<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 0-22229
___________________________________________________
VITAL IMAGES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 42-1321776
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 WEST LAKE STREET, SUITE 100 55416
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal
executive offices)
(612) 915-8000
(Registrant's telephone number, including area code)
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No _____
___________________________________________________
On May 8, 1998, there were 4,815,486 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
1
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VITAL IMAGES, INC.
------------------
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 and December 31, 1997 ...3
Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 ..................................4
Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 ..................................5
Notes to Financial Statements ...............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...........................13
SIGNATURES ...................................................................14
INDEX TO EXHIBITS ............................................................15
2
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- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
VITAL IMAGES, INC.
BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 314,382 $ 448,377
Marketable securities 5,180,951 5,963,464
Accounts receivable, net of allowance for doubtful accounts
of $60,000 and $40,000 as of March 31, 1998 and December
31, 1997, respectively 391,493 581,130
Prepaid expenses and other current assets 233,975 264,826
-------------------- --------------------
Total current assets 6,120,801 7,257,797
Property and equipment, net 941,810 997,947
Patent costs 40,267 40,267
-------------------- --------------------
TOTAL ASSETS $ 7,102,878 $ 8,296,011
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 252,323 $ 203,579
Accrued payroll 191,635 322,572
Deferred revenue 235,412 212,556
Other current liabilities 125,823 104,003
-------------------- --------------------
Total current liabilities 805,193 842,710
Deferred revenue 180,992 200,107
-------------------- --------------------
Total liabilities 986,185 1,042,817
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding as of March 31, 1998 and December 31,
1997 - -
Common stock: authorized 20,000,000 shares of $.01 par
value; issued and outstanding, 4,812,201 shares as of March
31, 1998 and 4,806,561 shares as of December 31, 1997 48,122 48,066
Additional paid-in capital 18,016,146 18,006,824
Accumulated deficit (11,947,575) (10,801,696)
-------------------- --------------------
Total shareholders' equity 6,116,693 7,253,194
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,102,878 $ 8,296,011
==================== ====================
</TABLE>
(The accompanying notes are an integral part of the interim financial
statements.)
3
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VITAL IMAGES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDED
MARCH 31,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Revenue:
License fees $ 472,853 $ 76,999
Maintenance and services 93,680 79,089
Hardware 199,332 -
------------------ --------------------
Total revenue 765,865 156,088
Cost of revenue:
License fees 36,446 21,833
Maintenance and services 24,411 -
Hardware 158,020 -
------------------ --------------------
Total cost of revenue 218,877 21,833
Gross margin 546,988 134,255
Operating expenses:
Sales and marketing 639,714 390,822
Research and development 529,321 423,186
General and administrative 600,135 307,086
------------------ --------------------
Total operating expenses 1,769,170 1,121,094
Operating loss (1,222,182) (986,839)
Interest income 79,421 114,179
------------------ --------------------
Loss before income taxes (1,142,761) (872,660)
Income taxes 3,118 500
------------------ --------------------
Net loss $ (1,145,879) $ (873,160)
================== ====================
Net loss per share - basic and diluted $ (0.24) $ (0.18)
================== ====================
Weighted average common shares outstanding - basic and diluted 4,804,736 4,750,578
================== ====================
</TABLE>
(The accompanying notes are an integral part of the interim financial
statements.)
4
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VITAL IMAGES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDED
MARCH 31,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,145,879) $ (873,160)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 118,740 57,326
Stock-based compensation - 30,300
Provision for uncollectible accounts receivable 20,000 952
Changes in operating assets and liabilities:
Accounts receivable 169,637 6,604
Prepaid expenses and other current assets 30,851 36,726
Accounts payable 48,744 (26,671)
Deferred revenue 3,741 (73,765)
Accrued payroll and other liabilities (109,117) 2,974
--------------------- ---------------------
Net cash used in operating activities (863,283) (838,714)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (62,603) (141,649)
Additions to patent costs - (3,048)
Investments in marketable securities (3,717,487) -
Maturities of marketable securities 4,500,000 -
--------------------- ---------------------
Net cash provided by (used in) investing activities 719,910 (144,697)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net investment by Bio-Vascular - (3,205)
Purchases of common stock under Employee Stock Purchase Plan 9,378 -
--------------------- ---------------------
Net cash provided by (used in) financing activities 9,378 (3,205)
NET DECREASE IN CASH AND CASH EQUIVALENTS (133,995) (986,616)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448,377 6,481,067
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 314,382 $ 5,494,451
===================== =====================
</TABLE>
(The accompanying notes are an integral part of the interim financial
statements.)
5
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VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Vital Images, Inc. ("Vital
Images" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary, including items of
a normal recurring nature, for a fair presentation have been included. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
These financial statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
(2) SPIN-OFF OF VITAL IMAGES:
On May 12, 1997, Bio-Vascular, Inc. ("Bio-Vascular"), the former parent company
of Vital Images, distributed all of the shares 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 Vital Images common stock for
each two shares of Bio-Vascular stock held on that date, and cash in lieu of
fractional shares.
(3) REVENUE RECOGNITION:
Effective January 1, 1998 the Company adopted Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), which provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions and supersedes SOP 91-1, Software Revenue Recognition. The adoption
of SOP 97-2 did not materially impact the Company's revenue recognition
practices, financial position or results of operations during the first quarter
of 1998 and would not have materially impacted the revenue recognition
practices, financial position or results of operations of the quarter ended
March 31, 1997.
6
<PAGE>
VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- --------------------------------------------------------------------------------
(4) MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
<TABLE>
<CAPTION>
Percentage of
Significant Accounts
Customer Revenue Receivable
-------- ------- ----------
<S> <C> <C> <C>
Three months ended Toshiba America Medical Systems, $ 329,000 39%
March 31, 1998 Inc.
CogniSeis Development, Inc. $ 153,000 -
Three months ended Duke University Medical Center $ 18,000 4%
March 31, 1997
</TABLE>
The Company's accounts receivable are generally concentrated with a small base
of customers. As of March 31, 1998, three customers accounted for 65% of
accounts receivable, while as of December 31, 1997, six customers accounted for
73% of accounts receivable.
Export revenue amounted to 3% and 31% of total revenue for the three months
ended March 31, 1998 and 1997, respectively. Substantially all of the Company's
export revenue is negotiated, invoiced and paid in U.S. dollars. Gross export
revenue by geographic area is summarized as follows:
Three Months Ended
March 31,
----------------------
1998 1997
---- ----
Europe and Middle East.................................. $ 16,000 $ 28,000
Asia and Pacific Region................................. 4,000 16,000
Canada, Mexico and others............................... 2,000 4,000
(5) NET LOSS PER SHARE:
For the three months ended March 31, 1998, net loss per share is computed using
the weighted average common shares outstanding during the period. Common share
equivalents are not included in the net loss per share calculations, since they
are anti-dilutive. Warrants and options to purchase common stock, 1,462,211
outstanding as of March 31, 1998, could potentially dilute basic earnings per
share in future periods if the Company generates net income.
For the three months ended March 31, 1997, the weighted average common shares
outstanding used in the net loss per share calculation is one-half of the
weighted average of Bio-Vascular common shares outstanding based on the
distribution of one share of the Company's common stock for each two shares of
Bio-Vascular's common stock pursuant to the Distribution. Common share
equivalents are not included in the net loss per share calculation, since they
are anti-dilutive.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On May 12, 1997 (the "Distribution Date"), Bio-Vascular, the former parent
company of Vital Images, distributed all of the shares 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 Vital Images common stock for
each two shares of Bio-Vascular stock held on that date, and cash in lieu of
fractional shares.
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. On the Distribution Date, Bio-Vascular contributed to Vital
Images an additional $1,845,000 in cash equivalents in order to restore Vital
Images' cash, cash equivalents and marketable securities balance to $10,000,000.
On July 17, 1997, the Board of Directors of the Company adopted a resolution
changing the Company's fiscal year end from October 31 to December 31 of each
year. This quarterly report on Form 10-Q contains unaudited financial
statements for the three months ended March 31, 1998 and the comparable period
of the prior calendar year.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 WITH THE THREE MONTHS ENDED
MARCH 31, 1997
Revenue was $766,000 compared to $156,000, a 391% increase. This increase was
primarily the result of system and software revenue of $488,000 from shipments
of Vitrea, the Company's new medical visualization product released in October
of 1997. It is expected that revenue will continue to increase in future
quarters due to increased sales of Vitrea software and systems. However, actual
results could vary materially from the foregoing forward-looking statement as a
result of lower than expected demand for the Vitrea product or the timing of
future releases of Vitrea software.
The gross margin percentage decreased from 86% to 71%, primarily as a result of
Vitrea system sales increasing as a proportion of the Company's product mix.
The Vitrea system, consisting of Vitrea software and third party hardware and
peripherals, is designed to offer end users an integrated visualization system.
The Company receives only a nominal discount in purchasing the third party
hardware and peripheral components of the Vitrea system and the Company's gross
margin on the resale of these system components approximates its discount. The
Company anticipates that as Vitrea systems continue as a significant proportion
of the Company's product mix, the overall gross margin percentage will
approximate the results of this quarter. This forward-looking statement will be
influenced primarily by vendor discounts on the third party hardware and
peripheral components of the Vitrea system and on the Company's product mix.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONTINUED
- --------------------------------------------------------------------------------
Sales and marketing expenses increased to $640,000 from $391,000, a 64%
increase. The increase was primarily due to increased compensation costs,
including the addition of a Director of Sales in March 1998 and a full quarter
of compensation expense for the Vice President of Marketing and Business
Development hired in February 1997, increased costs due to increases in the
Company's customer support infrastructure, as well as travel expenses related to
the marketing and promotion of the Vitrea product. The Company expects sales
and marketing costs to increase in future periods as a result of the cost of
additional sales and customer support personnel.
Research and development expenses increased 25% to $529,000 from $423,000. The
increase was primarily due to increased compensation costs resulting from
increased staffing for the development of the Vitrea product. In addition,
depreciation and other expenses related to staffing also increased due to
increased development efforts for Vitrea software. The Company anticipates that
such costs will increase in future periods as future releases of Vitrea software
are developed, but at a rate less than the increase for the three months ended
March 31, 1998 as compared with the three months ended March 31, 1997.
General and administrative expenses increased from $307,000 to $600,000, a 95%
increase. The increase was primarily due to a charge of $180,000 in connection
with the resignation of the Company's former Chief Executive Officer. In
addition, increases in the Company's administrative infrastructure, and the
incremental costs associated with becoming an independent public company
contributed to the increase in expenses. During the three months ended
March 31, 1997, the Company leased new corporate offices resulting in increased
rent expense, increased its purchases of property and equipment resulting in
increased depreciation, and incurred costs for legal and investor relations
expenses as a result of becoming an independent public company. Finally,
compensation costs increased as a result of increased staffing, including a full
quarter of compensation expense for the Chief Financial Officer hired in
February 1997. The Company believes that, excluding the $180,000 discussed
above, general and administrative costs will increase in future periods
primarily due to increased compensation expense for 1997 hires that will be
present for the entire year and administrative costs associated with being an
independent public company.
The increased expenses attributable to the continuing development of the
Company's management team and infrastructure and the development and promotion
of Vitrea, resulted in an operating loss of $1,222,000 for the three months
ended March 31, 1998, compared with an operating loss of $987,000 for the three
months ended March 31, 1997.
Interest income was $79,000 for the three months ended March 31, 1998 compared
with $114,000 for the comparable period in 1997. The decrease in interest
income during the three months ended March 31, 1998 was due to a lower balance
of cash, cash equivalents and marketable securities as a result of the use of
cash to fund the Company's operations.
The income tax provisions for the three months ended March 31, 1998 and 1997
consist solely of certain state minimum fees. A valuation allowance has been
established to completely reserve for the deferred tax assets of the Company.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the Distribution, Bio-Vascular assigned to Vital Images,
$10,000,000 in cash, cash equivalents and marketable securities, effective
November 1, 1996. On the Distribution Date, Bio-Vascular contributed to Vital
Images an additional $1,845,000 in cash equivalents in order to restore Vital
Images' cash, cash equivalents and marketable securities balance to $10,000,000.
If the Company's operations progress as anticipated, of which there can be no
assurance, management believes that its cash, cash equivalents and marketable
securities should be sufficient to satisfy its cash requirements for at least
the next twelve months. The timing of the Company's future capital
requirements, however, will depend on a number of factors, including the ability
and willingness of physicians to use three-dimensional visualization software in
clinical diagnosis, surgical planning patient screening and other diagnosis and
treatment protocols; the ability of the Company to build an effective sales and
distribution channel; the impact of competition in the medical visualization
business; and the ability to enhance existing products and develop new products
on a timely basis. If the Company's operations do not progress as anticipated,
additional capital will be required sooner. There can be no assurance that any
required additional capital will be available on acceptable terms or at all, and
the failure to obtain any such required capital would have a material adverse
effect on the Company's business.
For the three months ended March 31, 1998 and 1997, cash used by operating
activities was $863,000 and $839,000, respectively. The Company invested
$63,000 and $142,000 in property and equipment during the three months ended
March 31, 1998 and 1997, respectively, primarily for the acquisition of computer
equipment. The Company used $3,717,000 to purchase marketable securities and had
$4,500,000 of marketable securities mature during the three months ended March
31, 1998.
The Company has no material commitments at this time other than facility leases
and expected employment contracts, but will be using cash in the near term as it
continues to develop the market for its products and its channels of
distribution.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.
YEAR 2000 ISSUES
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing the
internal readiness of its computer systems and the compatibility of its products
sold to customers for handling the year 2000. In addition, the Company is
assessing the readiness of third-parties (e.g., customers and suppliers) which
interact with the Company's systems. The Company plans to devote the necessary
resources to resolve all significant year 2000 issues in a timely manner. Based
on management's current assessment, it does not believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition, in part because the Company's principal product has only
recently been introduced and was developed to be year 2000 functional. However,
there can be no assurance that year 2000 issues will not arise which relate to
the Company's suppliers or the integration of the Company's products into the
systems of its customers.
NEW ACCOUNTING STANDARD
Effective January 1, 1998 the Company adopted Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), which provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions and supersedes SOP 91-1, Software Revenue Recognition. The adoption
of SOP 97-2 did not materially impact the Company's revenue recognition
practices, financial position or results of operations during the first quarter
of 1998 and would not have materially impacted the revenue recognition
practices, financial position or results of operations of the quarter ended
March 31, 1997.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--CONTINUED
- --------------------------------------------------------------------------------
CERTAIN IMPORTANT FACTORS
This Form 10-Q contains certain forward-looking statements and information that
are based on management's beliefs, as well as on assumptions made by, and upon
information currently available to, management. When used in this Form 10-Q,
the words "expect," "anticipate," "intend," "plan," "believe," "seek," and
"estimate" or similar expressions are intended to identify such forward-looking
statements. However, this Form 10-Q also contains other forward-looking
statements. Forward-looking statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions, including, but
not limited to, the following factors, which could cause the Company's future
results and shareholder values to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company: the early stage
of the industry and business in which the Company operates, the Company's
transition to an independent medical visualization business, the extent to which
the Company's products gain market acceptance, litigation regarding patent and
other intellectual property rights, the introduction of competitive products by
others, dependence on major customers, the progress of product development, the
availability of third-party reimbursement, and the receipt and timing of
regulatory approvals and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission, including those
set forth under the heading "Important Factors" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE>
_______________________________________________________________________________
PART II. OTHER INFORMATION
_______________________________________________________________________________
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed
in the exhibit index beginning on page 15
(b) Form 8-K. The Company filed no reports on Form 8-K during the three months
ended March 31, 1998.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITAL IMAGES, INC.
May 12, 1998 /s/ Gregory S. Furness
------------------------------------------
Gregory S. Furness
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
14
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VITAL IMAGES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
10.5 Incentive Stock Option Adjustment Plan (filed herewith electronically) (1)
10.10 Employee Stock Purchase Plan (filed herewith electronically) (2)
27.1 Financial Data Schedule for the Three Months Ended March 31, 1998 (filed
herewith electronically)
(1) Document is being re-filed to replace and correct Exhibit 10.5 to the
Company's Registration Statement on Form 10 (File No. 0-22229)
(2) Document is being re-filed to correct typographical error in
authorized shares referred to in Exhibit 10.10 to the Company's
Registration Statement on Form 10 (file No. 0-22229)
15
<PAGE>
Exhibit 10.5
VITAL IMAGES, INC.
INCENTIVE STOCK OPTION ADJUSTMENT PLAN
1. BACKGROUND; PURPOSE OF PLAN
1.1 Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of May 2, 1997 (the "Distribution
Agreement"), between the Company and Bio-Vascular, Inc., a Minnesota
corporation ("Bio-Vascular"), pursuant to which Bio-Vascular will
distribute (the "Distribution") all of the outstanding shares of the
Company's common stock to Bio-Vascular's shareholders of record on the
Record Date (as defined in the Distribution Agreement). In connection
with the Distribution, each holder of an option to purchase Bio-Vascular
common stock (a "Bio-Vascular Option") as of the Record Date will be
entitled to retain such Bio-Vascular Option, provided that such Bio-
Vascular Option will be adjusted to reflect the Distribution (an
"Adjusted Bio-Vascular Option"). In addition, as of the Record Date, each
holder of a Bio-Vascular Option will also be entitled to receive an
option to purchase Company common stock that will be adjusted to reflect
the Distribution (an "Adjusted Company Option").
1.2 Pursuant to the terms and conditions of the applicable plans under which
the Bio-Vascular Options were initially granted, the exercise price and
number of shares covered by each Adjusted Bio-Vascular Option, as well as
the exercise price and number of shares covered by each Adjusted Company
Option, will be determined according to a formula, set forth in the
Employee Benefits Agreement entered into between Bio-Vascular and the
Company, that is based on the relative fair market trading values of Bio-
Vascular common stock and Company common stock during the first five
trading days following the Distribution Date (as defined in the
Distribution Agreement). Pursuant to this formula, these adjustments will
be made in such a manner that the aggregate "intrinsic value," or
difference between fair market value and exercise price, of the Adjusted
Bio-Vascular Option and Adjusted Company Option will equal the pre-
Distribution "intrinsic value" of the Bio-Vascular Option with respect to
which the adjustment and grant were made.
1.3 In order to ensure that each Adjusted Company Option is granted without
any additional benefit not provided by the Bio-Vascular Option with
respect to which it is granted, Adjusted Company Options will be granted
under the terms of a corresponding "mirror" plan of the Company. With
respect to Bio-Vascular Options granted under the Bio-Vascular, Inc. 1988
Stock Option Plan, this Vital Images, Inc. Incentive Stock Option
Adjustment Plan (the "Plan") will serve as such a "mirror" plan.
Accordingly, the sole purpose of this Plan is to provide for the grant of
such Adjusted Company Options, and no additional option grants of any
kind will be granted under this Plan.
2. DEFINITIONS
Wherever used in the Plan, the following terms have the meanings set forth
below:
1
<PAGE>
2.1 "Bio-Vascular Committee" means the group of individuals administering the
Bio-Vascular, Inc. 1988 Stock Option Plan.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
2.4 "Committee" means the Committee which may be designated from time to time
by the Board pursuant to Section 3.5 of the Plan.
2.5 "Employer" means the Company if the Participant renders employment or
other services to the Company or any Subsidiary of the Company and means
Bio-Vascular if the Participant renders employment or other services to
Bio-Vascular or any Subsidiary of Bio-Vascular.
2.6 "Incentive Stock Option" or "ISO" means a stock option which is intended
to qualify as an incentive stock option as defined in Section 422A of the
Code.
2.7 "Non-Statutory Stock Option" or "NSO" means a stock option to purchase
stock that does not qualify as an incentive stock option as defined in
Section 422A of the Code.
2.8 "Option" means, where required by the context of the Plan, an ISO and/or
NSO granted pursuant to the Plan.
2.9 "Optionee" means a Participant in the Plan who has been granted one or
more Options under the Plan.
2.10 "Participant" means an individual described in Section 5 of this Plan
who may be granted Options under the Plan.
2.11 "Stock" means the Common Stock, $.01 par value, of the Company.
2.12 "Subsidiary" means (i) when used in reference to the Company, any entity
that is directly or indirectly controlled by the Company or any entity in
which the Company has a significant equity interest, as determined by the
Board or (ii) when used in reference to Bio-Vascular, any entity that is
directly or indirectly controlled by Bio-Vascular or any entity in which
Bio-Vascular has a significant equity interest, as determined by the
Board.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Board, which shall have full power,
subject to the provisions of the Plan, to grant Options, construe and
interpret the Plan, establish rules and regulations with respect to the
Plan and Options granted hereunder, and perform all other acts, including
the delegation of administrative responsibilities, that it believes
reasonable and necessary.
3.2 The Board shall have the sole discretion, subject to the provisions of
the Plan, to determine
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the Participants eligible to receive Options pursuant to the Plan and the
amount, type, and terms of any Options and the terms and conditions of
option agreements relating to any Option.
3.3 The Board may correct any defect, supply any omission, or reconcile any
inconsistency in the Plan or in any Option granted hereunder in the
manner and to the extent it shall deem necessary to carry out the terms
of the Plan.
3.4 Any decision made, or action taken, by the Board arising out of or in
connection with the interpretation and administration of the Plan shall
be final, conclusive and binding upon Optionee.
3.5 The Board may designate a Committee from time to time to administer the
Plan. If designated, the Committee shall be composed of not less than
three persons (who shall be members of the Board) who are appointed from
time to time by the Board. If the Board has appointed a Committee
pursuant to this Section 3.5, then the Committee may administer the Plan
and exercise all of the rights and powers granted to the Board in this
Plan, including without limitation the right to grant Options pursuant to
the Plan and to establish the Option price as provided in the Plan.
3.6 The Board and the Bio-Vascular Committee will reasonably cooperate and
communicate with each other to promote the purposes of the Plan.
4. SHARES SUBJECT TO THE PLAN
4.1 Number. The total number of shares of Stock reserved for issuance upon
exercise of Options under the Plan is 425,000. Such shares shall consist
of authorized but unissued Stock. If any Option granted under the Plan
lapses or terminates for any reason before being completely exercised,
the shares covered by the unexercised portion of such Option may again be
made subject to Options under the Plan.
4.2 Changes in Capitalization. In the event of any change in the outstanding
shares of Stock of the Company by reason of any stock dividend, split,
recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, or rights offering to purchase stock at a price
substantially below fair market value, or other similar corporate change,
the aggregate number of shares which may be subject to Options under the
Plan and the terms of any outstanding Option, including the number and
kind of shares subject to such Options and the purchase price per share
thereof, shall be appropriately adjusted as the Board, in its sole
discretion, may deem equitable to prevent substantial dilution or
enlargement of the rights granted to or available for Optionees.
Notwithstanding the preceding sentence, in no event shall any fraction of
a share of Stock be issued upon the exercise of an Option.
(a) Change in Control. In the event of a "Change in Control" of the
Company, as defined in paragraph (b) below, then the following
acceleration and valuation provisions shall apply:
(i) Except as otherwise determined by the Board, in its discretion,
prior to the
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occurrence of a Change in Control, any Options outstanding on the
date such Change in Control is determined to have occurred that
are not yet exercisable and vested on such date shall become
fully exercisable and vested;
(ii) Except as otherwise determined by the Board, in its discretion,
prior to the occurrence of a Change in Control, the value of all
outstanding Options, to the extent they are exercisable and
vested (including Options that shall become exercisable and
vested pursuant to subparagraph (i) above), shall be cashed out
at the Change in Control Price, (reduced by the exercise price
applicable to such Options). The cash out proceeds shall be paid
to the Optionee or, in the event of an Optionee prior to payment,
to the estate of the Optionee or to a person who acquired the
right to exercise the Option by bequest or inheritance.
(b) Definition of "Change in Control". For purposes of this Section 4.2,
a "Change in Control" means the happening of any of the following,
provided that it occurs after the Distribution Date:
(i) When any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, a Subsidiary or
a Company employee benefit plan, including any trustee of such
plan acting as trustee) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The occurrence of a transaction requiring shareholder approval,
and involving the sale of all or substantially all of the assets
of the Company or the merger of the Company with or into another
corporation.
(c) Change in Control Price. For purposes of this Section 4.2, "Change
in Control Price" shall be, as determined by the Board, (i) the
highest Fair Market Value of a Share within the 60 day period
immediately preceding the date of determination of the Change in
Control Price by the Board (the "60-Day Period"), or (ii) the highest
price paid or offered per Share, as determined by the Board, in any
bona fide transaction or bona fide offer related to the Change in
Control of the Company, at any time within the 60-Day Period, or
(iii) some lower price as the Board, in its discretion, determines to
be a reasonable estimate of the fair market value of a Share.
5. ELIGIBLE PARTICIPANTS
In addition to the following persons, individuals who hold outstanding Bio-
Vascular Options as of the Record Date are eligible to participate in the Plan:
5.1 Incentive Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary, including officers and
directors who are also employees of the Company or any Subsidiary.
5.2 Non-Statutory Stock Options. Non-statutory stock options may be granted
to (i) any
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employee of the Company or any Subsidiary, including any officer or
director who is also an employee of the Company or any Subsidiary; (ii)
any non-employee director of the Company or any Subsidiary; and (iii) any
consultant to, or other independent contractor of, the Company.
6. GRANT OF OPTIONS
Subject to the terms, conditions, and limitations set forth in this Plan, the
Company, by action of its Board, may from time to time grant Options to
purchase shares of the Company's Stock to those eligible Participants as may
be selected by the Board, in such amounts and on such other terms as the Board
in its sole discretion shall determine. Such Options may be (i) "Incentive
Stock Options" so designated by the Board and which, when granted, are
intended to qualify as incentive stock options as defined in Section 422A of
the Code; (ii) "Non-Statutory Stock Options" so designated by the Board and
which, when granted, do not qualify as incentive stock options under Section
422A of the Code; or (iii) a combination of both. The date on which the Board
approves the granting of an Option shall be the date of grant of such Option.
Notwithstanding the foregoing, with respect to the grant of any Incentive
Stock Option under the Plan, the aggregate fair market value of Stock
(determined as of the date the Option is granted) with respect to which such
Options are exercisable for the first time by an Optionee in any calendar year
(under all such stock option plans of the Company or Subsidiaries) shall not
exceed $100,000. Each grant of an Option under the Plan shall be evidenced by
a written stock option agreement between the Company and the Optionee setting
forth the terms and conditions, not inconsistent with the Plan, under which
the Option so granted may be exercised pursuant to the Plan and containing
such other terms with respect to the Option as the Board in its sole
discretion may determine.
7. OPTION PRICE AND FORM OF PAYMENT
The purchase price for a share of Stock subject to an Option granted hereunder
shall not be less than 100% of the fair market value of the Stock. For
purposes of this Section 7, the "fair market value" of the Stock shall be
determined as follows:
(a) if the Stock of the Company is listed or admitted to unlisted trading
privileges on a national securities exchange, the fair market value
on any given day shall be the closing sale price for the Stock, or if
no sale is made on such day, the closing bid price for such day on
such exchange;
(b) if the Stock is not listed or admitted to unlisted trading privileges
on a national securities exchange, the fair market value on any given
day shall be the closing sale price for the Stock as reported on the
NASDAQ National Market System on such day, or if no sale is made on
such day, the closing bid price for such day as entered by a market
maker for the Stock;
(c) if the Stock is not listed on a national securities exchange, is not
admitted to unlisted trading privileges on any such exchange, and is
not eligible for inclusion in the NASDAQ National Market System, the
fair market value on any given day shall be the average of the
closing representative bid and asked prices as reported by the
National Quotation Bureau, Inc. or, if the Stock is not quoted on the
National Association of
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Securities Dealers Automated Quotations System, then as reported in
any publicly available compilation of the bid and asked prices of the
Stock in any over-the-counter market on which the Stock is traded; or
(d) if there exists no public trading market for the Stock, the fair
market value on any given day shall be an amount determined in good
faith by the Board in such manner as it may reasonably determine in
its discretion, provided that such amount shall not be less than the
book value per share, as reasonably determined by the Board as of the
date of determination, or less than the par value of the Stock.
Notwithstanding the foregoing, in the case of an Incentive Stock Option granted
to any Optionee then owning more than 10% of the voting power of all classes of
the Company's stock, the purchase price per share of the Stock subject to such
Option shall not be less than 110% of the fair market value of the Stock on the
date of grant of the Incentive Stock Option, determined as provided above.
Except as provided herein, the purchase price of each share of Stock purchased
upon the exercise of any Option shall be paid:
(a) in United States dollars in cash or by check, bank draft or money
order payable to the order of the Company; or
(b) at the discretion of the Board, through the delivery of shares of
Stock, having initially or as a result of successive exchanges of
shares, an aggregate fair market value (as determined in the manner
provided under this Plan) equal to the Option price; or
(c) at the discretion of the Board, by a combination of both (a) and (b)
above; or
(d) by such other method as may be permitted in the written stock option
agreement between the Company and the Optionee.
If such form of payment is permitted, the Board shall determine procedures for
tendering Stock as payment upon exercise of an Option and may impose such
additional limitations and prohibitions on the use of Stock as payment upon the
exercise of an Option as it deems appropriate.
If the Board in its sole discretion so agrees, the Company may finance the
amount payable by an Optionee upon exercise of any Option upon such terms and
conditions as the Board may determine at the time such Option is granted under
this Plan, provided, however, that the amount financed shall not exceed the
"good faith loan value" (as that term is defined in Section 207.2(e) of
Regulation G of the Federal Reserve Board) of the shares of Stock to be acquired
upon exercise of an Option.
8. EXERCISE OF OPTIONS
8.1 Manner of Exercise. An Option, or any portion thereof, shall be exercised
by delivering a written notice of exercise to the Board and paying to the
Company the full purchase price of the Stock acquired upon the exercise
of the Option. Until certificates for the Stock acquired upon the
exercise of an Option are issued to an Optionee, such Optionee shall not
have any rights as a shareholder of the Company.
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8.2 The Limitations and Conditions on Exercise of Options. In addition to any
other limitations or conditions contained in this Plan or that may be
imposed by the Board from time to time or in the stock option agreement
to be entered into with respect to Options granted hereunder, the
following limitations and conditions shall apply to the exercise of
Options granted under this Plan:
(a) No Incentive Stock Option may be exercisable by its terms after the
expiration of 10 years from the date of the grant thereof.
(b) No Incentive Stock Option granted to an eligible Participant then
owning more than 10% of the voting power of all classes of the
Company's stock may be exercisable by its terms after the expiration
of five years from the date of the grant thereof.
9. INVESTMENT PURPOSES
Unless a registration statement under the Securities Act of 1933 is in effect
with respect to Stock to be purchased upon exercise of Options to be granted
under the Plan, the Company shall require that an Optionee agree with and
represent to the Company in writing that he or she is acquiring such shares of
Stock for the purpose of investment and with no present intention to transfer,
sell or otherwise dispose of such shares of Stock other than by transfers
which may occur by will or by the laws of descent and distribution, and no
shares of Stock may be transferred unless, in the opinion of counsel to the
Company, such transfer would be in compliance with applicable securities laws.
In addition, unless a registration statement under the Securities Act of 1933
is in effect with respect to the Stock to be purchased under the Plan, each
certificate representing any shares of Stock issued to an Optionee hereunder
shall have endorsed thereon a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND WITHOUT
REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS, IN RELIANCE UPON
EXEMPTION(S) CONTAINED THEREIN. NO TRANSFER OF THESE SHARES OR ANY INTEREST
THEREIN MAY BE MADE EXCEPT PURSUANT TO EFFECTIVE REGISTRATION STATEMENTS UNDER
SAID LAWS UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO IT THAT SUCH TRANSFER OR DISPOSITION DOES NOT REQUIRE
REGISTRATION UNDER SAID LAWS AND, FOR ANY SALES UNDER RULE 144 OF THE ACT,
SUCH EVIDENCE AS IT SHALL REQUEST FOR COMPLIANCE WITH THAT RULE, OR APPLICABLE
STATE SECURITIES LAWS."
10. TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be transferable by an Optionee (whether
by sale, assignment, hypothecation or otherwise) other than by will or the
laws of descent and distribution, and Options shall be exercisable during the
Optionee's lifetime only by the Optionee.
11. TERMINATION OF EMPLOYMENT
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11.1 Generally. The transfer by a Participant of employment or other service
from one Employer or its Subsidiaries to the other Employer or its
Subsidiaries will not be deemed to constitute a termination of employment
or other service for purposes of this Plan. Except as otherwise provided
in this Section 11, if an Optionee's employment with the Employer or the
Employer's Subsidiary is terminated (hereinafter "Termination") other
than by death or Disability (as hereinafter defined), the Optionee may
exercise any Option granted under the Plan, to the extent the Optionee
was entitled to exercise the Option at the date of Termination, for a
period of three months after the date of Termination or until the term of
the Option has expired, whichever date is earlier.
11.2 Death or Disability of Optionee. In the event of the death or
Disability of an Optionee prior to expiration of an Option held by him or
her, the following provisions shall apply:
(a) If the Optionee is at the time of his or her Disability employed by
the Employer or a Subsidiary of the Employer and has been in
continuous employment (as determined by (x) the Committee if the
Employer is the Company or a Subsidiary of the Company or (y) the
Bio-Vascular Committee if the Employer is Bio-Vascular or a
Subsidiary of Bio-Vascular) since the date of grant of the Option,
then the Option may be exercised by the Optionee until the earlier of
one year following the date of such Disability or the expiration date
of the Option, but only to the extent the Optionee was entitled to
exercise such Option at the time of his or her Disability. For the
purpose of this Section, the term "Disability" shall have the meaning
given to it in Section 22(e) (3) of the Code. The determination of
whether an Optionee has a Disability within the meaning of Section
22(e) (3) shall be made by the (x) the Committee if the Employer is
the Company or a Subsidiary of the Company or (y) the Bio-Vascular
Committee if the Employer is Bio-Vascular or a Subsidiary of Bio-
Vascular.
(b) If the Optionee is at the time of his or her death employed by the
Employer or a Subsidiary of the Employer and has been in continuous
employment (as determined by (x) the Committee if the Employer is the
Company or a Subsidiary of the Company or (y) the Bio-Vascular
Committee if the Employer is Bio-Vascular or a Subsidiary of Bio-
Vascular) since the date of grant of the Option, then the Option may
be exercised by the Optionee's estate or by a person who acquired the
right to exercise the Option by will or the laws of descent and
distribution, until the earlier of one year from the date of the
Optionee's death or the expiration date of the Option, but only to
the extent the Optionee was entitled to exercise the Option at the
time of death.
(c) If the Optionee dies within three months after Termination, the
Option may be exercised until the earlier of nine months following
the date of death or the expiration date of the Option, by the
Optionee's estate or by a person who acquires the right to exercise
the Option by will or the laws of descent or distribution, but only
to the extent the Optionee was entitled to exercise the Option at the
time of Termination.
11.3 Termination for Cause. If the employment of an Optionee is terminated by
the Employer or a Subsidiary of the Employer for cause, then the Board
shall have the right to cancel any Options granted to the Optionee under
the Plan.
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12. AMENDMENT AND TERMINATION OF PLAN
12.1 The Board, without approval by the shareholders of the Company, may at
any time and from time to time suspend or terminate the Plan in whole or
in part or amend it from time to time in such respects as may be in the
best interests of the Company; provided, however, that no such amendment
shall be made without approval of the shareholders if it would: (a)
materially modify the eligibility requirements for Participants; (b)
increase the total number of shares of Stock which may be issued pursuant
to Options, except in accordance with Section 4.2 of the Plan; (c) reduce
the minimum Option price per share as set forth in Section 7 of the Plan,
except in accordance with Section 4.2 of the Plan; (d) extend the period
of granting Options; or (e) materially increase in any other way the
benefits accruing to Optionees.
12.2 No amendment, suspension or termination of this Plan shall, without the
Optionee's consent, alter or impair any of the rights or obligations
under any Option theretofore granted to the Optionee under the Plan.
12.3 The Board may amend the Plan, subject to the limitations cited above, in
such manner as it deems necessary to permit the granting of Incentive
Stock Options meeting the requirements of future amendments to the Code
or regulations promulgated thereunder.
13. MISCELLANEOUS PROVISIONS
13.1 Right to Continued Employment. No person shall have any claim or right to
be granted an Option under the Plan, and the grant of an Option under the
Plan shall not be construed as giving an Optionee the right to continued
employment with the Employer or any Subsidiary of the Employer. The
Employer further expressly reserves the right at any time to dismiss an
Optionee or reduce an Optionee's compensation with or without cause, free
from any liability, or any claim under the Plan, except as provided
herein or in a stock option agreement.
13.2 Withholding Taxes. The Employer shall have the right to require that
payment or provision for payment of any and all withholding taxes due
upon the grant or exercise of an Option hereunder or the disposition of
any Stock or other property acquired upon exercise of an Option be made
by an Optionee. In connection therewith, the Board shall have the right
to establish such rules and regulations or impose such terms and
conditions in any agreement relating to an Option granted hereunder with
respect to such withholding as the Board may deem necessary and
appropriate.
13.3 Governing Law. The Plan shall be administered in the State of
Minnesota, and the validity, construction, interpretation, and
administration of the Plan and all rights relating to the Plan shall be
determined solely in accordance with the laws of such state, unless
controlled by applicable federal law, if any.
14. EFFECTIVE DATE
The effective date of the Plan is the Distribution Date. No Option may be
granted after November
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13, 1997, provided, however, that the Plan and all outstanding Options shall
remain in effect until such outstanding Options have expired or been canceled.
TC3: 336020 v03 6/20/97
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Exhibit 10.10
VITAL IMAGES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE. The purpose of this Employee Stock Purchase Plan (the
"Plan") is to advance the interests of Vital Images, Inc. (the "Company") and
its shareholders by providing Employees of the Company and its Designated
Subsidiaries (as defined in Section 2(e) below) with an opportunity to acquire
an ownership interest in the Company through the purchase of Common Stock of the
Company on favorable terms through payroll deductions. It is the intention of
the Company that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of Section 423 of the
Code.
SECTION 2. DEFINITIONS.
(a) "Board" means the Board of Directors of the Company.
(b) "Common Stock" means the common stock, par value $.01 per share, of the
Company, or the number and kind of shares of stock or other securities
into which such common stock may be changed in accordance with Section 13
of the Plan.
(c) "Committee" means the entity administering the Plan, as provided in
Section 3 below.
(d) "Compensation" means regular straight-time earnings and commissions that
are included in regular compensation, excluding all other amounts such as
amounts attributable to overtime, shift premium, incentive compensation
and bonuses (except to the extent that the inclusion of any such item is
specifically directed by the Committee), determined in a manner consistent
with the requirements of Section 423 of the Code, as provided in Section 1
above.
(e) "Designated Subsidiary" means a Subsidiary that has been designated by the
Board from time to time, in its sole discretion, as eligible to
participate in the Plan.
(f) "Employee" means any person, including an officer, who is employed by the
Company or one of its Designated Subsidiaries, exclusive of any such
person whose customary employment with the Company or a Designated
Subsidiary is for 20 hours or less per week.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Fair Market Value" means, with respect to the Common Stock, as of any
date:
(i) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or admitted
but transactions in the Common Stock are reported on The Nasdaq National
Market, the average of the reported high and low sale prices of the Common
Stock on such exchange or by The Nasdaq National Market as of such date (or,
if no shares were traded on such day, as of the next preceding day on which
there was such a trade); or
(ii) if the Common Stock is not so listed or admitted to unlisted trading
privileges or reported on The Nasdaq National Market, and bid and asked prices
therefor in the over-the-counter
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market are reported by The Nasdaq SmallCap Market or the National Quotation
Bureau, Inc. (or any comparable reporting service), the average of the closing
bid and asked prices as of such date, as so reported by The Nasdaq SmallCap
Market, or, if not so reported thereon, as reported by the National Quotation
Bureau, Inc. (or such comparable reporting service); or
(iii) if the Common Stock is not so listed or admitted to unlisted trading
privileges, or reported on The Nasdaq National Market, and such bid and
asked prices are not so reported, such price as the Committee determines in
its sole discretion, but in a manner acceptable under Section 423 of the
Code.
(i) "Offering" means any of the offerings to Participants of options to
purchase Common Stock under the Plan, each continuing for three months, as
described in Section 5 below.
(j) "Offering Date" means the first day of the period of an Offering under the
Plan, as described in Section 5 below.
(k) "Option Price" is defined in Section 8 below.
(l) "Participant" means an eligible Employee who elects to participate in the
Plan pursuant to Section 6 below.
(m) "Securities Act" means the Securities Act of 1933, as amended.
(n) "Subsidiary" means any subsidiary corporation of the Company within the
meaning of Section 424(f) of the Code.
(o) "Termination Date" means the last day of the period of an Offering under
the Plan, as described in Section 5 below.
SECTION 3. ADMINISTRATION. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, the Plan will be
administered by (i) the Board or (ii) a committee (the "Committee") consisting
solely of not less than two members of the Board who are not employees of the
Company (for purposes of this Plan and with respect to the administration of the
Plan, references hereinafter to the Committee shall mean either the Committee,
or if the Board has not appointed the Committee, the Board). Members of the
Committee may be appointed from time to time by the Board, shall serve at the
pleasure of the Board, and may resign at any time upon written notice to the
Board. A majority of the members of the Committee shall constitute a quorum.
The Committee shall act by majority approval of the members and shall keep
minutes of its meetings. Action of the Committee may be taken without a meeting
if unanimous written consent is given. Copies of minutes of the Committee's
meetings and of its actions by written consent shall be kept with the corporate
records of the Company. In accordance with and subject to the provisions of
the Plan, the Committee shall have authority to make, administer and interpret
such rules and regulations as it deems necessary to administer the Plan, and any
determination, decision or action in connection with construction,
interpretation, administration or application of the Plan shall be final,
conclusive and binding upon all Participants and any and all persons claiming
under or through any Participant. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any option granted under the Plan.
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SECTION 4. ELIGIBILITY.
(a) With respect to an Offering, any Employee who is employed by the Company
immediately prior to the Offering Date of the Offering shall be eligible
to participate in the Plan, beginning with the Offering commencing on such
Offering Date, subject to the limitations imposed by Section 423(b) of the
Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no Employee
shall be granted an option under the Plan if:
(i) immediately after the grant, such Employee (or any other person whose
stock ownership would be attributed to such Employee pursuant to Section
424(d) of the Code) would own shares of Common Stock and/or hold outstanding
options to purchase shares of Common Stock possessing 5% or more of the total
combined voting power or value of all classes of shares of the Company or of
any Subsidiary; or
(ii) the amount of payroll deductions that the Employee has elected to have
withheld under such option (pursuant to Section 7 below) would permit the
Employee to purchase shares of Common Stock under all "employee stock
purchase plans" (within the meaning of Section 423 of the Code) of the
Company and its Subsidiaries to accrue (that is, become exercisable) at a
rate that exceeds $25,000 of the Fair Market Value of such shares of Common
Stock (determined at the time such option is granted) for each calendar
year in which such option is outstanding at any time.
SECTION 5. OFFERINGS. Options to purchase shares of Common Stock shall be
offered to Participants under the Plan through a continuous series of Offerings,
each continuing for three months, and each of which shall commence on January 1,
April 1, July 1 and October 1 of each year, as the case may be (the "Offering
Date"), and shall terminate on March 31, June 30, September 30 and December 31
of such year, as the case may be (the "Termination Date"). The first Offering
under the Plan shall have an Offering Date of July 1, 1997 and a Termination
Date of September 30, 1997. Offerings under the Plan shall continue until
either (a) the Committee decides, in its sole discretion, that no further
Offerings shall be made because the Common Stock remaining available under the
Plan is insufficient to make an Offering to all eligible Employees, or (b) the
Plan is terminated in accordance with Section 17 below.
SECTION 6. PARTICIPATION.
(a) Participation in the Plan by an eligible Employee is voluntary. An
eligible Employee may become a Participant in the Plan by completing a
subscription agreement authorizing payroll deductions on the form provided
by the Company (the "Participation Form") and filing the Participation
Form with the Company's Chief Financial Officer not less than 15 days
before the Offering Date of the first Offering in which the Participant
wishes to participate.
(b) Except as provided in Section 7(a) below, payroll deductions for a
Participant shall begin with the first payroll following the applicable
Offering Date, and shall continue until the termination date of the Plan,
subject to earlier termination by the Participant as provided in Section
11 below or increases or decreases by the Participant in the amount of
payroll deductions as provided in Section 7(c) below.
SECTION 7. PAYROLL DEDUCTIONS.
(a) By completing and filing a Participation Form, a Participant shall elect
to have payroll
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deductions made from his total Compensation (in whole percentages from 1%
to a maximum of 10% of his total Compensation) on each payday during the
time he is a Participant in the Plan in such amount as he shall designate
on the Participation Form; provided, however, that no Participant's
payroll deductions shall be less than $10.00 per pay period.
(b) All payroll deductions authorized by a Participant shall be credited to an
account established under the Plan for the Participant. The monies
represented by such account shall be held as part of the Company's general
assets, usable for any corporate purpose, and the Company shall not be
obligated to segregate such monies. A Participant may not make any
separate cash payment or contribution to such account.
(c) No increases or decreases of the amount of payroll deductions for a
Participant may be made during an Offering. A Participant may increase or
decrease the amount of his payroll deductions under the Plan for
subsequent Offerings by completing an amended Participation Form and
filing it with the Company's Chief Financial Officer not less than 15 days
prior to the Offering Date as of which such increase or decrease is to be
effective.
(d) A Participant may discontinue his participation in the Plan at any time as
provided in Section 11 below.
SECTION 8. GRANT OF OPTION. On each Offering Date, each eligible Employee
who is then a Participant shall be granted (by operation of the Plan) an option
to purchase (at the Option Price) as many full shares of Common Stock as he will
be able to purchase with (a) the payroll deductions credited to his account
during his participation in the Offering beginning on such Offering Date and (b)
the balance (if any) carried forward from the Employee's payroll deduction
account from the preceding Offering. Notwithstanding the foregoing, in no event
may the number of shares purchased by any Employee during an Offering exceed 500
shares of Common Stock. The option price per share of such shares (the "Option
Price") shall be the lower of (a) 85% of the Fair Market Value of one share of
Common Stock on the Offering Date, or (b) 85% of the Fair Market Value of one
share of Common Stock on the Termination Date.
SECTION 9. EXERCISE OF OPTION.
(a) Unless a Participant gives written notice to the Company as provided in
Section 9(d) below or withdraws from the Plan pursuant to Section 11
below, the Participant's option for the purchase of shares of Common Stock
granted for an Offering will be exercised automatically at the Termination
Date of such Offering for the purchase of the number of full shares of
Common Stock that the accumulated payroll deductions in his account on
such Termination Date will purchase at the applicable Option Price.
(b) A Participant may purchase only one or more full shares in connection with
the automatic exercise of an option granted for any Offering. That portion
of any balance remaining in a Participant's payroll deduction account at
the close of business on the Termination Date of any Offering that is less
than the purchase price of one full share will be carried forward into the
Participant's payroll deduction account for the following Offering. In no
event will the balance carried forward be equal to or greater than the
purchase price of one share on the Termination Date of an Offering.
Notwithstanding the foregoing, the Committee may determine, in its sole
discretion, that in lieu of carrying such cash balances forward, such
balances will be deemed to have purchased such number of fractional shares
of Common Stock as then would be purchasable at the applicable Option
Price, with such fractional shares calculated to the fourth (4th) decimal
place.
(c) No Participant (or any person claiming through such Participant) shall
have any interest in any
4
<PAGE>
Common Stock subject to an option under the Plan, and no Participant shall
have any rights as a shareholder of the Company with respect to any shares
of Common Stock subject to an option under the Plan, until such option has
been exercised, at which point such interest shall be limited to the
interest of a purchaser of the Common Stock purchased upon such exercise
pending the delivery or credit of such Common Stock in accordance with
Section 10 below. During his lifetime, a Participant's option to purchase
shares of Common Stock under the Plan is exercisable only by him.
(d) By written notice to the Company prior to the Termination Date of any
Offering, a Participant may elect, effective on such Termination Date, to:
(i) withdraw all of the accumulated payroll deductions in his account as of
the Termination Date (which withdrawal may, but need not, also constitute a
notice of termination and withdrawal pursuant to Section 11(a)); or
(ii) exercise his option for a specified number of full shares (but not
less than five) that is less than the number of full shares of Common Stock
that the accumulated payroll deductions in his account will purchase on the
Termination Date of the Offering at the applicable Option Price, and withdraw
the balance in his payroll deduction account.
SECTION 10. DELIVERY.
(a) Except as provided in paragraph (b) below, as promptly as practicable
after the Termination Date of each Offering, the Company will deliver to
each Participant, as appropriate, either:
(i) (A) a certificate representing the shares of Common Stock purchased
upon exercise of his option granted for such Offering, registered in the name
of the Participant or, if the Participant so directs on his Participation
Form, in the names of the Participant and his spouse, and (B) if the
Participant makes an election pursuant to Section 9(d)(ii), a check in the
amount of the balance of any payroll deductions credited to his account that
were not used for the purchase of Common Stock; or
(ii) if the Participant makes an election pursuant to Section 9(d)(i) for
the Offering, a cash payment equal to the total of the payroll deductions
credited to his account.
(b) Notwithstanding Section 10(a) above, in lieu of delivering certificates to
each of the Participants with respect to shares of Common Stock purchased
in connection with an Offering, the Company may deliver a certificate to a
third party representing an aggregate of all of the shares of Common Stock
purchased in connection with the Offering (including an aggregate of all
of the fractional shares deemed to have been purchased pursuant to Section
9(b), if applicable) rounded down to the nearest full share, plus cash in
an amount equal to the Option Price multiplied by any remaining fractional
share deemed to have been purchased pursuant to Section 9(b), if
applicable, which shares will be held for the benefit of the Participants
in accordance with their respective interests, and will deliver a
statement of account to each Participant indicating the number of shares
of Common Stock purchased by that Participant in connection with that
Offering. If shares are held for the benefit of Participants, all full
shares purchased and fractional shares deemed to have been purchased by a
Participant in an Offering and in any subsequent Offerings will accumulate
for the benefit of the Participant until the Participant's withdrawal or
termination pursuant to Section 11.
SECTION 11. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
5
<PAGE>
(a) A Participant may terminate his participation in the Plan and withdraw
all, but not less than all, the payroll deductions credited to his account
under the Plan at any time prior to the Termination Date of an Offering,
for such Offering, by giving written notice to the Company. Such notice
shall state that the Participant wishes to terminate his involvement in
the Plan, specify a termination date and request the withdrawal of all of
the Participant's payroll deductions held under the Plan. All of the
Participant's payroll deductions credited to his account will be paid to
him as soon as practicable after the termination date specified in the
notice of termination and withdrawal (or, if no such date is specified, as
soon as practical after receipt of his notice of termination and
withdrawal), and his option for such Offering will be automatically
canceled, and no further payroll deductions for the purchase of shares of
Common Stock will be made for such Offering or for any subsequent
Offering, except in accordance with a new Participation Form filed by the
Participant pursuant to Section 6 above. If shares are held for the
benefit of Participants pursuant to Section 10(b), then on the withdrawal
and termination of a Participant's participation in the Plan, the
Participant will be entitled to receive, at the Participant's option, (i)
cash equal to the Fair Market Value of all full shares of Common Stock and
any fractional share deemed purchased pursuant to Section 9(b) then held
for the benefit of the Participant; or (ii) a certificate representing the
number of full shares of Common Stock held for the benefit of the
Participant plus cash in an amount equal to the Fair Market Value of any
remaining fractional shares deemed to have been purchased. In any event,
Fair Market Value will be determined as of the termination date specified
in the notice of termination and withdrawal (or, if no such date is
specified, as of the date the notice of termination and withdrawal is
received), and such certificate will be delivered and such amounts paid as
soon thereafter as practicable.
(b) Upon termination of a Participant's employment for any reason, including
retirement or death, the payroll deductions accumulated in his account
will be returned to him as soon as practicable after such termination or,
in the case of his death, to the person or persons entitled thereto under
Section 14 below, and his option will be automatically canceled. If shares
are held for the benefit of Participants pursuant to Section 10(b), then
upon the termination of a Participant's employment for any reason,
including retirement or death, the Participant, or, in the case of death,
his Designated Beneficiary (if allowed by the Committee) or the executor
or administrator of the Participant's estate will be entitled to receive,
at their option, (i) cash equal to the Fair Market Value of all full
shares of Common Stock and any fractional share deemed purchased pursuant
to Section 9(b) then held for the benefit of the Participant; or (ii) a
certificate representing the number of full shares of Common Stock held
for the benefit of the Participant plus cash in an amount equal to the
Fair Market Value of any remaining fractional share deemed to have been
purchased. In any event, Fair Market Value will be determined as of such
termination and such certificate will be delivered and such amounts paid
as soon thereafter as practicable. For purposes of the Plan, the
termination date of employment shall be the Participant's last date of
actual employment and shall not include any period during which such
Participant receives any severance payments. A transfer of employment
between the Company and a Designated Subsidiary or between one Designated
Subsidiary and another Designated Subsidiary, or absence or leave approved
by the Company, shall not be deemed a termination of employment under this
Section 11(b).
(c) A Participant's termination and withdrawal pursuant to Section 11(a) above
will not have any effect upon his eligibility to participate in a
subsequent Offering by completing and filing a new Participation Form
pursuant to Section 6 above or in any similar plan that may hereafter be
adopted by the Company.
6
<PAGE>
SECTION 12. INTEREST. No interest shall accrue on a Participant's payroll
deductions under the Plan.
SECTION 13. STOCK SUBJECT TO THE PLAN.
(a) The maximum number of shares of Common Stock that shall be reserved for
sale under the Plan shall be 250,000 shares, subject to adjustment upon
changes in capitalization of the Company as provided in Section 13(b)
below. The shares to be sold to Participants under the Plan may be, at the
election of the Company, either treasury shares (if applicable) or shares
authorized but unissued. If the total number of shares of Common Stock
that would otherwise be subject to options granted pursuant to Section 8
above on any Termination Date exceeds the number of shares then available
under the Plan (after deduction of all shares for which options have been
exercised or are then outstanding), the Company shall make a pro rata
allocation of the shares of Common Stock remaining available for issuance
in as uniform and equitable a manner as is practicable. In such event, the
Company shall give written notice of such reduction of the number of
shares subject to the option to each Participant affected thereby and
shall return any funds accumulated in each Participant's account that are
in excess of the funds need to purchase the shares of Common Stock in that
Participant's account as soon as practicable after the Termination Date of
such Offering.
(b) If any option under the Plan is exercised after any Common Stock dividend,
split-up, recapitalization, merger, consolidation, combination or exchange
of Common Stock or the like, occurring after the shareholders of the
Company approve the Plan, the number of shares of Common Stock to which
such option shall be applicable and the Option Price for such Common Stock
shall be appropriately adjusted by the Company.
(c) If Participants are deemed to have purchased fractional shares of Common
Stock pursuant to Section 9(b), the aggregate of such fractional share
interests at any given time will be applied to reduce the maximum number
of shares of Common Stock remaining available for issuance under the Plan;
provided, however, that any fractional shares that are paid out to a
Participant in cash pursuant to Section 11 will automatically again become
available for issuance under the Plan.
SECTION 14. DESIGNATION OF BENEFICIARY.
(a) In the discretion of the Committee, a Participant may file a written
designation of a beneficiary who is to receive shares of Common Stock
and/or cash, if any, from the Participant's account under the Plan in the
event of such Participant's death at a time when cash or shares of Common
S tock are held for his account.
(b) Such designation of beneficiary may be changed by the Participant at any
time by written notice given to the Company's Chief Financial Officer. In
the event of the death of a Participant in the absence of a valid
designation of a beneficiary who is living at the time of such
Participant's death, the Company shall deliver such shares of Common Stock
and/or cash to the executor or administrator of the estate of the
Participant; or, if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may
deliver such shares of Common Stock and/or cash to the spouse or to any
one or more dependents or relatives of the Participant; or, if no spouse,
dependent or relative is known to the Company, then to such other person
as the Company may designate.
SECTION 15. TRANSFERABILITY. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws of
descent and distribution, or as provided in Section 14 above) by the
Participant. Any such attempt at assignment, transfer,
7
<PAGE>
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Section 11(a)
above.
SECTION 16. SHARE TRANSFER RESTRICTIONS.
(a) Shares of Common Stock shall not be issued under the Plan unless such
issuance is either registered under the Securities Act and applicable
state securities laws or is exempt from such registrations.
(b) Shares of Common Stock issued under the Plan may not be sold, assigned,
transferred, pledged, encumbered, or otherwise disposed of (whether
voluntarily or involuntarily) except pursuant to registration under the
Securities Act and applicable state securities laws, or pursuant to
exemptions from such registrations.
(c) Each certificate representing shares of Common Stock issued under the Plan
to a Participant who is subject to Section 16 of the Exchange Act shall be
stamped with a legend in substantially the following form, unless the
Committee, in its sole discretion, determines not to require such a
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMITTEE.
SECTION 17. AMENDMENT OR TERMINATION. The Plan may be amended by the Board
from time to time to the extent that the Board deems necessary or appropriate in
light of, and consistent with, Section 423 of the Code; provided, however, that
no such amendment shall be effective, without approval of the shareholders of
the Company, if shareholder approval of such amendment is then required pursuant
to Rule 16b-3 under the Exchange Act or any successor rule or Section 423 of the
Code. The Board also may terminate the Plan or the granting of options pursuant
to the Plan at any time; provided, however, that the Board shall not have the
right to modify, cancel, or amend any outstanding option granted pursuant to the
Plan before such termination unless each Participant consents in writing to such
modification, amendment or cancellation.
SECTION 18. NOTICES. All notices or other communications by a Participant to
the Company in connection with the Plan shall be deemed to have been duly given
when received by the Company's Chief Financial Officer or by any other person
designated by the Company for the receipt of such notices or other
communications, in the form and at the location specified by the Company.
SECTION 19. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon the
consummation of the distribution of the shares of the Company's Common Stock by
Bio-Vascular, Inc. ("Bio-Vascular") in connection with the spin-off of the
Company from Bio-Vascular. The distribution was consummated on May 12, 1997.
SECTION 20. MISCELLANEOUS. The headings to Sections in the Plan have been
included for convenience of reference only. The masculine pronoun shall include
the feminine and the singular or the plural, whenever appropriate. Except as
otherwise expressly indicated, all references to Sections in the Plan shall be
to Sections of the Plan. The Plan shall be interpreted and construed in
accordance with the laws of the State of Minnesota.
Approved by the Company's Board of Directors: March 19, 1997.
Approved by the Company's shareholder: May 1, 1997.
8
<PAGE>
VITAL IMAGES, INC.
EMPLOYEE STOCK PURCHASE PLAN
PAYROLL DEDUCTION AUTHORIZATION FORM AND SUBSCRIPTION AGREEMENT
---------------------------------------------------------------
______ Original Application
______ Change in Payroll Deduction Amount
1. ___________________________________ hereby elects to participate in the
Vital Images, Inc. Employee Stock Purchase Plan (the "Plan") and subscribes
to purchase shares of the Company's Common Stock (the "Shares") in
accordance with this Agreement and the Plan.
2. I hereby authorize payroll deductions, beginning ____________, 19__, from
each paycheck in the amount of $_______________ (may not exceed 10% of
total compensation on each payday) in accordance with the Plan.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares in accordance with the Plan, and that shares will be
purchased for me automatically at the end of each three-month offering
period under the Plan unless I withdraw my accumulated payroll deductions,
withdraw from the Plan, or both, by giving written notice to the Company
prior to the end of the offering period, as provided in the Plan.
4. Shares purchased for me under the Plan should be issued or held in an
account in the name(s) of:
_______________________________________________
(name(s))
_______________________________________________
(address)
_______________________________________________
_______________________________________________
(social security number)
5. I understand that if I dispose of any Shares received by me pursuant to the
Plan within two years after the first day of the offering period during
which I purchased such Shares, I may be treated for federal income tax
purposes as having received ordinary income at the time of such disposition
in an amount equal to the excess of the fair market value of the Shares at
the time such Shares were delivered to me over the option price paid for
the Shares. I hereby agree to notify the Company in writing within 30 days
after the date of any such disposition. However, if I dispose of such
shares at any time after the expiration of the two-year holding period, I
understand that I will be treated for federal income tax purposes as having
received income only at the time of such disposition, and that such income
will be taxed as ordinary income only to the extent of an amount equal to
the lesser of (a) the excess of the fair market value of the Shares at the
time of such disposition over the amount paid for the Shares under the
option, or (b) the excess of the fair market value
<PAGE>
of the Shares over the option price, measured as if the option had been
exercised on the first day of the offering period during which I purchased
such shares. The remainder of the gain, if any, recognized on such
disposition will be taxed at capital gains rates.
6. I have read the current prospectus for the Vital Images, Inc. Employee
Stock Purchase Plan.
Date:________________ ________________________________
Signature of Employee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE QUARTER ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 314,382
<SECURITIES> 5,180,951
<RECEIVABLES> 451,493
<ALLOWANCES> 60,000
<INVENTORY> 75,671
<CURRENT-ASSETS> 6,120,801
<PP&E> 2,413,446
<DEPRECIATION> 1,471,636
<TOTAL-ASSETS> 7,102,878
<CURRENT-LIABILITIES> 805,193
<BONDS> 0
0
0
<COMMON> 48,122
<OTHER-SE> 6,068,571
<TOTAL-LIABILITY-AND-EQUITY> 7,102,878
<SALES> 672,185
<TOTAL-REVENUES> 765,865
<CGS> 194,466
<TOTAL-COSTS> 218,877
<OTHER-EXPENSES> 1,769,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,142,761)
<INCOME-TAX> 3,118
<INCOME-CONTINUING> (1,145,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,145,879)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
