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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended JUNE 30, 2001
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 0-15963
INVIVO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0115161
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4900 HOPYARD RD. #210 PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 925-468-7600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
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. [X]
Based on the closing sales price of $10.55 on September 24, 2001, the aggregate
market value of registrant's voting Common Stock held by non-affiliates of the
registrant was approximately $46,665,300.
There were 4,423,249 shares of the registrant's Common Stock, $.01 par value,
outstanding on September 24, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year June 30,
2001 are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Invivo Corporation designs, manufactures and markets monitoring systems that
measure and display vital signs of patients in medical settings. The Company's
systems simultaneously monitor heart function, respiration, heart rate, blood
oxygen levels, invasive and non-invasive blood pressure and exhaled carbon
dioxide levels.
The Company developed the first multi-parameter vital sign patient
monitoring system for use during magnetic resonance imaging ("MRI"). Based on
the Company's reputation in the MRI patient monitoring field and its
technological expertise, it has made inroads into the general patient monitoring
market with its Millennia product introduced in early fiscal 1997.
The Company has established relationships with most of the world's largest
MRI equipment manufacturers. It presently maintains distribution agreements or
other OEM vendor relationships with Siemens A.G. Medical Engineering Group
("Siemens Medical"), Philips Medical Systems ("Philips Medical"), Hitachi
Medical Corporation, and GE Medical Systems ("GE Medical"). GE Medical, Siemens
Medical and Philips Medical have approved the use of the Company's monitors for
incorporation into their MRI equipment. In fiscal 2001, the Company entered into
an agreement with Philips Medical to develop an integrated MRI compatible
patient vital signs monitoring system for use with Philips' MRI scanner designed
for cardiovascular disease diagnosis.
In addition to the patient monitoring business, the Company offers a line of
safety and industrial instrumentation products. The percentage of sales
contributed by the Company's patient monitoring line of products was 62%, 62%
and 65% for fiscal years 1999, 2000, and 2001, respectively.
Financial information regarding operating segments for the three years ended
June 30, 2001 is included in Note 14 "Segment Information," of the Notes to the
Consolidated Financial Statements.
INDUSTRY
PATIENT MONITORING
MRI
MRI is a non-invasive diagnostic tool that uses magnetic fields and radio
frequencies to produce images of internal organs and structures of the body. As
a result, MRI scanners are used worldwide, and are located principally in
hospitals and stand-alone imaging centers. The Company believes that roughly
half of these MRI scanners are located in the United States.
The Company believes the MRI marketplace will continue to grow as new uses
for MRI are developed. The Company believes that over 2,000 new MRI units were
sold worldwide in 2000.
MRI patient monitoring technology enables physicians to track vital signs
while the patient is undergoing an MRI procedure. While not every MRI use
requires a patient monitor, as uses continue to expand, the Company believes
patient monitoring during the MRI procedure has become increasingly important.
The MRI environment presents unique challenges for patient monitoring. A monitor
must not interfere with the MRI in a manner that degrades the image. In
addition, the monitor signal must be protected from the MRI's magnetic field and
radio frequencies in order to maintain the accurate performance of the monitor.
In light of these challenges, only three companies are currently manufacturing
MRI patient monitors. The Company believes it is the market leader.
The Company expects that growth in the MRI monitoring market will come from
new MRI unit placements, outfitting existing MRI equipment not presently
equipped with monitoring devices, and replacing existing MRI patient monitors.
GENERAL PATIENT MONITORING
General patient monitoring products measure, display and document vital
signs information obtained from sensors attached to the patient. The principal
customers of patient monitoring products include hospitals and outpatient
surgery centers.
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The Company estimates the worldwide market for patient monitoring products
that measure multiple vital signs, including MRI and general patient monitoring,
was approximately $2.0 billion in 2000. This market consists of three segments
identified by their environments. The first segment is the portable monitoring
market that includes the emergency room, bedsides, cath labs and neo-natal care
units of hospitals. The second segment is the inpatient and outpatient operating
room market. The final segment includes intensive and critical care units in
hospitals.
The general patient monitoring market is mature and therefore highly
competitive. The Company believes the two greatest factors contributing to
product success are price and features.
SAFETY AND INDUSTRIAL INSTRUMENTATION
The Company's safety and industrial instrumentation product line includes
gas detection and monitoring devices that are offered in portable and fixed
settings. OSHA and other regulatory agencies require the use of such devices in
confined spaces where toxic gases or low levels of oxygen are suspected. The
Company's safety and industrial instrumentation products also includes pressure
and infrared sensor instrumentation that are frequently utilized in industrial
settings. The Company expects the safety and industrial instrumentation segment
to experience only modest growth in the foreseeable future.
PRODUCTS
MRI PATIENT MONITORS
Through its patented technologies and proprietary shielding techniques, the
Company is able to monitor a patient's vital signs without disrupting the MRI
process.
OMNI-TRAK 3100. In the late 1980s, the Company pioneered the development of
vital signs monitoring during magnetic resonance imaging with the introduction
of the Omni-Trak 3100. The Omni-Trak 3100 provides continuous monitoring of all
key aspects of a patient's vitality, including electrocardiograph, respiration,
heart rate, blood oxygen levels, invasive and non-invasive blood pressure and
expired carbon dioxide levels.
OMNI-TRAK 3150. In April 1998, the Company introduced its next-generation
MRI monitor. The Omni-Trak 3150 incorporates all of the features of the
Omni-Trak 3100 plus it is compact, mobile and easy to use. Through
state-of-the-art radio transmission, the Omni-Trak 3150 communicates with our
Millennia remote display controller, allowing critical data to be viewed by
physicians and technicians in both the MRI room and the control room.
MAGNITUDE. In fiscal 2001, the Company introduced its full featured,
high-end MRI monitor. The Magnitude provides all of the features of the
Omni-Trak 3150 along with Digital Signal Processing (DSP) of the ECG signal for
enhanced ECG performance and removal of MRI gradient artifact. The Magnitude
also offers automatic identification and measurement of five anesthetic agents.
GENERAL PATIENT MONITORING
Based on its reputation in the MRI patient monitoring field and its
technological expertise, the Company has penetrated the general patient
monitoring market.
MILLENNIA. The Millennia portable patient monitor is a compact
multi-parameter vital signs monitor, which weighs approximately 15 pounds.
Hospitals maximize the use of their monitors because they can easily be moved
with a patient or between locations. The Millennia also features a large color
display and user-friendly interface. Additional features include a module for
anesthetic agent identification and analysis that allows an anesthesiologist to
confirm the type and amount of anesthetic gas that is administered to a patient
and the ability to measure blood oxygen levels in non-tranquil patients (such as
newborns) whose frequent and unpredictable movements make the use of many
traditional monitors difficult. The Company is developing a product that will
measure multiple anesthetic agents simultaneously. The Company also developed a
modified version of the Millennia for incorporation into GE Medical 's CT
scanners for use in cardiology.
CENTURION. The Company's Centurion central station monitoring system
networks Millennia patient monitors, allowing a single healthcare professional
to monitor up to eight patients simultaneously. The main monitoring screen
provides for rapid interpretation of vital signs information by a single health
care professional.
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OTHER. Other monitors include:
- a non-invasive blood pressure monitor that uses digital signal
processing for fast and consistent measurements
- an inexpensive multi-parameter vital signs monitor designed specifically
for the international market
- a stand-alone unit to measure blood oxygen levels
- a monitor for blood pressure and blood oxygen levels
- a portable, hand-held blood oxygen level monitor offering a low-cost,
transportable monitoring unit
SAFETY AND INDUSTRIAL INSTRUMENTATION
The Company offers single-gas and multi-gas detection and monitoring
instruments in both portable and fixed models. The user carries or wears
portable units that are equipped with audible and visual alarms to warn the user
that potential dangers exist. Typical applications for these units are in
industrial or other settings where the user expects to move about, including
underground spaces housing telephone cables and waste water sewers, mines and
large factories. Fixed gas area monitors are appropriate for confined spaces
where chemicals or gases are used or stored. Typical applications for these
monitors are oil refineries, chemical plants and semiconductor fabrication
facilities.
The Company's flagship safety product, the MicroMax, is a hand-sized,
microprocessor-based, portable, multi-gas detector. The MicroMax simultaneously
detects up to four gases. The MicroMax PRO, an enhanced version of the MicroMax,
has additional features that include voice messaging and data logging software.
The Company also offers the UniMax, a pocket-sized, microprocessor-based,
portable, single-gas detector. UniMax is available with up to nine
interchangeable plug-in sensors for various types of gases and allows for
audible and visual alarm combinations.
The Company's oxygen monitoring products measure oxygen levels in air
cylinders used by individuals in oxygen-deprived situations. The primary use for
this equipment is for a self-contained breathing apparatus for fire fighters and
hazardous material clean-up workers.
The Company's industrial sensor and instrumentation products consist of
pressure sensors and infrared non-contact temperature measuring devices.
The infrared non-contact temperature measuring products are used in a wide
variety of industrial instrumentation situations. These include the fabrication
of semiconductors, the manufacturing of metals and glass, and miscellaneous
automotive, plant maintenance, construction and food preparation applications.
The Company's quickTemp is a hand-held, pocket-sized, infrared non-contact
thermometer.
The Company sells its pressure sensing devices primarily to plastic
extrusion equipment manufacturers who use these devices in their production
processes. Manufacturers in the food, beverage, synthetic fiber and
pharmaceutical industries also use these devices to measure the pressure of
processing ingredients.
SALES AND MARKETING
Unlike many other medical device companies its size, the Company sells its
patient monitoring products in the United States through a direct sales force.
The domestic sales force includes 31 salespersons organized into five regions in
the United States. Distributors, assisted by the Company's five international
sales personnel located in Europe and in the Far East, handle sales throughout
the rest of the world.
The Company sells its patient monitoring products primarily to hospitals
and, to a lesser degree, to stand-alone imaging centers, outpatient surgery
centers and OEM customers. The Company has OEM or worldwide distribution
agreements with Siemens A.G. Medical Engineering Group, Philips Medical Systems,
Hitachi Medical Corporation and GE Medical Systems for its MRI monitoring
equipment. These relationships facilitate the sale of monitors with the MRI
equipment manufactured by these companies.
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The Company has also established relationships with leading hospital group
purchasing organizations such as HealthTrust, Premier Inc., AmeriNet, Inc.,
Broadlane, Inc., HealthSouth and MedAssets/Insource.
The Company markets its safety and industrial instrumentation products
mostly through distributors and its own sales personnel. The Company sells these
products primarily to municipalities, utilities, telephone companies, oil
refineries and OEMs.
Foreign sales represented 21%, 22% and 23% of the Company's total sales in
fiscal 2001, 2000 and 1999. The Company is actively trying to expand its
international presence, especially in the patient monitoring business. See Note
14 of the Notes to Consolidated Financial Statements for additional information
regarding foreign sales.
The Company's backlog of unfilled purchase orders for all its products was
approximately $11.3 million as of June 30, 2001, compared to approximately $10.1
million as of June 30, 2000 and approximately $7.3 million as of June 30, 1999.
Within the next 12 months, the Company expects to ship all of its current
backlog. Because of customer changes in delivery schedules and the possible
cancellation of orders, backlog as of any particular date may not be
representative of the Company's actual sales for any succeeding fiscal period.
Historically, order cancellations have not been significant. The Company's
businesses are not inherently seasonal, although for some of its businesses
orders and shipments in the first and second fiscal quarters have been
historically lower than the third and fourth quarters.
MANUFACTURING AND ASSEMBLY
Other companies manufacture components and subassemblies to the Company's
specifications. The Company then assembles its products at its facilities in
California and Florida. The patient monitoring and gas detection manufacturing
facilities are ISO 9001 certified. The Company generally obtains the materials
and supplies that it uses to produce its products from a wide variety of
suppliers. The Company has not experienced any significant shortages. Although
certain materials that the Company uses in the manufacture of patient monitoring
and gas detection devices are available from only a few suppliers, the Company
does not anticipate any significant difficulties in obtaining any of these
materials in the foreseeable future.
COMPETITION
The patient monitoring markets in which the Company competes include MRI and
general monitoring. The Company is aware of three current competitors in the
worldwide MRI monitoring market. The general patient monitoring market is highly
competitive and includes companies that are much larger than the Company with
significantly greater financial resources. The Company estimates there are
approximately 15 to 20 competitors in the general patient monitoring market.
In the patient monitoring business, price is an important factor in hospital
purchasing patterns as a result of cost containment pressures on the health care
industry. To the extent that healthcare reform measures negatively affect the
financial condition of hospitals and thereby reduce their capital purchases, the
Company expects price to continue to be a very important competitive factor. The
Company also competes on the basis of product reliability, quality, technical
features, performance and service.
The markets for the Company's non-medical products are, in general,
characterized by a relatively limited number of competitors; however, these
markets are highly competitive. The Company estimates there are generally five
to ten competitors in each of these markets. The Company competes on price,
product reliability, quality, technical features, performance and service in
these markets.
GOVERNMENTAL REGULATION
The patient monitoring devices the Company manufactures and markets are
subject to regulation by the FDA and, in some instances, corresponding state and
foreign governmental agencies.
The Company's existing medical devices were cleared for marketing in the
United States through the FDA's section 510(k) premarket notification process.
The 510(k) premarket notification process is available where the new product
being submitted to the FDA can be compared to a pre-existing commercially
available product that performs functions the FDA considers to be substantially
equivalent. If a product does not meet the eligibility requirements for the
510(k) process, then its application must be submitted, instead, under the more
time consuming and costly premarket approval procedure.
The Company's manufacturing facilities and the manufacture of its products
are subject to FDA regulations regarding registration of manufacturing
facilities, compliance with FDA good manufacturing practices and the reporting
of adverse events. The FDA's good
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manufacturing practices, titled "Quality System Regulation", require
preproduction design controls and implementation of a full quality assurance
system along with standards for manufacturing processes and facilities and
record keeping for device failure and complaint investigations. The Company is
subject to periodic on-site inspection for compliance with such regulations. The
FDA may also conduct investigations and evaluations of the Company's products at
its own initiative or in response to customer complaints or reports of
malfunctions. If the FDA believes that its regulations have been violated, it
has extensive enforcement authority including the power to seize, embargo or
restrain entry of products from the market and to prohibit the operation of
manufacturing facilities until the noted deficiencies are corrected to their
satisfaction.
The Company seeks, where appropriate, to comply with the certification and
safety standards of various organizations such as Underwriters' Laboratories,
the Canadian Standards Association and the various safety and test regulations
of the European Community. The Company recently received approval from the
Japanese Ministry of Health and Labor Welfare to market its new MRI monitor.
The manufacture and testing of the Company's safety products and medical
devices requires it to handle and store small quantities of a wide variety of
chemicals, some of which are highly toxic. Certain of these chemicals pose a
serious threat to workers and others who may come in contact with them if
improperly used or handled. Most municipalities, including those in which the
Company is presently located, now require that the proposed storage and use of
dangerous chemicals receive local approval. State air quality boards, or similar
agencies, must also approve the venting, and certain other aspects of handling,
of these types of chemicals. These municipal and state agencies may, as a
condition to the granting of approvals and permits, impose certain procedural
limitations on the Company's storage and handling of these chemicals and
structural requirements on the facilities where these chemicals are stored and
used. They also impose record keeping and reporting requirements on the users of
these chemicals.
Compliance with these requirements has not, to date, had a material effect
on the Company's capital expenditures, earnings or competitive position.
Nonetheless, environmental regulation at the local, state and national levels
continues to evolve, and the possibility exists that more stringent limitations
and requirements may become applicable to the Company.
RESEARCH AND EXPERIMENTAL
During fiscal years 2001, 2000, and 1999 the Company's research and
experimental expenses were approximately $3.3 million, $3.0 million, and $3.0
million, respectively. Most of these expenditures relate to the patient safety
monitoring business.
INTELLECTUAL PROPERTY
The Company's success and competitive position depends upon its continued
ability to develop new proprietary technology while protecting the Company's
existing intellectual property. As of June 30, 2001, the Company held nine US
patents expiring at different times between 2002 and 2018 and had one US patent
application pending.
There is no assurance that any of the Company's current or future patent
applications will result in patents, and the Company's existing or future
patents may be circumvented, declared invalid or challenged as to scope or
ownership. For these and other reasons, the Company may not realize any
competitive advantage from the Company's existing patents and any patents that
the Company may be granted in the future. Furthermore, others may develop
technologies that are similar or superior to the Company's proprietary
technologies or design around any patents that the Company may hold. In
addition, the Company has not secured patent protection in foreign countries and
the Company cannot be certain that the steps the Company takes to prevent
misappropriation of our intellectual property abroad will be effective, or that
the application of foreign laws to technology developed abroad will not
adversely effect the validity or enforceability of the Company's U.S. patents.
EMPLOYEES
As of June 30, 2001 the Company had 361 employees. The Company is not a
party to any collective bargaining agreement and has not experienced a strike or
work stoppage. The Company considers its relations with its employees to be
good.
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ITEM 2. PROPERTIES
The following table sets forth information with respect to the real property
owned or leased by the Company which it considers material to its business.
GENERAL CHARACTER OWNERSHIP OR DATE OF
LOCATION AND USE OF THE PROPERTY EXPIRATION OF LEASE
-------- ----------------------- --------------------
Pleasanton, California 3,200 square-foot headquarters facility April 2006
Fremont, California 8,000 square-foot building used as the July 2006
Company's manufacturing and distribution
facility for its gas calibration and process
control products
Orlando, Florida 54,000 square-foot building used as the Owned
manufacturing, distribution and administrative
facility for the Company's patient monitoring
products
Cucamonga, California 35,000 square-foot building used as the March 2011
manufacturing, distribution and administrative
facility for the Company's oxygen monitoring
products
Miramar, Florida 14,000 square-foot building used as the September 2005
manufacturing, distribution and administrative
facility for the Company's gas detection and
monitoring products
From time to time, the Company leases smaller facilities as its needs dictate.
The Company considers its facilities to be sufficient for its current
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company's medical device subsidiary, Invivo Research, was one of two
third-party defendants named in a lawsuit in June of 1994 by Southern Nevada
Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court.
The underlying action in this matter stemmed from an incident involving a
surgical patient undergoing a procedure at the Southern Nevada Surgical Center.
The patient suffered a serious permanent brain injury. A lawsuit was filed on
behalf of the patient against the surgical center and the anesthesiologist who
monitored the patient. The defendants in that action made a substantial
settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex
were seeking indemnity and contribution of approximately $14 million from the
manufacturer of the anesthetic gas machine and Invivo Research, which
manufactured the vital signs monitor used in this procedure. SNSC and Surgex
alleged that both the anesthetic gas machine and the vital signs monitor were
defective. The Company believes that the vital signs monitor operated properly
and was properly designed for its intended function.
On August 18, 1999, the Nevada District Court granted the Company's Motion
to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and
Surgex contribution claims, without prejudice, based upon Nevada law that
provides that an action must be brought to trial within five years of the date
of the filing of the original action. The dismissal is being appealed.
In April of 1997, the plaintiff's insurer, CNA, filed an action with
identical causes in the same Nevada State Court. This second action was removed
by the Company to U.S. District Court. The action by CNA was dismissed by the
District Court on January 19, 2000 as the District Court found CNA did not have
standing as the real party of interest. CNA appealed the decision to the Ninth
Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the
dismissal and remanded the case back to Federal District Court on July 30, 2001.
The Company has appealed this decision and requested a decision from the full
panel of the Ninth Circuit.
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The Company intends to vigorously defend itself in these proceedings. Any
judgment against the Company that exceeds the amount that its insurer is
required to pay could have a material adverse effect on its business and results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and directors as of June 30, 2001 are listed below,
together with brief accounts of their business experience and certain other
information.
NAME AGE POSITION
---- --- --------
James B. Hawkins................................ 45 President, Chief Executive Officer, Secretary and Director
John F. Glenn................................... 40 Vice President, Finance and Chief Financial Officer
F. Larry Young.................................. 42 Vice President, Operations
Stuart Baumgarten............................... 47 President, Invivo Research, Inc.
James B. Hawkins has been President, Chief Executive Officer and a Director
of Invivo and its predecessor since August 1985. He also has served as Secretary
of Invivo since July 1986. He earned his undergraduate degree in Business
Commerce from Santa Clara University and his MBA from San Francisco State
University.
John F. Glenn was appointed Vice President, Finance and Chief Financial
Officer of Invivo in November 1990. Mr. Glenn earned his undergraduate degree in
Business Administration from the University of Nevada and his MBA from the
University of Santa Clara.
F. Larry Young has been Vice President, Operations of Invivo since April
1990 and the Chief Operating Officer of the Lumidor Safety Products subsidiary
since August 1996.
Stuart Baumgarten has been President of the Invivo Research subsidiary since
November 1998. From March 1996 to November 1998, Mr. Baumgarten served as Vice
President of Sales and Marketing for Invivo Research.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS
MARKET INFORMATION
The Company's common stock is traded on the Nasdaq National Market under
the symbol "SAFE." The following table describes, for the quarters indicated,
the high and low closing sale prices for a share of the Company's common stock
as reported on the Nasdaq National Market.
HIGH LOW
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YEAR ENDED JUNE 30, 2001
First Quarter ........ 11.88 8
Second Quarter ....... 11.88 7.13
Third Quarter ........ 10.88 7.18
Fourth Quarter ....... 10.18 8
YEAR ENDED JUNE 30, 2000
First Quarter ........ 14 11.5
Second Quarter ....... 13.25 10
Third Quarter ........ 13 10.56
Fourth Quarter ....... 12.50 8
As of June 30, 2001 the Company had 59 shareholders of record of our common
stock, although there are a larger number of beneficial holders.
DIVIDEND POLICY
The Company intends to retain future earnings to finance the expansion of
its business and does not anticipate paying any cash dividends on its common
stock in the foreseeable future. If the Company were to declare dividends in the
future, such dividends would be paid at the discretion of its board of directors
after taking into account various factors, including, among other things, the
Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs and expansion plans, the income
tax laws then in effect and the requirements of Delaware law. In addition, the
Company's credit facility prohibits the payment of dividends without consent
from the lender.
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ITEM 6. SELECTED FINANCIAL DATA
The operations data set forth below with respect to the fiscal years ended
June 30, 2001, 2000 and 1999 and the balance sheet data at June 30, 2001 and
2000 are derived from, and are qualified by, reference to the Company's audited
financial statements included elsewhere herein and should be read in conjunction
with those financial statements and the notes thereto. The operations data set
forth below with respect to the fiscal years ended June 30, 1998 and 1997 and
the balance sheet data at June 30, 1999, 1998 and 1997 are derived from audited
financial statements not included herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales .................................. $ 54,279 $ 52,750 $ 48,858 $ 40,651 35,904
Gross profit ........................... 26,432 25,745 24,490 19,695 17,285
Operating expenses
Selling, general and administrative .. 18,601 16,583 15,623 13,429 14,174
Research and experimental ............ 3,305 3,028 3,007 2,455 2,449
Other income (expense) ................. 747 1,088 (153) (383) (184)
Loss on Sale of G.C. Industries ........ (601) -- -- -- --
Income tax expense ..................... 1,618 2,256 1,889 1,165 162
Net income ............................. $ 3,054 $ 4,967 $ 3,818 $ 2,263 $ 316
Basic net income per common share ...... $ .69 $ 1.15 $ 1.07 $ .69 $ .10
Weighted average common shares
outstanding (basic) .................. 4,403 4,329 3,552 3,265 3,239
Diluted net income per common share .... $ .68 $ 1.10 $ 1.00 $ .66 $ .09
Weighted average common shares
outstanding (diluted) ................ 4,476 4,497 3,831 3,427 3,445
JUNE 30,
-----------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA:
Working capital .............. $31,380 $26,730 $22,949 $ 9,364 $ 7,474
Total assets ................. 52,011 49,476 44,641 30,195 26,612
Long-term debt ............... 1,647 1,393 1,375 1,480 1,584
Stockholders' equity ......... 43,709 40,325 35,167 18,168 15,815
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
SALES Sales for fiscal 2001 were $54,279,100, an increase of 2.9% over sales
of $52,749,900 for fiscal 2000. Sales at the Company's patient safety monitoring
business increased 7.7% in fiscal 2001 as compared to fiscal 2000. Continued
growth in sales of the Company's MRI vital signs monitor offset a decrease in
"Millennia" product sales as the general monitoring market experienced slowing
market conditions. The sales increase at the patient safety monitoring business
for fiscal 2001 was offset by a sales decline at the Company's safety and
industrial instrumentation segment as the Company's non-contact infrared
temperature products continued to experience difficult market conditions. The
Company's pressure sensing devices and oxygen monitoring products also
experienced sales declines. An increase in sales at the Company's gas detection
product line in fiscal 2001 partially offset the other sales declines in the
safety and industrial segment.
GROSS PROFIT The gross profit margin decreased slightly in fiscal 2001 to
48.7% from 48.8% in fiscal 2000. An increase in the gross profit margin at the
patient safety monitoring business helped offset the deteriorating gross margins
of the non-contact infrared industrial products due to price discounting and
other safety and industrial instrumentation product lines due to decreased
sales.
OPERATING EXPENSES Selling, general and administrative expenses for fiscal
2001 increased 12.2% or $2,018,200 compared to fiscal 2000. Selling, general and
administrative expenses were 34.3% of sales for fiscal 2001 compared with 31.4%
for fiscal 2000. The increase in these expenditures in aggregate and as a
percentage of sales for fiscal 2001 was primarily due to higher administrative
and selling expenses at the Company's patient safety monitoring business along
with the write-off of the remaining balance on a note receivable of $203,600,
net of a deferred gain of $52,000, from the sale of a product line in fiscal
1996. The note receivable was deemed not collectable based on the recent
non-performance of the buyer and the effect of the current economic downturn on
the product line's market. The increase in selling, general and administrative
expenses at the patient safety monitoring business was in anticipation of higher
sales volume for fiscal 2001 than was actually achieved. The increase in selling
expenses was also due to higher sales commission expenses and higher
international selling expenses as the Company established a U.K. subsidiary in
the first quarter of fiscal 2001.
Research and experimental expenses were $3,305,000 or 6.1% of sales for
fiscal 2001 compared to $3,027,700 or 5.7% for fiscal 2000. The increase in
these expenses in aggregate and as a percentage of sales in fiscal 2001 was due
to increased expenditures on behalf of the patient safety monitoring business
which offset a decline in research and experimental expenditures at the safety
and industrial instrumentation product lines. The Company plans to continue its
efforts in developing new products and enhancing its existing ones and expects
future research and experimental expenditures as a percentage of sales to be in
the range of fiscal 2001 levels.
OTHER INCOME AND EXPENSE Other income, net for fiscal 2001 of $861,400
included a gain of $450,000 on the settlement of a patent infringement lawsuit
brought by the Company against a competitor in the MRI monitoring market. Other
income also included interest income which was $435,200 for fiscal 2001 as
compared to $388,800 for fiscal 2000. The increase in interest income was due to
higher balances on the Company's short-term investments. Interest expense
decreased to $114,700 for fiscal 2001 compared with $137,000 for fiscal 2000.
On March 2, 2001, the Company sold G.C. Industries, a gas permeation device
business, for $664,000 in cash. The asset sale resulted in a loss of $600,500.
G.C. Industries was a part of the safety and industrial segment and represented
approximately 1% of the Company's annual sales.
PROVISION FOR INCOME TAXES The effective tax rate for fiscal 2001 was 34.6%
as compared to 31.20% for fiscal 2000. The increase in the effective rate was
primarily due to a loss on the sale of G.C. Industries not deductible for tax
purposes. The effective rate differs from the statutory rate due principally to
the benefit of a foreign sales corporation and other credits.
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YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
SALES Sales for fiscal 2000 were $52,749,900, an increase of 8.0% over sales
of $48,858,000 for fiscal 1999. This sales increase was primarily due to sales
growth at the Company's patient safety monitoring business along with growth at
the oxygen monitoring and gas detection businesses in the safety and industrial
instrumentation segment. These increases offset a decrease in sales of the
Company's non-contact infrared temperature products as these products
experienced strong competitive pricing pressures. The "Millennia" portable vital
signs monitor and MRI vital signs monitor were the primary contributors to the
sales increase at the patient safety monitoring business.
GROSS PROFIT The gross profit margin decreased in fiscal 2000 to 48.8% from
50.1% in fiscal 1999. The decrease was attributable to several factors which
included heavy price discounting at the non-contact infrared industrial business
due to difficult market conditions; higher manufacturing costs at the patient
safety monitoring business which included the expansion of the service
organization; and lower margins in the OEM patient safety monitoring business
due to lower contracted prices on increased volume. The increase in sales at the
oxygen monitoring business also contributed to the gross margin decrease as that
business has inherently lower gross margins than the Company's other businesses.
OPERATING EXPENSES Selling, general and administrative expenses for fiscal
2000 increased 6.1% or $960,000 compared to fiscal 1999. Selling, general and
administrative expenses were 31.4% of sales for fiscal 2000 compared with 32.0%
for fiscal 1999. The increase in these expenditures in aggregate for fiscal 2000
was primarily due to higher administrative expenses at the Company's patient
safety monitoring along with higher selling expenses on the higher sales volume
at the patient safety monitoring business.
Research and experimental expenses were 5.7% of sales for fiscal 2000
compared to 6.2% for fiscal 1999. The decrease was attributable to a decline in
the amount of research and experimental expenses on behalf of the patient safety
monitoring business as $271,400 of labor expenditures related to equipment for
the production of the Company's proprietary anesthetic agent module for the
"Millennia" was capitalized in the second and third quarters of fiscal 2000. The
Company does not foresee similar items to be capitalized in fiscal 2001.
OTHER INCOME AND EXPENSE Other income of $1,225,600 for fiscal 2000 included
a $834,000 gain on the sale of short-term investments. Interest income increased
to $388,800 in fiscal 2000 as compared to $148,800 for fiscal 1999. Interest
expense decreased to $137,000 for fiscal 2000 compared with $255,500 for fiscal
1999. These changes were the result of the investment of, and the payoff of the
outstanding balances on the Company's revolving bank line of credit and term
loan with, the proceeds from the Company's secondary stock offering in March
1999.
PROVISION FOR INCOME TAXES The effective tax rate for fiscal 2000 decreased
to 31.2% as compared to 34% for fiscal 1999. The decrease was primarily due to
the adjustment of prior year's taxes. The effective rate also differs from the
statutory rate due principally to the benefit of a foreign sales corporation and
other credits.
INFLATION
The Company does not believe that inflation had a significant impact on its
results of operations during any of the last three fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 2001 increased to $31,380,100 from $26,729,600
at June 30, 2000. Net cash provided by operating activities was $2,307,100 for
fiscal 2001 compared with $1,712,600 provided by operating activities for fiscal
2000. This increase was largely the result of changes in operating assets and
liabilities, particularly accounts receivable and inventories.
Capital expenditures were $1,459,700 for fiscal 2001 compared to $2,101,300
for the prior year period. Capital expenditures were primarily related to
information system software enhancements and additional demonstration equipment
for the direct sales force at the Company's patient safety monitoring business
and leasehold improvements and manufacturing equipment at the Company's new
facility for the oxygen monitoring business.
The Company believes that its cash resources and cash flow from operations
are adequate to meet its anticipated cash needs for working capital and capital
expenditures throughout fiscal 2002. The Company's $1,000,000 revolving bank
line of credit is
12
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collateralized by the Company's accounts receivable, inventory, and equipment.
At June 30, 2001, $1,000,000 was available under the line of credit.
In September 2001, The Company's Board of Directors authorized the use of up
to $2 million of the Company's cash for repurchases of the Company's common
stock. These purchases, if commenced, could be suspended and then further
commenced or restarted at any time.
The Company will continue to explore opportunities for the possible
acquisitions of technologies or businesses, which may require the Company to
seek additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately, Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives up to their estimated residual values, and reviewed for impairment
in accordance with FAS Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In connection
with the adoption of FAS 142, the Company will be required to perform a
transitional goodwill impairment assessment. Statement 142 must be adopted in
fiscal years beginning after December 15, 2001. Early adoption is permitted
before the issuance of the Company's first quarter's financial statements. The
Company has not yet determined the impact these standards will have on its
results of operations and financial position.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
regarding the Company's plans, expectations, estimates and beliefs. Actual
results could differ materially from those discussed in, or implied by, these
forward-looking statements. Forward-looking statements are identified by words
such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and
other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The Company is not obligated to
update or revise these forward-looking statements to reflect new events or
circumstances. Factors that could cause actual results, events or circumstances
to differ from forward-looking statements made in this report include those set
forth in the following "Risk Factors" section.
RISK FACTORS
THE COMPANY IS DEPENDENT ON A CONCENTRATED LINE OF PRODUCTS
The Company's future financial performance will be largely dependent on its
patient monitor product line, which includes a limited number of products. The
Company expects its MRI patient monitors and its Millennia portable patient
monitor to have a substantial impact on revenue growth. In the MRI monitoring
market, the success of its MRI monitors is heavily dependent on the continued
acceptance of MRI technology as a diagnostic tool. In the general patient
monitoring market, the Company's Millennia monitor is heavily dependent on its
ability to further penetrate an already competitive market.
In addition, the recent consolidation in the medical care provider market
has resulted in a number of very large purchasers of medical devices. These
large purchasers typically prefer to establish relationships with medical device
manufacturers that have broad and diverse product lines.
The failure of the Company's products to continue to gain market acceptance
or a continued consolidation of the medical care provider market could have a
material adverse effect on its business and results of operations.
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THE COMPANY FACES INCREASED LEVELS OF COMPETITION
The Company has encountered and will continue to encounter significant
competition in the sale of its products. The Company's general patient
monitoring competitors include a number of large multinational corporations.
Some of these competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company can. In the MRI patient monitoring market, the Company has enjoyed a
significant first-to-market advantage over its competitors. However, competitors
have introduced products designed to compete with its MRI vital signs monitoring
products. In addition, as the market for MRI vital signs monitoring products
expands it may attract competitors with greater resources.
Additionally, competition may increase if new companies enter the Company's
markets or if existing competitors expand their product lines or intensify
efforts within existing product lines. The introduction of competitive products
may result in a decrease in the Company's market share and in a decrease in the
prices at which the Company is able to sell its products. The Company's market
share could also be adversely affected by increasing concentration in the
medical care provider market. Any decrease in the Company's market share or
decrease in the prices at which the Company is able to sell its products could
have a material adverse effect on its business and results of operations.
THE COMPANY'S FINANCIAL RESULTS MAY FLUCTUATE
The Company's financial results may fluctuate significantly from period to
period because of a variety of factors, many of which is beyond its control.
These factors include:
- increased competition
- changes in the Company's pricing policies and those of its competitors
- changes in the Company's operating expenses or capital expenditures
- timing and market acceptance of new and upgraded product introductions
by the Company and its competitors
- seasonal fluctuations in the demand for the Company's products
- introduction of alternative technologies by the Company and its
competitors
- effect of potential acquisitions
- other general economic factors
Fluctuations caused by these and other factors could have a material adverse
effect on the Company's business and results of operations.
THE COMPANY IS SUBJECT TO A SIGNIFICANT RISK OF NEW LAWS RELATED TO HEALTH CARE
Changes in the law or new interpretations of existing laws may have a
significant effect on the Company's costs of doing business and the amount of
reimbursement the Company receives from both government and third-party payors.
In addition, economic forces, regulatory influences and political initiatives
are subjecting the health care industry to fundamental changes. Federal, state
and local government representatives are likely to continue to review and assess
alternative health care delivery systems and payment methods. The Company
expects ongoing public debate on these issues. Any of these efforts or reforms
could have a material adverse affect on the Company's business and results of
operations.
THE COMPANY'S BUSINESS IS SUBJECT TO TECHNOLOGICAL CHANGE AND INTRODUCTION OF
NEW PRODUCTS
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15
Technological change, evolving industry standards and new product
introductions and enhancements characterize the markets for the Company's
products. Many of the Company's products and products under development are
technologically innovative, and therefore require significant planning, design,
development and testing. These activities require the Company to make
significant capital commitments and investments. In addition, industry standards
may change on short notice and new products and technologies may render existing
products and technologies uncompetitive. Additionally, the products that the
Company is currently developing, and those that the Company develops in the
future, may not be technologically feasible or accepted by the marketplace or
they may not be completed in an acceptable time frame. Any increased capital
investments or loss in sales due to technological change could have a material
adverse effect on the Company's business and results of operations.
THE COMPANY CURRENTLY IS INVOLVED IN A LEGAL PROCEEDING
The Company's medical device subsidiary, Invivo Research, was one of two
third-party defendants named in a lawsuit in June of 1994 by Southern Nevada
Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court.
The underlying action in this matter stemmed from an incident involving a
surgical patient undergoing a procedure at the Southern Nevada Surgical Center.
The patient suffered a serious permanent brain injury. A lawsuit was filed on
behalf of the patient against the surgical center and the anesthesiologist who
monitored the patient. The defendants in that action made a substantial
settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex
were seeking indemnity and contribution of approximately $14 million from the
manufacturer of the anesthetic gas machine and Invivo Research, which
manufactured the vital signs monitor used in this procedure. SNSC and Surgex
alleged that both the anesthetic gas machine and the vital signs monitor were
defective. The Company believes that the vital signs monitor operated properly
and was properly designed for its intended function.
On August 18, 1999, the Nevada District Court granted the Company's Motion
to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and
Surgex contribution claims, without prejudice, based upon Nevada law that
provides that an action must be brought to trial within five years of the date
of the filing of the original action. The dismissal is being appealed.
In April of 1997, the plaintiff's insurer, CNA, filed an action with
identical causes in the same Nevada State Court. This second action was removed
by the Company to U.S. District Court. The action by CNA was dismissed by the
District Court on January 19, 2000 as the District Court found CNA did not have
standing as the real party of interest. CNA appealed the decision to the Ninth
Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the
dismissal and remanded the case back to Federal District Court on July 30, 2001.
The Company has appealed this decision and requested a decision from the full
panel of the Ninth Circuit.
Any judgment against the Company that exceeds the amount that its insurer is
required to pay could have a material adverse effect on its business and results
of operations.
THE COMPANY FACES PRODUCT LIABILITY AND PRODUCT RECALL RISKS
With respect to all of its products, and particularly its medical devices,
the Company faces the risk of potentially large product liability claims. The
malfunction or misuse of its products could potentially result in serious harm
to a patient. In addition, the Company may be required to indemnify its
distributors and customers for similar claims made against them.
Claims could be made against the Company even if its products did not
contribute to the injury that was sustained. Frequently, the Company's products
are used with products developed by other manufacturers. Even if its products
are not the cause of the injury, the Company may not be able to prove that some
other product malfunction or human error caused a claimant's injury.
The Company has had product liability claims made against it in the past and
may have further claims made against it in the future. While the Company is
insured for certain product liability claims, not all claims will be covered and
the level of its insurance may not be sufficient to protect it from the full
amount of a successful claim. In addition, the Company may not be able to obtain
adequate amounts of insurance at an acceptable cost. Claims made against the
Company that are not insured, or that exceed the amount of the Company's
coverage, could have a material adverse effect on its business and results of
operations.
Similarly, the Company's products are subject to the potential of being
recalled by government agencies for actual or potential deficiencies or
problems. Any such recall would likely be expensive and would have a material
adverse effect on the Company's business and results of operations.
THE COMPANY FACES INCREASED RISKS OF INTERNATIONAL OPERATIONS
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International sales have accounted for over 20% of the Company's sales for
each of the past three years and may increase over time. International sales are
subject to a number of risks, including the following:
- fluctuations in exchange rates may affect the demand for products and
services the Company provides in foreign markets
- adverse changes in local economic conditions could depress the demand
for the Company's products
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system
- foreign customers may have longer payment cycles
- foreign countries may impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs, or adopt other
restrictions on foreign trade
- U.S. export licenses may be difficult to obtain
- the protection of intellectual property in foreign countries may be more
difficult to enforce
Any of these factors could have a material adverse impact on the Company's
business and results of operations.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's sales are primarily denominated in U.S. dollars and as a
result, the Company has relatively little exposure to foreign currency exchange
risk with respect to its sales. The Company does not currently hedge against
exchange foreign currency rate fluctuations. The effect of an immediate 10%
change in exchange rates would not have a material impact on the Company's
future operating results or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
PAGE
NUMBER
------
Independent Auditors' Report ....................................................................... 18
Consolidated Balance Sheets - June 30, 2001 and 2000 ............................................... 19
Consolidated Statements of Income for the Years Ended June 30, 2001, 2000, and 1999 ................ 20
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years
Ended June 30, 2001, 2000, and 1999 ............................................................. 21
Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000, and 1999 ............ 22
Notes to Consolidated Financial Statements ......................................................... 23 - 32
17
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Invivo Corporation:
We have audited the accompanying consolidated balance sheets of Invivo
Corporation and subsidiaries (the Company) as of June 30, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Invivo Corporation
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.
August 3, 2001
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19
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 280,000 969,800
Short-term investments 9,091,300 6,817,600
Trade receivables, less allowance for doubtful accounts of
$507,100 as of June 30, 2001 and $533,900 as of June 30, 2000 15,656,600 14,656,600
Inventories 11,249,100 10,132,000
Deferred income taxes 1,013,300 1,343,000
Prepaid expenses and other current assets 465,500 407,200
------------ ------------
Total current assets 37,755,800 34,326,200
Property and equipment, net 6,398,000 6,139,600
Intangible assets 7,633,900 8,439,700
Other assets 223,400 570,500
------------ ------------
$ 52,011,100 49,476,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,267,200 2,725,600
Accrued expenses 3,662,900 3,381,100
Current portion of long-term debt and capital leases 154,700 142,700
Income taxes payable 147,000 1,347,200
Other current liabilities 143,900 --
------------ ------------
Total current liabilities 6,375,700 7,596,600
Long-term debt and capital leases, excluding current portion 1,647,100 1,392,900
Deferred income taxes 279,700 118,000
Other -- 52,000
------------ ------------
Total liabilities 8,302,500 9,159,500
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; authorized shares totaling 20,000,000;
issued and outstanding shares totaling 4,423,249 as of
June 30, 2001 and 4,362,999 as of June 30, 2000 44,200 43,600
Additional paid-in capital 26,581,500 26,257,300
Retained earnings 17,095,900 14,041,800
Accumulated other comprehensive loss (13,000) (26,200)
------------ ------------
Total stockholders' equity 43,708,600 40,316,500
Commitments and contingencies
------------ ------------
$ 52,011,100 49,476,000
============ ============
See accompanying notes to consolidated financial statements.
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20
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Sales $ 54,279,100 52,749,900 48,858,000
Cost of goods sold 27,847,000 27,005,100 24,368,000
------------ ------------ ------------
Gross profit 26,432,100 25,744,800 24,490,000
------------ ------------ ------------
Operating expenses:
Selling, general, and administrative 18,601,000 16,582,800 15,622,800
Research and experimental 3,305,000 3,027,700 3,007,300
------------ ------------ ------------
Total operating expenses 21,906,000 19,610,500 18,630,100
------------ ------------ ------------
Income from operations 4,526,100 6,134,300 5,859,900
Other income (expense):
Interest expense (114,700) (137,000) (255,500)
Other, net 861,400 1,225,200 102,700
Loss on sale of G.C. Industries (600,500) -- --
------------ ------------ ------------
Income before income taxes 4,672,300 7,222,500 5,707,100
Income tax expense 1,618,200 2,255,600 1,889,200
------------ ------------ ------------
Net income $ 3,054,100 4,966,900 3,817,900
============ ============ ============
Basic net income per common share $ .69 1.15 1.07
============ ============ ============
Weighted-average common shares
outstanding (basic) 4,402,760 4,328,897 3,552,148
============ ============ ============
Diluted net income per common share $ .68 1.10 1.00
============ ============ ============
Weighted-average common shares and
common share equivalents outstanding (diluted) 4,476,014 4,497,490 3,831,260
============ ============ ============
See accompanying notes to consolidated financial statements.
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21
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 2001, 2000 and 1999
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS INCOME
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 1998 3,269,418 $ 32,700 12,878,600 5,257,000 --
Issuance of common stock:
Stock offering, net of offering
costs totaling $1,376,723 900,000 9,000 11,898,300 -- --
Acquisition of Invivo Research Inc. 82,256 800 1,047,000 -- --
Exercise of stock options 28,900 300 161,800 -- --
Tax benefit from exercise of options -- -- 90,900 -- --
Net income -- -- -- 3,817,900 -- 3,817,900
Unrealized loss on short-term
investments -- -- -- -- (27,800) (27,800)
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 1999 4,280,574 42,800 26,076,600 9,074,900 (27,800) $ 3,790,100
===========
Exercise of stock options 82,425 800 178,900 -- --
Tax benefit from exercise of options -- -- 1,800 -- --
Net income -- -- -- 4,966,900 -- 4,966,900
Unrealized gain on short-term
investments -- -- -- -- 1,600 1,600
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 2000 4,362,999 43,600 26,257,300 14,041,800 (26,200) $ 4,968,500
===========
Exercise of stock options 60,250 600 183,200 -- --
Tax benefit from exercise of options -- -- 141,000 -- --
Net income -- -- -- 3,054,100 -- 3,054,100
Unrealized gain on short-term
investments -- -- -- -- 26,200 26,200
Foreign currency translation adjustment -- -- -- -- (13,000) (13,000)
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 2001 4,423,249 $ 44,200 26,581,500 17,095,900 (13,000) $ 3,067,300
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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22
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 3,054,100 4,966,900 3,817,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,465,400 1,248,500 888,800
Loss on sale of property and equipment -- -- 46,100
Loss on sale of G.C. Industries 600,500 -- --
Write-off of note receivable 203,600 -- --
Deferred income taxes 491,400 (135,900) (107,000)
Tax benefit from exercise of stock options 141,000 1,800 90,900
Changes in operating assets and liabilities:
Trade receivables (1,098,300) (2,482,800) (1,896,800)
Inventories (934,100) (1,954,800) (894,800)
Prepaid expenses and other current assets (58,300) 170,600 (126,400)
Accrued expenses 88,400 (193,200) 894,600
Accounts payable (458,400) (189,200) (224,300)
Income taxes payable (1,200,200) 280,700 (366,700)
Other current liabilities 12,000 -- --
----------- ----------- -----------
Net cash provided by operating activities 2,307,100 1,712,600 2,122,300
----------- ----------- -----------
Cash flows from investing activities:
(Purchase) sale of short-term investments, net (2,247,500) 1,403,100 (8,246,900)
Capital expenditures (1,459,700) (2,101,300) (1,120,200)
Asset acquisition (482,000) -- --
Sale of G.C. Industries 664,000 -- --
Intangible assets -- -- (2,096,300)
Other assets 90,300 (300,700) 32,800
----------- ----------- -----------
Net cash used in investing activities (3,434,900) (998,900) (11,430,600)
----------- ----------- -----------
Cash flows from financing activities:
Issuances of common stock, net of offering costs 183,800 179,600 12,070,200
Bank borrowings (repayments), net 1,541,000 -- (3,087,200)
Payments under long-term debt and capital leases (1,286,800) (131,300) (21,000)
----------- ----------- -----------
Net cash provided by financing activities 438,000 48,300 8,962,000
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (689,800) 762,000 (346,300)
Cash and cash equivalents at beginning of year 969,800 207,800 554,100
----------- ----------- -----------
Cash and cash equivalents at end of year $ 280,000 969,800 207,800
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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23
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS AND SEGMENT INFORMATION
Invivo Corporation and subsidiaries (the Company) are engaged in
two business segments: patient safety monitoring and safety and
industrial instrumentation. The patient safety monitoring
segment designs, manufactures, and markets monitoring systems
that measure and display vital signs of patients in medical
settings. The safety and industrial instrumentation segment
designs, manufactures, and markets sensor-based instruments for
safety and industrial process control applications.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(c) CASH EQUIVALENTS
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
(d) SHORT-TERM INVESTMENTS
The Company classifies all of its short-term investments as
available-for-sale securities. Such short-term investments
consist primarily of federal agency securities and money market
funds, with unrealized gains and losses on the securities
reflected as other comprehensive income in stockholders' equity.
Realized gains and losses on short-term investments are included
in earnings and are derived using the specific identification
method for determining the cost of securities. It is the
Company's intent to maintain a liquid portfolio to take
advantage of investment opportunities; therefore, all securities
are considered to be available-for-sale and are classified as
current assets.
The Company derives the fair value of its short-term investments
based on quoted market prices.
(e) INVENTORIES
Inventories are stated at the lower of cost or market on a
first-in, first-out basis.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
Buildings 30 years
Equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Shorter of life of lease or 5 years
Automotive 5 years
23
24
(g) INCOME TAXES
The Company utilizes the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits which are not
expected to be realized.
(h) INTANGIBLE ASSETS
Intangible assets include patents and the cost in excess of
amounts otherwise assigned to net assets of businesses acquired
(goodwill). Patents are amortized on a straight-line basis over
their approximate useful lives, not to exceed 17 years. Goodwill
is amortized on a straight-line basis over 40 years. The Company
assesses the recoverability of goodwill by projecting results of
operations over the remaining useful lives of the businesses
acquired. Accumulated amortization as of June 30, 2001 and 2000
was approximately $1,240,000 and $1,319,800, respectively.
Amortization expense was approximately $254,400, $260,700 and
$191,700 for 2001, 2000 and 1999, respectively.
(i) REVENUE RECOGNITION
The Company recognizes revenue and all related costs upon
shipment of products to its customers. The Company does not as a
matter of contract provide its customers the right of return.
However, under certain circumstances the Company has allowed the
return of product. Based on experience and other information
available to the Company, the Company believes the amount of
future returns can be reasonably estimated. An allowance for
sales returns is reflected as a current liability with sales
revenue in the income statement reduced to reflect estimated
sales returns.
(j) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-
average number of common shares outstanding during the period.
Diluted net income per share is computed using the weighted-
average number of common and dilutive common shares outstanding
during the period. Dilutive potential common shares consist of
employee stock options.
(k) WARRANTIES
Product warranties providing for the repair or replacement of
defective products are included in the sale price of the
Company's products. The typical warranty period is one year.
Warranty obligations are accrued as a current liability for the
estimated amount of warranty expense expected in future
accounting periods based on experience and other information
available to the Company.
(l) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(m) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles held and
used by the Company are reviewed for impairment whenever events
or changes indicate that the carrying amount of an asset may not
be recoverable. The Company has identified no long-lived assets
or identifiable intangibles which are considered impaired.
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial
instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
their fair values because of their short maturities.
(o) RESEARCH AND EXPERIMENTAL COSTS
Research and experimental costs related to the design,
development and testing of new monitors, applications and
technologies are charged to expense as incurred.
(p) ACCOUNTING FOR STOCK OPTIONS
24
25
The Company accounts for its stock option plans in accordance
with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be
recorded only if the current market price of the underlying
stock exceeded the exercise price on the date of grant. The
Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities
to continue to apply provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma net income per share
disclosures for employee stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS
No. 123 had been applied.
(q) RECLASSIFICATIONS
Certain reclassifications have been made in the prior years'
financial statements to conform to classifications used in the
current year. These reclassifications had no effect on reported
earnings.
(r) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement
141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet in order to be
recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be
accounted for separately. Statement 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually
in accordance with the provisions of Statement 142. Statement
142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful
lives up to their estimated residual values, and reviewed for
impairment in accordance with FAS Statement No. 121. Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In connection with the adoption of FAS
142, the Company will be required to perform a transitional
goodwill impairment assessment. Statement 142 must be adopted in
fiscal years beginning after December 15, 2001. Early adoption
is permitted before the issuance of the Company's first
quarter's financial statements. The Company has not yet
determined the impact these standards will have on its results
of operations and financial position.
(2) SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
UNREALIZED
HOLDING
COST (LOSSES) GAINS FAIR VALUE
----------- ----------- -----------
As of June 30, 2001:
Money market funds $ 9,091,300 -- 9,091,300
=========== =========== ===========
As of June 30, 2000:
Federal agency securities $ 4,000,000 (26,200) 3,973,800
Money market funds 2,843,800 -- 2,843,800
----------- ----------- -----------
$ 6,843,800 (26,200) 6,817,600
=========== =========== ===========
(3) INVENTORIES
A summary of inventories as of June 30 follows:
2001 2000
----------- ----------
Raw materials $ 5,847,600 5,051,700
Work in process 4,210,600 3,814,300
Finished goods 1,190,900 1,266,000
----------- -----------
$11,249,100 10,132,000
=========== ===========
25
26
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment as of June 30 follows:
2001 2000
------------ ------------
Land and building $ 2,648,500 2,325,400
Equipment 8,106,600 7,706,400
Furniture and fixtures 1,939,100 1,027,600
Vehicles 110,400 130,400
Leased improvements 331,200 143,300
------------ ------------
13,135,800 11,333,100
Less accumulated depreciation and amortization (6,737,800) (5,193,500)
------------ ------------
$ 6,398,000 6,139,600
============ ============
Included in property and equipment as of June 30, 2001 is $208,200 of
equipment under capital lease. Accumulated amortization related to this
equipment was $89,500 as of June 30, 2001.
(5) BORROWINGS
A summary of debt and bank borrowings as of June 30 follows:
2001 2000
----------- -----------
Term loan payable in monthly installments of
approximately $9,400, including interest at LIBOR
plus 2% (5.95% at June 30, 2001); secured by land
and building $ 1,679,600 1,375,300
Less current portion (113,300) (104,400)
----------- -----------
$ 1,566,300 1,270,900
=========== ===========
The aggregate maturities of long-term debt as of June 30, 2001 are as
follows:
Year ending June 30:
2002 $ 113,300
2003 113,300
2004 113,300
2005 113,300
2006 113,300
Thereafter 1,113,100
----------
$1,679,600
==========
During fiscal year 2001, the Company refinanced its term loan and
increased the amount to $1,700,000. The additional funds were used for
expansion of its building.
During fiscal year 2001, the Company renewed its bank line of credit
from December 1, 2000 to December 1, 2001. The revolving line of credit
requires the Company to maintain a minimum tangible net worth, a maximum
ratio of total liabilities to tangible net worth, a minimum working
capital balance, and quarterly and annual profitability, and prohibits
the Company from paying dividends. As of June 30, 2001, $1,000,000 was
available under the line of credit.
26
27
(6) ACCRUED EXPENSES
A summary of accrued expenses as of June 30 follows:
2001 2000
---------- ---------
Accrued compensation and benefits $2,084,100 1,981,800
Other 1,578,800 1,399,300
---------- ----------
$3,662,900 3,381,100
========== ==========
(7) LEASE COMMITMENTS
The Company leases certain facilities and equipment under capital and
operating leases. The facilities' leases require the Company to pay
certain executory costs such as taxes, insurance, and maintenance. Rent
expense related to operating leases was approximately $498,000, $566,200
and $440,000 for the years ended June 30, 2001, 2000 and 1999,
respectively.
A summary of future minimum lease payments required under noncancelable
leases with terms in excess of one year, net of sublease rental income,
as of June 30, 2001 follows:
CAPITAL OPERATING
LEASES LEASES
----------- ----------
Fiscal year ending June 30:
2002 $ 49,800 635,300
2003 49,800 646,400
2004 37,500 654,800
2005 -- 664,800
2006 -- 535,900
Thereafter -- 262,900
----------- ----------
137,100 $3,400,100
==========
Less amount representing interest (14,900)
-----------
Present value of future minimum lease
payments 122,200
Less current portion (41,400)
-----------
Capital lease obligations, excluding current
portion $ 80,800
===========
(8) OTHER INCOME AND EXPENSE
A summary of other, net as of June 30 follows:
2001 2000 1999
-------- --------- -------
Interest Income $435,200 388,800 148,800
Gain on Sale of Securities -- 834,000 --
Settlement of lawsuit 450,000 -- --
Other (23,800) 2,400 (46,100)
-------- --------- -------
$861,400 1,225,200 102,700
======== ========= =======
27
28
(9) INCOME TAXES
A summary of the components of income tax expense (benefit) for the
years ended June 30 is as follows:
CURRENT DEFERRED TOTAL
----------- ----------- -----------
2001:
Federal $ 1,008,400 464,600 1,473,000
State 118,400 26,800 145,200
----------- ----------- -----------
$ 1,126,800 491,400 1,618,200
=========== =========== ===========
2000:
Federal $ 2,109,900 (202,900) 1,907,000
State 281,600 67,000 348,600
----------- ----------- -----------
$ 2,391,500 (135,900) 2,255,600
=========== =========== ===========
1999:
Federal $ 1,718,200 (82,700) 1,635,500
State 278,000 (24,300) 253,700
----------- ----------- -----------
$ 1,996,200 (107,000) 1,889,200
=========== =========== ===========
The effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of June 30 are as
follows:
2001 2000
----------- -----------
Deferred tax assets:
Reserves and other accruals $ 1,013,300 1,343,000
Capital loss carryover -- 199,400
----------- -----------
Gross deferred tax assets 1,013,300 1,542,400
Valuation allowance -- (199,400)
----------- -----------
Total deferred tax assets, less valuation
allowance 1,013,300 1,343,000
=========== ===========
Deferred tax liabilities:
Tax depreciation in excess of book depreciation (276,300) (58,000)
State taxes (3,400) (60,000)
----------- -----------
Total deferred tax liabilities (279,700) (118,000)
----------- -----------
Net deferred tax asset $ 733,600 1,225,000
=========== ===========
The valuation allowance decreased by $199,400 for the year ended June
30, 2001 due to the utilization and expiration of capital loss
carryforwards.
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
net deferred tax asset, or that the amounts will be recovered from
previously paid taxes.
28
29
The following summarizes the differences between the income tax expense
and the amount computed by applying the 34% federal statutory corporate
rate to income before income taxes as follows:
2001 2000 1999
----------- ----------- -----------
Federal income tax at statutory rate $ 1,588,600 2,455,700 1,940,000
State income taxes 95,800 230,100 183,000
Utilization of research, experimental, and
other credits (136,300) (103,200) (67,000)
Benefit of foreign sales corporation (132,400) (201,100) (257,000)
Non-deductible goodwill 342,300 88,100 --
Meals and entertainment 65,900 70,500 91,600
Decrease in valuation allowance on capital
loss carryforward (173,300) -- --
Other (32,400) (50,900) (1,400)
Adjustment of prior year's taxes -- (233,600) --
----------- ----------- -----------
$ 1,618,200 2,255,600 1,889,200
=========== =========== ===========
(10) STOCK OPTION PLAN
The Company has established stock option plans to provide for the
granting of stock options to employees (including officers and
directors) at prices not less than the fair market value of the
Company's common stock at the date of grant. Options vest ratably over
four years and expire in ten years. The Company has reserved 314,400 and
800,000 shares of its common stock for issuance under the 1986 and 1994
plans, respectively. During 2001, the Company granted 55,600 options to
purchase shares of common stock.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for the plans under the fair-value method. The fair value of
options issued under the plans was determined at the date of grant using
a Black-Scholes option pricing model with the following assumptions: no
dividend yield; volatility factor of the expected market price of the
Company's stock of 68%; a forfeiture rate of 5%; a weighted-average
expected life of options of five years; and a risk-free interest rate of
5.31%, 6.20% and 5.00% for 2001, 2000 and 1999, respectively. For
purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income and net income per common share would
approximate the following:
2001 2000 1999
------------- --------- ---------
Net income As reported $ 3,054,100 4,966,900 3,817,900
Pro forma 2,098,168 4,140,257 3,147,118
Basic net income per share As reported .69 1.15 1.07
Pro forma .48 .96 0.89
Diluted net income per share As reported .68 1.10 1.00
Pro forma .47 .92 0.82
Pro forma net income reflects only options granted from 1996 through
2001. Therefore, the full impact of calculating compensation cost for
the Company's plan under SFAS No. 123 is not reflected in the option's
vesting period and compensation costs for options granted prior to July
1, 1995 are not considered.
29
30
A summary of stock option activity for the years ended June 30, 2001 and
2000 follows:
WEIGHTED-
AVERAGE
WEIGHTED- WEIGHTED- EXERCISE PRICE
AVERAGE AVERAGE OPTIONS OF OPTIONS
EXERCISE GRANT DATE EXERCISABLE EXERCISABLE AT
OPTIONS PRICE FAIR VALUE AT YEAR END YEAR END
------- -------- -------- -------- --------
June 30, 1998 615,975 $ 7.77 328,401 $ 5.51
Granted 183,000 12.15 7.58
Exercised (28,900) 5.60
Canceled (6,250) 8.90
------- --------
June 30, 1999 763,825 $ 8.89 426,575 $ 6.96
Granted 186,850 10.03 6.32
Exercised (82,425) 2.18
Canceled (19,575) 11.25
------- --------
June 30, 2000 848,675 6.94 466,575 8.83
Granted 55,600 8.81 5.37
Exercised (60,250) 3.05
Canceled (32,350) 11.25
------- --------
June 30, 2001 811,675 10.11 574,150 9.99
=======
WEIGHTED- NUMBER
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED-
OUTSTANDING AS REMAINING AVERAGE AS OF AVERAGE
RANGE OF EXERCISE OF JUNE 30, CONTRACTUAL EXERCISE JUNE 30, EXERCISE
PRICES 2001 LIFE PRICE 2001 PRICE
--------------- ---------- ----------- ----------- ----------- -----------
$ 2.00 - 5.130 39,200 1.54 $ 4.62 39,200 $ 4.62
7.00 - 9.875 323,575 7.44 8.87 182,300 8.44
10.00 - 16.130 448,900 6.41 11.49 352,650 11.38
---------- -----------
811,675 574,150
========== ===========
(11) SALARY DEFERRAL PLAN
The Company's executive officers, together with all other eligible
employees, may participate in the Company's 401(k) Salary Deferral Plan
(the Plan). Employees become eligible upon completion of six months of
service. Each eligible employee receives a retirement benefit based upon
accumulated contributions to the Plan by the employee and the Company
plus any earnings on such contributions. The Company contributes an
amount equal to 35% of the first 4% of compensation which the employee
contributes. The Plan currently provides that participants vest 25% each
year over a four-year period. Company contributions to the Plan for the
plan years ended December 31, 2000 and 1999 were $120,400 and $84,800,
respectively.
(12) LEGAL PROCEEDINGS
The Company's medical device subsidiary, Invivo Research, was one of two
third-party defendants named in a lawsuit in June of 1994 by Southern
Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State
District Court. The underlying action in this matter stemmed from an
incident involving a surgical patient undergoing a procedure at the
Southern Nevada Surgical Center. The patient suffered a serious
permanent brain injury. A lawsuit was filed on behalf of the patient
against the surgical center and the anesthesiologist who monitored the
patient. The defendants in that action made a substantial settlement to
the patient. Southern Nevada Surgical Center ("SNSC") and Surgex were
seeking indemnity and contribution of approximately $14 million from the
manufacturer of the anesthetic gas machine and Invivo Research, which
manufactured the vital signs monitor used in this procedure. SNSC and
Surgex alleged that both the anesthetic gas machine and the vital signs
monitor were defective. The Company believes that the vital signs
monitor operated properly and was properly designed for its intended
function.
On August 18, 1999, the Nevada District Court granted the Company's
Motion to Dismiss for Failure to Prosecute. The Order granted dismissal
of the SNSC and Surgex contribution claims, without prejudice, based
upon Nevada law that provides that an action must be brought to trial
within five years of the date of the filing of the original action. The
dismissal is being appealed.
In April of 1997, the plaintiff's insurer, CNA, filed an action with
identical causes in the same Nevada State Court. This second action was
removed by the Company to U.S. District Court. The action by CNA was
dismissed by the District Court on January 19, 2000 as the District
Court found CNA did not have standing as the real party of interest. CNA
appealed the decision to the Ninth Circuit Court of Appeals. A
three-member panel of the Ninth Circuit reversed the dismissal and
remanded the case back to Federal District Court on July 30, 2001. The
Company has appealed this decision and requested a decision from the
full panel of the Ninth Circuit.
The Company intends to vigorously defend itself in these proceedings.
Any judgment against the Company that exceeds the amount that its
insurer is required to pay could have a material adverse effect on its
business and results of operations.
(13) MAJOR CUSTOMERS AND CREDIT RISK
In fiscal 2001, 2000 and 1999, no individual customer accounted for
greater than 10% of the Company's revenues or trade accounts receivable.
The Company has a customer base that is diverse geographically and by
industry. Customer credit evaluations are performed on an ongoing basis,
and collateral is generally not required for trade accounts receivable.
Management does not believe the Company has any significant
concentration of credit risk as of June 30, 2001.
(14) NET INCOME PER COMMON SHARE
The following table presents the calculation for basic and diluted net
income per common share.
FOR THE FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
2001 2000 1999
--------- --------- ---------
BASIC:
Weighted average common
Shares outstanding 4,402,760 4,328,897 3,552,148
========= ========= =========
Net Income 3,054,100 4,966,900 3,817,900
========= ========= =========
Basic net income per common share .69 1.15 1.07
========= ========= =========
DILUTED:
Weighted average common
Shares outstanding (basic) 4,402,760 4,328,897 3,552,148
Dilutive stock options 73,254 168,593 279,112
--------- --------- ---------
Weighted average common
Shares outstanding (diluted) 4,476,014 4,497,490 3,831,260
========= ========= =========
Net Income 3,054,100 4,966,900 3,817,900
========= ========= =========
Diluted net income per common share $ .68 $ 1.10 $ 1.00
========= ========= =========
30
31
(15) SEGMENT INFORMATION
The Company's chief operating decision-maker is considered to be the
chief executive officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by information by business
segment. The Company operates in two business segments: (i) patient
safety monitoring, which designs, manufactures, and markets monitoring
systems that measure and display vital signs of patients in medical
settings; and (ii) safety and industrial instrumentation, which is
engaged in the design, manufacture, and marketing of sensor-based
instruments for safety and industrial process control applications.
These segments are managed separately because of different customers and
products which require different business strategies. The Company
evaluates the operating performance of its segments based on net sales
and income from operations.
Summarized financial information concerning the Company's business
segments is shown in the following table. The "Corporate" column
includes general and administrative and corporate-related expenses not
allocated to reportable segments (in thousands).
PATIENT SAFETY AND
SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE(1) TOTAL
---------- --------------- ------------ ------
For the year ended June 30, 2001:
Net sales $35,503 18,776 -- 54,279
Income from operations 3,970 2,370 (1,814) 4,526
Depreciation and amortization 952 464 49 1,465
Total assets 29,026 12,733 10,252 52,011
PATIENT SAFETY AND
SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE(1) TOTAL
---------- --------------- ------------ ------
For the year ended June 30, 2000:
Net sales $32,966 19,784 -- 52,750
Income from operations 4,512 3,208 (1,586) 6,134
Depreciation and amortization 943 259 48 1,250
Total assets 29,135 10,803 9,538 49,476
PATIENT SAFETY AND
SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE(1) TOTAL
---------- --------------- ------------ ------
For the year ended June 30, 1999:
Net sales $30,173 18,685 -- 48,858
Income from operations 4,001 3,266 (1,407) 5,860
Depreciation and amortization 548 322 19 889
Total assets 24,836 9,282 10,523 44,641
(1) Includes costs not identifiable to a particular segment, such as
general and administrative expenses.
A reconciliation of income from operations to income before income taxes
for the year ended June 30 follows:
2001 2000 1999
------ ----- -----
Income from operations $4,526 6,134 5,860
Other income (expense) 146 1,089 (153)
------ ----- -----
Income before income taxes 4,672 7,223 5,707
====== ===== =====
31
32
The Company markets its products in the United States and in foreign
countries through its sales personnel and distributors. Export sales
account for a portion of the Company's net revenue and are approximately
summarized by geographic area as follows (in thousands):
YEAR ENDED JUNE 30,
---------------------------------
2001 2000 1999
------- ------- -------
United States $42,700 41,400 37,700
Export:
Europe 6,500 5,800 5,800
Pacific Rim 3,500 4,600 2,900
Other International 1,600 1,000 2,500
------- ------- -------
Total net sales $54,300 52,800 48,900
======= ======= =======
(16) SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities and supplemental cash flow
information are summarized as follows:
YEAR ENDED JUNE 30,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
Equipment acquired under capital lease $ -- -- 208,200
Common stock issued in connection with the
acquisition of Invivo Research Inc. -- -- 1,047,800
Cash paid:
Income taxes 2,186,000 2,109,000 2,272,000
Interest 114,700 137,000 255,500
32
33
SELECTED QUARTERLY FINANCIAL DATA (NOT COVERED BY REPORT OF INDEPENDENT
ACCOUNTANTS):
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
FISCAL YEAR 2001
Sales .................................. $12,673 13,034 13,801 14,771
Gross Profit ........................... 6,252 6,332 6,712 7,166
Net Income ............................. 845 881 485 844
Net Income per common share (basic) .... 0.19 0.20 0.11 0.19
Net Income per common share (diluted) .. 0.19 0.20 0.11 0.19
FISCAL YEAR 2000
Sales .................................. $12,864 13,028 13,232 13,626
Gross Profit ........................... 6,458 6,177 6,378 6,732
Net Income ............................. 1,158 1,211 1,163 1,435
Net Income per common share (basic) .... 0.27 0.28 0.27 0.33
Net Income per common share (diluted) .. 0.26 0.27 0.26 0.32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
The information required is incorporated by reference from the Company's
definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders.
ITEM 11.
The information required is incorporated by reference from the Company's
definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders.
ITEM 12.
The information required is incorporated by reference from the Company's
definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders.
ITEM 13.
The information required is incorporated by reference from the Company's
definitive proxy statement for the Company's 2001 Annual Meeting of
Stockholders.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT INDEX
NUMBER DESCRIPTION OF DOCUMENT PAGE
------ ----------------------- ----
3.01 Restated Certificate of Incorporation of the Registrant(1) ...........
3.02 Restated By-Laws of the Registrant(2) ................................
4.01 Form of Common Stock Certificate(2) ..................................
10.01 Sensor Control Corporation 1986 Incentive Stock Option Plan and
1986 Non-statutory Stock Option Plan, as amended(3) ..................
10.02 Indemnity Agreement(2) ...............................................
10.03 SafetyTek 1994 Stock Option Plan(4) ..................................
10.04 Credit Agreement between Wells Fargo Bank and Invivo Corp. dated
October 6, 1998(5) ...................................................
10.05 First Amendment to Credit Agreement between Invivo Corp. and Wells
Fargo Bank dated November 1, 1998(5) .................................
10.06 Stock Option Agreement with Walden Management Corporation Pension
Fund for the Benefit of George S. Sarlo (1) ..........................
10.07 Second Amendment to Credit Agreement between Invivo Corp. and Wells
Fargo Bank dated December 1, 1999 (6) ................................
10.08 Third Amendment to Credit Agreement between Invivo Corp. and Wells
Fargo Bank dated May 15, 2000 (7) ....................................
10.09 First Amendment to Lease between Miramar Flexspace Ltd. and Invivo
Corporation dated June 12, 2000 (7) ..................................
10.10 Lease between Sierra Precision and Capellino/Galleano dated June 7,
2000 (7) .............................................................
10.11 First Amendment to Lease between Sierra Precision and
Capellino/Galleano dated July 12, 2000 (7) ...........................
10.12 Fourth Amendment to Credit Agreement between Invivo Corp. and Wells
Fargo Bank dated December 1, 2000 (8) ................................
10.13 First Amendment to Lease between Principal Life insurance Company
and Invivo Corporation dated February 26, 2001 (9) ...................
10.14 Lease between Arcadia Management Services and Invivo Corporation
dated November 29, 2000 (9) ..........................................
10.15 Note and Mortgage Modification Agreement and Notice of Future
Advance between Suntrust Bank and Invivo Research Inc. dated May
30, 2001** ...........................................................
21.01 Subsidiaries of Registrant** .........................................
23.01 Consent of KPMG LLP** ................................................
** Filed herewith
(1) Incorporated by reference to corresponding Exhibit included with
Registrant's Registration Statement on Form S-2 filed on March 9, 1999.
(File No. 333-72071)
34
35
(2) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-K filed September 28, 1990. (File No. 0-15963)
(3) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 8-K filed January 28, 1991. (File No. 0-15963)
(4) Incorporated by reference to corresponding Exhibit included with
Registrant's Form S-8 filed January 27, 1995. (File No. 33-88798)
(5) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed November 12, 1998. (File No. 0-15963)
(6) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed February 14, 2000. (File No. 0-15963)
(7) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-K filed September 26, 2000. (File No. 0-15963)
(8) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed February 14, 2001. (File No. 0-15963)
(9) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed April 15, 2001. (File No. 0-15963)
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(B) FINANCIAL STATEMENT SCHEDULES
Invivo Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Years ended June 30, 2001, 2000 and 1999
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
------- ------- ------- -------
Allowance for doubtful accounts
Fiscal 2001 ............. 533,900 232,000 258,800 507,100
Fiscal 2000 ............. 280,600 502,400 249,100 533,900
Fiscal 1999 ............. 288,300 23,400 31,100 280,600
Warranty Reserve
Fiscal 2001 ............. 396,200 448,100 428,900 415,400
Fiscal 2000 ............. 308,200 330,800 242,800 396,200
Fiscal 1999 ............. 227,000 282,600 201,400 308,200
(1) Deductions as a result of write-offs
(C) REPORTS ON FORM 8-K
The Company was not required to file any reports on Form 8-K for the quarter
ended June 30, 2001.
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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.
Invivo Corporation
/S/ JOHN F. GLENN
John F. Glenn
Vice President-Finance\
Chief Financial Officer
September 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ ERNEST C. GOGGIO
-----------------------------
Ernest C. Goggio Chairman of the Board September 28, 2001
/S/ JAMES B. HAWKINS
-----------------------------
James B. Hawkins President, Chief September 28, 2001
Executive Officer, Director
(principal executive officer)
/S/ JOHN F. GLENN
-----------------------------
John F. Glenn Chief Financial Officer September 28, 2001
(principal financial
and accounting officer)
/S/ LAUREEN DEBUONO
-----------------------------
Laureen DeBuono Director September 28, 2001
/S/ GEORGE S. SARLO
-----------------------------
George S. Sarlo Director September 28, 2001
37