<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________
Form 10/A
AMENDMENT NO. 1
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)
IOWA* 42-1321776
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 WEST LAKE STREET, SUITE 100 55416
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal
executive offices)
(612) 915-8000
(Registrant's telephone number, including area code)
_____________________________
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
================================================================================
* It is expected that the Registrant will be reincorporated in Minnesota prior
to the effectiveness of this Registration Statement on Form 10, and the
information contained in the Information Statement forming a part hereof
reflects such reincorporation.
<PAGE>
VITAL IMAGES, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
- --- ------- ---------------------------------
<S> <C> <C>
1. Business........................... Summary; Vital Images, Inc.; Introduction; Risk
Factors; The Distribution; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Index to
Financial Statements
2. Financial Information.............. Selected Financial Data; Unaudited Pro Forma
Statements of Operations; Management's
Discussion and Analysis of Financial Condition
and Results of Operations
3. Properties......................... Business -- Facilities
4. Security Ownership of Certain
Beneficial Owners and Management... Security Ownership of Certain Beneficial
Owners; Beneficial Ownership of Management
5. Directors and Executive Officers... Management; Description of Capital
Stock -- Certain Limited Liability,
Indemnification and Anti-Takeover Provisions
6. Executive Compensation............. Management; Security Ownership of Certain
Beneficial Owners
7. Certain Relationships 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 April ___, 1997.
Vital Images was incorporated in Iowa in September 1988 and was reincorporated
in Minnesota in March 1997. Vital Images was acquired by Bio-Vascular through a
tax-free merger on May 24, 1994 and has operated as a wholly-owned subsidiary of
Bio-Vascular since that date. The acquisition by Bio-Vascular provided financial
resources and management capabilities to Vital Images and enabled Vital Images
to leverage these resources and focus its efforts on medical applications for
its technologies.
The decision to spin-off Vital Images was made because, strategically and
financially, the timing and circumstances were right to separate Bio-Vascular's
Surgical and Medical Visualization Businesses for the long-term benefit of its
shareholders, and because of the belief that each business would benefit by
being able to adopt strategies and pursue objectives appropriate to its specific
business, focus on its distinct distribution and marketing channels, be
recognized and evaluated by the financial community as a separate and distinct
business, and implement more focused incentive compensation arrangements that
are tied more directly to the results of operations of its respective business.
The attached Information Statement provides important information regarding
Vital Images and the distribution of Vital Images common stock to the
shareholders of Bio-Vascular. It also contains information about Vital Images'
organization, business, properties, management and operations, including
financial information. We encourage you to read this material carefully.
If you are a Bio-Vascular shareholder at the close of business on April ___,
1997, the record date for the distribution, you will receive one share of Vital
Images common stock for every two shares of Bio-Vascular common stock you own on
that date, with cash to be paid in lieu of any fractional interest in a share to
any holder who would be entitled to less than one whole share of Vital Images
common stock.
Sincerely,
John T. Karcanes
President and Chief Executive Officer
SHAREHOLDERS OF BIO-VASCULAR COMMON STOCK ON THE RECORD DATE FOR THE
DISTRIBUTION ARE NOT REQUIRED TO TAKE ANY ACTION TO PARTICIPATE IN THE
---
DISTRIBUTION. BIO-VASCULAR IS NOT SOLICITING YOUR PROXY BECAUSE
---
SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS NOT REQUIRED.
<PAGE>
[LETTER ON VITAL IMAGES LETTERHEAD]
Dear Shareholder of Bio-Vascular, Inc.:
Attached you will find an Information Statement providing you with considerable
detail about the business and operations of Vital Images, Inc. ("Vital Images"),
the company in which you will become a shareholder if you own shares of common
stock of Bio-Vascular, Inc. on April __, 1997.
Vital Images is engaged in the business of developing, marketing and supporting
medical visualization software and systems for use in clinical diagnosis and
surgical planning. Vital Images' VoxelView/_/ 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,
Andrew M. Weiss
President and Chief Executive Officer
<PAGE>
INFORMATION STATEMENT
[VITAL IMAGES, INC. LOGO]
COMMON STOCK, PAR VALUE $.01 PER SHARE
This Information Statement is being furnished by Bio-Vascular, Inc. ("Bio-
Vascular") in connection with the distribution (the "Distribution") to holders
of record of Bio-Vascular Common Stock ("Bio-Vascular Common Stock") on
________________, 1997 (the "Record Date") of one share of common stock, par
value $.01 per share ("Vital Images Common Stock"), including certain preferred
stock purchase rights, of Vital Images, Inc. ("Vital Images") for every two
shares of Bio-Vascular Common Stock owned on that date. The Distribution will
result in 100% of the outstanding shares of Vital Images Common Stock being
distributed to holders of Bio-Vascular Common Stock on a pro-rata basis. The
Distribution will be effective on April __, 1997 (the "Distribution Date"), and
it is expected that certificates representing Vital Images Common Stock will be
mailed on or about April __, 1997 (the "Mailing Date").
No consideration will be paid by Bio-Vascular's shareholders for the shares of
Vital Images Common Stock to be received by them in the distribution nor will
they be required to surrender or exchange shares of Bio-Vascular Common Stock in
order to receive Vital Images Common Stock.
There is no current public trading market for the shares of Vital Images Common
Stock, although it is expected that a "when issued" trading market will develop
on or about the Distribution Date. Application has been made to list Vital
Images Common Stock, and it is expected that the Vital Images Common Stock will
be listed, on the Nasdaq SmallCap Market under the symbol "VTAL."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" ON PAGE ___.
______________________
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS
DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
______________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE
MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS __________, 1997.
<PAGE>
CLINICAL STUDIES VISUALIZED WITH VITREA(TM)
[Photo of three-dimensional medical [Photo of three-dimensional medical
image] image]
CIRCLE OF WILLIS COLON
Three-dimensional view using Vitrea/_/ Three -dimensional, spiral CT view
demonstates the carotid artery in of the colon using Vitrea/_/.
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
Listing and 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 ________ shares of Vital Images
Common Stock, based on ___________ shares of
Bio-Vascular Common Stock outstanding as of
___________. 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."
Listing and Trading Market..... Application has been made to list the Vital
Images Common Stock, and it is expected that
the Vital Images Common Stock will be listed,
on the Nasdaq SmallCap Market under the symbol
"VTAL." See "The Distribution -- Listing and
Trading of Vital Images Common Stock."
Record Date.................... Close of business on April __, 1997.
Distribution Date.............. April __, 1997.
Mailing Date................... Certificates representing the shares of Vital
Images Common Stock and certain attached
preferred stock purchase rights will be mailed
to Bio-Vascular shareholders on or about April
__, 1997.
Tax Consequences............... Bio-Vascular has received an opinion of its tax
advisor to the effect that there appears to be
substantial authority for viewing the
Distribution as a non-taxable transaction for
Bio-Vascular and its shareholders. Bio-Vascular
has not applied, and does not intend to apply,
for a ruling from the Internal Revenue Service
to such effect. See "The Distribution --
Certain Federal Income Tax Consequences."
Relationship with Bio-Vascular
After the Distribution......... Following the Distribution, Bio-Vascular and
Vital Images will be operated as independent
public companies. Bio-Vascular and Vital Images
will, however, continue to have a relationship
as a result of the agreements being entered
into between Bio-Vascular and Vital Images in
connection with the Distribution, which include
a Distribution Agreement, an Employee Benefits
Agreement, a Tax Sharing Agreement and a
Transition Services Agreement. In addition, two
individuals will continue to serve as directors
of both Bio-Vascular and Vital Images after the
Distribution, with one of these individuals
serving for a transition period not to exceed
18 months. Except as referred to above or as
otherwise described herein, Bio-Vascular and
Vital 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, and to contribute all intercompany debt
owed by Vital Images as of that date to the capital of Vital Images.
Subsequently, Bio-Vascular's Board of Directors determined, effective as of the
Distribution Date, to make such additional capital contributions to Vital Images
as necessary to bring Vital Images' cash, cash equivalents and marketable
securities balances to a combined $10,000,000 and to contribute any additional
intercompany debt owed by Vital Images on the Distribution Date. If Vital
Images' operations progress as anticipated, of which there can be no assurance,
Vital Images believes that the capital contribution made by Bio-Vascular,
together with cash flows from operations, should be sufficient to satisfy its
cash requirements for at least the next two years. The timing of Vital Images'
future capital requirements, however, will depend on a number of factors,
including the ability of Vital Images to successfully commercialize and market
its products; the ability and willingness of physicians to use two- and three-
dimensional imaging software in clinical diagnosis, surgical planning, patient
screening and other diagnosis and treatment protocols; the impact of competition
in the medical visualization business; the ability of Vital Images to
differentiate its volume rendering software from competing products employing
surface rendering or other technologies; and the ability to enhance existing
products and develop new products on a timely basis. To the extent that Vital
Images' operations do not progress as anticipated, additional capital will be
required sooner. There can be no assurance that any required additional capital
will be available on acceptable terms, or at all, and the failure to obtain any
such required capital would have a material adverse effect on Vital Images'
business. See "Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE
Vital Images faces intense competition in its Medical Visualization
Business. While the industry is in a relatively early stage, its development to
date has been characterized by rapid innovation and technological change. Vital
Images expects technology to continue to develop rapidly, and Vital Images'
success will depend to a large extent on its ability to maintain a competitive
position with its volume rendering technology. There can be no assurance that
Vital Images will be able to compete effectively in the marketplace or that
products developed by its competitors will not render its products obsolete or
non-competitive. Similarly, there can be no assurance that Vital Images'
competitors will not succeed in developing or marketing products that are viewed
as providing superior clinical performance or are less expensive relative to
Vital Images' products currently marketed or to be developed. Companies
competing with Vital Images in the medical visualization industry include large,
established manufacturers of medical imaging equipment. In addition to having
significantly greater capital and staff resources for research and development
that are critical to success in the rapidly changing medical visualization
industry, such companies also have well-established marketing and distribution
networks and may have a competitive advantage in marketing visualization tools
as an integrated part of their imaging products. Additionally, Vital Images
faces competition from other entities, such as picture archive and communication
systems ("PACS") vendors, hospital, radiology and clinical systems suppliers and
internal development projects sponsored by hospital radiology departments. There
can be 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. Although Vital Images
has entered into a reseller agreement with Silicon Graphics for purchase and
resale of Silicon Graphics workstations, this agreement is terminable by either
party at will on 30 days' notice. While Vitrea is also capable of running on
other types of hardware, Vitrea's performance on other hardware is currently
reduced relative to its performance when operated on Silicon Graphics
workstations. In addition, other workstations capable of running Vitrea may be
significantly more expensive than those manufactured and sold by Silicon
Graphics. Accordingly, Vital Images' ability to market its products is dependent
to a significant degree on the availability of Silicon Graphics workstations and
their use and acceptance by Vital Images' customers. To the extent that Silicon
Graphics workstations become unavailable to Vital Images or that end-users of
Vital Images' products utilize platforms manufactured by other companies, Vital
Images may encounter difficulty in marketing its products. In any such event,
Vital Images may be required to engage in substantial research and development
and sales and marketing efforts, at potentially significant expense, to
reconfigure and remarket its products to run at optimal performance levels on
workstations other than those manufactured by Silicon Graphics. There can be no
assurance that end-users of Vital Images' products will not determine to use
platforms other than those currently compatible with Vital Images' products, and
any such use could have a material adverse effect on Vital Images' business,
financial condition and results of operations. See "Business--Products and
Product Development."
UNCERTAIN PROTECTION FOR INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS
Although Vital Images has filed a patent application with respect to
certain aspects of its technology, it generally does not rely on patent
protection with respect to its products and technologies. Instead, Vital Images
relies primarily on a combination of trade secret and copyright law, employee
and third-party nondisclosure agreements and other protective measures to
protect intellectual property rights pertaining to its products and
technologies. There can be no assurance, however, that these measures will
provide meaningful protection of Vital Images' trade secrets, know-how or other
intellectual property in the event of any unauthorized use, misappropriation or
disclosure or that others will not independently develop similar technologies or
duplicate any technology developed by Vital Images. In addition, to the extent
that any patents are applied for, there can be no assurance that such
applications will result in issued patents or, if issued, that such patents will
be held to be valid or will otherwise be of value. While Vital Images does not
believe that its products and technologies infringe any existing patents or
intellectual property rights of third parties, there can be no assurance that
such infringement does not exist. The costs of defending an intellectual
property claim could be substantial and could adversely affect Vital Images,
even if it were ultimately successful in defending any such claims. If Vital
Images' products or technologies were found to infringe the rights of a third
party, Vital Images could be required to pay significant damages or license fees
or cease production, which could have a material adverse effect on Vital Images'
business. See "Business--Intellectual Property."
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PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of products used in the practice of medicine
entail significant risk of product liability claims. While Vital Images
currently maintains $2,000,000 of product liability insurance, there can be no
assurance that these coverage limits will be adequate to protect Vital Images
from any liabilities it might incur in connection with sales of its products or
that Vital Images will be able to maintain this level of coverage in the future.
In addition, in order to compete in the medical visualization industry, Vital
Images will have to maintain a steady pace of new product rollouts and updates
or enhancements of existing products. Accordingly, Vital Images may require
increased product liability coverage as additional products and updates come to
the marketplace. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability claim
or series of such claims against Vital Images in excess of Vital Images'
insurance coverage could have a material adverse effect on its business.
DEPENDENCE ON KEY EMPLOYEES
Vital Images will depend upon the active participation of Dr. Vincent
Argiro, its founder and Executive Vice President and Chief Technology Officer,
and Andrew M. Weiss, its President and Chief Executive Officer. Loss of the
services of either of these individuals could have a material adverse effect on
Vital Images' future business. Furthermore, Vital Images' success as an
independent company will depend on its ability to enhance and develop markets
for its current products as well as to introduce new products to the
marketplace. This success will depend largely on its ability to attract and
retain other qualified scientific and management personnel. Vital Images
competes for such personnel with other companies, academic institutions,
government entities and organizations, many of which have substantially greater
capital resources and research and development capabilities than Vital Images.
There can be no assurance that Vital Images will be successful in recruiting or
retaining such personnel, and the inability of Vital Images to recruit and
retain such personnel would have a material adverse effect on Vital Images'
business. See "Management."
TRANSITION TO INDEPENDENT COMPANY
Vital Images has not operated as a stand-alone company since its
acquisition by Bio-Vascular in May 1994 and, following the Distribution, Bio-
Vascular will be under no duty to provide assistance to Vital Images except as
described in the Distribution Agreement and Transition Services Agreement. There
can be no assurance that Vital Images will be able successfully to manage its
transition to an independent company or to operate and develop its business and
manage its growth opportunities without the financial and managerial assistance
provided by Bio-Vascular since the acquisition. See "Relationship Between Bio-
Vascular and Vital Images After the Distribution" and "Business."
GOVERNMENT REGULATION
Vital Images' products are subject to regulation by the FDA and by
comparable agencies in foreign countries. In the United States, the FDA
regulates the development, introduction, manufacturing, labeling and
recordkeeping procedures for medical devices, including medical visualization
software and systems. The process of obtaining marketing clearance from the FDA
for new products and new applications for existing products can be time-
consuming and expensive. All of the products currently marketed by Vital Images
have received marketing clearance from the FDA pursuant to 510(k) pre-market
notifications filed with the assistance of Bio-Vascular. There can be no
assurance, however, that clearance will be granted with respect to future
products or enhancements or that FDA review will not 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, financial markets, including the Nasdaq
SmallCap Market, have experienced extreme price and volume fluctuations that
have affected the market price of many stocks and that, at times, could be
viewed as unrelated or disproportionate to the operating performance of such
companies. Such fluctuations have also affected the share prices of many newly
public issues and of medical technology companies. Such volatility and other
factors may have a materially adverse effect on the market price for shares of
Vital Images Common Stock.
POSSIBILITY OF SUBSTANTIAL SALES OF VITAL IMAGES COMMON STOCK
The planned Distribution will involve the distribution on the Distribution
Date of an aggregate of approximately _______ shares of Vital Images Common
Stock to the shareholders of Bio-Vascular as of the Record Date, representing
all of the issued and outstanding shares of Vital Images Common Stock as of that
date. Substantially all of such shares of Vital Images Common Stock will be
eligible for immediate resale in the public market. Neither Bio-Vascular nor
Vital Images is able to predict whether substantial amounts of Vital Images
Common Stock will be sold in the open market following the Distribution. Any
sales of substantial amounts of Vital Images Common Stock in the public market,
or the perception that such sales might occur, whether as a result of the
Distribution or otherwise, could materially adversely affect the market price of
Vital Images Common Stock. See "The Distribution--Listing and Trading of Vital
Images Common Stock."
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CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Vital Images' Articles authorize the Board of Directors, without any action
by shareholders, to establish the rights and preferences of up to 5,000,000
shares of undesignated preferred stock. Vital Images is also subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. In
addition, Vital Images has adopted a Shareholder Rights Plan (the "Rights
Agreement") designed to protect Vital Images and its shareholders from
unsolicited attempts or inequitable offers to acquire Vital Images. These
measures may, in certain circumstances, deter or discourage takeover attempts
and other changes in control of Vital Images not approved by its Board of
Directors. As a result, Vital Images' shareholders may lose opportunities to
dispose of their shares at the higher prices typically available in takeover
attempts or that may be available under a merger proposal. In addition, these
measures may have the effect of permitting Vital Images' current directors to
retain their positions and place them in a better position to resist changes
that shareholders may wish to make if they are dissatisfied with the conduct of
Vital Images' business. See "Description of Capital Stock -- Preferred Stock"
and "-- Certain Limited Liability, Indemnification and Anti-Takeover Provisions"
and "Rights Agreement."
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET.
Vital Images has applied for quotation of its Common Stock on the Nasdaq
SmallCap Market. There can be no assurance, however that Vital Images will be
able to maintain the qualification standards for listing of Vital Images Common
Stock on the Nasdaq SmallCap Market. Under current Nasdaq listing requirements,
inclusion on the Nasdaq SmallCap Market will require Vital to have at least two
active market makers in Vital Images Common Stock, total assets of $2 million,
capital and surplus of $1 million, a minimum bid price for Vital Images Common
Stock of $1.00 per share, 300 holders of Vital Images Common Stock and 100,000
shares of Vital Images Common Stock held by non-affiliates, having a market
value of $200,000 or more. Recently, the Board of Directors of Nasdaq approved
more stringent listing and maintenance requirements that, if approved by the
Securities and Exchange Commission, would make it more difficult for Vital
Images to maintain its listing on the Nasdaq SmallCap Market. In the event that
Vital Images is unable to maintain such listing, trading, if any, in Vital
Images Common Stock would thereafter be conducted in the over-the-counter market
in what are commonly referred to as the "pink sheets" or the National
Association of Securities Dealers' "Electronic Bulletin Board." Consequently,
the liquidity of Vital Images Common Stock would likely be impaired, not only in
the number of shares that could be bought and sold, but also through delays in
the timing of the transactions, and reduction in security analysts and the news
media coverage, if any, of Vital Images. As a result, prices for shares of Vital
Images Common Stock may be lower than might otherwise prevail.
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, if, during the time in which Vital Images Common Stock
is quoted on the Nasdaq SmallCap Market, it is priced below $5.00 per share,
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 a reasonable care, the broker-dealer
is aware of or should have been aware of the participation of a previously
sanctioned person. In such event, it may be more difficult for broker-dealers to
sell Vital Images Common Stock and holders of Vital Images Common Stock may
therefore have difficulty in selling their shares in the future in the secondary
trading market.
In the event that the Vital Images Common Stock is not listed on, or is
delisted from the Nasdaq SmallCap Market due to the failure to meet the
maintenance requirements or other relevant criteria, trading, if any, of Vital
Images Common Stock would 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. Accordingly,
delisting from the Nasdaq SmallCap Market and the application of the
comprehensive Penny Stock Rules may make it more difficult for broker-dealers to
sell Vital Images Common Stock and purchasers of the shares of Vital Images
Common Stock in the Offering 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 ______________, 1997, between Bio-
Vascular and Vital Images (the "Distribution Agreement").
Bio-Vascular will effect the Distribution on the Distribution Date by
delivering all of the outstanding shares of Vital Images Common Stock to the
Distribution Agent for distribution to the shareholders of record of Bio-
Vascular Common Stock on the Record Date. The Distribution will be made on the
basis of one share of Vital Images Common Stock for each two shares of Bio-
Vascular Common Stock held on the Record Date. The actual total number of shares
of Vital Images Common Stock to be distributed will depend on the number of
shares of Bio-Vascular Common Stock outstanding on the Record Date. Based upon
the ___________ shares of Bio-Vascular Common Stock outstanding on
________________, 1997, approximately _______________ shares of Vital Images
Common Stock would be distributed to Bio-Vascular shareholders in the
Distribution. The shares of Vital Images Common Stock will be fully paid and
non-assessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of Capital Stock. -- Common Stock." The shares of Vital
Images Common Stock will also be distributed with certain attached preferred
stock purchase rights. See "Rights Agreement." Certificates representing shares
of Vital Images Common Stock will be mailed to Bio-Vascular shareholders on the
Mailing Date.
No holder of Bio-Vascular Common Stock will be required to pay any cash or
other consideration for the shares of Vital Images Common Stock to be received
in the Distribution, to surrender or exchange any shares of Bio-Vascular Common
Stock, or to take any other action in order to receive the shares of Vital
Images Common Stock to which they are entitled in the Distribution.
No certificates or scrip representing fractional shares of Vital Images
Common Stock will be issued to Bio-Vascular shareholders as a part of the
Distribution. The Distribution Agent will aggregate all fractional shares of
Vital Images Common Stock otherwise issuable in the Distribution into whole
shares and sell them in the open market at then-prevailing prices on behalf of
shareholders who would otherwise be entitled to receive such fractional share
interests. Such persons will receive instead a cash payment in the amount of
their pro rata share of the total sale proceeds, net of any commissions incurred
in connection with such sales. Such sales are expected to be made on, or as soon
as practicable after, the Distribution Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Bio-Vascular has received an opinion from Coopers & Lybrand L.L.P.
("Coopers & Lybrand") to the effect that (i) it appears that there is
substantial authority for viewing the Distribution as a tax-free transaction
qualifying under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the following discussion insofar as it relates to
statements of tax law or conclusions thereunder is correct and complete in all
material respects.
The opinion of Coopers & Lybrand received by Bio-Vascular represents only
the best judgment of Coopers & Lybrand, and is not binding on the Internal
Revenue Service (the "IRS"). Additionally, the opinion of Coopers & Lybrand is
limited insofar as it speaks only to the existence of "substantial authority"
for viewing the Distribution as non-taxable under Section 355 of the Code. An
opinion as to "substantial authority" is determined by an objective analysis of
current tax law and an application of 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.
LISTING AND TRADING OF VITAL IMAGES COMMON STOCK
Vital Images has filed an application to list the Vital Images Common
Stock, and it is expected that the Vital Images Common Stock will be traded, on
the Nasdaq Small Cap Market under the symbol "VTAL." Based on the number of
holders of record of Bio-Vascular Common Stock as of ________, 1997, Vital
Images is expected initially to have approximately 1,250 shareholders of record
after the Distribution.
A "when-issued" trading market in the Vital Images Common Stock is expected
to develop on or about the Distribution Date. The term "when-issued" means
trading in shares prior to the time certificates are actually available or
issued. Prices at which shares of the Vital Images Common Stock may trade on the
when-issued basis or after the Distribution cannot be predicted, if such trading
occurs at all.
Shares of Vital Images Common Stock distributed to Bio-Vascular
shareholders will be freely transferable, except for shares received by persons
who may be deemed to be "affiliates" of Vital Images under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of Vital Images after the Distribution will generally include
individuals or entities that control, are controlled by, or are under common
control with, Vital Images, and may include certain officers and directors of
Vital Images as well as principal shareholders of Vital Images. Persons who are
affiliates of Vital Images will be permitted to sell their shares of Vital
Images Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 thereunder.
RELATIONSHIP BETWEEN BIO-VASCULAR AND VITAL IMAGES
AFTER THE 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 to contribute the intercompany debt owed by
Vital Images as of that date of approximately $3,100,000 to the capital of Vital
Images and has, effective as of the Distribution Date, agreed to make such
additional capital contributions as are necessary to bring Vital Images' cash,
cash equivalents and marketable securities balances to a combined total of
$10,000,000 and to contribute any additional intercompany debt owed by Vital
Images on the Distribution Date. It is currently anticipated that the amount of
additional intercompany debt to be contributed on the Distribution Date will be
approximately $100,000.
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, and to contribute all intercompany debt
owed by Vital Images as of that date to the capital of Vital Images.
Subsequently, Bio-Vascular's Board of Directors determined, effective as of the
Distribution Date, to make such additional capital contributions to Vital Images
as necessary to bring Vital Images' cash, cash equivalents and marketable
securities balances to a combined $10,000,000 and to contribute any additional
intercompany debt owed by Vital Images on the Distribution Date.
NEED FOR ADDITIONAL FINANCING
If Vital Images' operations progress as anticipated, of which there can be
no assurance, Vital Images believes that the capital contribution made by Bio-
Vascular, together with cash flows from operations, should be sufficient to
satisfy its cash requirements for at least the next two years. The timing of
Vital Images' future capital requirements, however, will depend on a number of
factors, including the ability of Vital Images to successfully commercialize and
market its products; the ability and willingness of physicians to use two- and
three-dimensional imaging software in clinical diagnosis, surgical planning,
patient screening and other diagnosis and treatment protocols; the impact of
competition in the medical visualization business; the ability of Vital Images
to differentiate its volume rendering software from competing products employing
surface rendering or other technologies; and the ability to enhance existing
products and develop new products on a timely basis. To the extent that Vital
Images' operations do not progress as anticipated, additional capital may be
required sooner. There can be no assurance that any required additional capital
will be available on acceptable terms, or at all, and the failure to obtain any
such required capital would have a material adverse effect on Vital Images'
business.
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, and to contribute all intercompany debt owed
31
<PAGE>
by Vital Images as of that date. 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) Reflects the contribution to capital of the intercompany balance due from
Vital Images to Bio-Vascular. The intercompany balance represents the net
amount historically received from Bio-Vascular which were advanced to fund
Vital Images' product in development activities. Vital Images had no
demonstrated ability or commitment to repay these advances. 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, and to contribute all
intercompany debt owed by Vital Images as of that date. Subsequently, Bio-
Vascular's Board of Directors determined, effective as of the Distribution Date,
to make such additional capital contributions to Vital Images as necessary to
bring Vital Images' cash, cash equivalents and marketable securities balances to
a combined $10,000,000 and to contribute any additional intercompany debt owed
by Vital Images on the Distribution Date.
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 1997, WITH THE THREE MONTHS
ENDED JANUARY 31, 1996
Revenue increased 7% to $152,000 from $143,000.
The gross margin percentage increased to 86% from 77%, primarily due to the
elimination of existing royalty obligations on software, which were satisfied on
May 24, 1996. Vital Images' business strategy is currently to focus on the sale
of Vitrea and its Vitrea system, consisting of Vitrea software and third party
hardware and peripherals, designed to offer end users an integrated
visualization system. Vital Images receives only a nominal discount in
purchasing the third party hardware and peripheral components of the Vitrea
system and expects that its gross margin on the resale of these system
components will approximate the discount. As a result, as Vitrea systems
increase as a proportion of Vital Images' product mix, Vital Images expects that
overall gross margin percentages will decrease. This forward looking statement
will be influenced primarily by resale gross margins on the proprietary and
third party components of the Vitrea system and on Vital Images' anticipated
product mix and any deviation from Vital Images' expectations regarding future
resale gross margins and product mix could cause actual results to differ.
Selling, general and administrative expense increased 12% to $569,000 from
$507,000. General and administrative expense incurred in the three months ended
January 31, 1996, included hiring costs related to the employment of Mr. Weiss
during that period. The absence of these expenses in the three months ended
January 31, 1997 resulted in a decrease in general and administrative expense of
$100,000 between these periods. Selling expense increased by $125,000 as a
result of increased marketing activity and the employment of additional sales
personnel, including a Vice President of Sales during the entire three months
ended January 31, 1997, compared to only one month during the quarter ended
January 31, 1996. It is expected that selling expense will continue to increase
as Vital Images builds a direct sales
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, owed approximately
$3,100,000 in intercompany debt, 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,
recording cash advanced as intercompany debt. The advances of cash had no
payment requirements and were interest free, as Vital Images had, substantially,
no ability to repay these advances. Bio-Vascular conducted the investing
activities and continued to finance the activities of Vital Images. In
anticipation of the Distribution, on November 1, 1996, Bio-Vascular agreed to
assign to Vital Images $10,000,000 in cash, cash equivalents and marketable
securities and to contribute all intercompany debt existing on that date. As a
result, at January 31, 1997, Vital Images had $9,033,000 in cash, cash
equivalents and marketable securities. The intercompany balance is included in
equity as net investment by Bio-Vascular. Subsequent to November 1, 1996, Bio-
Vascular's Board of Directors determined, effective as of the Distribution Date,
to make such additional capital contributions as necessary to bring Vital
Images' cash, cash equivalents and marketable securities balances to a combined
$10,000,000 and to contribute any additional intercompany debt existing on that
date.
If Vital Images' operations progress as anticipated, of which there can be
no assurance, Vital Images believes that the capital contribution made by Bio-
Vascular should be sufficient to satisfy its cash requirements for at least the
next two years. The timing of Vital Images' future capital requirements,
however, will depend on a number of factors, including the ability of Vital
Images to launch successfully its Vitrea product line; the ability and
willingness of physicians to use three-dimensional imaging software in clinical
diagnosis, surgical planning patient screening and other diagnosis and treatment
protocols; the impact of competition in the medical visualization business; and
the ability to enhance 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 a reseller agreement between Vital Images and
Silicon Graphics, Vital Images will purchase O2 workstation systems at a nominal
discount, install its Vitrea software, and market the package as an integrated
medical visualization solution, thereby implementing Vital Images' strategy to
develop, market, sell and support an integrated visualization workstation. The
reseller agreement between Vital Images and Silicon Graphics is terminable at
will by either party upon 30 days' notice.
In addition to its immediate clinical applications, Vitrea also
incorporates a number of additional technological advances, making it adaptable
to routine clinical use in surgical navigation and cancer treatment and for
integration into diagnostic imaging equipment manufactured by other companies.
In particular, Vitrea was written using advanced programming techniques, a
modular, object-oriented design, C++ programming language, and a shared
messaging structure. These characteristics make it easy to modify Vitrea to suit
the clinical needs of surgical navigation and oncology, as well as allowing
diagnostic equipment manufacturers to integrate Vitrea or its components into
imaging system consoles and off-line review stations, thereby providing Vital
Images with the opportunity to leverage the Vitrea development investment into
new commercial areas.
In licensing its products, Vital Images provides three months of no
additional cost maintenance and support, and also offers support and maintenance
contracts to its customers, as well as certain other services such as
installation and training. Maintenance contracts for VoxelView have typically
been offered to licensees on an annual basis, and provide for software updates,
error correction, telephone support and other general maintenance services in
exchange for an annual maintenance fee. In connection with the commercial
release of Vitrea expected to take place in the second 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.
This software, which allows Vital Images' products to interface with DICOM
networks, is 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.
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.
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<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 _____________, 2007, and no option can be granted under the
Director Plan after such date. However,
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<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 _____________ 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.
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<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 _____________ shares of Vital
Images Common Stock issued and outstanding, held of record by ____ shareholders.
The holders of Vital Images Common Stock are entitled to one vote for each share
on all matters submitted to a vote of shareholders and may not cumulate votes
for the election of directors. Accordingly, the owners of a majority of the
shares of Vital Images Common Stock outstanding will have the power to elect all
of the directors. Each share of outstanding Vital Images Common Stock is
entitled to participate equally in any distribution of net assets made to the
shareholders in liquidation, dissolution or winding up of Vital Images and is
entitled to participate equally in dividends as and when declared by the Board
of Directors. There will be no redemption, sinking fund, conversion or
preemptive rights with respect to the shares of Vital Images Common Stock. All
shares of Vital Images Common Stock will have equal rights and preferences.
PREFERRED STOCK
Upon the Distribution, no shares of preferred stock will be issued or
authorized by the Board of Directors for issuance other than the Series A Junior
Preferred Stock authorized in connection with the Rights Agreement. See "Rights
Agreement." Under the governing Minnesota law and Vital Images' Articles, no
action by Vital Images' shareholders is necessary, and only action of the Board
of Directors is required, to authorize the issuance of any of the shares of
preferred stock. The Board of Directors is empowered to establish, and to
designate the name of, each other class or series of the shares of preferred
stock and to set the terms of such shares (including terms with respect to
redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences). Accordingly, the Board of Directors, without
shareholder approval, may issue shares of preferred stock with terms (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences) that could adversely
affect the voting power and other rights of holders of the Vital Images Common
Stock. It is not possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of the Vital Images Common
Stock until the Board of Directors determines the specific rights of the holders
of such preferred stock. However, the effects might include, among other things,
restricting dividends on the Vital Images Common Stock, diluting the voting
power of the Vital Images Common Stock, impairing the liquidation rights of the
Vital Images Common Stock and delaying or preventing a change in control of
Vital Images. Other than any potential issuance of the Series A Junior Preferred
Stock pursuant to the Rights Agreement, Vital Images has no present plans to
issue any shares of preferred stock.
CERTAIN LIMITED LIABILITY, INDEMNIFICATION AND ANTI-TAKEOVER PROVISIONS
Article X of Vital Images' Articles, and Article VI, Section 1 of Vital
Images' By-Laws, provide that Vital Images will indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent, as permitted by Minnesota Statutes Section 302A.521 as enacted and
amended.
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<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 $____ per Preferred Stock
Fraction (the "Purchase Price"), subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of _________,
1997 between Vital Images and ________________, as Rights Agent (the "Rights
Agreement"). The description set forth below is intended as a summary only and
is qualified in its entirety by reference to the Rights Agreement, which is
filed as an exhibit to the Registration Statement on Form 10, of which this
Information Statement forms a part.
Initially, the Rights will be evidenced by Vital Images Common Stock
certificates, and no separate Rights Certificates will be distributed. The
Rights will separate from the Vital Images Common Stock and will be distributed
to the holders thereof on the "Rights Distribution Date," which shall be the
close of business on the tenth business day following the first to occur of the
following: (i) a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding Vital Images
Common Stock, other than as a result of a Permitted Offer, as defined (the
"Stock Acquisition Date"); (ii) the announcement (or such later date as the
Board of Directors, acting by a majority of the Continuing Directors, may
determine) of a tender offer or exchange offer (other than a Permitted Offer, as
defined) that would result in a person or group beneficially owning 15% or more
of the outstanding Vital Images Common Stock; or (iii) a determination by the
Board that a Person is an Adverse Person, and that such Person, alone or
together with its affiliates and associates, has become the beneficial owner of
a substantial amount of Vital Images Common Stock (which amount shall in no
event be less than the greater of 10% of Vital Images Common Stock then
outstanding or the sum of .001% and the largest percentage of the outstanding
shares of Vital Images' Common Stock then known by the Company to be
beneficially owned by any person (with certain exceptions)) and (A) such
beneficial ownership by such Person is intended to cause Vital Images to
repurchase the Vital Images Common Stock beneficially owned by such Person or to
cause pressure on Vital Images to take action or enter into a transaction or
series of transactions intended to provide such Person with short-term financial
gain under circumstances where the Board determines that the best long-term
interests of Vital Images and its shareholders would not be served by taking
such action or entering into such transaction or series of transactions at that
time or (B) such beneficial ownership is causing or reasonably likely to cause a
material adverse impact including, but not limited to, impairment of
relationships with customers or impairment of Vital Images' ability to maintain
its competitive position.
A "Permitted Offer" means a tender or exchange offer which is for all
outstanding Vital Images Common Stock at a price and on terms determined, prior
to the purchase of shares under such tender or exchange offer, by the Board at a
time when a majority of the members of the Board are Continuing Directors to be
fair to the Vital Images shareholders and otherwise in the best interests of
Vital Images and its shareholders (other than the Person or any affiliate or
associate thereof on whose behalf the offer is being made).
A "Continuing Director" is (i) any person who is a member of the Board of
Directors, while such person is a member of the Board of Directors, who is not
an Acquiring Person or an Adverse Person, or an affiliate or associate of either
of the foregoing, or a representative, nominee or designee of an Acquiring
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<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 ____________, unless earlier redeemed or
exchanged by Vital Images as described below (the earliest of all such dates,
the "Expiration Date").
If (i) a person or group, with certain exceptions, becomes the beneficial
owner of more than 15% of the then outstanding Vital Images Common Stock, other
than as a result of a Permitted Offer or (ii) the Board determines that a person
is an Adverse Person (such events to be referred to as "Section 11(a)(ii)
Events"), then each holder of a Right will thereafter have the right to receive,
upon exercise, that number of Preferred Stock Fractions (or in certain
circumstances, that number of shares of Vital Images Common Stock, cash, non-
cash property or other securities of Vital Images) having a market value equal
to two times the Exercise Price of the Right. The Rights, however, are not
exerciseable following the occurrence of either of the events set forth above
until such time as the Rights are no longer redeemable by Vital Images as set
forth below. Notwithstanding any of the foregoing, following the occurrence of
either of the events set forth above, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person or Adverse Person (or certain related persons and transferees)
will be null and void.
If at any time following the Stock Acquisition Date, other than pursuant to
a Permitted Offer, (i) Vital Images is acquired in a merger or other business
combination transaction in which Vital Images is not the surviving corporation
or the Vital Images Common Stock is changed or exchanged or (ii) 50% or more of
the Vital Images' assets or earning power is sold or transferred, (such events
to be referred to as "Section 13 Events") each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive that number of shares of common stock of the acquiring company
which equals the exercise price of the Right divided by one-half of the current
market price of such common stock at the date of the occurrence of the event.
The Section 11(a)(ii) Events and the Section 13 Events are collectively referred
to as the "Triggering Events."
At any time after the occurrence of a Section 11(a)(ii) Event, at the
election of the Board, Vital Images may exchange the Rights (other than Rights
which have become void), in whole or in part, at an exchange ratio of one
Preferred Stock Fraction per Right (subject to adjustment).
The Purchase Price payable and the number of Preferred Stock Fractions
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent dilution (i) in the event of a stock dividend on, or a subdivision,
split, combination, consolidation or reclassification of, the Preferred Stocks,
(ii) if all holders of any security of Vital Images are granted rights, options
or warrants to subscribe for or purchase Preferred Stocks or convertible
securities at less than the current market price of the Preferred Stocks, or
(iii) upon the distribution to holders of Preferred Stocks of evidences of
indebtedness or assets (excluding quarterly cash dividends ) or of subscription
rights or warrants (other than those referred to above).
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
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<PAGE>
fractional Preferred Stocks other than fractions which are integral multiples of
Preferred Stock Fractions (or, in the event of an appropriate election, shares
of Vital Images Common Stock), and, in lieu of such fractional Preferred Stocks
(or shares of Vital Images Common Stock, as the case may be), an adjustment in
cash will be made based on the market price of the Preferred Stocks (or common
stock, if appropriate) on the last trading date prior to the date of exercise.
In general, at any time prior to the first to occur of (i) ten days
following the Stock Acquisition Date, (ii) ten days after a person is determined
to be an Adverse Person, or (iii) the Final Expiration Date, Vital Images, upon
determination of the Board, may redeem the Rights in whole, but not in part, at
a price of $.001 per Right (payable in cash, stock or other consideration deemed
appropriate by the Board of Directors). Immediately upon redemption of the
Rights, the Rights will terminate, and the only right of the holders of the
Rights will be to receive the $.001 redemption price.
The Preferred Stocks purchasable upon exercise of the Rights will be
nonredeemable and junior to any other series of preferred stock Vital Images may
issue (unless otherwise provided in the terms of such other stock). Each
Preferred Stock will have a preferential quarterly dividend in an amount equal
to 1,000 times the dividend declared on each share of Vital Images Common Stock,
but in no event less than $100. In the event of liquidation, the holders of
Preferred Stocks will receive a preferred liquidation payment equal to the
greater of $1,000 per share, plus accrued dividends, or 1,000 times the payment
made with respect to each share of Vital Images Common Stock. Each Preferred
Stock will have 1,000 votes, voting together with the Vital Images Common Stock.
In the event of any merger, consolidation or other transaction in which Vital
Images Common Stock is exchanged, each Preferred Stock will be entitled to
receive 1,000 times the amount and type of consideration received per share of
Vital Images Common Stock. The rights of the Preferred Stocks as to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of Vital Images, including, without limitation, the
right to vote or receive dividends. The creation of the Rights should not be
taxable to shareholders. Shareholders may, however, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exerciseable for Preferred Stocks (or other consideration) of Vital Images or
for common stock of an acquiring company as set forth above.
Prior to the Rights Distribution Date, the Board may adopt amendments to
any of the provisions of the Rights Agreement (with certain exceptions),
including amendments that modify the definition of Acquiring Person, change the
Purchase Price or extend the Final Expiration Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board to cure any ambiguity, to make changes which do not adversely affect the
interests of holders of Rights (excluding any Rights held by an Acquiring Person
or Adverse Person that have become null and void under the Rights Agreement).
One Right will be attached to each share of Vital Images Common Stock
distributed in the Distribution so long as the Rights Agreement remains in
effect and the Rights continue to remain attached to and trade with the shares
of Vital Images Common Stock, Vital Images will issue one Right for each share
of Vital Images Common Stock issued between the Record Date and any Rights
Distribution Date, so that all outstanding shares of Vital Images Common Stock
will have attached Rights. Based upon the ___________ shares of Bio-Vascular
Common Stock outstanding on ________________, 1997 and the _______ shares of
Bio-Vascular Common Stock reserved for issuance under outstanding warrants and
options, Vital Images will initially reserve for issuance upon exercise of the
Rights _______ Preferred Stocks.
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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. In addition, the Vital Images Common Stock is expected to be
listed on the Nasdaq SmallCap Market. Reports, proxy statements and other
information concerning Vital Images can be inspected and copied at the Public
Reference Room of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
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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 April ___, 1997 (the "Distribution").
Shareholders will receive one share of the Company for each two shares of Bio-
Vascular common stock held. The Company has attempted to structure the
transaction as tax-free, but since no advance ruling will be sought from the
Internal Revenue Service, no assurance can be made about the final tax treatment
of the transaction. In anticipation of the Distribution, Bio-Vascular made a
capital contribution to Vital Images of the intercompany debt due from Vital
Images and assigned $10 million in cash, cash equivalents and marketable
securities to Vital Images effective November 1, 1996. Subsequently, Bio-
Vascular's Board of Directors agreed to make such additional capital
contributions as are necessary to bring the Company's cash, cash equivalents and
marketable securities balances to a combined total of $10 million effective as
of the Distribution Date. Bio-Vascular and the Company will also enter into a
number of agreements to facilitate the Distribution and the transition of the
Company to an independent business.
On May 24, 1994, Bio-Vascular acquired Vital Images through a "stock for stock"
exchange of 1,645,025 shares of Bio-Vascular Common Stock for the 1,645,025
shares of Vital Images common and Series A preferred stock 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 made a capital contribution to Vital Images of the
intercompany debt due from Vital Images and assigned $10 million in cash, cash
equivalents and marketable securities, to Vital Images, effective November 1,
1996, consisting of approximately $3,000,000 of marketable securities and
approximately $6,873,000 of cash and cash equivalents, along with the related
accrued interest and unamortized premiums.
The financial information included herein is not necessarily indicative of the
financial position, results of operations or cash flows of the Company in the
future or what the financial position, results of operations or cash flows would
have been if the Company had been a separate, independent company during the
periods presented. (See Note 3 of the Notes to Financial Statements for the
Unaudited Pro Forma Statements of Operations.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates:
The preparation of the Company's financial statements in conformity with
generally accepting accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
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, respectively, for issuance under such plans.
At January 31, 1997, options to purchase 1,293,720 Bio-Vascular shares are
outstanding, and 797,552 are exerciseable.
Rights Plan:
The Company intends, prior to the Distribution Date, to declare a dividend
distribution of one Preferred Stock Purchase Right (Right) on each outstanding
share of the Company's common stock. With certain exceptions, the Right will
become exerciseable only in the event that an acquiring party accumulates 15% or
more of the Company's common stock or a party announces an offer to acquire 15%
or more of the Company's common stock. The Right will expire on ______________,
if not previously redeemed or exercised. Each Right will entitle the holder to
purchase one-tenth of a share of preferred stock at a price of $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.
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
Europe.......................... 27,640 6,473 111,166 114,672 359,468
Canada and Mexico............... 1,395 589 6,263 56,290 33,826
</TABLE>
F-17
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(INFORMATION AS OF JANUARY 31, 1997 AND FOR
THE THREE MONTHS ENDED JANUARY 31, 1997
AND 1996 IS UNAUDITED)
The following table sets forth the revenue of the Company by customer profile
for the years ended October 31, 1996, 1995 and 1994. For the three month periods
ended January 31, 1997 and 1996, revenues were primarily from Medical.
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Medical.......................... $667 $ 467 $ 428
Geoscience....................... 59 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 by CogniSeis, which occurred in
_____________, 1995, the Company received the license fee payment. The
Company has no remaining obligations under the license agreement. 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>
10.1 Form of Distribution Agreement, to be dated effective
as of _________, 1997 between Bio-Vascular, Inc. and
Vital Images, Inc...................................................... Filed herewith electronically.
10.2 Form of Employee Benefits Agreement, to be
dated effective as of __________, 1997, between
Bio-Vascular, Inc. and Vital Images, Inc............................... Filed herewith electronically.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
10.5 Incentive Stock Option Adjustment Plan................................. Filed herewith electronically.
10.6 1990 Stock Option Plan................................................. Filed herewith electronically.
10.12 1997 Director Stock Option Plan........................................ Filed herewith electronically.
10.18 Joint Development Agreement dated August 14,
1996 between Vital Images, Inc. and
ATL Ultrasound, Inc.*.................................................. Filed herewith electronically.
</TABLE>
______________
* Portions of such exhibit are subject to a request for confidential treatment
filed with the Commission by the Registrant.
II-2
<PAGE>
<TABLE>
<S> <C> <C>
23.1 Consent of Coopers & Lybrand L.L.P., dated
April 18, 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 18, 1997 VITAL IMAGES, INC.
By: /s/ Andrew M. Weiss
---------------------
Andrew M. Weiss
President and Chief Executive Officer
II-4
<PAGE>
VITAL IMAGES, INC.
REGISTRATION STATEMENT ON FORM 10
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Item No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
10.1 Form of Distribution Agreement, to be dated
effective as of _________, 1997 between
Bio-Vascular, Inc. and Vital Images, Inc............................. Filed herewith electronically.
10.2 Form of Employee Benefits Agreement, to
be dated effective as of __________, 1997,
between Bio-Vascular, Inc. and Vital Images, Inc..................... Filed herewith electronically.
10.5 Incentive Stock Option Adjustment Plan............................... Filed herewith electronically.
10.6 1990 Stock Option Plan............................................... Filed herewith electronically.
10.12 1997 Director Stock Option and Incentive Plan....................... Filed herewith electronically.
10.18 Joint Development Agreement dated August 14, 1996 between
Vital Images, Inc. and ATL Ultrasound, Inc.*......................... Filed herewith electronically.
23.1 Consent of Coopers & Lybrand L.L.P., dated
April 18, 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 10.1
DISTRIBUTION AGREEMENT
between
Bio-Vascular, Inc.
and
Vital Images, Inc.
Dated ________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1. DEFINITIONS..................................................... 1
ARTICLE 2. PRE-DISTRIBUTION TRANSACTIONS................................... 4
2.1. Reincorporation; Other Corporate Action........................... 4
2.2. Bio-Vascular Approval............................................. 4
2.3. Related Agreements................................................ 4
2.4. Securities Law Actions............................................ 4
2.5. Capital Contribution.............................................. 5
ARTICLE 3. THE DISTRIBUTION................................................ 5
3.1. Conditions to the Distribution.................................... 5
3.2. The Distribution.................................................. 6
3.3. Fractional Shares................................................. 6
3.4. Warrants.......................................................... 6
ARTICLE 4. INDEMNIFICATION, CLAIMS AND OTHER MATTERS....................... 7
4.1. Indemnification by Bio-Vascular................................... 7
4.2. Indemnification by Vital Images................................... 7
4.3. Insurance Proceeds................................................ 8
4.4. Procedure for Indemnification..................................... 8
4.5. Other Claims...................................................... 10
4.6. Contribution in Respect of Certain Indemnifiable Losses........... 10
4.7. No Beneficiaries.................................................. 10
ARTICLE 5. CERTAIN ADDITIONAL MATTERS...................................... 10
5.1. Construction of Agreements........................................ 10
5.2. Consents, Etc..................................................... 11
5.3. No Representations or Warranties.................................. 11
5.4. Officers and Directors............................................ 11
5.5. Existing Intercompany Arrangements................................ 11
5.6. Intercompany Accounts............................................. 11
5.7. Qualification as Tax-Free Distribution............................ 11
ARTICLE 6. ACCESS TO INFORMATION AND SERVICES.............................. 12
6.1. Provision of Corporate Records.................................... 12
6.2. Access to Information............................................. 12
6.3. Production of Witnesses and Individuals........................... 12
6.4. Retention of Records.............................................. 13
6.5. Confidentiality................................................... 13
6.6. Privileged Matters................................................ 14
ARTICLE 7. INSURANCE....................................................... 15
7.1. Policies and Rights of Vital Images............................... 15
7.2. Post-Distribution Date Claims..................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.3. Administration and Reserves....................................... 16
7.4. Allocation of Insurance Proceeds................................. 16
7.5. Agreement for Waiver of Conflict and Shared Defense.............. 16
ARTICLE 8. DISPUTE RESOLUTION............................................. 16
8.1. Negotiation and Binding Arbitration.............................. 16
8.2. Initiation....................................................... 17
8.3. Submission to Arbitration........................................ 17
8.4. Equitable Relief................................................. 17
8.5. Consolidation.................................................... 17
SECTION 9. MISCELLANEOUS.................................................. 17
9.1. Entire Agreement................................................. 17
9.2. Expenses......................................................... 17
9.3. Governing Law.................................................... 17
9.4. Jurisdiction and Venue........................................... 18
9.5. Notices.......................................................... 18
9.6. Modification of Agreement........................................ 18
9.7. Termination...................................................... 18
9.8. Successors and Assigns........................................... 18
9.9. No Third Party Beneficiaries..................................... 19
9.10. Titles and Headings; Interpretation.............................. 19
9.11. Exhibits......................................................... 19
9.12. Severability..................................................... 19
9.13. No Waiver........................................................ 19
9.14. Survival......................................................... 19
9.15. Counterparts..................................................... 19
</TABLE>
EXHIBITS
Exhibit A Employee Benefits Agreement
Exhibit B Tax Sharing Agreement
Exhibit C Transition Services Agreement
ii
<PAGE>
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (this "Agreement"), dated as of _________, 1997, is
made and entered into by and between Bio-Vascular, Inc., a Minnesota corporation
("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation ("Vital
Images").
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, engaged in the business of developing, marketing and supporting
medical visualization software and systems for use in clinical diagnosis and
surgical planning.
WHEREAS, the Board of Directors of Bio-Vascular has determined it to
be in the best interests of the shareholders of Bio-Vascular to separate Vital
Images from Bio-Vascular by distributing all of the issued and outstanding
shares of Vital Images common stock, $.01 par value per share, including certain
preferred stock purchase rights attached thereto (the "Vital Images Common
Stock"), to the holders of Bio-Vascular's common stock, par value $.01 per share
(the "Bio-Vascular Common Stock"), as provided herein; and
WHEREAS, Bio-Vascular and Vital Images have determined that it is
necessary and desirable to establish the principal corporate transactions
required to effect the Distribution, certain other agreements governing matters
relating to the Distribution and the relationship of Bio-Vascular and Vital
Images after the Distribution.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound hereby, Bio-
Vascular and Vital Images agree as follows:
ARTICLE
I.
DEFINITIONS
As used in this Agreement, initially capitalized terms defined
immediately after their use shall have the respective meanings thereby provided,
and the following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
Action: any action, claim, suit, arbitration, inquiry, subpoena, discovery
request, proceeding or investigation by or before any court or grand jury, any
governmental or other regulatory or administrative agency or commission or any
arbitration tribunal.
Affiliate: with respect to any specified person, a person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with such specified person; provided, however, that
unless otherwise expressly provided, Vital Images and Bio-Vascular shall not be
deemed to be Affiliates of one another for purposes of this Agreement.
Agent: American Stock Transfer & Trust Company, the distribution agent
appointed by Bio-Vascular and Vital Images to distribute or make book entry
credits for the Vital Images Common Stock in connection with the Distribution.
<PAGE>
Books and Records: the books and records (or true and complete copies
thereof), including computerized records, of Bio-Vascular that relate
principally to Vital Images and are necessary for the operation of the Vital
Images Business, including, without limitation, the corporate documents and
records of corporate proceedings of Vital Images, all books and records relating
to Vital Images Employees, the purchase of materials, supplies and services by
Vital Images; the dealings with customers of Vital Images; and all files
relating to any Action involving Vital Images.
Code: the Internal Revenue Code of 1986, as amended.
Commission: the Securities and Exchange Commission.
Distribution: the distribution as a dividend of Vital Images Common Stock
to holders of Bio-Vascular Common Stock, as provided in Article 3 hereof.
Distribution Date: the effective date of the Distribution, as determined
by the Board of Directors of Bio-Vascular.
Employee Benefits Agreement: the agreement, substantially in the form of
Exhibit A hereto, pursuant to which Bio-Vascular and Vital Images will provide
for certain employee benefit matters.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Form 10: the Registration Statement on Form 10 filed by Vital Images with
the Commission to register the Vital Images Common Stock pursuant to the
Exchange Act.
Indemnifiable Losses: with respect to any claim by an Indemnitee for
indemnification authorized pursuant to Article 4 hereof, any and all losses,
liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all Actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable attorneys' fees and expenses in connection therewith) suffered by
such Indemnitee with respect to such claim.
Indemnifying Party: any party who is required to pay any other person
pursuant to Article 4 hereof.
Indemnitee: any party who is entitled to receive payment from an
Indemnifying Party pursuant to Article 4 hereof.
Indemnity Payment: the amount an Indemnifying Party is required to pay an
Indemnitee pursuant to Article 4 hereof.
Information Statement: the definitive information statement, substantially
in compliance with Regulation 14C under the Exchange Act, to be mailed to the
holders of Bio-Vascular Common Stock in connection with the Distribution.
Insurance Proceeds: those monies (i) received by an insured from an
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
2
<PAGE>
Insured Claims: those Liabilities that, individually or in the aggregate,
are covered within the terms and conditions of any of the Policies, whether or
not subject to deductibles, co-insurance, uncollectibility or retrospectively-
rated premium adjustments, but only to the extent that such Liabilities are
within applicable Policy limits, including aggregates.
Intercompany Debt: intercompany debt owed by Vital Images to Bio-Vascular.
Liabilities: any and all debts, liabilities and obligations, whether
accrued, contingent or reflected on a balance sheet, known or unknown,
including, without limitation, those arising under any law, rule, regulation,
Action, order or consent decree of any governmental entity or any judgment of
any court of any kind or award of any arbitrator of any kind, and those arising
under any contract, commitment or undertaking.
Policies: insurance policies and insurance contracts of any kind,
including, without limitation, primary and excess policies, comprehensive
general liability policies, automobile and workers' compensation insurance
policies, and self-insurance arrangements, together with the rights and benefits
thereunder.
Record Date: the date determined by the Board of Directors of Bio-Vascular
as the record date for the Distribution.
Related Agreements: the Employee Benefits Agreement, Transition Services
Agreement, Tax Sharing Agreement and all other agreements entered into by Bio-
Vascular and Vital Images pursuant to this Agreement or otherwise in connection
with the Distribution.
Securities Act: the Securities Act of 1933, as amended.
Shared Policies: all Policies owned or maintained by or on behalf of Bio-
Vascular prior to the Distribution Date, relating to both Bio-Vascular's
business and the Vital Images Business.
Staff: the Staff of the Commission.
Tax Sharing Agreement: the agreement, substantially in the form of Exhibit
B hereto, pursuant to which Bio-Vascular and Vital Images will provide for
certain tax matters.
Transition Services Agreement: the agreement, substantially in the form of
Exhibit C hereto, pursuant to which Bio-Vascular will provide certain
transitional services to Vital Images following the Distribution Date.
Vital Images Business: (i) the business of developing, marketing and
supporting medical visualization software and systems for use in clinical
diagnosis and surgical planning; (ii) any terminated, divested or discontinued
businesses or operations as of the Distribution Date that primarily related to
Vital Images or were conducted by Vital Images; and (iii) any business or
operation conducted by Vital Images or any Affiliate of Vital Images at any time
on or after the Distribution Date.
Vital Images Employee: any employee of Vital Images, and any employee of
Bio-Vascular who is assigned to Vital Images on or prior to the Distribution
Date, including, but not limited to, any such employee who was laid off, on
leave of absence or any disability leave as of the Distribution Date.
3
<PAGE>
Warrants: all unexercised warrants to purchase Bio-Vascular Common Stock
issued and outstanding as of the Record Date, which as of the date hereof,
consist of warrants to purchase an aggegrate of 90,000 shares of Bio-Vascular
Common Stock issued and outstanding and anticipated to remain as such as of the
Record Date.
ARTICLE
2.
PRE-DISTRIBUTION TRANSACTIONS
2.1. Reincorporation; Other Corporate Action. Prior to the date of this
Agreement, Vital Images, formerly an Iowa corporation, will have taken all
necessary action to reincorporate as a Minnesota corporation, and to
qualify as a foreign corporation in each jurisdiction where the conduct of
its business or location of its properties or employees so requires. In
addition, Vital Images will take all other corporate action necessary to
undertake the transactions contemplated by this Agreement or any Related
Agreement, which corporate actions will include, but will not be limited
to, authorization of a sufficient number of shares of Vital Images Common
Stock necessary to effect the Distribution and the approval of appropriate
stock-based compensation or other plans, agreements and arrangements, as
provided for in the Employee Benefits Agreement.
2.2. Bio-Vascular Approval. Bio-Vascular shall cooperate with Vital Images in
effecting, and if so requested by Vital Images, Bio-Vascular shall, as the
sole shareholder of Vital Images, approve or ratify, any actions that are
reasonably necessary or desirable to be taken by Vital Images to
effectuate the transactions contemplated by this Agreement or any Related
Agreement in a manner consistent with the terms hereof or thereof, as the
case may be, including, without limitation, the reincorporation of Vital
Images as a Minnesota corporation, the election or appointment of
directors and officers of Vital Images to serve in such capacities
following the Distribution Date, and the approval of appropriate stock-
based compensation or other plans, agreements and arrangements for Vital
Images Employees, non-Vital Images Employee members of Vital Images' Board
of Directors and consultants of Vital Images.
2.3. Related Agreements. Bio-Vascular and Vital Images will use their best
efforts to cause, on or before the Distribution Date, the execution and
delivery by each party of the Related Agreements and any other agreements
deemed necessary or desirable by the parties to establish and govern the
post-Distribution relationship of the parties.
2.4. Securities Law Actions.
(a) Bio-Vascular and Vital Images will prepare, and file with the
Commission, the Form 10, which shall include the Information
Statement, setting forth appropriate disclosure concerning Vital
Images, the Distribution and any other appropriate matters required to
be stated therein or determined to be included therein by Bio-Vascular
and Vital Images. Bio-Vascular and Vital Images shall use reasonable
efforts to cause the Form 10 to become effective under the Exchange
Act as soon as practicable after the filing thereof, and, prior to the
Distribution Date, Bio-Vascular shall mail the Information Statement
to holders of Bio-Vascular Common Stock as of the Record Date. The
joint obligations of Bio-Vascular and Vital Images under this Section
2.4(a) shall not affect their respective obligations of indemnity
under Article 4 hereof.
4
<PAGE>
(b) Bio-Vascular and Vital Images shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of the
various states or other political subdivisions of the United States in
connection with the Distribution.
(c) Vital Images will prepare and file, and will use its best efforts to
have approved, an application for listing of the Vital Images Common
Stock on the Nasdaq SmallCap Market.
2.5. Capital Contribution. In anticipation of the Distribution, Bio-Vascular has
assigned to Vital Images $10 milllion in cash, cash equivalents and
marketable securities, effective November 1, 1996, and has contributed the
Intercompany Debt as of that date, in the amount of approximately $3.1
million, to the capital of Vital Images. Effective as of the Distribution
Date, Bio-Vascular will make such additional capital contributions to Vital
Images as necessary to bring Vital Images' cash, cash equivalents and
marketable securities balances to a combined $10 million and eliminate any
additional Intercompany Debt owed by Vital Images on the Distribution Date.
ARTICLE
3.
THE DISTRIBUTION
3.1. Conditions to the Distribution. The Board of Directors of Bio-Vascular will
have the sole discretion to determine, by resolution, the Record Date, the
Distribution Date and all appropriate procedures in connection with the
Distribution, provided that the Distribution will not occur prior to such
time as each of the following conditions have been satisfied or have been
waived by Bio-Vascular's Board of Directors, in its sole discretion:
(a) an opinion from Coopers & Lybrand, LLP will have been obtained, in
form and substance satisfactory to Bio-Vascular's Board of Directors,
with respect to the federal income tax status of the Distribution
under Section 355 of the Code;
(b) any material approvals and consents necessary to consummate the
Distribution will have been obtained and will be in full force and
effect;
(c) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Distribution will be in effect, and
no other event will have occurred or failed to occur that prevents the
consummation of the Distribution;
(d) the Form 10 will have been declared effective by the Commission;
(e) Bio-Vascular will have received a favorable response from the Staff to
a request for "no-action" treatment concerning, among other matters,
whether the Distribution and related
5
<PAGE>
transactions may be effected without registration of the Vital Images
Common Stock under the Securities Act; and
(f) no other events or developments shall have occurred subsequent to the
date of this Agreement that, in the judgment of Bio-Vascular's Board
of Directors, would result in the Distribution having a material
adverse effect on Bio-Vascular or its shareholders;
provided further that the satisfaction of such conditions will not create
any obligation on the part of Bio-Vascular, Vital Images or any other
person to effect or to seek to effect the Distribution or in any way limit
Bio-Vascular's right to terminate this Agreement.
3.2. The Distribution. On or prior to the Distribution Date, Bio-Vascular will
deliver to the Agent the certificate for all of the shares of Vital Images
Common Stock owned by Bio-Vascular prior to the Distribution. Upon
certification by Bio-Vascular as to the number of shares of Bio-Vascular
Common Stock outstanding on the Record Date, Vital Images will deliver to
the Agent, for the benefit of holders of record of Bio-Vascular Common
Stock on the Record Date, stock certificate(s) representing, in the
aggregate (and rounded down to the nearest whole share), a number of shares
representing one (1) share of Vital Images Common Stock for every two (2)
shares of Bio-Vascular Common Stock outstanding on the Record Date (less
the shares of Vital Images Common Stock owned by Bio-Vascular prior to the
Distribution and previously delivered to the Agent pursuant to this
Section), and shall instruct the Agent to distribute, as promptly as
practicable following the Distribution Date to holders of record of Bio-
Vascular Common Stock on the Record Date, one (1) share of Vital Images
Common Stock for every two (2) shares of Bio-Vascular Common Stock, and
cash in lieu of fractional shares of Vital Images Common Stock, to be
obtained in the manner provided in Section 3.3 hereof. All of the shares of
Vital Images Common Stock issued in the Distribution will be fully paid,
nonassessable and free of preemptive rights.
3.3. Fractional Shares. No certificates or scrip representing fractional shares
of Vital Images Common Stock will be issued as a part of the Distribution,
and in lieu of receiving fractional shares, each holder of Bio-Vascular
Common Stock who would otherwise be entitled to receive a fractional share
of Vital Images Common Stock pursuant to the Distribution will receive cash
for such fractional share. Bio-Vascular and Vital Images agree that Bio-
Vascular shall instruct the Agent: (i) to determine the number of whole
shares and fractional shares of Vital Images Common Stock allocable to each
holder of Bio-Vascular Common Stock as of the Record Date; (ii) to
aggregate all such fractional shares into whole shares; (iii) to sell the
whole shares obtained thereby in the open market at then-prevailing prices
on behalf of Bio-Vascular shareholders who would otherwise be entitled to
receive fractional shares interests; and (iv) to distribute to each such
Bio-Vascular shareholder such shareholder's ratable share of the total
proceeds of such sales (net of any commissions incurred in connection with
such sales), net of any amounts required to be withheld under applicable
law.
3.4. Warrants. Vital Images will assume its proportionate share of obligations
represented by the Warrants such that, after the Distribution, each Warrant
will be exercisable for shares of both Bio-Vascular Common Stock and shares
of Vital Images Common Stock, according to the ratio set forth in Section
3.2 hereof. Upon notice to Bio-Vascular of the exercise of any Warrants,
Bio-Vascular will promptly provide notice thereof to Vital Images, and
Vital Images will promptly thereafter issue to the exercising holder of
such Warrants the appropriate number of shares of Vital Images Common
Stock. Vital Images will be entitled to receive a pro rata portion
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of the exercise price, determined by multiplying the per share exercise
price stated in the Warrant by the ratio of the post-Distribution fair
market value of Vital Imates Common Stock to the post-Distribution fair
market value of Bio-Vascular Common Stock. For the purposes of this Section
3.4, "post-Distribution fair market value" means:
(i) with respect to Bio-Vascular Common Stock, the average of the
last reported sales prices on each of the five (5) trading days
immediately following the Distribution Date, as reported by the
Nasdaq National Market;
(ii) with respect to Vital Images Common Stock, the average of the
daily average of bid and asked prices reported by the Nasdaq
SmallCap Market or "over the counter market" on each of the five
(5) trading days immediately following the Distribution Date.
ARTICLE
4.
INDEMNIFICATION, CLAIMS
AND OTHER MATTERS
4.1. Indemnification by Bio-Vascular. Bio-Vascular will indemnify, defend and
hold harmless Vital Images and each of its directors, officers, employees,
agents and Affiliates from and against any and all Indemnifiable Losses of
Vital Images or any of its Affiliates arising out of or due to, directly or
indirectly, any Action relating to: (i) the business or operations of Bio-
Vascular, or its Affiliates, exclusive of the Vital Images Business; (ii)
any claim that the information included in the Information Statement or
Form 10 under (A) the captions "Summary -- Distributing Corporation,"
"-- Principal Businesses to be Retained by Bio-Vascular" or "-- Primary
Purpose of the Distribution," (B) the captions "The Distribution -- Reasons
for the Distribution," "-- Manner of Effecting the Distribution" and "--
Certain Federal Income Tax Consequences" or (C) the caption "Security
Ownership of Certain Beneficial Owners" is false or misleading with respect
to any material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(iii) Third Party Claims (as defined below) of failure by Bio-Vascular to
perform under, or any violation by Bio-Vascular of, any provision of this
Agreement or any Related Agreement, which is to be performed or complied
with by Bio-Vascular; and (iv) breaches of this Agreement or any Related
Agreement by Bio-Vascular or its Affiliates.
4.2. Indemnification by Vital Images. Vital Images will indemnify, defend and
hold harmless Bio-Vascular and each of its directors, officers, employees,
agents and Affiliates from and against any and all Indemnifiable Losses of
Bio-Vascular or any of its Affiliates arising out of or due to, directly or
indirectly, any Action relating to: (i) the Vital Images Business and its
operation prior to, on or after the Distribution Date (including any
Indemnifiable Loss relating to, arising out of or resulting from any act or
failure to act by any director, officer or agent of Vital Images or any
Vital Images Employee, whether or not such act or failure to act is or was
within such person's authority); (ii) any claim that the information
included in the Information Statement or Form 10, other than the
information under the captions listed in Section 4.1(ii) hereof, is false
or misleading with respect to any material fact or omits to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (iii) Third Party Claims of failure by Vital Images
to perform under, or any violation by Vital Images of, any provision of
this Agreement or any
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Related Agreement which is to be performed or complied with by Vital
Images; and (iv) breaches of this Agreement or any Related Agreement by
Vital Images or its Affiliates.
4.3. Insurance Proceeds. The amount that any Indemnifying Party is or may be
required to pay to any Indemnitee pursuant to Section 4.1 or Section 4.2
hereof will be reduced (including, without limitation, retroactively) by
any Insurance Proceeds and other amounts actually recovered by or on behalf
of such Indemnitee in reduction of the related Indemnifiable Loss. If an
Indemnitee shall have received an Indemnity Payment in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Indemnifiable Loss as
specified above, then such Indemnitee will pay to such Indemnifying Party a
sum equal to the amount of such Insurance Proceeds or other amounts
actually received. Notwithstanding the foregoing, nothing in this Section
will grant to Vital Images or its Affiliates any direct or indirect rights
or benefits to insurance coverage with respect to which Vital Images is not
otherwise entitled under Article 7 hereof, nor require Bio-Vascular or its
Affiliates to make any claim for insurance coverage unless and to the
extent that Vital Images would otherwise be entitled to have Bio-Vascular
make a claim under Article 7 hereof.
4.4. Procedure for Indemnification.
(a) If either party shall receive notice of any claim or Action brought,
asserted, commenced or pursued by any person or entity not a party to
this Agreement (hereinafter a "Third Party Claim"), with respect to
which the other party is or may be obligated to make an Indemnity
Payment, it shall give such other party prompt notice thereof
(including any pleadings relating thereto) after becoming aware of
such Third Party Claim, specifying in such reasonable detail as is
known to it the nature of such Third Party Claim and the amount or
estimated amount thereof, to the extent such estimate is then feasible
(which estimate shall not be conclusive of the final amount of such
claim); provided, however, that the failure of a party to give notice
as provided in this Section 4.4 shall not relieve the other party of
its indemnification obligations under this Article 4, except to the
extent that such other party is actually prejudiced by such failure to
give notice.
(b) For any Third Party Claim concerning which notice is required to be
given, and, in fact, is given under subparagraph (a) of this Section
4.4, the Indemnifying Party shall defend in a timely manner, to the
extent permitted by law, such Third Party Claim through counsel
appointed by the Indemnifying Party and reasonably acceptable to the
Indemnitee. Once an Indemnifying Party has commenced its defense of an
Indemnitee, it cannot withdraw from such defense until conclusion of
the matter, unless the Indemnified Party agrees to the withdrawal or
the Indemnitee is also defending the claim. The Indemnitee shall have
the right to participate in the defense of the Third Party Claim by
employing separate counsel at its own expense.
(c) If a party responds to a notice of a Third Party Claim by denying its
obligation to indemnify the other party, or if the Indemnifying Party
fails to defend in a timely manner, the Indemnitee shall be entitled
to defend such Third Party Claim through counsel appointed by it. In
addition, if it is later determined that such party wrongfully denied
such claim, or the Indemnifying Party failed to defend timely, then
the Indemnifying Party shall (i) reimburse the Indemnitee for all
costs and expenses (other than salaries of officers and employees)
incurred reasonably by the Indemnitee in connection with its defense
of such Third Party Claim; and (ii) be estopped from
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challenging a judgment, order, settlement, compromise, or consent
judgment resolving the Third Party Claim entered into in good faith by
the Indemnitee (if such claim has been resolved prior to the
conclusion of the proceeding between the Indemnitee and Indemnifying
Party). An Indemnifying Party, after initially rejecting a claim for
defense or indemnification, may defend and indemnify the Indemnitee,
at any time prior to the resolution of said Third party Claim, for
such claim, provided that (x) the Indemnifying Party reimburses the
Indemnitee for all costs and expenses (other than salaries of officers
and employees) incurred reasonably by the Indemnitee in connection
with its defense of such Third Party Claim up to the time the
Indemnifying Party assumes control of the defense of such claim
(including costs incurred in the transition of the defense from the
Indemnitee to the Indemnifying Party); and (y) the assumption of the
defense of the Third Party Claim will not prejudice or cause harm to
the Indemnitee.
(d) With respect to any Third Party Claim for which indemnification has
been claimed hereunder, no party shall enter into any compromise or
settlement, or consent to the entry of any judgment which (i) does not
include as a term thereof the giving by the third party of a release
to the Indemnitee from all further liability concerning such Third
Party Claim on terms no less favorable than those obtained by the
party entering into such compromise, settlement or consent; or (ii)
imposes any obligation on the Indemnitee without such Indemnitee's
written consent (such consent not to be withheld unreasonably), except
an obligation to pay money which the Indemnifying Party has agreed to
pay on behalf of the Indemnitee. In the event that an Indemnitee
enters into any such compromise, settlement or consent without the
written consent of the Indemnifying Party (other than as contemplated
by Section 4.4(c) hereof), the entry of such compromise, settlement or
consent shall relieve the Indemnifying Party of its indemnification
obligation related to the claims underlying such compromise,
settlement or consent.
(e) Upon final judgment, determination, settlement or compromise of any
Third Party Claim, and unless otherwise agreed by the parties in
writing, the Indemnifying Party shall pay promptly on behalf of the
Indemnitee, or to the Indemnitee in reimbursement of any amount
theretofore required to be paid by the Indemnitee, the amount so
determined by final judgment, determination, settlement or compromise.
Upon the payment in full by the Indemnifying Party of such amount, the
Indemnifying Party shall succeed to the rights of such Indemnitee to
the extent not waived in settlement, against the third party who made
such Third Party Claim and any other person who may have been liable
to the Indemnitee with respect to the indemnified matter.
(f) In connection with defending against Third Party Claims, the parties
shall cooperate with and assist each other by making available all
employees, books, records, communications, documents, items and
matters within their knowledge, possession or control that are
necessary, appropriate or reasonably deemed relevant with respect to
defense of such claims; provided, however, that nothing in this
subparagraph (f) shall be deemed to require the waiver of any
privilege, including the attorney-client privilege, or protection
afforded by the attorney work product doctrine. In addition,
regardless of the party actually defending a Third Party Claim for
which there is an indemnity obligation under Section 4.1 or 4.2
hereof, the parties shall give each other regular status reports
relating to such action with detail sufficient to permit the other
party to assert and protect its rights and obligations under this
Agreement.
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(g) The provisions of this Section 4.4 shall survive for two (2) years
following the date of this Agreement and shall be the exclusive
procedures for any claims subject to the provisions of Sections 4.1 or
4.2 hereof.
4.5. Other Claims. Any claim on account of an Indemnifiable Loss which does not
result from a Third Party Claim shall be asserted by written notice from
the Indemnitee to the Indemnifying Party within sixty (60) days of first
learning of the breach under Section 4.1(iv) or Section 4.2(iv) hereof, as
the case may be. All such claims that are not timely asserted pursuant to
this Section shall be deemed to be forever waived. The Indemnitee's written
notice shall contain such information as the Indemnitee has regarding the
alleged breach. Such Indemnifying Party shall have a period of sixty (60)
days (or such shorter time period as may be required by law as indicated by
the Indemnitee in the written notice) within which to respond thereto. If
such Indemnifying Party does not respond within such 60-day period (or
lesser period), such Indemnifying Party shall be deemed to have accepted
responsibility to make payment for the amount of Indemnifiable Loss and
shall have no further right to contest the validity of such claim. If such
Indemnifying Party does respond within such 60-day (or lesser) period and
rejects such claim in whole or in part, such Indemnitee shall be free to
pursue such remedies as may be available under applicable law or under this
Agreement.
4.6. Contribution in Respect of Certain Indemnifiable Losses. If the
indemnification provided for in this Article 4 is unavailable to an
Indemnitee in respect of any Indemnifiable Loss arising out of, or related
to, information contained in the Information Statement or the Form 10, the
Indemnifying Party, in lieu of indemnifying such Indemnitee, shall
contribute to the amount paid or payable by such Indemnitee as a result of
such Indemnifiable Loss, in such proportion as is appropriate to reflect
the relative fault of Vital Images, its directors, officers, employees or
agents, on the one hand, and Bio-Vascular, its directors, officers,
employees or agents, on the other hand, in connection with the statements
or omissions which resulted in such Indemnifiable Loss. The relative fault
of such respective groups shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by either such group.
4.7. No Beneficiaries. Except to the extent expressly provided otherwise in
this Article 4, the indemnification provided for by this Article 4 shall
not inure to the benefit of any third party or parties and shall not
relieve any insurer who would otherwise be obligated to pay any claim of
the responsibility with respect thereto or, solely by virtue of the
indemnification provisions hereof, provide any such subrogation rights with
respect thereto and each party agrees to waive such rights against the
other to the fullest extent permitted.
ARTICLE
5.
CERTAIN ADDITIONAL MATTERS
5.1. Construction of Agreements. Notwithstanding any other provisions in this
Agreement to the contrary, in the event and to the extent that there is a
conflict between the provisions of this Agreement and the provisions of any
Related Agreement, the provisions of such Related Agreement shall control.
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5.2. Consents, Etc. Bio-Vascular and Vital Images shall use their best efforts
to obtain any consent, approval or amendment required to novate and/or
assign all agreements, leases, licenses and other rights of any nature
whatsoever relating to the Vital Images Business to Vital Images, and to
have Bio-Vascular released and Vital Images substituted as guarantor under
any guarantees by Bio-Vascular of obligations of Vital Images; provided,
however, that Bio-Vascular shall not be obligated to pay any consideration
therefor (except for filing fees and other administrative charges) to any
third party from whom such consents, approvals and amendments are
requested.
5.3. No Representations or Warranties. Vital Images understands and agrees that
Bio-Vascular is not, in this Agreement, or in any Related Agreement or any
other agreement or document contemplated by this Agreement, representing or
warranting in any way as to the businesses and Liabilities retained,
transferred or assumed in connection with the Distribution, or that the
obtaining of the consents or approvals, the execution and delivery of any
ancillary or amendatory agreements or the making of the filings and
applications contemplated by this Agreement will satisfy the provisions of
all applicable agreements or the requirements of all applicable laws or
judgments, it being understood and agreed that, subject to Section 5.2
hereof, Vital Images shall bear the economic and legal risk or the business
and Liabilities retained or assumed hereunder by Vital Images, and the
legal and economic risk that any necessary consents or approvals are not
obtained or that any requirements of law or judgments are not complied with
or satisfied.
5.4. Officers and Directors. Vital Images and Bio-Vascular shall take all
necessary actions to elect or otherwise appoint, as of the Distribution
Date, individuals to be directors or officers (or both) of Vital Images, as
set forth in the Information Statement, and to cause the resignation of
individuals as officers and directors of each so that there are no common
directors or officers of Vital Images and Bio-Vascular as of the
Distribution Date, except as described in the Information Statement.
5.5. Existing Intercompany Arrangements. Except as otherwise provided in this
Agreement or in any Related Agreement, any and all agreements,
arrangements, commitments or understandings, whether or not in writing,
between Bio-Vascular and Vital Images will be terminated and of no further
force and effect as of the Distribution Date. Following the Distribution
Date, the parties shall discuss in good faith the provision of any services
and products to be provided by the other, but which inadvertently were not
the subject of this Agreement, the Transition Services Agreement or any
other Related Agreement. Nothing in this Section, however, will require or
authorize Bio-Vascular or Vital Images to provide and charge each other for
any services other than on the terms and conditions specified in the
Transition Services Agreement or the other Related Agreements.
5.6. Intercompany Accounts. Notwithstanding Section 5.5 hereof, any
intercompany receivable, payable or loan between Bio-Vascular and Vital
Images outstanding on the Distribution Date will not be deemed altered,
amended or terminated as a result of this Agreement or the consummation of
the transactions contemplated hereby and will continue in accordance with
its terms following the Distribution Date; provided, however, that all
Intercompany Debt will be contributed to the capital of Vital Images, as
provided in Section 2.5 hereof.
5.7. Qualification as Tax-Free Distribution.
(a) After the Distribution Date, neither Bio-Vascular or Vital Images will
take, or allow any Affiliate to take, any action which could
reasonably be expected to prevent the
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Distribution from qualifying as a tax-free distribution within the
meaning of Section 355 of the Code.
(b) After the Distribution Date, Vital Images will not, nor allow any
Affiliate of Vital Images to, take any action or enter into any
transaction which could reasonably be expected to materially adversely
impact the anticipated tax consequences to Bio-Vascular, which are
known to Vital Images, of any transaction contemplated by this
Agreement; provided, however, that nothing in this Section 5.7(b)
shall prohibit Vital Images from taking any action, or entering into
any transaction (or permitting or causing any Affiliate to so act or
enter) in the ordinary course of business or in the ordinary course of
business dealing, or in connection with the settlement of any audit
issue or in connection with the filing of any tax return. After the
Distribution Date, Bio-Vascular shall not, nor allow any Affiliate to,
take any action or enter into any transaction which could reasonably
be expected to materially adversely impact the anticipated tax
consequences to Vital Images, which are known to Bio-Vascular, of any
transaction contemplated by this Agreement; provided, however, that
nothing in this Section 5.7(b) shall prohibit Bio-Vascular from taking
any action, or entering into any transaction (or permitting or causing
any Affiliate so to act or enter), in the ordinary course of business
or in the ordinary course of business dealing, or in connection with
the settlement of any audit issue or in connection with the filing of
any tax return.
ARTICLE
6.
ACCESS TO INFORMATION AND SERVICES
6.1. Provision of Corporate Records. 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,
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unless and to the extent Bio-Vascular and Vital Images agree to a
longer period for the foregoing restrictions with respect to specific
categories of confidential business information, in which case the
foregoing restrictions shall expire with respect to such information
on the expiration of such longer period. The date of disclosure in the
case of confidential business information known by a party on the
Distribution Date shall be the Distribution Date. Each of Bio-Vascular
and Vital Images shall not disclose to another, or use, except for
purposes of fulfilling their respective obligations under this
Agreement or the relevant Related Agreements, any business information
which is confidential information of Vital Images or confidential
information of Bio-Vascular, respectively. The foregoing restrictions
shall not expire until such time and to the extent that such
information ceases to be confidential information.
(d) Each party shall protect confidential information of the other party
by using the same degree of care, but no less than a reasonable degree
of care, to prevent the unauthorized disclosure of the other party's
confidential information as the party uses to protect its own
confidential information of a like nature.
(e) Each party shall ensure that its Affiliates, sublicensees and other
transferees (such as advisors, attorneys and other consultants) agree
to be bound by the same restrictions on use and disclosure of
confidential information as bind the party in advance of the
disclosure of confidential information to them.
6.6. Privileged Matters.
(a) Bio-Vascular and Vital Images agree that Vital Images will maintain,
preserve and assert all privileges, including, without limitation, any
privilege or protection arising under or relating to any attorney-
client relationship (including, without limitation, the attorney-
client and work product privileges), that existed prior to the
Distribution Date ("Privilege" or "Privileges"). Vital Images will not
waive any Privilege that could be asserted under applicable law
without the prior written consent of Bio-Vascular. The rights and
obligations created by this paragraph apply to all information as to
which, but for the Distribution, Bio-Vascular would have been entitled
to assert or did assert the protection of a Privilege ("Privileged
Information"), including but not limited to (i) any and all
information generated prior to the Distribution Date but which, after
the Distribution, is in the possession of Vital Images; (ii) all
communications subject to a Privilege occurring prior to the
Distribution Date between counsel for Bio-Vascular and any person who,
at the time of the communication, was an employee of Bio-Vascular,
regardless of whether such employee is or becomes an Vital Images
Employee; and (iii) all information generated, received or arising
after the Distribution Date that refers or relates to Privileged
Information generated, received or arising prior to the Distribution
Date.
(b) Upon receipt by Vital Images or any of its Affiliates of any subpoena,
discovery or other request that arguably calls for the production or
disclosure of Privileged Information, or if Vital Images obtains
knowledge that any current or former employee of Vital Images has
received any subpoena, discovery or other request which arguably calls
for the production or disclosure of Privileged Information, Vital
Images will promptly notify Bio-Vascular of the existence of the
request and will provide Bio-Vascular a reasonable opportunity to
review the information and to assert any rights it may have under this
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Section 6.6 or otherwise to prevent the production or disclosure of
Privileged Information. Vital Images will not produce or disclose any
information arguably covered by a Privilege under this Section 6.6
unless (i) Bio-Vascular has provided its express written consent to
such production or disclosure; or (ii) a court of competent
jurisdiction has entered a final, non-appealable order finding that
the information is not entitled to protection under any applicable
privilege.
(c) Bio-Vascular's delivery of copies of the Books and Records and other
information to Vital Images, and Bio-Vascular's agreement to permit
Vital Images to possess copies of Privileged Information occurring or
generated prior to the date of this Agreement, are made in reliance on
Vital Images' agreement, as set forth in this Section 6.6, to maintain
the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The access to information being
granted pursuant to Sections 6.1 and 6.2 hereof, the agreement to
provide witnesses and individuals pursuant to Section 6.3 hereof and
transfer of Privileged Information to Vital Images pursuant to this
Agreement shall not be deemed a waiver of any Privilege that has been
or may be asserted under this Section 6.6 or otherwise. Nothing in
this Distribution Agreement shall operate to reduce, minimize or
condition the rights granted to Bio-Vascular in, or the obligations
imposed upon Vital Images by, this Section 6.6.
(d) If there is a reasonable likelihood that the waiver by Bio-Vascular of
any Privilege could expose Vital Images to liability or could
otherwise adversely affect Vital Images, Bio-Vascular will consult
with Vital Images prior to such waiver, and Bio-Vascular will assert
or preserve the Privilege, as applicable, if reasonably practical and
if Bio-Vascular's interests will not be adversely affected by its
assertion or preservation of the Privilege.
ARTICLE
7.
INSURANCE
7.1. Policies and Rights of Vital Images. Before, on and after the Distribution
Date, Vital Images shall have any and all rights of an insured party under
each of the Shared Policies, specifically including, but not limited to,
rights of indemnity and the right(s) to be defended by or at the expense of
insurer(s), with respect to all injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred on or prior to the
Distribution Date by any party in or in connection with the conduct of
Vital Images or, to the extent any claim is made against Vital Images, Bio-
Vascular, and which injuries, losses, liabilities, damages and expenses may
arise out of insured or insurable occurrences or events under one or more
of the Shared Policies; provided, however, that nothing in this clause is
intended to effectuate or shall be deemed to constitute or reflect the
assignment of the Shared Policies, or any of them, to Vital Images.
7.2. Post-Distribution Date Claims. If, subsequent to the Distribution Date, any
person, corporation, firm or entity shall assert a claim against Vital
Images with respect to any injury, loss, liability, damage or expense
incurred or claimed to have been incurred prior to the Distribution Date
in, or in connection with, the conduct of Vital Images or, to the extent
any claim is made against Vital Images, Bio-Vascular, and which injury,
loss, liability, damage or expense may arise out of insured or insurable
occurrences or events under one or more of the Shared Policies, Bio-
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
<PAGE>
8.2. Initiation. A party seeking to initiate the procedures will give written
notice to the other party, briefly describing the nature of the Dispute. A
meeting will be held between the parties within ten (10) days of the
receipt of such notice, attended by individuals with decision-making
authority regarding the Dispute, to attempt in good faith to negotiate a
resolution of the Dispute.
8.3. Submission to Arbitration. If, within thirty (30) days after such meeting,
the parties have not succeeded in negotiating a resolution of the Dispute,
they will agree to submit the Dispute to binding arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association, by a sole arbitrator selected by the parties. The arbitration
will be held in St. Paul, Minnesota and governed by the Minnesota
equivalent of the Federal Arbitration Act, 9 U.S.C. (S)(S) 1-16, and
judgment upon the award rendered by the arbitrator may be entered by any
court having jurisdiction thereof. The costs of arbitration will be
apportioned between Bio-Vascular and Vital Images as determined by the
arbitrator in such manner as the arbitrator deems reasonable, taking into
account the circumstances of the Dispute, the conduct of the parties during
the proceeding, and the result of the arbitration.
8.4. Equitable Relief. Nothing herein will preclude either party from seeking
equitable relief to prevent any immediate, irreparable harm to its
interests, including multiple breaches of this Agreement or the relevant
Related Agreement by the other party. Otherwise, these procedures are
exclusive and will be fully exhausted prior to the initiation of any
litigation. Either party may seek specific enforcement of any arbitrator's
decision under this Article 8.
8.5. Consolidation. The arbitrator may consolidate an arbitration under this
Agreement with any arbitration arising under or relating to the Related
Agreements or any other agreement between the parties entered into pursuant
hereto, as the case may be, if the subject of the Disputes thereunder arise
out of or relate essentially to the same set of facts or transactions. Such
consolidated arbitration will be determined by the arbitrator appointed for
the arbitration proceeding that was commenced first in time.
ARTICLE
9.
MISCELLANEOUS
9.1. Entire Agreement. This Agreement, including the Exhibits and the
agreements and other documents referred to herein, shall constitute the
entire agreement between Bio-Vascular and Vital Images with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter.
9.2. Expenses. Except as otherwise expressly provided in this Agreement, any
Related Agreement or any other agreement being entered into between Bio-
Vascular and Vital Images in connection with this Agreement, Bio-Vascular
and Vital Images shall each pay their own costs and expenses incurred in
connection with the Distribution and the consummation of the transactions
contemplated by this Agreement.
9.3. Governing Law. This Agreement, the Related Agreements and any other
agreement entered into in connection with the Distribution, shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota (regardless of the laws that might otherwise
17
<PAGE>
govern under applicable principles of conflict of laws) as to all matters,
including, without limitation, matters of validity, construction, effect,
performance and remedies.
9.4. Jurisdiction and Venue. Subject to the arbitration provisions of this
Agreement, each party consents to the personal jurisdiction of the state
and federal courts located in the State of Minnesota and hereby waives any
argument that venue in any such forum is not convenient or proper.
9.5. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly
given (i) on the date of service if served personally on the party to whom
notice is given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United States
Postal Service, provided receipt of delivery has been confirmed; or (iv) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by registered or
certified mail, postage prepaid, properly addressed and return-receipt
requested, to the party as follows:
If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota 55114
Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8010
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
9.6. Modification of Agreement. No modification, amendment or waiver of any
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
9.7. Termination. This Agreement may be terminated and the Distribution
abandoned at any time prior to the Distribution Date by, and in the sole
discretion of, Bio-Vascular without the approval of Vital Images. In the
event of such termination, neither party (or any of its directors of
officers) shall have any liability of any kind to the other party.
9.8. Successors and Assigns.
(a) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective
successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned
18
<PAGE>
by either party without the prior written consent of the other party,
and such consent shall not be unreasonably withheld.
(b) The obligations of Bio-Vascular and Vital Images under Articles 4 and
7 hereof shall survive the sale or other transfer by either of them of
any of their respective assets or businesses or the assignment by
either of them of any of their respective Liabilities.
9.9. No Third Party Beneficiaries. Except for certain parties entitled to
indemnification under Sections 4.1 and 4.2 hereof and listed therein, this
Agreement is solely for the benefit of the parties hereto and is not
intended to confer upon any other person except the parties hereto any
rights or remedies hereunder.
9.10. Titles and Headings; Interpretation. The titles and headings to Articles
and Sections herein are inserted for convenience of reference only and are
not intended to constitute a part of or to affect the meaning or
interpretation of this Agreement. As used in this Agreement, the term
"person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof. Whenever any words are
used herein in the masculine gender, they shall be construed as though
they were also used in the feminine gender in all cases where they would
so apply.
9.11. Exhibits. The Exhibits to this Agreement shall be construed with and as
an integral part of this Agreement to the same extent as if the same had
been set forth verbatim herein.
9.12. Severability. In case any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions hereof without including any of
such which may hereafter be declared invalid, void or unenforceable. In
the event that any such term, provision, covenant or restriction is
hereafter held to be invalid, void or unenforceable, the parties hereto
agree to use their best efforts to find and employ an alternate means to
achieve the same or substantially the same result as that contemplated by
such term, provision, covenant or restriction.
9.13. No Waiver. Neither the failure nor any delay on the part of any party
hereto to exercise any right under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
preclude any other or further exercise of the same or any other right, nor
shall any waiver of any right with respect to any occurrence be construed
as a waiver of such right with respect to any other occurrence.
9.14. Survival. All covenants and agreements of the parties contained in this
Agreement will survive the Distribution Date.
9.15. Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered on their behalf as of the date first written above.
BIO-VASCULAR, INC.
By:
-------------------------------
Its:
-------------------------------
VITAL IMAGES, INC.
By:
-------------------------------
Its:
-------------------------------
20
<PAGE>
EXHIBIT 10.2
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT (this "Agreement"), dated as of _____________,
1997, is made and entered into by and between Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), and Vital Images, Inc., a Minnesota corporation
("Vital Images"). Capitalized terms used in this Agreement and not defined
herein will have the meaning given in that certain Distribution Agreement
between the parties, dated of even date herewith (the "Distribution Agreement").
WHEREAS, Vital Images is currently a wholly-owned subsidiary of Bio-
Vascular, and as such, directors, officers and employees of both Bio-Vascular
and Vital Images participate in certain stock-based compensation and incentive
plans, insurance plans and retirement and other benefit plans currently
maintained or sponsored by Bio-Vascular;
WHEREAS, Bio-Vascular and Vital Images have entered into the Distribution
Agreement, pursuant to which Bio-Vascular will distribute all of the issued and
outstanding shares of Vital Images Common Stock to its shareholders, on such
terms and conditions as are contained therein;
WHEREAS, following the Distribution, Bio-Vascular and Vital Images will be
operated as independent public companies, and Vital Images will no longer be a
wholly-owned subsidiary of Bio-Vascular; and
WHEREAS, Bio-Vascular and Vital Images wish to provide for the allocation
of responsibilities with respect to certain employee benefit matters following
the Distribution, including, but not limited to, stock-based compensation and
incentive plans, insurance plans and retirement and other benefit plans.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, and intending to be legally bound, Bio-Vascular and
Vital Images hereby agree as follows:
ARTICLE
1.
ADDITIONAL BENEFITS DEFINITIONS
1.1 Additional Benefits Definitions. As used in this Agreement, capitalized
--------------------------------
terms defined immediately after their use shall have the respective
meanings thereby provided, and the following additional terms shall have
the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
Adjusted Bio-Vascular Option. An Existing Bio-Vascular
----------------------------
Option adjusted in the manner provided in Section 4.6 hereof.
Bio-Vascular Adjustment Plans. The Bio-Vascular, Inc. 1990
-----------------------------
Management Incentive Stock Option Adjustment Plan and 1992 Stock
Option Adjustment Plan to be adopted pursuant to Section 4.3 hereof
for the purpose of enabling Bio-Vascular to grant options to purchase
Bio-Vascular Common Stock to holders of Bio-Vascular Options granted
under the Existing Vital Images Option Plans. Each Bio-Vascular
Adjustment Plan will "mirror" the material provisions of the
corresponding Existing Vital Images Option Plan, except that each Bio-
Vascular Adjustment Plan will provide that: (i) the Distribution will
not be deemed a "termination" of the employment of any Vital Images
<PAGE>
Employee for the purposes of the Plan, and (ii) following the
Distribution, termination of employment of any Vital Images Employee
for the purposes of the Plan will be determined by reference to
employment by Vital Images or any of its subsidiaries.
Bio-Vascular Option Plans. The Bio-Vascular, Inc. Incentive Stock
-------------------------
Option Plan, 1992 Directors' Option Plan and 1995 Stock Incentive
Plan.
Cutoff Date. The business day immediately preceding the
-----------
Distribution Date.
Distribution Ratio. The ratio set forth in the Distribution
------------------
Agreement at which shares of Vital Images Common Stock will be issued
with respect to shares of Bio-Vascular Common Stock in the
Distribution.
Employee. An individual who, on the Distribution Date, is
--------
identified as being in any of the following categories.
Bio-Vascular Categories of Employees:
(i) Bio-Vascular Terminee. Any individual formerly employed
---------------------
in the Retained Business whose employment was terminated
prior to the Distribution Date.
(ii) Bio-Vascular Employee. Any individual who is an Employee of
---------------------
Bio-Vascular on the Distribution Date.
Vital Images Categories of Employees:
(i) Vital Images Terminee. Any individual formerly employed in
---------------------
the Vital Images Business whose employment was terminated
prior to the Distribution Date.
(ii) Vital Images Employee. Any individual who is an Employee of
---------------------
Vital Images on the Distribution Date.
ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation.
Existing Bio-Vascular Stock Option. Each unexercised option to
----------------------------------
purchase Bio-Vascular Common Stock outstanding as of the Record Date,
issued pursuant to any Bio-Vascular Option Plan, non-plan grant or in
connection with Bio-Vascular's assumption of Vital Images' obligations
under the Existing Vital Images Option Plans in the May 1994 merger
between Vital Images and Bio-Vascular.
Existing Vital Images Option Plans. The Vital Images,
----------------------------------
Incorporated 1990 Management Incentive Stock Option Plan and 1992
Stock Option Plan, as adopted by Vital Images prior to the May 1994
merger between Vital Images and Bio-Vascular.
2
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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
<PAGE>
(i) Bio-Vascular Future Qualified Beneficiary. Any person who
-----------------------------------------
becomes a Qualified Beneficiary on or after the
Distribution Date under any Bio-Vascular Medical/Dental
Plan.
(ii) Bio-Vascular Current Qualified Beneficiary. Any Bio-
------------------------------------------
Vascular Terminee who on or before the Cutoff Date, was a
Qualified Beneficiary under any Bio-Vascular
Medical/Dental Plan.
(iii) Vital Images Future Qualified Beneficiary. Any person who
-----------------------------------------
becomes a Qualified Beneficiary after the Cutoff Date
under any Vital Images Medical/Dental Plan.
(iv) Vital Images Current Qualified Beneficiary. Any Vital
------------------------------------------
Images Terminee who on or before the Cutoff Date was a
Qualified Beneficiary under any Bio-Vascular
Medical/Dental Plan.
Vital Images Adjustment Plans. The Vital Images, Inc. Incentive Stock
-----------------------------
Option Adjustment Plan, 1992 Directors' Option Adjustment Plan and 1995
Stock Incentive Adjustment Plan to be adopted pursuant to Section 4.4
hereof for the purpose of enabling Vital Images to grant options to
purchase Vital Images Common Stock to the holders of Bio-Vascular Options
granted under the Bio-Vascular Option Plans. Each Vital Images Adjustment
Plan will "mirror" the material provisions of the corresponding Bio-
Vascular Option Plan, except that each Vital Images Adjustment Plan will
provide that: (i) the Distribution will not be deemed a "termination" of
the employment of any Bio-Vascular Employee for the purposes of the Plan,
and (ii) following the Distribution, termination of employment of any Bio-
Vascular Employee for the purposes of the Plan will be determined by
reference to employment by Bio-Vascular or any of its subsidiaries.
Vital Images Option. An option to acquire Vital Images Common Stock
-------------------
granted under any of the Existing Vital Images Option Plans, Vital Images
Adjustment Plans or any non-plan grant and granted pursuant to Section
4.5(b) hereof.
Welfare Plan. Any Plan that provides medical, health, disability,
------------
accident, life insurance, death, dental or any other welfare benefit,
including, without limitation, any post-employment benefit.
401(k) Retirement Plan. A defined contribution plan maintained
----------------------
pursuant to Section 401(k) or 401(a) of the Code for Employees and their
beneficiaries. The following are specific 401(k) Retirement Plans:
(i) Bio-Vascular 401(k) Plan. The Bio-Vascular 401(k)
------------------------
Retirement Plan and Trust, in effect as of the date hereof.
(ii) Vital Images 401(k) Plan. The Vital Images 401(k)
------------------------
Retirement Plan and Trust to be adopted by Vital Images
prior to the Distribution Date pursuant to Section 3.1
hereof.
4
<PAGE>
ARTICLE
2.
EMPLOYMENT AND CREDITS
2.1 Allocation of Responsibilities on Distribution Date. On the Distribution
---------------------------------------------------
Date, except to the extent retained or assumed by Bio-Vascular under this
Agreement or any other agreement related to the Distribution, Vital Images
shall retain or assume, as the case may be, sole responsibility as employer
for the Vital Images Employees, and shall cause any Vital Images Employee
that is then a party to any employment, change in control or other
employment-related agreement with Bio-Vascular to terminate such agreement
effective as of the Distribution Date. Except as otherwise provided in this
Agreement or in any other agreement between Bio-Vascular or Vital Images,
the assumption or retention of responsibility as employer by Vital Images
described in this Section 2.1 shall not, of itself, constitute a severance
or a termination of employment under any plan of severance, of income or
other Plan extension maintained by Bio-Vascular or Vital Images, and no
such severance, separation or termination shall be deemed to occur by
reason hereof.
2.2 Service Credits. For purposes of determining Service Credits under any
---------------
Plans, Vital Images shall credit each Vital Images Employee with such
Employee's Service Credits and original hire date as may be reflected in
the Bio-Vascular payroll system records as of the Distribution Date. Such
Service Credits and hire date shall continue to be maintained as described
herein for as long as the Employee does not terminate employment. Subject
to the provisions of ERISA, Vital Images may, in its sole discretion, make
such decisions as it deems appropriate with respect to determining Service
Credits for Vital Images Employees whose employment with Vital Images is
terminated following the Distribution Date but who are subsequently re-
employed by Vital Images.
ARTICLE
3.
401(k) RETIREMENT PLANS
3.1 Establishment of Vital Images 401(k) Plan. Effective as of the Distribution
-----------------------------------------
Date, Vital Images shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new Plan named the Vital
Images 401(k) Retirement Plan and Trust (the "Vital Images 401(k) Plan") in
such form as may be approved by Vital Images' Board of Directors, and
intended to qualify for tax-favored treatment under Section 401(a) and
401(k) of the Code and to be in compliance with the requirements of ERISA.
3.2 Continuation of Benefits. Following the Distribution Date, Vital Images
------------------------
will provide benefits under the Vital Images 401(k) Plan to all Vital
Images Employees who, immediately prior to the Distribution Date, were
participants in, or otherwise entitled to benefits under, the Bio-Vascular
401(k) Plan. All Vital Images Employees who wish to participate in the
Vital Images 401(k) Plan will be required to enroll in the Vital Images
401(k) Plan in accordance with its terms.
3.3 Transfer and Acceptance of Account Balances. As soon as practicable after
-------------------------------------------
the Distribution Date, Bio-Vascular shall cause the trustees of the Bio-
Vascular 401(k) Plan to transfer to the trustee or other funding agent of
the Vital Images 401(k) Plan the amounts (in cash, securities, other
property, plan loans, or a combination thereof) acceptable to the
administrator or trustee of
5
<PAGE>
the Vital Images 401(k) Plan representing the account balances of all Vital
Images Employees. Each such transfer shall comply with Section 414(l) of
the Code and the requirements of ERISA and the regulations promulgated
thereunder. Vital Images shall cause the trustees or other funding agent of
the Vital Images 401(k) Plan to accept the plan-to-plan transfer from the
Bio-Vascular 401(k) Plan trustees, and to credit the account of each Vital
Images Employee under the Vital Images 401(k) Plan with amounts transferred
on their behalf.
3.4 Bio-Vascular to Provide Information. Bio-Vascular shall provide Vital
-----------------------------------
Images, as soon as practicable after the Distribution Date with a list of
Vital Images Employees who, to the best knowledge of Bio-Vascular, were
participants in or otherwise entitled to benefits under the Bio-Vascular
401(k) Plan on the Cutoff Date, together with a listing of each
participant's Service Credits under the Bio-Vascular 401(k) Plan and a
listing of each such Vital Images Employee's account balance thereunder.
Bio-Vascular shall, as soon as practicable after the Distribution Date,
provide Vital Images with such additional information in the possession of
Bio-Vascular (and not already in the possession of Vital Images) as may be
reasonably requested by Vital Images and necessary for Vital Images to
administer effectively the Vital Images 401(k) Plan.
3.5 Regulatory Filings. Vital Images and Bio-Vascular shall, in connection with
------------------
the plan-to-plan transfer described in Section 3.3, cooperate in making any
and all appropriate filings required by the Commission or the Internal
Revenue Service, or required under the Code, ERISA, or any applicable
securities laws and the regulations thereunder, and take all such action as
may be necessary and appropriate to cause such plan-to-plan transfer to
take place as soon as practicable after the Distribution Date or otherwise
when required by law.
ARTICLE
4.
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
4.1 Bio-Vascular Option Plans. Prior to the Distribution, Bio-Vascular will
-------------------------
take all action necessary and appropriate to effect amendments to the Bio-
Vascular Option Plans such that (i) the Distribution will not be deemed a
"termination" of the employment of any Vital Images Employee for the
purposes of such Plans, and (ii) following the Distribution, termination of
employment of any Vital Images Employee for the purposes of such Plans will
be determined by reference to employment by Vital Images or any of its
subsidiaries. Following the Distribution, Bio-Vascular shall continue the
Bio-Vascular Option Plans, as so amended, and shall continue to reserve
those shares of Bio-Vascular Common Stock already reserved for issuance
thereunder.
4.2 Existing Vital Images Option Plans. Prior to the Distribution, Vital Images
----------------------------------
shall take all action necessary and appropriate (i) to ratify the Existing
Vital Images Option Plans, and (ii) to the extent such plans have not been
approved by the shareholders of Vital Images, to present the Existing Vital
Images Option Plans to Bio-Vascular, as the sole shareholder of Vital
Images, for approval. Following the Distribution, Vital Images shall
continue the Existing Vital Images Option Plans, and shall continue to
reserve at least those shares of Vital Images Common Stock already reserved
for issuance thereunder.
4.3 Bio-Vascular Adjustment Plans. Prior to the Distribution Date, Bio-Vascular
-----------------------------
shall take, or cause to be taken, all action necessary and appropriate (i)
to ratify the adoption of the Bio-Vascular Adjustment Plans, and (ii) if
necessary, to present the Bio-Vascular Adjustment Plans to its
6
<PAGE>
shareholders for approval. Following the Distribution, Bio-Vascular shall
reserve for issuance under the Bio-Vascular Option Adjustment Plans the
number of shares of Bio-Vascular Common Stock already reserved for issuance
pursuant to obligations assumed under the Existing Vital Images Plans.
4.4 Vital Images Adjustment Plans. Prior to the Distribution Date, Vital Images
-----------------------------
shall take, or cause to be taken, all action necessary and appropriate (i)
to ratify the adoption of the Vital Images Adjustment Plans, and (ii) to
present the Vital Images Adjustment Plans to Bio-Vascular, as the sole
shareholder of Vital Images, for approval. To the extent authorized by Bio-
Vascular prior to the Distribution Date, Vital Images shall reserve for
issuance under each Vital Images Adjustment Plan such number of shares of
Vital Images Common Stock necessary to grant Options pursuant to Section
4.5(b) hereof; provided, however, that any such shares not used to grant
Vital Stock Options pursuant to Section 4.5(b) will not be available for
future awards thereunder.
4.5 Treatment of Existing Bio-Vascular Options. In connection with the
------------------------------------------
Distribution, each Existing Bio-Vascular Option will be converted into an
Adjusted Bio-Vascular Option and will entitle the grantee to receive a
grant of a Vital Images Option, as follows.
(a) Following the Distribution, each Existing Bio-Vascular Option will
survive as an Adjusted Bio-Vascular Option in accordance with the
terms of the Existing Bio-Vascular Option and the terms of (i) the
relevant non-plan grant, (ii) Bio-Vascular Option Plan, as amended
pursuant to Section 4.1 hereof, or (iii) Bio-Vascular Adjustment Plan,
as the case may be, except that the exercise price of, and number of
shares of Bio-Vascular Common Stock subject to, the Adjusted Bio-
Vascular Option will be determined as provided in Section 4.6 hereof.
As soon as practicable after the Distribution Date, Bio-Vascular will
enter into new option agreements with each grantee of an Adjusted Bio-
Vascular Option, reflecting the modifications required by this
Section.
(b) As soon as practicable after the Record Date and prior to the
Distribution Date, Vital Images shall grant, to each grantee of an
Existing Bio-Vascular Option, a Vital Images Option, under the
appropriate Vital Images Adjustment Plan, Existing Vital Images Option
Plan or pursuant to a non-plan grant, as the case may be, which option
will be subject to the same terms and conditions of the Existing Bio-
Vascular Option, except that the option will be exercisable to
purchase shares of Vital Images Common Stock and the exercise price
of, and number of shares of Vital Images Common Stock subject to, the
Vital Images Options shall be determined as provided in Section 4.6
hereof. As soon as practicable after the Distribution Date, Vital
Images will enter into new option agreements with each grantee of a
Vital Images Option, reflecting the grant pursuant to this Section.
4.6 Adjustment and Setting of Number of Shares and Exercise Prices.
--------------------------------------------------------------
(a) The number of shares of Bio-Vascular Common Stock subject to each
Adjusted Bio-Vascular Option will equal the number of shares of Bio-
Vascular Common Stock subject to the Existing Bio-Vascular Option with
respect to which the Adjusted Bio-Vascular Option was granted, and the
number of shares of Vital Images Common Stock subject to each Vital
Images Option will be determined by applying the Distribution Ratio to
the number of shares of Bio-Vascular Common Stock subject to the
Existing Bio-Vascular
7
<PAGE>
Option with respect to which the Vital Images Option was granted;
provided, however, that the number of shares subject to both the
Adjusted Bio-Vascular Option and the Vital Images Option will be
subject to such further adjustment by Bio-Vascular and Vital Images as
Bio-Vascular may deem necessary such that the aggregate "intrinsic
value" of such options, determined in the manner set forth in Section
4.6(b) below, will equal the "intrinsic value" of the Existing Bio-
Vascular Stock Option to which such options relate. In no event will
options to purchase any fractional shares of Bio-Vascular Common Stock
or Vital Images Common Stock be issued, nor will any cash be paid in
lieu thereof. Options will be issued for whole shares only, determined
by rounding down.
(b) The adjusted exercise price of each Adjusted Bio-Vascular Option and
of the related Vital Images Option shall be determined in such a
manner so that the aggregate "intrinsic value" of the Adjusted Bio-
Vascular Option and the Vital Images Option together will equal the
intrinsic value of the Existing Bio-Vascular Stock Option to which
such options relate. For the purposes of this Section 4.6, "intrinsic
value" means:
(i) with respect to each Existing Bio-Vascular Stock Option, the
difference between the exercise price and the last reported sale
price of Bio-Vascular Common Stock on the Cutoff Date (or, if
such date is not a trading day, the trading day immediately
preceding the Cutoff Date), as reported by the Nasdaq National
Market, multiplied by the number of shares covered;
(ii) with respect to each Adjusted Bio-Vascular Option, the
difference between the exercise price and the average of the
last reported sales prices of Bio-Vascular Common Stock on each
of the five (5) trading days immediately following the
Distribution Date, as reported by the Nasdaq National Market,
multiplied by the number of shares covered; and
(iii) with respect to each Vital Images Option, the difference between
the exercise price and the average of bid and asked prices of
Vital Images Common Stock reported by the Nasdaq SmallCap Market
or on the "over the counter market" averaged over the five (5)
trading days immediately following the Distribution Date,
multiplied by the number of shares covered.
4.7 Effect of the Distribution on Restricted Stock Awards. On the Distribution
-----------------------------------------------------
Date, each grantee of restricted shares of Bio-Vascular Common Stock shall
retain such shares and shall receive as part of the Distribution a number
of restricted shares of Vital Images Common Stock determined by applying
the Distribution Ratio to the number of restricted shares of Bio-Vascular
Common Stock as of the Record Date. In no event will any fractional shares
of restricted Vital Images Common Stock be granted, nor will any cash be
paid in lieu thereof. The restrictions on shares of restricted Bio-Vascular
Common Stock and Vital Images Common Stock granted to a Bio-Vascular
Employee shall be identical to the restrictions underlying the shares of
restricted Bio-Vascular Common Stock prior to the Distribution, and the
restrictions on shares of restricted Bio-Vascular Common Stock and Vital
Images Common Stock granted to a Vital Images Employee shall pertain to
continued employment by Vital Images, and shall otherwise mirror the
restriction on such Vital Images Employee's shares of restricted Bio-
Vascular Common Stock prior to the Distribution. Following the Distribution
Date, shares of restricted Bio-Vascular Common Stock will continue to be
held by Bio-Vascular and shares of Vital Images Common Stock will be held
by Vital Images pending lapse of such restrictions.
8
<PAGE>
4.8 Communication Regarding Termination Of Employment, Vesting And Lapse Of
-----------------------------------------------------------------------
Restrictions. Bio-Vascular shall promptly notify Vital Images of the
------------
termination of employment of any Bio-Vascular Employee holding Vital
Images Options or restricted shares of Vital Images Common Stock and of any
amendment to an Adjusted Bio-Vascular Option held by a Bio-Vascular
Employee holding a related Vital Images Option. Vital Images shall
promptly notify Bio-Vascular of the termination of employment of any Vital
Images Employee holding an Bio-Vascular Option or restricted shares of Bio-
Vascular Common Stock and of any amendment to a Vital Images Option held by
a Vital Images Employee holding a related Adjusted Bio-Vascular Stock
Option. Such notices with respect to termination shall specify the date of
termination, the reason for termination (e.g. for cause, without cause,
upon a change of control, etc.), whether the termination is with or without
written consent and the impact that such termination has on any outstanding
grant or award of options on restricted shares. Such notices with respect
to amendments to an Adjusted Bio-Vascular Option or a Vital Images Option
shall specify the amendment, the name of the Bio-Vascular Employee or Vital
Images Employee, as applicable, and such other information as the other
party shall reasonably require. Bio-Vascular agrees that each Adjusted Bio-
Vascular Option held by a Vital Images Employee whose related Vital Images
Option is amended following the Distribution Date shall be deemed amended
and shall be amended to the same extent as the related Vital Images Option
without further action. Vital Images agrees that each Vital Images Option
held by a Bio-Vascular Employee whose related Adjusted Bio-Vascular Option
is amended following the Distribution Date shall be deemed amended and
shall be amended to the same extent as the related Adjusted Bio-Vascular
Option without further action.
4.9 Determination of Consent to Termination of Employment Plans. Each party
-----------------------------------------------------------
agrees that the giving or withholding of consent to the termination of
employment of any Bio-Vascular Employee or Vital Images Employee, as the
case may be, shall be as determined by the party employing such person and
stated in the notice of termination as required by Section 4.8 hereof.
ARTICLE
5.
STOCK PURCHASE PLANS
5.1 Bio-Vascular Purchase Plan. The 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
<PAGE>
Vascular and Vital Images combined, and the Bio-Vascular experience shall
be retained by Bio-Vascular if this results in the lowest aggregate
unemployment tax costs for Bio-Vascular and Vital Images combined.
7.6 Intercompany Service Charge. Legal, professional, managerial,
---------------------------
administrative, clerical, consulting and support or production services
provided to one party by personnel of the other party, upon the request of
the first party or when such services are otherwise required by this
Agreement between Vital Images and Bio-Vascular, shall be charged to the
party receiving such services on commercially reasonable terms to be
negotiated (or in accordance with the provisions of the Transition Services
Agreement or any other applicable agreement between the parties).
7.7 Warn Claims. Before and after the Distribution Date, each party shall
-----------
comply in all material respects with the Worker Adjustment and Retraining
Act ("WARN"). Bio-Vascular shall be responsible for WARN claims relating to
Bio-Vascular Employees or to Employees who prior to the Distribution Date
were employed in the Retained Business. Vital Images shall be responsible
for WARN Claims relating to Vital Images Employees or to Employees who
prior to the Distribution Date were employed in the Vital Images Business.
Each party shall indemnify, defend and hold harmless the other in
connection with WARN claims for which the indemnitor is responsible and
which are brought against the indemnitee.
7.8 Employees On Leave Of Absence. After the Distribution Date, Bio-Vascular
-----------------------------
shall assume responsibility, if any, as employer for all Employees
returning from an approved leave of absence who prior to the Distribution
Date were employed in the Retained Business. After the Distribution Date,
Vital Images shall assume responsibility, if any, as employer for all
Employees returning from an approved leave of absence who prior to the
Distribution Date were employed in the Vital Images Business.
7.9 No Third-Party Beneficiary Rights. Neither this Agreement nor any other
---------------------------------
intercompany agreement between Vital Images and Bio-Vascular is intended to
nor does it create any third party contractual or other common law rights,
and no person shall be deemed a third-party beneficiary hereof or thereof
7.10 Attorney-Client Privilege. Consistent with the provisions of Section 6.6 of
-------------------------
the Distribution Agreement, the provisions herein requiring either party to
this Agreement to cooperate shall not be deemed to be a waiver of the
attorney/client privilege for either party or shall it require either party
to waive its attorney/client privilege.
ARTICLE
8.
DEFAULT
8.1 Default. If either party materially defaults hereunder, the nondefaulting
-------
party shall be entitled to all remedies provided in the Distribution
Agreement, including the arbitration of disputes set forth therein.
8.2 Force Majeure. Neither party will hold the other party responsible for a
-------------
delay in the performance of any obligation hereunder due to labor
disturbances, accidents, fires, floods, wars, riots, rebellions, blockages,
acts of governments, governmental requirements and regulations,
15
<PAGE>
restrictions imposed by law or any other similar conditions, beyond the
reasonable control and without the fault or negligence of such party, and
the time for performance by such party will be extended by the period of
such delay.
ARTICLE
9.
MISCELLANEOUS
9.1 Relationship of the Parties. Neither party is an agent of the other party
---------------------------
and neither party has any authority to bind the other party, transact any
business in the other party's name or on its behalf, or make any promises
or representations on behalf of the other party unless provided for in any
Exhibit or otherwise agreed to in writing. Each party will perform all of
its respective obligations under this Agreement as an independent
contractor, and no joint venture, partnership or other relationship will be
created or implied by this Agreement.
9.2 Entire Agreement. This Agreement contains the entire agreement among the
----------------
parties hereto with respect to the subject matter hereof and supersedes all
prior written or oral agreements between the parties relating to the
subject matter hereof.
9.3 Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of Minnesota (regardless
of the laws that might otherwise govern under applicable principles of
conflict of laws) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
9.4 Jurisdiction and Venue. Subject to the arbitration provisions of the
----------------------
Distribution Agreement, each party consents to the personal jurisdiction of
the state and federal courts located in the State of Minnesota and hereby
waives any argument that venue in any such forum is not convenient or
proper.
9.5 Notices. All notices, requests, demands and other communications under this
-------
Agreement shall be in writing and shall be deemed to have been duly given
(i) on the date of service if served personally on the party to whom notice
is given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, provided telephonic
confirmation of receipt is obtained promptly after completion of
transmission; (iii) on the business day after delivery to an overnight
courier service or the express mail service maintained by the United States
Postal Service, provided receipt of delivery has been confirmed; or (iv) on
the fifth day after mailing, provided receipt of delivery is confirmed, if
mailed to the party to whom notice is to be given, by registered or
certified mail, postage prepaid, properly addressed and return-receipt
requested, to the party as follows:
If to Bio-Vascular: Bio-Vascular, Inc.
2575 University Avenue
St. Paul, Minnesota
55114 Attn: Chief Executive Officer
Facsimile No. (612) 642-9018
16
<PAGE>
If to Vital Images: Vital Images, Inc.
3100 West Lake Street, Suite 100
Minneapolis, MN 55416
Attn: Chief Financial Officer
Facsimile No. (612) 915-8002
Any party may change its address by giving the other party written notice
of its new address in the manner set forth above.
9.6 Modification of Agreement. No modification, amendment or waiver of any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
9.7 Successors and Assigns. A party's rights and obligations hereunder may not
----------------------
be assigned or transferred without the prior written consent of the other
party hereto. Subject to the foregoing, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and shall survive any acquisition,
disposition or other corporate restructuring or transaction involving
either party.
9.8 Titles and Headings. The titles and headings to Articles and Sections
-------------------
herein are inserted for convenience of reference only and are not intended
to constitute a part of or to affect the meaning or interpretation of this
Agreement.
9.9 Severability. In case any one or more of the provisions contained in this
------------
Agreement should be invalid, illegal or unenforceable, the enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired thereby. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions hereof without including any of such
which may hereafter be declared invalid, void or unenforceable. In the
event that any such term, provision, covenant or restriction is hereafter
held to be invalid, void or unenforceable, the parties hereto agree to use
their best efforts to find and employ an alternate means to achieve the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction.
9.10 No Waiver. Neither the failure nor any delay on the part of any party
---------
hereto to exercise any right under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right preclude any
other or further exercise of the same or any other right, nor shall any
waiver of any right with respect to any occurrence be construed as a waiver
of such right with respect to any other occurrence.
9.11 Survival of Obligations. Notwithstanding anything in this Agreement or the
-----------------------
Distribution Agreement to the contrary, this Agreement shall survive the
consummation of the transactions contemplated by the Distribution
Agreement.
17
<PAGE>
9.12 Counterparts. This Agreement may be executed in one or more counterparts,
------------
all of which shall be considered one and the same agreement, and shall
become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered as of the date first written above.
BIO-VASCULAR, INC.
By:______________________________________
Its:_____________________________________
VITAL IMAGES, INC.
By:______________________________________
Its:_____________________________________
18
<PAGE>
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 10.5
VITAL IMAGES, INC.
INCENTIVE STOCK OPTION ADJUSTMENT PLAN
1. Background; Purpose of Plan.
---------------------------
a. Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of ___________, 1997 (the
"Distribution Agreement"), between the Company and Bio-Vascular, Inc.,
a Minnesota corporation ("Bio-Vascular"), pursuant to which Bio-
Vascular will distribute (the "Distribution") all of the outstanding
shares of the Company's common stock to Bio-Vascular's shareholders of
record on the Record Date (as defined in the Distribution Agreement).
In connection with the Distribution, each holder of an option to
purchase Bio-Vascular common stock (a "Bio-Vascular Option") as of the
Record Date will be entitled to retain such Bio-Vascular Option,
provided that such Bio-Vascular Option will be adjusted to reflect the
Distribution (an "Adjusted Bio-Vascular Option"). In addition, as of
the Record Date, each holder of a Bio-Vascular Option will also be
entitled to receive an option to purchase Company common stock that
will be adjusted to reflect the Distribution (an "Adjusted Company
Option").
b. Pursuant to the terms and conditions of the applicable plans under
which the Bio-Vascular Options were initially granted, the exercise
price and number of shares covered by each Adjusted Bio-Vascular
Option, as well as the exercise price and number of shares covered by
each Adjusted Company Option, will be determined according to a
formula, set forth in the Employee Benefits Agreement entered into
between Bio-Vascular and the Company, that is based on the relative
fair market trading values of Bio-Vascular common stock and Company
common stock during the first five trading days following the
Distribution Date (as defined in the Distribution Agreement). Pursuant
to this formula, these adjustments will be made in such a manner that
the aggregate "intrinsic value," or difference between fair market
value and exercise price, of the Adjusted Bio-Vascular Option and
Adjusted Company Option will equal the pre-Distribution "intrinsic
value" of the Bio-Vascular Option with respect to which the adjustment
and grant were made.
c. In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option
with respect to which it is granted, Adjusted Company Options will be
granted under the terms of a corresponding "mirror" plan of the
Company. With respect to Bio-Vascular Options granted under the Bio-
Vascular Incentive Stock Option Plan As Amended, this Vital Images,
Inc. Incentive Stock Option Adjustment Plan (the "Plan") will serve as
such a "mirror" plan. Accordingly, the sole purpose of this Plan is to
provide for the grant of such Adjusted Company Options, and no
additional option grants of any kind will be granted under this Plan.
2. Administration.
--------------
This Plan shall be administered by a Committee appointed by the Board
of Directors of the Company (hereinafter referred to as the "Committee").
The Committee shall consist of two or more directors who are not employees
of the Company and who qualify as "non-employee directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of
1934. Committee members shall be appointed from time to time by the Board,
and shall serve at the pleasure of the Board. In the
<PAGE>
absence of any such appointment, the Board of Directors of the Company shall
constitute the Committee. Subject to such orders and resolutions not
inconsistent with the provisions of this Plan as may from time to time be issued
or adopted by the Board of Directors, the Committee shall have full power and
authority to interpret the Plan and, to the extent contemplated herein, shall
exercise the discretion granted to it (i) to determine the purchase price of the
shares of Common Stock covered by each option, (ii) to determine the persons to
whom and the time or times at which such options shall be granted and the number
of shares to be subject to each option, (iii) to determine the terms of exercise
of each option, (iv) to interpret the Plan, (v) to prescribe, amend, and rescind
rules and regulations relating to the Plan, (vi) to determine the terms and
provisions (and amendments thereof) of each agreement under this Plan (which
agreements need not be identical), and (vii) to make all other determinations
necessary or advisable for the administration of the Plan.
All decisions, determinations and selections made by the Committee pursuant
to the provisions of the Plan and applicable existing orders and resolutions of
the Board of Directors shall be final. Each option granted shall be evidenced by
a written agreement containing such terms and conditions as may be approved by
the Committee and which shall not be inconsistent with the Plan and the orders
and resolutions of the Board of Directors with respect thereto.
The Committee and the group of individuals (the "Bio-Vascular Committee")
administering the Bio-Vascular Incentive Stock Option Plan As Amended (the "Bio-
Vascular Option Plan") will reasonably cooperate and communicate with each other
to promote the purposes of the Plan.
3. Eligibility and Participation.
-----------------------------
All of the Company's employees shall be eligible to receive options under
the Plan, including officers and members of the Company's Board of Directors who
are full-time employees of the Company. In addition, persons who hold
outstanding Bio-Vascular Options under the Bio-Vascular Option Plan as of the
Record Date will be eligible to participate in the Plan. The Committee shall
allot to such participants options to purchase shares in such amounts as the
Committee shall determine; provided, however, that no participant shall be
allotted an option for any greater number of shares than would result in such
participant owning, directly or indirectly, more than 10% of the total combined
voting power or value of the stock of the Company or any of its subsidiaries
unless the option price is at least 110% of the market value of the stock on the
date of grant, and the option is by its terms not exercisable after five (5)
years from the date of grant.
4. Shares Subject to the Plan.
--------------------------
Subject to adjustments as provided in Section 5 herein, an aggregate of
425,000 shares of common stock, $.01 par value of the Company shall be subject
to this Plan, either from authorized, but unissued shares, or shares reacquired
by the Company, including shares purchased in the open market or any combination
thereof. Such number and kind of shares shall be appropriately adjusted in the
event of any one or more stock splits or stock dividends hereafter paid or
declared with respect to such stock. If, prior to the termination of the Plan,
shares issued pursuant to this Plan are repurchased, such repurchased shares
shall again become available for issuance under the Plan.
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares for option by termination of expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
<PAGE>
5. Adjustments Upon Changes in Capitalization.
------------------------------------------
Notwithstanding any limitations set forth in Section 4 hereof, in the event
of a merger, consolidation, reorganization, stock dividend, stock split, or
other change in corporate structure or capitalization affecting the Common
Shares of the Company occurring after the Distribution Date, such appropriate
adjustments shall be made in the maximum number of shares available under the
Plan or to any one individual and in the number, kind, option price, etc., of
shares subject to options granted under the Plan as may be determined by the
Committee.
6. Terms and Conditions of Options.
-------------------------------
The Committee shall have the power, subject to the limitations contained in
this Plan, to prescribe any terms and conditions in respect of the granting or
exercise of any option under this Plan and, in particular, shall prescribe the
following terms and conditions:
a. Each option shall state the number of shares to which it pertains.
b. Each option shall be granted within ten (10) years of the date the
Bio-Vascular Option Plan was adopted by the Board of Directors of Bio-
Vascular.
c. The Committee, in its sole discretion, except with respect to employees
that own directly or indirectly more than 10% of the total combined voting
power or value of the stock of the Company or any of its subsidiaries, in
which case the option price shall be at least 110% of the market value of
the common stock on the date of grant, shall determine the price at which
shares shall be sold to participants hereunder, provided that such price
shall be payable at the time the shares are sold hereunder in cash or in
equivalent value (determined as of the date tendered) in an amount equal to
100% of the fair market value of the common stock on the date of grant.
If the Company common stock is listed on a national exchange or quoted in
the National Market System, fair market value shall be equal to the closing
price for the Company common stock as reported by the Wall Street Journal
(or other accurate reporter of market activity) for the business day
preceding the day on which the option was issued. If the Company common
stock is reported in the National Association of Securities Dealers
Automated Quotation System, fair market value shall be the average of the
bid and asked prices for the business day preceding the day on which the
option was issued. Except as specifically provided herein, determination of
the price at which shares shall be sold to participants shall be determined
by the Committee with reliance upon such appraisal(s) or other data as the
Committee may deem appropriate. Payment for shares upon exercise of any
option under this Plan with previously acquired shares of the Company shall
be subject to all applicable rules of the federal or state agencies having
appropriate jurisdiction, if any, and such shares shall be valued at fair
market value as of the date of exercise of the option.
d. If so designated by the Committee, options granted pursuant to this Plan
are intended to qualify for long-term capital gains tax treatment under the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended.
Eligibility for such tax treatment requires that the stock be held at least
one (1) year from date of exercise of the option and at least
<PAGE>
two (2) years from the date the option is granted.
e. An option shall be exercised when written notice of such exercise has been
given to the Company at its principal business office by the person
entitled to exercise the option and full payment for shares, as defined
herein, with respect to which the option is exercised has been received by
the Company. Until the stock certificates are issued, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to optioned shares notwithstanding the exercise of the Option.
f. Except as provided in this Section, an option may be exercised only by the
optionee while such optionee is, and has continually been, since the date
of the grant of the option, an employee of the Employer or within three (3)
months following termination of employment for reasons other than death,
disability or termination of employment for gross and willful misconduct or
voluntary resignation. If the continuous employment of an optionee
terminates by reason of death, an option granted hereunder held by the
deceased employee which is eligible for exercise as of the death may be
exercised within one (1) year following the date of death, but in no event
later than ten (10) years after the date of grant of such option by the
person or persons to whom the participant's rights under such option shall
have passed by will or by applicable laws of descent and distribution. If
the continuous employment of an optionee terminates by reason of
disability, such option(s) as the disabled employee would be entitled to
exercise as of the date of termination of employment must be exercised
within one (1) year following the date of termination, but in no event
later than ten (10) years after the date of grant of such option. In the
event that an optionee shall cease to be employed by the Employer by reason
of his voluntary resignation or his gross and willful misconduct during the
course of his employment, including but not limited to dishonesty, fraud,
failure to perform his duties, or other conduct adverse to the Company's or
Bio-Vascular's interests as the case may be, the option shall be terminated
as of the termination of employment. The transfer by a participant of
employment or other service from one Employer or its subsidiaries to the
other Employer or its subsidiaries will not be deemed to constitute a
termination of employment or other service for purposes of this Plan.
g. The aggregate fair market value (determined as of the time the option is
granted) of the common stock with respect to which options are exercisable
for the first time by the holder during any calendar year shall not exceed
$100,000.
7. Issuance of Options.
-------------------
Whenever the Committee shall designate a participant for the receipt of an
option, the Secretary (or if the Secretary is himself the recipient, the
President) of the Company shall forthwith send notice thereof to the
participant, in such form as the Committee shall approve, stating the number of
shares optioned to the participant and the price per share thereof. The date of
grant of the option to such participant shall be determined by the Committee, in
its discretion and consistent with the purpose of this Plan. Thereafter, the
Company shall issue to the participant an option instrument in such form as
deemed necessary or appropriate by the Committee.
8. Options Not Transferable.
------------------------
Options under the Plan may not be sold, pledged, assigned or transferred in
any manner, other
<PAGE>
than as provided in Section 6(f) and may be exercised during the lifetime of an
optionee only by such optionee.
9. Amendment or Termination of the Plan.
------------------------------------
The Board of Directors of the Company may amend this Plan from time to time
as it may deem advisable. No amendment of the Plan, however, shall, without
shareholder approval, increase the maximum number of shares under the Plan as
provided in Section 4, or decrease the minimum option price provided in Section
6. Except as provided in Section 5, the Board shall not alter or impair any
option theretofore granted under the Plan without the consent of the holder of
the option. The Board of Directors may at any time terminate the Plan, provided
that any such termination of the Plan shall not adversely affect options already
granted and such options shall remain in full force and effect as if the Plan
had not been terminated.
10. Agreement and Representations of Participants.
---------------------------------------------
As a condition to the exercise of any option or portion thereof, the
Company may require the person exercising such option to represent and warrant
at the time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
under the Securities Act of 1933 or any other applicable law, regulation or rule
of any governmental agency.
In the event legal counsel to the Company renders an opinion to the Company
that shares for options exercised pursuant to this Plan cannot be issued to the
optionee because such action would violate any applicable federal or state
securities laws, then, in that event, the optionee agrees that the Company shall
not be required to issue said shares to the optionee and shall have no liability
to the optionee other than the return to optionee of amounts tendered to the
Company upon exercise of the option.
11. Definitions.
-----------
As used herein the following definitions shall apply:
a. "Continuous employment" shall mean employment without interruption
with the Employer. Employment shall not be considered interrupted in
the case of sick leave, military leave or any other leave of absence
approved by the Employer.
b. "Employer" means the Company if the participant renders employment or
other services to the Company or any subsidiary of the Company and
means Bio-Vascular if the Participant renders employment or other
services to Bio-Vascular or any subsidiary of Bio-Vascular.
c. "Option" shall mean a stock option granted pursuant to the Plan.
d. "Stockholder" shall mean the holders of outstanding shares of the
common stock of the Company.
12. Effective Date and Termination of the Plan.
------------------------------------------
The Plan shall become effective as of the Distribution Date. The Plan
shall terminate on the earlier of:
<PAGE>
a. The date when all the common shares available under the Plan shall
have been acquired through the exercise of options granted under the
Plan; or
b. Ten (10) years after the date of adoption by the Board of Directors of
Bio-Vascular, of the Bio-Vascular Option Plan; or
c. Such other date as the Board of Directors of the Company may
determine.
13. Form of Option.
--------------
Options shall be issued in such form as deemed necessary or appropriate by
the Committee.
<PAGE>
EXHIBIT 10.6
VITAL IMAGES, INCORPORATED
1990 MANAGEMENT INCENTIVE STOCK OPTION PLAN
1. Purpose of Plan. The purposes of this Plan, which shall be known as the
1990 Management Incentive Stock Option Plan and is hereinafter referred to as
the "Plan", are (i) to provide incentives for officers, directors, and key
employees of Vital Images, Incorporated (the "Company") by encouraging their
ownership of the Common Stock of the Company (collectively, the "Stock") and
(ii) to aid the Company in retaining such officers, directors, and key employees
upon whose efforts the Company's success and future growth depends and in
attracting other officers, directors and key employees.
2. Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors (the "Committee"), as hereinafter provided.
The Committee shall be appointed from time to time by the Board of
Directors and shall consist of not fewer than three of its members. However, if
the Board of Directors shall at any time consist of three members or less, then
such committee shall consist of the entire Board of Directors. Members of the
Board of Directors who serve on the Committee shall be eligible to participate
in the Plan. The Board of Directors shall designate one of the members of the
Committee as its Chairman. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members and the Committee's determinations shall constitute recommendations to
the Board of Directors which the Board shall have discretion to act upon. Any
decision or determination reduced to writing and signed by all members of the
Committee shall be as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary (who need
not be a member of the Committee).
For purposes of administration, the Committee, subject to the terms of
the Plan, shall have authority to establish such rules and regulations, make
such determinations and interpretations, as it deems necessary or advisable, and
all determinations and interpretations approved by the Board shall be final,
conclusive and binding on all persons, including persons granted options
hereunder ("Optionees") and their legal representatives and beneficiaries.
No member of the Committee or the Board of Directors shall be liable for
any act or omission with respect to his service on the Committee or with respect
to the Plan, if he acts in good faith and in a manner he reasonably believes to
be in or not opposed to the best interests of the Company.
3. Stock Available for Options. There shall be available for options under
the Plan a total of 370,000 shares of Common Stock, subject to any adjustments
which may be made pursuant to Section 5(g). Shares of Stock with respect to
which options are granted pursuant to the Plan may be either authorized and
unissued shares, or previously issued shares held in the
<PAGE>
treasury of the Company, or both. Shares of Stock covered by options which have
terminated or expired prior to exercise shall not be available for further
options hereunder.
4. Eligibility. Options under the Plan shall be granted to officers,
directors or key employees of the Company ("Management"). Options may be granted
to eligible members of Management whether or not they hold or have held options
previously granted under the Plan or otherwise granted or assumed by the
Company.
5. Terms and Conditions of Options. The Committee shall, in its discretion,
prescribe (for approval or rejection by the Board of Directors) the terms and
conditions of the options to be granted hereunder which shall be evidenced by an
option agreement, which terms and conditions need not be the same in each case,
subject to the following:
a. Number of Shares. Each option shall state the number of shares of
Common Stock to which it pertains.
b. Option Price. Each option shall state the price at which each
share of Stock covered by an option granted under the Plan shall
be purchased, which may be more or less than the then fair market
value of the Company's stock.
c. Option Period. The period for exercise of an option (the "Option
Period") shall in no event be more than ten years from the date on
which the option is granted. With respect to each person who is
granted options under this Plan, the Committee and the Board shall
have the right, among other things, to determine that his right to
exercise such options shall vest, ratably, monthly or annually, or
otherwise, over a determined period (the "Vesting Period"), except
as provided in Section 5(e), commencing on the date of grant. Any
shares of Stock not purchased as the right to exercise ratably
accrues may be purchased thereafter at any time before the
expiration of the Option Period except as provided in Section
5(e).
d. Exercise of Options. In order to exercise an option, the holder
thereof (the "Optionee") shall deliver to Company written notice
specifying the number of shares of Common Stock to be purchased,
and unless otherwise determined, together with a certified or bank
cashier's check payable to the order of the Company in the full
amount of the purchase price therefor. An Optionee shall not have
any rights of a stockholder until the shares of Stock are issued
to him. An option may not be exercised for less than the lessor of
(i) ten shares of Stock, or (ii) the number of shares of Stock
remaining subject to such option.
e. Effect of Termination of Employment or Directorship.
Notwithstanding anything to the contrary in this Plan or any
option agreement issued hereunder, for employees of the Company
whose positions of employment terminate within two years of the
commencement of such employment
2
<PAGE>
with the Company, and for directors of the Company serving solely
as a director (where such persons are not employees of the
Company) whose position as a director terminates within two years
of the commencement of such position, after such Optionee has
ceased (for any reason) to be in the employ of the Company, or
ceased (for any reason) to be a director of the Company if he is
serving solely as a director, options may only be exercised within
a period of 90 days after such termination and only by payment of
the purchase price for all stock under option in cash or by
certified check.
Nothing in the Plan or in any option granted pursuant to the
Plan shall be construed to confer on any individual any right to
continue in the employ of the Company or interfere in any way with
the right of the Company to terminate his employment at any time.
f. Nontransferability of Options. During the lifetime of an Optionee,
options held by such Optionee shall be exercisable only by him. No
option shall be transferable other than by will or the laws of
descent and distribution.
g. Adjustments for Change in Stock Subject to Plan and Other Events.
Except as otherwise may be provided in the Option Agreement in the
event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, consolidation, merger (other than
a merger or consolidation which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares), any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any
person or group of all or a majority of the then outstanding
voting securities of the Company, rights offering, or any other
change in the corporate structure or rights with respect to any
shares of the Company, the Committee shall make such adjustments,
if any, in the number and kind of shares of Stock subject to the
Plan, in the number and kind of shares covered by outstanding
options, and/or in the option price per share to provide that the
Optionee shall have the right following such event, during the
period that such options shall be exercisable, to exercise such
options for the kind and amount of securities, cash and other
property receivable upon such event by a holder of the number and
kind of shares of Stock for which such options might have been
exercised immediately prior to such event.
The provisions of this paragraph (g) shall apply to any
outstanding options but in no event shall any option be
exercisable after the date of termination of the exercise period
of such option specified in Sections 5(c).
3
<PAGE>
h. Registration. Listing and Qualification of Shares of
Stock/Shareholders Agreement. Each option shall be subject to the
requirements that if at any time the Stock covered thereby is not
registered, listed or qualified upon any securities exchange or
under any federal or state law, and (1) if the Board of Directors
shall determine that such registration, listing or qualification
or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with,
the granting of such option or the purchase of shares of Stock
thereunder, no such option may be exercised unless and until such
registration, listing, qualification, consent or approval shall
have been effected or obtained free of any conditions not
acceptable to the Board of Directors, or (2) if the Board of
Directors shall determine that such registration, listing or
qualification or the consent or approval of any governmental
regulatory body is not necessary and/or not desirable as a
condition of, or in connection with, the granting of such option
or the purchase of shares of Stock thereunder, the Board of
Directors may impose any conditions upon the exercise of such
options as it shall deem necessary or desirable in view of such
determination and no such option may be exercised unless and until
such conditions have been satisfied. Without limiting the
foregoing, the Company may require that any person exercising an
option shall make such representations and agreements and furnish
such information as the Company deems appropriate to assure
compliance with the foregoing or any other applicable legal
requirement. Each option shall also be subject to the Optionee, on
exercise of such option, being required to execute a Shareholders'
Agreement in form and substance satisfactory to the Board of
Directors, providing for a right of first refusal in favor of the
Company and/or certain of its shareholders in connection with the
transfer of Stock and such other provisions as shall be determined
by the Board.
i. Withholding of Taxes. No option may be exercised unless the
Optionee has paid, or has made provision satisfactory to the
Committee for payment of, Federal, state and local income taxes,
or any other taxes (other than stock transfer taxes) which the
Company may be obligated to collect as a result of the issue or
transfer of shares of Stock upon the exercise of an option.
j. Other Terms and Conditions. The Committee may impose such other
terms and conditions, not inconsistent with the terms hereof, on
the grant or exercise of options, as it deems advisable.
6. Amendment and Termination. Unless the Plan shall theretofore have been
terminated as hereinafter provided, the Plan shall terminate on, and no option
shall be granted hereunder after, January 1, 2000; provided, however, that the
Board of Directors may at any time
4
<PAGE>
prior to that date terminate the Plan. The Board of Directors may at any time
amend the Plan. No termination or amendment of the Plan may, without the consent
of an Optionee, adversely affect the rights of such Optionee with respect to any
option held by such Optionee.
7. Other Actions. Nothing contained in the Plan shall be construed to limit
the authority of the Company to exercise its corporate rights and powers,
including but not limited to, the right of the Company to grant options for
proper corporate purposes other than under the Plan to any officer, director,
employee or other person, firm, corporation or association.
5
<PAGE>
EXHIBIT 10.12
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.
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Section 12. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
Option Holders.
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EXHIBIT 10.18
JOINT DEVELOPMENT AGREEMENT
THIS AGREEMENT is by and between Vital Images, Inc., an Iowa corporation
having offices at 2575 University Avenue, Saint Paul, MN 55114-1024
(hereinafter "Vital Images"), and ATL Ultrasound, Inc., a Washington corporation
having offices at 22100 Bothell Everett Highway, P.O. Box 3003, Bothell, WA
98041-3003 (hereinafter "ATL");
WITNESSETH:
WHEREAS, Vital Images is in the business of developing, marketing, selling
and servicing three dimensional volume visualization (3DVV) systems for three
dimensional medical imaging applications; and
WHEREAS, ATL is in the business of developing, marketing, selling and
servicing medical diagnostic ultrasound systems; and sells ultrasound systems
embodying its own internally developed three dimensional imaging capabilities;
and
WHEREAS, ATL desires to add Vital Images' three dimensional volume
visualization capabilities to its ultrasound offerings to complement its own
internally developed three dimensional imaging products; and
WHEREAS, Vital Images desires to extend its 3DVV technology to medical
diagnostic ultrasonic imaging applications.
NOW, THEREFORE, in consideration of the mutual premises herein contained,
the parties agree as follows:
1. DEFINITIONS
1.1 "Acceptance Date" for purposes of this Agreement shall mean the date
that ATL accepts in writing any Product as meeting the product specifications
set forth in the Product Development Plan for that Product as evidenced by ATL's
authorization of a first customer delivery ("FCD") release for the Product.
1.2 Products shall mean any product developed under this Agreement which
provides three dimensional volume visualization capabilities for medical
diagnostic ultrasound imaging applications, and at the outset of this Agreement
is intended to consist of [*]
1.3 "Maintenance" as used herein shall mean the repair of software errors
and malfunctions caused by Vital Images' software in Products previously sold to
customers which have been documented by ATL and verified by Vital Images.
1.4 "Upgrades" as used herein shall mean the provision by means of a
Product Development Plan of new or different functionality for Products
previously sold to customers or for new Product offerings and any modifications
or additions to the Products necessary to
* Portions of Section 1.2 have been omitted pursuant to a request by the
Registrant for confidential treatment from the Securities and Exchange
Commission (the "Commission"). Included with such request, the Registrant has
filed Section 1.2 separately with the Commission.
<PAGE>
conform the Products to hardware changes or the evolution of technology with
which the Products operate.
1.5 "Options" as used herein shall mean additional functionality developed
by means of a Product Development Plan which may be optionally purchased by a
customer.
2. EXCLUSIVE COLLABORATION.
2.1 Vital Images and ATL agree that, commencing as of the date of this
Agreement, each will work with the other exclusively as each other's sole
collaborator pursuant to the terms of this Agreement for the next five (5) years
in the development of three dimensional visualization ("3D") products for
medical diagnostic ultrasound imaging applications. Vital Images is committed to
work with ATL until at least the Acceptance Date of a first Product.
2.2 For the purposes of this Agreement, the phrase "exclusively as its
sole collaborator" shall mean that, during the term of this Agreement:
(a) Neither party to this Agreement shall assist, work with or collaborate
with any other person or entity in the development of three dimensional
visualization products for medical diagnostic ultrasound imaging applications,
except:
(i) ATL may continue to work with TomTec in the area of 3D
technology for the sole purpose of providing ATL customers who desire to
use a TomTec product with existing TomTec products which operate with ATL
products and may work with clinical or academic groups who are developing
3D capabilities but are not manufacturing or sales entities for such
products; and
(ii) Vital Images may work with third parties in the development,
manufacture, marketing and sale of Vital Images' three dimensional
visualization systems for use in connection with multi-modality
environments.
(b) Each party hereby represents and warrants to the other that it shall
not use any proprietary information or technology of the other party in
connection with the development of its other product unless it first receives
the written consent of the other party.
(c) Notwithstanding any other provisions of this Agreement or the Sales
Agreement, Vital Images may develop, manufacture, market and/or sell three
dimensional visualization systems for use in connection with any other medical
or non-medical applications except medical diagnostic ultrasound imaging. In
addition, Vital Images will not develop, manufacture, market and/or sell three
dimensional visualization systems for interoperative ultrasound, minimally
invasive ultrasound, and ultrasonic guided therapy applications for any entity
which develops, manufactures or sells medical diagnostic ultrasound systems.
Vital Images may itself or in collaboration with any other entity develop,
manufacture, market and/or sell three dimensional visualization system for use
in medical diagnostic ultrasound:
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(i) for the development, manufacture and sale of a product which is
substantially similar to a Product as to which ATL no longer has exclusive
distribution rights under the Sales and Marketing Agreement; and
(ii) for the development, manufacture and sale of a product which is
substantially similar to a Product as to which ATL and Vital Images are
unable to reasonably agree upon a Product Development Plan hereunder, or
which is substantially similar to a Product as to which ATL and Vital
Images have abandoned development.
(d) Subject to the provisions of Section 2.2 of the Sales and Marketing
Agreement, Vital Images may use the clinical protocols for a Product developed
pursuant to this Agreement beginning no later than six (6) months after the
Acceptance Date for the Product.
3. PRODUCT DEVELOPMENT PROGRAMS.
3.1 The parties shall commence Product development programs designed to
develop Products for sale by ATL pursuant to the terms of the Sales and
Marketing Agreement. The scope and schedules for these development programs as
envisioned by the parties as of the date of execution of this Agreement is found
in Exhibit 3.1 to this Agreement.
3.2 Prior to commencing any product development program, the parties will
jointly prepare and execute a written Product development plan which will
include, among other things, the items listed in Exhibit 3.2 (collectively, the
"Product Development Plans" and singularly the "Product Development Plan").
A preliminary draft of the Product Development Plan presently contemplated
for the Product described in Section 1.2(a) is attached hereto as Exhibit 3.2A
and shall serve as a model for the form and structure of the other Product
Development Plans contemplated hereunder.
3.3 As part of any Product Development Plan, Vital Images shall include a
proposal for staffing, costs, and timing to carry out the plan, and the parties
will then agree upon a fixed price for which Vital Images shall perform its
portion of the plan. The basis for payment by ATL to Vital Images for its
performance of the Product Development Plan and the costs incurred by Vital
Images is set forth in Section 5.2. If it should develop that additional work
is needed to complete the results contemplated by the Product Development Plan
beyond that which is covered by the stated price to be paid by ATL to Vital
Images, the parties shall meet to decide whether to finish the plan, and the
allocation of the work and costs necessary to complete the plan.
3.4 The details of the development programs provided in Exhibits 3.1 and
3.2A are expected to change and evolve with time, and new programs may be added
to those outlined in the Exhibits. All material modifications to the current
programs and any new programs added shall be undertaken with the written consent
of both parties.
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3.5 Upgrades and Options may be developed upon the mutual agreement of the
parties pursuant to written development programs structured in the same manner
as the Product Development Plans described in Section 3.2 above. In addition,
Vital Images will provide ATL with the information required by ATL to develop
and add its own Upgrades and Options consistent with Vital Images' application
programming interface. Vital Images shall provide reasonable assistance to ATL
in the form of Product information readily available to Vital Images for the
development by ATL of upgrades or options needed to maintain the Products or to
adapt the Products to evolving or new hardware. Vital Images has no obligation
under this Agreement to provide the source code to any of its software to ATL.
Subject to the conditions of the prior paragraph, Vital Images agrees
to produce at least one Upgrade and one Option each year during the term of this
Agreement if so requested by ATL. Vital Images agrees to provide Maintenance
support as reasonably required to support the Products being sold by ATL for so
long as ATL is selling a Product and for two years after ATL ceases selling a
Product, and thereafter only insofar as ATL is obligated by law to provide
Product support.
3.6 Upgrades sold to customers shall require a royalty payment by ATL to
Vital Images, and Upgrades which are provided free of charge to customers shall
not require a royalty payment by ATL to Vital Images. The parties must mutually
agree prior to commencing development of an Upgrade as to whether an Upgrade
will be sold or provided free of charge. The sale of an Option by ATL shall
require a royalty payment by ATL to Vital Images. The amount of any such royalty
payments shall be established pursuant to Exhibit 3.0 of the Sales Agreement.
3.7 On an ongoing basis, Vital Images and ATL shall assess whether
developments in Vital Images' visualization technology would have beneficial
applications to the Products or would be suitable for collaboration with ATL in
the context of a new Product Development Plan. If so, the parties shall discuss
such technological developments for the purpose of identifying future Product
Development Plans and incorporating the technological developments into existing
Product Development Plans; provided, however, Vital Images shall have no
obligation to discuss such technological developments with ATL if such
discussion would violate any (i) law or regulation, or (ii) other contractual
commitments of Vital Images. ATL shall incur in such Product Development Plans
only the incremental costs due to adaptation and integration for such pre-
developed technologies.
4. SALES AND MARKETING OF JOINTLY DEVELOPED PRODUCTS.
4.1 All Products which are jointly developed by the parties under this
Agreement shall be sold and marketed under the provisions of this Agreement and
the Sales and Marketing Agreement (also referred to herein as the "Sales
Agreement").
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5. RESEARCH & DEVELOPMENT COSTS.
5.1 In consideration of the commitment of Section 2.1, ATL shall pay Vital
Images within 10 working days of the execution of this Agreement a
nonrefundable, one-time fee in the amount of $300,000.
5.2 ATL shall reimburse Vital Images for its agreed upon engineering costs
for the Products to be developed under this Agreement as specified in Section
3.3 above. ATL shall, at the time of the payment of Section 5.1, make a
prepayment of $100,000 to Vital Images which shall be fully creditable against
the engineering costs. Vital Images shall inform ATL at any time it believes the
budget for development of a specific Product will be exceeded so that the
parties can meet and discuss any actions that may be appropriate under the
circumstances. ATL shall reimburse Vital Images for such engineering costs
incurred on a quarterly basis, within 30 days of the tendering by Vital Images
of an invoice showing such costs incurred and the basis for such costs in a form
sufficient to document such costs for tax record purposes. Vital Images'
engineering costs (including development, quality and regulatory engineering)
and engineering program management shall be determined based on a day rate which
rate shall include a zero margin, but a full allocation of overhead expenses.
ATL shall also reimburse Vital Images for the expenses of travel which is
requested by ATL and has been approved in advance of the travel by ATL.
6. REGULATORY APPROVALS.
6.1 ATL shall have the responsibility for obtaining any regulatory
approvals necessary for the marketing and sale of the Products developed
hereunder, and shall bear the costs attendant to such approvals. ATL shall make
reasonable efforts to obtain needed regulatory approvals in a timely manner.
Vital Images shall support ATL's efforts to secure regulatory approvals pursuant
to the terms and conditions of each Product Development Plan and in addition
thereto, by providing at no cost to ATL any reasonably available existing
information and documentation of Vital Images which would be reasonably
necessary or useful to ATL in obtaining such approvals.
6.2 Both parties shall conduct their activities under this Agreement in a
manner which is consistent and in compliance with the FDA's Good Manufacturing
Practices. In addition, Vital Images shall comply with section 4.4, "Design
Control," and section 4.6, "Purchasing," insofar as it relates to
subcontractors, of "ANSI/ISO/ASQC Q9001-1994, Quality Systems-Model for Quality
Assurance in Design, Development, Production, Installation, and Servicing", and
ATL Document Numbers 9032-0182 Rev. B and 9080-0008 Rev. B, and revisions and
successors thereto which are provided to Vital Images by ATL. Vital Images
agrees to cooperate with ATL and regulatory authorities in any audits or
inspections of the development, manufacture, and sale of Products.
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7. INTELLECTUAL PROPERTY.
7.1 Subject to compliance by the receiving party with the confidentiality
obligations of Section 10, each party grants to the other party the right of
access to its information and intellectual property which the parties mutually
agree are useful to the other in developing the Products which are the subject
of this Agreement; provided, such access shall not grant to or transfer any
rights in the information or intellectual property received by the other party
except as specifically provided for herein. Vital Images has no obligation
under this Agreement to provide the source code to any of its software to ATL.
7.2 Title to and ownership of the intellectual property owned by each
party prior to the execution date of this Agreement or intellectual property
developed by a party outside any of the Product Development Plans which are the
subject of this Agreement shall not be affected or changed by this Agreement,
and such title and ownership rights shall survive any termination of this
Agreement. For purposes of this Agreement, intellectual property shall be deemed
to include all technology or information owned by either party. Intellectual
property owned by Vital Images (including, without limitation, all computer
software owned by Vital Images) prior to this Agreement shall continue to be
owned by Vital Images, and intellectual property owned by ATL prior to this
Agreement shall continue to be owned by ATL.
7.3 Intellectual property developed solely by Vital Images during the
course of the Product Development Plans pursuant to this Agreement shall be
solely owned by Vital Images. Intellectual property developed solely by ATL
during the course of the development programs of this Agreement shall be solely
owned by ATL; and intellectual property jointly developed by personnel of both
parties shall be jointly owned by the parties. Following termination of this
Agreement, each party is free to use or license jointly-owned intellectual
property in its sole discretion.
7.4 As to intellectual property in the following areas, all solely owned
intellectual property developed during the course of the Product Development
Plans of this Agreement, and excluding any intellectual property or intellectual
property rights developed outside of the Product Development Plans of this
Agreement, shall be perpetually licensed in the manner described below on a
worldwide royalty-free, nonexclusive, nontransferable basis:
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C>
Intellectual Property Developed Solely Intellectual Property Developed Solely By
By Vital Images To Which ATL is Perpetually ATL To Which Vital Images Is Perpetually
Licensed Licensed
- ----------------------------------------------------------------------------------------------------
Ultrasound imaging and probe design Volume visualization and display
- ----------------------------------------------------------------------------------------------------
Image data management in the ultrasound Image data management in the visualization
system system
- ----------------------------------------------------------------------------------------------------
ATL product user interface items 3DVV product user interface items
- ----------------------------------------------------------------------------------------------------
</TABLE>
It is understood that such perpetual licenses are not transferable by the
recipient and are for the purpose of enabling the recipient to work internally
with the licensed technology in
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development of its future products. The intellectual property which is the
subject of the license may be sublicensed by the recipient to facilitate OEM
sales or direct sales to end users of its products when licensing is the form in
which the recipient usually transfers such intellectual property to customers.
7.5 Each party shall be responsible for the costs of protecting and
maintaining its solely owned intellectual property. The parties shall jointly
bear the costs of protecting and maintaining intellectual property which is
jointly owned. Both parties have the obligation to execute all documents
necessary to secure protection for such jointly owned intellectual property and
to the extent necessary, shall assist one another to maintain ownership rights
in solely owned intellectual property. If one party does not desire to protect
(as by patent application filing, use of copyright notices or maintenance of a
trade secret) or maintain (as by maintenance fee payment) an element of
intellectual property which it solely or jointly owns and which was developed
during the course of a Product Development Plan of this Agreement, the party
shall extend such opportunity to the other party, which other party shall have
30 days to decide to protect and/or maintain the intellectual property elements
at its own cost and expense. If such other party elects to do so, title to that
element of intellectual property and all obligations associated with the
maintenance of such intellectual property shall thereupon pass to such other
party.
7.6 Each party shall have the right to enforce as to third parties the
intellectual property rights of both parties that are embodied in the Products
sold by it and developed under this Agreement and to enjoy the full cooperation
of the other party in such enforcement. Such enforcement shall be at the cost
and expense of the party enforcing such rights.
7.7 Vital Images shall escrow a copy of the source code for each Product
being sold by ATL and shall update such escrow to be current at all times with
the level(s) of software being used by ATL. The source code shall be escrowed
with a mutually agreed upon escrow agent. Such source code shall be provided to
ATL for a given Product if Vital Images is no longer willing or able to
collaborate with ATL in the development of Upgrades or Options for the Product
or to provide for Maintenance of a Product being sold by ATL and ATL is not in
breach of this Agreement or the Sales Agreement. Such source code shall be
released to ATL only after Vital Images has been so notified of the release, and
solely for the purpose of enabling ATL to perform an Upgrade, Option, or
Maintenance for a Product which, in the reasonable judgment of ATL, is necessary
to repair or maintain or continue the production of Products currently being
produced by ATL or previously shipped by ATL to customers. The escrow agent
shall release escrowed source code to ATL only upon: (i) its receipt of written
instructions from Vital Images to do so, or (ii) its receipt of an order by a
court of competent jurisdiction directing the escrow agent to do so. ATL shall
retain any source code released from escrow only for the period of time which is
reasonably necessary for ATL to effect the foregoing Product repair or
maintenance. ATL shall permit access to the source code to only those of its
employees or consultants who have a need to know in order to effect such repair
or maintenance, and have been advised of the confidential nature of such
software, and the obligations to Vital Images hereunder to maintain such
confidence. At the conclusion of the repair or maintenance ATL shall return the
released software to escrow and destroy all other copies or forms of the source
code then in its possession. ATL shall also return to escrow, with a copy sent
to Vital Images, the source code as modified or
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altered by ATL, and ATL shall retain a license solely limited to making, selling
and using the modified or altered software in Products licensed to ATL under the
Sales Agreement. ATL shall retain no license to own or possess the source code
or the modified or altered source code in any form. Vital Images shall at all
times retain all proprietary and intellectual property rights in and to the
source code.
8. TERM AND TERMINATION.
8.1 The term of this Agreement shall extend through June 30, 2001. This
Agreement may be terminated earlier by one party upon its good faith
determination that the other party is not or cannot satisfy its commercial needs
in the area of 3DVV. A party making such determination shall notify the other of
such determination and the basis for such termination, whereafter the notified
party has the right to meet with the notifying party to discuss or rebut such
termination. A termination by the notifying party shall only become effective
after the notifying party has met with the other party to discuss such
termination. It is the intention of ATL to carefully scrutinize whether its
commercial needs are being satisfied by this Agreement in the event of any
change of control of Vital Images.
8.2 This Agreement may be earlier terminated as follows:
(a) In the event that one party is in material default or breach of any
provision of this Agreement, the other party shall have the right to terminate
this Agreement upon 30 days written notice to the party in default or breach,
provided that such party may avoid such termination by curing the condition of
breach or default within such 30 day notice period.
(b) In the event of the liquidation or windup of one of the parties
hereto, or the adjudication of bankruptcy, appointment of a receiver by a court
of competent jurisdiction or assignment for the benefit of creditors, or where a
levy of execution directly invoices all the substantial assets of a party, this
Agreement shall automatically terminate effective the date of said liquidation,
windup, adjudication, appointment, or assignment, except that, at the election
of the party not involved in such action, the licenses granted to that party
under this Agreement may be continued for the unexpired term of this Agreement.
(c) In the event the Sales Agreement is terminated for any reason, Vital
Images or ATL shall have the option to terminate this Agreement.
8.3 Upon termination of this Agreement pursuant to Section 8.1 or 8.2
hereof:
(a) Each party shall return to the providing party all copies of any
Confidential Information that was provided by one party to the other during the
course of this Agreement and is unrelated to Products being sold under the Sales
Agreement.
(b) ATL shall pay to Vital Images all sums owing under this Agreement
including, without limitation, all amounts owing under any Product Development
Plan for work completed by Vital Images prior to the date it received
notification of the termination.
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(c) All Product Development Plans shall automatically terminate.
(d) Each party shall continue to be bound by the provisions of this
Agreement, which, by their nature, extend beyond or cannot be fully performed
prior to the effective date of termination, including, without limitation, the
provisions of Sections 2.2(d), 7.2, 7.3, 7.4, 7.7 and 10 of this Agreement.
8.4 The termination of this Agreement pursuant to this Section shall be
without prejudice to any rights or remedies to which the terminating party is
entitled, if any, due to the material breach of one of the parties of any
warranty, representation or covenant given by the other party under this
Agreement.
8.5 Either party's obligation to exclusively collaborate with respect to
any Product pursuant to Sections 2.1 and 2.2 shall terminate if (i) ATL fails to
meet the minimum sales quantity in a given year which is necessary to maintain
its exclusive rights to such Product under the Sales Agreement or for any other
reason under the Sales Agreement ATL's exclusive rights to make, use and sell
such Product terminate, including those listed in Section 2.1(b) of the Sales
Agreement, or (ii) a party elects to terminate further negotiations with respect
to a Product Development Plan because the parties hereto cannot agree on the
terms and conditions of the Product Development Plan. Upon termination of the
exclusivity provisions of Sections 2.1 and 2.2 as to a given Product, each party
may itself, or may assist others engaged in medical ultrasound imaging, in
developing, making, selling or using its 3D medical imaging technology in a like
product, provided that no use is made of the technology or proprietary
information solely owned by the other party except as licensed pursuant to
Section 7.4 of this Agreement.
9. NOTICE.
9.1 Any notice required or permitted to be given by this Agreement
shall be given by prepaid, first class, mail or facsimile transmission addressed
to:
if to ATL: Jacques Souquet, Sr. Vice President
Advanced Technology Laboratories, Inc.
22100 Bothell Everett Highway SE
P.O. Box 3003
Bothell, WA 98041-3003
Facsimile number (206) 485-3680
if to Vital Images: Andrew M. Weiss, President
Vital Images, Inc.
2575 University Avenue
Saint Paul, MN 55114-1024
Facsimile number (612) 642-9018
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Such addresses and numbers may be altered by notices so given.
10. CONFIDENTIALITY.
10.1 All information communicated by one party to the other under this
Agreement ("Confidential Information") shall be received in confidence, and
shall be used only for the purposes of this Agreement. No Confidential
Information shall be disclosed by the recipient, its agents, or employees
without the prior written consent of the disclosing party except as permitted
pursuant to the terms of this Agreement. Recipient shall take all reasonable
precautions, but not less than those used to protect its own confidential
information, to prevent the disclosure of Confidential Information to third
parties, except as may be required by reason of legal or regulatory requirements
beyond the reasonable control of the recipient. Only those employees or agents
of the recipient with a reasonable need to know may have access to the
Confidential Information provided by the disclosing party.
Information shall not be deemed to be Confidential Information if it:
(a) is in the public domain at the time of disclosure;
(b) becomes part of the public domain after disclosure in a manner not
involving breach of this Agreement by the recipient;
(c) is in the possession of the recipient at the time of disclosure as
shown by its written records;
(d) is lawfully disclosed to the recipient by a third party, free of any
obligation of confidentiality;
(e) is independently developed by the recipient's employees or agents who
had no contact with or access to the Confidential Information;
(f) is communicated by the disclosing party to an unaffiliated third party
free of any obligation of confidentiality; or,
(g) is disclosed in response to a valid order by a court or other
governmental body, is otherwise required by law, or is necessary to establish
the rights of either party under this Agreement.
11. ASSIGNMENT.
11.1 Neither party shall assign its rights and/or obligations under
this Agreement or any interest therein to any third party without the prior
written consent of the other party to this Agreement except that Vital Images
shall have the right to assign the rights and/or obligations under this
Agreement to any third party who purchases substantially all of the business
assets of
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Vital Images or who succeeds to the business of Vital Images by reason of a
merger or consolidation. Assignments to a wholly owned or commonly owned
subsidiary company may be made if the other party is so informed and receives
written notice of the assignee's consent to be bound by all of the rights and
obligations of this Agreement, and of the assignor's agreement to guarantee such
performance by the assignee. This Agreement shall be binding upon and inure to
the benefit of any successor to each party's business in whole or in part to
which this Agreement relates.
12. WARRANTIES.
12.1 Each party covenants to and agrees with the other that:
(a) Authority to Conduct Business. It is duly organized and in good
-----------------------------
standing under the laws of the jurisdiction in which it is incorporated and has
all requisite corporate power and authority and the permits, consents, and
qualifications necessary to operate its business as it is currently being
conducted.
(b) Authority to Perform Agreement. The execution, delivery and
------------------------------
performance of this Agreement has been duly authorized by all necessary
corporate action, and does not constitute a breach by the warranting party of
its organizational documents or of any contract or agreement to which the
warranting party is a party or by which the warranting party or its assets are
bound.
(c) Exchange of Information. It shall promptly furnish to the other
-----------------------
party a complete and correct copy of any notice, report or other communication
that it receives from the FDA or from any other governmental agency concerning
the Products.
(d) Impairment of Obligations. It shall not enter into any agreement,
-------------------------
the execution or performance of which would violate or cause a breach of its
obligations under this Agreement.
(e) Ownership of Intellectual Property. It is the owner of the entire
----------------------------------
right, title and interest in any technology, know-how and/or proprietary
information provided or licensed to the other hereunder, has the sole right to
grant licenses to use such technology, know-how and proprietary information, and
has not previously granted any rights to such technology, know-how or
proprietary information that would interfere with any rights granted to the
other party under this Agreement.
13. PUBLICITY.
13.1 Neither party shall originate any publicity, news release or
public announcement, written or oral, whether to the public or press,
stockholders or otherwise, relating to this Agreement, to any amendment hereto
or performances hereunder save only such announcements as are mutually agreed
upon, which agreement shall not be unreasonably withheld, or in the opinion of
counsel for the party making such announcement are required by law to be made.
If a party decides to make an announcement required by law under this Agreement,
it will give the
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other party three (3) days' advance written notice of the text of the
announcement so that the other party will have an opportunity to comment upon
the announcement.
14. CHOICE OF LAW.
14.1 This Agreement shall be construed and administered in accordance
with the laws of the State of Washington.
15. NO WAIVER; PRESERVATION OF INTENT.
15.1 Failure to enforce any provision in this Agreement shall not
constitute a waiver of a party's rights thereafter to enforce the provision, or
any other provision of this Agreement. In the event any provision hereof is
deemed null and void or unenforceable, the remaining provisions hereof shall be
deemed severable therefrom and shall remain in full force and effect.
16. AMENDMENT.
16.1 This Agreement shall not be varied or amended other than by a
written instrument signed by both parties hereto.
17. RELATIONSHIP OF THE PARTIES.
17.1 This Agreement is not intended to be, nor shall it be construed,
by implication or otherwise, as an agreement to establish a partnership (limited
or otherwise), a corporation or other formal business organization. No party can
be bound by another party acting as its agent hereunder. Each party acts as an
independent contractor subject only to the terms and conditions stated herein.
18. FORCE MAJEURE.
18.1 No party shall be liable to the other party for any failure to
perform any obligation under this Agreement where such failure is due to causes
beyond the reasonable control of the party. Such causes include, but are not
limited to acts of war, government export controls, other governmental acts,
industrial dispute, lock-out, accident, fire, explosion, transport delays, acts
of a third party, or loss or damage to any equipment. Each party shall use its
best efforts to comply with its respective obligations under this Agreement
despite the intervention or occurrence of any such cause, and to resume
compliance with those obligations as soon as any such cause ceases to affect the
performance of its obligations under this Agreement.
19. NO FRANCHISE.
19.1 The parties agree that this Agreement shall not constitute a
franchise agreement under Washington or Minnesota law. If the parties
relationship is deemed to be a franchise by a court of law or other judicial
body, the parties hereto expressly agree to waive all rights and
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remedies which either of them may have due to any status as a franchisor or
franchisee or pursuant to the application of any franchise laws, rules or
regulations.
20. INTEGRATION.
20.1 This Agreement, together with the Sales Agreement, constitutes
the entire agreement between the parties, and all prior negotiations,
representations, agreements, and understandings are merged into, extinguished
by, and completely expressed by it. This Agreement shall not be varied or
amended other than by a written instrument executed by the parties hereto.
21. COUNTERPARTS EFFECTIVE.
21.1 This Agreement may be executed in counterparts, each of which
shall be effective as an original copy of this Agreement. Execution may be
effected by facsimile by mutual agreement of the parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year last written below.
VITAL IMAGES, INC. ATL UlTRASOUND, INC.
By /s/ Andrew M. Weiss By /s/ Jacques Souquet
--------------------- --------------------
Date: 8/14/96 Date: 8/14/96
------------------ -----------------
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Exhibit 3.2- Contents of Product Development Plans
I. Product Development Description, including
A. User Features
B. Clinical Applications
C. Systems Integration Characteristics
D. User Interface Requirements
E. Product Functions
II. Development Responsibilities and Program Coordination Process
A. ATL & Vital Images Responsibilities
B. Third Party Responsibilities
III. Product Development Project Plan and Timing
A. Development Calendar
B. Prototype Definitions & System Configurations
C. Clinical Sites
IV. Performance Requirements
V. Technical Specifications;
VI. Product Cost Targets
VII. Product Development Cost Projections, including
A. Vital Images Time, Material & Cost Forecast
B. ATL Time, Material & Cost Forecast
IX. Regulatory Strategy
X. Quality Plan
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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 18, 1997
