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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended October 31, 1999
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: 0-13907
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BIO-VASCULAR, INC.
(Exact name of Registrant as specified in its charter)
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Minnesota 41-1526554
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(State of Incorporation) (I.R.S. Employer Identification No.)
2575 UNIVERSITY AVENUE, ST. PAUL, MINNESOTA 55114-1024
(Address of principal executive offices)
TELEPHONE NUMBER: (651) 603-3700
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Rights
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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______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of January 21, 2000, 8,975,383 shares of Common Stock of the Registrant were
outstanding, and the aggregate market value of the Registrant's outstanding
Common Stock (based upon the last reported sale price of the Common Stock on
that date by the Nasdaq National Market), excluding shares owned beneficially by
executive officers and directors, was approximately $25,141,000.
Parts I and II of this Annual Report on Form 10-K incorporate by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Annual Report to Shareholders for the fiscal year ended October 31,
1999 (the "1999 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates documents incorporated by reference (to the extent specific
sections are referred to herein) from the Registrant's Proxy Statement for its
Annual Meeting of Shareholders to be held February 22, 2000 (the "1999 Proxy
Statement").
Tissue-Guard(TM), Supple Tissue-Guard(TM), Peri-Strips(R), Peri-Strips Dry(R),
PSD Gel(TM), Dura-Guard(R), Vascu-Guard(R), Supple Peri-Guard(R), Peri-Guard(R),
CV Peri-Guard(R), Ocu-Guard(TM), Biograft(R), Flo-Rester (R), Bio-Vascular
Probe(R) and Flo-Thru Intraluminal Shunt(TM) are trademarks of the Company.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. For this purpose, any statements contained in this Form 10-
K that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. All forward-looking statements in this document are
based on information available to the Company as of the date hereof, and the
Company assumes no obligation to update any forward-looking statements. Such
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may include, among others, those factors set forth
under the heading "Important Factors".
PART I
ITEM 1 - Business
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(a) General Development of Business
Introduction
Bio-Vascular, Inc. ("Bio-Vascular" or the "Company") develops, manufactures and
markets branded proprietary and patented specialty medical products for use in
thoracic, cardiac, neuro, vascular and ophthalmic surgery. The Company's
branded products include the Tissue-Guard product line, the Biograft peripheral
vascular graft, and surgical productivity tools used in cardiac and vascular
surgery. Tissue-Guard products are made from bovine pericardium (the membrane
surrounding the heart of cattle) processed using the Company's tissue-fixation
technology. The Tissue-Guard products, made in various configurations, are used
in a wide variety of surgical procedures and are designed to reinforce,
reconstruct and repair tissue and prevent leaks of air, blood and other body
fluids.
Through the Company's wholly-owned subsidiary, Jer-Neen Manufacturing Co., Inc.
(d/b/a Jerneen Micro Medical Technologies)("Jerneen"), the Company is a value
added original equipment manufacturer ("OEM") of micro precision wire-based
component products including precision coils, stylets and guidewire components
and subassemblies used in the medical industry. The Company acquired Jerneen
July 31, 1998.
History
Bio-Vascular was incorporated in July of 1985. In 1985, the Company was spun-
off to the shareholders of its then parent company, thereafter operating as a
separate public company. In the spin-off, the Company acquired the rights to
certain cardiovascular products, including Peri-Guard and Flo-Rester.
In 1994, the Company acquired Vital Images, Inc. ("Vital Images"), a company
involved in the development of software for three-dimensional visualization and
analysis of image data. In 1996, the Company made the decision to spin Vital
Images off. In 1997, the Company completed the spin-off distribution of all the
shares of Vital Images to the shareholders of Bio-Vascular, with Vital Images
thereafter operating as an independent company, with its own publicly traded
securities. The distribution was effected in order to allow each company to
maximize its individual strategic opportunities, as the direction of Vital
Images' business had begun to diverge from the core medical device business of
Bio-Vascular.
2
Also in 1994, the Company's branded products segment introduced Peri-Strips
staple line buttress for use in lung surgical procedures, primarily lung volume
reduction surgery ("LVRS"). Sales from Peri-Strips fueled significant revenue
growth for the Company from late 1994 through fiscal 1995, increasing from
$685,000 in fiscal 1994 to $5,500,000 in fiscal 1995. In January 1996, the
Health Care Financing Administration ("HCFA"), the agency of the U.S. Government
that controls Medicare, put in place a national policy decision not to reimburse
for LVRS. This decision by HCFA adversely affected the Company's revenues
generated from the sales of Peri-Strips, which declined to $2,900,000 in fiscal
1997. Annual revenues from Peri-Strips have remained relatively stable since
fiscal 1997, with fiscal 1998 and 1999 Peri-Strips revenues of $3,200,000 and
$3,100,000, respectively.
In July 1998, the Company completed the acquisition of Jerneen. This
acquisition broadens the Company's participation in the medical device industry,
increases the Company's immediate and long-term revenue potential and achieves a
balance of market opportunities consistent with the strategic objectives
targeted by the Company.
The Company has continued to advance and execute its strategy for growth,
focusing on opportunities to grow through acquisition, licensing and
distribution, expansion of markets for its current products, and internal new
product research and development activities. (See Research and Development on
Page 11 of this Report.)
Bio-Vascular's principal executive offices are located at 2575 University
Avenue, St. Paul, Minnesota 55114-1024. The Company can be contacted by
telephone at (651) 603-3700, by facsimile at (651) 642-9018, or by electronic
mail at info@biovascular.com.
(b) Financial Information About Industry Segments
The information under the caption "Supplemental Financial Statement and Segment
Information" on page 17 of the Company's 1999 Annual Report is incorporated
herein by reference.
(c) Narrative Description of Business
The table below summarizes the revenue contributed by the Company's significant
products or product lines for the periods indicated. The component products
segment financial results are included in the fourth quarter of fiscal 1998
(since date of acquisition) and all four quarters of fiscal 1999.
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Revenue Contribution by Significant Years Ended October 31,
Product or Product Line:
(In thousands) 1999 % 1998 % 1997 %
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Tissue-Guard Products:
Peri-Strips and Peri-Strips Dry $ 3,125 17% $ 3,233 27% $ 2,915 30%
Dura-Guard 2,550 13% 2,204 18% 1,832 19%
Other Tissue-Guard Products 2,689 14% 2,384 20% 2,020 21%
Surgical Productivity Tools 2,560 14% 2,051 17% 2,127 22%
Biograft 757 4% 748 6% 800 8%
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Total Branded Products 11,681 62% 10,620 88% 9,694 100%
Component Products 7,223 38% 1,397 12% - -
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Total Net Revenue $18,904 100% $12,017 100% $ 9,964 100%
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3
Products, Markets and Competition
Description of the Branded Products Segment
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The following table summarizes the Company's branded product lines and
associated products, and describes procedures in which such products are used.
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Product Line Product Application/Representative Procedure
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Tissue-Guard Peri-Strips Stapling buttress for sealing air leaks in lung volume reduction/lung
resection procedures and prothesis for the repair of soft tissue
deficiencies
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Peri-Strips Dry Stapling buttress for sealing air leaks in lung volume reduction/lung
resection procedures
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Vascu-Guard Vascular patch used in carotid endarterectomy and other peripheral
vascular procedures when the artery must be repaired
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Dura-Guard Repair patch used to seal the dura mater in neurosurgeries
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Peri-Guard Tissue patch used for pericardial closure and soft tissue repair
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Supple Peri-Guard More "supple" tissue patch used for pericardial closure and soft
tissue repair
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CV Peri-Guard Tissue patch used for intracardiac patching and great vessel repair
in adults
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Ocu-Guard Opthalmic wrapping material used in enucleation procedures
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Surgical Bio-Vascular Probe Tool used to locate arterial blockage in surgical bypass procedures
Productivity Tools
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Flo-Rester Internal vessel occluder used in coronary artery bypass graft surgery
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Flo-Thru Intraluminal Internal vessel stent used during minimally invasive cardiac surgery
Shunt
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Other Biograft Peripheral vascular bypass graft used in lower limb vascular
reconstruction
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Tissue-Guard Product Line
The Company's core competency in its branded products business is the
development and manufacture of tissue-based implantable medical products for use
by surgeons in various surgical procedures where reinforcing, reconstructing and
repairing tissue and preventing leaks of air, blood or other body fluids is
necessary for the achievement of a favorable outcome. Historically, surgeons
primarily used autologous tissue in situations where tissue repair was
necessary. Harvesting autologous tissue requires the surgeon to excise the
tissue from another part of the patient's body. The second surgical site
increases the cost of the procedure and lengthens the time the patient is under
anesthesia, thereby increasing the risk of complication and resulting in
additional pain and recovery time for the patient. To the extent a surgeon is
confident that the performance of a readily available medical product, whether
tissue-based or synthetic, is equal to or better than the patient's own tissue,
the Company believes the surgeon will choose the tissue-based or synthetic
product to avoid a second surgical site as a means of reducing surgical costs
and improving patient outcomes.
4
The Company's Tissue-Guard products are produced from bovine pericardium. Many
of the product characteristics and competitive advantages of this product line
are derived from the collagen configuration of the bovine pericardium.
Collagen, which is a fibrous protein found in all multi-cellular animals, makes
the pericardium durable and provides superior fluid interface properties,
similar to autologous tissue. These characteristics allow for effective host
tissue incorporation. Host cells deposit a collagen matrix on the surface of
the pericardial product allowing the Tissue-Guard product to integrate into the
host tissue. The Company believes this integration enhances the long-term
tensile strength (the maximum stress a material subjected to a stretching load
can withstand without tearing) of its Tissue-Guard products.
The bovine pericardium is processed using proprietary and patented tissue-
fixation technologies. The tissue is treated with glutaraldehyde and other
proprietary chemical treatments to prevent degradation of the tissue and to
render it biologically compatible with the host tissue. According to studies
commissioned by the Company, the tissue-fixation technologies used by the
Company reduce the level of residual glutaraldehyde remaining in the processed
tissue to one of the lowest levels documented in the industry, resulting in a
lower incidence of host tissue inflammatory response and promoting host tissue
incorporation similar to the body's natural healing process.
Peri-Strips and Peri-Strips Dry
Peri-Strips and Peri-Strips Dry soft tissue stapling buttresses are used in a
variety of pulmonary procedures including bullectomies, bronchial resections,
lobectomies, segmentectomies, wedge resections and LVRS. These products provide
for reapproximation and reinforcement of the surgical staple line to prevent air
leaks at the site. Peri-Strips and Peri-Strips Dry are customized to fit
disposable, reusable and endoscopic staplers of varying sizes made by a variety
of manufacturers.
LVRS is an alternative to traditional emphysema treatment such as medical
therapy or lung transplant. Lung transplantation is the only known cure for
emphysema, but like other transplant procedures, is extremely expensive
considering the high degree of risk associated with the procedure, the
inadequate supply of donor lungs and the requirement that the patient receive
anti-rejection drugs for the remainder of his or her lifetime. There are non-
surgical therapies, although less expensive than surgical alternatives, which
offer only temporary relief and become less effective as the disease progresses.
In LVRS, the surgeon uses a stapling device to remove sections of damaged
tissue, typically 20% to 30% of each lung. By removing the most diseased
tissue, the remaining lung tissue has room to expand, improving breathing
capacity by enabling the diaphragm muscles to regain their function and allow
the rib cage and diaphragm to return to their normal size and state. In 1994,
Dr. Joel Cooper, a pioneer in lung transplant surgery, modified LVRS using
strips of Supple Peri-Guard to reinforce the staple line to prevent air leakage
at the staple-line. Peri-Strips and Peri-Strips Dry were developed to suit the
types of surgical staplers most commonly used in LVRS. While LVRS is not a cure
for emphysema, the results from the procedure to date are very encouraging based
on the peer-reviewed published literature. Generally, the literature shows that
patients undergoing the procedure have reduced shortness of breath, improved
exercise tolerance and improved quality of life.
There are more than 30 clinical papers published regarding the use of bovine
pericardium medical products, such as Peri-Strips and Peri-Strips Dry, to reduce
air leaks and improve patient outcomes. According to a study commissioned by
the Company, using Peri-Strips Dry in surgical procedures to treat lung cancers
and other lung tumors improved the patient recovery times through decreased
duration of air leak, time to chest tube removal and hospital stay in comparison
to procedures completed without the product. The study's reported one-day
decrease in hospital stays could result in a net savings of up to $4,500 per
patient, as estimated by the Company.
Dura-Guard
Dura-Guard, a dural repair patch, is primarily used in craniotomy procedures
when the dura must be repaired and suturing without a patch is not deemed
sufficient. Craniotomies (surgical operations involving the brain and skull)
are typically performed to treat various brain conditions, such as tumors,
aneurysms, blood clots, head injuries and abscesses. The dura, the fibrous
layer below the skull which protects the brain and spinal cord must be cut with
a scalpel or scissors and resected to expose the brain during these procedures.
After the specific brain condition has been treated by the surgeon, the dura
must be closed to prevent leakage of cerebral spinal fluid. While the dura is
5
frequently closed with direct suture, surgeons who consider the prevention of
fluid leakage to be critical to the outcome of the operation will use a dural
repair patch.
Dura-Guard is designed to close dural incisions by fusing with the patient's
dura but with little or no adhesion (an abnormal union between two tissue
surfaces not intended to be joined) to the underlying brain cortex, a
complicating factor following any cranial surgery. Studies commissioned by the
Company have shown that fibrous bone cells invade the Dura-Guard surface facing
the cranium, as they do the human dura, inviting good host tissue incorporation.
The collagen configuration of the processed bovine pericardium in Dura-Guard
reapproximates around the sutures used to affix the patch, thereby providing a
barrier between the skull and the tissue layers underlying the dura and
preventing the leakage of cerebral spinal fluid.
Vascu-Guard
Vascu-Guard, a vascular repair patch, is primarily used in carotid
endarterectomy and other peripheral vascular procedures in which an artery must
be repaired and closing the vessel without a patch is insufficient. Carotid
endarterectomy is a surgical procedure used to remove atherosclerotic plaque
build-up in carotid arteries, the principal arteries located in the neck that
supply blood to the brain.
The build-up of atherosclerotic plaque (fat deposits with a proliferation of
fibrous connective cells along the artery walls) in the carotid arteries
increases the risk of stroke. A substantial portion of strokes is caused by a
fragment of atherosclerotic plaque breaking away from the inner wall of the
carotid artery and becoming lodged in an artery in the brain. Drug therapy is
often prescribed to treat early indications of atherosclerotic plaque build-up.
If the condition progresses to a point where drug therapy is not effective,
surgical intervention is often required.
Although the artery often can be closed without a patch, use of a patch has been
shown to significantly reduce the risk of recurrent disease. Certain patients
require patching due to the small size of their carotid arteries, or to decrease
the incidence of post-operative occlusion. The Company has commissioned studies
that have shown that Vascu-Guard supports endothelialization (growth of a cell
layer normally lining the interior of blood vessels) and that its non-
thrombogenic blood flow surface imitates the blood flow characteristics of
autologous vessels. In addition, its pulsatility (ability to reflect movement
signifying the rhythmic pumping of the heart) allows a surgeon to readily verify
normal blood flow after implantation.
Ocu-Guard
Ocu-Guard, an orbital implant wrap, is used in enucleation (removal of the eye)
surgery. Enucleation is a procedure which removes a patient's eye as a result
of trauma, malignancy or end-stage diseases such as glaucoma or diabetes.
Following enucleation surgery, a patient commonly receives an orbital implant
from which the visible prosthetic eye is attached. The implant used in the
majority of these procedures requires a soft-tissue wrap, such as Ocu-Guard.
Ocu-Guard is manufactured in convenient, pre-formed configurations to fit the
most common orbital implant sizes. The preformed configuration reduces implant
preparation time, provides ease of insertion and a snug fit around the implant.
Ocu-Guard has excellent handling characteristics allowing for ease of suturing.
Ocu-Guard also has strength and durability for suture retention necessary for
muscle attachment, which provides the motility of the prosthetic eye and also
promotes vascular in-growth again promoting the motility of the prosthesis.
CV Peri-Guard
CV Peri-Guard, an intracardiac repair patch, is used in a variety of surgical
procedures performed on the heart. Specific procedures in which CV Peri-Guard
is used include aortic and atrial patching, atrial and ventricular septal defect
repair, valve annuloplasty, and ventricular aneurysm repair. The Company's Peri-
Guard products have over a 15 year history of clinical use as a cardiac patch,
but cardiac indications for use under the Company's FDA marketing clearance were
previously limited to pericardial closure. With CV Peri-Guard, marketing
clearance was received from the FDA for a much broader range of cardiac uses and
specifically for intracardiac repair. CV Peri-Guard is the first biological
product cleared by the FDA for intracardiac patching.
6
Biograft
Biograft, a peripheral vascular graft manufactured from human umbilical veins,
is indicated for use in lower limb vascular reconstruction when a saphenous vein
is not available. Certain diseases, such as diabetes, can cause a restriction
or occlusion in the arteries which provide blood to the legs. If left
untreated, insufficient blood flow can ultimately result in the need for
amputation. If drug therapy is not deemed an effective treatment based upon the
severity of the restriction or blockage, the use of a graft in peripheral
vascular reconstructive surgery may be needed. In this type of surgical
procedure, the surgeon can bypass the blocked artery to regain blood
circulation, thereby saving the affected limb. Diabetics, in particular, are
often at risk for amputation of a lower limb due to insufficient blood flow in
the femoral artery in the thigh. By implanting a graft from the upper portion
of the femoral artery to either the lower femoral artery or to the popliteal
artery below the knee, the surgeon is able to increase blood flow below the site
of the restriction or blockage. Long-term patency (openness), and a thrombo-
resistant surface that provides smooth blood flow are essential qualities of an
effective graft.
Saphenous veins (autologous veins from the leg) typically provide the most
effective grafting material. In many instances, however, a suitable saphenous
vein may be unavailable in sufficient quantity or quality, and a substitute
graft must be used. The primary alternative substitute grafts involve synthetic
grafts made from PTFE, bio-synthetic materials or tissue-based grafts, such as
Biograft.
Biograft offers advantages over competitive vein grafts produced from synthetic
materials due to its thrombo-resistant surface, which provides smooth blood flow
and minimizes turbulence and risk of occlusion. Other competitive advantages of
Biograft include its long-term patency and its similarity to an autologous blood
vessel, minimizing intimal hyperplasia (a build up of cells on the interior of
the blood vessel, which results in restricted blood flow). In addition, a
knitted and supportive Dacron mesh placed around the graft allows for easier
handling and promotes tissue integration for strength and stability.
Surgical Productivity Tools: Bio-Vascular Probe, Flo-Rester and Flo-Thru
Intraluminal Shunt
Bio-Vascular Probe is a flexible shaft with varying sizes of bulbous tips on
either end. Surgeons use Bio-Vascular Probes to locate occlusions or blockages
in arteries and to ascertain the blood flow characteristics of arteries. A Bio-
Vascular Probe is inserted and fed into an artery. When the tip of the probe
meets resistance, the surgeon is able to identify the exact location of the
occlusion. The probe is then extracted and a bypass is completed below the
occlusion. In addition, a Bio-Vascular Probe can be used to atraumatically lift
the edge of the incision to assist the surgeon in the accurate placement of
sutures.
Flo-Rester, a vessel occluder, is manufactured from medical grade silicone.
Flo-Rester products are designed to interrupt blood flow. In surgical
procedures where continual blood flow is not required, Flo-Rester provides a
stented, blood-free, operative site during surgery. These products are
primarily used during coronary artery bypass graft surgeries in which blood is
routed past the heart through a heart / lung bypass machine in order to keep the
heart free of blood during surgery. During such procedures, incidental blood
flow can obstruct the surgeon's view of the operative site and interfere with
precise suturing. Flo-Rester consists of a flexible shaft with small bulbs at
each end that are inserted into the blood vessel to stop the blood flow at the
point where the artery bypass is sutured to the artery.
Flo-Thru Intraluminal Shunt is intended for use in minimally invasive beating
heart cardiac procedures where the patient is not placed on a heart / lung
bypass machine. The device enables a surgeon to perform a safe, easy and
precise anastomosis during coronary artery bypass by facilitating a bloodless,
stented operative field while maintaining distal blood flow. Flo-Thru
Intraluminal Shunt is a single-piece radiopaque silicone tube with atraumatic
bulbs, of varying size, on either ends of the silicone tube. Similar to Flo-
Rester, a radiopaque tab identifying the outer diameter of the bulbs is attached
to the shunt by a tether, which is used to facilitate positioning and removal.
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Competition
The Company's branded products compete primarily on the basis of product
performance, service and price. The surgical products market in which the
Company competes is characterized by intense competition. This market is
dominated by established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company.
Many of these competitors offer broader product lines within the Company's
specific product market, particularly in the Company's surgical tool product
markets and/or in the general field of medical devices and supplies. Broad
product lines give many of the Company's competitors the ability to negotiate
exclusive, long-term medical device supply contracts and, consequently, the
ability to offer comprehensive pricing for their products, including those that
compete with the Company's products. By offering a broader product line in the
general field of medical devices and supplies, competitors may also have a
significant advantage in marketing competing products to group purchasing
organizations, health maintenance organizations and other managed care
organizations that increasingly seek to reduce costs by centralizing and
consolidating their purchasing functions.
Competition with Tissue-Guard products is primarily from synthetic materials,
other biological tissues and cadaveric tissue. The ability of these alternative
products to compete with Tissue-Guard products varies based on each such
product's indication for use, relative feature benefits and surgical preference.
There can be no assurance that competing products will not achieve greater
acceptance or that future products developed by competitors will not offer
similar or enhanced performance advantages relative to the Tissue-Guard
products.
Synthetic patches are generally cheaper to produce and to the extent that
comparable synthetic patches are available and effective in surgical procedures,
the Company faces significant price competition for its Tissue-Guard products.
W. L. Gore & Associates, Inc., manufacturer of Gore-Tex(R), is believed to have
a prominent position in the synthetic patch market. There are other multi-
purpose patches made from bovine and other types of animal tissue that compete
with the Company's products, including bovine pericardium products produced by
Baxter International Inc., Medtronic, Inc. and Shelhigh, Inc. The Company does
not believe that these alternative bovine pericardium products have specific FDA
marketing clearance for all surgical specialty markets in which the Company
competes. The Company believes that the collagen characteristics exclusive to
tissue, the special configuration of its Tissue-Guard products and the
proprietary and patented tissue-fixation technology it employs offer significant
product performance and it intends to continue to compete on these bases.
Cadaveric tissue from tissue banks is sometimes utilized in neurological and
ophthalmic surgery. Tissue-Guard products offer the distinct advantage of
availability, product uniformity and ideal handling characteristics.
Competitive products to Biograft include synthetic grafts and other biological
grafts. Surgeons generally prefer the patient's own vessels for lower limb
vascular reconstruction. When the patient's own vessels are not available in
sufficient quality or quantity, surgeons choose a prosthetic graft such as
Biograft, or synthetic grafts made from PTFE produced by W. L. Gore &
Associates, Inc., IMPRA, Inc. or other grafts made of biological materials, such
as the CryoVein(R) by CryoLife, Inc.
Description of the Component Products Segment
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The component products segment produces critical micro components primarily from
wire materials, which it supplies on an OEM basis according to customer
specifications. These products include micro precision coils, stylets and
related wire products and guidewire components and subassemblies. Each of these
component categories comprises approximately one third of the segment's revenues
according to customer specifications.
Micro precision coils
Micro precision coils are precision wire components, comprised normally of
several strands of specialty wire materials wound into specific configurations.
These coils are manufactured utilizing proprietary processes and typically
involve the use of specialty metals such as medical grade stainless steel,
silver, platinum, and other similar metals. These micro coils are used to either
carry the electrical current required for operation of a medical device or
8
to assist the installation of the medical device within the patient's body.
Stylets and related wire products
Stylets and related wire products are produced through the use of proprietary
processes and medical grade stainless steel. This product category also
includes some plastic components. Stylets are typically used in the placement
of cardiovascular and vascular devices within the patient's body.
Guidewire components and subassemblies
Guidewire components and subassemblies are made of medical grade stainless
steel, and are manufactured through a combination of proprietary processes and
one critical, but adapted, grinding process. A guidewire is typically used at
the beginning of a surgical procedure to locate and provide a channel for the
placement of a diagnostic or therapeutic device.
There are two significant trends affecting the growth and development of the
Company's component product business. The first is the rapidly growing use of
implantable defibrillation devices in the treatment of sudden cardiac death.
The second trend is the development of less invasive diagnostic and therapeutic
procedures in the cardiovascular and interventional medicine segments. These
procedures require improved diagnostics, therapies, and placement of medical
devices such as stents. Significant international markets also exist in Europe
and Japan.
The primary companies involved in the industry segments mentioned above include
Medtronic, Inc., Guidant Corporation (which acquired Sulzer Intermedics during
fiscal 1999), St. Jude Medical (through its Pacesetter unit) and Boston
Scientific. In addition, numerous early stage companies are pursuing new
technologies in cardiovascular and interventional medicine, especially
neurological intervention. The Company anticipates that the cardiovascular and
interventional medicine industry will continue to experience significant
consolidation with the acquisition of earlier stage companies by the major
industry participants. Although there can be no assurance, the Company believes
that this consolidation will not hinder its component products segment growth
opportunity as the major participants are expected to continue to seek multiple
supply sources for critical device components such as those offered by the
Company.
Competition
The component products segment competes on the basis of superior quality of
processes and production, rapid and flexible customer response, and to a modest
degree, price. The component part usually comprises a minor portion of the total
device-level price. Accordingly, vendor performance and responsiveness are
generally more critical factors. There are four primary competitors to the
Company, all of which are privately held. One competitor is substantially
larger than the Company with annual revenues estimated in the range of $100
million. Given the concentration of the wire component product industry, the
Company believes that medical device customers are generally motivated to
promote healthy competition among their various suppliers in order to ensure
multiple supply sources for their critical device components.
Intellectual Property
Description of the Branded Products Segment
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In its branded products business, the Company relies on patents, trade secrets
and proprietary know-how which it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties.
Supple Peri-Guard, which is used in the manufacture of the majority of the
Company's Tissue-Guard products, is protected exclusively by trade secrets. The
Company owns United States patents related to Peri-Strips, Peri-Strips Dry and
Peri-Guard. During the year ended October 31, 1999, the Company filed two
patent applications to protect new and proprietary technologies. One of these
applications relates to the manufacturing and use of stent coverings formed of
biological tissues, and the other is for the Company's new "resorbable" line of
tissue implant materials. The Company currently has a United States patent
pending relating to Ocu-Guard. The Company also has an exclusive, worldwide,
perpetual license to make, use and sell its Flo-Rester product.
9
Description of the Component Products Segment
- ---------------------------------------------
In its component products business, the Company relies exclusively on trade
secret protection for its processes. The Company seeks to practice strict trade
secret discipline with all employees, consultants, customers and other parties.
A non-disclosure protocol is maintained on behalf of each of its customers,
consistent with the highly competitive nature of these customers at the base
device-level. The technology and equipment utilized in the manufacturing process
is a combination of proprietary know-how, and the adaptation of and development
utilizing readily-available equipment.
Marketing and Customers
Description of the Branded Products Segment
- -------------------------------------------
The Company's branded products strategy is to ensure that the Company has
products of superior quality supported by innovative and effective sales and
marketing programs. These programs include surgical trade shows, support of the
gathering, publication and presentation of clinical data and new product
information by key surgeons and the development of strategic physician
alliances. The marketing and sales strategy of the Company also includes
developing and maintaining a close working relationship with the hospitals and
surgeons who purchase and use the Company's products in order to assess and
satisfy their needs.
The Company sells its products through a combination of third-party distributors
and independent sales representatives. The Company's marketing and sales
function works closely with these distributors and representatives on the
implementation of marketing strategy and sales assistance including product
knowledge, training and presentation. The Company generally has written
agreements with its distribution partners. These agreements generally impose
limited geographic exclusivity and minimum purchase obligations. These
agreements are typically terminable upon breach of the agreement by the
distributor, including breach of the minimum sales obligations imposed by the
agreement.
Description of the Component Products Segment
- ---------------------------------------------
The component products segment's strategy is to proactively seek significant
partnerships with each of the primary participants in the medical device markets
it serves. The primary marketing strategy is to provide a rapid, flexible and
creative response to customer needs, coupled with state of the art, high quality
production response. The Company utilizes its Technology Development Center and
Rapid Response Unit for design, development and prototype services. The
utilization of these highly-technical solutions and timely, effective delivery
of development prototypes is believed to provide a key competitive advantage to
both the customer and the component products business. The component products
segment has also achieved ISO 9002 certification as a further demonstration to
its customers of its quality commitment. The segment's internal sales and
marketing function is supplemented by the capabilities of an external third
party sales representative group.
Information regarding the Company's significant customers under the caption
"Major Customers and Net Revenue by Geographic Area" on page 23 of the Company's
1999 Annual Report is incorporated herein by reference.
Information Regarding Both Segments
Backlog
- -------
The branded products segment normally does not experience significant backlogs.
Because the component products business is "build-to-order", the component
products segment typically has firm customer orders awaiting manufacture and
future release. The component products order backlog was $1,406,000 at October
31, 1999 as compared to $1,051,000 at October 31, 1998. The component products
segment does not expect any difficulty fulfilling these backlog orders as
scheduled in fiscal 2000. The Company does not believe that its backlog is a
meaningful indicator of its future business in the component products segment.
10
Raw Materials
- -------------
The Company acquires bovine pericardium for use in the Tissue-Guard product line
from United States Department of Agriculture ("USDA") inspected meat packing
facilities. The Company acquires human umbilical cords for use in Biograft from
various hospitals throughout the United States. The supply of wire, plastics
and plastic components required for the branded surgical productivity tools and
component products is currently adequate. The Company has not experienced any
product shortages arising from interruptions in the supply of any raw materials
or components, and has identified alternative sources of supply for significant
raw materials and components.
Research and Development
- ------------------------
As a component of the Company's business growth strategy, the Company continues
to make a significant investment in new product development in both its branded
and component products businesses.
The majority of the Company's investment is on branded product opportunities
applying both existing and newly developed technological expertise in the
processing of biological tissues. Current branded product development efforts
are primarily directed towards a sling for the surgical treatment of female
urinary stress incontinence, a small diameter graft and a stent covering
utilizing biological tissue. All three of these projects involve new and
advanced tissue formats which have been under development for approximately two
years. The animal feasibility testing phase for each of these projects was
begun in early fiscal 2000. These are projects with long development timelines,
but potentially very large returns.
The Company also targets research resources to the design and engineering of
development stage solutions to meet its component products customers'
specifications. This is a partnership to resolve problems and achieve high
performance solutions, typically occurring when the customer's program is
entering the prototype stage. During fiscal 1999, the component products
business opened its Technology Development Center (TDC), which was established
to provide creative solutions for their customers in addition to rapid response
prototyping. The design rights to the components produced by the component
products segment accrue to the customer in the vast majority of cases.
Governmental Regulation
General
- -------
The medical device industry in which the Company's branded products segment and
the customers of the Company's component product segment operate is subject to
extensive and rigorous regulation by the Food and Drug Administration ("the
FDA") and by comparable agencies in foreign countries. In the United States,
the FDA regulates the introduction, manufacturing, labeling and record keeping
procedures for medical devices including the Company's branded products and
medical devices incorporating the Company's component products.
Food and Drug Administration
- ----------------------------
FDA regulations classify medical devices as either Class I, II or III devices,
which are subject to general controls, special controls or pre-market approval
("PMA") requirements, respectively. While most Class I devices are exempt from
pre-market submission, it is necessary for most Class II devices, as well as
some Class I devices to be cleared by a 510(k) pre-market notification prior to
marketing. This establishes that the device is ''substantially equivalent'' to
a device that was legally marketed prior to May 28, 1976, the date on which the
Medical Device Amendments of 1976 became effective. The 510(k) pre-market
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device or
the particular application for the device requires a more rigorous review, the
FDA will require the manufacturer to submit a PMA application for a Class III
device that must be reviewed and approved by the FDA prior to sale and marketing
of the device in the United States. The PMA application must contain the
11
results of clinical trials and relevant prototype tests, laboratory and animal
studies. It must also contain a complete description of the device , its
components and a detailed description of the methods, facilities and controls
used for manufacturing, including the method of sterilization. In addition, the
submission must include the proposed labeling, advertising literature and
training methods, if applicable. The process of obtaining PMA can be expensive,
uncertain, lengthy and frequently requires anywhere from one to several years
from the date of FDA submission, if approval is obtained at all. Moreover, PMA,
if granted, may include significant limitations on the indicated uses for which
a product may be marketed. FDA enforcement policy strictly prohibits the
marketing of approved medical devices for unapproved uses. In addition, product
approvals can be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing.
Of the Company's current branded products, Biograft is a Class III device.
Biograft received marketing clearance from the FDA pursuant to the PMA process.
All other branded products have all been classified as Class II medical devices
and have received 510(k) marketing clearance from the FDA.
The Company's branded products manufacturing operation is subject to periodic
inspections by the FDA, whose primary purpose is to audit the Company's
compliance with the Quality System Regulations (''QSR'') published by the FDA
and other applicable government standards. Strict regulatory action may be
initiated in response to audit deficiencies or to product performance problems.
The Company believes that its manufacturing and quality control procedures are
in compliance with the requirements of the FDA regulations.
International Regulation
- -------------------------
International regulatory bodies have established varying regulations governing
product standards, packaging and labeling requirements, import restrictions,
tariff regulations and duties and tax. Many of these regulations are similar to
those of the FDA. In Japan, a potentially significant market for the Company's
branded products, clinical trials of certain branded products are required
before such products can be cleared for sale in the Japanese market. To date,
this has delayed the Company's market entry in some cases, but has not
ultimately prevented sales in Japan of any of the Company's branded products.
The Company relies on its independent distributors to comply with the majority
of the foreign regulatory requirements, including registration of the Company's
branded products with the appropriate governmental authorities. To date, the
Company has been successful in complying with the regulatory requirements in
most foreign countries in which its branded products are marketed. (See
Important Factors - Bovine Tissue Products on Page 14 of this Report.)
The registration system in the European Union ("EU") for the Company's branded
products requires that the Company's quality system conform with the ISO 9001
international quality standard and that its branded products conform with
"essential requirements" set forth by the Medical Device Directive ("MDD"). The
Company's manufacturing facilities and processes under which the Company's
branded products are produced were inspected and audited by the British
Standards Institute ("BSI") to verify the Company's compliance with the
essential requirements of the MDD. BSI also verified that the Company's quality
system conforms with the ISO 9001 international quality standard and that its
products conform with the "essential requirements" set forth by the MDD for the
class of branded products produced by the Company. BSI certified the Company's
conformity with both the ISO 9001 standard and the MDD essential requirements,
entitling the Company to place the "CE" mark on all the Company's current
branded products, except Biograft which is exempt. (See Important Factors -
Human Tissue Products on Page 13 of this Report.)
Third Party Reimbursement
The Company's branded products are purchased primarily by hospitals and other
end-users, and its unbranded component products are sold directly to medical
device manufacturers which distribute finished medical devices to hospitals and
other end-users. Hospitals and end-users of such products, in turn, bill
various third party payers for the services provided to the patients. These
payers, which include Medicare, Medicaid, private health insurance plans and
managed care organizations, reimburse all or part of the costs and fees
associated with the procedures utilizing the Company's products.
The availability and level of reimbursement from third-party payers is
significant to the Company's business. For
12
Medicare carriers, HCFA may establish a national coverage policy, including the
amount to be reimbursed, for coverage of claims submitted for reimbursement
related to a specific procedure. Private health insurance plans and managed care
organizations make their own determinations regarding coverage and reimbursement
based either upon "usual and customary" fees or, increasingly, upon a similar
prospective payment system.
In response to the focus of national attention on rising health care costs, a
number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payers to curb these costs. The development or increased use of
more cost effective treatments for diseases requiring surgeries currently
utilizing the Company's branded products could cause such payers to decrease or
deny reimbursement for such surgeries or to favor non-surgical alternatives.
There has also been a significant increase in the number of Americans enrolling
in some form of managed care plan. Higher managed care utilization typically
drives down the payments for health care procedures, which in turn places
pressure on medical supply prices. This causes hospitals to implement tighter
vendor selection and certification processes, by reducing the number of vendors
used, purchasing more products from fewer vendors and trading discounts on price
for guaranteed higher volumes to vendors. Hospitals have also sought to control
and reduce costs over the last decade by joining group purchasing organizations
or purchasing alliances. The Company cannot predict what continuing or future
impact these practices, the existing or proposed legislation, or such third-
party payer measures may have on its future business, financial condition or
results of operations.
Employees
At October 31, 1999, the Company employed approximately 220 full-time and part-
time individuals. The Company's employees are not represented by a union, and
the Company considers its relationship with its employees to be good.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The information under the caption "Major Customers and Net Revenue by Geographic
Area" on page 23 of the Company's 1999 Annual Report is incorporated herein by
reference.
ITEM 1A - Important Factors
- ---------------------------
The following factors are important and should be considered carefully in
connection with any evaluation of the Company's business, financial condition,
results of operations and prospects. Additionally, the following factors could
cause the Company's actual results to materially differ from those reflected in
any forward-looking statements of the Company.
Health Care Industry: Health care industry factors, including the
unpredictability of reductions and limitations on third-party (governmental
health programs, private health insurance, managed care organizations and other
similar programs) reimbursement levels for procedures using the Company's
products and increased customer demands for price concessions.
Competitive Industry: Competitive industry factors including the Company's and
its component business' customer's ability to contend with rapid product
innovation and technological change in the medical device industry, and its
ability to effectively compete with larger, well-established manufacturers of
competing products.
Intellectual Property: Intellectual property factors, including the protection
of intellectual property through trade secrets, propriety know-how,
confidentiality agreements and patents, both owned and licensed, and the
Company's ability to ensure such protective measures are obtained and remain
effective to keep competitors from using similar technologies or from marketing
comparable products. Litigation may be necessary to enforce such protective
measures or to defend the Company's technology that a competitor claims
infringes upon their product.
Human Tissue Product: Human tissue product factors include recently focused
attention on the safety of tissue banks, spurred by incidents of the
transmission of human disease during tissue transplantation. In the United
States,
13
regulations drafted by the FDA have outlined requirements for tissue banks.
Although the current regulations have specifically excluded from regulation
medical devices subject to FDA review, including preserved umbilical cord vein
grafts such as Biograft (the Company's only product derived from human tissue),
proposed rules indicate that medical devices containing human tissue products
may be subject to additional controls. Also, the long-term future regulatory
environment for Biograft in Europe is uncertain. The MDD issued by the EU
explicitly excludes medical devices from human tissue; however, there is an
effort developing to include such devices under a comprehensive regulatory
program. This effort is in the early stages, and the Company understands that a
consensus on such a directive could take several years. As a result, Biograft
may be subject to additional regulations in the United States and Europe, which
could make it uneconomical to sell Biograft under a regulatory program.
Bovine Tissue Products: Bovine Tissue Product factors include Bovine Spongiform
Encephalopathy ("BSE"), which has been endemic in cattle in the United Kingdom
and has received much publicity in Europe regarding beef for dietary
consumption. Under the direction of the USDA, the U.S. government has had an
active program of surveillance and import controls since the late 1980's,
designed to prevent the introduction of BSE into U.S. cattle. To date all
evidence indicates that U.S. cattle are free of BSE. The Company obtains all of
its raw pericardium for its Tissue-Guard products from USDA-inspected
slaughterhouses. The World Health Organization (WHO) has categorized the the
levels of BSE infectivity of tissue and fluids on a scale of 1 to 4, with
category 4 representing no detectable infectivity. The WHO has classified raw
pericardium in category 4. The Company's notified body under the MDD, the BSI,
and French authorities have specifically reviewed Tissue-Guard sourcing and
manufacturing processes and have then certified the Company's bovine pericardium
products. Although the Company does not anticipate that countries will prohibit
the sale of Tissue-Guard products as a result of concerns related to BSE, such
prohibition by certain countries could have a material adverse effect on the
Company's business, financial condition and results of operations.
Governmental Regulation: Governmental regulation factors, including the laws
and regulations, policies and judicial decisions that affect the regulation of
the Company's products, and delays and uncertainties in the regulatory approval
process in the United States and other countries, which could result in lost
market opportunities.
Product Liability Claims and Product Recall: Product liability claims and
product recall factors, including unexpected safety, performance and efficacy
concerns with the Company's products, which could lead to product recalls,
withdrawals, loss of sales and significant liability claims against the Company.
Also, the risk that the Company's product liability insurance coverages would
not be adequate to cover product liability claims made against the Company.
Dependence on Distributors and Sales Representatives: The risk factors
pertaining to the Company's dependence on domestic and international
distributors and sales representatives, which are utilized to transact a
significant portion of the Company's current business related to its branded
products, and the effects on the Company's operations due to a loss of a
significant distributor or a significant number of other distributors or sales
representatives.
Euro Conversion: The Euro conversion factors, including the uncertain impact of
the conversion on the competitive environment in which the Company operates and
its relationships with international distributors. The Company currently
denominates all of its foreign transactions in U.S. dollars.
Dependence on Significant Customer: The risk factors associated with the
Company's significant dependence on one component products customer, and the
effects on the Company's operations and financial results with changes in the
customer's ordering patterns or loss of the customer.
ITEM 2 - Properties
- -------------------
The Company leases approximately 36,000 square feet of office and manufacturing
space for its general offices and branded products business at 2575 University
Avenue, St. Paul, Minnesota. The base rent of this lease, which commenced
August 1, 1995 and expires July 31, 2005, is approximately $255,000 annually.
The Company also has two leases on two facilities for its component products
business totaling 29,000 square feet at 471 and 475 Apollo
14
Drive, Lino Lakes, Minnesota. The base rent of the first lease for 25,000 square
feet, which commenced December 1, 1997 and expires five years from that date
with a subsequent five year option, is approximately $103,000 annually. The base
rent of the second lease for 4,000 square feet, which commenced April 1, 1999
and expires five years from that date with a subsequent five year option, is
approximately $26,500 annually. The Company pays apportioned real estate taxes
and common costs on all leased facilities. The Company believes that its current
space is adequate for the foreseeable future.
ITEM 3 - Legal Proceedings
- --------------------------
The Company is currently involved in litigation which is ordinary and incidental
to its business. Management believes losses, if any, that might eventually be
sustained from such litigation would not be material to the Company's
consolidated financial position, results of operations or cash flows for any
period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.
ITEM 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
ITEM 4A - Executive Officers of the Registrant
- ----------------------------------------------
The Company's executive officers, their ages, and their offices held as of
December 31, 1999 are as follows:
Name Age Title
- ---- --- -----
M. Karen Gilles............. 57 President, Chief Executive Officer and Director
David A. Buche.............. 38 Vice President of Marketing and Sales
Connie L. Magnuson.......... 38 Vice President of Finance, Chief Financial Officer
and Corporate Secretary
B. Nicholas Oray, Ph.D...... 48 Vice President of Research and Development
James F. Pfau............... 56 President of Jerneen
M. Karen Gilles. Ms. Gilles has served as President and Chief Executive Officer
of the Company since July 1997 and as a Director of the Company since August
1997. Prior to July 1997, Ms. Gilles held the positions of Chief Financial
Officer of the Company from December 1990, Vice President of Finance from 1989,
and Secretary of the Company from November 1991. Ms. Gilles served as the
Director of Finance and Administration of the Company from April 1989 to
December 1989. Ms. Gilles also serves on the Board of Directors of Reuter
Manufacturing, Inc.
David A. Buche. Mr. Buche has served as Vice President of Marketing and Sales
since January 1998. Prior to January 1998, Mr. Buche held the positions of
Director of Marketing from November 1997 and Director of International Marketing
and Sales from March 1995. From 1988 to February 1995, Mr. Buche held various
product
15
and sales management positions at Spectranetics Corporation, a company that
develops and markets technology for interventional cardiovascular therapy.
Connie L. Magnuson. Ms. Magnuson joined the Company as Chief Financial Officer
and Vice President of Finance in November 1997 and has served as Corporate
Secretary since February 1998. From March 1997 to November 1997, Ms. Magnuson
served as Treasurer of Northern Technologies International Corporation. From
1996 to March 1997, Ms. Magnuson served as a private financial consultant. From
1983 to 1996, Ms. Magnuson held a series of positions with Deloitte and Touche
LLP, a public accounting firm, including Audit Senior Manager and Director of
Human Resources for their Minneapolis office.
B. Nicholas Oray, Ph.D. Dr. Oray joined the Company as Vice President of
Research and Development in April 1998. From 1997 to April 1998, he served as
Director of Research and Development at Seatrace Pharmaceuticals Inc. From 1993
to 1996, Dr. Oray held a series of positions with CryoLife Inc., including
Director of Bioadhesive Manufacturing and Associate Director of Biomedical
Products Laboratory. From 1991 to 1993, he held several positions with
F.A.C.T., a clinical research organization, including Director of Regulatory
Affairs and Associate Director of Clinical Trials Operations. From 1988 to
1990, Dr. Oray served as Director of Manufacturing, Director of Sterile
Manufacturing and Director of Purification and Production Group at Carrington
Laboratories, Inc.
James F. Pfau. Upon the completion of the Company's acquisition of Jerneen in
July 1998, Mr. Pfau was named President of Jerneen, having previously served as
Managing Director of Jerneen since October 1994. From 1990 to 1994, Mr. Pfau
was a business consultant and, for a period during that time, served as CEO and
President of a medical software start-up company.
16
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information under the caption "Common Stock Information" on page 24 of the
Company's 1999 Annual Report is incorporated herein by reference.
ITEM 6 - Selected Financial Data
- --------------------------------
The financial information in the table under the caption "Financial Highlights"
on page 1 of the Company's 1999 Annual Report is incorporated herein by
reference.
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 7-10 of the Company's
1999 Annual Report is incorporated herein by reference.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's quantitative and qualitative disclosures about market risk are
included in Item 7.
ITEM 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's Consolidated Financial Statements and related Notes thereto on
pages 11-23 and the Report of Independent Accountants on page 24 of the
Company's 1999 Annual Report are incorporated herein by reference, as is the
unaudited information set forth under the caption "Quarterly Results" on page 24
of the Company's 1999 Annual Report.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
(a) Directors of the Registrant:
The information under the caption "Election of Directors - Information
About Nominees" and "Election of Directors - Other Information About
Nominees" in the Registrant's 2000 Proxy Statement is incorporated herein
by reference.
(b) Executive Officers of the Registrant:
Information concerning Executive Officers of the Company is included in
this Report on page 15 under Item 4A, "Executive Officers of the
Registrant."
(c) Compliance with Section 16(a) of the Exchange Act:
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's 2000 Proxy Statement is
incorporated by reference herein.
17
ITEM 11 - Executive Compensation
- --------------------------------
The information under the captions "Executive Compensation" and "Election of
Directors - Directors' Compensation" in the Registrant's 2000 Proxy Statement is
incorporated by reference herein.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Registrant's 2000 Proxy Statement is
incorporated by reference herein.
ITEM 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
The information under the caption "Executive Compensation - Certain
Transactions" in the Registrant's 2000 Proxy Statement is incorporated by
reference herein.
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) List of documents filed as part of this Report:
1) Financial Statements, Related Notes and Report of Independent
Accountants:
The following items are incorporated herein by reference from the
pages indicated in the Company's 1999 Annual Report:
Page
----
- Consolidated Balance Sheets as of October 31, 1999 and 1998 11
- Consolidated Statements of Operations for the years ended
October 31, 1999, 1998 and 1997 12
- Consolidated Statements of Comprehensive Income and
Shareholders' Equity for the years ended
October 31, 1999, 1998 and 1997 13
- Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997 14
- Notes to Consolidated Financial Statements 15-23
- Report of Independent Accountants 24
The unaudited selected quarterly financial data included under the
caption "Quarterly Results" on page 24 of the Company's 1999 Annual
Report is incorporated herein by reference.
2) Financial Statement Schedules:
The following financial statement schedule and Report of Independent
Accountants thereon are included herein and should be read in
conjunction with the Consolidated Financial Statements referred to
above (page numbers refer to pages in this Annual Report on Form 10-
K):
Page
----
- Report of Independent Accountants on Financial Statement Schedule 21
- Schedule II - Valuation and Qualifying Accounts 22
18
All other financial statement schedules not listed have been omitted
because the required information is included in the Consolidated
Financial Statements or the Notes thereto, or is not applicable.
3) Exhibits:
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index on pages E-1 to E-3 of this Report.
The Company will furnish a copy of any exhibit to a shareholder who
requests a copy in writing upon payment to the Company of a fee of
$5.00 per exhibit. Requests should be sent to: Connie L. Magnuson,
Vice President of Finance and Chief Financial Officer, Bio-Vascular,
Inc., 2575 University Avenue, St. Paul, Minnesota 55114-1024.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report of Form 10-K pursuant to Item 14(c):
A. 1988 Stock Option Plan, as amended, (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30,
1992 (File No. 0-13907)).
B. 1995 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.15 to the Company's Annual
Report of Form 10-K for the year ended October 31, 1998
(File No. 0-13907)).
C. Employee Stock Purchase Plan, as amended (incorporated
by reference to Exhibit 10.18 to the Company's Annual
Report of Form 10-K for the year ended October 31, 1997
(File No. 0-13907)).
D. Form of Change in Control Agreement entered into
between the Company and Ms. M. Karen Gilles
(incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended
October 31, 1994 (File No. 0-13907)).
E. Form of Change in Control Agreement entered into
between the Company and each of Ms. Connie L. Magnuson
dated January 12, 1998 and Mr. David A. Buche dated
January 29, 1998 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
the period ended January 31, 1998 (File No. 0-13907)).
F. Employment Agreement dated July 31, 1998 among the
Company, Jer-Neen Manufacturing Co., Inc. and James F.
Pfau (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended July 31, 1998 (File No. 0-13907)).
G. Change in Control Agreement dated July 31, 1998 between
the Company and Mr. James F. Pfau (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the period ended July 31, 1998
(File No. 0-13907)).
19
H. Change in Control Agreement dated February 1, 1999
between the Company and Dr. B. Nicholas Oray
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended January 31, 1999 (File No. 0-13907)).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter
ended October 31, 1999.
(c) Exhibits:
The response to this portion of Item 14 is included as a separate
section of this Annual Report on pages E-1 through E-3 of the Form 10-
K.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is included as a separate
section of this Annual Report on page 22 of the Form 10-K.
20
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors
of Bio-Vascular, Inc.
Our audits of the consolidated financial statements referred to in our report
dated December 3, 1999 appearing in the 1999 Annual Report to Shareholders of
Bio-Vascular, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
December 3, 1999
21
SCHEDULE II
- -------------------------------------------------------------------------------------------------------
BIO-VASCULAR, INC.
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
beginning cost and at end of
Description of period expenses Deductions period
- -------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended October 31, 1999............ $ 128,000 $ 14,000 $ 44,000 $ 98,000
Year ended October 31, 1998............ 21,000 113,000 6,000 128,000
Year ended October 31, 1997............ 21,000 - - 21,000
- -------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
beginning cost and at end of
Description of period expenses Deductions period
- -------------------------------------------------------------------------------------------------------
Reserve for obsolete inventories:
Year ended October 31, 1999............ $ 479,000 $ 118,000 $ 19,000 $ 578,000
Year ended October 31, 1998............ 373,000 194,000 88,000 479,000
Year ended October 31, 1997............ 368,000 116,000 111,000 373,000
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BIO-VASCULAR, INC.
By /s/ M. Karen Gilles
----------------------------------------------------------
M. Karen Gilles, President and Chief Executive Officer
(Principal Executive Officer)
Dated: January 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on January 28, 2000 by the following persons on behalf of
the registrant and in the capacities indicated.
/s/ M. Karen Gilles
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M. Karen Gilles
President, Chief Executive Officer and Director
/s/ Connie L. Magnuson
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Connie L. Magnuson
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Timothy M. Scanlan
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Timothy M. Scanlan
Chairman, Board of Directors
/s/ Richard W. Perkins
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Richard W. Perkins, Director
/s/ Anton R. Potami
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Anton R. Potami, Director
/s/ William G. Kobi
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William G. Kobi, Director
/s/ Edward E. Strickland
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Edward E. Strickland, Director
23
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
2.1 Acquisition Agreement and Plan of Reorganization by and among the
Company, Jer-Neen Acquisition, Inc., Jer-Neen Manufacturing Co., Inc.,
George Nelson, Jr., Ronald Breckner, James Pfau, Willard Sykes and
Catherine Sykes dated July 31, 1998 (incorporated by reference to
Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the
period ended July 31, 1998 (File No. 0-13907)).
3.1 Restated Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1997 (File No. 0-
13907)).
3.2 Amendment to Restated Articles of Incorporation of the Company, as
amended, dated March 20, 1997 (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997 (File No. 0-13907)).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-4 (File
No. 33-74750)).
4.1 Form of common stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Company's registration statement on Form
10 (File No. 0-13907)).
4.2 Form of Rights Agreement, dated as of June 12, 1996, between Bio-
Vascular, Inc. and American Stock Transfer & Trust Company, which
includes as Exhibit A the form of Rights Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated June 12, 1996 (File No. 0-13907)).
4.3 Restated Articles of Incorporation of the Company, as amended (see
Exhibit 3.1).
4.4 Amendment to Restated Articles of Incorporation of the Company, as
amended, dated March 20, 1997 (see Exhibit 3.2).
4.5 Amended and Restated Bylaws of the Company (see Exhibit 3.3).
10.1 Agreement dated as of July 31, 1985 among Genetic Laboratories, Inc.,
Vascular Services Diversified, Inc., and the Company, including first
amendment thereto, dated September 25, 1985 (incorporated by reference
to Exhibit 2.1 to the Company's registration statement on Form 10 (File
No. 0-13907)).
10.2 Amendment No. 2 to the Agreement referred to in Exhibit 10.1, effective
July 31, 1985 (incorporated by reference to Exhibit 19.1 to the
Company's Quarterly Report on Form 10-Q for the period ended April 30,
1986 (File No. 0-13907)).
10.3 License Agreement dated September 25, 1985 between the Company and
Genetic Laboratories, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's registration statement on Form 10 (File No. 0-13907)).
10.4 Amendment to License Agreement dated June 13, 1986 between the Company
and Genetic Laboratories, Inc. (incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K dated June 15, 1986
(File No. 0-13907)).
10.5 Debt and Royalty Restatement Agreement dated June 16, 1986 among Genetic
Laboratories, Inc., Vascular Services Diversified, Inc. and the Company
(incorporated by reference to Exhibit 19.3 to the Company's Quarterly
Report on Form 10-Q for the period ended April 30, 1986 (File No. 0-
13907)).
E-1
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
10.6 Purchase Agreement dated February 17, 1986, between the Company and
Genetic Laboratories, Inc. including Bill of Sale and Assignment
(incorporated by reference to Exhibit 19.4 to the Company's Quarterly
Report on Form 10-Q (File No. 0-13907)).
10.7 Purchase and sale agreement dated October 30, 1989 and closed December
28, 1989 between the Company and Meadox Medicals, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 11, 1990 (File No. 0-13907)).
10.8 Assignment and Assumption Agreement dated July 31, 1985 between the
Company and Genetic Laboratories, Inc., including the Purchase Agreement
dated June 4, 1984 between Genetic Laboratories, Inc. and Xomed, Inc.
(incorporated by reference to Exhibit 19.5 to the Company's Quarterly
Report on Form 10-Q for the period ended April 30, 1986 (File No. 0-
13907)).
10.9 Assignment dated June 13, 1986 by Genetic Laboratories, Inc. to the
Company (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 15, 1986 (File No. 0-13907)).
10.10 Confirmatory Assignment dated June 13, 1986 by Genetic Laboratories,
Inc., to the Company (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated June 15, 1986 (File No. 0-
13907)).
10.11 Confirmatory Assignment dated June 13, 1986 by Genetic Laboratories,
Inc., to the Company (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated June 15, 1986 (File No. 0-
13907)).
10.12 Trademark Assignment Agreement dated June 19, 1986 between the Company
and Genetic Laboratories, Inc. (incorporated by reference to Exhibit
19.10 to the Company's Quarterly Report on Form 10-Q for the period
ended April 30, 1986 (File No. 0-13907)).
10.13 Assignment dated June 26, 1986 between the Company and Genetic
Laboratories, Inc. (incorporated by reference to Exhibit 19.11 to the
Company's Quarterly Report on Form 10-Q for the period ended April 30,
1986 (File No. 0-13907)).
10.14 1988 Stock Option Plan, as amended, (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1992 (File No. 0-13907)).
10.15 1995 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report of Form 10-K for the year
ended October 31, 1998 (File No. 0-13907)).
10.16 Employee Stock Purchase Plan, as amended (incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1997 (File No. 0-13907)).
10.17 Form of Change in Control Agreement entered into between the Company and
Ms. M. Karen Gilles (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended October 31, 1994
(File No. 0-13907)).
10.18 Form of Change in Control Agreement entered into between the Company and
each of Ms. Connie L. Magnuson dated January 12, 1998 and Mr. David A.
Buche dated January 29, 1998 (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the period ended
January 31, 1998 (File No. 0-13907)).
E-2
BIO-VASCULAR, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
10.19 Employment Agreement dated July 31, 1998 among the Company, Jer-Neen
Manufacturing Co., Inc. and Mr. James F. Pfau (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended July 31, 1998 (File No. 0-13907)).
10.20 Change in Control Agreement dated July 31, 1998 between the Company and
Mr. James F. Pfau (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended July 31,
1998 (File No. 0-13907)).
10.21 Change in Control Agreement dated February 1, 1999 between the Company
and Dr. B. Nicholas Oray (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the period ended January
31, 1999 (File No. 0-13907)).
10.22 Lease Agreement effective August 1, 1995 between the Company and CMS
Investors, Inc. (incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended October 31, 1995
(File No. 0-13907)).
10.23 Purchase and Sale Agreement dated December 1, 1995 among the Company,
Bioplasty, Inc. and Uroplasty, Inc. (incorporated by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995 (File No. 0-13907)).
10.24 License Agreement dated December 1, 1995 between the Company and
Uroplasty, Inc. (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the year ended October 31, 1995
(File No. 0-13907)).
10.25 Assignment of U.S. Patent dated December 1, 1995 among the Company,
Bioplasty, Inc. and Uroplasty, Inc. (incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995 (File No. 0-13907)).
10.26 Lease Agreement effective August 27, 1997 between Jer-Neen Manufacturing
Co., Inc. and F&G Incorporated (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
January 31, 1999 (File No. 0-13907)).
13.1 Portions of the Company's 1999 Annual Report to Shareholders
incorporated herein by reference (filed herewith electronically).
21.1 List of Subsidiaries of the Company (filed herewith electronically).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith electronically).
27.1 Financial Data Schedule for the year ended October 31, 1999 (filed
herewith electronically).
E-3