, pollutant,
contaminant, waste, by-product or constituent regulated under
CERCLA; oil and petroleum products and natural gas, natural gas
liquids, liquefied natural gas and synthetic gas usable for
fuel; pesticides regulated under the FIFRA; asbestos and
asbestos containing materials, PCBs, and other substances
regulated under the TSCA; source material, special nuclear
material, by-product material and any other radioactive
materials or radioactive wastes, however produced, regulated
under the Atomic Energy Act or the Nuclear Waste Policy Act;
chemicals subject to the OSHA Hazard Communication Standard, 29
C.F.R. Section 1910.1200 et seq.; and industrial process and
pollution control wastes, whether or not hazardous within the
meaning of RCRA; any substance whose nature and/or quantity or
existence, use, manufacture, disposal or effect render it
subject to federal, state or local regulation, investigation,
remediation, or removal as potentially injurious to public
health or welfare.
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d. "Use" means to manage, generate, manufacture, process, treat,
store, use, re-use, refine, recycle, reclaim, blend or burn for
energy recovery, incinerate, accumulate speculatively,
transport, transfer, dispose of, or abandon Hazardous Materials.
e. "Release" or Released" shall mean any actual or threatened
spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, or
disposing of Hazardous Materials into the environment, as
"environment" is defined in CERCLA.
f. "Response" or "Respond" shall mean action taken in compliance
with Environmental Laws to correct, remove, remediate, cleanup,
prevent, mitigate, monitor, evaluate, investigate, assess or
abate the Release of a Hazardous Material.
36.02 Tenant's Obligations with Respect to Environmental Matters. During
the term of this Lease, Tenant shall comply at its own cost with all
Environmental Laws with respect to its use and occupancy of the
Premises. Tenant shall not Use, or authorize the Use of, any
Hazardous Materials on the Premises, without prior written
disclosure to and approval by the Landlord. Tenant shall not take
any action that would subject the Premises to permit requirements
under RCRA for storage, treatment or disposal of Hazardous
Materials. Tenant shall not dispose of Hazardous Materials in
dumpsters provided for tenant use. Tenant shall not discharge
Hazardous Materials into Project drains or sewers. Tenant shall not
cause or allow the Release of any Hazardous Materials on, to, or
from the Project. Tenant shall arrange at its own cost for the
lawful transportation and off-site disposal of all Hazardous
Materials that it generates. Notwithstanding the foregoing, normal
quantities of Hazardous Materials customarily used in the conduct of
general administrative and executive office activities (e.g., copier
fluids and cleaning supplies) may be Used at the Premises without
Landlord's prior written consent so long as the same are Used at all
times in compliance with the manufacturer's instructions therefor
and all applicable Environmental Laws.
36.03 Copies of Notices. During the term of this Lease, Tenant shall
provide Landlord promptly with copies of all summons, citations,
directives, information inquiries or requests, notices of potential
responsibility, notices of violation or deficiency, orders or
decrees, Claims, complaints, investigations, judgments, letters,
notices of environmental liens or Response actions in progress, and
other communications, written or oral, actual or threatened, from
the United States Environmental Protection Agency, Occupational
Safety and Health Administration, Minnesota Pollution Control
Agency, or other federal, state or local agency or authority, or any
other entity or individual, concerning any Release of a Hazardous
Material on, to or from the Premises, the imposition of any lien on
the Premises, or any alleged violation of or responsibility under
Environmental Laws. Landlord and Landlord's beneficiaries, agents
and employees shall have the right to enter the Premises and conduct
appropriate inspections or tests in order to determine Tenant's
compliance with Environmental Laws.
36.04 Tests and Reports. Upon written request by Landlord, if the same are
in Tenant's possession or required by law, Tenant shall provide
Landlord with the results of any appropriate reports and tests with
transportation and disposal contracts for Hazardous Materials, with
any permits issued under Environmental Laws, and with any other
applicable documents to demonstrate that Tenant complies with all
Environmental Laws relating to the Premises.
36.05 Tenant's Obligation to Respond. If Tenant's Use of Hazardous
Materials at the Premises gives rise to liability or to a Claim
under any Environmental Law, causes a significant public health
effect, or creates a nuisance, Tenant shall promptly take all
applicable action in Response.
36.06 Indemnification. Tenant shall indemnify, defend, and hold harmless
Landlord, its beneficiaries, its lenders, any managing agents and
leasing agents of the Premises, and their respective agents,
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partners, officers, directors and employees from and against any and
all Claims arising from or attributable to any breach by Tenant of
any of its warranties, representations or covenants in this Article.
Tenant's obligations hereunder shall survive the termination or
expiration of this Lease.
36.07 Landlord's Statement. To the best of Landlord's knowledge there are
no Hazardous Materials (other than normal quantities of Hazardous
Materials customarily used in connection with the operation,
administration, maintenance and repair of office complexes similar
to the Project) located in the Building or Premises. For purposes of
this Section, the clause "best of Landlord's knowledge" shall mean
the actual present knowledge of Stuart Ackerberg and Alan Ackerberg.
37. RELOCATION OF PREMISES - Intentionally Deleted
38. PUBLIC ACCOMMODATIONS LAWS
Landlord with respect to the Common Areas, and Tenant, with respect the
Premises, each covenant and agree to complete any and all alterations,
modifications or improvements specifically required by the Americans With
Disabilities Act, including, but not limited to, remodeling, renovation,
rehabilitation, reconstruction, changes or rearrangements in structure, and
changes or rearrangements to wall configuration or full height partitions
which are or become necessary, in order to comply with all Public
Accommodation Laws, regardless of whether such modifications are the legal
responsibility of Landlord, Tenant or third party; provided, however, that
Tenant's obligations pursuant to this Article 38 only apply to alterations,
modifications or improvements that are required as a result of Tenant's
specific use or occupancy of the Premises or as a result of any additions
or alterations made to the Premises by or on behalf of Tenant. Landlord and
Tenant covenant and agree to use their reasonable efforts to insure that
any and all alterations, modifications or improvements undertaken pursuant
hereto are accomplished in a manner which will not substantially interfere
with the others' use or possession of space in the Project or Building. All
costs incurred by Landlord to comply with Public Accommodations Laws in the
Common Areas shall be included in Project Operating Costs, including the
amortization of capital expenditures together with an interest rate of 12%
per annum over a period of five (5) years.
Landlord agrees to permit Tenant, at Tenant's cost, to make any
improvements or modifications to the Premises which are required by Public
Accommodation Laws that are Tenant's responsibility hereunder, and to
approve such improvements or modifications, provided that all such
improvements or modifications are made in compliance with applicable Public
Accommodations Laws and otherwise in accordance with Article 13
hereinabove. Tenant acknowledges and agrees that, while Landlord may review
and approve plans and specifications for Tenant's leasehold improvements,
(and may construct Tenant's leasehold improvements for Tenant), Landlord
assumes no responsibility for compliance of such plans and specifications,
the Premises, or Tenant's leasehold improvements, with Public
Accommodations Laws, and Tenant shall hold Landlord harmless from Tenant's
failure to comply with the requirements thereof.
For the purposes of this Lease, "Public Accommodation Laws" shall mean all
applicable federal, state and local laws, regulations, and building codes,
in effect during the term of this Lease, governing non-discrimination in
employment, public accommodations and commercial facilities, including,
without limitation, the requirements of the Americans With Disabilities Act
42 USC 12101.
39. MISCELLANEOUS
39.01 Addenda. If any provision contained in a Rider to this Lease is
inconsistent with any other provision herein, the provision
contained in the Rider shall control, unless otherwise provided in
the Rider.
39.02 Captions, Articles and Section Numbers. The captions appearing
within the body of this Lease have been inserted for reference only
and in no way define, limit or enlarge the scope or meaning of this
Lease.
39.03 Changes Requested by Lender. Neither Landlord or Tenant shall
unreasonably withhold its consent to changes or amendments to this
Lease requested by the lender on Landlord's interest, so long as
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these changes do not alter the basic business terms of this Lease or
materially and adversely alter any of Tenant's rights or obligations
hereunder.
39.04 Choice of Law. This Lease shall be construed and enforced in
accordance with the laws of Minnesota.
39.05 Consent. Notwithstanding anything contained in this Lease to the
contrary, Tenant shall have no claim against Landlord for money
damages by reason of any refusal, withholding or delaying by
Landlord of any consent, approval or statement of satisfaction.
Tenant's only remedies therefor shall be an action for specific
performance, or declaratory judgment to enforce any right to such
consent.
39.06 Corporate Authority. If Tenant is a corporation, Tenant represents
and warrants that each individual signing this Lease is duly
authorized to execute and deliver this Lease on behalf of the
corporation, and that this Lease is binding on Tenant in accordance
with its terms. Tenant shall deliver a certified copy of a
resolution (as well as a related incumbency certificate) of its
board of directors authorizing such execution.
39.07 Execution of Lease; No Option. The submission of this Lease to
Tenant shall be for examination purposes only, and does not
constitute a reservation of or option for Tenant to lease the
Premises. Execution of this Lease by Tenant and its return to
Landlord shall not be binding on Landlord notwithstanding any time
interval, until Landlord has in fact signed and delivered this Lease
to Tenant.
39.08 Mortgagee Protection. Tenant agrees to send by certified or
registered mail to any first mortgagee or beneficiary of Landlord
whose address has been furnished to Tenant, a copy of any notice of
default served by Tenant on Landlord. If Landlord fails to cure such
default within the time provided for in this Lease, such mortgagee
or beneficiary shall have an additional thirty (30) days to cure
such default; provided, that if such default cannot reasonably be
cured within that thirty (30) day period, then such mortgage or
beneficiary shall have such additional time to cure the default as
is reasonably necessary under the circumstances.
39.09 Prior Agreements; Amendments. This Lease contains all of the
agreements of the parties with respect to any matter covered or
mentioned in this Lease, and no prior agreement or understanding
pertaining to any such matter shall be effective for any purpose. No
provisions of this Lease may be amended or added to except by an
agreement in writing signed by the parties or their respective
successors in interest.
39.10 Recording. Tenant shall not record this Lease without the prior
written consent of Landlord.
39.11 Severability. A final determination by a court that any provision of
this Lease is invalid shall not affect the validity of any other
provision.
39.12 Successors and Assigns. This Lease shall apply to and bind the
heirs, personal representatives, and permitted successors and
assigns of the parties.
39.13 Time of the Essence. Time is of the essence of this Lease.
39.14 Waiver. Landlord's consent to or approval of any act by Tenant
requiring Landlord's consent or approval shall not be deemed to
waive or render unnecessary Landlord's consent to or approval of any
subsequent act by Tenant.
24
<PAGE>
39.15. Independent Covenants. Each covenant, agreement, obligation, or
other provision of this Lease to be performed by Tenant is a
separate and independent covenant of Tenant and not dependent on
any other provisions of this Lease.
39.16 Joint and Several Liability. If Tenant comprises more than one
person or entity, or if this Lease is guaranteed by any party, all
such persons and entities shall be jointly and severally liable for
payment of rents and the performance of Tenant's obligations
hereunder.
The parties hereto have executed this Lease as of the dates set forth below.
TENANT: LANDLORD:
Vital Images, Inc., Acky-3100 Lake Limited Partnership,
an Iowa corporation a Minnesota limited partnership
By: /s/ Andrew Weiss By: The Saratoga Corporation,
---------------------------- a Wisconsin corporation
Its: President & CEO Its: General Partner
---------------------------
BY: /s/ Stuart I. Ackerberg
-------------------------------
ITS: President
-------------------------------
DATE: 2/12/97 DATE: 2/12/97
-------------------------- -----------------------------
25
<PAGE>
EXHIBIT "A"
FLOOR PLAN
(ATTACHED)
<PAGE>
[FLOOR PLAN OF PREMISES "A"]
A-1
<PAGE>
[FLOOR PLAN OF PREMISES "B"]
A-2
<PAGE>
EXHIBIT "B"
SITE PLAN /LEGAL DESCRIPTION
Page 1 of 2
Tract 1: That part of the East 25 feet, measured at right angles, of Lot E
lying North of the South 40 feet thereof;
Tract 2: That part of Lot H lying Westerly of a line drawn parallel with and
200 feet East, measured at right angles, from the West line of Lot H and North
of a line described as beginning at the intersection of the West line of said
Lot H and a line drawn parallel with and 40 feet North, measured at right
angles, from the south line thereof, thence Each along said parallel line to its
intersection with a line drawn parallel with and 55.5 feet Northwesterly,
measured at right angles, from the center line of Lake Street, as said center
line is shown in "West End Subdivision, Minneapolis, Minn."; thence
Northeasterly along said last described parallel line to an intersection with a
line drawn parallel with and 200 feet East measured at right angles from the
West line of said Lot H;
Tract 3: That part of Lot H, described as commencing at a point where a line
parallel with and 40 feet Northwesterly, measured at right angles, from the
center line of Lake Street, as said center line is shown in "West End
Subdivision, Minneapolis, Minn." is intersected by a line parallel with and 200
feet East measured at right angles, from the West line of said Lot H thence
North along said last mentioned parallel line 578.4 feet to the actual point of
beginning thence continuing North along said last mentioned parallel line 21.6
feet; thence East at right angles to said parallel line to an intersection with
the Westerly line of Dean Boulevard, as said Westerly line is described and
shown in Book 359 of Deeds, page 379; thence Southerly along said Westerly line
to an intersection with a line drawn East at right angles to said parallel line
from the actual point of beginning; thence West to the actual point of
beginning;
all in "West End Subdivision, Minneapolis, Minn.", according to the recorded
plat thereof.
Together with an easement for the purposes of maintaining a concrete wall and
steel fence over that part of said Lot H described as commencing at a point
where a line drawn parallel with and 40 feet Northwesterly, measured at right
angles from the center line of Lake Street as said center line is shown in "West
End Subdivision, Minneapolis, Minn.", is intersected by a line parallel with and
200 feet East, measured at right angles, from the West line of said Lot H;
thence North along said last mentioned parallel line 600 feet to the actual
point of beginning of the tract of land to be described; thence East at a right
angle 92.2 feet; thence North at a right angle 2.05 feet; thence West at a right
angle 37.7 feet; thence Southwesterly to the actual point of beginning.
Hennepin County, Minnesota
B-1
<PAGE>
[EXHIBIT "B" SITE PLAN/LEGAL DESCRIPTION]
Page 2 of 2
B-2
<PAGE>
EXHIBIT "C"
TENANT'S WORK
None
<PAGE>
EXHIBIT "D"
GENERAL SPECIFICATIONS FOR TENANT'S ALTERATIONS OR IMPROVEMENTS
1. Landlord's Approvals of Plans
1.1 All plans for improvements or alterations are subject to Landlord
approval; however, such approval does not signify code approval. Tenant shall
have sole responsibility for compliance with all applicable statutes, codes,
ordinances and other regulations for all work. In instances where several sets
of requirements must be met, Landlord's requirements shall govern unless
prohibited by code. All conditions and measurements should be field-verified by
the Tenant.
1.2 Tenant must provide Landlord with Floor Plans and Working Drawings for
the Premises. Upon receipt of Tenant's drawings, Landlord shall review and
return to Tenant one copy marked either "Approved", "Approved with Changes" or
"Revise and Resubmit". Tenant shall resubmit revised drawings within ten working
days and the same procedure will be repeated until Landlord initials the
drawings "Approved" or "Approved with Changes".
1.3 Specific written approval of Landlord is required for the following:
a) Drilling, cutting, coring or construction of any openings,
penetrations or other alterations or improvements to the demising walls of the
Premises, the exterior of the Premises or Building, or floors, columns or roof
of the Premises or Building.
b) Installation or testing of any alarm or signal system, or any
interruption of or connection to the Building fire or life-safety systems.
c) Installation or connection to any vents or ductwork, or to any
water, sewer, gas, or electrical lines.
d) Construction of any mezzanine.
e) Installation of any odor-producing equipment.
f) Installation of any sign visible from the exterior of the
Premises.
g) Modifications to Floor Plans or Working Drawings previously
approved under Section 1.2 above.
2. Codes, Permits and Insurance
2.1 Tenant has full and complete responsibility to comply with all
applicable codes, ordinances, statutes and regulations of any governing
authority in the design and operation of the Premises, and to obtain all
necessary licenses and permits required for construction, occupancy and
operation.
2.2 Tenant shall obtain a building permit and shall provide Landlord with
one set of plans approved by the Department of Inspections and a copy of the
permit before commencement of any demolition or construction.
2.3 Prior to commencement of any work, Tenant shall provide Landlord with
Certificates of Insurance evidencing coverage of Tenant's contractor and
subcontractors for Worker's Compensation and
<PAGE>
Employer's Liability Insurance; Comprehensive General Liability Insurance; and
Comprehensive Automobile Liability Insurance. All such certificates shall name
Landlord and Landlord's Agent as additional insureds.
2.4 Tenant shall provide Landlord with a copy of the Certificate of
Occupancy issued by the Department of Inspections upon completion of the work.
3. Construction Rules and Procedures
3.1 Tenant or Tenant's contractor shall contact Landlord at least three
business days prior to the start of construction and shall provide Landlord with
a list of names, addresses and telephone numbers of all contractors and
subcontractors that will be involved in the work.
3.2 Tenant is responsible for securing the Premises. All property in the
Premises shall be there at the risk of Tenant and Landlord shall not be liable
for damage or theft.
3.3 Tenant shall arrange for all utility services to be placed in Tenant's
name prior to the start of construction. Tenant nor Tenant's contractor shall
not use any common area outlets for utility services. Tenant is responsible for
the cost of all temporary utility services during construction.
3.4 All trash and construction debris will be contained and disposed of in
the manner stated in the Lease.
3.5 No contractor parking will be provided.
4. Costs Billed Back to Tenant by Landlord
4.1 At Landlord's option, certain portions of Tenant's Work may be
performed by Landlord's Contractor and billed back to Tenant. Portions of the
work subject to this procedure may include, but are not specifically limited to:
a) Final connection to Building power source, water supply line,
sewer line, common ductwork or vents, gas lines, sprinkler systems, or fire
alarm systems.
b) Structural alterations such as core drilling, roof penetrations,
cutting or patching of any floors, walls, columns or beams.
c) Installation of any fireproofing.
d) Reviews of Tenant's plans by Landlord's consultants, as
necessary.
e) Any alterations, additions or modifications to the Premises'
facade, storefront or entryways.
<PAGE>
ADDENDUM 1
OPTION TO EXTEND TERM
This Addendum is attached to and made part of that certain Lease (the "Lease")
dated January 31, 1997 by and between Acky-3100 Lake Limited Partnership, as
Landlord, and Vital Images, Inc. as Tenant, covering the Property (the
"Property"). The terms used herein shall have the same definitions as set forth
in the Lease. The provisions of this Addendum shall supersede any inconsistent
or conflicting provisions of the Lease.
A. Option(s) to Extend Term.
1.01 Grant of Option. Landlord hereby grants to Tenant one (1) option (the
"Option") to extend the Lease Term, for an additional term of five (5) years
(the "Extension"), on the same terms and conditions as set forth in the Lease
(including, without limitation, the provisions regarding Improvements Rent), but
at an increased Base Rent as set forth below.
1.02 Exercise of Option: The Option shall be exercised only by written
notice delivered to Landlord at least two hundred seventy (270) days before the
expiration of the Lease Term. If Tenant fails to deliver Landlord written notice
of the exercise of the Option within the prescribed time period, such Option
shall lapse, and there shall be no further right to extend the Lease Term. The
Option shall be exercisable by Tenant on the express conditions that at the time
of the exercise and on the commencement date of such Extension, Tenant shall not
be in default under any of the provisions of the Lease.
1.03 Base Rent: Annual Base Rent during the Extension shall initially be
equal to the sum of (a) annual Base Rent payable immediately prior to the
commencement date of the Extension, plus (b) the greater of (i) the CPI
Adjustment (as hereinafter defined) and (ii) the product of .04, multiplied by
annual Base Rent payable immediately prior to the commencement date of the
Extension. Thereafter, Base Rent payable during the Extension shall be by four
percent (4%) increased on each anniversary of the commencement date of the
Extension, (the same being achieved by multiplying the Base Rent by 104%).
1.04 CPI Adjustment. For purposes hereof, the term "CPI Adjustment" shall
mean an amount equal to the product of (i) the product of $9.50 multiplied by
the number of rentable square feet in the Rentable Area of the Premises
immediately prior to the commencement date of the Extension, multiplied by (ii)
the percentage of increase in the CPI (as hereinafter defined) published for
November 2001 over the CPI published for November 1996.
1.05 Definition of CPI. For purposes hereof "CPI" shall mean the numerical
index of the "Revised Consumer Price Index, All, Urban Consumers New Series"
(1982-84 = 100) published by the United States Department of Labor, Bureau of
Labor Statistics. If the Department of Labor discontinues publication of the
CPI, any comparable consumer price index which shall be subsequently published
to supersede the CPI shall be used, and if none is published, then the Consumer
Price Index published by the United States Department of Commerce (with proper
adjustment) shall be used to determine the above-described increase in annual
Base Rent.
<PAGE>
ADDENDUM 2
OPTION TO EXPAND
This Addendum is attached to and made part of that certain Lease (the "Lease")
dated January 31, 1997 by and between Acky-3100 Lake Limited Partnership, as
Landlord, and Vital Images, Inc. as Tenant, covering the Property (the
"Property"). The terms used herein shall have the same definitions as set forth
in the Lease. The provisions of this Addendum shall supersede any inconsistent
or conflicting provisions of the Lease.
1. Option to Expand.
-----------------
1.01 Subject to the terms and conditions hereinafter set forth, and
provided that if the same is exercised on or after February 10, 1999 Tenant has
theretofore waived its termination option set forth in Addendum 4 hereto or the
same has expired by lapse of time, Tenant shall have an option to lease
additional premises in the Building constituting 7,077 rentable square feet as
outlined on Exhibit A attached hereto (the "Expansion Premises"), for a term
commencing as set forth below.
1.02 Tenant must exercise its expansion option, if at all, by notice to
Landlord given no later than one hundred twenty (120) days prior to the
Expansion Premises Commencement Date (as hereinafter defined), time being of the
essence. If not timely exercised, the Tenant's expansion shall terminate and
Tenant shall have no further right to lease the Expansion Premises pursuant to
this Section.
1.03 The term of the lease of Expansion Premises shall commence on the date
specified in Tenant's Notice of Exercise pursuant to Section 1.02 above (which
must be at least 120 days following the date of Tenant's notice and prior to the
Expiration Date) (the "Expansion Premises Commencement Date").
1.04 If Tenant has validly exercised its option to lease the Expansion
Premises, then effective as of the Expansion Premises Commencement Date, the
Expansion Premises shall be included in the Premises, subject to all the terms,
conditions and provisions of this Lease, except as follows:
(a) the Rentable Area of the Premises shall be increased by the Rentable
Area of the Expansion Premises (which shall be deemed to be 7,077
square feet) (i.e., subject to the addition of any First Offer Space
[as defined in Addendum 3], the total Rentable Area of the Premises
will be 21,293);
(b) Tenant's Proportionate Share shall be increased by the percentage
obtained by dividing the Rentable Area of the Expansion Premises by
the Rentable Area of the Building (i.e., subject to the addition of
any First Offer Space, Tenant's Proportionate Share shall be 44.3%);
(c) the term of the demise covering the Expansion Premises shall commence
on the Expansion Premises Commencement Date and shall expire
simultaneously with the expiration or earlier termination for the
Term, including any extension or renewal thereof;
(d) the Expansion Premises shall be rented in "as is" condition as of the
Expansion Premises Commencement Date;
(e) the Base Rental Rate per square foot of the Rentable Area of the
Expansion Premises shall be equal to the product of the number of
rentable square feet of Rentable Area of the Expansion
1
<PAGE>
Premises, multiplied by the Rental Rate set forth in Section 2.07 of
the Lease from time to time; and
(f) the Improvements Rental Rate per square foot of the Rentable Area of
the Expansion Premises shall be equal to the product of the number of
rentable square feet of Rentable Area of the Expansion Premises,
multiplied by the Rental Rate set forth in Section 2.08 of the Lease
from time to time.
1.05 Tenant may only exercise its option to lease the Expansion Premises,
and an exercise thereof shall only be effective, if at the time of Tenant's
exercise and on the Expansion Premises Commencement Date, this Lease is in full
force and effect and Tenant is not in default under this Lease and (inasmuch
named in this Lease) the entire Premises are occupied by the original Tenant
named herein, and Tenant has not assigned this lease or sublet all or any
portion of the Premises. Without limitation of the foregoing, no sublessee or
assignee shall be entitled to exercise the option and no exercise of the option
by the original Tenant named herein shall be effective if Tenant assigns this
lease or subleases all or part of the Premises prior to the Expansion Premises
Commencement Date.
1.06 If Landlord should be unable for any reason to deliver possession of
the Expansion Premises on the Expansion Commencement Date, Landlord shall not be
subject to any liability for failure to deliver possession. Such failure to
deliver possession shall not affect either the validity of this lease or the
obligations of either Landlord or Tenant hereunder, or be construed to extend
the expiration of the Term of this Lease either as to the Expansion Premises or
to the balance of the Premises; provided, however, that under such
circumstances, Rent shall not commence as to the Expansion Premises until
Landlord does deliver possession. Notwithstanding the foregoing, if for any
reason Landlord is unable to Deliver Possession of the Expansion Premises to
Tenant on or prior to the date falling sixty (60) days following the Expansion
Premises Commencement Date and such failure does not result either from Force
Majeure Events or Tenant caused delays, then (a) Landlord shall not be subject
to any liability therefor and (b) such delay and Landlord's ability to Deliver
Possession shall not effect either the validity of this Lease or the obligations
of either Landlord or Tenant hereunder or be deemed to extend the Expiration
Date either with respect to the Expansion Premises or the balance of the
Premises; provided, however, that under such circumstances Tenant shall have the
right to terminate this Lease, by giving written notice of the same to Landlord
at any time following the end of such 60-day period and prior to the first to
occur of (a) the thirtieth (30th) day following the end of such 60-day period
and (b) the date Landlord does Deliver Possession which termination shall be
effective upon receipt of such notice.
1.07 Upon the valid exercise by Tenant of its expansion option, at the
request of either party hereto, Landlord and Tenant shall enter into a written
supplement to this lease confirming the terms, conditions and provisions
applicable to the Expansion Premises as determined in accordance with the
provisions of this Section.
1.08 The parties acknowledge that there is currently a security system (the
"Security System") that services the Premises as well as the Expansion Premises.
The Security System is currently owned and operated by The Ackerberg Group
("TAG"). TAG is the current tenant of the Expansion Premises pursuant to a lease
with Landlord. In the event that Tenant leases the Expansion Premises (either
pursuant to this Addendum or pursuant to its right of first offer contained in
Addendum 3 hereto), then subject to the rights of TAG, if any, and any other
party having an interest in the Security System, Tenant shall have the right to
use the Security System from and after the Expansion Premises Commencement Date
or First Offer Space Commencement Date (as defined in Addendum 3), as the case
may be, through and including the expiration or earlier termination of this
Lease; it being further understood that (i) Landlord makes no warranty as to the
condition or fitness of the Security System, (ii) Landlord shall have no
obligation to operate, repair, replace or maintain the Security System and (iii)
any use of the Security System by Tenant shall be in compliance with all of the
terms and provisions of this Lease.
2
<PAGE>
ADDENDUM 3
RIGHT OF FIRST OFFER
This Addendum is attached to and made part of that certain Lease (the "Lease")
dated January 31, 1997 by and between Acky-3100 Lake Limited Partnership, as
Landlord, and Vital Images, Inc. as Tenant, covering the Property (the
"Property"). The terms used herein shall have the same definitions as set forth
in the Lease. The provisions of this Addendum shall supersede any inconsistent
or conflicting provisions of the Lease.
1. Right of First Offer. Landlord hereby grants to Tenant the right to
lease any space located in the Building not previously leased to Tenant ("First
Offer Space"), on the terms and conditions hereinafter set forth, when and if
such space become "available for leasing" during the First Offer Period (as
hereinafter defined).
1.01 First Offer Space shall be deemed "available for leasing" after the
latest to occur of (i) the expiration or earlier termination of any existing
lease for such space, including any renewals or extensions thereof, and (ii) if
such space is subject to an expansion option, right of first offer or right of
first refusal in an existing lease, upon the expiration of such option, right of
first offer or right of first refusal or the earlier expiration of the given
lease.
1.02 If First Offer Space becomes available for leasing during the First
Offer Period, then, prior to offering such First Offer Space to the public for
lease, Landlord shall give Tenant written notice (an "Offer Notice") of the
location and net rentable area of such portion of the First Offer Space, the
date of commencement of the term of the demise (the "First Offer Space
Commencement Date"), the expiration date of the term of the demise (which may
extend beyond the Expiration Date for the balance of the Premises so long as (if
the same extends beyond the Expiration Date) the term of the demise is no longer
than 3 years in duration), and the "Prevailing Rental Rate" (as defined in
Section 1.09 below) for such portion of the First Offer Space.
1.03 Tenant's right to lease the First Offer Space described in any such
Offer Notice from Landlord shall be exercisable by written notice from Tenant to
Landlord ("Tenant's Notice") of Tenant's election to exercise said right given
not later than five (5) days after Landlord's Offer Notice is given, time being
of the essence. Tenant may not elect to lease less than the entire area of the
First Offer Space described in such Offer Notice. If Tenant does not timely
exercise its option to lease the entire area of the First Offer Space described
in an Offer Notice by Tenant's Notice, Tenant's right of first offer with
respect to such First Offer Space shall thereupon expire and Tenant shall have
no further right to lease the same pursuant to this Addendum. Notwithstanding
the foregoing, if Tenant agrees with all of the terms and provisions of an Offer
Notice other than Landlord's determination of the Prevailing Rental Rate and
Tenant notifies Landlord of such disagreement in Tenant's Notice, Landlord and
Tenant agree to negotiate the "Prevailing Rental Rate" in good faith for a
period of ten (10) days following Tenant's Notice. If Landlord and Tenant do not
come to agreement with respect to the Prevailing Rental Rate within such 10-day
period, Tenant shall have the right to rescind its exercise with respect to such
First Offer Space by notice given to Landlord on or prior to the expiration of
such 10-day period; it being further understood that (a) if Landlord and Tenant
do come agreement with respect to the Prevailing Renal Rate with respect to any
First Offer Space that is disputed in a Tenant's Notice then the same shall be
deemed the "Prevailing Rental Rate" pursuant to the terms of this Addendum with
respect to such First Offer Space and (b) if Landlord and Tenant do not reach
agreement with respect to the Prevailing Rental Rate and Tenant does not timely
and properly exercise its rescission right described above, Tenant shall be
deemed to accept the Prevailing Rental Rate originally set forth in Landlord's
Offer Notice for the pertinent First Offer Space and the same shall apply for
purposes of this Addendum.
1.04 If Tenant has validly exercised its right to lease First Offer Space,
then, effective as of the pertinent First Offer Space Commencement Date, such
First Offer Space shall be included in the Premises, subject to all of the
terms, conditions and provisions of this Lease, except as follows:
(a) the Rentable Area of the Premises shall be increased by the
rentable area of the First Offer Space, and Tenant's Proportionate Share shall
be increased by the percentage obtained by dividing the rentable area of the
First Offer Space by the Rentable Area of the Building;
1
<PAGE>
(b) the term of the demise covering such First Offer Space shall
commence on the pertinent First Offer Space Commencement Date and shall expire
as of the expiration date set forth in the applicable Offer Notice (which may in
accordance with Section 1.02 above extend beyond the Expiration Date for the
balance of the Premises);
(c) unless otherwise agreed by Landlord and Tenant the First Offer
Space shall be rented in its "as is" condition as of the First Offer Space
Commencement Date; and
(d) the rental rate per square foot of net rentable area for the
First Offer Space shall be equal to the Prevailing Rental Rate.
1.05 If Landlord should be unable to deliver possession on the First
Offer Space Commencement Date of the First Offer Space that Tenant has exercised
its right to lease by reason of any act or occurrence beyond the reasonable
control of Landlord, including by reason of the unlawful holding over of any
tenants or occupants beyond the expiration of their lease terms or other causes
of any nature, Landlord shall not be subject to any liability for failure to so
deliver possession. Such failure to deliver possession shall not affect either
the validity of this Lease or the obligations of either Landlord or Tenant
hereunder or be construed to extend the expiration of the Term either as to such
First Offer Space or the balance of the Premises; provided, however, that under
such circumstances, Rent shall not commence as to such First Offer Space until
Landlord is able to deliver possession. Notwithstanding the foregoing, if for
any reason Landlord is unable to Deliver Possession of any First Offer Space to
Tenant on or prior to the date falling sixty (60) days following the applicable
First Offer Space Commencement Date and such failure does not result either from
Force Majeure Events or Tenant caused delays, then (a) Landlord shall not be
subject to any liability therefor and (b) such delay and Landlord's ability to
Deliver Possession shall not effect either the validity of this Lease or the
obligations of either Landlord or Tenant hereunder or be deemed to extend the
expiration date with respect to either the pertinent First Offer Space or the
balance of the Premises; provided, however, that under such circumstances Tenant
shall have the right to terminate this Lease, by giving written notice of the
same to Landlord at any time following the end of such 60-day period and prior
to the first to occur of (a) the thirtieth (30th) day following the end of such
60-day period and (b) the date Landlord does Deliver Possession which
termination shall be effective upon receipt of such notice.
1.06 As used herein, the term "First Offer Period" shall mean the
period commencing on the Commencement Date for Premises A and expiring on the
date falling two hundred seventy (270) days prior to expiration of the Term.
1.07 If Tenant has validly exercised its right to lease First Offer
Space, at Landlord's option, Landlord and Tenant shall execute and deliver an
amendment to this Lease reflecting the lease of such First Offer Space by
Landlord to Tenant on the terms provided above, which amendment shall be
executed and delivered prior to the pertinent First Offer Space Commencement
Date.
1.08 The right of first offer contained herein shall automatically
terminate and become null and void and of no force and effect upon the
occurrence of any of the following: (i) the expiration or termination of this
Lease, (ii) the termination of Tenant's right to possession of the Premises,
(iii) the assignment of this Lease by Tenant, (iv) the sublease by Tenant of all
or part of the Premises, (v) the failure of Tenant to timely or properly
exercise the right of first offer or (vi) any default by Tenant under this Lease
that extends beyond all applicable notice and cure periods.
1.09 For purposes of this Lease, the "Prevailing Rental Rate" shall
mean the prevailing annual rental rate per square foot of rentable area, as
determined in good faith by Landlord for leases of approximately the same
duration and commencing at approximately the same time as the term for which the
prevailing rental rate is being determined, for improved space in the Building
comparable to the applicable First Offer Space in the area, degree of
improvement and location (to the extent that quoted rental rates in the Building
vary with regard to location). The components of the prevailing rental rate may
included, among the other then prevailing components of rent: a fixed annual
rent (such as Base Rent), periodic adjustments or additions to a fixed annual
rent based on a share of Building real estate taxes and other expenses (such as
the Project Operating Costs) or increases based on an inflation index (such as
CPI Adjustment).
2
<PAGE>
ADDENDUM 4
TERMINATION OPTION
This Addendum is attached to and made part of that certain Lease (the "Lease")
dated January 31, 1997 by and between Acky-3100 Lake Limited Partnership, as
Landlord, and Vital Images, Inc. as Tenant, covering the Property (the
"Property"). The terms used herein shall have the same definitions as set forth
in the Lease. The provisions of this Addendum shall supersede any inconsistent
or conflicting provisions of the Lease.
1. Termination Option. Provided that (a) Tenant is not in default hereunder at
the time of exercise or on the Termination Date (as hereinafter defined), (b)
this Lease is then in full force and effect and (c) Tenant has not exercised any
right to lease First Offer Space pursuant to a Tenant's Notice tendered on or
after February 10, 1999 (unless Tenant has rescinded such exercise pursuant to
Section 1.03 of Addendum 3 hereto), Tenant shall have the option to terminate
this Lease (the "Termination Option"), effective as of the day immediately
preceding the third (3rd) anniversary of the Commencement Date for Premises A
(the "Termination Date"), by giving written notice to Landlord ("Tenant's
Termination Notice") no later than one hundred twenty (120) days prior to the
Termination Date, together with a sum equal to the quotient of (i) the product
of (A) $11.38 multiplied by (B) the number of rentable square feet in the
Rentable Area of the Premises, divided by (ii) 3 (the "Termination Payment")
time being of the essence; provided, however, that if Tenant exercises its
option to expand pursuant to Addendum 2 above or any right to lease First Offer
Space pursuant to Addendum 3 above prior to February 10, 1999, then,
notwithstanding the foregoing, Tenant must furnish Landlord with Tenant's
Termination Notice no later then one hundred eighty (180) days prior to the
Termination Date together with the Termination Payment, time being of the
essence, in order to exercise the Termination Option. If the Termination Option
is not timely exercised or the Termination Payment is not made to Landlord in a
timely manner, the Termination Option shall, thereupon expire and Tenant shall
thereafter have no further right to terminate this Lease. If Tenant shall elect
to terminate this Lease by timely furnishing Landlord Tenant's Termination
Notice and by making the Termination Payment in a timely manner, then on the
Termination Date this Lease shall be deemed to have expired by lapse of time and
Tenant shall return the Premises to Landlord on or before the Termination Date
in accordance with the terms of this Lease. Tenant may only exercise the
Termination Option, and an exercise thereof shall only be effective, if at the
time of Tenant's exercise and on the Termination Date, this lease is in full
force and effect and Tenant is not in default under this Lease, and (inasmuch as
the Termination Option is intended only for the benefit of the original Tenant
named in this Lease) the Premises are occupied by the original Tenant named
herein and said Tenant has not assigned this Lease or sublet all or any portion
of the Premises. Without limitation of the foregoing, no sublessee or assignee
shall be entitled to exercise the Termination Option, and no exercise of the
Termination Option by the original Tenant named herein shall be effective if
said Tenant assigns this Lease or subleases all or any portion of the Premises
prior to the Termination Date. Notwithstanding the foregoing, in the event that
(i) Tenant properly exercises the Termination Option and makes the Termination
Payment in a timely manner and (ii) thereafter (but prior to the Termination
Date) Landlord and Tenant negotiate and enter into a lease for other space in
the Building, Landlord agrees to reimburse the Termination Payment to Tenant.
<PAGE>
February 12, 1997
Mr. Stuart Ackerberg
The Ackerberg Group
Suite 100
3100 West Lake Street
Minneapolis, MN 55416
Re: Sharing Arrangements
Dear Mr. Ackerberg:
As you know, Vital Images, Inc. ("Vital") has entered into a Lease Agreement
with Acky-3100 Lake Limited Partnership (the "Landlord") of even date herewith
(the "Vital Lease"). Pursuant to the Vital Lease, Vital will lease certain
premises located on the first floor ("Premises A") of the building known as Lake
Pointe Corporate Centre in Minneapolis (the "Building") and certain premises
located on the second floor of the Building ("Premises B"). The Landlord has
also granted to Vital the right to lease additional space on the first floor of
the Building ("Premises C") upon not less than 120 days' prior notice to the
Landlord. It is Vital's understanding that the Ackerberg Group ("Ackerberg")
has entered into a lease of Premises C with the Landlord (the "Ackerberg
Lease").
The purpose of this letter is to set forth the understandings of Vital and
Ackerberg with respect to the shared use of certain portions of Premises A and
Premises C, the shared use and compensation of a receptionist, the shared use of
the existing security system and Ackerberg's telephone system, the potential
early occupancy of portions of Premises B by Vital and certain other matters
pertaining to Premises C. The understanding of the parties with respect to each
of these matters is as follows:
1. Shared Space. The parties hereby acknowledge and agree that, within
Premises A is located an employee entrance area, a computer room (the "Computer
Room"), a coat room and a lunch room (collectively, the "Shared Vital Space")
and within Premises C is located a reception area (the "Shared Ackerberg
Space"). Ackerberg desires access to and use of the Shared Vital Space, for
itself and its employees, during the term of its occupancy of Premises C. Vital
desires access to and use of the Shared Ackerberg Space, for itself, its
employees, customers and invitees, throughout its occupancy of Premises A. For
purposes of this letter agreement, the parties agree that the Shared Vital Space
and the Shared Ackerberg Space is as outlined on Exhibit A hereto. Vital hereby
agrees to permit Ackerberg and its employees access
<PAGE>
Mr. Stuart Ackerberg
February 12, 1997
Page 2
to and use of the Shared Vital Space, in common with Vital and its employees;
provided, however, that in recognition of Vital's confidentiality concerns,
access to the Computer Room shall be limited to those employees of Ackerberg who
require such access in connection with performing their employment duties for
Ackerberg. Ackerberg hereby agrees to permit Vital, its employees, customers and
invitees, access to and use of the Shared Ackerberg Space, in common with
Ackerberg, its employees, customers and invitees. Vital's use of the Shared
Ackerberg Space hereunder, and Ackerberg's use of the Shared Vital Space
hereunder, shall be consistent with the rules and regulations applicable under
the Vital Lease and with such other reasonable rules of conduct as may be
established from time to time by Vital and/or Ackerberg. Vital and Ackerberg
shall each bear their own expenses, and their own share of operating expenses
under the Vital Lease and the Ackerberg Lease, respectively, relating to the
Shared Vital Space and the Shared Ackerberg Space, respectively.
2. Receptionist. Vital acknowledges that Ackerberg currently employs a
receptionist, who performs telephone answering, facsimile and related
receptionist duties for Ackerberg's business from a location within the Shared
Ackerberg Space. Ackerberg hereby agrees to permit such receptionist to perform
the same and similar duties for Vital's business in the Building. In
consideration of such services, Vital hereby agrees to pay Ackerberg on a
monthly basis an amount equal to 50% of the sum of (i) the salary or wages paid
to, and (ii) any standard fringe benefits accruing for the benefit of, such
receptionist, by or from Ackerberg. Vital and Ackerberg shall each have the
right to terminate the receptionist-sharing arrangement described in this
paragraph 2 at any time upon thirty (30) days' prior notice to the other party.
In the event of any such cancellation, Ackerberg agrees that Vital shall have
the right to locate another receptionist, together with telephone, computer and
related reception equipment, in the reception area contained within the
Ackerberg Space for the purpose of providing reception services in connection
with Vital's business.
3. Security and Phone Systems. Vital and Ackerberg each hereby
acknowledges that (i) there is presently located within the Building a security
system serving Premises A, Premises B and Premises C (the "Security System"),
and (ii) Ackerberg has installed and is presently using a "PBX" telephone system
in connection with its business operations in the Building (the "Telephone
System"). Ackerberg hereby agrees that (a) Vital shall have free access to and
use of the Security System in connection with its occupancy of Premises A and
Premises B, with no charge or fee to be paid by Vital for such access or usage,
and (b) Ackerberg shall leave in place the Security System card-key readers and
all wiring related thereto for Vital's use upon any vacation of Premises C by
Ackerberg. Ackerberg also agrees to permit Vital to use the Telephone System,
until such time as Vital installs its own telephone system, to provide handsets
relating to such usage and to program the Telephone System to support such
usage. Vital hereby agrees to pay to Ackerberg on a monthly basis an equitable
amount based upon Vital's usage of handsets and its relative usage of the
Telephone System, which amount shall be reasonably determined by Ackerberg based
upon amounts paid by
<PAGE>
Mr. Stuart Ackerberg
February 12, 1997
Page 3
Ackerberg for it usage of the Telephone system, and to pay all costs relating to
long distance charges, expenses for local telephone service and costs relating
to installation of any phone lines necessary for such usage. Vital estimates
that it may require usage of the Telephone System and handsets for approximately
one to three months, after which time Vital expects that it will have to install
its own telephone system. In this regard, Ackerberg agrees not to restrict
Vital's access to phone line wiring or related systems necessary for
installation of Vital's own Telephone System.
4. Early Occupancy of Premises B. As set forth in the Vital Lease,
Vital's Lease and occupancy of Premises B is scheduled to commence on September
1, 1997 (the "Commencement Date"). Vital acknowledges that Ackerberg is or may
be using and/or occupying all or a portion of Premises B between the date hereof
and the Commencement Date. At the mutual convenience of Ackerberg and Vital,
and notwithstanding the foregoing, Vital and Ackerberg agree that Vital may
occupy, on an office-by-office basis, Premises B from time to time after the
date hereof and prior to the Commencement Date. Should Vital so occupy all or
any portion of Premises B, Vital agrees to pay to Ackerberg rent for any such
space so occupied at the applicable per square foot rental rate then in affect
under the Vital Lease, together with any share of occupancy expenses and real
estate taxes allocated to such space pursuant to the Ackerberg Lease.
5. Premises C Restrictions. Ackerberg hereby acknowledges that, under the
Vital Lease, Vital has the right to lease Premises C from the Landlord upon not
less 120 days prior notice to the Landlord, and that Ackerberg shall have the
obligation to vacate Premises C prior to the Commencement Date of Vital's Lease
of Premises C. Ackerberg further agrees (i) that it will not materially alter or
modify the presently existing tenant improvements within Premises C, without
first notifying Vital in writing of such intended alteration or modification;
and (ii) that, should Ackerberg desire to assign its rights to occupy Premises
C, or to sublet all or any portion of Premises C, Ackerberg shall first notify
Vital of such intention.
Ackerberg and Vital hereby agree that this letter agreement shall remain in
effect (except as otherwise specifically set forth herein) until the earliest to
occur of (a) this letter agreement is terminated by mutual written consent of
Ackerberg and Vital, (b) Vital leases and occupies Premises C pursuant to its
expansion right set forth in Addendum 2 to the Vital Lease, or (c) the
expiration or earlier termination of the Ackerberg Lease or the Vital Lease or
of Ackerberg's or Vital's respective right of possession under the Ackerberg
Lease or the Vital Lease, respectively. In the event of any breach of this
letter agreement, the non-breaching party shall be entitled to any and all
rights available at law or in equity. This letter agreement shall not be
amended or modified in any respect, unless such amendment or modification is set
forth in writing and signed by Ackerberg and Vital.
<PAGE>
Mr. Stuart Ackerberg
February 12, 1997
Page 4
Very truly yours,
VITAL IMAGES, INC.
By: /s/ Andrew Weiss
-------------------------
& Its: President & CEO
-----------------------
Agreed and acknowledged this 12 day of February, 1997.
THE ACKERBERG GROUP
By:
-------------------------
Its:
-----------------------
(Signature page to Letter Agreement)
<PAGE>
[FLOOR PLAN OF LEASED PREMISES APPEARS HERE]
<PAGE>
EXHIBIT 10.17
CHANGE IN CONTROL AGREEMENT
---------------------------
[Date]
Mr./Ms. _______________
___________________
___________________
Dear Mr./Ms. _______________:
You are presently [being offered the position of] [the] _______________ of Vital
Images, Inc., a Minnesota corporation (the "Company"). The Company considers the
establishment and maintenance of a sound and vital management to be essential to
protecting and enhancing the best interests of the Company and its shareholders.
In this connection, the Company recognizes that, as is the case with many
publicly held corporations, the possibility of a Change in Control may arise and
that such possibility and the uncertainty and questions which it may raise among
management may result in the departure or distraction of management personnel to
the detriment of the Company and its shareholders.
Accordingly, the Board has determined that appropriate steps should be taken to
minimize the risk that Company management will depart prior to a Change in
Control, thereby leaving the Company without adequate management personnel
during such a critical period, and that appropriate steps also be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a Change in Control. In
particular, the Board believes it important, should the Company or its
shareholders receive a proposal for transfer of control, that you be able to
continue your management responsibilities without being influenced by the
uncertainties of your own personal situation.
The Board recognizes that continuance of your position with the Company involves
a substantial commitment to the Company in terms of your personal life and
professional career and the possibility of foregoing present and future career
opportunities, for which the Company receives substantial benefits. Therefore,
to induce you to remain in the employ of the Company, this Agreement, which has
been approved by the Board, sets forth the benefits which the Company agrees
will be provided to you in the event your employment with the Company is
terminated in connection with a Change in Control under the circumstances
described below.
The following terms will have the meaning set forth below unless the context
clearly requires otherwise. Terms defined elsewhere in this Agreement will have
the same meaning throughout this Agreement.
ARTICLE I.
DEFINITIONS
-----------
1. "Affiliate" means (i) any corporation at least a majority of whose
outstanding securities
<PAGE>
Mr./Ms. _______________
[Date]
Page 2
ordinarily having the right to vote at elections of directors is owned
directly or indirectly by the Company or (ii) any other form of business
entity in which the Company, by virtue of a direct or indirect ownership
interest, has the right to elect a majority of the members of such entity's
governing body.
2. "Agreement" means this letter agreement as amended, extended or renewed
from time to time in accordance with its terms.
3. "Board" means the board of directors of the Company duly qualified and
acting at the time in question. On and after the date of a Change in
Control, any duty of the Board in connection with this Agreement is
nondelegable and any attempt by the Board to delegate any such duty is
ineffective.
4. "Cause" means:
a. your gross misconduct;
b. your willful and continued failure to perform substantially your
duties with the Company (other than any such failure (1) resulting
from your Disability or incapacity due to bodily injury or physical or
mental illness or (2) relating to changes in your duties after a
Change in Control which constitute Good Reason) after a demand for
substantial performance is delivered to you by the chair of the Board
which specifically identifies the manner in which you have not
substantially performed your duties and provides for a reasonable
period of time within which you may take corrective actions; or
c. your conviction (including a plea of nolo contendere) of willfully
engaging in illegal conduct constituting a felony or gross misdemeanor
under federal or state law which is materially and demonstrably
injurious to the Company or which impairs your ability to perform
substantially your duties for the Company.
An act or failure to act will be considered "gross" or "willful" for this
purpose only if done, or omitted to be done, by you in bad faith and
without reasonable belief that it was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Company's board of
directors (or a committee thereof) or based upon the advice of counsel for
the Company will be conclusively presumed to be done, or omitted to be
done, by you in good faith and in the best interests of the Company. It is
also expressly understood that your attention to matters not directly
related to the business of the Company will not provide a basis for
termination for Cause so long as the Board did not expressly disapprove in
writing of your engagement in such activities either before or within a
reasonable period of time after the Board knew or could reasonably have
known that you engaged in those activities. Notwithstanding the
<PAGE>
Mr./Ms. _______________
[Date]
Page 3
foregoing, you may not be terminated for Cause unless and until there has
been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of
the Board at a meeting of the Board called and held for the purpose (after
reasonable notice to you and an opportunity for you, together with your
counsel, to be heard before the Board), finding that in the good faith
opinion of the Board you were guilty of the conduct set forth above in
clauses a., b. or c. of this definition and specifying the particulars
thereof in detail.
5. "Change in Control" means any of the following:
a. the sale, lease, exchange or other transfer, directly or indirectly,
of all or substantially all of the assets of the Company in one
transaction or in a series of related transactions, to any Person;
b. the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, as the
case may be;
c. any Person is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of (1) 20
percent or more, but not more than 50 percent, of the combined voting
power of the outstanding securities of the Company ordinarily having
the right to vote at elections of directors, unless the transaction
resulting in such ownership has been approved in advance by the
"continuity directors" or (2) more than 50 percent of the combined
voting power of the outstanding securities of the Company ordinarily
having the right to vote at elections of directors (regardless of any
approval by the continuity directors);
d. a merger or consolidation to which the Company is a party if the
shareholders of the Company immediately prior to the effective date of
such merger or consolidation have, solely on account of ownership of
securities of the Company at such time, "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act) immediately following
the effective date of such merger or consolidation of securities of
the surviving company representing (1) 50 percent or more, but not
more than 80 percent, of the combined voting power of the surviving
corporation's then outstanding securities ordinarily having the right
to vote at elections of directors, unless such merger or consolidation
has been approved in advance by the continuity directors, or (2) less
than 50 percent of the combined voting power of the surviving
corporation's then outstanding securities ordinarily having the right
to vote at elections of directors (regardless of any approval by the
continuity directors);
e. the continuity directors cease for any reason to constitute at least a
majority the Board; or
<PAGE>
Mr./Ms. _______________
[Date]
Page 4
f. a change in control of a nature that is determined by outside legal
counsel to the Company, in a written opinion specifically referencing
this provision of the Agreement, to be required to be reported
(assuming such event has not been "previously reported") pursuant to
section 13 or 15(d) of the Exchange Act, whether or not the Company is
then subject to such reporting requirement, as of the effective date
of such change in control.
For purposes of this Section 1(e), a "continuity director" means any
individual who is a member of the Board on _______________, 199___, while
he or she is a member of the Board, and any individual who subsequently
becomes a member of the Board whose election or nomination for election by
the Company's shareholders was approved by a vote of at least a majority of
the directors who are continuity directors (either by a specific vote or by
approval of the proxy statement of the Company in which such individual is
named as a nominee for director without objection to such nomination).
6. "Code" means the Internal Revenue Code of 1986, as amended. Any reference
to a specific provision of the Code includes a reference to such provision
as it may be amended from time to time and to any successor provision.
7. "Company" means Vital Images, Inc. and/or any Affiliate.
8. "Confidential Information" means information which is proprietary to the
Company or proprietary to others and entrusted to the Company, whether or
not trade secrets. It includes information relating to business plans and
to business as conducted or anticipated to be conducted, and to past or
current or anticipated products or services. It also includes, without
limitation, information concerning research, development, purchasing,
accounting, marketing and selling. All information which you have a
reasonable basis to consider confidential is Confidential Information,
whether or not originated by you and without regard to the manner in which
you obtain access to that and any other proprietary information.
9. "Date of Termination" following a Change in Control (or prior to a Change
in Control if your termination was either a condition of the Change in
Control or was at the request or insistence of any Person related to the
Change in Control) means:
a. if your employment is to be terminated for Disability, 30 days after
Notice of Termination is given (provided that you have not returned to
the performance of your duties on a full-time basis during such 30-day
period);
b. if your employment is to be terminated by the Company for Cause or by
you for Good Reason, the date specified in the Notice of Termination,
which date may not be less than 30 days or more than 60 days after the
date on which the Notice of
<PAGE>
Mr./Ms. _______________
[Date]
Page 5
Termination is given unless you and the Company otherwise expressly
agree;
c. if your employment is to be terminated by the Company for any reason
other than Cause, Disability, death or Retirement, the date specified
in the Notice of Termination, which in no event may be a date earlier
than 90 days after the date on which a Notice of Termination is given,
unless an earlier date has been expressly agreed to by you in writing
either in advance of, or after; receiving such Notice of Termination;
or
d. if your employment is terminated by reason of death or Retirement, the
date of death or Retirement, respectively.
In the case of termination by the Company of your employment for Cause, if
you have not previously expressly agreed in writing to the termination,
then within 30 days after receipt by you of the Notice of Termination with
respect thereto, you may notify the Company that a dispute exists
concerning the termination, in which event the Date of Termination will be
the date set either by mutual written agreement of the parties or by the
judge or arbitrators in a proceeding as provided in Section 13 of this
Agreement. During the pendency of any such dispute, you will continue to
make yourself available to provide services to the Company and the Company
will continue to pay you your full compensation and benefits in effect
immediately prior to the date on which the Notice of Termination is given
(without regard to any changes to such compensation or benefits which
constitute Good Reason) and until the dispute is resolved in accordance
with Section 13 of this Agreement. You will be entitled to retain the full
amount of any such compensation and benefits without regard to the
resolution of the dispute unless the judge or arbitrators decide(s) that
your claim of a dispute was frivolous or advanced by you in bad faith.
10. "Disability" means a disability as defined in the Company's long-term
disability plan as in effect immediately prior to the Change in Control
or; in the absence of such a plan, means permanent and total disability as
defined in section 22(e)(3) of the Code.
11. "Exchange Act" means the Securities Exchange Act of 1934, as amended. Any
reference to a specific provision of the Exchange Act or to any rule or
regulation thereunder includes a reference to such provision as it may be
amended from time to time and to any successor provision.
12. "Good Reason" means:
a. change in your status, position(s), duties or responsibilities as an
executive of the Company as in effect immediately prior to the Change in
Control which, in your reasonable judgment, is an adverse change (other
than, if applicable, any such change directly attributable to the fact
that the Company is no longer publicly
<PAGE>
Mr./Ms. _______________
[Date]
Page 6
owned) except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by
you other than for Good Reason;
b. a reduction by the Company in your base salary (or an adverse change
in the form or timing of the payment thereof) as in effect immediately
prior to the Change in Control or as thereafter increased;
c. the failure by the Company to continue in effect any Plan in which you
(and/or your family) are eligible to participate at any time during
the 90-day period immediately preceding the Change in Control (or
Plans providing you (and/or your family) with at least substantially
similar benefits) other than as a result of the normal expiration of
any such Plan in accordance with its terms as in effect immediately
prior to the 90-day period immediately preceding the time of the
Change in Control, or the taking of any action, or the failure to act,
by the Company which would adversely affect your (and/or your
family's) continued eligibility to participate in any of such Plans on
at least as favorable a basis to you (and/or your family) as is the
case on the date of the Change in Control or which would materially
reduce your (and/or your family's) benefits in the future under any of
such Plans or deprive you (and/or your family) of any material benefit
enjoyed by you (and/or your family) at the time of the Change in
Control;
d. the Company's requiring you to be based more than 30 miles from where
your office is located immediately prior to the Change in Control,
except for required travel on the Company's business, and then only to
the extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company during the
90-day period immediately preceding the Change in Control (without
regard to travel related to or in anticipation of the Change in
Control);
e. the failure by the Company to obtain from any Successor the assent to
this Agreement contemplated by Section 6 of this Agreement;
f. any purported termination by the Company of your employment which is
not properly effected pursuant to a Notice of Termination and pursuant
to any other requirements of this Agreement, and for purposes of this
Agreement, no such purported termination will be effective;
g. any refusal by the Company to continue to allow you to attend to
matters or engage in activities not directly related to the business
of the Company which, at any time prior to the Change in Control, you
were not expressly prohibited in writing by the Board from attending
to or engaging in; or
<PAGE>
Mr./Ms. _______________
[Date]
Page 7
h. your termination of your employment with the Company for any reason
other than death, Disability or Retirement during the twelfth (12th)
month following the month in which a Change in Control occurs.
13. "Highest Monthly Compensation" means one-twelfth of the highest amount of
your compensation for any 12 consecutive calendar-month period during the
____ consecutive calendar-month period prior to the month that includes the
Date of Termination. For purposes of this definition, "compensation" means
the amount reportable by the Company, for federal income tax purposes, as
wages paid to you by the Company, increased by the amount of contributions
made by the Company with respect to you under any qualified cash or
deferred arrangement or cafeteria plan that is not then includable in your
income by reason of the operation of section 402(a)(8) or section 125 of
the Code, and increased further by any other compensation deferred for any
reason.
14. "Notice of Termination" means a written notice given on or after the date
of a Change in Control (unless your termination before the date of the
Change in Control was either a condition of the Change in Control or was at
the request or insistence of any Person related to the Change in Control)
which indicates the specific termination provision in this Agreement
pursuant to which the notice is given. Any purported termination by the
Company or by you for Good Reason on or after the date of a Change in
Control (or before the date of a Change in Control if your termination was
either a condition of the Change in Control or was at the request or
insistence of any Person related to the Change in Control) must be
communicated by written Notice of Termination to be effective; provided,
that your failure to provide Notice of Termination will not limit any of
your rights under this Agreement except to the extent the Company
demonstrates that it suffered material actual damages by reason of such
failure.
15. "Person" means any individual, corporation, partnership, group, association
or other "person," as such term is used in section 14(d) of the Exchange
Act, other than the Company, any Affiliate or any employee benefit plan(s)
sponsored by the Company or an Affiliate.
16. "Plan" means any compensation plan, program, policy or agreement (such as a
stock option, restricted stock plan or other equity-based plan), any bonus
or incentive compensation plan, program, policy or agreement, any employee
benefit plan, program, policy or agreement (such as a thrift, pension,
profit sharing, medical, dental, disability, accident, life insurance,
relocation, salary continuation, expense reimbursements, vacation, fringe
benefits, office and support staff plan or policy) or any other plan,
program, policy or agreement of the Company intended to benefit employees
(and/or their families) generally, management employees (and/or their
families) as a group or you (and/or your family) in particular.
17. "Retirement" means termination of employment on or after the day on which
you attain the
<PAGE>
Mr./Ms. _______________
[Date]
Page 8
age of 65.
18. "Successor" means any Person that succeeds to, or has the practical ability
to control (either immediately or solely with the passage of time), the
Company's business directly, by merger, consolidation or other form of
business combination, or indirectly, by purchase of the Company's
outstanding securities ordinarily having the right to vote at the election
of directors or, all or substantially all of its assets or otherwise.
ARTICLE II.
TERM OF AGREEMENT
-----------------
This Agreement is effective immediately and will continue in effect until
_______________, 199___; provided, however; that commencing on _______________,
199___ and each _______________ thereafter, the term of this Agreement will
automatically be extended for 12 additional months beyond the expiration date
otherwise then in effect, unless at least 90 calendar days prior to any such
_______________, the Company or you has given notice that this Agreement will
not be extended; and, provided, further; that if a Change in Control has
occurred during the term of this Agreement, this Agreement will continue in
effect beyond the termination date then in effect for a period of 12 months
following the month during which the Change in Control occurs or, if later,
until the date on which the Company's obligations to you arising under or in
connection with this Agreement have been satisfied in full.
ARTICLE III.
CHANGE IN CONTROL BENEFITS
--------------------------
1. Benefits upon a Change in Control Termination. You will become entitled to
the payments and benefits described in clauses (a) and (b) of this Article
III., subject to the limitations described in clause (c) of this Article
III., and to the benefit of the provisions described in clause (d), if and
only if (i) your employment with the Company is terminated for any reason
other than death, Cause, Disability or Retirement, or if you terminate your
employment with the Company for Good Reason; and (ii) the termination
occurs either within the period beginning on the date of a Change in
Control and ending on the last day of the twelfth month that begins after
the month during which the Change in Control occurs or prior to a Change in
Control if your termination was either a condition of the Change in Control
or was at the request or insistence of a Person related to the Change in
Control.
a. Cash Payment. Within five business days following the Date of
Termination or, if later, within five business days following the date
of the Change in Control, the Company will make a lump-sum cash
payment to you in an amount equal to the product of (i) your Highest
Monthly Compensation multiplied by (ii) ____.
b. Welfare Plans. The Company will maintain in full force and effect, for
the
<PAGE>
Mr./Ms. _______________
[Date]
Page 9
continued benefit of you and your dependents for a period terminating
___ months after the Date of Termination, all insured and self-insured
employee welfare benefit Plans (including, without limitation,
medical, life, dental, vision and disability plans) in which you were
eligible to participate at any time during the 90-day period
immediately preceding the Change in Control, provided that your
continued participation is possible under the general terms and
provisions of such Plans and any applicable funding media and without
regard to any discretionary amendments to such Plans by the Company
following the Change in Control (or prior to the Change in Control if
amended as a condition or at the request or insistence of a Person
(other than the Company) related to the Change in Control) and
provided that you continue to pay an amount equal to your regular
contribution under such Plans for such participation (based upon your
level of benefits and employment status most favorable to you at any
time during the 90-day period immediately preceding the Change in
Control). The continuation period under federal and state continuation
laws, to the extent applicable, will begin to run from the date on
which coverage pursuant to this clause (b) ends. If, at the end of the
___ -month period, you have not previously received or are not then
receiving equivalent benefits from a new employer (including coverage
for any pre-existing conditions), the Company will arrange, at its
sole cost and expense, to enable you to convert your and your
dependents' coverage under such Plans to individual policies or
programs upon the same terms as executives of the Company may apply
for such conversions. In the event that your or your dependents'
participation in any such Plan is barred, the Company, at its sole
cost and expense, will arrange to have issued for the benefit of you
and your dependents individual policies of insurance providing
benefits substantially similar (on a federal, state and local income
and employment after-tax basis) to those which you otherwise would
have been entitled to receive under such Plans pursuant to this clause
(b) or; if such insurance is not available at a reasonable cost to the
Company, the Company will otherwise provide you and your dependents
equivalent benefits (on a federal, state and local income and
employment after-tax basis). You will not be required to pay any
premiums or other charges in an amount greater than that which you
would have paid in order to participate in such Plans.
c. Limitation on Payments and Benefits. Notwithstanding anything in this
Agreement to the contrary, if any of the payments or benefits to be
made or provided in connection with this Agreement, together with any
other payments or benefits which you have the right to receive from
the Company or any corporation which is a member of an "affiliated
group" (as defined in section 1504(a) of the Code without regard to
section 1504(b) of the Code) of which the Company is a member
constitute an "excess parachute payment" (as defined in section
280G(b) of the Code), the payments or benefits to be made or provided
in connection with this Agreement will be reduced to the extent
necessary to prevent any portion of such payments or benefits from
becoming subject to the excise tax imposed under section
<PAGE>
Mr./Ms. _______________
[Date]
Page 10
4999 of the Code. The determination as to whether any such decrease in
the payments or benefits to be made or provided in connection with
this Agreement is necessary must be made in good faith by legal
counsel or a certified public accountant selected by you and
reasonably acceptable to the Company, and such determination will be
conclusive and binding upon you and the Company. In the event that
such a reduction is necessary, you will have the right to designate
the particular payments or benefits that are to be reduced or
eliminated so that no portion of the payments or benefits to be made
or provided to you in connection with this Agreement will be excess
parachute payments subject to the excise tax under Code section 4999.
The Company will pay or reimburse you on demand for the reasonable
fees, costs and expenses of the counsel or accountant selected to make
the determinations under this clause (c).
2. Disposition. If, on or after the date of a Change in Control, an Affiliate
is sold, merged, transferred or in any other manner or for any other reason
ceases to be an Affiliate or all or any portion of the business or assets
of an Affiliate are sold, transferred or otherwise disposed of and the
acquiror is not the Company or an Affiliate (a "Disposition"), and you
remain or become employed by the acquiror or an affiliate of the acquiror
(as defined in this Agreement but substituting "acquiror" for "Company") in
connection with the Disposition, you will be deemed to have terminated
employment on the effective date of the Disposition for purposes of this
section unless (a) the acquiror and its affiliates jointly and severally
expressly assume and agree, in a manner that is enforceable by you, to
perform the obligations of this Agreement to the same extent that the
Company would be required to perform if the Disposition had not occurred
and (b) the Successor guarantees, in a manner that is enforceable by you,
payment and performance by the acquiror.
ARTICLE IV.
INDEMNIFICATION
---------------
Following a Change in Control, the Company will indemnify and advance expenses
to you to the full extent permitted by law and the Company's articles of
incorporation and bylaws for damages, costs and expenses (including, without
limitation, judgments, fines, penalties, settlements and reasonable fees and
expenses of your counsel) incurred in connection with all matters, events and
transactions relating to your service to or status with the Company or any other
corporation, employee benefit plan or other entity with whom you served at the
request of the Company.
ARTICLE V.
CONFIDENTIALITY
---------------
You will not use, other than in connection with your employment with the
Company, or disclose any Confidential Information to any person not employed by
the Company or not authorized by the Company to receive such Confidential
Information, without the prior written consent of the
<PAGE>
Mr./Ms. _______________
[Date]
Page 11
Company; and you will use reasonable and prudent care to safeguard and protect
and prevent the unauthorized disclosure of Confidential Information. Nothing in
this Agreement will prevent you from using, disclosing or authorizing the
disclosure of any Confidential Information: (a) which is or hereafter becomes
part of the public domain or otherwise becomes generally available to the public
through no fault of yours; (b) to the extent and upon the terms and conditions
that the Company may have previously made the Confidential Information available
to certain persons; or (c) to the extent that you are required to disclose such
Confidential Information by law or judicial or administrative process.
ARTICLE VI.
SUCCESSORS
----------
The Company will seek to have any Successor, by agreement in form and substance
satisfactory to you, assent to the fulfillment by the Company of the Company's
obligations under this Agreement. Failure of the Company to obtain such assent
at least three business days prior to the time a Person becomes a Successor (or
where the Company does not have at least three business days' advance notice
that a Person may become a Successor, within one business day after having
notice that such Person may become or has become a Successor) will constitute
Good Reason for termination by you of your employment. The date on which any
such succession becomes effective will be deemed the Date of Termination and
Notice of Termination will be deemed to have been given on that date. A
Successor has no rights, authority or power with respect to this Agreement prior
to a Change in Control.
ARTICLE VII.
OTHER PROVISIONS
----------------
1. Fees and Expenses. The Company, upon demand, will pay or reimburse you for
all reasonable legal fees, court costs, experts' fees and related costs and
expenses incurred by you in connection with any actual, threatened or
contemplated litigation or legal, administrative, arbitration or other
proceeding relating to this Agreement to which you are or reasonably expect
to become a party, whether or not initiated by you, including, without
limitation: (a) all such fees and expenses, if any, incurred in contesting
or disputing any such termination; or (b) your seeking to obtain or enforce
any right or benefit provided by this Agreement; provided, however; you
will be required to repay (without interest) any such amounts to the
Company to the extent that a court issues a final and non-appealable order
setting forth the determination that the position taken by you was
frivolous or advanced by you in bad faith.
2. Binding Agreement. This Agreement inures to the benefit of, and is
enforceable by, you, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you die while any amount would still be payable to you under this Agreement
if you had continued to live, all such amounts, unless otherwise
<PAGE>
Mr./Ms. _______________
[Date]
Page 12
provided in this Agreement, will be paid in accordance with the terms of
this Agreement to your devisee, legatee or other designee or; if there be
no such designee, to your estate.
3. No Mitigation. You will not be required to mitigate the amount of any
payments or benefits the Company becomes obligated to make or provide to
you in connection with this Agreement by seeking other employment or
otherwise. The payments or benefits to be made or provided to you in
connection with this Agreement may not be reduced, offset or subject to
recovery by the Company by any payments or benefits you may receive from
other employment or otherwise.
4. No Setoff. The Company has no right to setoff payments or benefits owed to
you under this Agreement against amounts owed or claimed to be owed by you
to the Company under this Agreement or otherwise.
5. Taxes. All payments and benefits to be made or provided to you in
connection with this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.
6. Notices. For the purposes of this Agreement, notices and all other
communications provided for in, or required under, this Agreement must be
in writing and will be deemed to have been duly given when personally
delivered or when mailed by United States registered or certified mail,
return receipt requested, postage prepaid and addressed to each party's
respective address set forth on the first page of this Agreement (provided
that all notices to the Company must be directed to the attention of the
chair of the Board), or to such other address as either party may have
furnished to the other in writing in accordance with these provisions,
except that notice of change of address will be effective only upon
receipt.
7. Disputes. If you so elect, any dispute, controversy or claim arising under
or in connection with this Agreement will be settled exclusively by binding
arbitration administered by the American Arbitration Association in
Minneapolis, Minnesota in accordance with the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction;
provided, that you may seek specific performance of your right to receive
payment or benefits until the Date of Termination during the pendency of
any dispute or controversy arising under or in connection with this
Agreement. The Company will be entitled to seek an injunction or
restraining order in a court of competent jurisdiction (within or without
the State of Minnesota) to enforce the provisions of Section 5 of this
Agreement.
8. Jurisdiction. Except as specifically provided otherwise in this Agreement,
the parties agree that any action or proceeding arising under or in
connection with this Agreement must be brought in a court of competent
jurisdiction in the State of Minnesota, and hereby consent to the exclusive
jurisdiction of said courts for this purpose and agree not to assert that
such
<PAGE>
Mr./Ms. _______________
[Date]
Page 13
courts are an inconvenient forum.
9. Related Agreements. To the extent that any provision of any other Plan or
agreement between the Company and you limits, qualifies or is inconsistent
with any provision of this Agreement, then for purposes of this Agreement,
while such other Plan or agreement remains in force, the provision of this
Agreement will control and such provision of such other Plan or agreement
will be deemed to have been superseded, and to be of no force or effect, as
if such other agreement had been formally amended to the extent necessary
to accomplish such purpose. Nothing in this Agreement prevents or limits
your continuing or future participation in any Plan provided by the Company
and for which you may qualify, and nothing in this Agreement limits or
otherwise affects the rights you may have under any Plans or other
agreements with the Company. Amounts which are vested benefits or which
you are otherwise entitled to receive under any Plan or other agreement
with the Company at or subsequent to the Date of Termination will be
payable in accordance with such Plan or other agreement.
10. No Employment or Service Contract. Nothing in this Agreement is intended
to provide you with any right to continue in the employ of the Company for
any period of specific duration or interfere with or otherwise restrict in
any way your rights or the rights of the Company, which rights are hereby
expressly reserved by each, to terminate your employment at any time for
any reason or no reason whatsoever, with or without cause.
11. Funding and Payment. Benefits payable under this Agreement will be paid
only from the general assets of the Company. No person has any right to or
interest in any specific assets of the Company by reason of this Agreement.
To the extent benefits under this Agreement are not paid when due to any
individual, he or she is a general unsecured creditor of the Company with
respect to any amounts due. The Company with whom you were employed
immediately before your Date of Termination has primary responsibility for
benefits to which you or any other person are entitled pursuant to this
Agreement but to the extent such Company is unable or unwilling to provide
such benefits, the Company and each other Affiliate are jointly and
severally responsible therefor to the extent permitted by applicable law.
If you were simultaneously employed by more than one Company immediately
before your Date of Termination, each such Company has primary
responsibility for a portion of the benefits to which you or any other
person are entitled pursuant to this Agreement that bears the same ratio to
the total benefits to which you or such other person are entitled pursuant
to this Agreement as your base pay from the Company immediately before your
Date of Termination bears to your aggregate base pay from all such
Companies.
12. Survival. The respective obligations of, and benefits afforded to, the
Company and you which by their express terms or clear intent survive
termination of your employment with the Company or termination of this
Agreement, as the case may be, including without limitation the provisions
of Articles III, IV, V and VI and Sections 1, 4, 5, 6 and 7 of Article
<PAGE>
Mr./Ms. _______________
[Date]
Page 14
VII of this Agreement, will survive termination of your employment with the
Company or termination of this Agreement, as the case may be, and will
remain in full force and effect according to their terms.
ARTICLE VIII.
MISCELLANEOUS
-------------
1. Modification and Waiver. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is
agreed to in a writing signed by you and the chair of the Board. No waiver
by any party to this Agreement at any time of any breach by another party
to this Agreement of, or of compliance with, any condition or provision of
this Agreement to be performed by such party will be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time.
2. Entire Agreement. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter to this Agreement
have been made by any party which are not expressly set forth in this
Agreement.
3. Governing Law. This Agreement and the legal relations among the parties as
to all matters, including, without limitation, matters of validity,
interpretation, construction, performance and remedies, will be governed by
and construed exclusively in accordance with the internal laws of the State
of Minnesota (without regard to the conflict of laws principles of any
jurisdiction).
4. Headings. Headings are for purposes of convenience only and do not
constitute a part of this Agreement.
5. Further Acts. The parties to this Agreement agree to perform, or cause to
be performed, such further acts and deeds and to execute and deliver or
cause to be executed and delivered, such additional or supplemental
documents or instruments as may be reasonably required by the other party
to carry into effect the intent and purpose of this Agreement.
6. Severability. The invalidity or unenforceability of all or any part of any
provision of this Agreement will not affect the validity or enforceability
of the remainder of such provision or of any other provision of this
Agreement, which will remain in full force and effect.
7. Counterparts. This Agreement may be executed in several counterparts, each
of which will be deemed to be an original, but all of which together will
constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject matter
discussed above, kindly sign
<PAGE>
Mr./Ms. _______________
[Date]
Page 15
and return to the Company the enclosed copy of this letter which will then
constitute our agreement on this subject.
Sincerely,
VITAL IMAGES, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Agreed to this ___ day of ________, 1997.
___________________________________
Employee
<PAGE>
EXHIBIT 10.18
JOINT DEVELOPMENT AGREEMENT
THIS AGREEMENT is by and between Vital Images, Inc., an Iowa corporation
having offices at 2575 University Avenue, Saint Paul, MN 55114-1024
(hereinafter "Vital Images"), and ATL Ultrasound, Inc., a Washington corporation
having offices at 22100 Bothell Everett Highway, P.O. Box 3003, Bothell, WA
98041-3003 (hereinafter "ATL");
WITNESSETH:
WHEREAS, Vital Images is in the business of developing, marketing, selling
and servicing three dimensional volume visualization (3DVV) systems for three
dimensional medical imaging applications; and
WHEREAS, ATL is in the business of developing, marketing, selling and
servicing medical diagnostic ultrasound systems; and sells ultrasound systems
embodying its own internally developed three dimensional imaging capabilities;
and
WHEREAS, ATL desires to add Vital Images' three dimensional volume
visualization capabilities to its ultrasound offerings to complement its own
internally developed three dimensional imaging products; and
WHEREAS, Vital Images desires to extend its 3DVV technology to medical
diagnostic ultrasonic imaging applications.
NOW, THEREFORE, in consideration of the mutual premises herein contained,
the parties agree as follows:
1. DEFINITIONS
1.1 "Acceptance Date" for purposes of this Agreement shall mean the date
that ATL accepts in writing any Product as meeting the product specifications
set forth in the Product Development Plan for that Product as evidenced by ATL's
authorization of a first customer delivery ("FCD") release for the Product.
1.2 [*]
1.3 "Maintenance" as used herein shall mean the repair of software errors
and malfunctions caused by Vital Images' software in Products previously sold to
customers which have been documented by ATL and verified by Vital Images.
1.4 "Upgrades" as used herein shall mean the provision by means of a
Product Development Plan of new or different functionality for Products
previously sold to customers or for new Product offerings and any modifications
or additions to the Products necessary to
* Section 1.2 has been omitted pursuant to a request by the Registrant for
confidential treatment from the Securities and Exchange Commission (the
"Commission"). Included with such request, the Registrant has filed Section
1.2 separately with the Commission.
<PAGE>
conform the Products to hardware changes or the evolution of technology with
which the Products operate.
1.5 "Options" as used herein shall mean additional functionality developed
by means of a Product Development Plan which may be optionally purchased by a
customer.
2. EXCLUSIVE COLLABORATION.
2.1 Vital Images and ATL agree that, commencing as of the date of this
Agreement, each will work with the other exclusively as each other's sole
collaborator pursuant to the terms of this Agreement for the next five (5) years
in the development of three dimensional visualization ("3D") products for
medical diagnostic ultrasound imaging applications. Vital Images is committed to
work with ATL until at least the Acceptance Date of a first Product.
2.2 For the purposes of this Agreement, the phrase "exclusively as its
sole collaborator" shall mean that, during the term of this Agreement:
(a) Neither party to this Agreement shall assist, work with or collaborate
with any other person or entity in the development of three dimensional
visualization products for medical diagnostic ultrasound imaging applications,
except:
(i) ATL may continue to work with TomTec in the area of 3D
technology for the sole purpose of providing ATL customers who desire to
use a TomTec product with existing TomTec products which operate with ATL
products and may work with clinical or academic groups who are developing
3D capabilities but are not manufacturing or sales entities for such
products; and
(ii) Vital Images may work with third parties in the development,
manufacture, marketing and sale of Vital Images' three dimensional
visualization systems for use in connection with multi-modality
environments.
(b) Each party hereby represents and warrants to the other that it shall
not use any proprietary information or technology of the other party in
connection with the development of its other product unless it first receives
the written consent of the other party.
(c) Notwithstanding any other provisions of this Agreement or the Sales
Agreement, Vital Images may develop, manufacture, market and/or sell three
dimensional visualization systems for use in connection with any other medical
or non-medical applications except medical diagnostic ultrasound imaging. In
addition, Vital Images will not develop, manufacture, market and/or sell three
dimensional visualization systems for interoperative ultrasound, minimally
invasive ultrasound, and ultrasonic guided therapy applications for any entity
which develops, manufactures or sells medical diagnostic ultrasound systems.
Vital Images may itself or in collaboration with any other entity develop,
manufacture, market and/or sell three dimensional visualization system for use
in medical diagnostic ultrasound:
2
<PAGE>
(i) for the development, manufacture and sale of a product which is
substantially similar to a Product as to which ATL no longer has exclusive
distribution rights under the Sales and Marketing Agreement; and
(ii) for the development, manufacture and sale of a product which is
substantially similar to a Product as to which ATL and Vital Images are
unable to reasonably agree upon a Product Development Plan hereunder, or
which is substantially similar to a Product as to which ATL and Vital
Images have abandoned development.
(d) Subject to the provisions of Section 2.2 of the Sales and Marketing
Agreement, Vital Images may use the clinical protocols for a Product developed
pursuant to this Agreement beginning no later than six (6) months after the
Acceptance Date for the Product.
3. PRODUCT DEVELOPMENT PROGRAMS.
3.1 The parties shall commence Product development programs designed to
develop Products for sale by ATL pursuant to the terms of the Sales and
Marketing Agreement. The scope and schedules for these development programs as
envisioned by the parties as of the date of execution of this Agreement is found
in Exhibit 3.1 to this Agreement.
3.2 Prior to commencing any product development program, the parties will
jointly prepare and execute a written Product development plan which will
include, among other things, the items listed in Exhibit 3.2 (collectively, the
"Product Development Plans" and singularly the "Product Development Plan").
A preliminary draft of the Product Development Plan presently contemplated
for the Product described in Section 1.2(a) is attached hereto as Exhibit 3.2A
and shall serve as a model for the form and structure of the other Product
Development Plans contemplated hereunder.
3.3 As part of any Product Development Plan, Vital Images shall include a
proposal for staffing, costs, and timing to carry out the plan, and the parties
will then agree upon a fixed price for which Vital Images shall perform its
portion of the plan. The basis for payment by ATL to Vital Images for its
performance of the Product Development Plan and the costs incurred by Vital
Images is set forth in Section 5.2. If it should develop that additional work
is needed to complete the results contemplated by the Product Development Plan
beyond that which is covered by the stated price to be paid by ATL to Vital
Images, the parties shall meet to decide whether to finish the plan, and the
allocation of the work and costs necessary to complete the plan.
3.4 The details of the development programs provided in Exhibits 3.1 and
3.2A are expected to change and evolve with time, and new programs may be added
to those outlined in the Exhibits. All material modifications to the current
programs and any new programs added shall be undertaken with the written consent
of both parties.
3
<PAGE>
3.5 Upgrades and Options may be developed upon the mutual agreement of the
parties pursuant to written development programs structured in the same manner
as the Product Development Plans described in Section 3.2 above. In addition,
Vital Images will provide ATL with the information required by ATL to develop
and add its own Upgrades and Options consistent with Vital Images' application
programming interface. Vital Images shall provide reasonable assistance to ATL
in the form of Product information readily available to Vital Images for the
development by ATL of upgrades or options needed to maintain the Products or to
adapt the Products to evolving or new hardware. Vital Images has no obligation
under this Agreement to provide the source code to any of its software to ATL.
Subject to the conditions of the prior paragraph, Vital Images agrees
to produce at least one Upgrade and one Option each year during the term of this
Agreement if so requested by ATL. Vital Images agrees to provide Maintenance
support as reasonably required to support the Products being sold by ATL for so
long as ATL is selling a Product and for two years after ATL ceases selling a
Product, and thereafter only insofar as ATL is obligated by law to provide
Product support.
3.6 Upgrades sold to customers shall require a royalty payment by ATL to
Vital Images, and Upgrades which are provided free of charge to customers shall
not require a royalty payment by ATL to Vital Images. The parties must mutually
agree prior to commencing development of an Upgrade as to whether an Upgrade
will be sold or provided free of charge. The sale of an Option by ATL shall
require a royalty payment by ATL to Vital Images. The amount of any such royalty
payments shall be established pursuant to Exhibit 3.0 of the Sales Agreement.
3.7 On an ongoing basis, Vital Images and ATL shall assess whether
developments in Vital Images' visualization technology would have beneficial
applications to the Products or would be suitable for collaboration with ATL in
the context of a new Product Development Plan. If so, the parties shall discuss
such technological developments for the purpose of identifying future Product
Development Plans and incorporating the technological developments into existing
Product Development Plans; provided, however, Vital Images shall have no
obligation to discuss such technological developments with ATL if such
discussion would violate any (i) law or regulation, or (ii) other contractual
commitments of Vital Images. ATL shall incur in such Product Development Plans
only the incremental costs due to adaptation and integration for such pre-
developed technologies.
4. SALES AND MARKETING OF JOINTLY DEVELOPED PRODUCTS.
4.1 All Products which are jointly developed by the parties under this
Agreement shall be sold and marketed under the provisions of this Agreement and
the Sales and Marketing Agreement (also referred to herein as the "Sales
Agreement").
4
<PAGE>
5. RESEARCH & DEVELOPMENT COSTS.
5.1 In consideration of the commitment of Section 2.1, ATL shall pay Vital
Images within 10 working days of the execution of this Agreement a
nonrefundable, one-time fee in the amount of $300,000.
5.2 ATL shall reimburse Vital Images for its agreed upon engineering costs
for the Products to be developed under this Agreement as specified in Section
3.3 above. ATL shall, at the time of the payment of Section 5.1, make a
prepayment of $100,000 to Vital Images which shall be fully creditable against
the engineering costs. Vital Images shall inform ATL at any time it believes the
budget for development of a specific Product will be exceeded so that the
parties can meet and discuss any actions that may be appropriate under the
circumstances. ATL shall reimburse Vital Images for such engineering costs
incurred on a quarterly basis, within 30 days of the tendering by Vital Images
of an invoice showing such costs incurred and the basis for such costs in a form
sufficient to document such costs for tax record purposes. Vital Images'
engineering costs (including development, quality and regulatory engineering)
and engineering program management shall be determined based on a day rate which
rate shall include a zero margin, but a full allocation of overhead expenses.
ATL shall also reimburse Vital Images for the expenses of travel which is
requested by ATL and has been approved in advance of the travel by ATL.
6. REGULATORY APPROVALS.
6.1 ATL shall have the responsibility for obtaining any regulatory
approvals necessary for the marketing and sale of the Products developed
hereunder, and shall bear the costs attendant to such approvals. ATL shall make
reasonable efforts to obtain needed regulatory approvals in a timely manner.
Vital Images shall support ATL's efforts to secure regulatory approvals pursuant
to the terms and conditions of each Product Development Plan and in addition
thereto, by providing at no cost to ATL any reasonably available existing
information and documentation of Vital Images which would be reasonably
necessary or useful to ATL in obtaining such approvals.
6.2 Both parties shall conduct their activities under this Agreement in a
manner which is consistent and in compliance with the FDA's Good Manufacturing
Practices. In addition, Vital Images shall comply with section 4.4, "Design
Control," and section 4.6, "Purchasing," insofar as it relates to
subcontractors, of "ANSI/ISO/ASQC Q9001-1994, Quality Systems-Model for Quality
Assurance in Design, Development, Production, Installation, and Servicing", and
ATL Document Numbers 9032-0182 Rev. B and 9080-0008 Rev. B, and revisions and
successors thereto which are provided to Vital Images by ATL. Vital Images
agrees to cooperate with ATL and regulatory authorities in any audits or
inspections of the development, manufacture, and sale of Products.
5
<PAGE>
7. INTELLECTUAL PROPERTY.
7.1 Subject to compliance by the receiving party with the confidentiality
obligations of Section 10, each party grants to the other party the right of
access to its information and intellectual property which the parties mutually
agree are useful to the other in developing the Products which are the subject
of this Agreement; provided, such access shall not grant to or transfer any
rights in the information or intellectual property received by the other party
except as specifically provided for herein. Vital Images has no obligation
under this Agreement to provide the source code to any of its software to ATL.
7.2 Title to and ownership of the intellectual property owned by each
party prior to the execution date of this Agreement or intellectual property
developed by a party outside any of the Product Development Plans which are the
subject of this Agreement shall not be affected or changed by this Agreement,
and such title and ownership rights shall survive any termination of this
Agreement. For purposes of this Agreement, intellectual property shall be deemed
to include all technology or information owned by either party. Intellectual
property owned by Vital Images (including, without limitation, all computer
software owned by Vital Images) prior to this Agreement shall continue to be
owned by Vital Images, and intellectual property owned by ATL prior to this
Agreement shall continue to be owned by ATL.
7.3 Intellectual property developed solely by Vital Images during the
course of the Product Development Plans pursuant to this Agreement shall be
solely owned by Vital Images. Intellectual property developed solely by ATL
during the course of the development programs of this Agreement shall be solely
owned by ATL; and intellectual property jointly developed by personnel of both
parties shall be jointly owned by the parties. Following termination of this
Agreement, each party is free to use or license jointly-owned intellectual
property in its sole discretion.
7.4 As to intellectual property in the following areas, all solely owned
intellectual property developed during the course of the Product Development
Plans of this Agreement, and excluding any intellectual property or intellectual
property rights developed outside of the Product Development Plans of this
Agreement, shall be perpetually licensed in the manner described below on a
worldwide royalty-free, nonexclusive, nontransferable basis:
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C>
Intellectual Property Developed Solely Intellectual Property Developed Solely By
By Vital Images To Which ATL is Perpetually ATL To Which Vital Images Is Perpetually
Licensed Licensed
- ----------------------------------------------------------------------------------------------------
Ultrasound imaging and probe design Volume visualization and display
- ----------------------------------------------------------------------------------------------------
Image data management in the ultrasound Image data management in the visualization
system system
- ----------------------------------------------------------------------------------------------------
ATL product user interface items 3DVV product user interface items
- ----------------------------------------------------------------------------------------------------
</TABLE>
It is understood that such perpetual licenses are not transferable by the
recipient and are for the purpose of enabling the recipient to work internally
with the licensed technology in
6
<PAGE>
development of its future products. The intellectual property which is the
subject of the license may be sublicensed by the recipient to facilitate OEM
sales or direct sales to end users of its products when licensing is the form in
which the recipient usually transfers such intellectual property to customers.
7.5 Each party shall be responsible for the costs of protecting and
maintaining its solely owned intellectual property. The parties shall jointly
bear the costs of protecting and maintaining intellectual property which is
jointly owned. Both parties have the obligation to execute all documents
necessary to secure protection for such jointly owned intellectual property and
to the extent necessary, shall assist one another to maintain ownership rights
in solely owned intellectual property. If one party does not desire to protect
(as by patent application filing, use of copyright notices or maintenance of a
trade secret) or maintain (as by maintenance fee payment) an element of
intellectual property which it solely or jointly owns and which was developed
during the course of a Product Development Plan of this Agreement, the party
shall extend such opportunity to the other party, which other party shall have
30 days to decide to protect and/or maintain the intellectual property elements
at its own cost and expense. If such other party elects to do so, title to that
element of intellectual property and all obligations associated with the
maintenance of such intellectual property shall thereupon pass to such other
party.
7.6 Each party shall have the right to enforce as to third parties the
intellectual property rights of both parties that are embodied in the Products
sold by it and developed under this Agreement and to enjoy the full cooperation
of the other party in such enforcement. Such enforcement shall be at the cost
and expense of the party enforcing such rights.
7.7 Vital Images shall escrow a copy of the source code for each Product
being sold by ATL and shall update such escrow to be current at all times with
the level(s) of software being used by ATL. The source code shall be escrowed
with a mutually agreed upon escrow agent. Such source code shall be provided to
ATL for a given Product if Vital Images is no longer willing or able to
collaborate with ATL in the development of Upgrades or Options for the Product
or to provide for Maintenance of a Product being sold by ATL and ATL is not in
breach of this Agreement or the Sales Agreement. Such source code shall be
released to ATL only after Vital Images has been so notified of the release, and
solely for the purpose of enabling ATL to perform an Upgrade, Option, or
Maintenance for a Product which, in the reasonable judgment of ATL, is necessary
to repair or maintain or continue the production of Products currently being
produced by ATL or previously shipped by ATL to customers. The escrow agent
shall release escrowed source code to ATL only upon: (i) its receipt of written
instructions from Vital Images to do so, or (ii) its receipt of an order by a
court of competent jurisdiction directing the escrow agent to do so. ATL shall
retain any source code released from escrow only for the period of time which is
reasonably necessary for ATL to effect the foregoing Product repair or
maintenance. ATL shall permit access to the source code to only those of its
employees or consultants who have a need to know in order to effect such repair
or maintenance, and have been advised of the confidential nature of such
software, and the obligations to Vital Images hereunder to maintain such
confidence. At the conclusion of the repair or maintenance ATL shall return the
released software to escrow and destroy all other copies or forms of the source
code then in its possession. ATL shall also return to escrow, with a copy sent
to Vital Images, the source code as modified or
7
<PAGE>
altered by ATL, and ATL shall retain a license solely limited to making, selling
and using the modified or altered software in Products licensed to ATL under the
Sales Agreement. ATL shall retain no license to own or possess the source code
or the modified or altered source code in any form. Vital Images shall at all
times retain all proprietary and intellectual property rights in and to the
source code.
8. TERM AND TERMINATION.
8.1 The term of this Agreement shall extend through June 30, 2001. This
Agreement may be terminated earlier by one party upon its good faith
determination that the other party is not or cannot satisfy its commercial needs
in the area of 3DVV. A party making such determination shall notify the other of
such determination and the basis for such termination, whereafter the notified
party has the right to meet with the notifying party to discuss or rebut such
termination. A termination by the notifying party shall only become effective
after the notifying party has met with the other party to discuss such
termination. It is the intention of ATL to carefully scrutinize whether its
commercial needs are being satisfied by this Agreement in the event of any
change of control of Vital Images.
8.2 This Agreement may be earlier terminated as follows:
(a) In the event that one party is in material default or breach of any
provision of this Agreement, the other party shall have the right to terminate
this Agreement upon 30 days written notice to the party in default or breach,
provided that such party may avoid such termination by curing the condition of
breach or default within such 30 day notice period.
(b) In the event of the liquidation or windup of one of the parties
hereto, or the adjudication of bankruptcy, appointment of a receiver by a court
of competent jurisdiction or assignment for the benefit of creditors, or where a
levy of execution directly invoices all the substantial assets of a party, this
Agreement shall automatically terminate effective the date of said liquidation,
windup, adjudication, appointment, or assignment, except that, at the election
of the party not involved in such action, the licenses granted to that party
under this Agreement may be continued for the unexpired term of this Agreement.
(c) In the event the Sales Agreement is terminated for any reason, Vital
Images or ATL shall have the option to terminate this Agreement.
8.3 Upon termination of this Agreement pursuant to Section 8.1 or 8.2
hereof:
(a) Each party shall return to the providing party all copies of any
Confidential Information that was provided by one party to the other during the
course of this Agreement and is unrelated to Products being sold under the Sales
Agreement.
(b) ATL shall pay to Vital Images all sums owing under this Agreement
including, without limitation, all amounts owing under any Product Development
Plan for work completed by Vital Images prior to the date it received
notification of the termination.
8
<PAGE>
(c) All Product Development Plans shall automatically terminate.
(d) Each party shall continue to be bound by the provisions of this
Agreement, which, by their nature, extend beyond or cannot be fully performed
prior to the effective date of termination, including, without limitation, the
provisions of Sections 2.2(d), 7.2, 7.3, 7.4, 7.7 and 10 of this Agreement.
8.4 The termination of this Agreement pursuant to this Section shall be
without prejudice to any rights or remedies to which the terminating party is
entitled, if any, due to the material breach of one of the parties of any
warranty, representation or covenant given by the other party under this
Agreement.
8.5 Either party's obligation to exclusively collaborate with respect to
any Product pursuant to Sections 2.1 and 2.2 shall terminate if (i) ATL fails to
meet the minimum sales quantity in a given year which is necessary to maintain
its exclusive rights to such Product under the Sales Agreement or for any other
reason under the Sales Agreement ATL's exclusive rights to make, use and sell
such Product terminate, including those listed in Section 2.1(b) of the Sales
Agreement, or (ii) a party elects to terminate further negotiations with respect
to a Product Development Plan because the parties hereto cannot agree on the
terms and conditions of the Product Development Plan. Upon termination of the
exclusivity provisions of Sections 2.1 and 2.2 as to a given Product, each party
may itself, or may assist others engaged in medical ultrasound imaging, in
developing, making, selling or using its 3D medical imaging technology in a like
product, provided that no use is made of the technology or proprietary
information solely owned by the other party except as licensed pursuant to
Section 7.4 of this Agreement.
9. NOTICE.
9.1 Any notice required or permitted to be given by this Agreement
shall be given by prepaid, first class, mail or facsimile transmission addressed
to:
if to ATL: Jacques Souquet, Sr. Vice President
Advanced Technology Laboratories, Inc.
22100 Bothell Everett Highway SE
P.O. Box 3003
Bothell, WA 98041-3003
Facsimile number (206) 485-3680
if to Vital Images: Andrew M. Weiss, President
Vital Images, Inc.
2575 University Avenue
Saint Paul, MN 55114-1024
Facsimile number (612) 642-9018
9
<PAGE>
Such addresses and numbers may be altered by notices so given.
10. CONFIDENTIALITY.
10.1 All information communicated by one party to the other under this
Agreement ("Confidential Information") shall be received in confidence, and
shall be used only for the purposes of this Agreement. No Confidential
Information shall be disclosed by the recipient, its agents, or employees
without the prior written consent of the disclosing party except as permitted
pursuant to the terms of this Agreement. Recipient shall take all reasonable
precautions, but not less than those used to protect its own confidential
information, to prevent the disclosure of Confidential Information to third
parties, except as may be required by reason of legal or regulatory requirements
beyond the reasonable control of the recipient. Only those employees or agents
of the recipient with a reasonable need to know may have access to the
Confidential Information provided by the disclosing party.
Information shall not be deemed to be Confidential Information if it:
(a) is in the public domain at the time of disclosure;
(b) becomes part of the public domain after disclosure in a manner not
involving breach of this Agreement by the recipient;
(c) is in the possession of the recipient at the time of disclosure as
shown by its written records;
(d) is lawfully disclosed to the recipient by a third party, free of any
obligation of confidentiality;
(e) is independently developed by the recipient's employees or agents who
had no contact with or access to the Confidential Information;
(f) is communicated by the disclosing party to an unaffiliated third party
free of any obligation of confidentiality; or,
(g) is disclosed in response to a valid order by a court or other
governmental body, is otherwise required by law, or is necessary to establish
the rights of either party under this Agreement.
11. ASSIGNMENT.
11.1 Neither party shall assign its rights and/or obligations under
this Agreement or any interest therein to any third party without the prior
written consent of the other party to this Agreement except that Vital Images
shall have the right to assign the rights and/or obligations under this
Agreement to any third party who purchases substantially all of the business
assets of
10
<PAGE>
Vital Images or who succeeds to the business of Vital Images by reason of a
merger or consolidation. Assignments to a wholly owned or commonly owned
subsidiary company may be made if the other party is so informed and receives
written notice of the assignee's consent to be bound by all of the rights and
obligations of this Agreement, and of the assignor's agreement to guarantee such
performance by the assignee. This Agreement shall be binding upon and inure to
the benefit of any successor to each party's business in whole or in part to
which this Agreement relates.
12. WARRANTIES.
12.1 Each party covenants to and agrees with the other that:
(a) Authority to Conduct Business. It is duly organized and in good
-----------------------------
standing under the laws of the jurisdiction in which it is incorporated and has
all requisite corporate power and authority and the permits, consents, and
qualifications necessary to operate its business as it is currently being
conducted.
(b) Authority to Perform Agreement. The execution, delivery and
------------------------------
performance of this Agreement has been duly authorized by all necessary
corporate action, and does not constitute a breach by the warranting party of
its organizational documents or of any contract or agreement to which the
warranting party is a party or by which the warranting party or its assets are
bound.
(c) Exchange of Information. It shall promptly furnish to the other
-----------------------
party a complete and correct copy of any notice, report or other communication
that it receives from the FDA or from any other governmental agency concerning
the Products.
(d) Impairment of Obligations. It shall not enter into any agreement,
-------------------------
the execution or performance of which would violate or cause a breach of its
obligations under this Agreement.
(e) Ownership of Intellectual Property. It is the owner of the entire
----------------------------------
right, title and interest in any technology, know-how and/or proprietary
information provided or licensed to the other hereunder, has the sole right to
grant licenses to use such technology, know-how and proprietary information, and
has not previously granted any rights to such technology, know-how or
proprietary information that would interfere with any rights granted to the
other party under this Agreement.
13. PUBLICITY.
13.1 Neither party shall originate any publicity, news release or
public announcement, written or oral, whether to the public or press,
stockholders or otherwise, relating to this Agreement, to any amendment hereto
or performances hereunder save only such announcements as are mutually agreed
upon, which agreement shall not be unreasonably withheld, or in the opinion of
counsel for the party making such announcement are required by law to be made.
If a party decides to make an announcement required by law under this Agreement,
it will give the
11
<PAGE>
other party three (3) days' advance written notice of the text of the
announcement so that the other party will have an opportunity to comment upon
the announcement.
14. CHOICE OF LAW.
14.1 This Agreement shall be construed and administered in accordance
with the laws of the State of Washington.
15. NO WAIVER; PRESERVATION OF INTENT.
15.1 Failure to enforce any provision in this Agreement shall not
constitute a waiver of a party's rights thereafter to enforce the provision, or
any other provision of this Agreement. In the event any provision hereof is
deemed null and void or unenforceable, the remaining provisions hereof shall be
deemed severable therefrom and shall remain in full force and effect.
16. AMENDMENT.
16.1 This Agreement shall not be varied or amended other than by a
written instrument signed by both parties hereto.
17. RELATIONSHIP OF THE PARTIES.
17.1 This Agreement is not intended to be, nor shall it be construed,
by implication or otherwise, as an agreement to establish a partnership (limited
or otherwise), a corporation or other formal business organization. No party can
be bound by another party acting as its agent hereunder. Each party acts as an
independent contractor subject only to the terms and conditions stated herein.
18. FORCE MAJEURE.
18.1 No party shall be liable to the other party for any failure to
perform any obligation under this Agreement where such failure is due to causes
beyond the reasonable control of the party. Such causes include, but are not
limited to acts of war, government export controls, other governmental acts,
industrial dispute, lock-out, accident, fire, explosion, transport delays, acts
of a third party, or loss or damage to any equipment. Each party shall use its
best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
19. NO FRANCHISE.
19.1 The parties agree that this Agreement shall not constitute a
franchise agreement under Washington or Minnesota law. If the parties
relationship is deemed to be a franchise by a court of law or other judicial
body, the parties hereto expressly agree to waive all rights and
12
<PAGE>
remedies which either of them may have due to any status as a franchisor or
franchisee or pursuant to the application of any franchise laws, rules or
regulations.
20. INTEGRATION.
20.1 This Agreement, together with the Sales Agreement, constitutes
the entire agreement between the parties, and all prior negotiations,
representations, agreements, and understandings are merged into, extinguished
by, and completely expressed by it. This Agreement shall not be varied or
amended other than by a written instrument executed by the parties hereto.
21. COUNTERPARTS EFFECTIVE.
21.1 This Agreement may be executed in counterparts, each of which
shall be effective as an original copy of this Agreement. Execution may be
effected by facsimile by mutual agreement of the parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year last written below.
VITAL IMAGES, INC. ATL UlTRASOUND, INC.
By /s/ Andrew M. Weiss By /s/ Jacques Souquet
--------------------- --------------------
Date: 8/14/96 Date: 8/14/96
------------------ -----------------
13
<PAGE>
Exhibit 3.2- Contents of Product Development Plans
I. Product Development Description, including
A. User Features
B. Clinical Applications
C. Systems Integration Characteristics
D. User Interface Requirements
E. Product Functions
II. Development Responsibilities and Program Coordination Process
A. ATL & Vital Images Responsibilities
B. Third Party Responsibilities
III. Product Development Project Plan and Timing
A. Development Calendar
B. Prototype Definitions & System Configurations
C. Clinical Sites
IV. Performance Requirements
V. Technical Specifications;
VI. Product Cost Targets
VII. Product Development Cost Projections, including
A. Vital Images Time, Material & Cost Forecast
B. ATL Time, Material & Cost Forecast
IX. Regulatory Strategy
X. Quality Plan
14
<PAGE>
EXHIBIT 10.19
SALES AND MARKETING AGREEMENT
THIS SALES AND MARKETING AGREEMENT (the "Agreement") is by and between ATL
Ultrasound, Inc., a corporation of the State of Washington, having a place of
business at 22100 Bothell-Everett Highway, Bothell, Washington 98041-3003
("ATL"), and Vital Images, Inc., a corporation of the State of Iowa having a
place of business at 2575 University Avenue, St. Paul, Minnesota 55114-1024
("Vital Images").
WITNESSETH:
WHEREAS, the parties have concurrently herewith entered into a Joint Development
Agreement (the "Development Agreement") under which the parties will participate
in programs designed to extend Vital Images' three dimensional volume
visualization technology into medical diagnostic ultrasound imaging
applications.
WHEREAS, the parties desire to grant to ATL certain rights to use Vital Images'
three dimensional volume visualization technology, including that resulting from
the Development Agreement, in medical diagnostic ultrasound imaging
applications.
NOW, THEREFORE, in consideration of the terms and conditions in this Agreement,
the parties agree as follows:
1. DEFINITION OF TERMS
1.1 Definition. As used in this Agreement, the following terms shall have the
----------
following meanings:
(a) "Acceptance Date" shall have the meaning set forth in Section 1.1
of the Development Agreement.
(b) "Maintenance" shall have the meaning set forth in Section 1.3 of
the Development Agreement.
(c) "Products" shall have the meaning set forth in Section 1.2 of the
Development Agreement and shall further include any additions, modifications,
improvements, revisions, enhancements, or upgrades to the Product made by ATL,
Vital Images, or jointly by the parties.
(d) "Upgrades" shall have the meaning set forth in Section 1.4 of the
Development Agreement. Upgrades sold to customers shall require a royalty
payment by ATL to Vital Images, and Upgrades which are provided free of charge
to customers shall not require a royalty payment by ATL to Vital Images.
Pursuant to Section 3.6 of the Development Agreement, the parties will agree
prior to entering into a Product Development Plan (as defined in the Development
Agreement) for any Upgrade as to whether an Upgrade will be sold or provided
free of charge to customers.
<PAGE>
(e) "Options" shall have the meaning set forth in Section 1.5 of the
Development Agreement. The sale of an Option by ATL shall require the payment of
a royalty by ATL to Vital Images.
2. LICENSE TO ATL
2.1 License to ATL. Subject to the terms and conditions of this Agreement, ATL
--------------
shall have the world-wide and exclusive right to make, use, and sell Products in
any and all medical diagnostic ultrasound imaging markets, and to extend the
perpetual right to use Products to its customers through sublicensing as
provided in Section 7.1 hereof. The exclusive rights granted to ATL under this
Agreement to make, use and sell Products shall commence on the date this
Agreement is signed by the parties, and shall extend on a Product by Product
basis for an initial exclusivity period of one year from the Acceptance Date of
each Product.
(a) Maintenance of Exclusivity. Following the expiration of the
--------------------------
initial one year exclusivity period, ATL shall continue to have the world-wide
and exclusive right to make, use and sell each Product in accordance with this
Agreement for so long as the number of each Product sold by ATL in subsequent
twelve month periods meets an agreed upon minimum unit sales number. The parties
shall meet annually to set the minimum unit sales number for each Product for
the purpose of exclusivity, which number will be agreed upon by the parties in
good faith negotiations by a date not later than two months after the end of the
preceding sales year. In such negotiations ATL shall have the right to require
that the unit sales number be [*] and Vital Images shall have the right to
insist that the unit sales number [*].
(b) Loss of Exclusivity. In the event that any of the following
-------------------
events occur, ATL shall retain the right to make, use and sell the affected
Product, but ATL's exclusive rights with respect to the Product shall terminate:
(i) If the number of units of such Product sold by ATL in any twelve
month period is less than the agreed-upon minimum number for that period; or
(ii) If the parties fail to agree upon a minimum unit sales
number for a Product as described in Section 2.1(a) above.
In addition, Vital Images has the option of notifying ATL that it henceforth has
only nonexclusive rights to a distribute a Product in the event that ATL begins
selling a product of its own internal development which substantially matches
the specifications of the Product being exclusively distributed by ATL
hereunder.
When ATL has non-exclusive rights to make, use or sell a Product under this
Agreement, Vital Images may itself or may assist others engaged in medical
ultrasound, in developing, making, using, selling or distributing a like
product, provided that no use is made (i) of the technology or proprietary
information solely owned by ATL except as permitted by the license of Section
7.4 of the Development Agreement, or (ii) of the ATL user interface.
-2-
* The Registrant has omitted portions ("Confidential Information") of Section
2.1(a) pursuant to a request by the Registrant for confidential treatment
from the Securities and Exchange Commission (the "Commission"). Included with
such request, the Registrant has filed the Confidential Information
separately with the Commission.
<PAGE>
2.2 Ultrasound Protocols. Vital Images will not implement, sell or distribute
--------------------
any ultrasound protocol of the Products on any other Vital Images product until
the expiration of a period of six (6) months following the Acceptance Date of
the Product without the consent of ATL. If Vital Images does implement an
ultrasound protocol of a Product on any other product, the following shall
apply:
(a) Protocol Identification. The ultrasound protocol will be
-----------------------
identified on the product display as an ATL protocol in a manner agreed upon by
ATL and Vital Images. Any publication describing or identifying the ultrasound
protocol will identify the protocol as an ATL protocol; and
(b) Royalty Payable To ATL. For each product sold by or with the
----------------------
consent of Vital Images which uses an ultrasound protocol of a Product, Vital
Images will pay ATL a royalty equal to 10% of the actual realized price paid by
the customer ("ARP") for the ultrasound option of the product in sales where the
ultrasound option is separately priced in good faith to the customer. For sales
where the ultrasound option is not separately priced, ATL and Vital Images shall
jointly agree in good faith on a basis for determining a royalty to be paid by
Vital Images which is equivalent to the foregoing 10% of the ultrasound option
ARP royalty, such agreement being a precondition to sales of a product using an
ultrasound protocol by or with the consent of Vital Images. A discount actually
realized by the customer may be used in determining the ARP, which discount
shall be no greater than the discount given on the non ultrasound features of
the product. Royalties payable by Vital Images under this Section 2.2 shall be
accounted for and paid on the same basis as royalties payable by ATL under
Section 3 of this Agreement.
2.3 Obligation to Market and Sell. Vital Images understands that ATL designs,
-----------------------------
develops, manufactures, and sells medical diagnostic ultrasound systems and
products, that ATL is currently selling and continues to develop 3D imaging
capabilities in its ultrasound systems, and that ATL may have additional 3D
imaging capabilities under development which it will offer for sale in addition
to the Products sold under this Agreement. Vital Images further acknowledges
that the sale of the Products may not be the only means ATL uses to participate
in three dimension volume visualization technology. Other than products of
TomTec identified in Section 2.2(a)(i) of the Development Agreement, ATL will
not make, use or sell the three dimension volume visualization product of any
third party which competes directly with a Product sold under this Agreement for
so long as it has exclusive rights hereunder to such Product. ATL MAKES NO
REPRESENTATION OR WARRANTY THAT ATL WILL MARKET AND SELL THE PRODUCTS; provided
however, after the Acceptance Date for any Product, if ATL has not commenced
actively marketing the Product within 30 days of receipt of the Food and Drug
Administration's 510k approval for the Product, then ATL shall retain the right
to make, use and sell the Product, but ATL's exclusive rights with respect to
that Product shall terminate. Any business decisions relating to the Products
including, but not limited to, the manufacture, sale, price, and promotion of
the Products shall be at the sole discretion of ATL.
2.4 Referrals. During the term of this Agreement, all medical diagnostic
---------
ultrasound imaging business opportunities received by Vital Images and relating
to a Product as to which ATL has
-3-
<PAGE>
exclusive rights shall be referred to ATL including opportunities in connection
with a multi-modality environment.
During that portion of the term of this Agreement that Vital Images has referral
obligations to ATL, all multi-modality three dimensional visualization business
opportunities received by ATL shall be referred to Vital Images.
2.5 No Franchise. ATL shall be entitled to develop and implement its own
------------
marketing and distribution plans free of control by or interference from Vital
Images, and the parties agree that this Agreement shall not constitute a
franchise agreement under Washington or Minnesota law. If the parties'
relationship is deemed to be a franchise by a court of law or other judicial
body, the parties hereto expressly agree to waive all rights and remedies which
either of them may have due to any status as a franchisor or franchisee or
pursuant to the application of any franchise laws, rules or regulations.
3. ROYALTY PAYMENTS
3.1 Royalty. For the rights granted to ATL under this Agreement, ATL shall pay
-------
Vital Images a royalty for each Product sold by ATL as shown on the attached
Exhibit 3.0.
- -----------
3.2 Time of Payment. Royalty payments shall be paid to Vital Images within
---------------
thirty days following the end of each calendar quarter during the term of this
Agreement, and shall apply to any Product shipped to an end user customer by ATL
during the immediately preceding calendar quarter.
3.3 Taxes. The royalty payments set forth in this Agreement are inclusive of
-----
any and all taxes however designated or levied. Any and all taxes arising out of
or in connection with the royalty payments set forth in this Agreement shall be
the responsibility of Vital Images. Any taxes based upon the sales transaction
between ATL and the customer shall be the responsibility of ATL and the customer
as they shall determine.
3.4 Foreign Registration and Sale. ATL shall be responsible for the
-----------------------------
preparation, at its own cost and expense, of all documents necessary for
registration, marketing and sale of the Products in any foreign country into
which ATL elects to begin marketing and distribution activities and shall be
responsible for securing and maintaining in full force and effect all other
permits, licenses and approvals required in order to market and sell the
Products in such foreign countries.
3.5 Books and Records. During the term of this Agreement and for two years
-----------------
thereafter, ATL shall maintain accurate and complete books and records with
respect to the Products sold by ATL. With each royalty payment submitted to
Vital Images, ATL shall furnish a written report containing sufficient
information to allow the determination of the royalty payment then due. Upon
reasonable notice to ATL, and not more frequently than once per year during the
term of this Agreement, Vital Images, or a third party retained by Vital Images
and reasonably acceptable to ATL who agrees to be bound by the obligations of
confidentiality of this Agreement, shall have access to the books and record of
ATL to verify the royalty payments set
-4-
<PAGE>
forth above. Vital Images shall be responsible for its costs in connection with
the inspection of the books and records of ATL.
4. VITAL IMAGES SUPPORT
4.1 Sales and Marketing Plans. ATL shall be entitled to develop and implement
-------------------------
its own sales and marketing plans for the Products free of interference from or
control by Vital Images. ATL shall be solely responsible for the development,
creation and execution of such sales and marketing plans. Vital Images, at ATL's
request, shall support ATL's development of such sales and marketing plans by
providing to ATL any existing information reasonably available to Vital Images
concerning the specifications, performance and operation of the Products which
is reasonably useful to ATL in the development of its sales and marketing plans
and which Vital Images can supply without violating any applicable laws or
regulations or contractual commitments.
4.2 Training. If requested by ATL, Vital Images shall provide support for
--------
three initial product training seminars for ATL personnel with respect to each
Product. The first such training seminar for a given Product, provided such
seminar is held in North America, shall be at no cost to ATL. ATL shall
reimburse Vital Images for all travel expenses (including transportation, meals,
and lodging) incurred by Vital Images in connection with providing such seminars
outside of North America, and for all travel expenses for the second and third
seminars for a given Product.
4.3 Support. Subsequent to the Acceptance Date of a Product, Vital Images
-------
shall provide Maintenance for the Product for so long as and only to the degree
that ATL continues to have contractual or legal Maintenance obligations to a
customer, and through a period extending two years following the date ATL ceases
to market and sell a particular Product. Such Maintenance shall be provided in
response to the reasonable request of ATL as promptly as possible and at no cost
to ATL.
4.5 Product Warranties. ATL may pass along to its customers any warranties
------------------
made by Vital Images in this Agreement or in the Development Agreement which
relate to the Products. ATL shall be solely responsible for any other warranties
it makes to its customers. Vital Images warrants that the Products and Product
components it furnishes to ATL will meet the agreed upon Product specifications.
EXCEPT AS EXPRESSLY PROVIDED HEREIN, VITAL IMAGES MAKES NO WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, TO EITHER ATL OR ANY CUSTOMER, WITH RESPECT TO ANY OF THE
PRODUCTS OR PORTIONS THEREOF, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
ATL warrants and represents that, for the benefit of both parties hereto, all
Product sales to customers shall be subject to the warranty, exclusion, and
intellectual property terms 11, 12, and 14 of the Terms of Sale attached hereto
as Exhibit 4.5. Vital Images' warranties hereunder shall not be enforceable as
to a given Product beyond a date which is two years after the date ATL has
-5-
<PAGE>
ceased selling the Product, except insofar as ATL continues to be obligated by
law to support the Product.
4.6 Customer Complaints. Vital Images shall conduct timely complaint analysis
-------------------
with respect to any complaints received by ATL relating to any Products sold by
ATL under this Agreement to the extent such complaints result from any software
or components provided by Vital Images, and will provide ATL with the results of
such analysis. Vital Images shall forward to ATL information regarding
complaints it receives on software identical or substantially similar to the
software used in the Products. Should any Product complaint received by ATL or
Vital Images necessitate the submission of a Medical Device Report, or any
subsequently established governmental reporting requirement, ATL shall have the
responsibility for providing the required response. Vital Images shall provide
reasonable assistance and support to ATL in the preparation of such report, and
shall receive a copy of any response submitted to the governmental authority by
ATL.
5. WARRANTIES, CONFIDENTIALITY, AND INDEMNITY
5.1 Warranties. Each party covenants to and agrees with the other that:
----------
Authority to Conduct Business. It is duly organized and in good
-----------------------------
standing under the laws of the jurisdiction in which it is incorporated and has
all requisite corporate power and authority and the permits, consents, and
qualifications necessary to operate its business as it is currently being
conducted.
Authority to Perform Agreement. The execution, delivery and performance of
------------------------------
this Agreement has been duly authorized by all necessary corporate action, and
does not constitute a breach by the warranting party of its organizational
documents or of any contract or agreement to which the warranting party is a
party or by which the warranting party or its assets are bound.
Exchange of Information. It shall promptly furnish to the other party a
-----------------------
complete and correct copy of any notice, report or other communication that it
receives from the FDA or from any other governmental agency concerning the
Products.
Impairment of Obligations. It shall not enter into any agreement, the
-------------------------
execution or performance of which would violate or cause a breach of its
obligations under this Agreement.
Ownership of Intellectual Property. It is the owner of the entire
----------------------------------
right, title and interest in any technology, know-how and/or proprietary
information provided or licensed to the other hereunder, has the sole right to
grant licenses to use such technology, know-how and proprietary information, and
has not previously granted any rights to such technology, know-how or
proprietary information that would interfere with any rights granted to the
other party under this Agreement.
5.2 Confidentiality. All information communicated by one party to the other
---------------
under this Agreement ("Confidential Information") shall be received in
confidence, and shall be used only
-6-
<PAGE>
for the purposes of this Agreement. No Confidential Information shall be
disclosed by the recipient, its agents, or employees without the prior written
consent of the disclosing party. Recipient shall take all reasonable
precautions, but not less than those used to protect its own confidential
information, to prevent the disclosure of Confidential Information to third
parties, except as may be required by reason of legal or regulatory requirements
beyond the reasonable control of the recipient. Only those employees or agents
of the recipient with a reasonable need to know may have access to the
Confidential Information provided by the disclosing party.
Information shall not be deemed to be Confidential Information if it:
is in the public domain at the time of disclosure;
becomes part of the public domain after disclosure in a manner not
involving breach of this Agreement by the recipient;
is in the possession of the recipient at the time of disclosure as
shown by its written records;
is lawfully disclosed to the recipient by a third party, free of any
obligation of confidentiality;
is independently developed by the recipient's employees or agents who
had no contact with or access to the Confidential Information;
is communicated by the disclosing party to an unaffiliated third party
free of any obligation of confidentiality; or,
is disclosed in response to a valid order by a court or other
governmental body, is otherwise required by law, or is necessary to establish
the rights of either party under this Agreement.
5.3 Intellectual Property Indemnity. Vital Images shall indemnify, defend, and
-------------------------------
hold harmless ATL, its parent company, each of their respective subsidiaries and
affiliates, and each of their respective officers, directors, and employees from
and against any and all claims, damages, liabilities, costs, and expenses
(including reasonable attorney's fees and legal costs) arising out of or in any
way connected with any claim that any intellectual property, technology, or
information provided by Vital Images and contained within any Product sold by
ATL under this Agreement infringes the intellectual or other property rights of
any third party.
ATL shall indemnify, defend, and hold harmless Vital Images, its parent company,
each of their respective subsidiaries and affiliates, and each of their
respective officers, directors, and employees from and against any and all
claims, damages, liabilities, costs, and expenses (including reasonable
attorney's fees and legal costs) arising out of or in any way connected with any
claim that any intellectual property, technology, or information provided by ATL
and
-7-
<PAGE>
contained within any Product sold by ATL under this Agreement infringes the
intellectual or other property rights of any third party.
5.4 Product Liability. ATL shall indemnify, defend, and hold harmless Vital
-----------------
Images, its parent company, each of their respective subsidiaries and
affiliates, and each of their respective officers, directors, and employees from
and against any and all claims, damages, liabilities, costs, and expenses
(including reasonable attorney's fees and legal costs) arising out of or
relating to personal injury (including death), or property damage caused by the
Product to the extent caused by the negligence of ATL. The indemnification shall
be contingent upon Vital Images giving ATL reasonable notice of receipt of any
claim and allowing ATL to assume the control or the defense, compromise, or
settlement thereof. Vital Images shall assist ATL to the extent reasonably
required for the defense.
Vital Images shall indemnify, defend, and hold harmless ATL, its parent company,
each of their respective subsidiaries and affiliates, and each of their
respective officers, directors, and employees from and against any and all
claims, damages, liabilities, costs, and expenses (including reasonable
attorney's fees and legal costs) arising out of or relating to personal injury
(including death), or property damage caused by the Product to the extent caused
by the negligence of Vital Images. The indemnification shall be contingent upon
ATL giving Vital Images reasonable notice of receipt of any claim and allowing
Vital Images to assume the control or the defense, compromise, or settlement
thereof. ATL shall assist Vital Images to the extent reasonably required for the
defense.
6. TERM AND TERMINATION
6.1 Term. This Agreement shall become effective at the date the Agreement is
----
signed by the parties, and shall extend until terminated by either party in
accordance with the provisions in this Agreement.
This Agreement may be terminated by either party as follows:
In the event that one party is in material default or breach of any
provision of this Agreement, the other party shall have the right to terminate
this Agreement upon 30 days written notice to the party in default or breach,
provided that such party may avoid such termination by curing the condition of
breach or default within such 30 day notice period.
In the event of the liquidation or windup of one of the parties hereto, or
the adjudication of bankruptcy, appointment of a receiver by a court of
competent jurisdiction or assignment for the benefit of creditors, or where a
levy of execution directly invoices all the substantial assets of a party, this
Agreement shall automatically terminate effective the date of said liquidation,
windup, adjudication, appointment, or assignment, except that, at the election
of the party not involved in such action, the licenses granted to that party
under this Agreement may be continued for the unexpired term of this Agreement.
-8-
<PAGE>
6.2 Rights and Duties Upon Termination. Upon termination of this Agreement for
----------------------------------
any reason:
ATL shall cease making, selling and using the Products, except that ATL may
dispose of its remaining Product inventory, and all exclusivity rights with
respect thereto will terminate.
Each party shall return to the providing party all copies of any
Confidential Information that was provided by one party to the other during the
course of this Agreement.
Any and all licenses granted to ATL pursuant to Section 2.1 of this
Agreement for purposes of making, selling and using the Products hereunder shall
automatically terminate and be of no further force and effect.
Each party shall continue to be bound by the provisions of this Agreement,
which, by their nature, extend beyond or cannot be fully performed prior to the
effective date of termination, including (a) warranty and indemnification
obligations, (b)provisions relating to the protection, nondisclosure and
restrictions on the use of Confidential Information, (c) remaining Maintenance
obligations; (d) the rights and obligations of Section 2.2, and (e) provisions
relating to the inspection of the other party's books and records.
Each party shall pay to the other all sums owing under this Agreement,
including, without limitation, all royalty payments.
6.3 Survival of Remedies. The termination of this Agreement pursuant to this
--------------------
Section shall be without prejudice to any rights or any remedies to which the
terminating party is entitled, if any, due to the material breach of the other
party of any warranty, representation or covenant given by the other party under
this Agreement.
7. SUBLICENSING OF SOFTWARE
7.1 Right to Sublicense. Vital Images hereby grants to ATL a non-transferable
-------------------
right and license, during the term of this Agreement, to sublicense any Vital
Images software incorporated in or used in connection with a Product to end user
purchasers of the Products in accordance with a written sublicense agreement to
be entered into between ATL and the end user purchaser, the terms of which shall
be mutually agreed upon by ATL and Vital Images prior to the Acceptance Date for
the Product in connection with which the sublicense is granted. ATL shall have
no ownership rights to Vital Images software by reason of this right to
sublicense except for such right to sublicense.
7.2 Enforcement. Vital Images retains the right to pursue any breaches of such
-----------
sublicenses by end user purchasers or any other person or entity. ATL agrees to
promptly inform Vital Images of any unauthorized use of the software by
purchasers or others.
7.3 Protection of Software. Unless otherwise consented to in writing by Vital
----------------------
Images, ATL may not alter, disassemble, decompile or reverse engineer the Vital
Images software of any
-9-
<PAGE>
Product which has been escrowed, or any Vital Images software which is not in a
Product, under any circumstances.
8. MISCELLANEOUS
8.1 Assignment. Neither party shall assign its rights or obligations under
----------
this Agreement or any interest therein to any third party without the prior
written consent of the other party, provided, Vital Images may assign its rights
or obligations under this Agreement to any third party who purchases
substantially all of the business assets of Vital Images or who succeeds to the
business of Vital Images by reason of a merger or consolidation. Assignments to
a wholly owned or commonly owned subsidiary of a party may be made if the other
party is informed and receives written notice of the consent of the subsidiary
to be bound by all of the rights and obligations in this Agreement, and of the
assignor's agreement to guarantee such performance by the assignee. This
Agreement shall be binding upon and inure to the benefit of any successor to
each party's business in whole or in part to which this Agreement relates.
8.2 Publicity. Neither party shall originate any publicity, news release, or
---------
public announcement, written or oral, whether to the public or press,
stockholders or otherwise, relating to this Agreement, or the performance
hereunder save only such announcements as are mutually agreed upon, which
agreement shall not be unreasonably withheld, or in the opinion of counsel for
the party making the announcement, are required by law to be made. If a party
decides to make an announcement required by law under this Agreement, it will
give the other party three (3) days' advanced written notice of the text of the
announcement so that the other party will have an opportunity to comment upon
the announcement.
8.3 Choice of Law. This Agreement shall be construed and administrated in
-------------
accordance with the laws of the State of Washington.
8.4 Preservation of Intent. In the event any provision in this Agreement is
----------------------
deemed null and void or unenforceable, the remaining provisions shall be deemed
severable therefrom and shall remain in full force and effect.
8.5 Notices. Any notice required or permitted to be given by this Agreement
-------
shall be given by prepaid, first class, mail or facsimile transmission addressed
to:
if to ATL: Jacques Souquet, Sr. Vice President
Advanced Technology Laboratories, Inc.
22100 Bothell Everett Highway SE
P.O. Box 3003
Bothell, WA 98041-3003
Facsimile number (206) 485-3680
-10-
<PAGE>
if to Vital Images: Andrew M. Weiss, President
Vital Images, Inc.
2575 University Avenue
Saint Paul, MN 55114-1024
Facsimile number (612) 642-9018
Such addresses and numbers may be altered by notices so given.
8.6 Force Majeure. No party shall be liable to the other party for any failure
-------------
to perform any obligation under this Agreement where such failure is due to
causes beyond the reasonable control of the party. Such causes include, but are
not limited to acts of war, government export controls, other governmental acts,
industrial dispute, lock-out, accident, fire, explosion, transport delays, acts
of a third party, or loss or damage to any equipment. Each party shall use its
best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
8.7 Waiver. Failure to enforce any provision in this Agreement shall not
------
constitute a waiver of a party's rights thereafter to enforce the provision, or
any other provision of this Agreement.
8.8 Entire Agreement. This Agreement sets forth the entire understanding and
----------------
agreement by and between the parties with respect to the subject matter of this
Agreement. There are no understandings or agreements, either written or oral,
expressed or implied, other than those contained in this Agreement.
8.9 Headings. The Article and Section headings contained in this Agreement are
--------
for reference purpose only, and shall not be used by the parties to interpret
the provisions of this Agreement, or effect the interpretation or construction
of this Agreement.
8.10 Counterparts Effective. This Agreement may be executed in counterparts,
----------------------
each of which shall be effective as an original copy of this Agreement.
Execution may be effected by facsimile by mutual agreement of the parties.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the day and
year last written below.
ATL Ultrasound, Inc. Vital Images, Inc.
By: /s/ Cass Diaz By: Andrew M. Weiss
-------------------------------- ---------------------------
Title: Senior V.P., Marketing/Sales Title: President & CEO
---------------------------- ------------------------
Date: 8/14/96 Date: 8/14/96
------------------------------ -------------------------
-12-
<PAGE>
Exhibit 3.0 - Royalty Payments
[*]
* The registrant has omitted Exhibit 3.0 pursuant to a request by the
registrant for confidential treatment from the Commission. Included with such
request, the registrant has filed Exhibit 3.0 separately with the Commission.
-13-
<PAGE>
TERMS OF SALE
1. TERMS. ATL offers the products listed on the reverse side under the
following terms. Additional or different terms, or modification to the terms
proposed by Customer (whether in a document now or later submitted) will not be
effective unless accepted by ATL in writing. Any extended maintenance services
sold in connection with the purchase of products shall be under the terms on
ATL's standard maintenance service contract. This quotation supersedes all
previous quotations for the products, and is the entire and only offer between
ATL and Customer concerning the sale of products. Prices quoted assume product
delivery with one hundred eighty (180) days from the quotation date. Quoted
prices are subject to revision for products delivered after one hundred eighty
(180) days from the quotation date. This quotation shall remain open for forty
five (45) days from the quotation date, and is subject to change of or
withdrawal prior to acceptance. Submission of purchase order shall constitute
acceptance of the terms of this quotation. To accept this quotation, indicate
shipping instructions on the reverse side, sign the quotation, and return within
the time for acceptance.
2. DEPOSIT. Twenty percent (20%) of the total purchase price of the products
shall be paid with the purchase order. ATL reserves the right to reject any
purchase order not accompanied by the deposit.
3. TAXES. Prices do not include applicable sales, excise, use, value added,
or other taxes, duties or fees (including customs duties and broker charges if
applicable) in effect or later levied which ATL may be required to pay or
collect in connection with the sale of products. All such taxes, duties and fees
shall be paid to ATL by customer upon receipt of an invoice from ATL.
4. PAYMENT. Unless otherwise stated on the invoice, each invoice shall be
paid net thirty (30) days from invoice date. Overdue payments shall be charged
interest at the lesser of eighteen percent (18%) per annum, or the maximum
permitted by applicable law. ATL shall have the right to offset amounts owed to
ATL from any amounts ATL may owe Customer under any other agreement. ATL
reserves the right to require full payment for products sold under a trade-in
arrangement until the trade-in product is received by ATL, determined to be
assessed accurately, and free of all liens and encumbrances.
5. DEFAULT. If Customer fails to make payments when due, ATL may recover all
incidental and consequential damages caused by Customer's breach, including all
fees paid to collection agencies, attorney's fees and costs. In addition, until
Customer has paid the full amount due, without prior notice, ATL may withhold
service on the products and any other ATL products owned by Customer.
6. SOLVENCY. If Customer becomes insolvent, files for protection under the
bankruptcy code, makes an assignment for the benefit of creditors, has a
receiver or trustee appointed, or is unable to meet its financial obligations as
they come due, ATL may terminate this Contract, withhold delivery of products,
stop delivery of products, and retain the deposit as liquidated damages. In any
event, ATL may demand full payment in advance of shipment. If Customer refuses
to make such payment, ATL may terminate this Contract and retain the deposit as
liquidated damages.
7. SECURITY INTEREST. Customer hereby grants ATL a purchase money security
interest in the products, a security interest in the products, and the right to
possession of the products under Customer's default in payment until all
payments have been made. Customer authorizes ATL to sign on Customer's behalf
and file any documents to perfect ATL's security interest in the products.
8. CANCELLATION. Customer may cancel the order upon written notice. For
orders canceled within five (5) days following the date the order was placed but
before shipment of the product, ATL shall retain five percent (5%) of the
purchase price from the deposit, and refund any excess deposit. For orders
canceled more than five (5) days from the date the order was placed but before
shipment of the products, ATL shall retain ten percent (10%) of the total
purchase price from the deposit, and refund any excess deposit. For any order
canceled, ATL also shall be entitled to recover the cost of any and all services
provided to Customer including any educational services, and any costs incurred
resulting from the return of products purchased from a third party on Customer's
behalf. Customer agrees that such cancellation fees constitute fair and
reasonable compensation for Customer's right of cancellation. Once shipment of
substantially all the products has been made, the order cannot be canceled.
9. TITLE. Products shall be delivered to Customer F.O.B. shipping point.
Title to and risk of loss to the products shall pass to Customer upon delivery
to the F.O.B. point. Unless otherwise agreed in writing, all shipping costs
shall be prepaid by ATL and billed to Customer. ATL shall have the right to
make shipments in separate lots.
10. INSPECTION. Customer will be deemed to have accepted the products as
conforming and undamaged unless Customer gives written notice of rejection
within ten (10) days
<PAGE>
of product receipt. Products shall be inspected by an authorized ATL
representative and made operational according to ATL's published specifications
as determined by an authorized ATL representative, unless sold to Customer for
further distribution.
11. WARRANTY. ATL warrants that the products shall be free from defects in
material and workmanship for one (1) year from the date of delivery within the
United States, or thirteen (13) months from date of invoice for products shipped
by ATL outside of the United States. ATL makes no warranty for products shipped
within the United States for subsequent shipment outside of the United States.
For spare parts, add-ons and upgrades, the warranty is ninety (90) days from the
date of delivery unless otherwise agreed in writing by ATL. All warranties are
conditioned upon ATL's receipt of written notice of any defect prior to the end
of the applicable warranty period. ATL's obligation and liability under this
warranty is limited solely, at ATL's option, to repair or replacement of the
products, or repayment or reduction of a reasonable portion of the purchase
price for the products. ATL's warranties and obligations shall terminate
without notice to Customer if the products are subject to misuse (including,
damage to the transesophageal scanhead and cable caused by biting), alteration
or, are repaired by other than an authorized ATL representative.
12. EXCLUSION. EXCEPT AS EXPRESSLY STATED HEREIN, ATL MAKES NO OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES ARISING FROM COURSE OF
PERFORMANCE, COURSE OF DEALING, USAGE OF TRACE, OR SAMPLES PREVIOUSLY SUPPLIED.
ATL shall not be liable to Customer for any special, indirect, incidental, or
consequential damages resulting from breach of warranty or any other provision
of this Contract, or for any liability of Customer to any third party. Any
action by Customer against ATL arising out of this Contract must be brought
within one (1) year after delivery of the products.
13. PROPRIETARY INFORMATION. Customer shall keep confidential all proprietary
information furnished or disclosed by ATL unless such information has become
part of the public domain through no fault of Customer. Customer shall not use
or disclose such confidential and proprietary information for any purpose except
as necessary for the maintenance, repair or operation of the products, without
the prior written consent of ATL. Customer shall inform its employees and
others with access to such confidential or proprietary information that it is
confidential and subject to the restrictions described herein.
14. INTELLECTUAL PROPERTY. Customer acknowledges that the products and all
codes, programs, firmware, software, know-how, methods and concepts associated
with the products and all manuals and other printed material relating to the
products include valuable copyright, patent, trademark, trade secret, and other
proprietary rights of ATL (collectively "Intellectual Property"). ATL grants
Customer a license to use the intellectual property only in connection with and
to the extent necessary for the use of the products. ATL reserves and retains
as patent, copyright, trade secret, trademark and other proprietary rights
related to the Intellectual Property. No title to or ownership of any
intellectual property is transferred to Customer. Customer shall not infringe,
contest, or violate ATL's proprietary rights, and shall not copy, trace,
disassemble, decompile, reverse engineer, or modify any intellectual property,
or cause or permit others to do so. Transfer of the products by Customer shall
constitute a transfer of such license which shall not otherwise be transferable.
Customer's license to use the intellectual property shall automatically
terminate if Customer uses or permits use of intellectual property in any way
not permitted by or in violation of this paragraph. Customer shall be bound by
the terms of third party license agreements for third party software that may be
used in the products.
15. EXPORT LICENSING. Customer acknowledges that the products may be subject
to licensing and other restrictions under United States law. Customer
represents and warrants that the products are being acquired for ultimate use in
the country of delivery by ATL. Customer agrees: (a) to comply with all
applicable laws and registrations regarding the export of products from the
country or delivery; (b) not to export the products from the country of delivery
without first obtaining any required license or authorization of the United
States Government; and (c) to notify Customer's purchasers of any products of
applicable export licensing and other restrictions under the laws of the United
States, the country of delivery, or COCOM. ATL makes no warranty for products
shipped in violation of the provisions above.
16. UPGRADES. The price of all upgrades assumes the immediate return of
replaced components, free from all liens and encumbrances, in exchange for the
upgrade components. ATL will provide Customer with all software upgrades
mandated by law, if replaced components are not returned, ATL shall induce
Customer for an upgrade components at ATL's list price.
17. MANUFACTURE. ATL may change the construction or design of the products
without notice to Customer as long as the function and performance of the
products are not substantially altered. ATL reserves the right to use
refurnished components in the manufacture and repair of products. The
components shall be subject to the same
<PAGE>
inspection and quality control procedures as all other materials used in the
manufacture of products and shall be warranted to the same extent as all other
components under the warranty.
18. LEASING. ATL may accept a purchase commitment from a leasing company for
Customer's benefit provided the purchase commitment is submitted within thirty
(30) calendar days from the date of the Contract and is approved in writing by
ATL. Acceptance of a purchase commitment shall not relieve Customer of its
obligations under this Contract should such leasing company fail, for whatever
reason, to make full payment for products purchased under this Contract.
Customer shall be discharged from the obligations to pay only at such time as
ATL has received timely and full payment from such leasing company. If products
are purchased by a leasing company for Customer's benefit, ATL and the Customer
shall be bound by Paragraphs 1, 9-17, and 19-22.
19. EDUCATION SERVICES. Customer's rights to receive educational services
obtained in conjunction with the purchase of products shall expire unless the
services are used within twelve (12) months from the date of the corresponding
products are shipped.
20. DELAY. ATL shall be excused from performance due to acts of God, perils of
the sea, fire, flood, epidemic, war, civil disorder, government acts or
restrictions, accidents, plant conditions strikes, labor difficulties, failure
of or delay in transportation, shortages of fuel, energy, damage to products in
transport, failure or any supplier to perform, or any cause beyond ATL's
reasonable control.
21. ASSIGNMENT. No assignment of rights or delegation of duties under this
Contract shall be binding upon ATL without ATL's prior written consent.
22. APPLICABLE LAW. This Contract shall be governed by the laws of the State
of Washington. Customer consents to jurisdiction and venue of the Superior
Court of King County, Washington for all matters relating to this Contract.
<PAGE>
EXHIBIT 23.1
CONSENT OF COOPERS & LYBRAND L.L.P.
We hereby consent to (i) the references to our firm in the Vital Images, Inc.
Registration Statement on Form 10 under the caption "The Distribution -- Certain
Federal Income Tax Consequences of the Distribution," (ii) the reference to our
firm's opinion under such caption, and the inclusion of our firm's opinion,
dated January 10, 1997, discussing the taxability of the Distribution of the
Vital Images, Inc. shares, and (iii) the inclusion of our firm's opinion, dated
March 6, 1997, discussing the summarization of certain tax consequences of the
Distribution.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, MN
March 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from The
financial statements and related notes for the three months ended January 31,
1997 and the year ended October 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JAN-31-1997 OCT-31-1996
<CASH> 6,045,839 0
<SECURITIES> 2,986,875 0
<RECEIVABLES> 141,964 239,607
<ALLOWANCES> 10,400 48,800
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,367,421 282,921
<PP&E> 1,651,771 1,476,197
<DEPRECIATION> 876,535 824,846
<TOTAL-ASSETS> 10,152,990 942,911
<CURRENT-LIABILITIES> 481,205 541,410
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 9,459,678 942,901
<TOTAL-LIABILITY-AND-EQUITY> 10,152,990 942,911
<SALES> 152,493 882,126
<TOTAL-REVENUES> 152,493 882,126
<CGS> 20,909 162,286
<TOTAL-COSTS> 1,014,041 3,265,012
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (753,325) (2,544,249)
<INCOME-TAX> 500 1,500
<INCOME-CONTINUING> (753,825) (2,545,749)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (753,825) (2,545,749)
<EPS-PRIMARY> (.16) (.54)
<EPS-DILUTED> 0 0
</TABLE>
