<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________
Form 10/A
AMENDMENT NO. 2
TO
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)
MINNESOTA 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
================================================================================
<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 and Related
Transactions....................... Summary; The Distribution; Relationship
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 May 12, 1997.
Vital Images was incorporated in Iowa in September 1988 and was reincorporated
in Minnesota in April 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 May 5,
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 May 5, 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/_/ and Vitrea/_/ 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/_/, 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/_/, 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 half of calendar 1997. Vital Images intends
to offer Vitrea/_/ both as a software package and as a part of an integrated
software and hardware system to radiologists, surgeons and other care providers.
Vitrea/_/ and the integrated Vitrea/_/ 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 May 5,
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 May 12, 1997 (the "Distribution Date"), and it is expected that
certificates representing Vital Images Common Stock will be mailed on or about
May 13, 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 Record Date. It is expected that the Vital Images Common Stock
will initially be traded in the over-the-counter market on the OTC Electronic
Bulletin Board, although Vital Images intends to seek listing of the Vital
Images Common Stock on the Nasdaq SmallCap Market. There can be no assurance,
however, that Vital Images will be successful in meeting the requirements for
initial or continued listing on the Nasdaq SmallCap Market.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" ON PAGE 11.
______________________
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 MAY 2, 1997.
<PAGE>
CLINICAL STUDIES VISUALIZED WITH VITREA(TM)
[Photo of three-dimensional medical [Photo of three-dimensional medical
image] image]
CIRCLE OF WILLIS COLON
Three-dimensional view using Vitrea/_/ Three-dimensional, spiral CT view
demonstrates the of the colon using Vitrea/_/.
carotid artery in the brain.
[Photo of three-dimensional medical [Photo of three-dimensional medical
image] image]
CAROTID BRONCHUS
Using Vitrea/_/ a three-dimensional Three-dimensional image using
view of the carotid artery Vitrea/_/ demonstrates an "endoscopic"
demonstrates facial and cranial bone, view of the bronchus.
muscular structure and the
vasculature of the neck.
<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..................................................................... 20
Reasons for the Distribution....................................................... 20
Manner of Effecting the Distribution............................................... 21
Certain Federal Income Tax Consequences............................................ 21
Trading of Vital Images Common Stock............................................... 24
RELATIONSHIP BETWEEN BIO-VASCULAR AND VITAL IMAGES AFTER THE DISTRIBUTION............ 24
Distribution Agreement............................................................. 25
Employee Benefits Agreement........................................................ 26
Tax Sharing Agreement.............................................................. 29
Transition Services Agreement...................................................... 29
FINANCING............................................................................ 30
Initial Capital Contribution by Bio-Vascular....................................... 30
Need for Additional Financing...................................................... 30
CAPITALIZATION....................................................................... 31
DIVIDEND POLICY...................................................................... 32
SELECTED FINANCIAL DATA.............................................................. 33
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS......................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................... 37
BUSINESS............................................................................. 43
General............................................................................ 43
Technology......................................................................... 43
Strategy........................................................................... 44
Industry Background................................................................ 45
Markets............................................................................ 46
Products & Product Development..................................................... 47
Competition........................................................................ 49
Marketing, Distribution and Customer Support....................................... 50
Intellectual Property.............................................................. 50
Manufacturing and Service.......................................................... 51
Governmental Regulation............................................................ 51
Third Party Reimbursement and Cost Containment..................................... 53
Facilities......................................................................... 54
Employees.......................................................................... 54
Legal Proceedings.................................................................. 54
MANAGEMENT........................................................................... 55
Directors and Executive Officers................................................... 55
Committees of the Board of Directors............................................... 57
Compensation of Directors.......................................................... 58
Director Stock Option Plan......................................................... 58
Executive Compensation............................................................. 59
Grants of Options to Purchase Bio-Vascular Common Stock............................ 60
Exercises and Year-End Values of Options to Purchase Bio-Vascular Common Stock..... 61
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Change in Control Agreements...................................................... 61
1997 Stock Option and Incentive Plan.............................................. 62
Stock Purchase Plan............................................................... 63
Other Stock Option Plans.......................................................... 63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS..................................... 64
BENEFICIAL OWNERSHIP OF MANAGEMENT.................................................. 65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 66
DESCRIPTION OF CAPITAL STOCK........................................................ 67
Common Stock...................................................................... 67
Preferred Stock................................................................... 67
Certain Limited Liability, Indemnification and Anti-Takeover Provisions........... 67
Transfer Agent and Registrar...................................................... 68
RIGHTS AGREEMENT.................................................................... 69
ADDITIONAL INFORMATION.............................................................. 72
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 April
1997.
THE DISTRIBUTION
<TABLE>
<S> <C>
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 4,765,869 shares of Vital Images
Common Stock, based on 9,531,738 shares of
Bio-Vascular Common Stock outstanding as of
April 28, 1997. The shares of Vital Images
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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."
Trading Market................. It is expected that the Vital Images Common
Stock will initially be traded in the over-the-
counter market on the OTC Electronic Bulletin
Board, although Vital Images intends to seek
listing of the Vital Images Common Stock on the
Nasdaq SmallCap Market. There can be no
assurance, however, that Vital Images will be
successful in meeting the requirements for
initial or continued listing on the Nasdaq
SmallCap Market. See "The Distribution --
Trading of Vital Images Common Stock."
Record Date.................... Close of business on May 5, 1997.
Distribution Date.............. May 12, 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 May
13, 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 Images will cease to have any material
relationship with each other following the
Distribution. See "Relationship Between Bio-
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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."
</TABLE>
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/_/ and
Vitrea/_/, which provide clinicians with both two- and three-dimensional views
inside the human body for use in clinical diagnosis and surgical planning.
VoxelView/_/, 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/_/, 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 half of calendar 1997.
Vital Images intends to offer Vitrea/_/ both as a software package and as
an integrated software and hardware system to radiologists, surgeons and other
care providers. Vitrea/_/ and the integrated Vitrea/_/ system are both designed
for ready integration into hospital radiology networks. Vitrea(TM)'s primary
feature 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 currently offers VoxelView/_/ as a visualization software
package targeted at the academic and research segments of the medical imaging
market, rather than the clinical market targeted for Vitrea/_/. Like Vitrea/_/,
VoxelView/_/ employs interactive volume rendering to manipulate and display
imaging data from a wide variety of medical imaging sources. While
VoxelView/_/ currently offers more features and greater functionality than
Vitrea/_/, its operation also requires the user to have more training and
expertise in computer graphics than are required to use Vitrea/_/. Because
Vitrea/_/ is targeted for clinical use, it has visualization settings stored
within the software, employs a built-in clinical workflow and is for use in
specific clinical visualization applications.
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/_/, VoxelGeo/_/, Voxel Animator/_/ and Vitrea/_/ are
trademarks of Vital Images. O2/_/ and OpenGL/_/ are trademarks of Silicon
Graphics.
9
<PAGE>
SUMMARY FINANCIAL DATA
(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 April 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. 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. 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 no assurance that Vital Images will be able to compete effectively with
such manufacturers or competing entities. See "Business--Technology," "--
Industry Background" and "--Competition."
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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. 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."
AVAILABILITY OF SOFTWARE LIBRARIES
Vital Images' Vitrea/_/ product includes certain libraries owned by Duke
University which allow Vitrea/_/ to interface with industry-standard network
configurations. While Vital Images is currently negotiating a licensing
arrangement with Duke University for these libraries in anticipation of the
commercial release of Vitrea/_/ and expects that such an agreement will be
reached on satisfactory terms, there can be no assurance that an agreement will
be reached on such terms, if at all. Failure of Vital Images to successfully
negotiate a license agreement with Duke University could significantly delay or
prevent commercial release of Vitrea/_/, and would have a material, adverse
effect on Vital Images' business. See "Business--Intellectual Property."
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 involve delays that would
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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, the over-the-counter market has 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 4,765,869 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."
EFFECTS OF TRADING IN THE OVER-THE-COUNTER MARKET.
It is expected that Vital Images Common Stock will initially be traded in the
over-the-counter market on the OTC Electronic Bulletin Board. Consequently,
the liquidity of Vital Images Common Stock will likely be impaired, not only in
the number of shares that may be bought and sold, but also through delays in
the timing of transactions, and coverage by security analysts and the news
media, if any, of Vital Images is also likely to be reduced. As a result, prices
for shares of Vital Images Common Stock may be lower than might otherwise
prevail if Vital Images Common Stock were traded on Nasdaq or a national
securities exchange.
APPLICABILITY OF "PENNY STOCK RULES"
Federal regulations under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act") regulate the trading of so-called "penny stocks" (the
"Penny Stock Rules"), which are generally defined as any security not listed on
a national securities exchange or Nasdaq, priced at less than $5.00 per share
and offered by an issuer with limited net tangible assets and revenues. In
addition, equity securities listed on Nasdaq which are priced at less than $5.00
are deemed penny stocks for the limited purpose of Section 15(b)(6) of the
Exchange Act. Therefore, during the time in which Vital Images Common Stock is
traded in the over-the-counter market, as well as during any time in which Vital
Images Common Stock is quoted on Nasdaq and is priced below $5.00 per share, if
such quotation occurs at all, trading of Vital Images
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Common Stock will be subject to the provisions of Section 15(b)(6) of the
Exchange Act which make it unlawful for any broker-dealer to participate in a
distribution of any penny stock without the consent of the Securities and
Exchange Commission if, in the exercise of reasonable care, the broker-dealer is
aware of or should have been aware of the participation of a previously
sanctioned person. Accordingly, it may be more difficult for broker-dealers to
sell Vital Images Common Stock and shareholders of Vital Images may therefore
have difficulty in selling their shares in the future in the secondary trading
market.
Additionally, during the time that the Vital Images Common Stock trades
below $5.00 per share and is not listed on Nasdaq or any national securities
exchange, trading, if any, of Vital Images Common Stock will be subject to the
full range of the Penny Stock Rules. Under these rules, broker-dealers must take
certain steps prior to selling a "penny stock," which steps include: (i)
obtaining financial and investment information from the investor; (ii) obtaining
a written suitability questionnaire and purchase agreement signed by the
investor; and (iii) providing the investor a written identification of the
shares being offered and the quantity of the shares. If the Penny Stock Rules
are not followed by the broker-dealer, the investor has no obligation to
purchase the shares. The application of the comprehensive Penny Stock Rules may
make it more difficult for broker-dealers to sell Vital Images Common Stock and
shareholders of Vital Images may have difficulty in selling their shares in the
future in the secondary trading market.
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 May 2, 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 9,531,738 shares of Bio-Vascular Common Stock outstanding on April 28, 1997,
approximately 4,765,869 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 such law to the facts. In its opinion,
Coopers & Lybrand indicates that, according to regulations promulgated
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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 shareholder's federal income tax return
for the taxable year in which the Distribution occurs, providing
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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 EXERCISE OF AN OPTION OR
OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS
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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.
TRADING OF VITAL IMAGES COMMON STOCK
Initially, it is expected that the Vital Images Common Stock will be traded
in the over-the-counter market on the OTC Electronic Bulletin Board, although
Vital Images intends to seek listing of the Vital Images Common Stock on the
Nasdaq SmallCap Market. There can be no assurance, however, that Vital Images
will be successful in meeting the requirements for initial or continued listing
on the Nasdaq SmallCap Market. Based on the number of holders of record of Bio-
Vascular Common Stock as of April 28, 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 Record 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 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.
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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 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 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. It is currently anticipated that the amount of
such additional cash, cash equivalents or marketable securities to be
contributed on the Distribution Date will be approximately $2,000,000.
The Distribution Agreement also sets forth all of the material conditions
precedent to the Distribution, which are: (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 material conditions and certain other conditions set forth in the
Distribution Agreement. With respect to the condition set forth in (ii), above,
neither Bio-Vascular nor the Company is aware of any material consents or
approvals necessary to consummate the Distribution. However, 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
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Images have agreed that, in connection with the Distribution, Vital Images will
assume its proportionate 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-Vascular to cause the
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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, employees
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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, the Purchase Plan will
continue in full force and effect in accordance with its terms. The
Employee Benefits Agreement provides that participants under the
Purchase Plan will be eligible to participate in the Distribution and
receive shares of Vital Images Common Stock only to the extent that,
by operation of the Purchase Plan or otherwise, they are shareholders
of record on the Record Date; provided, however, that participants who
are entitled to receive shares of Bio-Vascular Common Stock under the
Purchase Plan as of the Record Date but who have not yet been
mechanically recorded as shareholders of record as of the Record Date
will be treated as shareholders of record for purposes of the
Distribution. The Employee Benefits Agreement also provides for
certain adjustments to the Offering Price (defined in the Purchase
Plan) during the Offering Period in which the Distribution occurs in
order to reflect the effect of the Distribution, and provides that
Vital Images will establish an Employee Stock Purchase Plan for Vital
Images employees, with offerings commencing July 1, 1997.
[_] 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 restrictions 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 restrictions 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
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anticipated that approximately 21,323 shares of restricted Vital
Images Common Stock will be awarded in connection with the
Distribution.
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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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. 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.
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.
30
<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 14,955,559
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 (13,125) (13,125)
holding loss......................................... ----------- -----------
Total equity................................ 9,459,688 11,459,688
----------- -----------
Total capitalization........................ $ 9,459,688 $11,459,688
----------- -----------
</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. Does not include 45,000 shares of Vital Images Common
Stock subject to warrants to be issued by Vital Images in connection with
the Distribution pursuant to the anti-dilution provisions of outstanding
warrants to purchase Bio-Vascular Common Stock.
(2) Reflects the estimated total capital contribution of $12,000,000 to be 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.
31
<PAGE>
Accordingly, the historical balance reflects the $10,000,000 capital
contribution of cash, cash equivalents and marketable securities, while the
as adjusted balance reflects an estimated additional $2,000,000
contribution based on Vital Images' current balances of cash, cash
equivalents and marketable securities. Actual cash, cash equivalents or
marketable securities contributed at the Distribution Date may be more or
less than the $2,000,000 estimated additional amount.
(3) Activity in the Net Investment by Bio-Vascular equity account relates to
net cash received from Bio-Vascular through intercompany advances to fund
Vital Images' product development activities. Vital Images had no
demonstrated ability or commitment to repay these advances and,
accordingly, these amounts received from Bio-Vascular were considered to be
capital contributions. After the distribution, the net investment by Bio-
Vascular will be reclassified by Vital Images as additional paid-in
capital.
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.
32
<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.
33
<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."
34
<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:
35
<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.
36
<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 clinical use, received FDA
37
<PAGE>
marketing clearance in December 1996. Vital Images currently expects to release
Vitrea commercially in the second half 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. 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.
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
38
<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
In fiscal 1994, Vital Images began the process of focusing its resources on
medical visualization software and systems. This process involved Vital Images'
exit from its other markets, microscopy and geoscience. See "Overview", above.
As a result, Vital Images' year to year revenue, excluding the $1.5 million
one-time source code license fee for Voxel Geo received in 1995, has declined.
The following table outlines revenue sources over the last three years and is
illustrative of the initial effect of this change in focus on revenue. Vital
Images believes that its focus on medical visualization software and systems
will be of long-term benefit to its shareholders. This forward looking statement
is based on Vital Images' assessment of the relative size of each market
opportunity, available resources, knowledge base and collaborative
alliances.
<TABLE>
<CAPTION>
OCTOBER 31,
REVENUE BY CATEGORY 1996 1995 1994
------------------- -------- ----------- ---------
<S> <C> <C> <C>
Medical....................... $667,000 $ 467,000 $ 428,000
Geoscience.................... 59,000 627,000 736,000
Microscopy.................... 93,000 243,000 440,000
Other......................... 63,000 57,000 76,000
-------- ---------- ----------
Revenue Before
Source Code License Fee..... 882,000 1,394,000 1,680,000
Source Code License Fee....... -- 1,500,000 --
-------- ---------- ----------
Total Revenue............... $882,000 $2,894,000 $1,680,000
</TABLE>
39
<PAGE>
Revenue decreased $2,012,000, or 70%, to $882,000, from $2,894,000,
comparing 1996 revenue to 1995 revenue. However, revenue from medical
visualization increased 43% to $667,000, from $467,000. The increase in revenue
from medical visualization is a result of Vital Images' changed focus. In
addition to focusing some effort on additional sales of VoxelView, much of Vital
Images' efforts and resources have been directed toward the development of more
clinically powerful and practice-oriented medical visualization software to
answer the evolving needs of medical practice. 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 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
40
<PAGE>
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 and participated in Bio-
Vascular's centralized funding and cash management. When Bio-Vascular acquired
Vital Images on May 24, 1994, Vital Images had only $286,000 in cash. Within a
month, Vital Images had effectively used their cash and Bio-Vascular began
financing their activities. Bio-Vascular conducted the investing activities and
continued to finance the activities of Vital Images. The advances of cash by
Bio-Vascular to Vital Images had no payment requirements and were interest
free, as Vital Images had, substantially, no ability to repay these advances.
Accordingly, the net cash received from Bio-Vascular through intercompany
advances was considered to be a contribution to capital. 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. As a result, at
January 31, 1997, Vital Images had $9,033,000 in cash, cash equivalents and
marketable securities. 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.
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 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.
41
<PAGE>
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.
42
<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 half 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 technician. Volume rendering is not dependent on the creation of
artificial surfaces and allows visualization of varying
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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. Although Vital Images expects to
focus its marketing efforts primarily on Vitrea, VoxelView, and any successor
product, will continue to be offered to the medical marketplace.
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
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biopsy guidance in neuroradiology. While medical visualization systems have also
been used in 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.
For the year ended October 31, 1996, one geoscience customer accounted for
approximately 11% of Vital Images' sales, and for the year ended October 31,
1995, CogniSeis Development, Inc. accounted for approximately 62% of Vital
Images' sales, due to the one-time license fee of $1,500,000 paid for VoxelGeo.
Because Vital Images has changed its focus to medical applications for its
imaging products, the loss of any geoscience customer is not expected to have a
material adverse effect on Vital Images. See Notes to Financial Statements -
Note 10 "Major Customers and Geographic Data."
PRODUCTS AND PRODUCT DEVELOPMENT
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 half 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 feature 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 and is thus designed for use in
daily clinical routines. A Vitrea user can view the image data in two or three
dimensions using visualization
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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.
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 an arrangement under an expired 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. While the reseller agreement has expired,
Vital Images currently purchases workstations pursuant to the terms and
conditions of the agreement, and expects to continue to do so or to enter into a
new agreement on substantially the same terms.
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 half 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
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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.
Vital Images spent $1,459,490, $1,356,578 and $1,254,946 on research and
development efforts in each of the fiscal years ended October 31, 1996, 1995 and
1994, respectively.
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 original equipment manufacturers ("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. See Notes to Financial Statements - Note
10 "Major Customers and Geographic Data." for information regarding Vital
Images' and export sales. 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
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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.
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.
Vitrea includes certain DICOM libraries that are owned by Duke University.
These libraries, which allow Vital Images' products to interface with DICOM
networks, are the subject of a licensing agreement that is currently being
negotiated between Vital Images and Duke University. Vital Images currently
expects to complete this agreement on terms that will be satisfactory to Vital
Images prior to the first commercial shipment of Vitrea. However, failure of
Vital Images to successfully negotiate a license agreement with Duke University
for these libraries could significantly delay or prevent commercial release of
Vitrea/_/ which would have a material, adverse effect on Vital Images'
business.
MANUFACTURING AND SERVICE
As of February 1997, 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.
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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 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
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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, 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.
53
<PAGE>
FACILITIES
Vital Images' principal offices, sales, marketing and operations, as well
as some product development activities, are located in Minneapolis, Minnesota,
where the Company currently occupies approximately 10,000 square feet under a
lease that expires January 31, 2002. Under certain conditions, the lease may be
terminated early on January 31, 2000. On September 1, 1997, Vital Images will
increase its leased space to approximately 14,000 square feet. The base rent is
currently $99,000 per year and will increase to $135,000 per year on September
1, 1997. In addition to the base rent, Vital Images pays its share of the
operating expenses, property taxes and insurance premiums on the building. 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.
Some of Vital Images product development, quality engineering and customer
support operations are conducted in facilities with approximately 9,000 square
feet located in Fairfield, Iowa under a lease that expires on May 1, 2000 with
an annual rent of approximately $80,000. Vital Images also pays the operating
costs on the property.
Vital Images considers its current facilities adequate for its current
needs and believes that suitable additional space will be available as
needed.
EMPLOYEES
As of March 31, 1997, Vital Images had thirty-seven (37) employees, with
twenty (20) 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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<PAGE>
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. Immediately prior to the Distribution Date, each of the director
nominees named below will be elected to the Board of Vital Images. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Andrew. M. Weiss........... 40... 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
</TABLE>
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-
55
<PAGE>
national corporation with operations including medical device and medical
imaging equipment 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
56
<PAGE>
September 1991 to June 1992, Dr. Argiro also served as President of Vital
Images. Prior 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.
57
<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 March 19, 2007, and no option can be granted under the Director
Plan after such date. However,
58
<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 $100,000 in the fiscal year ended October 31, 1996.
Information set forth in the table below reflects compensation paid to the named
individuals for services rendered to Vital Images and/or of Bio-Vascular. All
restricted stock award values and option award information set forth in the
table relate to awards of, or options to purchase, shares of Bio-Vascular Common
Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
RESTRICTED SHARES OF
AWARD(S) OF BIO-VASCULAR
NAME AND OTHER ANNUAL BIO-VASCULAR COMMON STOCK
PRINCIPAL COMPENSATION COMMON UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) 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."
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<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 $27,540 as of such date.
Effective May 24, 1994, Dr. Argiro was granted an award of 12,960 shares of
Bio-Vascular Common Stock, vesting in three equal installments of 4,320
shares on each successive May 24 following the date of grant.
(7) Mr. Davis was named Vice President, Sales of Vital Images in January 1996.
GRANTS OF OPTIONS TO PURCHASE BIO-VASCULAR COMMON STOCK
The following table discloses information regarding options to purchase
Bio-Vascular Common Stock granted to Mr. Weiss and Mr. Davis during the fiscal
year ended October 31, 1996. No options to purchase Bio-Vascular Common Stock
were granted to Dr. Argiro during the fiscal year ended October 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF BIO- PERCENT OF TOTAL
VASCULAR COMMON OPTIONS GRANTED TO MARKET
STOCK UNDERLYING BIO-VASCULAR EXERCISE OR PRICE ON
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION DATE OF
NAME GRANTED (#) (1) FISCAL YEAR (2) ($/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
60
<PAGE>
percent (50%) or more of the combined voting power of Bio-Vascular'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 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 NUMBER OF SHARES OF BIO-VASCULAR VALUE OF UNEXERCISED IN-THE-MONEY
COMMON 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, [_] [_] 14,000 7,000 43,750 21,875
Ph.D.
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.
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<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 a
number not to exceed thirty-six (36), as well as employee welfare benefits then
in effect for a period of not longer than thirty-six (36) 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 March 19, 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 upon the achievement of performance or other goals. No awards have
been granted under the Stock Incentive Plan.
STOCK PURCHASE PLAN
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<PAGE>
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 Vital Images employee for the purposes of such plans, and
that options held by Vital Images employees following the Distribution will
remain exerciseable following the Distribution, so long as such employees remain
employed by Vital Images or any subsidiary. Similar modifications to the 1990
Plan and the 1992 Plan have also been adopted by Vital Images with respect to
Bio-Vascular employees. 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.
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<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 acquire within 60
days upon the exercise of options. Excludes the 397,350 PCM Shares. Mr.
Perkins disclaims beneficial ownership of the PCM Shares.
65
<PAGE>
(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."
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<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 4,765,869 shares of Vital
Images Common Stock issued and outstanding, held of record by approximately
1,250 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.
67
<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.
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<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 $20 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 May 1,
1997 between Vital Images and American Stock Transfer & Trust Company, 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 an affiliate or associate of either
of the foregoing, or a representative, nominee or designee of an Acquiring
69
<PAGE>
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 April 30, 2007 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 Stock or convertible
securities at less than the current market price of the Preferred Stock, or
(iii) upon the distribution to holders of Preferred Stock of evidences of
indebtedness or assets (excluding quarterly cash dividends ) or of subscription
rights or warrants (other than those referred to above).
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
70
<PAGE>
fractional Preferred Stock 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 Stock
(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 Stock (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 Stock 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 share
of 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 Stock 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 share of
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 share of 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 Stock 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 Stock (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 9,531,738 shares of Bio-Vascular
Common Stock outstanding on April 28, 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 20,000 shares of
Preferred Stock.
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<PAGE>
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.
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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
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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................ 131,564 190,807 234,032
and 1995, respectively
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
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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-Vascular.......... -- -- $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
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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 May 12, 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 agreed to
assign to Vital Images $10,000,000 in cash, cash equivalents and marketable
securities, 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 then 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 -(CONTINUED)
(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. These amount received from
Bio-Vascular were considered to be capital contributions, as the Company did not
have the ability to substantially repay these advances. In anticipation of the
Distribution, Bio-Vascular 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.
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.
F-9
<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)
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 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
F-10
<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)
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 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:
<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-
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)
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)
Non-Cash Financing Transactions:
Effective November 1, 1996, Bio-Vascular assigned approximately $3,000,000 of
marketable securities to Vital Images, along with the related accrued interest
and unamortized premium.
(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,
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)
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.
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 of Vital Images Common Stock, 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 April 30, 2007,
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 $20.00. 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. The compensatory element for any shares issued under the
Company's Employee Stock Purchase Plan will be accounted for in accordance with
Statement No. 123.
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)
(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 three-year period. In February 1997, the 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>
Japan and Australia............. $18,850 $26,259 $144,123 $210,425 $269,160
United Kingdom.................. 3,956 3,850 9,201 42,427 165,241
Netherlands..................... 5,876 -- 29,047 26,475 93,938
Canada and Mexico............... 1,395 589 6,263 56,290 33,826
Germany......................... -- 210 56,282 5,561 18,085
Other Europe.................... 17,808 2,413 16,636 40,209 82,204
</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 2,127 (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. The Company entered into
a source code license agreement in August 1995 with CogniSeis Development,
Inc. ("CogniSeis") granting it a worldwide, perpetual, exclusive license
for use in oil and gas exploration applications. Under this agreement,
CogniSeis became both the exclusive developer and marketer of VoxelGeo.
Upon validation of the source code, the Company received the license fee
payment. The Company has no remaining obligations under the license
agreement and there are no refund provisions related to this $1,500 one-
time license fee. 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>
4.3 Form of Certificate representing Vital Images, Inc.
Common Stock........................................................... Filed herewith electronically.
4.4 Rights Agreement, dated effective as of May 1, 1997,
between Vital Images, Inc. and American Stock Transfer
and Trust Company, which includes as Exhibit B the
form of Rights Certificate............................................. Filed herewith electronically.
4.5 Certificate of Designation, Preferences and Rights of
Series A Junior Preferred Stock of Vital Images, Inc. ................. Filed herewith electronically.
10.1 Form of Distribution Agreement, to be dated effective
as of May 2, 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 May 2, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc............................... Filed herewith electronically.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
10.3 Form of Tax Sharing Agreement, to be dated
effective as of May 2, 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 May 2, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc............................... 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.
10.15 Lease agreement dated May 14, 1993, as amended
April 15, 1997, between Vital Images, Inc.
and Douglas Green IRA Trust............................................ 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>
23.1 Consent of Coopers & Lybrand L.L.P., dated
April 30, 1997......................................................... 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: April 30, 1997 VITAL IMAGES, INC.
By: /s/ Gregory S. Furness
-------------------------
Gregory S. Furness
Vice President, Finance, Chief
Financial Officer and Treasurer
II-4
<PAGE>
VITAL IMAGES, INC.
REGISTRATION STATEMENT ON FORM 10
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Item No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
4.3 Form of Certificate representing Vital Images, Inc.
Common Stock......................................................... Filed herewith electronically.
4.4 Rights Agreement, dated effective as of May 1, 1997,
between Vital Images, Inc. and American Stock Transfer
and Trust Company, which includes as Exhibit B the
form of Rights Certificate........................................... Filed herewith electronically.
4.5 Certificate of Designation, Preferences and Rights of
Series A Junior Preferred Stock of Vital Images, Inc. ............... Filed herewith electronically.
10.1 Form of Distribution Agreement, to be dated
effective as of May 2, 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 May 2, 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 May 2, 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 May 2, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc............................. 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.
10.15 Lease agreement dated May 14, 1993, as amended
April 15, 1997, between Vital Images, Inc.
and Douglas Green IRA Trust.......................................... Filed herewith electronically.
23.1 Consent of Coopers & Lybrand L.L.P., dated April 30, 1997............ Filed herewith electronically.
</TABLE>
_______________________
* Portions of such exhibit are subject to a request for confidential treatment
filed with the Commission by the Registrant.
E-1
<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 92846N 10 4
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 May 1, 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
American Stock Transfer & Trust Company
dated as of May 1, 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 May 1, 1997 (this "Agreement"), is
between Vital Images, Inc., a Minnesota corporation (the "Company"), and
American Stock Transfer & Trust Company, a New York corporation, 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 April 30, 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 May 1, 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 April 21,
2007.
(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
5
<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 American Stock Transfer &
Trust Company (the "Rights Agent") dated as of May 1, 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 President and Chief Executive Officer or its Chief
Financial Officer and Vice President, Finance, 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. 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
9
<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.
10
<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 $20.00 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 its President and Chief
Executive Officer, or its Chief Financial Officer and Vice President,
Finance, 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 Company's President and Chief Executive Officer, or its Chief
Financial Officer and Vice President, Finance, 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.
29
<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:
American Stock Transfer & Trust Company
[Address]
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: American Stock Transfer &
Trust Company
By:____________________________ By:____________________________
Name:__________________________ Name:__________________________
Title:_________________________ Title:_________________________
35
<PAGE>
Exhibit B
---------
[Form of Rights Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER 5:00 P.M., MINNEAPOLIS, MINNESOTA TIME, ON APRIL 30, 2007
OR EARLIER IF REDEEMED OR EXCHANGED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.001 PER RIGHT, AND TO EXCHANGE ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT REFERRED TO HEREIN. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ADVERSE
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF
SUCH RIGHTS MAY BECOME NULL AND VOID. [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 RIGHTS SHALL NOT BE EXERCISABLE AND SHALL BE VOID SO LONG AS
HELD BY A HOLDER IN ANY JURISDICTION WHERE THE REQUISITE QUALIFICATION TO THE
ISSUANCE TO SUCH HOLDER, OR THE EXERCISE BY SUCH HOLDER, OF THE RIGHTS IN SUCH
JURISDICTION SHALL NOT HAVE BEEN OBTAINED OR BE OBTAINABLE.*
- ------------------
*The portion of the legend in brackets shall be inserted only if applicable,
shall be modified to apply to an Acquiring Person or an Adverse Person, as
applicable, and shall replace the preceding sentence.
1
<PAGE>
VITAL IMAGES, INC.
------------------
RIGHTS CERTIFICATE
------------------
This certifies that ______________, or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of May 1, 1997 (the "Rights Agreement"), between Vital
Images, Inc., a Minnesota corporation (the "Company"), and American Stock
Transfer & Trust Company, a _____________ corporation (the "Rights Agent"), to
purchase from the Company at any time after the Distribution Date (as such term
is defined in the Rights Agreement) and prior to 5:00 p.m. (Minneapolis,
Minnesota time) on April 30, 2007 at the office of the Rights Agent designated
for such purpose, or its successors as Rights Agent, one one-thousandth of one
fully paid and non-assessable share of the Company's Series A Junior Preferred
Stock, par value $.01 per share (the "Preferred Shares"), at a purchase price
(the "Purchase Price") of $20.00 per one one-thousandth of a Preferred Share
(such fraction, a "Preferred Share Fraction") upon presentation and surrender of
this Rights Certificate with the Form of Election to Purchase and related
Certificate duly completed and executed. The Purchase Price may be paid by cash,
certified bank check or money order payable to the order of the Company. The
number of Rights evidenced by this Rights Certificate (and the number of
Preferred Share Fractions which may be purchased upon exercise thereof) set
forth above, and the Purchase Price per Preferred Share Fraction set forth
above, are the number and Purchase Price as of the close of business on
__________________ ____________________, 1997, based on the Preferred Shares as
constituted at such date. Pursuant to the Rights Agreement, 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 will be issued.
Capitalized terms used herein without definition shall have the meaning
given to them in the Rights Agreement.
Upon the occurrence of a Section 11(a)(ii) Event, if the Rights evidenced by
this Rights Certificate are beneficially owned by (i) an Acquiring Person, an
Adverse Person or an Affiliate or Associate of any such Person, (ii) a
transferee of any such Acquiring Person, Adverse Person, Associate or Affiliate,
or (iii) under certain circumstances specified in the Rights Agreement, a
transferee of a Person who, after such transfer, became an Acquiring Person, an
Adverse Person or an Affiliate or Associate of any such Person, such Rights
shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Rights Agreement, the Purchase Price (in certain limited
circumstances) and the number and kind of Preferred Shares or other securities
which may be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events. In certain circumstances, and as
described in the Rights Agreement, Common Shares, cash, property or other
securities may be issued by the Company upon the exercise hereof in lieu of
Preferred Shares.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal offices of the
Company and the
2
<PAGE>
above-mentioned office of the Rights Agent and are also available upon written
request to the Company.
Subject to the provisions of the Rights Agreement, this Rights Certificate,
with or without other Rights Certificates, upon surrender at the office or
offices of the Rights Agent designated for such purpose, with the Form of
Election and Certificate set forth on the reverse side duly executed, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing Rights entitling the holder to purchase a like aggregate
number of Preferred Shares Fractions as the Rights evidenced by the Rights
Certificate or Rights Certificates surrendered shall have entitled such holder
to purchase. If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights Certificate or
Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed, subject to adjustment as provided in the
Rights Agreement, at a redemption price of $.001 per Right at any time prior to
the earlier of the close of business on (i) the tenth Business Day following the
Stock Acquisition Date (as such time period may be extended pursuant to the
Rights Agreement), (ii) the tenth Business Day after a determination that a
Person is an Adverse Person, or (iii) the Final Expiration Date.
Subject to the provisions of the Rights Agreement, the Company may, at its
option, at any time after a Section 11(a)(ii) Event, exchange all or part of the
Rights evidenced by this Certificate for Preferred Share Fractions, or, upon an
appropriate Section 24(a) election, Common Shares.
No fractional Preferred Shares will be issued upon the exercise of any Right
or Rights evidenced hereby (other than fractions which are integral multiples of
a Preferred Share Fraction), but in lieu thereof a cash payment will be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Preferred Shares or
of any other securities of the Company (including Common Shares) which may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, 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 the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company.
Dated:____________________________
ATTEST:___________________________ VITAL IMAGES, INC.
__________________________________ By:_____________________________________
Title:__________________________________
3
<PAGE>
Countersigned:
[RIGHTS AGENT]
By:_______________________________
Authorized Officer
4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________________
Attorney, to transfer the within Rights Certificate on the books of the within-
named Company, with full power of substitution.
Dated:________________________________
Enter taxpayer identification
number of transferee ====================================
Tax ID #:
====================================
The signature must correspond in ====================================
every particular, without alteration, Sign here:
with the name(s) as printed on your
certificate. If acting in a special
capacity (executor, administrator,
custodian, etc.), the capacity
must be indicated. ====================================
SIGNATURE GUARANTEED
MEDALLION GUARANTEED*
___________________________________
(Authorized Signature)
*The signature(s) should be guaranteed by a brokerage firm or a financial
institution that is a member of an approved medallion program, such as
Securities Transfer Agents Medallion Program ("STAMP"), Stock Exchange
Medallion Program ("SEMP") or New York Stock Exchange, Inc. Medallion Signature
Program ("MSP").
5
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring
Person, an Adverse Person or an Affiliate or Associate of any such Person
(as such terms are defined pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person, an Adverse Person or an Affiliate or Associate of any
such Person.
Date:_____________________________ _______________________________________
Signature
SIGNATURE GUARANTEED
MEDALLION GUARANTEED
__________________________________
Authorized Signature
NOTICE
------
The signature to the foregoing Certificate must correspond to the name as
written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
6
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: Vital Images, Inc.
The undersigned irrevocably hereby elects to exercise ___________ Rights
represented by this Rights Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or Common Shares or such other securities of
the Company or of any other person which may be issuable upon the exercise of
the Rights) and requests that certificates for such shares be issued in the name
of and delivered to:
Please insert social security
or other taxpayer identification number________________________________
_______________________________________________________________________
(Please print name and address)
_______________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other taxpayer identification number________________________________
_______________________________________________________________________
(Please print name and address)
_______________________________________________________________________
Dated:__________________________ __________________________________________
Signature
SIGNATURE GUARANTEED
MEDALLION GUARANTEED*
________________________________
Authorized Signature
*The signature(s) should be guaranteed by a brokerage firm or a financial
institution that is a member of an approved medallion program, such as
Securities Transfer Agents Medallion Program ("STAMP"), Stock Exchange
Medallion Program ("SEMP") or New York Stock Exchange, Inc. Medallion Signature
Program ("MSP").
7
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(3) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not being exercised by or on behalf of a Person who is or was an
Acquiring Person, an Adverse Person or an Affiliate or Associate of
any such Person (as such terms are defined pursuant to the Rights
Agreement); and
(4) after due inquiry and to the best knowledge of the undersigned,
the undersigned [ ] did [ ] did not acquire the Rights evidenced by
this Rights Certificate from any Person who is, was or became an
Acquiring Person, an Adverse Person or an Affiliate or Associate of
any such Person.
Date:_____________________________ ______________________________________
Signature
SIGNATURE GUARANTEED
MEDALLION GUARANTEED
__________________________________
Authorized Signature
NOTICES
-------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment or
the Form of Election to Purchase, as the case may be, is not completed, the
Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Adverse
Person or an Affiliate or Associate thereof (as defined in the Rights Agreement)
and such Assignment or Election to Purchase will not be honored.
8
<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, Andrew M. Weiss, President and Chief Executive Officer, and Gregory D.
Furness, Chief Financial Officer, Secretary 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
April 30, 1997, adopted the following resolution creating a series of 20,000
shares of Preferred Stock designated as Series A Junior Preferred Stock:
RESOLVED, that the Certificate of Designation, Preferences and Rights of
Series A Junior Preferred Stock of Vital Images, Inc., designating 20,000 shares
of the Company's authorized but unissued Preferred Stock as "Series A Junior
Preferred Stock" and setting forth the rights, preferences and privileges
thereof, substantially in the form attached as Exhibit A to the Rights Agreement
[as set forth below] (the "Certificate of Designation") is hereby approved and
the resolutions set forth therein are hereby adopted.
FURTHER RESOLVED, that the proper officers of the Company are hereby
authorized on behalf of the Company to execute the Certificate of Designation
and to cause such Certificate of Designation to be filed with the Office of the
Secretary of State of the State of Minnesota and to take such other actions as
may be necessary or appropriate for the authorization of such series of
Preferred Stock.
FURTHER RESOLVED, that the minimum number of Preferred Shares sufficient to
permit the exercise in full of all outstanding Rights at any time is hereby
reserved for issuance upon exercise of the Rights, such number to be subject to
adjustment from time to time in accordance with the Rights Agreement, and
subject to the limitation that in no event shall the number of Preferred Shares
reserved
<PAGE>
hereunder, when added to the number of Preferred Shares then otherwise reserved
for issuance by the Company, exceed the total number of authorized but unissued
Preferred Shares of the Company at any time.
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 20,000.
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 May 1, 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:
2
<PAGE>
(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 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 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.
3
<PAGE>
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 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.
4
<PAGE>
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 May, 1997.
-------------------------------------
Andrew M. Weiss
President and Chief Executive Officer
ATTEST:
___________________________________
Gregory S. Furness
Chief Financial Officer, Secretary
and Treasurer
6
<PAGE>
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
between
Bio-Vascular, Inc.
and
Vital Images, Inc.
Dated May 2, 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 May 2, 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.
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.
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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.
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(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 OTC Electronic Bulletin Board.
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. 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 on the Distribution Date. It is agreed that amounts advanced by
Bio-Vascular to Vital Images through the date hereof, as well as any amount
advanced through the Distribution Date have been, and will be, considered
contributions to the capital of Vital Images.
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
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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.
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. Following the Distribution Date, all Books
and Records, will remain 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
seven (7) 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,
13
<PAGE>
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
14
<PAGE>
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-
15
<PAGE>
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.
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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:
-------------------------------
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EXHIBIT 10.2
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT (this "Agreement"), dated as of May 2, 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.
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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
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(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
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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 Record Date (or, if
such date is not a trading day, the trading day immediately
preceding the Record 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 OTC Electronic
Bulletin Board 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 Bio-Vascular Purchase Plan will continue
--------------------------
in full force and effect in accordance with its terms. Participants under the
Bio-Vascular Purchase Plan will be eligible to participate in the Distribution
only to the extent that, by operation of the Bio-Vascular Purchase Plan or
otherwise, they are shareholders of record on the Record Date; provided,
however, that participants who are entitled to receive shares of Bio-Vascular
Common Stock under the Bio-Vascular Purchase Plan as of the Record Date but who
have not yet been mechanically recorded as shareholders of record as of the
Record Date will be treated as shareholders of record for purposes of the
Distribution. Prior to the beginning of the next Offering Period on May 1, 1997,
Bio-Vascular will give notice to all Vital Images Employees of the effect of the
Distribution on their participation in the Bio-Vascular Purchase Plan and of the
expected establishment of the Vital Images Purchase Plan. If the Distribution
Date occurs on or after May 1, 1997, Bio-Vascular will also make an appropriate
adjustment in calculating the Option Price (as defined in the Bio-Vascular
Purchase Plan) for the Offering Period beginning on May 1, 1997 to account for
the effect of the Distribution. Such adjustment will be made by using 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, in lieu of the price of Bio-Vascular
Common Stock on May 1, 1997, for comparison in determining the Option Price.
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
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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
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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:_____________________________________
18
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SCHEDULE 6.1(a)
[Medical/Dental Plans to be Sponsored and Continued by Bio-Vascular]
19
<PAGE>
SCHEDULE 6.1(b)
[Medical/Dental Plans to be Sponsored and Established by Vital Images]
20
<PAGE>
EXHIBIT 10.3
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (this "Agreement"), dated as of May 2, 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.
<PAGE>
"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
2
<PAGE>
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.
3
<PAGE>
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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<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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.
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(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.
9
<PAGE>
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:
10
<PAGE>
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
11
<PAGE>
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:
------------------------------------
12
<PAGE>
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) 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 10.10
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.
2
<PAGE>
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.
3
<PAGE>
(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
4
<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
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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 May 12, 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.
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Approved by the Company's Board of Directors: (Date).
Approved by the Company's shareholders: (Date).
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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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<PAGE>
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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<PAGE>
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 March 19, 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 March 19, 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 first,
second and third 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 on March 17, 1997 and by the sole 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.
9
<PAGE>
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 10.15
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.
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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.
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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
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Commercial Lease-Option to Renew
This Agreement, made this 15th day of April, 1997 by and between the Douglas
---- -----
Greenfield IRA Trust, as Landlord, and Bio-Vascular and/or Vital Images, Inc.,
as Tenant:
As per your current lease originated May 14, 1993 between Douglas W.
Greenfield, IRA Trust as Landlord and Vital Images Inc. as Tenant, expiration
June 1, 1997 Tenant may exercise the following option:
THE TENANT SHALL HAVE THE OPTION TO EXTEND THIS LEASE FOR ONE
LEASE PERIOD (FOUR YEARS). TENANT WILL RENEW THE LEASE WITH AN
ADDITIONAL RENTAL INCREASE OF 7 PERCENT PER LEASE PERIOD AT THE
TIME OF RENEWAL. TOTAL RENT SHALL BE $6,628.65 PER MONTH.
The Tenant hereby agrees to extend the above lease for an additional lease
period (3 years) at a rate of $6,628.65 per month expiring June 1, 2000. The
Landlord agrees to provide an additional option of renewal for one lease period
(3 years) under the same terms and conditions as stated in the original lease.
Agreed to and accepted
/s/ Gregory S. Furness, 4/15/97 /s/ Myrna Leyden 4-8-97
- ------------------------------- -------------------------------
Tenant CFO date Landlord DG date
<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
April 30, 1997
