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U.S. Securities And Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-15963
INVIVO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0115161
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
4900 HOPYARD RD. SUITE 210, PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices) (Zip Code)
TELEPHONE: (925) 468-7600
(Registrant's telephone number)
---------------
Indicate by check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, par value $.01
per share, at December 31, 2001 was 4,426,249 shares.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVIVO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2001 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,513,800 280,000
Short term investments 9,722,400 9,091,300
Trade receivables, net 13,296,500 15,656,600
Inventories 11,516,700 11,249,100
Deferred income taxes 1,084,800 1,013,300
Prepaid expenses and other current assets 480,200 465,500
------------ ------------
Total current assets 37,614,400 37,755,800
Property and equipment, net 6,970,300 6,398,000
Goodwill 7,633,900 7,633,900
Other assets 223,400 223,400
------------ ------------
$ 52,442,000 52,011,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,712,400 2,267,200
Accrued expenses 3,521,100 3,662,900
Current portion of long-term debt and
capital leases 154,700 154,700
Income taxes payable 10,900 147,000
Other current liabilities -- 143,900
------------ ------------
Total current liabilities 5,399,100 6,375,700
Long-term debt, excluding current portion 1,576,400 1,647,100
Deferred income taxes 279,700 279,700
------------ ------------
Total liabilities 7,255,200 8,302,500
------------ ------------
Stockholders' equity:
Common stock 44,200 44,200
Additional paid-in capital 26,601,600 26,581,500
Retained earnings 18,564,800 17,095,900
Accumulated other comprehensive loss (23,800) (13,000)
------------ ------------
Total stockholders' equity 45,186,800 43,708,600
------------ ------------
Commitments and contingencies $ 52,442,000 52,011,100
============ ============
See accompanying notes to consolidated financial statements.
2
INVIVO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 13,541,200 13,034,000 26,904,500 25,707,300
Cost of goods sold 6,728,800 6,702,100 13,711,400 13,123,500
------------ ------------ ------------ ------------
Gross profit 6,812,400 6,331,900 13,193,100 12,583,800
------------ ------------ ------------ ------------
Operating expenses:
Selling, general
and administrative 4,643,800 4,335,800 9,107,300 8,607,600
Research and experimental 1,026,300 719,800 1,895,600 1,492,500
------------ ------------ ------------ ------------
Total operating expenses 5,670,100 5,055,600 11,002,900 10,100,100
------------ ------------ ------------ ------------
Income from operations 1,142,300 1,276,300 2,190,200 2,483,700
Other income (expense):
Interest income 50,400 99,100 121,600 214,500
Interest expense (13,600) (31,100) (51,900) (64,200)
------------ ------------ ------------ ------------
Income before income taxes 1,179,100 1,344,300 2,259,900 2,634,000
Income tax expense 412,700 463,800 791,000 908,700
------------ ------------ ------------ ------------
Net income $ 766,400 $ 880,500 1,468,900 1,725,300
============ ============ ============ ============
Basic net income per common share $ .17 $ .20 .33 .39
============ ============ ============ ============
Weighted average common
Shares outstanding (basic) 4,424,119 4,393,249 4,423,684 4,387,229
============ ============ ============ ============
Diluted net income per common Share $ .17 $ .20 .32 .38
============ ============ ============ ============
Weighted average common
Shares outstanding (diluted) 4,593,068 4,473,133 4,552,362 4,481,909
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
INVIVO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,468,900 $ 1,725,300
Adjustments to reconcile net income to
Cash provided by operating activities:
Depreciation and amortization 698,800 781,300
Deferred income taxes (71,500) 267,000
Change in operating assets and liabilities:
Trade receivables 2,349,300 129,500
Inventories (267,600) (141,400)
Prepaid expenses and other current assets (14,700) (230,300)
Accrued expenses (141,800) (840,900)
Accounts payable (554,800) (771,600)
Income taxes payable (136,100) (155,000)
----------- -----------
Net cash provided by operating activities 3,330,500 763,900
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (631,100) (530,100)
Capital expenditures (1,271,100) (761,200)
Other assets (143,900) 16,600
----------- -----------
Net cash (used in) provided by investing activities (2,046,100) (1,274,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 20,100 78,500
Principal payments under long-term debt and other liabilities (70,700) (77,200)
----------- -----------
Net cash provided by financing activities (50,600) 1,300
----------- -----------
Net (decrease) increase in cash and cash equivalents 1,233,800 (509,500)
Cash and cash equivalents at beginning of period 280,000 969,800
----------- -----------
Cash and cash equivalents at end of period $ 1,513,800 $ 460,300
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 998,600 $ 793,600
=========== ===========
Interest $ 31,300 $ 64,200
=========== ===========
See accompanying notes to consolidated financial statements.
4
INVIVO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
and results of operations as of the end of and for the periods indicated.
Interim results are not necessarily indicative of results for a full year.
The financial statements and notes are presented as permitted by Form
10-Q, and do not contain certain information included in the Company's annual
consolidated financial statements and notes.
2. SEGMENT INFORMATION
The Company has adopted the provisions of Statement of Financial
Accounting Standards (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.
Summarized financial information concerning the Company's business
segments is shown in the following table. The "Corporate" column includes
general and administrative and corporate-related expenses not allocated to
reportable segments (in thousands).
PATIENT SAFETY AND
SAFETY INDUSTRIAL
MONITORING INSTRUMENTATION CORPORATE TOTAL
---------- --------------- --------- -------
For the three months ended December 31, 2001
Net sales ...................................... $ 9,844 3,697 -- 13,541
Income from operations ......................... 1,393 234 (485) 1,142
Depreciation and amortization .................. 190 140 13 343
For the three months ended December 31, 2000
Net sales ...................................... $ 8,446 4,588 -- 13,034
Income from operations ......................... 1,045 578 (347) 1,276
Depreciation and amortization .................. 275 94 13 382
For the six months ended December 31, 2001
Net sales ...................................... $18,922 7,983 -- 26,905
Income from operations ......................... 2,533 557 (900) 2,190
Depreciation and amortization .................. 393 280 26 699
Total assets at December 31, 2000 .................. 27,713 12,864 11,865 52,442
For the six months ended December 31, 2000
Net sales ...................................... $16,464 9,243 -- 25,707
Income from operations ......................... 1,968 1,194 (678) 2,484
Depreciation and amortization .................. 527 228 26 781
Total assets at December 31, 2000 .................. 28,746 11,339 9,377 49,462
5
A reconciliation of income from operations to income before income taxes
for the three and six months ended December 31 follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Income from operations $1,142,300 1,276,300 2,190,200 2,483,700
Other income (expense) 36,800 68,000 69,700 150,300
---------- ---------- ---------- ----------
Income before taxes $1,179,100 1,344,300 2,259,900 2,634,000
========== ========== ========== ==========
3. DEBT AND BANK BORROWINGS
The Company's bank line of credit of $1,000,000 was renewed at the same
terms on December 1, 2001 and expires on December 1, 2002. The Company's
revolving bank line of credit is collateralized by the Company's accounts
receivable, inventory, and equipment. At December 31, 2001, $1,000,000 was
available under the line of credit.
4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 766,400 $ 880,500 $ 1,468,900 $ 1,725,300
Change in unrealized gain (loss)
on short-term investments -- 5,500 -- 12,500
Change in foreign currency translation (43,400) -- (10,800) --
----------- ----------- ----------- -----------
Comprehensive Income $ 723,000 $ 886,000 $ 1,458,100 $ 1,737,800
=========== =========== =========== ===========
5. NET INCOME PER COMMON SHARE
The following table presents the calculation for basic and diluted net
income per common share:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
BASIC:
Weighted average common
Shares outstanding 4,424,119 4,393,249 4,423,684 4,387,229
========== ========== ========== ==========
Net Income $ 766,400 $ 880,500 $1,468,900 $1,492,500
========== ========== ========== ==========
Basic net income per common share $ 0.17 $ 0.20 $ 0.33 $ 0.39
========== ========== ========== ==========
DILUTED:
Weighted average common
Shares outstanding (basic) 4,424,119 4,393,249 4,423,684 4,387,229
Dilutive stock options 168,949 79,884 128,678 94,680
---------- ---------- ---------- ----------
6
Weighted average common
Shares outstanding (diluted) 4,593,068 4,473,133 4,552,362 4,481,909
============= ============= ============= ==========
Net Income $ 766,400 $ 880,500 $ 1,468,900 $1,492,500
============= ============= ============= ==========
Diluted net income per common share $ 0.17 $ 0.20 $ 0.32 $ 0.38
============= ============= ============= ==========
7
6. GOODWILL
The Company adopted SFAS No.142, Goodwill and Other Intangible Assets
effective July 1, 2001. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. Accordingly, the Company did not record any amortization during the first
six months of fiscal 2002 related to goodwill. SFAS No. 142 requires a
two-step process for testing impairment. First, the fair value of each
reporting unit is compared to its carrying value to determine whether an
indication of impairment exists. If impairment is indicated, then the fair
value of the reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination.
The amount of impairment for goodwill and other intangible assets is measured
as the excess of its carrying value over its fair value. No such impairment
losses were recorded upon the initial adoption of SFAS 142.
The following table reconciles the prior period's reported net income to
its respective pro forma balance adjusted to exclude the amortization of
goodwill, which is no longer recorded under SFAS No. 142.
For the Three Months Ended For the Six Months Ended
December 31, 2000 December 31, 2000
Earnings per Share Earnings per Share
Amount Basic Diluted Amount Basic Diluted
---------- ------ ------- ---------- ------ ------
Net income $ 880,500 0.20 0.20 $1,725,300 0.39 0.38
Add back goodwill amortization 71,700 0.02 0.02 138,200 0.03 0.03
---------- ------ ------ ---------- ------ ------
Adjusted net income $ 952,200 0.22 0.22 $1,863,500 0.42 0.41
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000
Sales
Sales of $13,541,200 for the second quarter ended December 31, 2001
increased 3.9% compared to sales of $13,034,000 for the second quarter ended
December 31, 2000. Sales for the six months ended December 31, 2001 increased
4.7% to $26,904,500 compared with $25,707,300 for the comparable period last
year. Sales at the Company's patient safety monitoring business increased 16.6%
in the second quarter and 14.9% for the six months compared to year earlier
sales. Continued growth in sales of the Company's MRI vital signs monitor offset
a decrease in "Millennia" product sales for the three and six month periods. The
continued growth in the MRI vital signs monitor can be attributed to increased
acceptance and usage of MRI procedures in hospital settings as the Company
continues to maintain its leadership position in this market. The decline in
"Millennia" sales is primarily due to the maturity of the product and the
continued slow to flat growth of the general patient monitoring market. The
sales increase at the patient safety monitoring business for the second quarter
and first six months of fiscal 2002 was offset by a sales decline at the
Company's safety and industrial instrumentation segment as the Company's gas
detection and oxygen monitoring product sales are being negatively affected by
the general economic slowdown. The Company's pressure sensing devices and
non-contact infrared thermometer products also experienced sales declines for
the three and six months ended December 31, 2001.
Gross Profit
The gross profit margin increased for the three months ended December 31,
2001 to 50.3% from 48.6% and remained at 49.0% for the six months ended December
31, 2001 as compared to the comparable prior year periods. The increase in the
quarter was attributable to the increase in patient safety monitoring business
as a percentage of total revenue and further to the proportionate increase in
MRI vital signs monitors by the patient safety monitoring business. The effect
of these developments offset the declining gross margins of the safety and
industrial instrumentation product lines which was due primarily to the impact
of the decreased sales relative to fixed cost of sale components.
Operating Expenses
Selling, general and administrative expenses for the three and six month
periods ended December 31, 2001 increased 7.1% or $308,000 and 5.8% or $499,700,
respectively, from the previous fiscal periods. Selling, general and
administrative expenses were 34.3% and 33.9% of sales for the three and six
month periods ended December 31, 2001 compared with 33.3% and 33.5%,
respectively, for the comparable periods in fiscal 2001. The increase in these
expenditures in aggregate and as a percentage of sales for the three and six
month periods ended December 31, 2001 was due to higher administrative and
selling expenses at the Company's patient safety monitoring business along with
higher facility leasing and depreciation expenses at the safety and industrial
instrumentation product line and corporate facilities. These increases more than
offset the affect of the Company's adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, effective July 1, 2001 as a result of which the Company
stopped amortizing its goodwill.
Research and experimental expenses for the three and six month periods
ended December 31, 2001 increased 42.6% or $306,500 and 27.0% or $403,100,
respectively, form the previous fiscal periods. Research and experimental
expenses were 7.6% and 7.1% of sales for the three and six month periods ended
December 31, 2001 compared to 5.5% and 5.8% for the comparable periods in fiscal
2001. The increase for the three and six month periods ended December 31, 2001
was due to increased expenditures on behalf of the medical device business on
its next generation vital signs monitors which offset a decline in research and
experimental expenditures at the safety and industrial instrumentation product
lines. The Company plans to continue its efforts in developing new products and
enhancing its existing ones and expects future research and experimental
expenditures as a percentage of sales to be in the range of the first half
fiscal 2002 levels
9
Other Income and Expense
Interest income was $50,400 for the second quarter of fiscal 2002 as
compared to $99,100 for the prior year period. For the first six months of
fiscal 2002 interest income was $121,600 as compared to $214,500 for the prior
year period. The decrease was largely due to the lower interest rates earned on
the Company's short-term investments
Provision for Income Taxes
The effective tax rate for the three and six months ended December 31,
2001 was 35.0% as compared to 34.5% for the prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2001 increased to $32,215,300 from
$31,380,100 at June 30, 2001. Net cash provided by operating activities was
$3,330,500 for the six months ended December 31, 2001 compared with $763,900
provided by operating activities for the six months ended December 31, 2000.
This increase in net cash provided by operating activities was the result of a
decrease in accounts receivable particularly at the patient safety monitoring
business as the Company improved its collection efforts and days outstanding on
its receivables.
Capital expenditures were $1,271,100 for the first six months of fiscal
2002 compared to $761,200 for the prior year period. Capital expenditures were
primarily related to the expansion of the Company's medical device facility and
investments in manufacturing equipment and sales demonstration equipment for the
medical device business along with leasehold improvements at the Company's new
facility for the pressure sensing and non-contact infrared thermometer product
lines.
The Company believes that its cash resources and cash flow from operations
are adequate to meet its anticipated cash needs for working capital and capital
expenditures throughout fiscal 2002. The Company's revolving bank line of credit
is collateralized by the Company's accounts receivable, inventory, and
equipment. The line of credit was renewed at the same terms for one year on
December 1, 2001. At December 31, 2001, $1,000,000 was available under the line
of credit. The Company believes that its cash resources and cash flow from
operations are adequate to meet its anticipated cash needs for working capital
and capital expenditures throughout fiscal 2002.
The Company will continue to explore opportunities for the possible
acquisitions of technologies or businesses, which may require the Company to
seek additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to
legal obligations associated with retirement of long-lived assets that result
from the acquisition, construction, development or normal use of the asset. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. Invivo is
currently evaluating the impact of SFAS No. 143 on its financial statements and
related disclosures.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many
of the fundamental provisions of that Statement. Invivo will adopt the
provisions of SFAS No. 144 commencing January 1, 2002. The effects of adopting
SFAS No. 144 are currently being determined.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
regarding the Company's plans, expectations, estimates and beliefs. Actual
results could differ materially from those discussed in, or implied by, these
forward-looking statements. Forward-
10
looking statements are identified by words such as "believe," "anticipate,"
"expect," "intend," "plan," "will," "may" and other similar expressions. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. The Company is not obligated to update or revise these
forward-looking statements to reflect new events or circumstances. Factors that
could cause actual results, events or circumstances to differ from
forward-looking statements made in this report include those set forth in the
following "Risk Factors" section.
RISK FACTORS
THE COMPANY IS DEPENDENT ON A CONCENTRATED LINE OF PRODUCTS
The Company's future financial performance will be largely dependent on
its patient monitor product line, which includes a limited number of products.
The Company expects its MRI patient monitors and its Millennia portable patient
monitor to have a substantial impact on revenue growth. In the MRI monitoring
market, the success of its MRI monitors is heavily dependent on the continued
acceptance of MRI technology as a diagnostic tool. In the general patient
monitoring market, the Company's Millennia monitor is heavily dependent on its
ability to further penetrate an already competitive market.
In addition, the recent consolidation in the medical care provider market
has resulted in a number of very large purchasers of medical devices. These
large purchasers typically prefer to establish relationships with medical device
manufacturers that have broad and diverse product lines.
The failure of the Company's products to continue to gain market
acceptance or a continued consolidation of the medical care provider market
could have a material adverse effect on its business and results of operations.
THE COMPANY FACES INCREASED LEVELS OF COMPETITION
The Company has encountered and will continue to encounter significant
competition in the sale of its products. The Company's general patient
monitoring competitors include a number of large multinational corporations.
Some of these competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company can. In the MRI patient monitoring market, the Company has enjoyed a
significant first-to-market advantage over its competitors. However, competitors
have introduced products designed to compete with its MRI vital signs monitoring
products. In addition, as the market for MRI vital signs monitoring products
expands it may attract competitors with greater resources.
Additionally, competition may increase if new companies enter the
Company's markets or if existing competitors expand their product lines or
intensify efforts within existing product lines. The introduction of competitive
products may result in a decrease in the Company's market share and in a
decrease in the prices at which the Company is able to sell its products. The
Company's market share could also be adversely affected by increasing
concentration in the medical care provider market. Any decrease in the Company's
market share or decrease in the prices at which the Company is able to sell its
products could have a material adverse effect on its business and results of
operations.
THE COMPANY'S FINANCIAL RESULTS MAY FLUCTUATE
The Company's financial results may fluctuate significantly from period to
period because of a variety of factors, many of which is beyond its control.
These factors include:
- increased competition
- changes in the Company's pricing policies and those of its competitors
- changes in the Company's operating expenses or capital expenditures
- timing and market acceptance of new and upgraded product introductions by
the Company and its competitors
11
- seasonal fluctuations in the demand for the Company's products
- introduction of alternative technologies by the Company and its
competitors
- effect of potential acquisitions
- other general economic factors
Fluctuations caused by these and other factors could have a material adverse
effect on the Company's business and results of operations.
THE COMPANY IS SUBJECT TO A SIGNIFICANT RISK OF NEW LAWS RELATED TO HEALTH CARE
Changes in the law or new interpretations of existing laws may have a
significant effect on the Company's costs of doing business and the amount of
reimbursement the Company receives from both government and third-party payors.
In addition, economic forces, regulatory influences and political initiatives
are subjecting the health care industry to fundamental changes. Federal, state
and local government representatives are likely to continue to review and assess
alternative health care delivery systems and payment methods. The Company
expects ongoing public debate on these issues. Any of these efforts or reforms
could have a material adverse affect on the Company's business and results of
operations.
THE COMPANY'S BUSINESS IS SUBJECT TO TECHNOLOGICAL CHANGE AND INTRODUCTION OF
NEW PRODUCTS
Technological change, evolving industry standards and new product
introductions and enhancements characterize the markets for the Company's
products. Many of the Company's products and products under development are
technologically innovative, and therefore require significant planning, design,
development and testing. These activities require the Company to make
significant capital commitments and investments. In addition, industry standards
may change on short notice and new products and technologies may render existing
products and technologies uncompetitive. Additionally, the products that the
Company is currently developing, and those that the Company develops in the
future, may not be technologically feasible or accepted by the marketplace or
they may not be completed in an acceptable time frame. Any increased capital
investments or loss in sales due to technological change could have a material
adverse effect on the Company's business and results of operations.
THE COMPANY CURRENTLY IS INVOLVED IN A LEGAL PROCEEDING
The Company's medical device subsidiary, Invivo Research, was one of two
third-party defendants named in a lawsuit in June of 1994 by Southern Nevada
Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court.
The underlying action in this matter stemmed from an incident involving a
surgical patient undergoing a procedure at the Southern Nevada Surgical Center.
The patient suffered a serious permanent brain injury. A lawsuit was filed on
behalf of the patient against the surgical center and the anesthesiologist who
monitored the patient. The defendants in that action made a substantial
settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex
were seeking indemnity and contribution of approximately $14 million from the
manufacturer of the anesthetic gas machine and Invivo Research, which
manufactured the vital signs monitor used in this procedure. SNSC and Surgex
alleged that both the anesthetic gas machine and the vital signs monitor were
defective. The Company believes that the vital signs monitor operated properly
and was properly designed for its intended function.
On August 18, 1999, the Nevada District Court granted the Company's Motion
to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and
Surgex contribution claims, without prejudice, based upon Nevada law that
provides that an action must be brought to trial within five years of the date
of the filing of the original action. The dismissal is being appealed.
In April of 1997, the plaintiff's insurer, CNA, filed an action with
identical causes in the same Nevada State Court. This second action was removed
by the Company to U.S. District Court. The action by CNA was dismissed by the
District Court on January 19, 2000 as the District Court found CNA did not have
standing as the real party of interest. CNA appealed the decision to the Ninth
12
Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the
dismissal and remanded the case back to Federal District Court on July 30, 2001.
The Company appealed this decision and requested a decision from the full panel
of the Ninth Circuit. The Ninth Circuit, without issuing an opinion, unanimously
voted to deny the Petition for Rehearing in this matter. The action will now be
remanded to the U.S. District Court for further proceedings.
Any judgment against the Company that exceeds the amount that its insurer
is required to pay could have a material adverse effect on its business and
results of operations.
THE COMPANY FACES PRODUCT LIABILITY AND PRODUCT RECALL RISKS
With respect to all of its products, and particularly its medical devices,
the Company faces the risk of potentially large product liability claims. The
malfunction or misuse of its products could potentially result in serious harm
to a patient. In addition, the Company may be required to indemnify its
distributors and customers for similar claims made against them.
Claims could be made against the Company even if its products did not
contribute to the injury that was sustained. Frequently, the Company's products
are used with products developed by other manufacturers. Even if its products
are not the cause of the injury, the Company may not be able to prove that some
other product malfunction or human error caused a claimant's injury.
The Company has had product liability claims made against it in the past
and may have further claims made against it in the future. While the Company is
insured for certain product liability claims, not all claims will be covered and
the level of its insurance may not be sufficient to protect it from the full
amount of a successful claim. In addition, the Company may not be able to obtain
adequate amounts of insurance at an acceptable cost. Claims made against the
Company that are not insured, or that exceed the amount of the Company's
coverage, could have a material adverse effect on its business and results of
operations.
Similarly, the Company's products are subject to the potential of being
recalled by government agencies for actual or potential deficiencies or
problems. Any such recall would likely be expensive and would have a material
adverse effect on the Company's business and results of operations.
THE COMPANY FACES INCREASED RISKS OF INTERNATIONAL OPERATIONS
International sales have accounted for over 20% of the Company's sales for
each of the past three years and may increase over time. International sales are
subject to a number of risks, including the following:
- fluctuations in exchange rates may affect the demand for products and
services the Company provides in foreign markets
- adverse changes in local economic conditions could depress the demand for
the Company's products
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system
- foreign customers may have longer payment cycles
- foreign countries may impose additional withholding taxes or otherwise tax
the Company's foreign income, impose tariffs, or adopt other restrictions
on foreign trade
- U.S. export licenses may be difficult to obtain
- the protection of intellectual property in foreign countries may be more
difficult to enforce
Any of these factors could have a material adverse impact on the Company's
business and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's sales are primarily denominated in U.S. dollars and as a
result, the Company has relatively little exposure to foreign currency exchange
risk with respect to its sales. The Company does not currently hedge against
exchange foreign currency rate
13
fluctuations. The effect of an immediate 10% change in exchange rates would not
have a material impact on the Company's future operating results or cash flows.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS:
The Company's medical device subsidiary, Invivo Research, was one of two
third-party defendants named in a lawsuit in June of 1994 by Southern Nevada
Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court.
The underlying action in this matter stemmed from an incident involving a
surgical patient undergoing a procedure at the Southern Nevada Surgical Center.
The patient suffered a serious permanent brain injury. A lawsuit was filed on
behalf of the patient against the surgical center and the anesthesiologist who
monitored the patient. The defendants in that action made a substantial
settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex
were seeking indemnity and contribution of approximately $14 million from the
manufacturer of the anesthetic gas machine and Invivo Research, which
manufactured the vital signs monitor used in this procedure. SNSC and Surgex
alleged that both the anesthetic gas machine and the vital signs monitor were
defective. The Company believes that the vital signs monitor operated properly
and was properly designed for its intended function.
On August 18, 1999, the Nevada District Court granted the Company's Motion
to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and
Surgex contribution claims, without prejudice, based upon Nevada law that
provides that an action must be brought to trial within five years of the date
of the filing of the original action. The dismissal is being appealed.
In April of 1997, the plaintiff's insurer, CNA, filed an action with
identical causes in the same Nevada State Court. This second action was removed
by the Company to U.S. District Court. The action by CNA was dismissed by the
District Court on January 19, 2000 as the District Court found CNA did not have
standing as the real party of interest. CNA appealed the decision to the Ninth
Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the
dismissal and remanded the case back to Federal District Court on July 30, 2001.
The Company appealed this decision and requested a decision from the full panel
of the Ninth Circuit. The Ninth Circuit, without issuing an opinion, unanimously
voted to deny the Petition for Rehearing in this matter. The action will now be
remanded to the U.S. District Court for further proceedings.
Any judgment against the Company that exceeds the amount that its insurer
is required to pay could have a material adverse effect on its business and
results of operations.
ITEM 2: CHANGES IN SECURITIES:
Not Applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES:
Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS:
At the Annual Meeting of Stockholders of the Company held on December 7,
2001 the Stockholders:
1. Elected all of the nominees for Director for the ensuing year as
follows:
NAME FOR AGAINST ABSTAIN
---- --------- ------- -------
Ernest Goggio 3,652,687 0 12,150
James Hawkins 3,624,337 0 40,500
George Sarlo 3,652,687 0 12,150
Laureen DeBuono 3,652,587 0 12,150
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2. Amended the 1994 Stock Option plan to increase by 220,000 the number
of shares covered by the Plan. The votes for amending the Plan were
as follows:
FOR AGAINST ABSTAIN
--------- -------- -------
3,322,640 253,697 88,500
3. Ratified the selection of KPMG LLP as independent auditors for the
Company. The votes for ratifying the selection of KPMG LLP were as
follows:
FOR AGAINST ABSTAIN
--------- -------- -------
3,631,887 200 32,750
ITEM 5: OTHER INFORMATION:
Not Applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit No. Description of Exhibit
------------- ----------------------
Exhibit 10.20 Sixth Amendment to Credit Agreement between
Wells Fargo Bank and Invivo Corporation
dated December 1, 2001
(b) Reports on Form 8-K:
None.
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SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
INVIVO CORPORATION
Date: February 14, 2001 By: /s/ JOHN F. GLENN
----------------------------------
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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