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Investor Research Center
March 8, 2000
BIO VASCULAR INC (BVAS)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements:
Certain statements contained in this Form 10-Q include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements in this document are based upon information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements. Forward-looking 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, the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission, such as the year-end Annual Report on Form 10-K for the year ended October 31, 1999.
Overview
Bio-Vascular, Inc. (the Company) is an innovative medical products company that operates through two segments. The Company's branded surgical products segment develops, manufactures and markets proprietary and patented specialty medical products for use in thoracic, cardiac, neuro, vascular and ophthalmic surgery. The Company's medical device components segment, operating through its wholly- owned subsidiary Jer-Neen Manufacturing Co., Inc. (Jerneen Micro Medical Technologies or Jerneen), is a value-added original equipment manufacturer of micro-precision wire-based component products, including precision coils, stylets and guidewire components and sub-assemblies used in the medical industry.
Results of Operations
Comparison of the Three Months Ended January 31, 2000 with the Three Months Ended January 31, 1999
For the first quarter of fiscal 2000, consolidated net revenues increased 14 percent to $4,382,000 from $3,829,000 in the first quarter of fiscal 1999. The branded surgical products segment reported net revenue of $3,114,000 in the fiscal 2000 quarter, a record increase of $687,000 or 28%, over the segment's 1999 quarterly revenue of $2,427,000. The medical device component segment's revenues decreased 10% to $1,268,000 during the first quarter of fiscal 2000 from $1,402,000 reported during the same quarter in 1999.
The branded surgical products segment experienced revenue gains from all major product lines during the quarter. Revenues from Surgical Tools sales increased to $750,000 during the 2000 quarter, a 48 percent increase over the comparable 1999 quarter, led by sales of the Flo-Thru Intraluminal Shunt(TM), a device used in minimally invasive "beating heart" surgery. Sales of Peri-Strips(R) increased $253,000 to $866,000 during the first three months of fiscal 2000, a 41% increase over the 1999 first quarter sales of $613,000. The Tissue-Guard(TM) product line, exclusive of Peri-Strips, contributed $208,000 in revenue growth in 2000 over the same quarter in 1999, driven by sales of Dura-Guard(R) and Vascu-Guard(R) which had quarterly revenue increases of 21% and 44%, respectively. The branded segment's international revenues accounted for 28% and 25% of the segment's 2000 and 1999 first quarter revenues, respectively, and 37% of the segment's net revenue increase during the first quarter of fiscal 2000. The Company believes that this increase in international sales may be attributable to the first quarter 2000 European introduction of APEX Processing(TM), which enhances the clinical performance of the segment's Tissue Guard products, and an increase in purchases by customers in anticipation of a planned, comprehensive European product price increase effective February 1, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The medical device component segment's 10% decrease in revenues to $1,268,000 during the 2000 quarter from the prior year is mainly due to the timing of customer draws against in house purchase orders and growth related issues, including the segment's implementation of new internal systems which will enhance future growth opportunities with significant customers.
The Company's gross margin percentage increased to 54% during the first quarter of fiscal 2000 from 50% for the comparable 1999 quarter. This decrease is primarily attributable to a four point percentage improvement in the branded segment's gross margin to 61% as a result of a steady cost structure leveraged over higher volumes of production. The component segment's gross margin declined to 35% during the first three months of fiscal 2000 from 38% during the 1999 quarter, due primarily to lower quarterly revenues and new precious metal handling agreements with key customers which reduce the segment's gross margin percentage but add, in absolute dollars, to the gross margin of the component segment.
Consolidated selling, general and administrative (SG&A) expense during the first quarter of fiscal 2000 of $2,039,000 was consistent with SG&A expense incurred during the comparable quarter in 1999 of $2,025,000, and declined as a percentage of net revenue from 53% in the 1999 quarter to 47% in the 2000 quarter as a result of expense control measures implemented during the quarter, leveraged over higher revenue levels.
Consolidated research and development (R&D) expense during the first quarter of fiscal 2000 increased to $606,000, up $273,000 or 82%, over the first quarter of fiscal 1999 R&D expense of $333,000. The increase in R&D expense represents the branded segment's investment in animal feasibility studies for new products in development and the continued implementation of the component segment's Technology Development Center, intended to expand the solutions-oriented service provided to its customers. R&D expense is expected to fluctuate as projects continue under development. This forward-looking statement will be influenced primarily by the number of projects and the related R&D personnel requirements, development and regulatory approval path, expected costs and the timing of those costs for each project.
The consolidated operating loss in the 2000 quarter was reduced 35% to $287,000 as compared to an operating loss of $441,000 for the first quarter of 1999. The operating loss decrease largely reflects the impact of the branded surgical product segment whose operating loss decreased $426,000 or 87% to $65,000 in the 2000 quarter as compared to an operating loss of $491,000 in the comparable 1999 quarter. The medical device component segment's operating loss was $222,000 for the first quarter of 2000 as compared to operating income of $50,000 in the first quarter of 1999.
Other income, primarily net interest income, was $30,000 in the 2000 quarter and $60,000 in the 1999 quarter. The decrease in net interest income is related to lower cash and investment balances in 2000, due primarily to cash expenditures for the Company's stock repurchase program (which was completed as of October 31, 1999), purchases of equipment and leasehold improvements and repayments of long-term obligations. The Company's loss before income taxes was $257,000 in the 2000 quarter as compared to a loss of $381,000 in the 1999 quarter.
The Company recorded a benefit from income taxes of $128,000 in 2000, an effective tax rate of 50%, as compared to a benefit from income taxes of $63,000 at an effective tax rate of 16% in 1999. The effective tax rate for the first quarter of fiscal 2000 is more than the statutory rates primarily due to the impact of permanent differences, including nondeductible goodwill acquired in the acquisition of Jerneen, partially offset by the impact of research and experimentation credits.
The first quarter 2000 net loss was $129,000, or $0.01 per share, compared to a net loss of $318,000, or $0.03 per share in 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Liquidity and Capital Resources
Cash and cash equivalents were $4,860,000 at January 31, 2000 as compared to $5,596,000 at October 31, 1999, a reduction of $736,000.
Operating activities used cash of $241,000 in the first three months of fiscal 2000, as compared to $119,000 during the same period in fiscal 1999. Cash was used by operations through an increase in inventory levels and by reducing accrued expenses. These cash uses were offset by non-cash expenses in excess of the loss from operations and receivable collection efforts which generated a reduction in receivables.
Investing activities used $397,000 of cash during the first quarter of fiscal 2000, which included $281,000 in purchases of equipment and leasehold improvements and the issuance of a collateralized note receivable of $106,000 to an unrelated party due in November 2000.
Financing activities used $98,000 of cash during the 2000 quarter, which consisted of cash repayments of capital equipment lease and other long-term obligations. The Company has long-term obligations (including current portions) of $957,000 at January 31, 2000. Payments are required through 2004.
The Company believes existing cash and investments will be sufficient to satisfy its cash requirements for the foreseeable future. This forward-looking statement, as well as the Company's long-term cash requirements, will be a function of a number of variables, including research & development priorities, acquisition opportunities and the growth and profitability of the business.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is required to be adopted by the Company during the quarter ended January 31, 2001. The Company's management has not yet fully evaluated the potential impact of adopting SFAS No. 133 on the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments the Company maintains are in accounts receivable and long-term obligations. The Company believes that the interest rate, credit and market risk related to these accounts is not significant. The Company manages the risk associated with these accounts through periodic reviews of the carrying value for non-collectibility of assets and establishment of appropriate allowances in connection with the Company's internal controls and policies. |
