<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-
6(E)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Vital Images, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
<PAGE>
VITAL IMAGES, INC.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
(612) 915-8000
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 13, 1998
----------------
TO THE SHAREHOLDERS OF VITAL IMAGES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Vital
Images, Inc., a Minnesota corporation (the "Company"), will be held on
Wednesday, May 13, 1998, at 3:30 p.m. (Minneapolis time), at the Minneapolis
Marriott City Center Hotel, 30 South Seventh Street, Minneapolis, Minnesota,
for the following purposes:
1. To elect seven directors of the Company for the coming year.
2. To consider and act upon a proposal to amend the 1997 Stock Option and
Incentive Plan to increase the number of shares reserved for issuances
thereunder.
3. To consider and act upon a proposal to amend the 1997 Director Stock
Option Plan to increase the number of shares reserved for issuance
thereunder.
4. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
accountants for the year ending December 31, 1998.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only holders of record of the Company's common stock at the close of business
on March 27, 1998 are entitled to notice of and to vote at the Annual Meeting
or any adjournment thereof. In the event there are not sufficient votes for a
quorum or to approve or ratify any of the foregoing proposals at the time of
the Annual Meeting, the Annual Meeting may be adjourned in order to permit
further solicitation of proxies by the Company.
Each of you is invited to attend the Annual Meeting in person if possible.
Whether or not you plan to attend in person, please mark, date and sign the
enclosed proxy, and mail it promptly. A return envelope is enclosed for your
convenience.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gregory S. Furness
Gregory S. Furness, Secretary
April 8, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,
PLEASE SIGN THE PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE>
VITAL IMAGES, INC.
3100 West Lake Street, Suite 100
Minneapolis, Minnesota 55416
(612) 915-8000
----------------
PROXY STATEMENT
----------------
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Vital Images, Inc., a Minnesota corporation ("Vital Images" or the
"Company"), for use at the Annual Meeting of Shareholders (the "Annual
Meeting") to be held at the Minneapolis Marriott City Center Hotel, 30 South
Seventh Street, Minneapolis, Minnesota, on Wednesday, May 13, 1998, at 3:30
p.m. (Minneapolis time), and any adjournment thereof. This Proxy Statement and
the accompanying form of proxy are being mailed to shareholders on or about
April 8, 1998.
The expense of the solicitation of proxies for the Annual Meeting, including
the cost of mailing, has been or will be borne by the Company. Arrangements
will be made with brokerage houses and other custodian nominees and
fiduciaries to send proxies and proxy materials to their principals, and the
Company will reimburse them for their expense in so doing. In addition to
solicitation by mail, proxies may be solicited by telephone, facsimile or
personally.
VOTING AND REVOCATION OF PROXY
Only holders of record of the Company's common stock at the close of
business on March 27, 1998, the record date for the Annual Meeting, are
entitled to notice of and to vote at the Annual Meeting. On the record date,
4,804,562 shares of the Company's common stock were outstanding. Each share of
common stock entitles the holder thereof to one vote upon each matter to be
presented at the Annual Meeting.
Each proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated, the shares
will be voted (i) FOR the election of the nominees for the Board of Directors
named in this Proxy Statement; (ii) FOR the approval of an amendment to the
1997 Stock Option and Incentive Plan to increase the number of shares reserved
for issuance thereunder; (iii) FOR the approval of an amendment to the 1997
Director Stock Option Plan to increase the number of shares reserved for
issuance thereunder; and (iv) FOR the ratification of the appointment of
Coopers & Lybrand L.L.P. as independent accountants for the year ending
December 31, 1998. While the Board of Directors knows of no other matters to
be presented at the Annual Meeting or any adjournment thereof, all proxies
returned to the Company will be voted on any such matter in accordance with
the judgment of the proxy holders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) giving
written notice of such revocation to the Secretary of the Company, (b) giving
another written proxy bearing a later date, or (c) attending the Annual
Meeting and voting in person (although attendance at the Annual Meeting will
not in and of itself constitute a revocation of a proxy).
1
<PAGE>
A quorum, consisting of a majority of the shares of Common Stock entitled to
vote at the Annual Meeting, must be present in person or by proxy before
action may be taken at the Annual Meeting. In general, the shareholders of the
Company may take action by the affirmative vote of the holders of the greater
of (i) a majority of the voting power of the shares present and entitled to
vote on a particular item of business, or (ii) a majority of the voting power
of the minimum number of shares entitled to vote that would constitute a
quorum. If an executed proxy is returned and the shareholder has abstained
from voting on any matter, the shares represented by such proxy will be
considered present at the meeting for purposes of determining a quorum and for
purposes of calculating the vote, but will not be considered to have been
voted in favor of such matter. If an executed proxy is returned by a broker
holding shares in "street name," which indicates that the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
such shares will be considered present at the meeting for purposes of
determining a quorum, but will not be considered to be represented at the
meeting for purposes of calculating the vote with respect to such matter.
INFORMATION CONCERNING THE COMPANY
On October 28, 1996, the Board of Directors of Bio-Vascular, Inc. ("Bio-
Vascular"), the former parent company of Vital Images, approved a plan to spin
off and establish Vital Images as an independent, publicly-owned company. On
May 12, 1997 (the "Distribution Date"), Bio-Vascular distributed all of the
shares of common stock of Vital Images to the shareholders of Bio-Vascular
(the "Distribution"), and on that date, Vital Images began operating as an
independent public company. All Bio-Vascular shareholders of record as of May
5, 1997 received one share of common stock of Vital Images for each two shares
of Bio-Vascular stock held on that date, and cash in lieu of fractional
shares.
Pursuant to an Employee Benefits Agreement between Vital Images and Bio-
Vascular, Vital Images and Bio-Vascular agreed to adjust each unexercised
option to purchase Bio-Vascular common stock outstanding as of the record date
for the Distribution ("Bio-Vascular Options") to reflect the Distribution (an
"Adjusted Bio-Vascular Option"), and each holder of a Bio-Vascular Option was
granted an option to purchase common stock of Vital Images 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, was determined
according to a formula provided in the Employee Benefits Agreement that was
based on the relative fair market trading values of Bio-Vascular common stock
and the Company's common stock during the first five trading days following
the date of the Distribution. Pursuant to the formula set forth in the
Employee Benefits Agreement, these adjustments were 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
would equal the pre-Distribution intrinsic value of the Bio-Vascular Option
with respect to which the adjustment and grant were made. In order to ensure
that each Vital Images Option was granted without any additional benefit not
provided by the corresponding Bio-Vascular Option, Vital Images Options were
granted under the terms of a corresponding "mirror" plan or pursuant to an
identical non-plan award agreement. While Bio-Vascular's option plans
generally restrict an optionees' right to exercise an option following
termination of employment, the terms of each option and non-plan award
agreement were 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 either Bio-Vascular or Vital Images, as the case
may be, following the Distribution. In connection with the Distribution, Vital
Images granted 608,534 Vital Images Options.
2
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL 1)
The business and affairs of the Company are managed under the direction of
its Board of Directors. Directors of the Company are elected annually to serve
until the next annual meeting of shareholders or until his or her successor is
elected. Shareholders will be asked at the Annual Meeting to elect seven
directors. The Board has nominated the seven individuals named below to serve
as directors of the Company. Unless authority is withheld, all proxies
received in response to this solicitation will be voted FOR the election of
the nominees named below. Except for Mr. James B. Hickey, Jr., who has been
nominated to serve on the Board of Directors for a term commencing upon his
election at the Annual Meeting, each of the nominees named below is now a
director of the Company and has served continuously as a director since the
month and year indicated. On the effective date of the Distribution, each of
the present nominees, with the exception of Dr. Vannier and Mr. Hickey, was
elected to the Board of Directors by Bio-Vascular as the Company's sole
shareholder. All nominees have indicated a willingness to serve if elected. If
any nominee becomes unable to serve prior to the Annual Meeting, the proxies
received in response to this solicitation will be voted for a replacement
nominee selected in accordance with the best judgment of the proxy holders
named therein.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY AGE DIRECTOR SINCE
---- -------------------------- --- --------------
<S> <C> <C> <C>
Douglas M. Pihl Chairman of the Board, President, 58 May 1997
Chief Executive Officer and Director
Vincent J. Argiro, Ph.D. Executive Vice President, Chief 42 May 1997(1)
Technology Officer and Director
James B. Hickey, Jr. Nominee 44 Not applicable
Richard W. Perkins Director 67 May 1997(1)
Edward E. Strickland Director 71 May 1997(1)
Michael W. Vannier, M.D. Director 49 December 1997
Sven A. Wehrwein Director 47 May 1997
</TABLE>
- --------
(1) Messrs. Perkins and Strickland were also directors of the Company prior to
the Distribution Date, and Dr. Argiro was previously Chairman of the Board
from September 1988 to May 1994.
SHAREHOLDER APPROVAL
The affirmative vote of a plurality of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy,
assuming a quorum is present, is required for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AS SET FORTH IN PROPOSAL
1.
3
<PAGE>
INFORMATION CONCERNING DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
DIRECTORS AND NOMINEES
The following discussion sets forth certain information concerning the
individuals nominated by the Board of Directors to serve as directors and
nominees of the Company.
Douglas M. Pihl has been a director of the Company since May 1997, its
Chairman of the Board since December 1997, and its Chief Executive Officer
since February 1998. Since August 1996, Mr. Pihl has been a private investor.
From May 1992 to August 1996, Mr. Pihl was President, Chief Executive Officer,
and a Director 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. Mr. Pihl 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 which then developed, manufactured and
marketed computer peripheral products. In addition to the Company, Mr. Pihl
serves as a director of Destron Fearing Corporation and Astrocom Corporation,
both of which are publicly-held companies, and as a director of RocketChips,
Inc. and LSC Corporation, which are private companies.
Vincent J. Argiro, Ph.D. was appointed Executive Vice President and Chief
Technology Officer of Vital Images in October 1995. From May 1994 to May 1997,
Dr. Argiro served as a Vice President of Bio-Vascular, the former parent
company of Vital Images. Dr. Argiro also served as a director of Bio-Vascular
from May 1994 until March 1996. Following the acquisition of the Company by
Bio-Vascular in May 1994, Dr. Argiro served as President of the Company until
October 1995. Dr. Argiro, the founder of the Company, served as Chairman of
the Board of the Company from September 1988 until May 1994. From 1988 to 1990
and from September 1991 to June 1992, Dr. Argiro also served as President of
the Company. 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.
James B. Hickey, Jr., a nominee for election to the Company's Board of
Directors, served as President and Chief Executive Officer of Aequitron
Medical, Inc., a publicly traded manufacturer of respiratory care and adaptive
mobility equipment, from 1993 to 1997. Previously, Mr. Hickey spent 15 years
with Baxter Healthcare/American Hospital Supply Corporation, where he was
President of the Respiratory Anesthesia Systems Division from 1989 to 1993,
and before that, was President of the Hospitex Division for three years.
Currently, Mr. Hickey serves as a director of Allied Healthcare Products, Inc.
and Pulmonetic Systems, Inc.
Richard W. Perkins has been a director of the Company since May 1997. 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 the following companies:
Bio-Vascular, Inc., LifeCore Biomedical, Inc., Children's Broadcasting
Corporation, CNS, Inc., Nortech Systems, Inc., Eagle Pacific Industries, Inc.,
Quantech Ltd., and Harmony Holdings, Inc.
4
<PAGE>
Edward E. Strickland has been a director of the Company since May 1997. Mr.
Strickland has been an independent financial consultant since 1986. Mr.
Strickland serves on the Board of Directors of Bio-Vascular, Inc.,
Communications Systems, Inc., Hector Communications, Inc., AVECOR
Cardiovascular Inc., Quantech, Ltd. and as Chairman of the Board of Reuter
Manufacturing, Inc. Mr. Strickland also served as a director of Vital Images
prior to the May 1994 merger with Bio-Vascular.
Michael W. Vannier, M.D. has been a director of the Company since December
1997. Dr. Vannier is currently a professor and the head of the Department of
Radiology in the College of Medicine at the University of Iowa. From 1982 to
1997, Dr. Vannier was a staff radiologist at Barnes Jewish Hospital and St.
Louis Children's Hospital in St. Louis Missouri. Dr. Vannier was also the
Georgia Eminent Scholar in Medical Imaging at the Emory University School of
Medicine in Atlanta, Georgia from 1994 to 1996, and served as Vice-Chairman
for Research at the Mallinckrodt Institute of Radiology from 1992 to 1994. Dr.
Vannier also served as a Professor of Radiology at the Mallinckrodt Institute
of Radiology from 1989 to 1997, as an Assistant Professor of Radiology and
Surgery at the Washington University School of Medicine in St. Louis, Missouri
from 1983 to 1997, and as an Affiliate Professor of System Science and
Mathematics at the Washington University College of Engineering in St. Louis,
Missouri from 1984 to 1997.
Sven A. Wehrwein has been a director of the Company since May 1997. Since
November 1997, Mr. Wehrwein has been Chief Financial Officer of the Center for
Diagnostic Imaging, a radiology services provider. He 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 January 1995 to May 1995 and from September 1996 to October 1997,
Mr. Wehrwein was an independent financial consultant. 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 is a Certified Public Accountant.
BOARD COMMITTEES AND ACTIONS
During 1997 following the Distribution, the Board of Directors met four
times and took action by written consent two times. The Board of Directors has
two standing committees, a Compensation Committee and an Audit Committee,
which met three times and once, respectively, during 1997. With the exception
of Richard W. Perkins, who was absent from one meeting of the Board of
Directors and one Compensation Committee meeting, each director attended at
least 75% of the total number of meetings of the Board of Directors and of
committees on which the director served during 1997.
The Compensation Committee establishes the salaries, compensation and
benefits of executive officers and senior management of the Company and
administers the Company's 1997 Director Stock Option Plan and 1997 Stock
Option and Incentive Plan. The current members of the Compensation Committee
are Michael W. Vannier, M.D. and Sven A. Wehrwein.
The Audit Committee reviews the internal and external financial reporting of
the Company and reviews the scope of the independent audit. The current
members of the Audit Committee are Edward E. Strickland and Sven A. Wehrwein.
The Board of Directors does not have a nominating committee.
5
<PAGE>
DIRECTOR COMPENSATION
The non-employee directors of the Company currently receive a fee of $500
for each meeting they attend. In addition, each non-employee director who is a
member of a committee of the Board of Directors receives $500 for each
committee meeting attended. Non-employee directors of the Company also receive
automatic grants of stock options in connection with their service as
directors under the 1997 Director Stock Option Plan (the "Director Plan"). On
February 24, 1998, the Board of Directors voted to increase the number of
shares which may be issued under the Director Plan from 75,000 shares to
105,000 shares. See "Information Concerning Directors, Nominees and Executive
Officers--Director Stock Option Plan" and "Approval of Amendment to 1997
Director Stock Option Plan to Increase Number of Shares Reserved for Issuance
Thereunder (Proposal 3)."
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive officers
of the Company who are not directors.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY AGE OFFICER SINCE
---- -------------------------- --- -------------
<S> <C> <C> <C>
Gregory S. Furness Vice President--Finance, Chief Financial Officer, 44 February 1997
Treasurer and Secretary
Jay D. Miller Vice President--Marketing and Sales 38 February 1997
</TABLE>
Gregory S. 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 was named Vice President--Marketing and Sales of Vital Images
in February 1998. Mr. Miller also served as the Company's Vice President--
Marketing and Business Development from February 1997 to February 1998. 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. Prior to 1989, Mr.
Miller was employed by Siemens Medical Systems in technical marketing.
6
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by or awarded to (i) the Company's Chief Executive Officer for 1997,
Mr. Andrew M. Weiss, and (ii) the Company's four other most highly compensated
executive officers whose annual compensation was $100,000 or more for the year
ended December 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(2) COMPENSATION
---------------------- ------------
AWARDS
-------------
SHARES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR(1) SALARY BONUS(3) OPTIONS(#)(4) COMPENSATION
- ------------------ ------- ----------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Andrew M. Weiss 1997 $ 150,000 $ 62,983 84,468 --
Former President and 1996 150,000 50,000 (4) $88,510(6)
Chief Executive Officer (5) 1995 2,308 50,000 -- --
Vincent J. Argiro, Ph.D. 1997 $ 113,750 $ 52,863 64,500 $25,380(7)
Executive Vice President 1996 105,000 -- (4) --
and Chief Technology Officer 1995 79,800 20,000 -- --
David A. Davis 1997 $ 100,000 $ 37,600 40,000 $88,134(9)
Former Vice President--Sales(8) 1996 100,000 50,000 (4) 38,196(6)
1995 -- -- -- --
Gregory S. Furness 1997 $ 110,000 $ 51,687 75,000 --
Vice President-- Finance, Chief Financial 1996 -- -- -- --
Officer, Treasurer and Secretary(10) 1995 -- -- -- --
Jay D. Miller 1997 $ 105,000 $ 60,650 50,000 $23,475(6)
Vice President--Marketing and 1996 -- -- -- --
Sales(11) 1995 -- -- -- --
</TABLE>
- --------
(1) On July 17, 1997 the Board of Directors voted to change the Company's
fiscal year end from October 31 to December 31, effective January 1,
1997. The compensation information set forth in the Summary Compensation
Table reflects compensation paid for the years ended October 31, 1995 and
1996 and the year ended December 31, 1997. During the two months ended
December 31, 1996, Messrs. Weiss, Argiro and Davis received compensation
of $33,333, $17,500 and $28,000, respectively.
(2) During the fiscal years ended October 31, 1995 and 1996, all compensation
to the Named Executive Officers was paid indirectly by Bio-Vascular, the
former parent company of Vital Images. During fiscal 1997, compensation
was paid indirectly by Bio-Vascular prior to the Distribution and
directly by the Company following the Distribution. For further
information regarding the Distribution, see "Information Concerning the
Company."
(3) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
Bonuses for 1997 for Messrs. Argiro, Furness, Miller and Weiss were
accrued in 1997 and paid in March 1998, except for a $10,000 signing
bonus received by Mr. Miller during 1997.
(4) Certain of the Named Executive Officers were granted stock options to
purchase shares of Bio-Vascular common stock in connection with their
employment by Bio-Vascular. As a result of the Distribution, such Named
Executive Officers (i) received Adjusted Bio-Vascular Options, which
after the Distribution were options to purchase the same number of shares
of Bio-Vascular common stock at adjusted exercise prices, and (ii) were
granted Vital Images Options to purchase shares of Vital Images' common
stock equal to one-half of the number of shares of Bio-Vascular common
stock subject to such Bio-Vascular Options. Thus, after the Distribution,
each holder of a Bio-Vascular Option held
7
<PAGE>
separate options to purchase shares of Bio-Vascular common stock and shares
of Vital Images' common stock. Each of the adjusted options is subject to
the same terms and conditions that applies to the corresponding Bio-
Vascular Options prior to the Distribution, except that vesting and
expiration is based on service with either Vital Images or Bio-Vascular.
All such options were granted on May 12, 1997. Specifically, Andrew M.
Weiss, Vincent J. Argiro and David A. Davis received grants of Adjusted
Bio-Vascular Options for the purchase of 231,064, 21,000 and 20,000 shares
of Bio-Vascular common stock, respectively. In connection with the
Distribution, Messrs. Weiss, Argiro and Davis also received Vital Images
Options for the purchase of 115,532, 10,500 and 10,000 shares of the
Company's common stock, respectively. Such options granted in connection
with the Distribution are not included in the Summary Compensation Table.
For further information, see "Information Concerning the Company."
(5) Mr. Weiss' employment with the Company commenced in October 1995. On
January 31, 1998, Mr. Weiss resigned as the Company's President and Chief
Executive Officer.
(6) Represents payments made for relocation expenses.
(7) Compensation related to the release of restricted stock to Dr. Argiro.
(8) Mr. Davis served as the Company's Vice President--Sales from January 1996
to October 1997.
(9) Represents payment of $8,134 for accrued vacation, a $60,000 severance
payment and $20,000 paid to Mr. Davis for relocation expenses.
(10) Mr. Furness has served as the Company's Vice President--Finance, Chief
Financial Officer, Treasurer and Secretary since February 1997.
(11) Mr. Miller has served as the Company's Vice President--Marketing and
Sales since February 1998 and served as Vice President--Marketing and
Business Development from February 1997 to February 1998.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an
additional discretionary contribution out of profits at the end of any year.
The Company did not make any discretionary contributions for the year ended
December 31, 1997.
STOCK OPTION AND INCENTIVE PLAN
The Vital Images, Inc. 1997 Stock Option and Incentive Plan (the "1997
Plan") permits the granting of awards to employees, consultants and other
service providers in the form of incentive stock options, non-qualified stock
options, grants of restricted stock, performance units, and stock bonuses. At
February 27, 1998, options for an aggregate of 564,518 shares were outstanding
under the 1997 Plan, and 110,482 shares were available for grant. None of the
outstanding stock options are presently exercisable. On February 24, 1998, the
Board of Directors voted to increase the number of shares which may be issued
pursuant to awards under the 1997 Plan from 675,000 shares to 925,000 shares.
The shareholders are being asked to approve the amendment to the 1997 Plan at
the Annual Meeting. Awards may be granted under the 1997 Plan through March
19, 2007. The 1997 Plan may be terminated earlier by the Board of Directors in
its sole discretion. See "Approval of Amendment to 1997 Stock Option and
Incentive Plan to Increase the Number of Shares Reserved for Issuance
Thereunder (Proposal 2)."
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. The 1997 Plan gives broad powers to the Committee to administer and
interpret the plan, including the authority to select the individuals to be
granted awards and to prescribe the particular form and conditions of each
award granted. Awards are granted on the basis of various factors, including
the individual's capacity for contributing to the successful performance of
the Company, the nature of the operations for which the individual is
responsible, and the period for which the individual has served or will have
served the Company at the vesting of the award.
8
<PAGE>
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the Company's 1997 fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (3)
---------------------------------------------------------- ----------------------
PERCENT OF TOTAL MARKET
OPTIONS OPTIONS GRANTED EXERCISE PRICE AT
GRANTED TO EMPLOYEES IN PRICE GRANT DATE EXPIRATION
NAME (#)(1) FISCAL YEAR(2) ($/SH) ($/SH) DATE 5% ($) 10% ($)
---- --------- ---------------- -------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew M. Weiss 84,468(4) 20.74% $2.375 $2.375 5/20/05 $ 95,783 $ 229,417
Vincent J. Argiro, Ph.D. 64,500 15.84% 2.375 2.375 5/20/05 73,140 175,184
David A. Davis 40,000(5) 9.82% 2.375 2.375 5/20/05 45,358 108,641
Gregory S. Furness 75,000 18.42% 2.375 2.375 5/20/05 85,047 203,702
Jay D. Miller 50,000 12.28% 2.375 2.375 5/20/05 56,698 135,801
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) All options were granted on May 20, 1997, and will vest and become
exercisable as to 28% of the shares on May 20, 1998, and as to an
additional 2% per month thereafter until fully vested and exercisable.
(2) Does not give effect to the grant of Vital Images Options to purchase an
aggregate of 608,534 shares of the Company's common stock which were
granted to holders of Bio-Vascular Options in connection with the
Distribution. See "Information Concerning the Company" and the footnotes
to the Summary Compensation Table.
(3) Represents the potential realizable value of each grant of options
assuming that the market price of the underlying common stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(4) Does not include Vital Images Options to purchase an aggregate of 100,000
and 15,532 shares of the Company's common stock at exercise prices of
$4.64 and $5.81 per share, respectively, which were granted to Mr. Weiss
in connection with the Distribution as an adjustment to Bio-Vascular
Options held by Mr. Weiss on the date of the Distribution. See
"Information Concerning the Company" and the footnotes to the Summary
Compensation Table.
(5) Does not include Vital Images Options to purchase an aggregate of 10,000
shares of the Company's common stock, 2,500 of which were vested at the
time of Mr. Davis' termination, at an exercise price of $5.20 per share
which were granted to Mr. Davis in connection with the Distribution as an
adjustment to Bio-Vascular Options held by Mr. Davis on the date of the
Distribution. See "Information Concerning the Company" and the footnotes
to the Summary Compensation Table.
The following table sets forth certain information regarding the number and
value of unexercised stock options held by the Named Executive Officers as of
the end of the Company's 1997 fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END (#) AT YEAR-END ($) (1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Andrew M. Weiss -- -- 107,766 / 92,234 -- / --
Vincent J. Argiro, Ph.D. -- -- 10,500 / 64,500 -- / --
David A. Davis -- -- 2,500 / -- -- / --
Gregory S. Furness -- -- -- / 75,000 -- / --
Jay D. Miller -- -- -- / 50,000 -- / --
</TABLE>
- --------
(1) Based on the difference between the December 31, 1997 closing price of
$1.3125 per share as reported on the OTC Electronic Bulletin Board and the
exercise price of the options.
9
<PAGE>
DIRECTOR STOCK OPTION PLAN
The Vital Images, Inc. 1997 Director Stock Option Plan (the "Director Plan")
was adopted by the Board of Directors on March 19, 1997 and approved by and
adopted by Bio-Vascular as the Company's sole shareholder on May 1, 1997, and
became effective on May 12, 1997. On February 24, 1998, the Board of Directors
voted to increase the number of shares reserved for issuance under the
Director Plan from 75,000 shares to 105,000 shares. The shareholders are being
asked to approve the amendment to the Director Plan at the Annual Meeting. The
Director Plan provides non-employee directors of the Company (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 was automatically granted an initial
option to purchase 15,000 shares on the date of the Distribution, and Eligible
Directors appointed or elected after the Distribution 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 the Company's common stock. The Director Plan will be administered
by the 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. Unless terminated by earlier action of the Board of Directors,
the Director Plan will terminate on March 19, 2007, and no option can be
granted under the Director Plan after such date. However, options outstanding
upon termination of the Director Plan may continue to be exercised in
accordance with their terms. For additional information concerning the
Director Plan, see "Approval of Amendment to 1997 Director Stock Option Plan
to Increase Number of Shares Reserved for Issuance Thereunder. (Proposal 3)."
EMPLOYEE STOCK PURCHASE PLAN
The Vital Images, Inc. 1997 Employee Stock Purchase Plan (the "Stock
Purchase Plan") was adopted by the Board of Directors on March 19, 1997 and by
Bio-Vascular as the sole shareholder of the Company on May 1, 1997. The Stock
Purchase Plan permits eligible employees to make voluntary contributions
through payroll deductions to be used to purchase common stock from the
Company. The Stock Purchase Plan consists of periodic offerings and the first
such offering began on July 1, 1997. Each offering under the Stock Purchase
Plan is 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 up to 500 shares under the Stock Purchase Plan
during each Offering Period. 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 the Company on the day that an Offering Period commences under the
Stock Purchase Plan, or (b) 85% of the closing price of the Company's common
stock on the day that such Offering Period terminates. With certain
exceptions, all employees of the Company 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, or by the Compensation Committee. Through December
31, 1997, 15,776 shares have been issued under the Stock Purchase Plan.
10
<PAGE>
OTHER STOCK OPTION PLANS
In connection with the issuance of Vital Images Options with respect to Bio-
Vascular Options in existence on the date of the Distribution, the Company
adopted the 1995 Stock Incentive Adjustment Plan, the Incentive Stock Option
Adjustment Plan and the 1992 Director's Option 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 was approved and adopted to provide that the Distribution will
not cause a termination of any employee of the Company for the purposes of
such plans, and that options held by employees of the Company following the
Distribution will remain exercisable following the Distribution, so long as
such employees remain employed by the Company or any subsidiary. Similar
modifications to the existing 1990 Management Incentive Stock Option Plan and
the 1992 Stock Option Plan were also adopted by the Company with respect to
Bio-Vascular employees. Awards of options under these plans, as well as
pursuant to certain non-plan award agreements, were made in connection with
the Distribution. It is intended that the 1995 Stock Incentive Adjustment
Plan, the Incentive Stock Option Adjustment Plan and the Director's Option
Adjustment Plan, as well as the 1992 Stock Option Plan and the 1990 Management
Incentive Stock Option Plan, will not be utilized to grant options to purchase
common stock of the Company other than in connection with the Distribution.
For additional information regarding the issuance of Vital Images Options in
connection with the Distribution, see "Information Concerning the Company."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1997 following the Distribution were made by a
Compensation Committee consisting of Richard W. Perkins, Douglas M. Pihl and
Sven A. Wehrwein, each of whom was a non-employee director of the Company
during 1997. For 1998, the members of the Compensation Committee are Michael
W. Vannier, M.D. and Sven A. Wehrwein, each of whom is also a non-employee
director of the Company. See "Report of the Compensation Committee." Messrs.
Argiro and Pihl, the only executive officers of the Company who currently
serve on the Board of Directors, will abstain from voting on compensation
matters affecting their compensation.
EMPLOYMENT ARRANGEMENTS
WEISS SEVERANCE AGREEMENT. Pursuant to a letter agreement dated February 13,
1998, the Company and Andrew M. Weiss agreed to terms regarding the
resignation of Mr. Weiss as President and Chief Executive Officer effective as
of January 31, 1998. In exchange for certain representations, promises and
releases, the Company agreed to pay Mr. Weiss a 1997 bonus in the amount of
$62,983 and to extend the exercise period for certain stock options. In
addition, and in accordance with the terms of Mr. Weiss' employment
arrangement, the Company made a lump-sum payment of $150,000 to Mr. Weiss,
equal to 12 months' base salary, and accelerated to January 31, 1998 the
vesting of 92,234 option shares issuable under existing option agreements.
PIHL EMPLOYMENT AGREEMENT. The Company has entered into an employment
agreement with Douglas M. Pihl effective February 1, 1998, which may be
terminated by either party on ten days' notice. Mr. Pihl's employment
agreement states that he will serve as the President and Chief Executive
Officer, and sets forth his duties, compensation, employee benefits and other
terms of employment.
11
<PAGE>
The agreement provides for an initial salary of $120,000, with salary
increases at the discretion of the Board of Directors. Mr. Pihl may also
receive bonuses in the sole discretion of the Board of Directors. The
agreement also provides for Mr. Pihl's participation in the Company's fringe
benefit plans and programs in which other senior executive officers of the
Company participate. In addition, the agreement includes standard
confidentiality provisions.
In connection with Mr. Pihl's employment with the Company, the Company has
granted to him a non-qualified stock option to purchase 300,000 shares of
common stock of the Company, which vests as follows: (1) 100,000 shares having
an exercise price of $1.125 per share vested on February 24, 1998; (2) an
additional 100,000 shares having an exercise price of $2.25 per share vest on
February 24, 1999; and (3) an additional 100,000 shares having an exercise
price of $4.50 per share vest on February 24, 2000. Mr. Pihl ceases vesting in
the option at such time as his service with the Company, as an employee or
consultant, terminates. However, Mr. Pihl will be entitled to exercise his
option, to the extent such option has vested prior to his termination of
service with the Company, until the option's expiration date of February 24,
2006.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of non-employee directors of the Company. The Committee is
responsible for assuring that compensation for executives is consistent with
the Company's compensation philosophy. The Committee also administers and
makes grants under the Company's 1997 Plan with respect to the Company's
executive officers. For 1997 following the Distribution, the Committee
consisted of Richard W. Perkins, Douglas M. Pihl and Sven A. Wehrwein. The
Company's Compensation Committee for 1998 consists of Michael W. Vannier, M.D.
and Sven A. Wehrwein. Prior to the Distribution, compensation decisions with
respect to the Company's executive officers were made by the Board of
Directors of Bio-Vascular.
The Company's executive compensation program is based on a pay-for-
performance philosophy. Under the Company's program, an executive's
compensation consists of three components: base salary, an annual incentive
(bonus) payment, and long-term incentives (stock options). Base salary is
determined by an assessment of the executive's sustained performance against
his or her individual job responsibilities, including the impact of such
performance on the business results of the Company. Payments under the
Company's annual incentive plan are tied to the level of achievement of annual
performance targets, including revenue, operating results and other
performance targets related to business functions under the executive's
direction. Annual performance targets are based upon the Company's annual
strategic plan as reviewed by the Board of Directors. An individual
executive's annual incentive opportunity is a percentage of his or her base
salary.
The Company's long-term incentives are in the form of stock options. The
objectives of these awards are to advance the longer term interests of the
Company and its shareholders, complement incentives tied to annual
performance, and align the interests of executives more closely with those of
shareholders. The Company also believes that the entrepreneurial character of
its executives makes the long-term incentives provided by its stock option
program especially significant in the motivation and retention of its
executives. The number of stock options awarded to an executive is based on
the executive's position and his or her performance in that position. The
executive's right to the stock options generally vests over a four-year period
and each option is exercisable, to the extent it has vested, over an eight-
year period following its grant.
12
<PAGE>
In February 1998, the entire Board of Directors approved a severance
agreement for Andrew M. Weiss, the Company's former President and Chief
Executive Officer, which included the payment of a bonus for 1997 in the
amount of $62,983 as well as the extension of the exercise period for certain
stock options. The severance arrangement also included a lump sum payment of
$150,000, which is equal to twelve months' base salary, and the acceleration
of the vesting of 92,234 option shares, as required by the terms of Mr.
Weiss's employment arrangement. The entire Board of Directors also approved a
compensation package for Douglas M. Pihl, the Company's current President and
Chief Executive Officer, which provides for an initial, annual base salary of
$120,000 with salary increases at the discretion of the Board of Directors.
Mr. Pihl will also be entitled to annual incentive payment similar to other
executive officers. In addition, Mr. Pihl was granted a stock option for
300,000 shares of the Company's common stock which vest in three separate
100,000 share installments on February 24, 1998, 1999, and 2000. The exercise
price of the option is $1.125 for the shares vesting on February 24, 1998,
$2.25 per share for shares vesting on February 24, 1999 and $4.50 per share
for shares vesting on February 24, 2000. The Compensation Committee believes
that the arrangements for Mr. Pihl are consistent with the philosophies and
objectives described above.
The Committee believes that the Company's executives are focused on the
attainment of a sustained high rate of growth and improving operating results
for the benefit of the Company and its shareholders, and that the Company's
compensation program, with its emphasis on performance-based and long-term
incentive compensation, serves to reinforce this focus.
By the Compensation Committee
Richard W. Perkins
Douglas M. Pihl
Sven A. Wehrwein
13
<PAGE>
PERFORMANCE GRAPH
Since May 14, 1997, the Company's common stock has been traded on the OTC
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. Prior to that date, the Company was a wholly-owned subsidiary of Bio-
Vascular and there was no public market for the Company's common stock. The
following graph shows changes during the period from May 14, 1997 (the date on
which the Company's common stock was first traded on the OTC Bulletin Board)
to December 31, 1997, in the value of $100 invested in: (1) the Company's
common stock; (2) the CRSP Total Return Index for The Nasdaq Stock Market
(US); and (3) Nasdaq Non-Financial Stocks. The values of each investment as of
the dates indicated are based on share prices plus any dividends paid in cash,
with the dividends reinvested on the date they were paid. The calculations
exclude trading commissions and taxes.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
5/14/97 6/30/97 9/30/97 12/31/97
------- ------- ------- --------
<S> <C> <C> <C> <C>
Vital Images, Inc............................. $100.00 $ 61.45 $ 67.47 $ 53.01
CRSP Total Return Index for Nasdaq Stock
Market (US).................................. $100.00 $108.28 $126.60 $130.10
Nasdaq Non-Financial Stocks................... $100.00 $107.87 $126.37 $114.51
</TABLE>
14
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of February 27, 1998, certain information
regarding the beneficial ownership of shares of common stock of the Company by
(i) each person or entity who is known by the Company to own more than 5% of
the Company's common stock, (ii) each director or nominee for director of the
Company, (iii) each Named Executive Officer and (iv) all directors, nominees
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(2)
- ------------------------------------ --------------------- --------------
<S> <C> <C>
Perkins Capital Management, Inc. 407,099(3) 8.47%
730 East Lake Street
Wayzata, MN 55391
OFFICERS AND DIRECTORS:
Douglas M. Pihl 115,500(4) 2.35%
Vincent J. Argiro, Ph.D. 268,910(5) 5.58%
James B. Hickey, Jr. -- --
Richard W. Perkins 90,875(6) 1.88%
Edward E. Strickland 116,000(7) 2.40%
Michael W. Vannier, M.D. 5,000(8) *
Sven A. Wehrwein 5,000(9) *
Andrew W. Weiss 200,000(10) 4.00%
Gregory S. Furness 15,000 *
David A. Davis -- --
Jay D. Miller -- --
All directors and executive officers as a
group (10 persons, including those named above) 816,285(11) 15.75%
</TABLE>
- --------
* Less than one percent.
(1) Each person has sole voting and sole dispositive power with respect to
all outstanding shares, except as noted.
(2) Based on 4,804,562 shares outstanding. Such number does not include
1,447,717 shares of common stock issuable upon exercise of stock options
and warrants outstanding at February 27, 1997. Each figure showing the
percentage of outstanding shares owned beneficially has been calculated
by treating as outstanding and owned the shares which could be purchased
by the indicated person(s) within 60 days upon the exercise of existing
stock options.
(3) Excludes shares beneficially owned by Mr. Perkins, a director of the
Company and the controlling shareholder of Perkins Capital Management,
Inc., a registered investment advisor ("PCM"). Of the 407,099 shares held
for the account of clients of PCM, for which beneficial ownership is
disclaimed by PCM, PCM has sole investment power with regard to all such
shares and sole voting power over 87,375 of such shares. Reflects
information as of December 31,1997, based on a Schedule 13G, dated
January 30, 1998, filed by PCM with the Securities and Exchange
Commission.
(4) Includes 105,000 shares that Mr. Pihl has the right to acquire within 60
days upon the exercise of stock options.
(5) Includes 10,500 shares that Dr. Argiro has the right to purchase within
60 days upon the exercise of stock options.
(6) 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 21,000 shares Mr. Perkins has the right to
purchase within 60 days upon the exercise of stock options. Excludes the
407,099 shares of stock owned by PCM. Mr. Perkins disclaims beneficial
ownership of the shares held by PCM.
15
<PAGE>
(7) Includes 15,000 shares held in Mr. Strickland's IRA, 1,050 shares held by
Mr. Strickland's spouse, 700 shares held in an IRA by Mr. Stricland's
spouse, and 500 shares held by a family limited partnership. Also
includes 31,000 shares that Mr. Strickland has the right to purchase
within 60 days upon the exercise of stock options.
(8) Includes 5,000 shares that Dr. Vannier has the right to acquire within 60
days upon the exercise of stock options.
(9) Includes 5,000 shares that Mr. Wehrwein has the right to acquire within
60 days upon the exercise of stock options.
(10) Includes 200,000 shares that Mr. Weiss has the right to acquire within 60
days upon the exercise of stock options.
(11) Includes shares which could be purchased within 60 days upon the exercise
of existing stock options as follows: Dr. Argiro, 10,500 shares; Mr.
Perkins, 21,000 shares; Mr. Pihl, 105,000 shares; Mr. Strickland, 31,000
shares; Dr. Vannier, 5,000 shares; Mr. Wehrwein, 5,000 shares; Mr. Weiss,
200,000 shares; and all directors and executive officers as a group,
377,500 shares.
COMPLIANCE WITH SECTION 16(A)
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors, executive officers, and any persons
holding more than 10% of the outstanding common stock of the Company to file
reports with the Securities and Exchange Commission concerning their initial
ownership of common stock and any subsequent changes in that ownership. The
Company's directors and officers first became subject to the obligation to
file such reports on May 12, 1997, in connection with the Distribution of all
of the outstanding shares of the Company's common stock to the shareholders of
Bio-Vascular. The Company believes that during 1997 the filing requirements
were satisfied, with the exception that Douglas M. Pihl failed to file, on a
timely basis, reports on Form 4 required by Section 16 of the Exchange Act
relating to the purchase of 5,000 shares on May 28, 1997 and 5,000 shares on
June 12, 1997. In making this disclosure, the Company has relied solely on
written representations of its directors, executive officers and beneficial
owners of more than 10% of common stock and copies of the reports that they
have filed with the Securities and Exchange Commission.
APPROVAL OF AMENDMENT TO 1997 STOCK OPTION
AND INCENTIVE PLAN TO INCREASE NUMBER OF SHARES
RESERVED FOR ISSUANCE THEREUNDER
(PROPOSAL 2)
The Vital Images, Inc. 1997 Stock Option and Incentive Plan ("1997 Plan")
was adopted by the Board of Directors on March 19, 1997 and approved by Bio-
Vascular, the sole shareholder of the Company, on May 1, 1997. An aggregate of
675,000 shares was reserved for issuance under the 1997 Plan at the time of
its adoption. Effective February 24, 1998, the Board of Directors voted to
increase the number of shares reserved for issuance under the 1997 Plan to
925,000 shares, subject to the approval of the Company's shareholders on or
before February 24, 1999. The shareholders are being asked to approve the
amendment to the 1997 Plan to increase the number of shares reserved for
issuance thereunder at Annual Meeting.
The 1997 Plan is intended to assist the Company in hiring and retaining
well-qualified employees, consultants, and other service providers by allowing
them to participate in the ownership and growth of the Company through the
grant of incentive and non-statutory stock options ("Options"), awards of
restricted stock, performance units, stock bonuses or any combination thereof.
Management believes that the granting of Options and other awards will serve
as partial consideration for and give well-qualified employees, consultants,
and other service providers an additional inducement to remain in the service
of the Company and provide them with an increased incentive to work for the
Company's success.
The principal features and effects of the 1997 Plan are discussed below.
16
<PAGE>
ADMINISTRATION
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors, which selects the employees, consultants, and other service
providers who will be granted Options and awards under the 1997 Plan. Subject
to the provisions of the 1997 Plan, the Compensation Committee also determines
the type, amount, size and terms of awards; the time when Options and awards
should be granted; whether any restrictions should be placed on shares
purchased pursuant to any Option or issued pursuant to any other award; and
all other determinations necessary or advisable for the administration of the
1997 Plan. The determinations by the Compensation Committee are final and
conclusive. The decisions of the Compensation Committee are not required to be
made on a uniform basis.
SHARES SUBJECT TO 1997 PLAN
The 1997 Plan, as amended, provides that the total number of shares of the
Company's common stock that may be purchased pursuant to the exercise of
Options and issued in connection with other awards shall not exceed 925,000
shares, subject to adjustment as provided in the 1997 Plan. The shares to be
issued upon the exercise of Options and awards granted under the 1997 Plan
will be currently authorized but unissued shares of common stock of the
Company. The number of shares of the Company's common stock available under
the 1997 Plan, the exercise price of an Option, or the value of an award, may
be adjusted by the Compensation Committee in its sole discretion upon any
stock dividend or split, recapitalization, reclassification, combination,
exchange of shares, or other similar corporate change, if the Compensation
Committee determines that such change necessarily or equitably requires such
an adjustment.
ELIGIBILITY
Employees of the Company and any of its "Affiliates" (as such term is
defined in the 1997 Plan) are eligible for selection to receive Options
qualified as incentive stock options ("ISOs") under Section 422 of the Code.
Employees, consultants and other service providers of the Company or its
Affiliates may be granted non-qualified Options ("NQOs"), restricted stock
awards, performance units or stock bonuses.
The additional shares which are not currently allocated, together with
shares previously authorized and available for issuance under the Plan, may be
allocated to such employees as the Compensation Committee may determine. No
Options or shares under the 1997 Plan will be allocated to directors who are
not employees of the Company.
TERMS OF OPTIONS
Upon the grant of an Option, the Compensation Committee fixes the number of
shares of the Company's common stock that the optionee may purchase upon
exercise of the Option and the price at which the shares may be purchased.
With regard to ISOs, the exercise price cannot be less than the "fair market
value" of the common stock at the time the ISO is granted, or 110% of such
fair market value in certain cases (as set forth below). NQOs may be granted
at less than the fair market value of the common stock, but not less than 85%
of fair market value. See "Federal Income Tax Consequences."
With regard to ISOs only, the aggregate fair market value of common stock
(determined at the time the ISO is granted) subject to ISOs granted to an
employee under all stock option plans of the
17
<PAGE>
Company and any Affiliate of the Company that become exercisable for the first
time by such employee during any calendar year may not exceed $100,000.
Furthermore, ISOs may not be granted to any employee who, immediately after
the grant of such ISO, would own more than 10% of the total combined voting
power of all classes of the Company's stock unless such ISO has an exercise
price equal to at least 110% of the common stock's fair market value at the
time of grant and the term of the ISO is no longer than five years.
Each Option will be exercisable by the optionee only during the term fixed
by the Compensation Committee, with such term ending not later than ten years
after the date of grant (ten years in the case of ISOs). Upon exercise of any
Option, payment for shares as to which the Option is exercised may be made in
cash, in shares of the Company's 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 of cash and such shares, as the Compensation
Committee may determine.
TRANSFERABILITY OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the 1997 Plan are non-transferable except to the
extent permitted by the agreement evidencing such Option. However, no Option
will be transferable by any optionee other than by will or the laws of descent
and distribution. If, pursuant to the agreement evidencing any Option, such
Option remains exercisable after the optionee's death, it may be exercised to
the extent permitted by such agreement by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise, by reason of the optionee's
death.
RESTRICTED STOCK AWARDS
Restricted stock awards granted pursuant to the 1997 Plan entitle the holder
to receive shares of the Company's common stock, which will be subject to
forfeiture to the Company if specified conditions are not satisfied by the end
of a specified period, as determined in each case by the Compensation
Committee. The Compensation Committee may establish a period (the "Restricted
Period") at the time a restricted stock award is granted during which the
holder will not be permitted to sell, transfer, pledge, encumber, or assign
the shares of the Company common stock subject to the award. During the
Restricted Period, the holder of shares subject to the restricted stock award
shall have all of the rights of a shareholder of the Company with respect to
such shares, including the right to vote the shares and to receive any
dividends and other distributions with respect to the shares. However, any and
all stock dividends, stock rights, and stock issued upon split-ups or
reclassifications of shares subject to restricted stock awards shall be
subject to the same restrictions as the shares with respect to which such
stock dividends, rights, or additional stock are issued. Except to the extent
otherwise provided in the restricted stock agreement governing each restricted
stock award, all shares of the Company's common stock then subject to any
restriction will be forfeited to the Company without further obligation of the
Company to the holder thereof, and all rights of the holder with respect to
such shares will terminate, if the holder ceases to provide services to the
Company or its Affiliates as an employee, consultant or other service
provider, or if any condition established by the Compensation Committee for
the release of any restriction has not occurred, prior to the expiration of
the Restricted Period.
PERFORMANCE UNITS
A performance unit may entitle the recipient to receive a payment from the
Company, in the form of stock, cash or a combination of both, upon the
achievement of established performance or other
18
<PAGE>
goals. A recipient may be granted one or more performance units under the 1997
Plan, and such performance units will be subject to such terms and conditions,
consistent with the other provisions of the 1997 Plan, as may be determined by
the Compensation Committee in its sole discretion. The Compensation Committee
may impose such restrictions or conditions, not inconsistent with the
provisions of the 1997 Plan, to the vesting of such performance units as it
deems appropriate, including, without limitation, that the recipient remain in
the continuous employ or service of the Company or any appropriate subsidiary
for a certain period or that the recipient or the Company (or any appropriate
subsidiary or division thereof) satisfy certain performance goals or criteria.
STOCK BONUS
A stock bonus entitles a recipient to receive an award of common stock of
the Company. Stock bonuses will be subject to such terms and conditions,
consistent with the other provisions of the 1997 Plan, as may be determined by
the Compensation Committee. The recipient will have all voting, dividend,
liquidation and other rights with respect to the shares of common stock issued
to a recipient as a stock bonus upon the recipient becoming the holder of
record of such shares; provided, however, that the Compensation Committee may
impose such restrictions on the assignment or transfer of a stock bonus as it
deems appropriate.
IMMEDIATE ACCELERATION OF AWARDS
The 1997 Plan provides that, notwithstanding any other provisions contained
in the 1997 Plan or the agreement evidencing any Option or restricted stock
award thereunder, the restrictions on all shares of restricted stock shall
lapse immediately, and all outstanding Options will become exercisable
immediately, if any of the following events occur: (i) the sale, lease,
exchange or other transfer of substantially all of the assets of the Company;
(ii) the liquidation or dissolution of the Company; (iii) certain mergers or
consolidations of the Company which result in a reduction in the voting power
of the current shareholders of the Company; (iv) any person becomes the
beneficial owner of more than 20% of the Company's Common Stock without the
advance approval of the incumbent directors or more than 50% of the voting
power of the Company's outstanding stock without regard to consent 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. However, a participant
under the 1997 Plan will not be entitled to the immediate acceleration of an
award as provided above if such acceleration would, with respect to such
participant, constitute a "parachute payment" for purposes of Section 280G of
the Internal Revenue Code of 1986, as amended, or any successor provision.
TERMINATION AND AMENDMENT
The 1997 Plan will terminate on the earlier of the date on which the 1997
Plan is terminated by the Board of Directors of the Company or March 19, 2007.
Options or restricted stock awards outstanding at the termination of the 1997
Plan may continue to be exercised in accordance with their terms after such
termination. The 1997 Plan may be amended at any time by the Board of
Directors. However, without the approval of a majority of the Company's
shareholders voting at a meeting at which a quorum is present, no such
amendment may (i) materially increase the benefits accruing to participants
under the 1997 Plan; (ii) increase the number of shares available for issuance
or sale pursuant to the 1997 Plan (other than as permitted in certain
circumstances provided by the 1997 Plan); or (iii) materially modify the
requirements as to eligibility for participation in the 1997 Plan.
19
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following description is a general summary of the current federal income
tax provisions relating to the grant and exercise of ISOs and NQOs under the
1997 Plan, the grant of other awards thereunder, and the sale of shares of
common stock acquired upon exercise of Options or under a restricted stock
award, performance unit or stock bonus. The provisions summarized below are
subject to changes in federal income tax laws and regulations, and the effects
of such provisions may vary with individual circumstances.
Incentive Stock Options
ISOs granted under the 1997 Plan are intended to be "incentive stock
options" as defined by Section 422 of the Code. Under present law, the
recipient of an ISO will not realize taxable income upon the grant or the
exercise of an ISO; and the Company will not receive an income tax deduction
at either such time. Generally, if an optionee exercises an ISO at any time
prior to three months after termination of the optionee's employment and does
not sell the shares acquired upon exercise of an ISO within either (i) two
years after the grant of the ISO or (ii) one year after the date of exercise
of the ISO, the gain upon a subsequent sale of the shares will be taxed as
long-term capital gain. If the optionee does not satisfy these requirements,
the optionee generally will recognize ordinary income in an amount equal to
the difference between the exercise price paid in connection with exercise of
the ISO and the fair market value of the shares acquired as of the date of
exercise of the ISO, and will recognize capital gain on the difference between
the sale price of the shares and the fair market value of the shares as of the
date of exercise. In such event, the Company would be entitled to a
corresponding income tax deduction equal to the amount recognized as ordinary
income by the optionee.
Upon the exercise of an ISO, the excess of the stock's fair market value on
the date of exercise over the exercise price will be included in the
optionee's alternative minimum taxable income ("AMTI") and may result in the
imposition of a tax on such AMTI. Liability for the alternative minimum tax is
complex and depends upon an individual's overall tax situation.
Non-Qualified Stock Options
Generally, upon the grant of an NQO, neither the Company nor the optionee
will experience any tax consequences. Upon exercise of an NQO granted under
the 1997 Option Plan, or upon the exercise of an Option initially intended to
be an ISO that does not qualify for the tax treatment described above, the
optionee will realize ordinary income in an amount equal to the excess of the
fair market value of the shares of common stock received over the exercise
price paid by the optionee with respect to such shares. The amount recognized
as ordinary income by the optionee will increase the optionee's basis in the
stock acquired pursuant to the exercise of the NQO. The Company will be
allowed a federal income tax deduction for the amount recognized as ordinary
income by the optionee upon the optionee's exercise of the NQO. Upon a
subsequent sale of the stock, the optionee will recognize short-term or long-
term gain or loss depending upon the holding period for the stock and upon the
stock's subsequent appreciation or depreciation in value.
Restricted Stock Awards
A participant who receives an award of restricted stock under the 1997 Plan
generally will recognize ordinary income at the time at which the restrictions
on such shares (the "Restrictions") lapse, in an amount equal to the excess of
(i) the fair market value of such shares at the time the
20
<PAGE>
Restrictions lapse, over (ii) the price, if any, paid for such shares. If the
participant makes an election with respect to such shares under Section 83(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), not later than
30 days after the date shares are transferred to the participant pursuant to
such award, the participant will recognize ordinary income at the time of
transfer in an amount equal to the excess of (i) the fair market value of the
shares covered by the award (determined without regard to any restriction
other than a restriction which by its terms will never lapse) at the time of
such transfer over (ii) the price, if any, paid for such shares. A
participant's tax basis in shares received pursuant to a restricted stock
award granted under the 1997 Plan will be equal to the sum of the price paid
for such shares, if any, and the amount of ordinary income recognized by such
participant with respect to the transfer of such shares or the lapse of the
Restrictions thereon. The participant's holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin
immediately after the transfer of such shares to the participant, if a Section
83(b) election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made. If,
subsequent to the lapse of Restrictions on his or her shares, the participant
sells such shares, the difference, if any, between the amount realized from
such sale and the tax basis of such shares to the holder will be taxed as
long-term or short-term capital gain or loss, depending on whether the
participant's holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time. If a Section 83(b) election is made and,
before the Restrictions on the shares lapse, the shares which are subject to
such election are resold to the Company or are forfeited, (i) no deduction
would be allowed to such participant for the amount included in the income of
such participant by reason of such Section 83(b) election, and (ii) the
participant would realize a loss in an amount equal to the excess, if any, of
the amount paid for such shares over the amount received by the participant
upon such resale or forfeiture (which loss would be a capital loss if the
shares are held as a capital asset at such time). In such event, the Company
would be required to include in its income the amount of any deduction
previously allowable to it in connection with the transfer of such shares.
Performance Units
A recipient of a performance unit normally will not recognize taxable income
at the time the performance unit is granted. Thereafter, the recipient will
recognize ordinary income as his or her rights under the performance unit
vest, and he or she receives a payment of the economic value of a vested
performance unit in the form of cash, common stock, or any combination
thereof. The amount of such ordinary income will be equal to the amount of
cash received, the market value of common stock received, or a combination
thereof. Upon a subsequent sale of any common stock received, the change in
the value of the common stock would be treated as a capital gain or loss. The
Company or its appropriate subsidiary will generally be allowed an income tax
deduction equal to the ordinary income recognized by the recipient.
Stock Bonus
A recipient of a stock bonus normally will recognize ordinary income at the
date of the Award equal to the value of the stock received, unless rights to
all or part of the stock are not immediately vested or are subject to
restrictions. Upon a subsequent sale of the common stock, the change in the
value of the common stock would be treated as capital gain or loss. The
Company or its appropriate subsidiary will generally be allowed an income tax
deduction equal to the ordinary income recognized by the recipient.
21
<PAGE>
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy,
assuming a quorum is present, is required to approve the amendment to the 1997
Plan increasing the number of share reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF
THE AMENDMENT TO THE 1997 STOCK OPTION AND INCENTIVE PLAN AS SET FORTH IN
PROPOSAL 2.
APPROVAL OF AMENDMENT TO 1997 DIRECTOR STOCK
OPTION PLAN TO INCREASE NUMBER OF SHARES
RESERVED FOR ISSUANCE THEREUNDER
(PROPOSAL 3)
The Vital Images, Inc. 1997 Director Stock Option Plan ("Director Plan") was
adopted by the Board of Directors on March 19, 1997 and approved by the sole
shareholder of the Company on May 1, 1997. An aggregate of 75,000 shares was
reserved for issuance under the Director Plan at the time of its adoption.
Effective February 24, 1998, the Board of Directors voted to increase the
number of shares reserved for issuance under the Director Plan to 105,000
shares, subject to the approval of the Company's shareholders on or before
February 24, 1999. The Shareholders are being asked to approve the amendment
to the Director Plan to increase the number of shares issuable thereunder at
the Annual Meeting.
The Director Plan is intended to assist the Company in attracting,
motivating and retaining well-qualified individuals to serve as directors of
the Company. Management believes that the granting of options will serve as
partial consideration for and give well-qualified directors an additional
inducement to remain in the service of the Company and provide them with an
increased incentive to work for the Company's success.
The principal features and effects of the Director Plan are discussed below.
ADMINISTRATION
The Board of Directors of the Company has full authority to administer the
Director Plan, including authority to interpret and construe any provisions of
the Director Plan and any stock options granted thereunder. Notwithstanding
the authority of the Board of Directors to administer the Plan, certain grants
of stock options under the Director Plan and the amounts and terms of the
options so granted will be automatically determined under the Director Plan.
As such, the Board of Directors will have no authority to determine the grant
or terms of such automatic options.
SHARES SUBJECT TO THE DIRECTOR PLAN
The Director Plan, as amended, provides that the total number of shares of
the Company's common stock that may be purchased pursuant to the exercise of
options shall not exceed 105,000 shares, subject to adjustment as provided in
the Director Plan. The shares to be issued upon the exercise of Options and
restricted stock awards granted under the Director Plan will be currently
authorized but unissued shares of common stock of the Company. The number of
shares of the Company's common stock available under the Director Plan, the
exercise price of an option may be
22
<PAGE>
adjusted by the Board of Directors in its sole discretion upon any stock
dividend or split, recapitalization, reclassification, combination, exchange
of shares, or other similar corporate change, if the Board of Directors
determines that such change necessarily or equitably requires such an
adjustment.
ELIGIBILITY
The only persons eligible to receive options under the Director Plan are
members of the Board of Directors of the Company. The only person eligible to
receive automatic grants of options under the Director Plan are those
Directors of the Company who are not also employees of the Company ("Non-
Employee Directors").
TERMS OF OPTIONS
Under the Director Plan, eligible individuals may receive discretionary or
automatic grants of options to purchase shares of common stock of the Company.
Each option granted under the Director Plan is evidenced by a written
agreement between the Company and the recipient of the option. Such agreements
may not be identical for all individuals to whom options are granted, and the
terms and conditions of such agreements may be modified with the consent of
persons to whom the option was granted. The Director Plan permits the granting
of Incentive Stock Options ("ISOs") meeting the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and Non-Qualified
Stock Options ("NQOs") that do not meet the requirements of Section 422.
Automatic Option Grants
The Director Plan provides Non-Employee Directors of the Company (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 was automatically granted an initial
option to purchase 15,000 shares on the Effective Date of the Distribution or,
if appointed or elected after the Effective Date of the Distribution, 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 the
Company's 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 the Company 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 the Company's common stock on the date such
option is granted. Options automatically granted under the Director Plan vest
and become exercisable 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
common stock of the Company 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.
23
<PAGE>
Discretionary Option Grants
Upon the discretionary grant of an option, the Board of Directors fixes the
number of shares of the Company's common stock that the optionee may purchase
upon exercise of the option and the price at which the shares may be
purchased. With regard to ISOs, the exercise price cannot be less than the
"fair market value" of the common stock at the time the ISO is granted or 110%
of such fair market value in certain cases (as set forth below). NQOs may be
granted at less than the fair market value of the common stock. See "Federal
Income Tax Consequences."
With regard to ISOs only, the aggregate fair market value of common stock
(determined at the time the ISO is granted) subject to ISOs granted to an
employee under all stock option plans of the Company and any Affiliate of the
Company that become exercisable for the first time by such employee during any
calendar year may not exceed $100,000. Furthermore, no ISO may be granted to
any employee who, immediately after the grant of such ISO, would own more than
10% of the total combined voting power of all classes of the Company's stock
unless such ISO has an exercise price equal to at least 110% of the common
stock's fair market value at the time of grant and the term of the ISO is no
longer than five years.
Each Option will be exercisable by the optionee only during the term fixed
by the Compensation Committee, with such term ending not later than eight
years after the date of grant (ten years in the case of ISOs). Upon exercise
of any Option, payment for shares as to which the Option is exercised may be
made in cash, in shares of the Company's 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 of cash and such shares, as the
Compensation Committee may determine.
TRANSFERABILITY OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the Director Plan are non-transferable except to the
extent permitted by the agreement evidencing such option. However, no option
will be transferable by any optionee other than by will or the laws of descent
and distribution. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, it may be exercised to
the extent permitted by such agreement by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise, by reason of the optionee's
death. If an optionee's term as a director of the Company shall terminate for
any reason, any Option then held by the optionee, to the extent then
exercisable under the applicable option agreement, shall remain exercisable
after the termination of the optionee's director status for a period of ninety
(90) days (but in no event beyond eight years from the date of grant of the
option).
IMMEDIATE ACCELERATION OF AWARDS
The Director Plan provides that, notwithstanding any other provisions
contained in the Director Plan or the agreement evidencing any Option or
restricted stock award thereunder, the restrictions on all shares of
restricted stock shall lapse immediately, and all outstanding Options will
become exercisable immediately, if any of the following events occur: (i) the
sale, lease, exchange or other transfer of substantially all of the assets of
the Company; (ii) the liquidation or dissolution of the Company; (iii) certain
mergers or consolidations of the Company which result in a reduction in the
voting power of the current shareholders of the Company; (iv) any person
becomes the beneficial owner of more than 20% of the Company's Common Stock
without the advance approval of the incumbent directors or more than 50% of
the voting power of the Company's outstanding stock without regard to consent
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
24
<PAGE>
nature that would be required to be reported pursuant to Section 13 or 15(d)
of the Exchange Act. However, a participant under the Director Plan will not
be entitled to the immediate acceleration of an award as provided above if
such acceleration would, with respect to such participant, constitute a
"parachute payment" for purposes of Section 280G of the Internal Revenue Code
of 1986, as amended, or any successor provision.
TERMINATION AND AMENDMENT
The Director Plan will terminate on the earlier of the date on which the
Director Plan is terminated by the Board of Directors of the Company or March
19, 2007. Option rights outstanding at the termination of the Director Plan
may continue to be exercised in accordance with their terms after such
termination. The Director Plan may be amended at any time by the Board of
Directors. However, without the approval of a majority of the Company's
shareholders voting at a meeting at which a quorum is present, no such
amendment may (i) materially increase the benefits accruing to participants
under the Director Plan; (ii) increase the number of shares available for
issuance or sale pursuant to the Director Plan (other than as permitted in
certain circumstances provided by the Director Plan); or (iii) materially
modify the requirements as to eligibility for participation in the Director
Plan.
FEDERAL INCOME TAX CONSEQUENCES
See "Approval of Amendment to 1997 Stock Option and Incentive Plan to
Increase Number of Shares Reserved for Issuance Thereunder (Proposal 2)--
Federal Income Tax Consequences" for a description and general summary of the
current federal income tax provisions relating to the grant and exercise of
ISOs and NQOs under the Director Plan and the sale of shares of common stock
acquired upon exercise of options. The provisions summarized therein are
subject to changes in federal income tax laws and regulations, and the effects
of such provisions may vary with individual circumstances.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy,
assuming a quorum is present, is required to approve the amendment to the
Director Plan increasing the number of share reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF
THE AMENDMENT TO THE 1997 DIRECTOR STOCK OPTION PLAN AS SET FORTH IN PROPOSAL
3.
RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT ACCOUNTANTS
(PROPOSAL 4)
The Board of Directors has appointed the firm of Coopers & Lybrand L.L.P. as
independent accountants for the year ending December 31, 1998. A
representative of Coopers & Lybrand L.L.P. will be present at the Annual
Meeting, will have an opportunity to make a statement if he desires to do so,
and will be available to respond to appropriate questions from shareholders.
All proxies received in response to this solicitation will be voted in favor
of the ratification of the appointment of the independent accountants, unless
other instructions are indicated thereon.
25
<PAGE>
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy,
assuming a quorum is present, is required to ratify the appointment of Coopers
& Lybrand L.L.P. as independent accountants for the Company for the year ending
December 31, 1998.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
ACCOUNTANTS AS SET FORTH IN PROPOSAL 4.
PROPOSALS OF SHAREHOLDERS
Any shareholder wishing to have a proposal considered for inclusion in the
Company's proxy solicitation materials for the 1999 Annual Meeting of
Shareholders must set forth such proposal in writing and file it with the
Secretary of the Company no later than December 15, 1998.
OTHER BUSINESS
At the date of this Proxy Statement, management knows of no other business
that may properly come before the Annual Meeting. However, if any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the proxies received in response to this solicitation in
accordance with their best judgment on such matters.
FINANCIAL INFORMATION
The Company's 1997 Annual Report to Shareholders, including, but not limited
to, the balance sheets as of December 31, 1997 and 1996 and the related
statements of operations and cash flows for the year ended December 31, 1997,
two months ended December 31, 1996 and the fiscal years ended October 31, 1996
and 1995, accompanies these materials. A copy of the 1997 Annual Report to
Shareholders may be obtained without charge upon request to the Company. In
addition, the Company will provide without charge to any shareholder solicited
hereby, upon written request of such shareholder, a copy of its 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. Requests
should be directed to Investor Relations, Vital Images, Inc., 3100 West Lake
Street, Suite 100, Minneapolis, Minnesota 55416.
By Order of the Board of Directors
/s/ Gregory S. Furness
Gregory S. Furness, Secretary
April 8, 1998
26
<PAGE>
APPENDIX A
VITAL IMAGES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
Section 1. Purpose of Plan. The purpose of the Vital Images, Inc. 1997
Stock Option and Incentive Plan (the "Plan") is to advance the interests of
Vital Images, Inc. (the "Company") and its shareholders by enabling the Company
and its Subsidiaries to attract and retain persons of ability to perform
services for the Company and its Subsidiaries by providing an incentive to such
individuals through equity participation in the Company and by rewarding such
individuals who contribute to the achievement by the Company of its economic
objectives.
Section 2. Definitions. The following terms will have the meanings set
forth below, unless the context clearly otherwise requires:
(a) "Board" means the Board of Directors of the Company.
(b) "Broker Exercise Notice" means a written notice pursuant to which a
Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or
any related withholding tax obligations and remit such sums to the Company
and directs the Company to deliver stock certificates to be issued upon
such exercise directly to such broker or dealer.
(c) "Change in Control" means an event described in Section 12(a) of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the group of individuals administering the Plan, as
provided in Section 3 of the Plan.
(f) "Common Stock" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4(c)
of the Plan.
(g) "Disability" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to
the long-term disability plan of the Company or Subsidiary then covering
the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within
the meaning of Section 22(e)(3) of the Code.
(h) "Eligible Recipients" means all employees of the Company or any
Subsidiary and any directors, consultants and independent contractors of
the Company or any Subsidiary.
1
<PAGE>
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Fair Market Value" means, with respect to the Common Stock, the
following:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the
Nasdaq National Market or on the Nasdaq SmallCap Market, the closing
price of the Common Stock on such exchange or reported by the Nasdaq
National Market or the Nasdaq SmallCap Market as of such date (or, if
no shares were traded on such day, as of the next preceding day on
which there was such a trade).
(ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the Nasdaq National Market or the
Nasdaq SmallCap Market, and bid and asked prices therefor in the over-
the-counter market are reported by the National Quotation Bureau, Inc.
(or any comparable reporting service), the mean of the closing bid and
asked prices as of such date, as so reported by the National Quotation
Bureau, Inc. (or such comparable reporting service).
(iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the Nasdaq National Market, and
such bid and asked prices are not so reported, such price as the
Committee determines in good faith in the exercise of its reasonable
discretion. The Committee shall not be required to obtain an appraisal
within six months of the adoption of the Plan. The Committee's
determination as to the current value of the Common Stock shall be
final, conclusive and binding for all purposes and on all persons,
including, without limitation, the Company, the shareholders of the
Company, the Participants and their respective successors-in-interest.
No member of the Board of the Committee shall be liable for any
determination regarding current value of the Common Stock that is made
in good faith.
(k) "Incentive Award" means an Option, Restricted Stock Award, Performance
Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan.
(l) "Incentive Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422
of the Code.
(m) "Non-Statutory Stock Option" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
does not qualify as an Incentive Stock Option.
(n) "Option" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2
<PAGE>
(o) "Participant" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
(p) "Performance Unit" means a right granted to an Eligible Recipient
pursuant to Section 8 of the Plan to receive a payment from the Company, in
the form of stock, cash or a combination of both, upon the achievement of
established performance or other goals.
(q) "Previously Acquired Shares" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive Award,
that are to be issued upon the grant, exercise or vesting of such Incentive
Award.
(r) "Restricted Stock Award" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 7 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 7.
(s) "Retirement" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board for
purposes of the Plan, early) retirement/pension plan or practice of the
Company or Subsidiary then covering the Participant, provided that if the
Participant is not covered by any such plan or practice, the Participant
will be deemed to be covered by the Company's plan or practice for purposes
of this determination.
(s) "Securities Act" means the Securities Act of 1933, as amended.
(u) "Stock Bonus" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 9 of the Plan.
(v) "Subsidiary" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Committee.
(w) "Tax Date" means the date any withholding tax obligation arises under
the Code for a Participant with respect to an Incentive Award.
Section 3. Plan Administration.
(a) The Committee. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will
be administered by (i) the Board or (ii) a committee (the "Committee")
consisting solely of not less than two members of the Board who are not
employees of the Company (for purposes of this Plan and with respect to the
administration of this Plan, references hereinafter to the Committee shall
mean either the Committee, or if the Board has not appointed a Committee,
the Board.) To
3
<PAGE>
the extent consistent with corporate law, the Committee may delegate to any
officers of the Company the duties, power and authority of the Committee
under the Plan pursuant to such conditions or limitations as the Committee
may establish; provided, however, that only the Committee may exercise such
duties, power and authority with respect to Eligible Recipients who are
subject to Section 16 of the Exchange Act. Each determination,
interpretation or other action made or taken by the Committee pursuant to
the provisions of the Plan will be conclusive and binding for all purposes
and on all persons, and no member of the Committee will be liable for any
action or determination made in good faith with respect to the Plan or any
Incentive Award granted under the Plan.
(b) Authority of the Committee.
(i) In accordance with and subject to the provisions of the Plan,
the Committee will have the authority to determine all provisions of
Incentive Awards as the Committee may deem necessary or desirable and
as consistent with the terms of the Plan, including, without
limitation, the following: (A) the Eligible Recipients to be selected
as Participants; (B) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, any exercise price, the
manner in which Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with other
Incentive Awards) and the form of written agreement, if any,
evidencing such Incentive Award; (C) the time or times when Incentive
Awards will be granted; (D) the duration of each Incentive Award; and
(E) the restrictions and other conditions to which the payment or
vesting of Incentive Awards may be subject. In addition, the Committee
will have the authority under the Plan in its sole discretion to pay
the economic value of any Incentive Award in the form of cash, Common
Stock or any combination of both.
(ii) The Committee will have the authority under the Plan to amend
or modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of
shares or other terms and conditions of an Incentive Award, extend the
term of an Incentive Award, accelerate the exercisability or vesting
or otherwise terminate any restrictions relating to an Incentive
Award, accept the surrender of any outstanding Incentive Award or, to
the extent not previously exercised or vested, authorize the grant of
new Incentive Awards in substitution for surrendered Incentive Awards;
provided, however that the amended or modified terms are permitted by
the Plan as then in effect and that any Participant adversely affected
by such amended or modified terms has consented to such amendment or
modification. No amendment or modification to an Incentive Award,
however, whether pursuant to this Section 3(b) or any other provisions
of the Plan, will be deemed to be a regrant of such Incentive Award
for purposes of this Plan.
4
<PAGE>
(iii) In the event of (A) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend
or divestiture (including a spin-off) or any other change in corporate
structure or shares, (B) any purchase, acquisition, sale or
disposition of a significant amount of assets or a significant
business, (C) any change in accounting principles or practices, or (D)
any other similar change, in each case with respect to the Company or
any other entity whose performance is relevant to the grant or vesting
of an Incentive Award, the Committee (or, if the Company is not the
surviving corporation in any such transaction, the board of directors
of the surviving corporation) may, without the consent of any affected
Participant, amend or modify the vesting criteria of any outstanding
Incentive Award that is based in whole or in part on the financial
performance of the Company (or any Subsidiary or division thereof) or
such other entity so as equitably to reflect such event, with the
desired result that the criteria for evaluating such financial
performance of the Company or such other entity will be substantially
the same (in the sole discretion of the Committee or the board of
directors of the surviving corporation) following such event as prior
to such event; provided, however, that the amended or modified terms
are permitted by the Plan as then in effect.
Section 4. Shares Available for Issuance.
(a) Maximum Number of Shares Available. Subject to adjustment as provided
in Section 4(c) of the Plan, the maximum number of shares of Common Stock
that will be available for issuance under the Plan will be 675,000 shares
of Common Stock.
(b) Accounting for Incentive Awards. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Incentive Awards will be
applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock
that are subject to an Incentive Award that is settled or paid in cash or
any form other than shares of Common Stock will automatically again become
available for issuance under the Plan. Any shares of Common Stock that
constitute the forfeited portion of a Restricted Stock Award, however, will
not become available for further issuance under the Plan.
(c) Adjustments to Shares and Incentive Awards. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares,
rights offering, divestiture or extraordinary dividend (including a spin-
off) or any other change in the corporate structure or shares of the
Company, the Committee (or, if the Company is not the surviving corporation
in any such transaction, the board of directors of the surviving
corporation) will make appropriate adjustment (which
5
<PAGE>
determination will be conclusive) as to the number and kind of securities
available for issuance under the Plan and, in order to prevent dilution or
enlargement of the rights of Participants, the number, kind and, where
applicable, exercise price of securities subject to outstanding Incentive
Awards.
Section 5. Participation. Participants in the Plan will be those Eligible
Recipients who, in the judgment of the Committee, have contributed, are
contributing or are expected to contribute to the achievement of economic
objectives of the Company or its Subsidiaries. Eligible Recipients may be
granted from time to time one or more Incentive Awards, singly or in combination
or in tandem with other Incentive Awards, as may be determined by the Committee
in its sole discretion. Incentive Awards will be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date will be the
date of any related agreement with the Participant.
Section 6. Options.
(a) Grant. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by
the Committee in its sole discretion. The Committee may designate whether
an Option is to be considered an Incentive Stock Option or a Non-Statutory
Stock Option. To the extent that any Incentive Stock Option granted under
the Plan ceases for any reason to qualify as an "incentive stock option"
for purposes of Section 422 of the Code, such Incentive Stock Option will
continue to be outstanding for purposes of the Plan but will thereafter be
deemed to be a Non-Statutory Stock Option.
(b) Exercise Price. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion
at the time of the Option grant, provided that (i) such price will not be
less than 100% of the Fair Market Value of one share of Common Stock on the
date of grant with respect to an Incentive Stock Option (110% of the Fair
Market Value if, at the time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly, more than 10% of the total
combined voting power of all classes of stock of the Company or any parent
or subsidiary corporation of the Company), and (ii) such price will not be
less than 85% of the Fair Market Value of one share of Common Stock on the
date of grant with respect to a Non-Statutory Stock Option.
(c) Exercisability and Duration. An Option will become exercisable at such
times and in such installments as may be determined by the Committee in its
sole discretion at the time of grant; provided, however, that no Option may
be exercisable after 10 years from its date of grant.
(d) Payment of Exercise Price. The total purchase price of the shares to be
purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee, in its sole discretion and upon terms
6
<PAGE>
and conditions established by the Committee, may allow such payments to be
made, in whole or in part, by tender of a Broker Exercise Notice,
Previously Acquired Shares, a promissory note (on terms acceptable to the
Committee in its sole discretion) or by a combination of such methods.
(e) Manner of Exercise. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in
the Plan and in the agreement evidencing such Option, by delivery in
person, by facsimile or electronic transmission or through the mail of
written notice of exercise to the Company (Attention: Secretary) at its
principal executive office in Minneapolis, Minnesota and by paying in full
the total exercise price for the shares of Common Stock to be purchased in
accordance with Section 6(d) of the Plan.
Section 7. Restricted Stock Awards.
(a) Grant. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be
subject to such terms and conditions, consistent with the other provisions
of the Plan, as may be determined by the Committee in its sole discretion.
The Committee may impose such restrictions or conditions, not inconsistent
with the provisions of the Plan, to the vesting of such Restricted Stock
Awards as it deems appropriate, including, without limitation, that the
Participant remain in the continuous employ or service of the Company or a
Subsidiary for a certain period or that the Participant or the Company (or
any Subsidiary or division thereof) satisfy certain performance goals or
criteria.
(b) Rights as a Shareholder; Transferability. Except as provided in
Sections 7(a), 7(c) and 12(c) of the Plan, a Participant will have all
voting, dividend, liquidation and other rights with respect to shares of
Common Stock issued to the Participant as a Restricted Stock Award under
this Section 7 upon the Participant becoming the holder of record of such
shares as if such Participant were a holder of record of shares of
unrestricted Common Stock.
(c) Dividends and Distributions. Unless the Committee determines otherwise
in its sole discretion (either in the agreement evidencing the Restricted
Stock Award at the time of grant or at any time after the grant of the
Restricted Stock Award), any dividends or distributions (including regular
quarterly cash dividends) paid with respect to shares of Common Stock
subject to the unvested portion of a Restricted Stock Award will be subject
to the same restrictions as the shares to which such dividends or
distributions relate. In the event the Committee determines not to pay such
dividends or distributions currently, the Committee will determine in its
sole discretion whether any interest will be paid on such dividends or
distributions. In addition, the Committee in its sole discretion may
require such dividends and distributions to be reinvested (and in such case
the Participants consent to such reinvestment) in shares of Common Stock
that will be subject to the same
7
<PAGE>
restrictions as the shares to which such dividends or distributions relate.
(d) Enforcement of Restrictions. To enforce the restrictions referred to
in this Section 7, the Committee may place a legend on the stock
certificates referring to such restrictions and may require the
Participant, until the restrictions have lapsed, to keep the stock
certificates, together with duly endorsed stock powers, in the custody of
the Company or its transfer agent or to maintain evidence of stock
ownership, together with duly endorsed stock powers, in a certificateless
book-entry stock account with the Company's transfer agent.
Section 8. Performance Units. An Eligible Recipient may be granted one or
more Performance Units under the Plan, and such Performance Units will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Committee may impose such restrictions or conditions, not inconsistent with the
provisions of the Plan, to the vesting of such Performance Units as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or any Subsidiary for a certain
period or that the Participant or the Company (or any Subsidiary or division
thereof) satisfy certain performance goals or criteria. The Committee will have
the sole discretion either to determine the form in which payment of the
economic value of vested Performance Units will be made to the Participant
(i.e., cash, Common Stock or any combination thereof) or to consent to or
disapprove the election by the Participant of the form of such payment.
Section 9. Stock Bonuses. An Eligible Recipient may be granted one or
more Stock Bonuses under the Plan, and such Stock Bonuses will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee. The Participant will have all voting,
dividend, liquidation and other rights with respect to the shares of Common
Stock issued to a Participant as a Stock Bonus under this Section 9 upon the
Participant becoming the holder of record of such shares; provided, however,
that the Committee may impose such restrictions on the assignment or transfer of
a Stock Bonus as it deems appropriate.
Section 10. Effect of Termination of Employment or Other Service.
(a) Termination Due to Death, Disability or Retirement. In the event a
Participant's employment or other service with the Company and all
Subsidiaries is terminated by reason of death, Disability or Retirement:
(i) All outstanding Options then held by the Participant will become
immediately exercisable in full and will remain exercisable for a
period of one year (three months in the case of Retirement) after such
termination (but in no event after the expiration date of any such
Option);
(ii) All Restricted Stock Awards then held by the Participant will
become fully
8
<PAGE>
vested; and
(iii) All Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined
by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
(b) Termination for Reasons Other than Death, Disability or Retirement.
(i) In the event a Participant's employment or other service is
terminated with the Company and all Subsidiaries for any reason other
than death, Disability or Retirement, or a Participant is in the
employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Company (unless the Participant continues in the
employ or service of the Company or another Subsidiary), all rights of
the Participant under the Plan and any agreements evidencing an
Incentive Award will immediately terminate without notice of any kind,
and no Options then held by the Participant will thereafter be
exercisable, all Restricted Stock Awards then held by the Participant
that have not vested will be terminated and forfeited, and all
Performance Units and Stock Bonuses then held by the Participant will
vest and/or continue to vest in the manner determined by the Committee
and set forth in the agreement evidencing such Performance Units or
Stock Bonuses; provided, however, that if such termination is due to
any reason other than termination by the Company or any Subsidiary for
"cause," all outstanding Options then held by such Participant will
remain exercisable to the extent exercisable as of such termination
for a period of three months after such termination (but in no event
after the expiration date of any such Option).
(ii) For purposes of this Section 10(b), "cause" (as determined by
the Committee) will be as defined in any employment or other agreement
or policy applicable to the Participant or, if no such agreement or
policy exists, will mean (A) dishonesty, fraud, misrepresentation,
embezzlement or deliberate injury or attempted injury, in each case
related to the Company or any Subsidiary, (B) any unlawful or criminal
activity of a serious nature, (C) any intentional and deliberate
breach of a duty or duties that, individually or in the aggregate, are
material in relation to the Participant's overall duties, or (D) any
material breach of any employment, service, confidentiality or
noncompete agreement entered into with the Company or any Subsidiary.
(c) Modification of Rights Upon Termination. Notwithstanding the other
provisions of this Section 10, upon a Participant's termination of
employment or other service with the Company and all Subsidiaries, the
Committee may, in its sole discretion (which may be exercised at any time
on or after the date of grant, including following such termination), cause
Options (or any part thereof) then held by such Participant to become or
continue to become exercisable and/or remain exercisable following such
termination of employment or
9
<PAGE>
service and Restricted Stock Awards, Performance Units and Stock Bonuses
then held by such Participant to vest and/or continue to vest or become
free of transfer restrictions, as the case may be, following such
termination of employment or service, in each case in the manner determined
by the Committee; provided, however, that no Option may remain exercisable
beyond its expiration date.
(d) Breach of Confidentiality or Noncompete Agreements. Notwithstanding
anything in the Plan to the contrary, in the event that a Participant
materially breaches the terms of any confidentiality or noncompete
agreement entered into with the Company or any Subsidiary, whether such
breach occurs before or after termination of such Participant's employment
or other service with the Company or any Subsidiary, the Committee in its
sole discretion may immediately terminate all rights of the Participant
under the Plan and any agreements evidencing an Incentive Award then held
by the Participant without notice of any kind.
(e) Date of Termination of Employment or Other Service. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to
have terminated on the date recorded on the personnel or other records of
the Company or the Subsidiary for which the Participant provides employment
or other service, as determined by the Committee in its sole discretion
based upon such records.
Section 11. Payment of Withholding Taxes.
(a) General Rules. The Company is entitled to (i) withhold and deduct
from future wages of the Participant (or from other amounts that may be due
and owing to the Participant from the Company or a Subsidiary), or make
other arrangements for the collection of, all legally required amounts
necessary to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or
payment of dividends with respect to, an Incentive Award or a disqualifying
disposition of stock received upon exercise of an Incentive Stock Option,
or (ii) require the Participant promptly to remit the amount of such
withholding to the Company before taking any action, including issuing any
shares of Common Stock, with respect to an Incentive Award.
(b) Special Rules. The Committee may, in its sole discretion and upon
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 11(a) of the Plan by electing
to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole
discretion), or by a combination of such methods.
10
<PAGE>
Section 12. Change in Control.
(a) Change in Control. For purposes of this Section 12, a "Change in
Control" of the Company will mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a person or
entity that is not controlled by the Company,
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the Company is a party if
the shareholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), immediately following the
effective date of such merger or consolidation, of securities of the
surviving corporation representing (A) more than 50%, but not more
than 80%, of the combined voting power of the surviving corporation's
then outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been
approved in advance by the Incumbent Directors (as defined in Section
12(b) below), or (B) 50% or less of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(iv) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (A) 20% or more, but not 50% or more, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (B) 50% or more of the combined
voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(v) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board; or
(vi) any other change in control of the Company of a nature that
would be required to be reported pursuant to Section 13 or 15(d) of
the Exchange Act, whether or not the Company is then subject to such
reporting requirements.
(b) Incumbent Directors. For purposes of this Section 12, "Incumbent
Directors" of the Company will mean any individuals who are members of the
Board on the effective date of
11
<PAGE>
the Plan and any individual who subsequently becomes a member of the Board
whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the Incumbent Directors
(either by specific vote or by approval of the Company's proxy statement in
which such individual is named as a nominee for director without objection
to such nomination).
(c) Acceleration of Vesting. Without limiting the authority of the
Committee under Section 3(b) of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its
sole discretion either in an agreement evidencing an Incentive Award at the
time of grant or at any time after the grant of an Incentive Award, (i) all
Options will become immediately exercisable in full and will remain
exercisable for the remainder of their terms, regardless of whether the
Participants to whom such Options have been granted remain in the employ or
service of the Company or any Subsidiary; (ii) all outstanding Restricted
Stock Awards will become immediately fully vested; and (iii) all
Performance Units and Stock Bonuses then held by the Participant will vest
and/or continue to vest in the manner determined by the Committee and set
forth in the agreement evidencing such Performance Unit or Stock Bonuses.
(d) Cash Payment for Options. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole
discretion either in an agreement evidencing an Incentive Award at the time
of grant or at any time after the grant of an Incentive Award, and without
the consent of any Participant effected thereby, may determine that some or
all Participants holding outstanding Options will receive, with respect to
some or all of the shares of Common Stock subject to such Options, as of
the effective date of any such Change in Control of the Company, cash in an
amount equal to the excess of the Fair Market Value of such shares
immediately prior to the effective date of such Change in Control of the
Company over the exercise price per share of such Options.
(e) Limitation on Change in Control Payments. Notwithstanding anything in
Section 12(c) or 12(d) of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as
provided in Section 12(c) or the payment of cash in exchange for all or
part of an Incentive Award as provided in Section 12(d) (which acceleration
or payment could be deemed a "payment" within the meaning of Section
280G(b)(2) of the Code), together with any other "payments" which such
Participant has the right to receive from the Company or any corporation
that is a member of an "affiliated group" (as defined in Section 1504(a) of
the Code without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the "payments" to such Participant
pursuant to Section 12(c) or 12(d) of the Plan will be reduced to the
largest amount as will result in no portion of such "payments" being
subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if a Participant is subject to a separate agreement with the
Company or a Subsidiary that expressly addresses the potential application
of Sections 280G or 4999 of the Code (including, without limitation,
12
<PAGE>
that "payments" under such agreement or otherwise will not be reduced or
that the Participant will have the discretion to determine which "payments"
will be reduced), then the limitations of this Section 12(e) will not
apply, and any "payments" to a Participant pursuant to Section 12(c) or
12(d) of the Plan will be treated as "payments" arising under such separate
agreement.
Section 13. Rights of Eligible Recipients and Participants;
Transferability.
(a) Employment or Service. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate
the employment or service of any Eligible Recipient or Participant at any
time, nor confer upon any Eligible Recipient or Participant any right to
continue in the employ or service of the Company or any Subsidiary.
(b) Rights as a Shareholder. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no
rights as a shareholder unless and until such Incentive Awards are
exercised for, or paid in the form of, shares of Common Stock and the
Participant becomes the holder of record of such shares. Except as
otherwise provided in the Plan, no adjustment will be made for dividends or
distributions with respect to such Incentive Awards as to which there is a
record date preceding the date the Participant becomes the holder of record
of such shares, except as the Committee may determine in its discretion.
(c) Restrictions on Transfer. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by
the Plan, no right or interest of any Participant in an Incentive Award
prior to the exercise or vesting of such Incentive Award will be assignable
or transferable, or subjected to any lien, during the lifetime of the
Participant, either voluntarily or involuntarily, directly or indirectly,
by operation of law or otherwise. A Participant will, however, be entitled
to designate a beneficiary to receive an Incentive Award upon such
Participant's death, and in the event of a Participant's death, payment of
any amounts due under the Plan will be made to, and exercise of any Options
(to the extent permitted pursuant to Section 10 of the Plan) may be made
by, the Participant's legal representatives, heirs and legatees.
(d) Non-Exclusivity of the Plan. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company or create any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as
the Board may deem necessary or desirable.
Section 14. Securities Law and Other Restrictions. Notwithstanding any
other provision of the Plan or any agreements entered into pursuant to the Plan,
the Company will not be required to issue any shares of Common Stock under this
Plan, and a Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to Incentive
13
<PAGE>
Awards granted under the Plan, unless (i) there is in effect with respect to
such shares a registration statement under the Securities Act and any applicable
state securities laws or an exemption from such registration under the
Securities Act and applicable state securities laws, and (ii) there has been
obtained any other consent, approval or permit from any other regulatory body
which the Committee, in its sole discretion, deems necessary or advisable. The
Company may condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the placement of
any legends on certificates representing shares of Common Stock, as may be
deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
Section 15. Plan Amendment, Modification and Termination. The Board may
suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such respects as the Board may deem advisable in
order that Incentive Awards under the Plan will conform to any change in
applicable laws or regulations or in any other respect the Board may deem to be
in the best interests of the Company; provided, however, that no amendments to
the Plan will be effective without approval of the stockholders of the Company
if stockholder approval of the amendment is then required under the Exchange
Act, Section 422 of the Code or the rules of any stock exchange or Nasdaq. No
termination, suspension or amendment of the Plan may adversely affect any
outstanding Incentive Award without the consent of the affected Participant;
provided, however, that this sentence will not impair the right of the Committee
to take whatever action it deems appropriate under Sections 4(c) and 12 of the
Plan.
Section 16. Effective Date and Duration of the Plan. The Plan was adopted
by the Board on March 19, 197 and by the sole shareholder of the Company on May
1, 1997, and is effective as of the consummation of the distribution of the
Company's Common Stock by Bio-Vascular, Inc. ("Bio-Vascular") to the shareholder
of Bio-Vascular. The Plan will terminate at midnight on March 19, 2007, and may
be terminated prior to such time to by Board action, and no Incentive Award will
be granted after such termination. Incentive Awards outstanding upon
termination of the Plan may continue to be exercised, or become free of
restrictions, in accordance with their terms.
Section 17. Miscellaneous.
(a) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.
(b) Successors and Assigns. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company and the
Participants.
14
<PAGE>
FIRST AMENDMENT TO THE
VITAL IMAGES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
The Vital Images, Inc. 1997 Stock Option and Incentive Plan (the "Plan")
was adopted by the Board of Directors of Vital Images, Inc. (the "Company") and
approved by the sole shareholder of the Company in 1997, and is now in full
force and effect. This Amendment is adopted in order to amend the Plan with
respect to the number of shares of capital stock which may be granted under the
Plan.
A. Amendment. Section 4(a) of the Plan is hereby amended to read as
follows:
(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 925,000 shares
of Common Stock.
B. Effective Date. This Amendment shall be effective as of February 24,
1998, and shall be subject to the approval by the shareholders of the Company at
the next Annual or Special Meeting of Shareholders.
<PAGE>
APPENDIX B
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.
1
<PAGE>
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, with respect to the Common Stock, the
following:
(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.
2
<PAGE>
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.
3
<PAGE>
(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 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
4
<PAGE>
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 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,
5
<PAGE>
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
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
6
<PAGE>
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.
(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
7
<PAGE>
(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).
(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
8
<PAGE>
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 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
9
<PAGE>
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 19, 1997 and by the sole shareholder of the Company on May 1,
1997, and is effective as of the Distribution Date. The Plan will terminate at
midnight on March 19, 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.
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.
10
<PAGE>
FIRST AMENDMENT TO THE
VITAL IMAGES, INC.
1997 DIRECTOR STOCK OPTION PLAN
The Vital Images, Inc. 1997 Director Stock Option Plan (the "Plan") was
adopted by the Board of Directors of Vital Images, Inc. (the "Company") and
approved by the sole shareholder of the Company in 1997, and is now in full
force and effect. This Amendment is adopted in order to amend the Plan with
respect to the number of shares of capital stock which may be granted under the
Plan.
A. Amendment. Section 4(a) of the Plan is hereby amended to read as
follows:
(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 105,000 shares
of Common Stock.
B. Effective Date. This Amendment shall be effective as of February 24,
1998, and shall be subject to the approval by the shareholders of the Company at
the next Annual or Special Meeting of Shareholders.
<PAGE>
- --------------------------------------------------------------------------------
PROXY
VITAL IMAGES, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS MAY 13, 1998
The undersigned, revoking all prior proxies, hereby appoints Douglas M. Phil
and Gregory S. Furness, or either or them, as proxy or proxies, with full
power of substitution and revocation, to vote all shares of common stock of
Vital Images, Inc. (the "Company") of record in the name of the undersigned
at the close of business on March 27, 1998, at the Annual Meeting of
Shareholders to be held on Wednesday, May 13, 1998, or at any adjournment
thereof, upon the following matters:
(TO BE SIGNED ON REVERSE SIDE)
---------
SEE
REVERSE
SIDE
---------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark your
votes as in this
example
1. ELECTION OF DIRECTORS.
FOR all nominees listed
(except as marked to
the contrary below)
[_]
WITHHOLD AUTHORITY
to vote for all
nominees listed
[_]
Nominees: Vincent J. Argiro, James B. Hickey, Jr., Richard W. Perkins,
Douglas M. Pihl, Edward E. Strickland, Michael W. Vannier, Sven
A. Wehrwein
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
-----------------------------------------------------------------------------
2. Approval of amendment to the 1997 Stock Option and Incentive Plan to increase
the number of shares reserved for issuance thereunder.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Approval of amendment to the 1997 Director Stock Option Plan to increase the
number of shares reserved for issuance thereunder.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. Ratification of appointment of Coopers & Lybrand L.L.P. as independent
accountants for the year ending December 31, 1998.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. In their discretion the proxies are authorized to vote upon such matters as
may properly come before the meeting.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR Proposals, 1, 2, 3 and 4. The Board of Directors recommends a vote
FOR Proposals 1, 2, 3 and 4.
Dated: ____________________________________, 1998
_________________________________________________
Signature of Shareholder
_________________________________________________
Signature of Joint Shareholder (if held jointly).
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE DATE AND SIGN exactly as your name(s) appears above indicating, where
proper, official position or representative capacity in which you are
signing. When signing as executor, administrator, trustee or guardian, give
full title as such; when shares have been issued in names of two or more
persons, all should sign.
- --------------------------------------------------------------------------------
