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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, 1999
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission file number 0-15963
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 $13.125 on September 20, 1999, the aggregate
market value of registrant's voting Common Stock held by non-affiliates of the
registrant was approximately $56,187,500.
There were 4,280,949 shares of the registrant's Common Stock, $.01 par value,
outstanding on September 20, 1999.
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,
1999 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"). As a result
it has enjoyed a significant first-to-market advantage. 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, GE Medical Systems ("GE Medical") and Elscint, Ltd. GE
Medical and Siemens Medical have approved the use of the Company's monitors for
incorporation into their MRI equipment. The Company continues to work with MRI
equipment manufacturers to develop additional customized features.
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 55%, 57%
and 62% for fiscal years 1997, 1998, and 1999, respectively. The percentage of
sales contributed by the Company's safety and industrial instrumentation line of
products was 45%, 43% and 38% for fiscal years 1997, 1998, and 1999,
respectively.
Financial information regarding operating segments for the three years
ended June 30, 1999 is included in Note 13, "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
the technology has improved, MRI has become a widely accepted method of
performing diagnostic procedures. 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 estimates that GE Medical, Siemens Medical and
Philips Medical together control over 70% of the worldwide MRI equipment market.
The Company believes the MRI marketplace will continue to grow as new uses
for MRI are developed. The Company believes that about 1,500 new MRI units were
replaced worldwide in 1998. Over the next three years, the Company believes that
there will be 10% to 15% annual growth in MRI unit sales as old equipment is
replaced and new equipment is added in hospitals and imaging centers.
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While not every MRI use requires a patient monitor, as uses continue to
expand, the Company believes patient monitoring during the MRI procedure will
become increasingly important. MRI patient monitoring technology enables
physicians to track vital signs while the patient is undergoing an MRI
procedure. 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.
The Company estimates the worldwide market for patient monitoring products
that measure multiple vital signs, including MRI and general patient monitoring,
was approximately $1.5 billion in 1998. 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 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
safety and industrial instrumentation market 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.
STRATEGY
The Company's strategy includes the following key elements:
EXPLOIT LEADERSHIP POSITION IN MRI PATIENT MONITORING TO GROW WITH ADVANCES
IN MRI USES. The Company believes that physicians and medical researchers will
continue to develop additional uses for MRIs in diagnostic, surgical and other
medical and patient care areas. The Company believes that a number of these new
uses will require effective monitoring of a patient's vital signs. The Company
intends to capitalize on its technology and relationships with its OEMs,
hospitals and stand-alone imaging centers to participate in the growth of MRIs.
The Company further intends to pursue refinements in its MRI monitors to suit
new uses of MRI equipment.
EXPAND PENETRATION OF THE MILLENNIA PRODUCT LINE. The Company believes
there is an increasing awareness in the medical community of its patient
monitoring capabilities outside of the MRI room since the introduction of the
Millennia product line. The Company intends to take advantage of this growing
familiarity with the Millennia to expand its market opportunities.
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ACQUIRE OR DEVELOP ADDITIONAL MEDICAL PRODUCTS. The Company intends to
leverage its growing reputation within the medical community by expanding its
medical product line. The Company believes an expanded medical product line will
enable it to achieve economies of scale and present cross-selling opportunities
for all of its medical products. To expand its product lines, the Company will
evaluate the acquisition and licensing of attractive products and complementary
businesses as well as the internal development of complementary products.
LEVERAGE THE ADVANTAGES PROVIDED BY DEDICATED SALES FORCE. Unlike other
medical device companies similar in size, the Company uses a dedicated sales
force currently comprised of approximately 35 salespeople to sell its patient
monitoring products. The Company's dedicated sales force provides it with direct
access to its customers, which the Company believes enables it to establish
strong relationships and to better understand its customers' needs. The Company
intends to use its sales force to further expand its market opportunities.
CONTINUE TO BENEFIT FROM EXISTING NON-MEDICAL PRODUCT LINES. The Company
has a number of well-established safety and industrial instrumentation product
lines that serve mature markets. The Company plans to continue to serve these
markets with its existing products and to evaluate the potential return from
enhancements of or modifications to these product lines.
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.
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 under 15 pounds.
Ease-of-transport enables a hospital to maximize use of the 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 that medical
personnel can easily use.
In January 1999, the Company introduced two new products in the Millennia
line that target substantial specialized markets for patient monitors. The first
of these is 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. The second incorporates 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.
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The Company also recently developed a modified version of the Millennia for
incorporation into GE Medical's CT scanners for use in cardiology. This
represents the first use of the Company's patient monitors in radiology
applications outside the MRI environment.
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.
With the recent FDA approval of its arrythmia detection enhancement for the
Centurion, the Company is continuing to upgrade its total product offering.
OTHER. Other monitors include:
o a non-invasive blood pressure monitor that uses digital signal
processing for fast and consistent measurements
o an inexpensive multi-parameter vital signs monitor designed
specifically for the low-end international market
o a stand-alone unit to measure blood oxygen levels
o a monitor for blood pressure and blood oxygen levels
o 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. In fiscal 1998, the Company introduced 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 uses. These include the fabrication of
semiconductors, the manufacturing of metals and glass, and miscellaneous
automotive, plant maintenance, construction and food preparation applications.
In fiscal 1997, the Company introduced the quickTemp, a hand-held, pocket-sized,
infrared non-contact thermometer.
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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 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 30 salespersons organized into five regions in
the United States. Distributors, assisted by our 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, GE Medical Systems and Elscint, Ltd. for its MRI
monitoring equipment. These relationships facilitate the sale of its monitors
with the MRI equipment manufactured by these companies.
The Company has also established relationships with leading group
purchasing organizations such as Premier Technology Management and AmeriNet,
Inc. and health care providers such as Kaiser Permanente and Columbia/HCA.
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 23%, 23% and 22% of the Company's total sales in
fiscal 1999, 1998 and 1997. The Company is actively trying to expand its
international presence, especially in the patient monitoring business.
The Company's backlog of unfilled purchase orders for all its products was
approximately $7.3 million as of June 30, 1999, compared to approximately $6.7
million as of June 30, 1998 and approximately $3.5 million as of June 30, 1997.
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 from a wide
variety of suppliers the materials and supplies that it uses to produce its
products. The Company has not experienced any significant shortages. Although
certain materials that the Company uses in the manufacture of certain 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
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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.
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 recently revised good manufacturing practices,
titled "Quality System Regulation", now 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 believes it is in compliance
with all applicable FDA regulations.
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 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.
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The Company believes that it presently is in compliance with all applicable
material environmental regulations. 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 1999, 1998, and 1997 the Company's research and experimental
expenses were approximately $3.0 million, $2.5 million, and $2.4 million,
respectively. The majority of these expenditures relate to the patient safety
monitoring business.
EMPLOYEES
As of June 30, 1999 the Company had 304 employees, all of whom were
full-time. 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.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain 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. Forward-looking statements in this
document include, but are not necessarily limited to, those relating to:
o the Company's intention to further penetrate the broad patient
monitoring market
o the anticipated growth in medical applications of MRI equipment
o the Company's ability to carry out its strategy
o the Company's success in developing new or enhanced products to take
advantage of market opportunities or to respond to competition
o the Company's ability to complete any future acquisitions of products
or businesses
o the Company's achieving year 2000 compliance or the impact on it of
any third party's year 2000 compliance
o the Company's belief that patient monitors will become an integral
component of MRI equipment
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 "Risk Factors"
section of this report.
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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 2001
Fremont, California 17,000 square-foot building used as our March 2001
manufacturing and distribution facility for our
gas calibration and process control products
Orlando, Florida 42,000 square-foot building used as the Owned
manufacturing, distribution and administrative
facility for our patient monitoring products
Cucamonga, California 24,000 square-foot building used as the June 2000
manufacturing, distribution and administrative
facility for our oxygen monitoring products
Miramar, Florida 9,000 square-foot building used as the August 2000
manufacturing, distribution and administrative
facility for our gas detection and monitoring
products
The Company has negotiated a lease for a new facility in Cucamonga
beginning in July, 2000. The Company does not believe that the cost of
relocation will be material. The Company also believes that the relocation will
not interrupt its business.
The Company considers its present facilities to be sufficient for current
operations. However, from time to time, the Company may lease smaller facilities
as its needs dictate.
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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. A substantial settlement was made to the patient by the
defendants in that action. 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 which
provides that an action must be brought to trial within five years of the date
of the filing of the original action.
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 Federal Court and is presently pending.
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.
In addition to the legal proceeding described above, the Company is subject
to other various legal proceedings that arise in the ordinary course of
business. While the outcome of these proceedings cannot be predicted with
certainty, the Company believes that none of such proceedings, individually or
in the aggregate, will have a material adverse effect on its business or results
of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on May 25, 1999 for the purpose
of amending the Company's Restated Certificate of Incorporation to authorize the
issuance of up to 20,000,000 shares of Common Stock. The proposal was approved
as a majority of the shares outstanding voted in favor of the proposal.
ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and directors as of June 30, 1999, are listed below,
together with brief accounts of their business experience and certain other
information.
NAME AGE POSITION
---- --- --------
James B. Hawkins............ 43 President, Chief Executive Officer, Secretary and Director
John F. Glenn............... 38 Vice President, Finance and Chief Financial Officer
F. Larry Young.............. 40 Vice President, Operations
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. Mr. Hawkins has served as a Director of Pillar
Corporation, a major stockholder in Invivo, since August 1987. Pillar
Corporation, based in Milwaukee, Wisconsin, manufactures heat induction and
melting equipment for the metals industry. He earned his undergraduate degree in
Business Commerce from Santa Clara University and a MBA from San Francisco State
University.
John F. Glenn was appointed Vice President, Finance and Chief Financial
Officer of Invivo in November 1990. From September 1988 to November 1990, Mr.
Glenn was employed by Pillar Corporation as Vice President, Finance and Chief
Financial Officer. From August 1983 to September 1988, he served in various
capacities with First Interstate Bank. Mr. Glenn earned his undergraduate degree
in Business Administration from University of Nevada, Reno 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 our Lumidor Safety Products subsidiary
since August 1996. From September 1986 to April 1990, Mr. Young was Vice
President, Manufacturing of Invivo. Prior to joining Invivo's predecessor as
Manufacturing Manager in July 1985, he served for four years in various
managerial capacities with Apple Computer, Inc.
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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
---- ---
YEAR ENDED JUNE 30, 1998
First Quarter ............... 7 1/2 6 3/4
Second Quarter .............. 10 7/8 7
Third Quarter ............... 10 3/4 8 7/16
Fourth Quarter .............. 13 1/2 10 3/4
YEAR ENDED JUNE 30, 1999
First Quarter ............... 14 3/4 9 1/4
Second Quarter .............. 16 7/16 12
Third Quarter ............... 18 1/2 13 1/2
Fourth Quarter .............. 13 9/16 11 1/2
As of June 30, 1999, the Company had 69 shareholders of record of our
common stock, although there are a larger number of beneficial holders.
DIVIDEND POLICY
The Company intends to retain all earnings, if any, to finance the
expansion of our business. The Company does not anticipate paying any cash
dividends on our 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 to
its stockholders without written consent from its 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, 1999, 1998 and 1997 and the balance sheet data at June 30, 1999 and
1998 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, 1996 and 1995 and
the balance sheet data at June 30, 1997, 1996 and 1995 are derived from audited
financial statements not included herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales .......................................... $ 48,858 $ 40,651 35,904 $ 31,391 $ 32,489
Gross profit ................................... 24,490 19,695 17,285 15,580 16,646
Operating expenses
Selling, general and administrative .......... 15,623 13,429 14,174 9,691 9,501
Research and experimental .................... 3,007 2,455 2,449 2,095 1,841
Other income (expense) ......................... (153) (383) (184) (49) (51)
Income tax expense ............................. 1,889 1,165 162 1,273 1,348
Net income ..................................... $ 3,818 $ 2,263 $ 316 $ 2,472 $ 3,348
Basic net income per common share .............. $ 1.07 $ .69 $ .10 $ .77 $ 1.05
Weighted average common shares
outstanding (basic) .......................... 3,552 3,265 3,239 3,216 3,186
Diluted net income per common share ............ $ 1.00 $ .66 $ .09 $ .72 $ .99
Weighted average common shares
outstanding (diluted) ........................ 3,831 3,427 3,445 3,456 3,390
JUNE 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA:
Working capital ............................. $22,949 $ 9,364 $ 7,474 $ 7,940 $ 6,428
Total assets ................................ 44,641 30,195 26,612 22,204 19,860
Long-term debt .............................. 1,375 1,480 1,584 730 926
Stockholders' equity ........................ 35,167 18,168 15,815 15,276 12,616
13
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Through its medical device subsidiary, Invivo Research, the Company offers
a line of patient monitors capable of continuous measurement of multiple vital
signs in the medical care environment. Prior to fiscal 1997, the patient
monitoring business was primarily focused on products for use in the MRI
environment. In the mid-1990s, the Company undertook to develop a full-featured,
competitively priced monitor for general applications. This effort culminated in
the introduction of the Millennia monitor in early fiscal 1997. The Company
substantially increased its sales force and marketing efforts in fiscal 1996 and
1997 to promote the entry into this new market. This increase was the primary
cause of operating expenses growing more rapidly than revenue in those years.
The improved operating results in fiscal 1998 and 1999 reflect, in part, the
ongoing market penetration of the Millennia product.
The Company's safety and industrial instrumentation business includes
monitors used to detect harmful levels of toxic and other gases in the workplace
and other environments. The Company's other safety and industrial
instrumentation products include a line of oxygen monitoring equipment,
equipment that sets and verifies the accuracy of gas monitors, pressure sensors
and non-contact infrared temperature measuring devices.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
SALES. Sales for fiscal 1999 increased 20.2% to $48,858,000 compared with
$40,651,400 for fiscal 1998. The sales increase for fiscal 1999 was primarily
due to sales growth at the Company's patient monitoring business. Continued
strong demand for the Company's next-generation MRI vital signs monitor, the
Omni-Trak 3150, was largely responsible for the sales increase. Increased sales
of the Company's gas detection and oxygen monitoring product lines also
positively affected sales in fiscal 1999.
GROSS PROFIT. The gross profit margin increased in fiscal 1999 to 50.1%
from 48.4% for fiscal 1998. The increase was largely attributable to the sales
growth of our MRI vital signs monitoring products, which have higher gross
margins than the Millennia vital signs monitor and other monitoring products.
OPERATING EXPENSES. Selling, general and administrative expenses for fiscal
1999 increased 16.3% or $2,194,300 over fiscal 1998 levels. Selling, general and
administrative expenses were 32.0% of sales for fiscal 1999 compared with 33.0%
for fiscal 1998. The increase in these expenditures in aggregate was largely due
to higher sales commission expenses on the higher sales volume at the patient
monitoring business. Higher administrative expenses in support of the
incremental sales volume at the patient monitoring business also contributed to
the increase.
Research and experimental expenses were $3,007,300 or 6.2% of sales for
fiscal 1999 compared to $2,455,000 or 6.0% for fiscal 1998. A substantial amount
of the total research and experimental expenses in fiscal 1999 was on behalf of
the patient monitoring business as the Company continued to develop additional
features for its Millennia vital signs monitor for specialized market areas.
OTHER INCOME AND EXPENSE. Interest expense decreased to $255,500 for fiscal
1999 compared with $387,300 for fiscal 1998. This decrease was the result of the
payoff of the outstanding balances on the Company's revolving bank line of
credit and term loan with the proceeds from its secondary stock offering in
March, 1999.
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15
PROVISION FOR INCOME TAXES. The effective tax rate for the year ended June
30, 1999 was 33.1% compared with 34.0% for fiscal 1998. The effective tax rate
differs from the statutory rate principally due to the benefit of a foreign
sales corporation and utilization of research, experimental and other credits.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. Sales for fiscal 1998 increased 13.2% to $40,651,400 from
$35,903,500 in fiscal 1997. The sales increase in fiscal 1998 was primarily
attributable to the sales growth at the patient monitoring business as sales of
the Millennia portable multi-parameter vital signs monitor continued to increase
from prior year levels. Growth in the Company's safety and industrial
instrumentation businesses also positively affected sales.
GROSS PROFIT. The gross profit margin increased slightly in fiscal 1998 to
48.5% from 48.1% in fiscal 1997. Continued improvement in the gross margin of
the Millennia monitor was primarily due to material cost reductions and
manufacturing efficiencies. In addition, higher gross margins at the gas
detection and industrial instrumentation businesses offset a decline in the
gross margin at the oxygen monitoring business.
OPERATING EXPENSES. Selling, general and administrative expenses in fiscal
1998 decreased 5.3% or $745,800 over fiscal 1997 levels. Selling, general and
administrative expenses were 33.0% of sales in fiscal 1998 compared with 39.5%
for fiscal 1997. The decrease in these expenditures in absolute dollars and as a
percentage of sales was primarily due to reduced selling, general and
administrative expenses at the patient monitoring business. This reduction
occurred as many of the expenses associated with the significant expansion of
the direct sales force in fiscal 1997 decreased.
Research and experimental expenses remained nearly constant in absolute
dollars at $2,455,000 or 6.0% of sales in fiscal 1998 as compared to $2,448,800
or 6.8% of sales in fiscal 1997. A substantial amount of the research and
experimental expenses was on behalf of the patient monitoring business as the
Company continued to develop additional features for the Millennia vital signs
monitor for specialized market areas.
OTHER INCOME AND EXPENSE. Interest expense increased to $387,300 for fiscal
1998 compared with $251,400 in fiscal 1997. The increase in interest expense was
the result of higher outstanding balances on the Company's revolving bank line
of credit along with the increased mortgage on the expanded patient monitoring
facility.
PROVISION FOR INCOME TAXES. The effective tax rate for fiscal 1998 remained
stable at 34.0%.
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
On March 15, 1999, the Company completed the sale of 900,000 additional
shares of common stock at a price of $14.75 per share. The Company netted
approximately $12,100,000 prior to the repayment of its outstanding bank
borrowings of approximately $2,500,000. Working capital at June 30, 1999
therefore increased to $22,948,900 from $9,363,700 at June 30, 1998.
Net cash provided by operating activities was $2,059,200 for the year ended
June 30, 1999 compared with $2,006,400 provided by operations for the year ended
June 30, 1998. This increase was largely the result of the increase in net
income offset by changes in operating assets and liabilities, particularly
inventories, accounts receivable, accounts payable and income taxes payable.
15
16
Capital expenditures were $1,120,200 for fiscal 1999 compared to $646,800
for fiscal 1998. The increase was primarily the result of costs associated with
the Company's new information systems and sales demonstration equipment at the
Company's patient safety monitoring business.
In fiscal 1993, the Company purchased 80% of the outstanding common stock
of Invivo Research, Inc. In fiscal 1994, the Company entered into an agreement
to acquire the remaining 20% of the Invivo Research, Inc. shares. The contingent
purchase price for such shares was to be paid in one or more installments.
One-fifth of the price vested on January 1, 1996, 1997 and 1998 and two-fifths
vested on January 1, 1999. The former Invivo Research shareholders could make an
election each year beginning in 1996 to be paid any vested payment. The amount
of any payment was based on the after tax profits of Invivo Research for the
calendar year preceding the year that the payment was made, regardless of when
the payment vested, subject to a minimum share price if certain milestones were
achieved. The Company was informed in March of 1996 that the former Invivo
Research shareholders would elect to be paid on their first installment. Based
on the 1995 calendar year results for Invivo Research, payment was made on June
1, 1996, for $987,900. In March of 1998, the former Invivo Research shareholders
elected to be paid on the second vested installment which amounted to $465,342.
The Company was informed in March of 1999 that the former Invivo Research
shareholders would elect to be paid on their final three installments. Based on
1998 calendar results for Invivo Research, the amount to be paid was $3,143,300.
The Company had the right to make one-third of the payment in the form of its
Common Stock. On June 1, 1999 the Company paid the former shareholders two of
the installments in cash totaling $2,095,500. The remaining installment was paid
in the form of the Company's Common Stock totaling 82,256 shares.
In October 1998, the Company increased its bank line of credit to
$7,500,000 from $5,000,000 and added a $1,000,000 three-year term loan. The
Company also renewed the line of credit from December 1, 1998 to December 1,
1999. The Company's revolving bank line of credit is collateralized by the
Company's accounts receivable, inventory, and equipment. On March 15, 1999 the
Company repaid the outstandings on the line of credit and term loan.
The Company believes that its cash flow from operations and proceeds from
its recent stock offering will be adequate to meet its anticipated cash needs
for working capital and capital expenditures throughout fiscal 2000. The Company
will continue to explore opportunities for the possible acquisitions of
technologies or businesses, which may require the Company to seek additional
financing.
16
17
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (as amended by SFAS No. 137), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement is effective for fiscal quarters and fiscal years beginning after June
15, 2000. As the Company does not currently have any derivative instruments for
hedging activities the Company believes that SFAS No. 133 will have no impact on
its consolidated financial statements.
YEAR 2000
READINESS FOR YEAR 2000
Many existing computer systems and related software applications use only two
digits to identify a year in the date field, without considering the impact of
the upcoming change in the century. Such systems and applications could fail or
create incorrect or unintended results unless corrected so that they can process
data related to the year 2000 and thereafter. The Company relies on such
computer systems and applications in operating and monitoring most major aspects
of our business. The Company has evaluated the impact of the year 2000 issue on
its business and the related expenses incurred in attempting to remedy such
impact. The year 2000 issue could affect the Company in at least three different
ways:
o The software or the chips embedded within computers and other systems
used in the Company's offices and manufacturing facilities could be
affected.
o The software or the chips used in the products the Company sells could
be affected.
o Third parties who do business with the Company may not be prepared for
the year 2000.
The Company determined that regardless of the year 2000 issue, replacement of
existing office and other systems would provide more efficient operations and
added functionality. The Company contracted with outside information consulting
companies both to install new hardware and to replace its current
mission-critical software systems with year 2000 compliant software. All
information system upgrades and conversions are completed and fully operational.
The Company is currently assessing its electronic office and manufacturing
equipment to determine if such equipment is dated-sensitive and will require
upgrades. If after this assessment the Company determines that some of its
equipment needs to be upgraded or replaced, it plans to finish the required work
by October 1999.
The Company believes that its currently marketed products are year 2000
compliant. Some of its products are not affected because they do not contain a
date field in the software. On some previously marketed products which are not
year 2000 compliant, the Company will make an upgrade available to its customers
to ensure year 2000 compliance.
The Company cannot predict the effect of year 2000 problems on its vendors,
customers and other entities with which it transacts business, or with whose
products its products interact. The Company has undertaken a survey of the year
2000 readiness of these third parties and believes its key vendors are 2000
compliant.
COSTS
Through June 30, 1999, the Company incurred approximately $350,000 of costs
associated with its new information systems, of which approximately $325,000 has
been capitalized. Of this, approximately $225,000 has been spent on replacing
old hardware, and approximately $100,000 has been spent on replacing old
software. Because the Company would have replaced these systems even without the
year
17
18
2000 problem, its year 2000 expenditures have not deferred other projects that
the Company otherwise would have undertaken.
RISKS
The Company expects to make the changes required to address the year 2000
problems for the software and embedded chips in its offices and manufacturing
facilities and in the products it makes. The Company presently believes that
with the new software and hardware it purchased and with any required
modifications to its office and other systems which its assessment shows to be
needed, the year 2000 issues is not reasonably likely to pose significant
problems with respect to the Company's operations or products. However, if
unforeseen difficulties arise, such modifications, conversions and replacements
are not completed on time, or if or customers' or suppliers' systems are not
modified to become year 2000 compliant, the year 2000 issue may have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company cannot presently assess the likelihood that it will experience
significant problems due to the unresolved year 2000 problems of third parties
with which it does business. Although the Company has not been put on notice
that any known third party problem will not be timely resolved, it has limited
information and no assurance can be made concerning the year 2000 readiness of
third parties. If third parties fail to achieve year 2000 compliance, the year
2000 issue may have a material adverse effect on the Company's business,
financial condition and results of operations. Similarly, there can be no
assurance that the Company can timely mitigate its risks related to a third
party's failure to resolve its year 2000 issues. If it fails to timely mitigate
such risks, that failure may have a material adverse effect on the Company's
business and results of operations.
CONTINGENCY PLANS
The Company has not attempted to quantify its most likely year 2000 worst-case
scenario nor has it considered any contingency plans in case the installations
by its outside information consulting companies are not satisfactory for year
2000 compliance, as it believes that the installations will prove sufficient to
address the year 2000 issue.
RISK FACTORS
Risks Relating to the Company's Business:
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 recently introduced Omni-Trak 3150 MRI patient monitor and
its Millennia portable patient monitor to have a substantial impact on revenue
growth. In the MRI monitoring market, the success of its Omni-Trak 3150 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 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.
18
19
The failure of the Company's products to continue to gain market acceptance
or an increase in the concentration of the medical care provider market could
have a material adverse effect on its business and results of operations.
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, the Company
is aware that some of its 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:
o increased competition
o changes in the Company's pricing policies and those of its competitors
o changes in the Company's operating expenses or capital expenditures
o timing and market acceptance of new and upgraded product introductions
by the Company and its competitors
o seasonal fluctuations in the demand for the Company's products
o introduction of alternative technologies by the Company and its
competitors
o effect of potential acquisitions
o 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. Health care
reform proposals
19
20
have been formulated by the current administration and by members of Congress.
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
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. A substantial settlement was made to the patient by the
defendants in that action. 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.
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 which
provides that an action must be brought to trial within five years of the date
of the filing of the original action.
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 Federal Court and is presently pending.
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.
20
21
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 us 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
International sales have accounted for over 20% of the company's sales for
each of the past three years and will likely increase over time. International
sales are subject to a number of risks, including the following:
o fluctuations in exchange rates may affect the demand for products and
services the company provides in foreign markets
o adverse changes in local economic conditions, such as those recently
occurring in Asian and South American countries, could depress the
demand for the Company's products
o agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system
o foreign customers may have longer payment cycles
o foreign countries may impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs, or adopt other
restrictions on foreign trade
o U.S. export licenses may be difficult to obtain
o 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 primary market risk exposure is that of currency risk. During
the year ended June 30, 1999, 23% of the Company's total sales came from
non-United States domiciled customers. The Company requires payment in United
States (U.S.) currency. If these customers currency devalues against the U.S.
dollar, the customers could potentially encounter difficulty in making the U.S.
dollar denominated payments.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
Page
Number
------
Independent Auditors' Report 23
Consolidated Balance Sheets - June 30, 1999
and 1998 24
Consolidated Statements of Income for
the Years Ended June 30, 1999, 1998, and 1997 25
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1999, 1998, and 1997 26
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998, and 1997 27
Notes to Consolidated Financial Statements 28-39
22
23
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended June 30, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
San Francisco, CA
July 28, 1999
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24
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 1998
ASSETS 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 207,800 554,100
Short-term investments 8,219,100 --
Trade receivables, less allowance for doubtful accounts of
$280,600 as of June 30, 1999 and $288,000 as of
June 30, 1998 12,173,800 10,277,000
Inventories 8,177,200 7,282,400
Deferred income taxes 1,289,000 1,138,000
Prepaid expenses and other current assets 577,800 451,400
------------ ------------
Total current assets 30,644,700 19,702,900
Property and equipment, net 5,026,200 4,441,100
Intangible assets 8,700,300 5,748,700
Other assets 269,800 302,600
------------ ------------
$ 44,641,000 30,195,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,914,800 3,139,100
Accrued expenses 3,574,300 2,679,700
Current portion of long-term debt, capital lease,
and bank borrowings 140,200 3,087,200
Income taxes payable 1,066,500 1,433,200
------------ ------------
Total current liabilities 7,695,800 10,339,200
Long-term debt and capital lease, excluding current portion 1,526,700 1,479,800
Deferred income taxes 200,000 156,000
Other 52,000 52,000
------------ ------------
Total liabilities 9,474,500 12,027,000
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; authorized shares - 20,000,000;
issued and outstanding shares - 4,280,574 as of June 30, 1999
and 3,269,418 as of June 30, 1998 42,806 32,694
Additional paid-in capital 26,076,594 12,878,606
Retained earnings 9,074,900 5,257,000
Accumulated other comprehensive loss (27,800) --
------------ ------------
Total stockholders' equity 35,166,500 18,168,300
Commitments and contingencies
------------ ------------
$ 44,641,000 30,195,300
============ ============
See accompanying notes to consolidated financial statements.
24
25
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Sales $ 48,858,000 40,651,400 35,903,500
Cost of goods sold 24,368,000 20,956,600 18,618,900
------------ ------------ ------------
Gross profit 24,490,000 19,694,800 17,284,600
------------ ------------ ------------
Operating expenses:
Selling, general, and administrative 15,622,800 13,428,500 14,174,300
Research and experimental 3,007,300 2,455,000 2,448,800
------------ ------------ ------------
Total operating expenses 18,630,100 15,883,500 16,623,100
------------ ------------ ------------
Income from operations 5,859,900 3,811,300 661,500
Other income (expense):
Interest expense (255,500) (387,300) (251,400)
Other, net 102,700 4,000 67,900
------------ ------------ ------------
Income before income taxes 5,707,100 3,428,000 478,000
Income tax expense 1,889,200 1,165,500 162,500
------------ ------------ ------------
Net income $ 3,817,900 2,262,500 315,500
============ ============ ============
Basic net income per common share $ 1.07 .69 .10
============ ============ ============
Weighted average common shares
outstanding (basic) 3,552,148 3,264,966 3,239,187
============ ============ ============
Diluted net income per common share $ 1.00 .66 .09
============ ============ ============
Weighted average common shares and
common share equivalents outstanding (diluted) 3,831,260 3,426,718 3,445,326
============ ============ ============
See accompanying notes to consolidated financial statements.
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26
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
----------- ----------- ----------- ----------- ------------- ------------
Balances as of June 30, 1996 3,225,993 $ 32,260 12,564,340 2,679,000 -- 15,275,600
Exercise of stock options 29,675 297 160,703 -- -- 161,000
Tax benefit from exercise of options -- -- 62,400 -- -- 62,400
Net income -- -- -- 315,500 -- 315,500
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 1997 3,255,668 32,557 12,787,443 2,994,500 -- 15,814,500
Exercise of stock options 13,750 137 76,863 -- -- 77,000
Tax benefit from exercise of options -- -- 14,300 -- -- 14,300
Net income -- -- -- 2,262,500 -- 2,262,500
----------- ----------- ----------- ----------- ----------- -----------
Balances as of June 30, 1998 3,269,418 32,694 12,878,606 5,257,000 -- 18,168,300
Issuance of common stock:
Stock offering, net of offering
costs totaling $1,376,723 900,000 9,000 11,898,300 -- -- 11,907,300
Acquisition of Invivo Research Inc. 82,256 823 1,046,977 -- -- 1,047,800
Exercise of stock options 28,900 289 161,811 -- -- 162,100
Tax benefit from exercise of options -- -- 90,900 -- -- 90,900
Comprehensive income:
Net income -- -- -- 3,817,900 -- 3,817,900
Unrealized loss on short-term
investments -- -- -- -- (27,800) (27,800)
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income 3,790,100
Balances as of June 30, 1999 4,280,574 $ 42,806 26,076,594 9,074,900 (27,800) 35,166,500
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
26
27
INVIVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,817,900 2,262,500 315,500
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 888,800 760,000 745,900
Unrealized loss on short-term investments 27,800 -- --
Loss on sale of property and equipment 46,100 64,800 21,200
Deferred income taxes (107,000) (310,700) (230,600)
Changes in operating assets and liabilities:
Trade receivables (1,896,800) (2,378,200) (1,483,300)
Inventories (894,800) (181,500) (1,596,500)
Prepaid expenses and other current assets (126,400) 64,800 68,300
Accrued expenses 894,600 526,500 251,900
Accounts payable (224,300) 268,100 1,234,700
Income taxes payable (366,700) 952,000 158,700
Other current liabilities -- (21,900) (71,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,059,200 2,006,400 (585,200)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of short-term investments (8,219,100) -- --
Capital expenditures (1,120,200) (646,800) (2,380,500)
Proceeds from sale of property and equipment -- -- 69,400
Intangible assets (2,095,500) (232,600) --
Other assets 32,800 (82,900) 149,800
------------ ------------ ------------
Net cash used in investing activities (11,402,000) (962,300) (2,161,300)
------------ ------------ ------------
Cash flows from financing activities:
Issuances of common stock, net of offering costs 12,104,700 76,900 161,000
Bank borrowings (repayments), net (3,087,200) (645,000) 2,545,000
Principal payments under long-term debt and other liabilities (21,000) (93,000) (224,600)
------------ ------------ ------------
Net cash provided by (used in) financing activities 8,996,500 (661,100) 2,481,400
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (346,300) 383,000 (265,100)
Cash and cash equivalents at beginning of year 554,100 171,100 436,200
------------ ------------ ------------
Cash and cash equivalents at end of year $ 207,800 554,100 171,100
============ ============ ============
See accompanying notes to consolidated financial statements.
27
28
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(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
Short-term investments are comprised of money market funds and
government securities with original maturities of greater than 90
days. Unrealized gains and losses related to these investments are
included as a component of stockholders' equity.
(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
related assets, generally three to seven years. Leasehold
improvements and assets under capital leases are amortized on the
straight-line method over the shorter of the lease term or the
estimated useful life of the related asset.
(g) INCOME TAXES
(Continued)
28
29
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
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, 1999 and 1998
was approximately $1,059,200 and $867,500, respectively.
Amortization expense was approximately $191,700, $159,100 and
$153,400 for 1999, 1998, and 1997, respectively.
(i) COMPREHENSIVE INCOME
The Company has no items of comprehensive income in any period
other than the year ended June 30, 1999. Therefore, net income as
presented in the consolidated statements of income equals
comprehensive income for the years ended June 30, 1998 and 1997.
(j) REVENUE RECOGNITION
The Company recognizes revenue and all related costs upon shipment
of products to its customers.
(k) 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.
(l) 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.
(Continued)
29
30
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(m) 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.
(n) RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to the design, development
and testing of new monitors, applications and technologies are
charged to expense as incurred.
(o) ACCOUNTING FOR STOCK OPTIONS
Prior to June 30, 1996, the Company accounted for its stock option
plan 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 on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
On June 30, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings 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. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure as required by SFAS No. 123.
(2) ACQUISITION OF INVIVO RESEARCH INC.
On December 31, 1992, the Company acquired 80% of the outstanding common
stock of Invivo Research Inc., a company that designs, manufactures, and
markets sensor-based patient safety devices.
In fiscal year 1994, the Company entered into an agreement to acquire the
remaining 20% of the Invivo Research Inc. shares. Under this agreement,
the purchase price for the remaining shares was to be paid in five
installments. One installment in the amount of $987,000 was paid during
fiscal year 1996. A second installment in the amount of $465,000 was paid
during fiscal years 1997 and 1998. The three remaining installments
become payable on March 15, 1999. The value of each installment was based
on a formula involving calendar 1998 after-tax profits. The total amount
of the three remaining installments was $3,143,300. On June 1, 1999, the
Company paid the former shareholders two of the installments in cash
totaling $2,095,500. The remaining installment was paid in the form of
the Company's common stock totaling 82,256 shares.
(Continued)
30
31
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(3) INVENTORIES
A summary of inventories as of June 30 follows:
1999 1998
---------- ----------
Raw materials $4,486,900 3,842,100
Work in process 2,397,000 2,126,000
Finished goods 1,293,300 1,314,300
---------- ----------
$8,177,200 7,282,400
========== ==========
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment as of June 30 follows:
1999 1998
----------- -----------
Land and building $ 2,325,400 2,329,500
Equipment 5,695,600 4,467,900
Furniture and fixtures 944,200 1,003,800
Vehicles 130,400 148,500
Leased improvements 136,300 --
----------- -----------
9,231,900 7,949,700
Less accumulated depreciation and amortization (4,205,700) (3,508,600)
----------- -----------
$ 5,026,200 4,441,100
=========== ===========
Included in property and equipment as of June 30, 1999 is $208,200 of
equipment under capital lease. Accumulated amortization related to this
equipment was $10,400 as of June 30, 1999.
(5) DEBT AND BANK BORROWINGS
A summary of debt and bank borrowings as of June 30 follows:
1999 1998
----------- -----------
Installments payable on the purchase of the remaining $ -- 232,600
shares of Invivo Research (note 2); amount is
payable in monthly installments of $38,778 through
December 31, 1998
(Continued)
31
32
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
Term loan payable in monthly installments of
approximately $8,700, including interest at LIBOR
plus 2.50%; secured by land and building 1,479,800 1,584,400
Borrowings under the $5,000,000 revolving loan, which
expires and is payable on December 1, 1999;
collateralized by accounts receivable and inventory
and equipment; interest payable monthly at LIBOR
plus 1.75% or the prime rate -- 2,750,000
----------- -----------
1,479,800 4,567,000
Less current portion (104,400) (3,087,200)
----------- -----------
$ 1,375,400 1,479,800
=========== ===========
The aggregate maturities of long-term debt as of June 30, 1999 are as
follows:
Year ending June 30,
2000 $ 104,400
2001 104,400
2002 104,400
2003 104,400
2004 104,400
Thereafter 853,400
----------
$1,375,400
==========
In the second quarter of fiscal year 1999, the Company increased its bank
line of credit to $7,500,000 from $5,000,000 and renewed the line of
credit from December 1, 1998 to December 1, 1999 and added a $1,000,000
three-year term loan. The revolving loan 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, quarterly
profitability, and minimum debt service ratio, and prohibits the Company
from paying dividends. In March of 1999,the Company repaid the term loan.
As of June 30, 1999, $7,500,000 was available under the line of credit.
(6) ACCRUED EXPENSES
A summary of accrued expenses as of June 30 follows:
1999 1998
---------- ----------
(Continued)
32
33
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
Accrued compensation and benefits $2,039,500 2,062,500
Other 1,534,800 617,200
---------- ----------
$3,574,300 2,679,700
========== ==========
(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 $440,000, $422,200
and $385,000 for the years ended June 30, 1999, 1998, and 1997,
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, 1999 follows:
CAPITAL OPERATING
LEASES LEASES
--------- ---------
Fiscal year ending
2000 $ 49,836 443,300
2001 49,836 222,100
2002 49,836 31,900
2003 49,836 16,600
2004 24,918 6,100
--------- ---------
224,262 $ 720,000
=========
Less amount representing interest (37,127)
Present value of future minimum lease payments 187,135
Less current portion 35,800
---------
Capital lease obligations, excluding current
portion $ 151,335
=========
(8) INCOME TAXES
A summary of the components of income tax expense (benefit) for the years
ended June 30 is as follows:
CURRENT DEFERRED TOTAL
----------- ----------- -----------
1999:
Federal $ 1,718,200 (82,700) 1,635,500
(Continued)
33
34
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
State 278,000 (24,300) 253,700
----------- ----------- -----------
$ 1,996,200 (107,000) 1,889,200
=========== =========== ===========
1998:
Federal $ 1,252,500 (284,000) 968,500
State 237,000 (40,000) 197,000
----------- ----------- -----------
$ 1,489,500 (324,000) 1,165,500
=========== =========== ===========
1997:
Federal $ 206,000 (179,000) 27,000
State 187,100 (51,600) 135,500
----------- ----------- -----------
$ 393,100 (230,600) 162,500
=========== =========== ===========
Deferred income taxes are attributable primarily to depreciation, accrued
expenses, and allowances.
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:
1999 1998 1997
----------- ----------- -----------
Deferred tax assets:
Reserves and other accruals $ 1,289,000 1,138,000 800,600
Capital loss carryover 199,400 199,400 199,400
Accumulated depreciation -- -- 1,700
----------- ----------- -----------
Gross deferred tax assets 1,488,400 1,337,400 1,001,700
Valuation allowance (199,400) (199,400) (199,400)
----------- ----------- -----------
Total deferred tax assets, less
valuation allowance 1,289,000 1,138,000 802,300
----------- ----------- -----------
Deferred tax liabilities:
Federal depreciation in excess of books (9,000) (15,000) --
State taxes (43,500) -- --
Acquired intangibles from acquisitions (147,500) (141,000) (145,400)
----------- ----------- -----------
Total deferred tax liabilities (200,000) (156,000) (145,400)
----------- ----------- -----------
Net deferred tax asset $ 1,089,000 982,000 656,900
=========== =========== ===========
There was no net change in the valuation allowance for the year ended
June 30, 1999.
Management believes that it is more likely than not that the results of
future operations will generate
(Continued)
34
35
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
sufficient taxable income to realize the net deferred tax asset or that
the amounts will be recovered from previously paid taxes.
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:
1999 1998 1997
----------- ----------- -----------
Federal income tax at statutory rate $ 1,940,000 1,165,500 162,500
State income taxes 183,000 156,000 103,000
Utilization of research, experimental, and
other credits (67,000) (57,000) (50,000)
Benefit of foreign sales corporation (257,000) (204,000) (135,500)
Permanent differences 92,000 54,000 44,000
Other (1,800) 51,000 38,500
----------- ----------- -----------
$ 1,889,200 1,165,500 162,500
=========== =========== ===========
(9) 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 600,000 shares
of its common stock for issuance under the 1986 and 1994 Plans,
respectively. During 1999, the Company granted 183,000 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 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 .71; a forfeiture rate of .05; a weighted-average
expected life of options of five years; and a risk-free interest rate of
5.0%, 5.8%, and 6.6% for 1999, 1998, and 1997, 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:
1999 1998 1997
----------- ----------- -----------
Net income As reported $ 3,817,900 2,262,500 315,500
Pro forma 3,147,118 1,892,084 55,656
Basic net income per share As reported 1.07 .69 .10
Pro forma 0.89 .58 .02
(Continued)
35
36
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
Diluted net income per share As reported 1.00 .66 .09
Pro forma 0.82 .55 .02
Pro forma net income reflects only options granted in 1996, 1997, 1998
and 1999. 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.
A summary of stock option activity for the years ended June 30, 1999 and
1998 follows:
WEIGHTED-AVERAGE
WEIGHTED- WEIGHTED- EXERCISE PRICE
AVERAGE AVERAGE OPTIONS BY OPTIONS
EXERCISE GRANT DATE EXERCISABLE EXERCISABLE AT
OPTIONS PRICE FAIR VALUE AT YEAR END YEAR END
-------- ---------- ------------ ------------ -----------------
June 30, 1997 516,100 7.36 267,638 4.19
Granted 123,500 10.00 5.41
Exercised (13,750) 5.60
Canceled (9,875) 7.29
--------
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
========
WEIGHTED-
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
---------------- ------------ ------------- ---------- ------------- -----------
$ 2.00 - 5.13 174,900 1.53 $ 2.76 174,900 $ 2.76
7.00 - 8.75 107,425 5.79 7.28 86,300 7.15
10.00 - 16.13 481,500 8.35 11.48 165,375 11.37
-------- -------- -------- -------- --------
763,825 426,575
======== ========
(Continued)
36
37
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(10) 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 25% 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
years ended June 30, 1999, 1998, and 1997 were, $85,100, $70,600 and
$56,700, respectively.
(11) LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of
its business. While the ultimate results of such proceedings cannot be
predicted with certainty, management expects that these matters will not
have a material adverse effect on the Company's financial position or
results of operations.
(12) MAJOR CUSTOMERS AND CREDIT RISK
In fiscal 1999, 1998, and 1997, 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, 1999.
(13) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and
major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within
the Company for making operating decisions and assessing financial
performance.
The Company's chief operating decision-maker is considered to be the
Chief Executive Officer. The CEO reviews financial information presented
on a consolidated basis accompanied by information by business segments.
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).
(Continued)
37
38
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
SAFETY AND
PATIENT SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE 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
SAFETY AND
PATIENT SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE TOTAL
-------------- --------------- --------- --------
For the year ended June 30, 1998:
Net sales $ 23,200 17,451 -- 40,651
Income from operations 1,811 3,192 (1,192) 3,811
Depreciation and amortization 449 301 10 760
Total assets 19,993 8,304 1,898 30,195
SAFETY AND
PATIENT SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE TOTAL
-------------- --------------- --------- --------
For the year ended June 30, 1997:
Net sales $ 19,702 16,202 -- 35,904
Income from operations (800) 2,701 (1,239) 662
Depreciation and amortization 479 259 8 746
Total assets 17,327 7,934 1,351 26,612
(Continued)
38
39
INVIVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
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,
-------------------------------------
1999 1998 1997
------- ------- -------
United States $37,700 31,300 27,900
Export:
Europe 5,800 2,400 2,200
Pacific Rim 2,900 2,000 2,600
Other International 2,500 5,000 3,200
------- ------- -------
Total net sales $48,900 40,700 35,900
======= ======= =======
(14) SUPPLEMENTAL CASH FLOWS INFORMATION
Noncash investing and financing activities and supplemental cash flow
information are summarized as follows:
YEAR ENDED JUNE 30,
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
Tax benefit associated with exercise of stock
options $ 90,900 14,400 62,400
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 2,272,000 875,158 234,800
Interest 255,500 389,274 293,100
39
40
SELECTED QUARTERLY FINANCIAL DATA (NOT COVERED BY REPORT OF INDEPENDENT
ACCOUNTANTS):
In millions, except per share amounts 1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
FISCAL YEAR 1999
Sales $11,501 11,910 12,382 13,065
Gross Profit 5,765 5,981 6,212 6,533
Net Income 759 893 987 1,178
Net Income per common share (basic) 0.23 0.27 0.29 0.28
Net Income per common share (diluted) 0.22 0.25 0.26 0.27
FISCAL YEAR 1998
Sales 9,384 9,724 10,425 11,119
Gross Profit 4,419 4,740 4,891 5,644
Net Income 460 543 575 685
Net Income per common share (basic) 0.14 0.17 0.18 0.21
Net Income per common share (diluted) 0.14 0.16 0.17 0.20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in the accountants or disagreements with the Company's
accountants on accounting and financial disclosure matters in fiscal 1999.
PART III
ITEMS 10 TO 13 INCLUSIVE.
These items have been omitted in accordance with instructions to Form 10-K
Annual Report. The Registrant will file with the Commission in October 1999
pursuant to regulation 14A, a definitive proxy statement that will involve the
election of directors.
40
41
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 Share purchase agreement dated as of January 5, 1990 by and between Data-Design Laboratories
and Sensor Control Corporation(5)..............................................................
10.05 Stock purchase agreement dated January 14, 1991 between G.C. Industries Inc. and Sensor
Control Corporation(6).........................................................................
10.06 Asset purchase agreement dated June 21, 1991 by and between Electronic Safety Products Inc.
and Sensor Control Corporation(7)..............................................................
10.07 Stock purchase agreement dated December 31, 1992 by and between Invivo Research Inc. and
SafetyTek Corporation(8).......................................................................
10.08 Real Estate Unconditional Guaranty dated January 21, 1993 by and between First Union
National Bank of Florida and SafetyTek Corporation(8)..........................................
10.09 First Amendment to Stock Purchase Agreement dated July 1, 1993 and related Stock Pledge
Agreement dated July 1, 1993 by and between Invivo Research Inc. and SafetyTek
Corporation(10)................................................................................
10.10 Lease between Lincoln-Whitehall Realty LLC and SafetyTek Corporation for the 5696 Stewart
Ave. Fremont, CA facility(11)..................................................................
10.11 Construction Loan Agreement between Invivo Research and First Union Bank dated July 31,
1996(12).......................................................................................
10.12 Credit Agreement between Wells Fargo Bank and Invivo Corp. dated October 6, 1998(13)...........
10.13 First Amendment to Credit Agreement between Invivo Corp. and Wells Fargo Bank dated November
1, 1998(13)....................................................................................
10.14 Stock Option Agreement with Walden Management Corporation Pension Fund for the Benefit of
George S. Sarlo(1).............................................................................
11.01 Statement regarding computation of per share earnings**........................................ 45
21.01 Subsidiaries of Registrant** 46
23.01 Consent of KPMG LLP**.......................................................................... 47
27.01 Financial Data Schedule**...................................................................... 48
41
42
- ----------
** 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)
(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 Registration Statement on Form S-1 filed on December 23, 1991.
(File No. 33-44623)
(6) Incorporated by reference to corresponding Exhibit included with
Registrant's Amended Registration Statement on Form S-1 filed on February
5, 1992. (File No. 33-44623)
(7) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed March 13, 1992. (File No. 0-15963)
(8) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 8-K filed January 14, 1993. (File No. 0-15963)
(9) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-K filed September 24, 1993. (File No. 0-15963)
(10) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed November 1, 1993. (File No. 0-15963)
(11) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed May 15, 1996. (File No. 0-15963)
(12) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-K filed September 27, 1996. (File No. 0-15963)
(13) Incorporated by reference to corresponding Exhibit included with
Registrant's Form 10-Q filed November 12, 1998. (File No. 0-15963)
42
43
(B) FINANCIAL STATEMENT SCHEDULES
Invivo Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Years ended June 30, 1999, 1998 and 1997
Additions
Balance at Charged to Balance
Beginning Costs and at end
of Year Expenses Deductions(1) of Year
---------- ---------- ------------- -------
Allowance for doubtful
accounts
Fiscal 1999 288,300 23,400 31,100 280,600
Fiscal 1998 371,000 17,100 99,800 288,300
Fiscal 1997 231,000 148,600 8,600 371,000
(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, 1999.
43
44
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 24, 1999
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 24, 1999
/S/ JAMES B. HAWKINS
- -------------------------------
James B. Hawkins President, Chief September 24, 1999
Executive Officer, Director
(principal executive
officer)
/S/ JOHN F. GLENN
- -------------------------------
John F. Glenn Chief Financial Officer September 24, 1999
(principal financial
and accounting officer)
/S/ LAUREEN DEBUONO
- -------------------------------
Laureen DeBuono Director September 24, 1999
/S/ GEORGE S. SARLO
- -------------------------------
George S. Sarlo Director September 24, 1999
/S/ ROGER SUSI
- -------------------------------
Roger Susi Director September 24, 1999
44