0000950149-01-501461.txt : 20011009 0000950149-01-501461.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950149-01-501461 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVIVO CORP CENTRAL INDEX KEY: 0000806168 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 770115161 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15963 FILM NUMBER: 1747905 BUSINESS ADDRESS: STREET 1: 4900 HOPYARD RD STE 210 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104687600 MAIL ADDRESS: STREET 1: 4900 HOPYARD RD STE 210 CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: SAFETYTEK CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SENSOR CONTROL CORP DATE OF NAME CHANGE: 19911023 10-K 1 f75943e10-k.txt FORM 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 2001 OR [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number 0-15963 INVIVO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 77-0115161 (State or other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 4900 HOPYARD RD. #210 PLEASANTON, CALIFORNIA 94588 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 925-468-7600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the closing sales price of $10.55 on September 24, 2001, the aggregate market value of registrant's voting Common Stock held by non-affiliates of the registrant was approximately $46,665,300. There were 4,423,249 shares of the registrant's Common Stock, $.01 par value, outstanding on September 24, 2001. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year June 30, 2001 are incorporated by reference in Part III. 1 2 PART I ITEM 1. BUSINESS OVERVIEW Invivo Corporation designs, manufactures and markets monitoring systems that measure and display vital signs of patients in medical settings. The Company's systems simultaneously monitor heart function, respiration, heart rate, blood oxygen levels, invasive and non-invasive blood pressure and exhaled carbon dioxide levels. The Company developed the first multi-parameter vital sign patient monitoring system for use during magnetic resonance imaging ("MRI"). Based on the Company's reputation in the MRI patient monitoring field and its technological expertise, it has made inroads into the general patient monitoring market with its Millennia product introduced in early fiscal 1997. The Company has established relationships with most of the world's largest MRI equipment manufacturers. It presently maintains distribution agreements or other OEM vendor relationships with Siemens A.G. Medical Engineering Group ("Siemens Medical"), Philips Medical Systems ("Philips Medical"), Hitachi Medical Corporation, and GE Medical Systems ("GE Medical"). GE Medical, Siemens Medical and Philips Medical have approved the use of the Company's monitors for incorporation into their MRI equipment. In fiscal 2001, the Company entered into an agreement with Philips Medical to develop an integrated MRI compatible patient vital signs monitoring system for use with Philips' MRI scanner designed for cardiovascular disease diagnosis. In addition to the patient monitoring business, the Company offers a line of safety and industrial instrumentation products. The percentage of sales contributed by the Company's patient monitoring line of products was 62%, 62% and 65% for fiscal years 1999, 2000, and 2001, respectively. Financial information regarding operating segments for the three years ended June 30, 2001 is included in Note 14 "Segment Information," of the Notes to the Consolidated Financial Statements. INDUSTRY PATIENT MONITORING MRI MRI is a non-invasive diagnostic tool that uses magnetic fields and radio frequencies to produce images of internal organs and structures of the body. As a result, MRI scanners are used worldwide, and are located principally in hospitals and stand-alone imaging centers. The Company believes that roughly half of these MRI scanners are located in the United States. The Company believes the MRI marketplace will continue to grow as new uses for MRI are developed. The Company believes that over 2,000 new MRI units were sold worldwide in 2000. MRI patient monitoring technology enables physicians to track vital signs while the patient is undergoing an MRI procedure. While not every MRI use requires a patient monitor, as uses continue to expand, the Company believes patient monitoring during the MRI procedure has become increasingly important. The MRI environment presents unique challenges for patient monitoring. A monitor must not interfere with the MRI in a manner that degrades the image. In addition, the monitor signal must be protected from the MRI's magnetic field and radio frequencies in order to maintain the accurate performance of the monitor. In light of these challenges, only three companies are currently manufacturing MRI patient monitors. The Company believes it is the market leader. The Company expects that growth in the MRI monitoring market will come from new MRI unit placements, outfitting existing MRI equipment not presently equipped with monitoring devices, and replacing existing MRI patient monitors. GENERAL PATIENT MONITORING General patient monitoring products measure, display and document vital signs information obtained from sensors attached to the patient. The principal customers of patient monitoring products include hospitals and outpatient surgery centers. 2 3 The Company estimates the worldwide market for patient monitoring products that measure multiple vital signs, including MRI and general patient monitoring, was approximately $2.0 billion in 2000. This market consists of three segments identified by their environments. The first segment is the portable monitoring market that includes the emergency room, bedsides, cath labs and neo-natal care units of hospitals. The second segment is the inpatient and outpatient operating room market. The final segment includes intensive and critical care units in hospitals. The general patient monitoring market is mature and therefore highly competitive. The Company believes the two greatest factors contributing to product success are price and features. SAFETY AND INDUSTRIAL INSTRUMENTATION The Company's safety and industrial instrumentation product line includes gas detection and monitoring devices that are offered in portable and fixed settings. OSHA and other regulatory agencies require the use of such devices in confined spaces where toxic gases or low levels of oxygen are suspected. The Company's safety and industrial instrumentation products also includes pressure and infrared sensor instrumentation that are frequently utilized in industrial settings. The Company expects the safety and industrial instrumentation segment to experience only modest growth in the foreseeable future. PRODUCTS MRI PATIENT MONITORS Through its patented technologies and proprietary shielding techniques, the Company is able to monitor a patient's vital signs without disrupting the MRI process. OMNI-TRAK 3100. In the late 1980s, the Company pioneered the development of vital signs monitoring during magnetic resonance imaging with the introduction of the Omni-Trak 3100. The Omni-Trak 3100 provides continuous monitoring of all key aspects of a patient's vitality, including electrocardiograph, respiration, heart rate, blood oxygen levels, invasive and non-invasive blood pressure and expired carbon dioxide levels. OMNI-TRAK 3150. In April 1998, the Company introduced its next-generation MRI monitor. The Omni-Trak 3150 incorporates all of the features of the Omni-Trak 3100 plus it is compact, mobile and easy to use. Through state-of-the-art radio transmission, the Omni-Trak 3150 communicates with our Millennia remote display controller, allowing critical data to be viewed by physicians and technicians in both the MRI room and the control room. MAGNITUDE. In fiscal 2001, the Company introduced its full featured, high-end MRI monitor. The Magnitude provides all of the features of the Omni-Trak 3150 along with Digital Signal Processing (DSP) of the ECG signal for enhanced ECG performance and removal of MRI gradient artifact. The Magnitude also offers automatic identification and measurement of five anesthetic agents. GENERAL PATIENT MONITORING Based on its reputation in the MRI patient monitoring field and its technological expertise, the Company has penetrated the general patient monitoring market. MILLENNIA. The Millennia portable patient monitor is a compact multi-parameter vital signs monitor, which weighs approximately 15 pounds. Hospitals maximize the use of their monitors because they can easily be moved with a patient or between locations. The Millennia also features a large color display and user-friendly interface. Additional features include a module for anesthetic agent identification and analysis that allows an anesthesiologist to confirm the type and amount of anesthetic gas that is administered to a patient and the ability to measure blood oxygen levels in non-tranquil patients (such as newborns) whose frequent and unpredictable movements make the use of many traditional monitors difficult. The Company is developing a product that will measure multiple anesthetic agents simultaneously. The Company also developed a modified version of the Millennia for incorporation into GE Medical 's CT scanners for use in cardiology. CENTURION. The Company's Centurion central station monitoring system networks Millennia patient monitors, allowing a single healthcare professional to monitor up to eight patients simultaneously. The main monitoring screen provides for rapid interpretation of vital signs information by a single health care professional. 3 4 OTHER. Other monitors include: - a non-invasive blood pressure monitor that uses digital signal processing for fast and consistent measurements - an inexpensive multi-parameter vital signs monitor designed specifically for the international market - a stand-alone unit to measure blood oxygen levels - a monitor for blood pressure and blood oxygen levels - a portable, hand-held blood oxygen level monitor offering a low-cost, transportable monitoring unit SAFETY AND INDUSTRIAL INSTRUMENTATION The Company offers single-gas and multi-gas detection and monitoring instruments in both portable and fixed models. The user carries or wears portable units that are equipped with audible and visual alarms to warn the user that potential dangers exist. Typical applications for these units are in industrial or other settings where the user expects to move about, including underground spaces housing telephone cables and waste water sewers, mines and large factories. Fixed gas area monitors are appropriate for confined spaces where chemicals or gases are used or stored. Typical applications for these monitors are oil refineries, chemical plants and semiconductor fabrication facilities. The Company's flagship safety product, the MicroMax, is a hand-sized, microprocessor-based, portable, multi-gas detector. The MicroMax simultaneously detects up to four gases. The MicroMax PRO, an enhanced version of the MicroMax, has additional features that include voice messaging and data logging software. The Company also offers the UniMax, a pocket-sized, microprocessor-based, portable, single-gas detector. UniMax is available with up to nine interchangeable plug-in sensors for various types of gases and allows for audible and visual alarm combinations. The Company's oxygen monitoring products measure oxygen levels in air cylinders used by individuals in oxygen-deprived situations. The primary use for this equipment is for a self-contained breathing apparatus for fire fighters and hazardous material clean-up workers. The Company's industrial sensor and instrumentation products consist of pressure sensors and infrared non-contact temperature measuring devices. The infrared non-contact temperature measuring products are used in a wide variety of industrial instrumentation situations. These include the fabrication of semiconductors, the manufacturing of metals and glass, and miscellaneous automotive, plant maintenance, construction and food preparation applications. The Company's quickTemp is a hand-held, pocket-sized, infrared non-contact thermometer. The Company sells its pressure sensing devices primarily to plastic extrusion equipment manufacturers who use these devices in their production processes. Manufacturers in the food, beverage, synthetic fiber and pharmaceutical industries also use these devices to measure the pressure of processing ingredients. SALES AND MARKETING Unlike many other medical device companies its size, the Company sells its patient monitoring products in the United States through a direct sales force. The domestic sales force includes 31 salespersons organized into five regions in the United States. Distributors, assisted by the Company's five international sales personnel located in Europe and in the Far East, handle sales throughout the rest of the world. The Company sells its patient monitoring products primarily to hospitals and, to a lesser degree, to stand-alone imaging centers, outpatient surgery centers and OEM customers. The Company has OEM or worldwide distribution agreements with Siemens A.G. Medical Engineering Group, Philips Medical Systems, Hitachi Medical Corporation and GE Medical Systems for its MRI monitoring equipment. These relationships facilitate the sale of monitors with the MRI equipment manufactured by these companies. 4 5 The Company has also established relationships with leading hospital group purchasing organizations such as HealthTrust, Premier Inc., AmeriNet, Inc., Broadlane, Inc., HealthSouth and MedAssets/Insource. The Company markets its safety and industrial instrumentation products mostly through distributors and its own sales personnel. The Company sells these products primarily to municipalities, utilities, telephone companies, oil refineries and OEMs. Foreign sales represented 21%, 22% and 23% of the Company's total sales in fiscal 2001, 2000 and 1999. The Company is actively trying to expand its international presence, especially in the patient monitoring business. See Note 14 of the Notes to Consolidated Financial Statements for additional information regarding foreign sales. The Company's backlog of unfilled purchase orders for all its products was approximately $11.3 million as of June 30, 2001, compared to approximately $10.1 million as of June 30, 2000 and approximately $7.3 million as of June 30, 1999. Within the next 12 months, the Company expects to ship all of its current backlog. Because of customer changes in delivery schedules and the possible cancellation of orders, backlog as of any particular date may not be representative of the Company's actual sales for any succeeding fiscal period. Historically, order cancellations have not been significant. The Company's businesses are not inherently seasonal, although for some of its businesses orders and shipments in the first and second fiscal quarters have been historically lower than the third and fourth quarters. MANUFACTURING AND ASSEMBLY Other companies manufacture components and subassemblies to the Company's specifications. The Company then assembles its products at its facilities in California and Florida. The patient monitoring and gas detection manufacturing facilities are ISO 9001 certified. The Company generally obtains the materials and supplies that it uses to produce its products from a wide variety of suppliers. The Company has not experienced any significant shortages. Although certain materials that the Company uses in the manufacture of patient monitoring and gas detection devices are available from only a few suppliers, the Company does not anticipate any significant difficulties in obtaining any of these materials in the foreseeable future. COMPETITION The patient monitoring markets in which the Company competes include MRI and general monitoring. The Company is aware of three current competitors in the worldwide MRI monitoring market. The general patient monitoring market is highly competitive and includes companies that are much larger than the Company with significantly greater financial resources. The Company estimates there are approximately 15 to 20 competitors in the general patient monitoring market. In the patient monitoring business, price is an important factor in hospital purchasing patterns as a result of cost containment pressures on the health care industry. To the extent that healthcare reform measures negatively affect the financial condition of hospitals and thereby reduce their capital purchases, the Company expects price to continue to be a very important competitive factor. The Company also competes on the basis of product reliability, quality, technical features, performance and service. The markets for the Company's non-medical products are, in general, characterized by a relatively limited number of competitors; however, these markets are highly competitive. The Company estimates there are generally five to ten competitors in each of these markets. The Company competes on price, product reliability, quality, technical features, performance and service in these markets. GOVERNMENTAL REGULATION The patient monitoring devices the Company manufactures and markets are subject to regulation by the FDA and, in some instances, corresponding state and foreign governmental agencies. The Company's existing medical devices were cleared for marketing in the United States through the FDA's section 510(k) premarket notification process. The 510(k) premarket notification process is available where the new product being submitted to the FDA can be compared to a pre-existing commercially available product that performs functions the FDA considers to be substantially equivalent. If a product does not meet the eligibility requirements for the 510(k) process, then its application must be submitted, instead, under the more time consuming and costly premarket approval procedure. The Company's manufacturing facilities and the manufacture of its products are subject to FDA regulations regarding registration of manufacturing facilities, compliance with FDA good manufacturing practices and the reporting of adverse events. The FDA's good 5 6 manufacturing practices, titled "Quality System Regulation", require preproduction design controls and implementation of a full quality assurance system along with standards for manufacturing processes and facilities and record keeping for device failure and complaint investigations. The Company is subject to periodic on-site inspection for compliance with such regulations. The FDA may also conduct investigations and evaluations of the Company's products at its own initiative or in response to customer complaints or reports of malfunctions. If the FDA believes that its regulations have been violated, it has extensive enforcement authority including the power to seize, embargo or restrain entry of products from the market and to prohibit the operation of manufacturing facilities until the noted deficiencies are corrected to their satisfaction. The Company seeks, where appropriate, to comply with the certification and safety standards of various organizations such as Underwriters' Laboratories, the Canadian Standards Association and the various safety and test regulations of the European Community. The Company recently received approval from the Japanese Ministry of Health and Labor Welfare to market its new MRI monitor. The manufacture and testing of the Company's safety products and medical devices requires it to handle and store small quantities of a wide variety of chemicals, some of which are highly toxic. Certain of these chemicals pose a serious threat to workers and others who may come in contact with them if improperly used or handled. Most municipalities, including those in which the Company is presently located, now require that the proposed storage and use of dangerous chemicals receive local approval. State air quality boards, or similar agencies, must also approve the venting, and certain other aspects of handling, of these types of chemicals. These municipal and state agencies may, as a condition to the granting of approvals and permits, impose certain procedural limitations on the Company's storage and handling of these chemicals and structural requirements on the facilities where these chemicals are stored and used. They also impose record keeping and reporting requirements on the users of these chemicals. Compliance with these requirements has not, to date, had a material effect on the Company's capital expenditures, earnings or competitive position. Nonetheless, environmental regulation at the local, state and national levels continues to evolve, and the possibility exists that more stringent limitations and requirements may become applicable to the Company. RESEARCH AND EXPERIMENTAL During fiscal years 2001, 2000, and 1999 the Company's research and experimental expenses were approximately $3.3 million, $3.0 million, and $3.0 million, respectively. Most of these expenditures relate to the patient safety monitoring business. INTELLECTUAL PROPERTY The Company's success and competitive position depends upon its continued ability to develop new proprietary technology while protecting the Company's existing intellectual property. As of June 30, 2001, the Company held nine US patents expiring at different times between 2002 and 2018 and had one US patent application pending. There is no assurance that any of the Company's current or future patent applications will result in patents, and the Company's existing or future patents may be circumvented, declared invalid or challenged as to scope or ownership. For these and other reasons, the Company may not realize any competitive advantage from the Company's existing patents and any patents that the Company may be granted in the future. Furthermore, others may develop technologies that are similar or superior to the Company's proprietary technologies or design around any patents that the Company may hold. In addition, the Company has not secured patent protection in foreign countries and the Company cannot be certain that the steps the Company takes to prevent misappropriation of our intellectual property abroad will be effective, or that the application of foreign laws to technology developed abroad will not adversely effect the validity or enforceability of the Company's U.S. patents. EMPLOYEES As of June 30, 2001 the Company had 361 employees. The Company is not a party to any collective bargaining agreement and has not experienced a strike or work stoppage. The Company considers its relations with its employees to be good. 6 7 ITEM 2. PROPERTIES The following table sets forth information with respect to the real property owned or leased by the Company which it considers material to its business.
GENERAL CHARACTER OWNERSHIP OR DATE OF LOCATION AND USE OF THE PROPERTY EXPIRATION OF LEASE -------- ----------------------- -------------------- Pleasanton, California 3,200 square-foot headquarters facility April 2006 Fremont, California 8,000 square-foot building used as the July 2006 Company's manufacturing and distribution facility for its gas calibration and process control products Orlando, Florida 54,000 square-foot building used as the Owned manufacturing, distribution and administrative facility for the Company's patient monitoring products Cucamonga, California 35,000 square-foot building used as the March 2011 manufacturing, distribution and administrative facility for the Company's oxygen monitoring products Miramar, Florida 14,000 square-foot building used as the September 2005 manufacturing, distribution and administrative facility for the Company's gas detection and monitoring products
From time to time, the Company leases smaller facilities as its needs dictate. The Company considers its facilities to be sufficient for its current operations. ITEM 3. LEGAL PROCEEDINGS The Company's medical device subsidiary, Invivo Research, was one of two third-party defendants named in a lawsuit in June of 1994 by Southern Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court. The underlying action in this matter stemmed from an incident involving a surgical patient undergoing a procedure at the Southern Nevada Surgical Center. The patient suffered a serious permanent brain injury. A lawsuit was filed on behalf of the patient against the surgical center and the anesthesiologist who monitored the patient. The defendants in that action made a substantial settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex were seeking indemnity and contribution of approximately $14 million from the manufacturer of the anesthetic gas machine and Invivo Research, which manufactured the vital signs monitor used in this procedure. SNSC and Surgex alleged that both the anesthetic gas machine and the vital signs monitor were defective. The Company believes that the vital signs monitor operated properly and was properly designed for its intended function. On August 18, 1999, the Nevada District Court granted the Company's Motion to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and Surgex contribution claims, without prejudice, based upon Nevada law that provides that an action must be brought to trial within five years of the date of the filing of the original action. The dismissal is being appealed. In April of 1997, the plaintiff's insurer, CNA, filed an action with identical causes in the same Nevada State Court. This second action was removed by the Company to U.S. District Court. The action by CNA was dismissed by the District Court on January 19, 2000 as the District Court found CNA did not have standing as the real party of interest. CNA appealed the decision to the Ninth Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the dismissal and remanded the case back to Federal District Court on July 30, 2001. The Company has appealed this decision and requested a decision from the full panel of the Ninth Circuit. 7 8 The Company intends to vigorously defend itself in these proceedings. Any judgment against the Company that exceeds the amount that its insurer is required to pay could have a material adverse effect on its business and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY Our executive officers and directors as of June 30, 2001 are listed below, together with brief accounts of their business experience and certain other information.
NAME AGE POSITION ---- --- -------- James B. Hawkins................................ 45 President, Chief Executive Officer, Secretary and Director John F. Glenn................................... 40 Vice President, Finance and Chief Financial Officer F. Larry Young.................................. 42 Vice President, Operations Stuart Baumgarten............................... 47 President, Invivo Research, Inc.
James B. Hawkins has been President, Chief Executive Officer and a Director of Invivo and its predecessor since August 1985. He also has served as Secretary of Invivo since July 1986. He earned his undergraduate degree in Business Commerce from Santa Clara University and his MBA from San Francisco State University. John F. Glenn was appointed Vice President, Finance and Chief Financial Officer of Invivo in November 1990. Mr. Glenn earned his undergraduate degree in Business Administration from the University of Nevada and his MBA from the University of Santa Clara. F. Larry Young has been Vice President, Operations of Invivo since April 1990 and the Chief Operating Officer of the Lumidor Safety Products subsidiary since August 1996. Stuart Baumgarten has been President of the Invivo Research subsidiary since November 1998. From March 1996 to November 1998, Mr. Baumgarten served as Vice President of Sales and Marketing for Invivo Research. 8 9 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, 2001 First Quarter ........ 11.88 8 Second Quarter ....... 11.88 7.13 Third Quarter ........ 10.88 7.18 Fourth Quarter ....... 10.18 8 YEAR ENDED JUNE 30, 2000 First Quarter ........ 14 11.5 Second Quarter ....... 13.25 10 Third Quarter ........ 13 10.56 Fourth Quarter ....... 12.50 8
As of June 30, 2001 the Company had 59 shareholders of record of our common stock, although there are a larger number of beneficial holders. DIVIDEND POLICY The Company intends to retain future earnings to finance the expansion of its business and does not anticipate paying any cash dividends on its common stock in the foreseeable future. If the Company were to declare dividends in the future, such dividends would be paid at the discretion of its board of directors after taking into account various factors, including, among other things, the Company's financial condition, results of operations, cash flows from operations, current and anticipated cash needs and expansion plans, the income tax laws then in effect and the requirements of Delaware law. In addition, the Company's credit facility prohibits the payment of dividends without consent from the lender. 9 10 ITEM 6. SELECTED FINANCIAL DATA The operations data set forth below with respect to the fiscal years ended June 30, 2001, 2000 and 1999 and the balance sheet data at June 30, 2001 and 2000 are derived from, and are qualified by, reference to the Company's audited financial statements included elsewhere herein and should be read in conjunction with those financial statements and the notes thereto. The operations data set forth below with respect to the fiscal years ended June 30, 1998 and 1997 and the balance sheet data at June 30, 1999, 1998 and 1997 are derived from audited financial statements not included herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------- FISCAL YEAR ENDED JUNE 30, ------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales .................................. $ 54,279 $ 52,750 $ 48,858 $ 40,651 35,904 Gross profit ........................... 26,432 25,745 24,490 19,695 17,285 Operating expenses Selling, general and administrative .. 18,601 16,583 15,623 13,429 14,174 Research and experimental ............ 3,305 3,028 3,007 2,455 2,449 Other income (expense) ................. 747 1,088 (153) (383) (184) Loss on Sale of G.C. Industries ........ (601) -- -- -- -- Income tax expense ..................... 1,618 2,256 1,889 1,165 162 Net income ............................. $ 3,054 $ 4,967 $ 3,818 $ 2,263 $ 316 Basic net income per common share ...... $ .69 $ 1.15 $ 1.07 $ .69 $ .10 Weighted average common shares outstanding (basic) .................. 4,403 4,329 3,552 3,265 3,239 Diluted net income per common share .... $ .68 $ 1.10 $ 1.00 $ .66 $ .09 Weighted average common shares outstanding (diluted) ................ 4,476 4,497 3,831 3,427 3,445
JUNE 30, ----------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- CONSOLIDATED BALANCE SHEET DATA: Working capital .............. $31,380 $26,730 $22,949 $ 9,364 $ 7,474 Total assets ................. 52,011 49,476 44,641 30,195 26,612 Long-term debt ............... 1,647 1,393 1,375 1,480 1,584 Stockholders' equity ......... 43,709 40,325 35,167 18,168 15,815
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000 SALES Sales for fiscal 2001 were $54,279,100, an increase of 2.9% over sales of $52,749,900 for fiscal 2000. Sales at the Company's patient safety monitoring business increased 7.7% in fiscal 2001 as compared to fiscal 2000. Continued growth in sales of the Company's MRI vital signs monitor offset a decrease in "Millennia" product sales as the general monitoring market experienced slowing market conditions. The sales increase at the patient safety monitoring business for fiscal 2001 was offset by a sales decline at the Company's safety and industrial instrumentation segment as the Company's non-contact infrared temperature products continued to experience difficult market conditions. The Company's pressure sensing devices and oxygen monitoring products also experienced sales declines. An increase in sales at the Company's gas detection product line in fiscal 2001 partially offset the other sales declines in the safety and industrial segment. GROSS PROFIT The gross profit margin decreased slightly in fiscal 2001 to 48.7% from 48.8% in fiscal 2000. An increase in the gross profit margin at the patient safety monitoring business helped offset the deteriorating gross margins of the non-contact infrared industrial products due to price discounting and other safety and industrial instrumentation product lines due to decreased sales. OPERATING EXPENSES Selling, general and administrative expenses for fiscal 2001 increased 12.2% or $2,018,200 compared to fiscal 2000. Selling, general and administrative expenses were 34.3% of sales for fiscal 2001 compared with 31.4% for fiscal 2000. The increase in these expenditures in aggregate and as a percentage of sales for fiscal 2001 was primarily due to higher administrative and selling expenses at the Company's patient safety monitoring business along with the write-off of the remaining balance on a note receivable of $203,600, net of a deferred gain of $52,000, from the sale of a product line in fiscal 1996. The note receivable was deemed not collectable based on the recent non-performance of the buyer and the effect of the current economic downturn on the product line's market. The increase in selling, general and administrative expenses at the patient safety monitoring business was in anticipation of higher sales volume for fiscal 2001 than was actually achieved. The increase in selling expenses was also due to higher sales commission expenses and higher international selling expenses as the Company established a U.K. subsidiary in the first quarter of fiscal 2001. Research and experimental expenses were $3,305,000 or 6.1% of sales for fiscal 2001 compared to $3,027,700 or 5.7% for fiscal 2000. The increase in these expenses in aggregate and as a percentage of sales in fiscal 2001 was due to increased expenditures on behalf of the patient safety monitoring business which offset a decline in research and experimental expenditures at the safety and industrial instrumentation product lines. The Company plans to continue its efforts in developing new products and enhancing its existing ones and expects future research and experimental expenditures as a percentage of sales to be in the range of fiscal 2001 levels. OTHER INCOME AND EXPENSE Other income, net for fiscal 2001 of $861,400 included a gain of $450,000 on the settlement of a patent infringement lawsuit brought by the Company against a competitor in the MRI monitoring market. Other income also included interest income which was $435,200 for fiscal 2001 as compared to $388,800 for fiscal 2000. The increase in interest income was due to higher balances on the Company's short-term investments. Interest expense decreased to $114,700 for fiscal 2001 compared with $137,000 for fiscal 2000. On March 2, 2001, the Company sold G.C. Industries, a gas permeation device business, for $664,000 in cash. The asset sale resulted in a loss of $600,500. G.C. Industries was a part of the safety and industrial segment and represented approximately 1% of the Company's annual sales. PROVISION FOR INCOME TAXES The effective tax rate for fiscal 2001 was 34.6% as compared to 31.20% for fiscal 2000. The increase in the effective rate was primarily due to a loss on the sale of G.C. Industries not deductible for tax purposes. The effective rate differs from the statutory rate due principally to the benefit of a foreign sales corporation and other credits. 11 12 YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999 SALES Sales for fiscal 2000 were $52,749,900, an increase of 8.0% over sales of $48,858,000 for fiscal 1999. This sales increase was primarily due to sales growth at the Company's patient safety monitoring business along with growth at the oxygen monitoring and gas detection businesses in the safety and industrial instrumentation segment. These increases offset a decrease in sales of the Company's non-contact infrared temperature products as these products experienced strong competitive pricing pressures. The "Millennia" portable vital signs monitor and MRI vital signs monitor were the primary contributors to the sales increase at the patient safety monitoring business. GROSS PROFIT The gross profit margin decreased in fiscal 2000 to 48.8% from 50.1% in fiscal 1999. The decrease was attributable to several factors which included heavy price discounting at the non-contact infrared industrial business due to difficult market conditions; higher manufacturing costs at the patient safety monitoring business which included the expansion of the service organization; and lower margins in the OEM patient safety monitoring business due to lower contracted prices on increased volume. The increase in sales at the oxygen monitoring business also contributed to the gross margin decrease as that business has inherently lower gross margins than the Company's other businesses. OPERATING EXPENSES Selling, general and administrative expenses for fiscal 2000 increased 6.1% or $960,000 compared to fiscal 1999. Selling, general and administrative expenses were 31.4% of sales for fiscal 2000 compared with 32.0% for fiscal 1999. The increase in these expenditures in aggregate for fiscal 2000 was primarily due to higher administrative expenses at the Company's patient safety monitoring along with higher selling expenses on the higher sales volume at the patient safety monitoring business. Research and experimental expenses were 5.7% of sales for fiscal 2000 compared to 6.2% for fiscal 1999. The decrease was attributable to a decline in the amount of research and experimental expenses on behalf of the patient safety monitoring business as $271,400 of labor expenditures related to equipment for the production of the Company's proprietary anesthetic agent module for the "Millennia" was capitalized in the second and third quarters of fiscal 2000. The Company does not foresee similar items to be capitalized in fiscal 2001. OTHER INCOME AND EXPENSE Other income of $1,225,600 for fiscal 2000 included a $834,000 gain on the sale of short-term investments. Interest income increased to $388,800 in fiscal 2000 as compared to $148,800 for fiscal 1999. Interest expense decreased to $137,000 for fiscal 2000 compared with $255,500 for fiscal 1999. These changes were the result of the investment of, and the payoff of the outstanding balances on the Company's revolving bank line of credit and term loan with, the proceeds from the Company's secondary stock offering in March 1999. PROVISION FOR INCOME TAXES The effective tax rate for fiscal 2000 decreased to 31.2% as compared to 34% for fiscal 1999. The decrease was primarily due to the adjustment of prior year's taxes. The effective rate also differs from the statutory rate due principally to the benefit of a foreign sales corporation and other credits. INFLATION The Company does not believe that inflation had a significant impact on its results of operations during any of the last three fiscal years. LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 2001 increased to $31,380,100 from $26,729,600 at June 30, 2000. Net cash provided by operating activities was $2,307,100 for fiscal 2001 compared with $1,712,600 provided by operating activities for fiscal 2000. This increase was largely the result of changes in operating assets and liabilities, particularly accounts receivable and inventories. Capital expenditures were $1,459,700 for fiscal 2001 compared to $2,101,300 for the prior year period. Capital expenditures were primarily related to information system software enhancements and additional demonstration equipment for the direct sales force at the Company's patient safety monitoring business and leasehold improvements and manufacturing equipment at the Company's new facility for the oxygen monitoring business. The Company believes that its cash resources and cash flow from operations are adequate to meet its anticipated cash needs for working capital and capital expenditures throughout fiscal 2002. The Company's $1,000,000 revolving bank line of credit is 12 13 collateralized by the Company's accounts receivable, inventory, and equipment. At June 30, 2001, $1,000,000 was available under the line of credit. In September 2001, The Company's Board of Directors authorized the use of up to $2 million of the Company's cash for repurchases of the Company's common stock. These purchases, if commenced, could be suspended and then further commenced or restarted at any time. The Company will continue to explore opportunities for the possible acquisitions of technologies or businesses, which may require the Company to seek additional financing. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately, Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives up to their estimated residual values, and reviewed for impairment in accordance with FAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. Statement 142 must be adopted in fiscal years beginning after December 15, 2001. Early adoption is permitted before the issuance of the Company's first quarter's financial statements. The Company has not yet determined the impact these standards will have on its results of operations and financial position. NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements regarding the Company's plans, expectations, estimates and beliefs. Actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company is not obligated to update or revise these forward-looking statements to reflect new events or circumstances. Factors that could cause actual results, events or circumstances to differ from forward-looking statements made in this report include those set forth in the following "Risk Factors" section. RISK FACTORS THE COMPANY IS DEPENDENT ON A CONCENTRATED LINE OF PRODUCTS The Company's future financial performance will be largely dependent on its patient monitor product line, which includes a limited number of products. The Company expects its MRI patient monitors and its Millennia portable patient monitor to have a substantial impact on revenue growth. In the MRI monitoring market, the success of its MRI monitors is heavily dependent on the continued acceptance of MRI technology as a diagnostic tool. In the general patient monitoring market, the Company's Millennia monitor is heavily dependent on its ability to further penetrate an already competitive market. In addition, the recent consolidation in the medical care provider market has resulted in a number of very large purchasers of medical devices. These large purchasers typically prefer to establish relationships with medical device manufacturers that have broad and diverse product lines. The failure of the Company's products to continue to gain market acceptance or a continued consolidation of the medical care provider market could have a material adverse effect on its business and results of operations. 13 14 THE COMPANY FACES INCREASED LEVELS OF COMPETITION The Company has encountered and will continue to encounter significant competition in the sale of its products. The Company's general patient monitoring competitors include a number of large multinational corporations. Some of these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company can. In the MRI patient monitoring market, the Company has enjoyed a significant first-to-market advantage over its competitors. However, competitors have introduced products designed to compete with its MRI vital signs monitoring products. In addition, as the market for MRI vital signs monitoring products expands it may attract competitors with greater resources. Additionally, competition may increase if new companies enter the Company's markets or if existing competitors expand their product lines or intensify efforts within existing product lines. The introduction of competitive products may result in a decrease in the Company's market share and in a decrease in the prices at which the Company is able to sell its products. The Company's market share could also be adversely affected by increasing concentration in the medical care provider market. Any decrease in the Company's market share or decrease in the prices at which the Company is able to sell its products could have a material adverse effect on its business and results of operations. THE COMPANY'S FINANCIAL RESULTS MAY FLUCTUATE The Company's financial results may fluctuate significantly from period to period because of a variety of factors, many of which is beyond its control. These factors include: - increased competition - changes in the Company's pricing policies and those of its competitors - changes in the Company's operating expenses or capital expenditures - timing and market acceptance of new and upgraded product introductions by the Company and its competitors - seasonal fluctuations in the demand for the Company's products - introduction of alternative technologies by the Company and its competitors - effect of potential acquisitions - other general economic factors Fluctuations caused by these and other factors could have a material adverse effect on the Company's business and results of operations. THE COMPANY IS SUBJECT TO A SIGNIFICANT RISK OF NEW LAWS RELATED TO HEALTH CARE Changes in the law or new interpretations of existing laws may have a significant effect on the Company's costs of doing business and the amount of reimbursement the Company receives from both government and third-party payors. In addition, economic forces, regulatory influences and political initiatives are subjecting the health care industry to fundamental changes. Federal, state and local government representatives are likely to continue to review and assess alternative health care delivery systems and payment methods. The Company expects ongoing public debate on these issues. Any of these efforts or reforms could have a material adverse affect on the Company's business and results of operations. THE COMPANY'S BUSINESS IS SUBJECT TO TECHNOLOGICAL CHANGE AND INTRODUCTION OF NEW PRODUCTS 14 15 Technological change, evolving industry standards and new product introductions and enhancements characterize the markets for the Company's products. Many of the Company's products and products under development are technologically innovative, and therefore require significant planning, design, development and testing. These activities require the Company to make significant capital commitments and investments. In addition, industry standards may change on short notice and new products and technologies may render existing products and technologies uncompetitive. Additionally, the products that the Company is currently developing, and those that the Company develops in the future, may not be technologically feasible or accepted by the marketplace or they may not be completed in an acceptable time frame. Any increased capital investments or loss in sales due to technological change could have a material adverse effect on the Company's business and results of operations. THE COMPANY CURRENTLY IS INVOLVED IN A LEGAL PROCEEDING The Company's medical device subsidiary, Invivo Research, was one of two third-party defendants named in a lawsuit in June of 1994 by Southern Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court. The underlying action in this matter stemmed from an incident involving a surgical patient undergoing a procedure at the Southern Nevada Surgical Center. The patient suffered a serious permanent brain injury. A lawsuit was filed on behalf of the patient against the surgical center and the anesthesiologist who monitored the patient. The defendants in that action made a substantial settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex were seeking indemnity and contribution of approximately $14 million from the manufacturer of the anesthetic gas machine and Invivo Research, which manufactured the vital signs monitor used in this procedure. SNSC and Surgex alleged that both the anesthetic gas machine and the vital signs monitor were defective. The Company believes that the vital signs monitor operated properly and was properly designed for its intended function. On August 18, 1999, the Nevada District Court granted the Company's Motion to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and Surgex contribution claims, without prejudice, based upon Nevada law that provides that an action must be brought to trial within five years of the date of the filing of the original action. The dismissal is being appealed. In April of 1997, the plaintiff's insurer, CNA, filed an action with identical causes in the same Nevada State Court. This second action was removed by the Company to U.S. District Court. The action by CNA was dismissed by the District Court on January 19, 2000 as the District Court found CNA did not have standing as the real party of interest. CNA appealed the decision to the Ninth Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the dismissal and remanded the case back to Federal District Court on July 30, 2001. The Company has appealed this decision and requested a decision from the full panel of the Ninth Circuit. Any judgment against the Company that exceeds the amount that its insurer is required to pay could have a material adverse effect on its business and results of operations. THE COMPANY FACES PRODUCT LIABILITY AND PRODUCT RECALL RISKS With respect to all of its products, and particularly its medical devices, the Company faces the risk of potentially large product liability claims. The malfunction or misuse of its products could potentially result in serious harm to a patient. In addition, the Company may be required to indemnify its distributors and customers for similar claims made against them. Claims could be made against the Company even if its products did not contribute to the injury that was sustained. Frequently, the Company's products are used with products developed by other manufacturers. Even if its products are not the cause of the injury, the Company may not be able to prove that some other product malfunction or human error caused a claimant's injury. The Company has had product liability claims made against it in the past and may have further claims made against it in the future. While the Company is insured for certain product liability claims, not all claims will be covered and the level of its insurance may not be sufficient to protect it from the full amount of a successful claim. In addition, the Company may not be able to obtain adequate amounts of insurance at an acceptable cost. Claims made against the Company that are not insured, or that exceed the amount of the Company's coverage, could have a material adverse effect on its business and results of operations. Similarly, the Company's products are subject to the potential of being recalled by government agencies for actual or potential deficiencies or problems. Any such recall would likely be expensive and would have a material adverse effect on the Company's business and results of operations. THE COMPANY FACES INCREASED RISKS OF INTERNATIONAL OPERATIONS 15 16 International sales have accounted for over 20% of the Company's sales for each of the past three years and may increase over time. International sales are subject to a number of risks, including the following: - fluctuations in exchange rates may affect the demand for products and services the Company provides in foreign markets - adverse changes in local economic conditions could depress the demand for the Company's products - agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system - foreign customers may have longer payment cycles - foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade - U.S. export licenses may be difficult to obtain - the protection of intellectual property in foreign countries may be more difficult to enforce Any of these factors could have a material adverse impact on the Company's business and results of operations. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's sales are primarily denominated in U.S. dollars and as a result, the Company has relatively little exposure to foreign currency exchange risk with respect to its sales. The Company does not currently hedge against exchange foreign currency rate fluctuations. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. 16 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements:
PAGE NUMBER ------ Independent Auditors' Report ....................................................................... 18 Consolidated Balance Sheets - June 30, 2001 and 2000 ............................................... 19 Consolidated Statements of Income for the Years Ended June 30, 2001, 2000, and 1999 ................ 20 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended June 30, 2001, 2000, and 1999 ............................................................. 21 Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000, and 1999 ............ 22 Notes to Consolidated Financial Statements ......................................................... 23 - 32
17 18 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Invivo Corporation: We have audited the accompanying consolidated balance sheets of Invivo Corporation and subsidiaries (the Company) as of June 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Invivo Corporation and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. August 3, 2001 18 19 INVIVO CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2001 and 2000
2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 280,000 969,800 Short-term investments 9,091,300 6,817,600 Trade receivables, less allowance for doubtful accounts of $507,100 as of June 30, 2001 and $533,900 as of June 30, 2000 15,656,600 14,656,600 Inventories 11,249,100 10,132,000 Deferred income taxes 1,013,300 1,343,000 Prepaid expenses and other current assets 465,500 407,200 ------------ ------------ Total current assets 37,755,800 34,326,200 Property and equipment, net 6,398,000 6,139,600 Intangible assets 7,633,900 8,439,700 Other assets 223,400 570,500 ------------ ------------ $ 52,011,100 49,476,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,267,200 2,725,600 Accrued expenses 3,662,900 3,381,100 Current portion of long-term debt and capital leases 154,700 142,700 Income taxes payable 147,000 1,347,200 Other current liabilities 143,900 -- ------------ ------------ Total current liabilities 6,375,700 7,596,600 Long-term debt and capital leases, excluding current portion 1,647,100 1,392,900 Deferred income taxes 279,700 118,000 Other -- 52,000 ------------ ------------ Total liabilities 8,302,500 9,159,500 ------------ ------------ Stockholders' equity: Common stock, $.01 par value; authorized shares totaling 20,000,000; issued and outstanding shares totaling 4,423,249 as of June 30, 2001 and 4,362,999 as of June 30, 2000 44,200 43,600 Additional paid-in capital 26,581,500 26,257,300 Retained earnings 17,095,900 14,041,800 Accumulated other comprehensive loss (13,000) (26,200) ------------ ------------ Total stockholders' equity 43,708,600 40,316,500 Commitments and contingencies ------------ ------------ $ 52,011,100 49,476,000 ============ ============
See accompanying notes to consolidated financial statements. 19 20 INVIVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended June 30, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ Sales $ 54,279,100 52,749,900 48,858,000 Cost of goods sold 27,847,000 27,005,100 24,368,000 ------------ ------------ ------------ Gross profit 26,432,100 25,744,800 24,490,000 ------------ ------------ ------------ Operating expenses: Selling, general, and administrative 18,601,000 16,582,800 15,622,800 Research and experimental 3,305,000 3,027,700 3,007,300 ------------ ------------ ------------ Total operating expenses 21,906,000 19,610,500 18,630,100 ------------ ------------ ------------ Income from operations 4,526,100 6,134,300 5,859,900 Other income (expense): Interest expense (114,700) (137,000) (255,500) Other, net 861,400 1,225,200 102,700 Loss on sale of G.C. Industries (600,500) -- -- ------------ ------------ ------------ Income before income taxes 4,672,300 7,222,500 5,707,100 Income tax expense 1,618,200 2,255,600 1,889,200 ------------ ------------ ------------ Net income $ 3,054,100 4,966,900 3,817,900 ============ ============ ============ Basic net income per common share $ .69 1.15 1.07 ============ ============ ============ Weighted-average common shares outstanding (basic) 4,402,760 4,328,897 3,552,148 ============ ============ ============ Diluted net income per common share $ .68 1.10 1.00 ============ ============ ============ Weighted-average common shares and common share equivalents outstanding (diluted) 4,476,014 4,497,490 3,831,260 ============ ============ ============
See accompanying notes to consolidated financial statements. 20 21 INVIVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended June 30, 2001, 2000 and 1999
ACCUMULATED COMMON STOCK ADDITIONAL OTHER -------------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS LOSS INCOME ----------- ----------- ----------- ----------- ----------- ----------- Balances as of June 30, 1998 3,269,418 $ 32,700 12,878,600 5,257,000 -- Issuance of common stock: Stock offering, net of offering costs totaling $1,376,723 900,000 9,000 11,898,300 -- -- Acquisition of Invivo Research Inc. 82,256 800 1,047,000 -- -- Exercise of stock options 28,900 300 161,800 -- -- Tax benefit from exercise of options -- -- 90,900 -- -- Net income -- -- -- 3,817,900 -- 3,817,900 Unrealized loss on short-term investments -- -- -- -- (27,800) (27,800) ----------- ----------- ----------- ----------- ----------- ----------- Balances as of June 30, 1999 4,280,574 42,800 26,076,600 9,074,900 (27,800) $ 3,790,100 =========== Exercise of stock options 82,425 800 178,900 -- -- Tax benefit from exercise of options -- -- 1,800 -- -- Net income -- -- -- 4,966,900 -- 4,966,900 Unrealized gain on short-term investments -- -- -- -- 1,600 1,600 ----------- ----------- ----------- ----------- ----------- ----------- Balances as of June 30, 2000 4,362,999 43,600 26,257,300 14,041,800 (26,200) $ 4,968,500 =========== Exercise of stock options 60,250 600 183,200 -- -- Tax benefit from exercise of options -- -- 141,000 -- -- Net income -- -- -- 3,054,100 -- 3,054,100 Unrealized gain on short-term investments -- -- -- -- 26,200 26,200 Foreign currency translation adjustment -- -- -- -- (13,000) (13,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances as of June 30, 2001 4,423,249 $ 44,200 26,581,500 17,095,900 (13,000) $ 3,067,300 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 21 22 INVIVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 2001, 2000 and 1999
2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 3,054,100 4,966,900 3,817,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,465,400 1,248,500 888,800 Loss on sale of property and equipment -- -- 46,100 Loss on sale of G.C. Industries 600,500 -- -- Write-off of note receivable 203,600 -- -- Deferred income taxes 491,400 (135,900) (107,000) Tax benefit from exercise of stock options 141,000 1,800 90,900 Changes in operating assets and liabilities: Trade receivables (1,098,300) (2,482,800) (1,896,800) Inventories (934,100) (1,954,800) (894,800) Prepaid expenses and other current assets (58,300) 170,600 (126,400) Accrued expenses 88,400 (193,200) 894,600 Accounts payable (458,400) (189,200) (224,300) Income taxes payable (1,200,200) 280,700 (366,700) Other current liabilities 12,000 -- -- ----------- ----------- ----------- Net cash provided by operating activities 2,307,100 1,712,600 2,122,300 ----------- ----------- ----------- Cash flows from investing activities: (Purchase) sale of short-term investments, net (2,247,500) 1,403,100 (8,246,900) Capital expenditures (1,459,700) (2,101,300) (1,120,200) Asset acquisition (482,000) -- -- Sale of G.C. Industries 664,000 -- -- Intangible assets -- -- (2,096,300) Other assets 90,300 (300,700) 32,800 ----------- ----------- ----------- Net cash used in investing activities (3,434,900) (998,900) (11,430,600) ----------- ----------- ----------- Cash flows from financing activities: Issuances of common stock, net of offering costs 183,800 179,600 12,070,200 Bank borrowings (repayments), net 1,541,000 -- (3,087,200) Payments under long-term debt and capital leases (1,286,800) (131,300) (21,000) ----------- ----------- ----------- Net cash provided by financing activities 438,000 48,300 8,962,000 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (689,800) 762,000 (346,300) Cash and cash equivalents at beginning of year 969,800 207,800 554,100 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 280,000 969,800 207,800 =========== =========== ===========
See accompanying notes to consolidated financial statements. 22 23 INVIVO CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001 and 2000 (1) SIGNIFICANT ACCOUNTING POLICIES (a) BUSINESS AND SEGMENT INFORMATION Invivo Corporation and subsidiaries (the Company) are engaged in two business segments: patient safety monitoring and safety and industrial instrumentation. The patient safety monitoring segment designs, manufactures, and markets monitoring systems that measure and display vital signs of patients in medical settings. The safety and industrial instrumentation segment designs, manufactures, and markets sensor-based instruments for safety and industrial process control applications. (b) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (d) SHORT-TERM INVESTMENTS The Company classifies all of its short-term investments as available-for-sale securities. Such short-term investments consist primarily of federal agency securities and money market funds, with unrealized gains and losses on the securities reflected as other comprehensive income in stockholders' equity. Realized gains and losses on short-term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company's intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available-for-sale and are classified as current assets. The Company derives the fair value of its short-term investments based on quoted market prices. (e) INVENTORIES Inventories are stated at the lower of cost or market on a first-in, first-out basis. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets as follows: Buildings 30 years Equipment 3 to 5 years Furniture and fixtures 3 to 5 years Leasehold improvements Shorter of life of lease or 5 years Automotive 5 years
23 24 (g) INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. (h) INTANGIBLE ASSETS Intangible assets include patents and the cost in excess of amounts otherwise assigned to net assets of businesses acquired (goodwill). Patents are amortized on a straight-line basis over their approximate useful lives, not to exceed 17 years. Goodwill is amortized on a straight-line basis over 40 years. The Company assesses the recoverability of goodwill by projecting results of operations over the remaining useful lives of the businesses acquired. Accumulated amortization as of June 30, 2001 and 2000 was approximately $1,240,000 and $1,319,800, respectively. Amortization expense was approximately $254,400, $260,700 and $191,700 for 2001, 2000 and 1999, respectively. (i) REVENUE RECOGNITION The Company recognizes revenue and all related costs upon shipment of products to its customers. The Company does not as a matter of contract provide its customers the right of return. However, under certain circumstances the Company has allowed the return of product. Based on experience and other information available to the Company, the Company believes the amount of future returns can be reasonably estimated. An allowance for sales returns is reflected as a current liability with sales revenue in the income statement reduced to reflect estimated sales returns. (j) NET INCOME PER SHARE Basic net income per share is computed using the weighted- average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted- average number of common and dilutive common shares outstanding during the period. Dilutive potential common shares consist of employee stock options. (k) WARRANTIES Product warranties providing for the repair or replacement of defective products are included in the sale price of the Company's products. The typical warranty period is one year. Warranty obligations are accrued as a current liability for the estimated amount of warranty expense expected in future accounting periods based on experience and other information available to the Company. (l) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The Company has identified no long-lived assets or identifiable intangibles which are considered impaired. (n) FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values because of their short maturities. (o) RESEARCH AND EXPERIMENTAL COSTS Research and experimental costs related to the design, development and testing of new monitors, applications and technologies are charged to expense as incurred. (p) ACCOUNTING FOR STOCK OPTIONS 24 25 The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded only if the current market price of the underlying stock exceeded the exercise price on the date of grant. The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which allows entities to continue to apply provisions of APB Opinion No. 25 and provide pro forma net income and pro forma net income per share disclosures for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. (q) RECLASSIFICATIONS Certain reclassifications have been made in the prior years' financial statements to conform to classifications used in the current year. These reclassifications had no effect on reported earnings. (r) NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives up to their estimated residual values, and reviewed for impairment in accordance with FAS Statement No. 121. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. Statement 142 must be adopted in fiscal years beginning after December 15, 2001. Early adoption is permitted before the issuance of the Company's first quarter's financial statements. The Company has not yet determined the impact these standards will have on its results of operations and financial position. (2) SHORT-TERM INVESTMENTS Short-term investments consist of the following:
UNREALIZED HOLDING COST (LOSSES) GAINS FAIR VALUE ----------- ----------- ----------- As of June 30, 2001: Money market funds $ 9,091,300 -- 9,091,300 =========== =========== =========== As of June 30, 2000: Federal agency securities $ 4,000,000 (26,200) 3,973,800 Money market funds 2,843,800 -- 2,843,800 ----------- ----------- ----------- $ 6,843,800 (26,200) 6,817,600 =========== =========== ===========
(3) INVENTORIES A summary of inventories as of June 30 follows:
2001 2000 ----------- ---------- Raw materials $ 5,847,600 5,051,700 Work in process 4,210,600 3,814,300 Finished goods 1,190,900 1,266,000 ----------- ----------- $11,249,100 10,132,000 =========== ===========
25 26 (4) PROPERTY AND EQUIPMENT A summary of property and equipment as of June 30 follows:
2001 2000 ------------ ------------ Land and building $ 2,648,500 2,325,400 Equipment 8,106,600 7,706,400 Furniture and fixtures 1,939,100 1,027,600 Vehicles 110,400 130,400 Leased improvements 331,200 143,300 ------------ ------------ 13,135,800 11,333,100 Less accumulated depreciation and amortization (6,737,800) (5,193,500) ------------ ------------ $ 6,398,000 6,139,600 ============ ============
Included in property and equipment as of June 30, 2001 is $208,200 of equipment under capital lease. Accumulated amortization related to this equipment was $89,500 as of June 30, 2001. (5) BORROWINGS A summary of debt and bank borrowings as of June 30 follows:
2001 2000 ----------- ----------- Term loan payable in monthly installments of approximately $9,400, including interest at LIBOR plus 2% (5.95% at June 30, 2001); secured by land and building $ 1,679,600 1,375,300 Less current portion (113,300) (104,400) ----------- ----------- $ 1,566,300 1,270,900 =========== ===========
The aggregate maturities of long-term debt as of June 30, 2001 are as follows: Year ending June 30: 2002 $ 113,300 2003 113,300 2004 113,300 2005 113,300 2006 113,300 Thereafter 1,113,100 ---------- $1,679,600 ==========
During fiscal year 2001, the Company refinanced its term loan and increased the amount to $1,700,000. The additional funds were used for expansion of its building. During fiscal year 2001, the Company renewed its bank line of credit from December 1, 2000 to December 1, 2001. The revolving line of credit requires the Company to maintain a minimum tangible net worth, a maximum ratio of total liabilities to tangible net worth, a minimum working capital balance, and quarterly and annual profitability, and prohibits the Company from paying dividends. As of June 30, 2001, $1,000,000 was available under the line of credit. 26 27 (6) ACCRUED EXPENSES A summary of accrued expenses as of June 30 follows:
2001 2000 ---------- --------- Accrued compensation and benefits $2,084,100 1,981,800 Other 1,578,800 1,399,300 ---------- ---------- $3,662,900 3,381,100 ========== ==========
(7) LEASE COMMITMENTS The Company leases certain facilities and equipment under capital and operating leases. The facilities' leases require the Company to pay certain executory costs such as taxes, insurance, and maintenance. Rent expense related to operating leases was approximately $498,000, $566,200 and $440,000 for the years ended June 30, 2001, 2000 and 1999, respectively. A summary of future minimum lease payments required under noncancelable leases with terms in excess of one year, net of sublease rental income, as of June 30, 2001 follows:
CAPITAL OPERATING LEASES LEASES ----------- ---------- Fiscal year ending June 30: 2002 $ 49,800 635,300 2003 49,800 646,400 2004 37,500 654,800 2005 -- 664,800 2006 -- 535,900 Thereafter -- 262,900 ----------- ---------- 137,100 $3,400,100 ========== Less amount representing interest (14,900) ----------- Present value of future minimum lease payments 122,200 Less current portion (41,400) ----------- Capital lease obligations, excluding current portion $ 80,800 ===========
(8) OTHER INCOME AND EXPENSE A summary of other, net as of June 30 follows:
2001 2000 1999 -------- --------- ------- Interest Income $435,200 388,800 148,800 Gain on Sale of Securities -- 834,000 -- Settlement of lawsuit 450,000 -- -- Other (23,800) 2,400 (46,100) -------- --------- ------- $861,400 1,225,200 102,700 ======== ========= =======
27 28 (9) INCOME TAXES A summary of the components of income tax expense (benefit) for the years ended June 30 is as follows:
CURRENT DEFERRED TOTAL ----------- ----------- ----------- 2001: Federal $ 1,008,400 464,600 1,473,000 State 118,400 26,800 145,200 ----------- ----------- ----------- $ 1,126,800 491,400 1,618,200 =========== =========== =========== 2000: Federal $ 2,109,900 (202,900) 1,907,000 State 281,600 67,000 348,600 ----------- ----------- ----------- $ 2,391,500 (135,900) 2,255,600 =========== =========== =========== 1999: Federal $ 1,718,200 (82,700) 1,635,500 State 278,000 (24,300) 253,700 ----------- ----------- ----------- $ 1,996,200 (107,000) 1,889,200 =========== =========== ===========
The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30 are as follows:
2001 2000 ----------- ----------- Deferred tax assets: Reserves and other accruals $ 1,013,300 1,343,000 Capital loss carryover -- 199,400 ----------- ----------- Gross deferred tax assets 1,013,300 1,542,400 Valuation allowance -- (199,400) ----------- ----------- Total deferred tax assets, less valuation allowance 1,013,300 1,343,000 =========== =========== Deferred tax liabilities: Tax depreciation in excess of book depreciation (276,300) (58,000) State taxes (3,400) (60,000) ----------- ----------- Total deferred tax liabilities (279,700) (118,000) ----------- ----------- Net deferred tax asset $ 733,600 1,225,000 =========== ===========
The valuation allowance decreased by $199,400 for the year ended June 30, 2001 due to the utilization and expiration of capital loss carryforwards. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax asset, or that the amounts will be recovered from previously paid taxes. 28 29 The following summarizes the differences between the income tax expense and the amount computed by applying the 34% federal statutory corporate rate to income before income taxes as follows:
2001 2000 1999 ----------- ----------- ----------- Federal income tax at statutory rate $ 1,588,600 2,455,700 1,940,000 State income taxes 95,800 230,100 183,000 Utilization of research, experimental, and other credits (136,300) (103,200) (67,000) Benefit of foreign sales corporation (132,400) (201,100) (257,000) Non-deductible goodwill 342,300 88,100 -- Meals and entertainment 65,900 70,500 91,600 Decrease in valuation allowance on capital loss carryforward (173,300) -- -- Other (32,400) (50,900) (1,400) Adjustment of prior year's taxes -- (233,600) -- ----------- ----------- ----------- $ 1,618,200 2,255,600 1,889,200 =========== =========== ===========
(10) STOCK OPTION PLAN The Company has established stock option plans to provide for the granting of stock options to employees (including officers and directors) at prices not less than the fair market value of the Company's common stock at the date of grant. Options vest ratably over four years and expire in ten years. The Company has reserved 314,400 and 800,000 shares of its common stock for issuance under the 1986 and 1994 plans, respectively. During 2001, the Company granted 55,600 options to purchase shares of common stock. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for the plans under the fair-value method. The fair value of options issued under the plans was determined at the date of grant using a Black-Scholes option pricing model with the following assumptions: no dividend yield; volatility factor of the expected market price of the Company's stock of 68%; a forfeiture rate of 5%; a weighted-average expected life of options of five years; and a risk-free interest rate of 5.31%, 6.20% and 5.00% for 2001, 2000 and 1999, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and net income per common share would approximate the following:
2001 2000 1999 ------------- --------- --------- Net income As reported $ 3,054,100 4,966,900 3,817,900 Pro forma 2,098,168 4,140,257 3,147,118 Basic net income per share As reported .69 1.15 1.07 Pro forma .48 .96 0.89 Diluted net income per share As reported .68 1.10 1.00 Pro forma .47 .92 0.82
Pro forma net income reflects only options granted from 1996 through 2001. Therefore, the full impact of calculating compensation cost for the Company's plan under SFAS No. 123 is not reflected in the option's vesting period and compensation costs for options granted prior to July 1, 1995 are not considered. 29 30 A summary of stock option activity for the years ended June 30, 2001 and 2000 follows:
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- EXERCISE PRICE AVERAGE AVERAGE OPTIONS OF OPTIONS EXERCISE GRANT DATE EXERCISABLE EXERCISABLE AT OPTIONS PRICE FAIR VALUE AT YEAR END YEAR END ------- -------- -------- -------- -------- June 30, 1998 615,975 $ 7.77 328,401 $ 5.51 Granted 183,000 12.15 7.58 Exercised (28,900) 5.60 Canceled (6,250) 8.90 ------- -------- June 30, 1999 763,825 $ 8.89 426,575 $ 6.96 Granted 186,850 10.03 6.32 Exercised (82,425) 2.18 Canceled (19,575) 11.25 ------- -------- June 30, 2000 848,675 6.94 466,575 8.83 Granted 55,600 8.81 5.37 Exercised (60,250) 3.05 Canceled (32,350) 11.25 ------- -------- June 30, 2001 811,675 10.11 574,150 9.99 =======
WEIGHTED- NUMBER NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED- OUTSTANDING AS REMAINING AVERAGE AS OF AVERAGE RANGE OF EXERCISE OF JUNE 30, CONTRACTUAL EXERCISE JUNE 30, EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE --------------- ---------- ----------- ----------- ----------- ----------- $ 2.00 - 5.130 39,200 1.54 $ 4.62 39,200 $ 4.62 7.00 - 9.875 323,575 7.44 8.87 182,300 8.44 10.00 - 16.130 448,900 6.41 11.49 352,650 11.38 ---------- ----------- 811,675 574,150 ========== ===========
(11) SALARY DEFERRAL PLAN The Company's executive officers, together with all other eligible employees, may participate in the Company's 401(k) Salary Deferral Plan (the Plan). Employees become eligible upon completion of six months of service. Each eligible employee receives a retirement benefit based upon accumulated contributions to the Plan by the employee and the Company plus any earnings on such contributions. The Company contributes an amount equal to 35% of the first 4% of compensation which the employee contributes. The Plan currently provides that participants vest 25% each year over a four-year period. Company contributions to the Plan for the plan years ended December 31, 2000 and 1999 were $120,400 and $84,800, respectively. (12) LEGAL PROCEEDINGS The Company's medical device subsidiary, Invivo Research, was one of two third-party defendants named in a lawsuit in June of 1994 by Southern Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court. The underlying action in this matter stemmed from an incident involving a surgical patient undergoing a procedure at the Southern Nevada Surgical Center. The patient suffered a serious permanent brain injury. A lawsuit was filed on behalf of the patient against the surgical center and the anesthesiologist who monitored the patient. The defendants in that action made a substantial settlement to the patient. Southern Nevada Surgical Center ("SNSC") and Surgex were seeking indemnity and contribution of approximately $14 million from the manufacturer of the anesthetic gas machine and Invivo Research, which manufactured the vital signs monitor used in this procedure. SNSC and Surgex alleged that both the anesthetic gas machine and the vital signs monitor were defective. The Company believes that the vital signs monitor operated properly and was properly designed for its intended function. On August 18, 1999, the Nevada District Court granted the Company's Motion to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and Surgex contribution claims, without prejudice, based upon Nevada law that provides that an action must be brought to trial within five years of the date of the filing of the original action. The dismissal is being appealed. In April of 1997, the plaintiff's insurer, CNA, filed an action with identical causes in the same Nevada State Court. This second action was removed by the Company to U.S. District Court. The action by CNA was dismissed by the District Court on January 19, 2000 as the District Court found CNA did not have standing as the real party of interest. CNA appealed the decision to the Ninth Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the dismissal and remanded the case back to Federal District Court on July 30, 2001. The Company has appealed this decision and requested a decision from the full panel of the Ninth Circuit. The Company intends to vigorously defend itself in these proceedings. Any judgment against the Company that exceeds the amount that its insurer is required to pay could have a material adverse effect on its business and results of operations. (13) MAJOR CUSTOMERS AND CREDIT RISK In fiscal 2001, 2000 and 1999, no individual customer accounted for greater than 10% of the Company's revenues or trade accounts receivable. The Company has a customer base that is diverse geographically and by industry. Customer credit evaluations are performed on an ongoing basis, and collateral is generally not required for trade accounts receivable. Management does not believe the Company has any significant concentration of credit risk as of June 30, 2001. (14) NET INCOME PER COMMON SHARE The following table presents the calculation for basic and diluted net income per common share.
FOR THE FISCAL YEAR ENDED JUNE 30, --------------------------------------------------- 2001 2000 1999 --------- --------- --------- BASIC: Weighted average common Shares outstanding 4,402,760 4,328,897 3,552,148 ========= ========= ========= Net Income 3,054,100 4,966,900 3,817,900 ========= ========= ========= Basic net income per common share .69 1.15 1.07 ========= ========= ========= DILUTED: Weighted average common Shares outstanding (basic) 4,402,760 4,328,897 3,552,148 Dilutive stock options 73,254 168,593 279,112 --------- --------- --------- Weighted average common Shares outstanding (diluted) 4,476,014 4,497,490 3,831,260 ========= ========= ========= Net Income 3,054,100 4,966,900 3,817,900 ========= ========= ========= Diluted net income per common share $ .68 $ 1.10 $ 1.00 ========= ========= =========
30 31 (15) SEGMENT INFORMATION The Company's chief operating decision-maker is considered to be the chief executive officer (CEO). The CEO reviews financial information presented on a consolidated basis accompanied by information by business segment. The Company operates in two business segments: (i) patient safety monitoring, which designs, manufactures, and markets monitoring systems that measure and display vital signs of patients in medical settings; and (ii) safety and industrial instrumentation, which is engaged in the design, manufacture, and marketing of sensor-based instruments for safety and industrial process control applications. These segments are managed separately because of different customers and products which require different business strategies. The Company evaluates the operating performance of its segments based on net sales and income from operations. Summarized financial information concerning the Company's business segments is shown in the following table. The "Corporate" column includes general and administrative and corporate-related expenses not allocated to reportable segments (in thousands).
PATIENT SAFETY AND SAFETY INDUSTRIAL MONITORING INSTRUMENTATION CORPORATE(1) TOTAL ---------- --------------- ------------ ------ For the year ended June 30, 2001: Net sales $35,503 18,776 -- 54,279 Income from operations 3,970 2,370 (1,814) 4,526 Depreciation and amortization 952 464 49 1,465 Total assets 29,026 12,733 10,252 52,011
PATIENT SAFETY AND SAFETY INDUSTRIAL MONITORING INSTRUMENTATION CORPORATE(1) TOTAL ---------- --------------- ------------ ------ For the year ended June 30, 2000: Net sales $32,966 19,784 -- 52,750 Income from operations 4,512 3,208 (1,586) 6,134 Depreciation and amortization 943 259 48 1,250 Total assets 29,135 10,803 9,538 49,476
PATIENT SAFETY AND SAFETY INDUSTRIAL MONITORING INSTRUMENTATION CORPORATE(1) TOTAL ---------- --------------- ------------ ------ For the year ended June 30, 1999: Net sales $30,173 18,685 -- 48,858 Income from operations 4,001 3,266 (1,407) 5,860 Depreciation and amortization 548 322 19 889 Total assets 24,836 9,282 10,523 44,641
(1) Includes costs not identifiable to a particular segment, such as general and administrative expenses. A reconciliation of income from operations to income before income taxes for the year ended June 30 follows:
2001 2000 1999 ------ ----- ----- Income from operations $4,526 6,134 5,860 Other income (expense) 146 1,089 (153) ------ ----- ----- Income before income taxes 4,672 7,223 5,707 ====== ===== =====
31 32 The Company markets its products in the United States and in foreign countries through its sales personnel and distributors. Export sales account for a portion of the Company's net revenue and are approximately summarized by geographic area as follows (in thousands):
YEAR ENDED JUNE 30, --------------------------------- 2001 2000 1999 ------- ------- ------- United States $42,700 41,400 37,700 Export: Europe 6,500 5,800 5,800 Pacific Rim 3,500 4,600 2,900 Other International 1,600 1,000 2,500 ------- ------- ------- Total net sales $54,300 52,800 48,900 ======= ======= =======
(16) SUPPLEMENTAL CASH FLOW INFORMATION Noncash investing and financing activities and supplemental cash flow information are summarized as follows:
YEAR ENDED JUNE 30, ------------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Equipment acquired under capital lease $ -- -- 208,200 Common stock issued in connection with the acquisition of Invivo Research Inc. -- -- 1,047,800 Cash paid: Income taxes 2,186,000 2,109,000 2,272,000 Interest 114,700 137,000 255,500
32 33 SELECTED QUARTERLY FINANCIAL DATA (NOT COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS):
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1ST QTR 2ND QTR 3RD QTR 4TH QTR ------- ------- ------- ------- FISCAL YEAR 2001 Sales .................................. $12,673 13,034 13,801 14,771 Gross Profit ........................... 6,252 6,332 6,712 7,166 Net Income ............................. 845 881 485 844 Net Income per common share (basic) .... 0.19 0.20 0.11 0.19 Net Income per common share (diluted) .. 0.19 0.20 0.11 0.19 FISCAL YEAR 2000 Sales .................................. $12,864 13,028 13,232 13,626 Gross Profit ........................... 6,458 6,177 6,378 6,732 Net Income ............................. 1,158 1,211 1,163 1,435 Net Income per common share (basic) .... 0.27 0.28 0.27 0.33 Net Income per common share (diluted) .. 0.26 0.27 0.26 0.32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. The information required is incorporated by reference from the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Stockholders. ITEM 11. The information required is incorporated by reference from the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Stockholders. ITEM 12. The information required is incorporated by reference from the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Stockholders. ITEM 13. The information required is incorporated by reference from the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Stockholders. 33 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K EXHIBIT INDEX
NUMBER DESCRIPTION OF DOCUMENT PAGE ------ ----------------------- ---- 3.01 Restated Certificate of Incorporation of the Registrant(1) ........... 3.02 Restated By-Laws of the Registrant(2) ................................ 4.01 Form of Common Stock Certificate(2) .................................. 10.01 Sensor Control Corporation 1986 Incentive Stock Option Plan and 1986 Non-statutory Stock Option Plan, as amended(3) .................. 10.02 Indemnity Agreement(2) ............................................... 10.03 SafetyTek 1994 Stock Option Plan(4) .................................. 10.04 Credit Agreement between Wells Fargo Bank and Invivo Corp. dated October 6, 1998(5) ................................................... 10.05 First Amendment to Credit Agreement between Invivo Corp. and Wells Fargo Bank dated November 1, 1998(5) ................................. 10.06 Stock Option Agreement with Walden Management Corporation Pension Fund for the Benefit of George S. Sarlo (1) .......................... 10.07 Second Amendment to Credit Agreement between Invivo Corp. and Wells Fargo Bank dated December 1, 1999 (6) ................................ 10.08 Third Amendment to Credit Agreement between Invivo Corp. and Wells Fargo Bank dated May 15, 2000 (7) .................................... 10.09 First Amendment to Lease between Miramar Flexspace Ltd. and Invivo Corporation dated June 12, 2000 (7) .................................. 10.10 Lease between Sierra Precision and Capellino/Galleano dated June 7, 2000 (7) ............................................................. 10.11 First Amendment to Lease between Sierra Precision and Capellino/Galleano dated July 12, 2000 (7) ........................... 10.12 Fourth Amendment to Credit Agreement between Invivo Corp. and Wells Fargo Bank dated December 1, 2000 (8) ................................ 10.13 First Amendment to Lease between Principal Life insurance Company and Invivo Corporation dated February 26, 2001 (9) ................... 10.14 Lease between Arcadia Management Services and Invivo Corporation dated November 29, 2000 (9) .......................................... 10.15 Note and Mortgage Modification Agreement and Notice of Future Advance between Suntrust Bank and Invivo Research Inc. dated May 30, 2001** ........................................................... 21.01 Subsidiaries of Registrant** ......................................... 23.01 Consent of KPMG LLP** ................................................
** Filed herewith (1) Incorporated by reference to corresponding Exhibit included with Registrant's Registration Statement on Form S-2 filed on March 9, 1999. (File No. 333-72071) 34 35 (2) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-K filed September 28, 1990. (File No. 0-15963) (3) Incorporated by reference to corresponding Exhibit included with Registrant's Form 8-K filed January 28, 1991. (File No. 0-15963) (4) Incorporated by reference to corresponding Exhibit included with Registrant's Form S-8 filed January 27, 1995. (File No. 33-88798) (5) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-Q filed November 12, 1998. (File No. 0-15963) (6) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-Q filed February 14, 2000. (File No. 0-15963) (7) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-K filed September 26, 2000. (File No. 0-15963) (8) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-Q filed February 14, 2001. (File No. 0-15963) (9) Incorporated by reference to corresponding Exhibit included with Registrant's Form 10-Q filed April 15, 2001. (File No. 0-15963) 35 36 (B) FINANCIAL STATEMENT SCHEDULES Invivo Corporation and Subsidiaries Schedule II Valuation and Qualifying Accounts Years ended June 30, 2001, 2000 and 1999
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR ------- ------- ------- ------- Allowance for doubtful accounts Fiscal 2001 ............. 533,900 232,000 258,800 507,100 Fiscal 2000 ............. 280,600 502,400 249,100 533,900 Fiscal 1999 ............. 288,300 23,400 31,100 280,600 Warranty Reserve Fiscal 2001 ............. 396,200 448,100 428,900 415,400 Fiscal 2000 ............. 308,200 330,800 242,800 396,200 Fiscal 1999 ............. 227,000 282,600 201,400 308,200
(1) Deductions as a result of write-offs (C) REPORTS ON FORM 8-K The Company was not required to file any reports on Form 8-K for the quarter ended June 30, 2001. 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Invivo Corporation /S/ JOHN F. GLENN John F. Glenn Vice President-Finance\ Chief Financial Officer September 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ ERNEST C. GOGGIO ----------------------------- Ernest C. Goggio Chairman of the Board September 28, 2001 /S/ JAMES B. HAWKINS ----------------------------- James B. Hawkins President, Chief September 28, 2001 Executive Officer, Director (principal executive officer) /S/ JOHN F. GLENN ----------------------------- John F. Glenn Chief Financial Officer September 28, 2001 (principal financial and accounting officer) /S/ LAUREEN DEBUONO ----------------------------- Laureen DeBuono Director September 28, 2001 /S/ GEORGE S. SARLO ----------------------------- George S. Sarlo Director September 28, 2001
37 EX-10.15 3 f75943ex10-15.txt EXHIBIT 10.15 1 EXHIBIT 10.15 NOTE AND MORTGAGE MODIFICATION AGREEMENT AND NOTICE OF FUTURE ADVANCE THIS NOTE AND MORTGAGE MODIFICATION AGREEMENT AND NOTICE OF FUTURE ADVANCE (hereinafter "Agreement") dated as of the 30 this day of May, 2001, by and between INVIVO RESEARCH, INC., an Oklahoma corporation (hereinafter the "Mortgagor") and SUNTRUST BANK, a bank organized under the laws of the State of Georgia (hereinafter the "Mortgagee"). W I T N E S S E T H: WHEREAS, Mortgagor executed and delivered unto First Union National Bank of Florida ("First Union") that certain real estate balloon promissory note dated October 8 1992, in the original principal amount of Eight Hundred Sixty Two Thousand Five Hundred and No/100 Dollars ($862,500.00) (hereinafter the "Note"), which Note is secured by that certain mortgage dated October 8, 1992, and recorded October 12, 1992, in Official Records Book 4472, Page 4201, Public Records of Orange County, Florida (as modified, the "Mortgage") for the purpose of creating a lien on the real property more particularly described therein (hereinafter referred to as "Property"). WHEREAS, the Mortgage secured payment of the Note and certain other obligations more particularly described in the Mortgage; and WHEREAS, on October 8, 1992, Mortgagor also executed and delivered to First Union an Assignment of Leases and Rentals recorded October 12, 1992 in Official Records Book 4472, Page 4226 (the "First Assignment") and a Uniform Commercial Code Financing Statement recorded October 12, 1992 in Official Records Book 4472, Page 4241, Public Records of Orange County, Florida; and WHEREAS, on January 21, 1993 Mortgagor executed that certain Modification of Note and Mortgage recorded March 12, 1993, in Official Records Book 4535, Page 2586, Public Records of Orange County, Florida; and WHEREAS, on July 31, 1996 Mortgagor executed that certain Notice of Future Advance, Mortgage Modification and Spreading Agreement recorded August 1, 1996 in Official Records Book 5098, Page 3941, Public Records of Orange County, Florida; and WHEREAS, on July 31, 1996 Mortgagor also executed that certain Collateral Assignment of Leases, Rents and Profits recorded August 1, 1996 in Official Records Book 5098, Page 3946 (the "Second Assignment"), and a UCC-1 Financing Statement recorded August 1, 1996 in Official Records Book 5098, Page 3950, Public Records of Orange County, Florida (the "Financing Statement"); and WHEREAS, on even date herewith, First Union has assigned the Note, the Mortgage, the First and Second Assignments, the Financing Statement and certain other loan documents to Mortgagee pursuant to that that certain Assignment of Mortgage and Loan Documents recorded on even date immediately prior hereto; and WHEREAS, Mortgagor has requested the Mortgagee to make an additional advance in the principal amount of Four Hundred Twenty Thousand Five Hundred Eighty Seven and 31/100 ($420,587.31) and to amend the terms of the Note and Mortgage, and the parties have agreed to modify the terms thereof in the manner hereinafter appearing; and WHEREAS, Paragraph 1.17 of the Mortgage provides, among other things, that the Mortgagee may, pursuant to the provisions of said paragraph, make future and further advances from time to time, but that such secured indebtedness shall not exceed at any time the maximum principal amount of two times the amount of the Note, plus interest thereon, and any disbursements made for the payment of taxes, levies, or insurance, on the Property, with interest on such disbursements. 38 2 NOW, THEREFORE, in consideration of the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the Mortgagor and Mortgagee agree as follows: 1. Recitals. The above recitals are true and correct, are incorporated herein by reference and are made a part hereof for all purposes. 2. Validity of Documents. The Mortgage, the First Assignment, the Second Assignment and the Financing Statement (hereinafter referred to as the "Security Instruments"), the Note and the other loan documents, as amended on even date, are valid, in full force, and of full legal effect and are enforceable in accordance with their terms. There are no defenses, counterclaims, offsets, demands or claims which the Mortgagor has in connection with either the loan or the loan documents which could be asserted to reduce or eliminate all or any part of Mortgagor's obligations under the loan documents or which could be asserted to mitigate or excuse Mortgagor's defaults in payment or performance of the obligations, or if any, such defenses or offsets are hereby waived and released by Mortgagor. 3. Releases. Effective on even date, Mortgagor hereby releases, acquits and forever discharges First Union, Mortgagee and their parents, subsidiaries, affiliates, directors, officers, employees, attorneys, agents, servants and representatives as well as the respective heirs, personal representatives, successors and assigns or any and all of them (collectively "the Released Mortgagee Parties") from any and all claims, counterclaims, demands, debts, actions, causes of action, suits, contracts, indebtedness, agreements, obligations, accounts, defenses, offsets against the indebtedness and liabilities of any kind or character whatsoever, known or unknown, suspected or unsuspected, in contract or in tort, in law or in equity, including without limitation, such claims and defenses as fraud, mistake, duress, misrepresentation, breach of contract, negligence, breach of duty, tortious interference with advantageous relationships and usury which the Mortgagor ever had, now have or hereafter might have against the Released Mortgagee Parties, jointly or severally, for or by reason of any matter, cause or thing whatsoever occurring up to the date of execution hereof, which relates to, in whole or in part, directly or indirectly: (a) the loan; (b) the loan documents; (c) the obligations; (d) the collateral; or (e) the administration of the loan. In addition, the Mortgagor agrees not to commence, join in, prosecute or participate in any suit or other proceeding in a position which is adverse to any of the Released Mortgagee Parties arising directly or indirectly from any of the foregoing matters. 4. Current Balance. The unpaid principal balance of the Note on the date hereof is One Million Two Hundred Seventy Nine Thousand Four Hundred Twelve and 69/100 and Dollars ($1,279,412.69), and interest is paid through May 31, 2001. 5. Maturity Date. The maturity date of the Note and the Mortgage are hereby extended until June 1, 2016 (the "Maturity Date"). 6. Additional Advance. In order to evidence the further advances contemplated hereby, Mortgagor has executed and delivered to Mortgagee a Future Advance Mortgage Note ("New Note") in the amount of Four Hundred Twenty Thousand Five Hundred Eighty Seven and 31/100 ($420,587.31), of even date herewith. The New Note shall be secured by the Mortgage to the same extent as if New Note had been executed and delivered by Mortgagor to Mortgagee on the date of the Mortgage. 7. Consolidation. The Note and the New Note are hereby merged and consolidated into one loan in the amount of One Million Seven Hundred Thousand and No/100 Dollars ($1,700,000.00) (the "Consolidated Debt"), and are likewise merged and consolidated into one instrument (the "Consolidation Mortgage Note") with the terms and conditions of the Consolidation Mortgage Note prevailing. 8. Modification of the Security Instruments. The Security Instruments are hereby modified and amended to secure and encumber the Consolidated Debt, and in the event of any default in payment of principal or interest under the Consolidation Mortgage Note or in the event of any other default as set forth in the Security Instruments, the Mortgagee shall have the same right to proceed against the property encumbered and secured by the Security Instruments as if the Security Instruments had initially secured the Consolidated Debt. 9. Financial Statements. Mortgagor shall deliver the following items to Mortgagee annually within 90 days after the end of Mortgagor's fiscal year or business calendar or periodically as directed by Mortgagee: Federal Income Tax Returns and complete and current copies of financial statements of Mortgagor, including but not limited to an Income Statement, Balance Sheet and Schedule of Rents covering the operation of the Mortgaged Property. In addition Mortgagor shall deliver or cause to be delivered to Mortgagee: (i) quarterly financial statements, (ii) quarterly and annual financial statements of Invivo Corporation ("Guarantor"); 39 3 and (iii) such other information, reports or statements as Mortgagee may request in order to assess the current financial condition of Mortgagor and the Guarantor. 10. Debt Service Coverage. Mortgagor's debt service coverage ratio must remain at or above 1.25 to 1 during the term of this loan. For purposes hereof, debt service coverage shall be defined as earnings before interest, taxes, depreciation and amortization divided by the sum of (i) current maturities of long-term debt plus (ii) interest expense. This ratio shall be calculated annually based on Mortgagor's June 30 fiscal year end financial statements and shall be done on a trailing twelve month basis. 11. Minimum Tangible Net Worth. Mortgagor shall maintain a tangible net worth of at least $8,700,000.00 during the term of this loan. For purposes hereof, Tangible Net Worth shall be defined as total assets less intangible assets and total liabilities. Intangible assets include nonmaterial benefits such as goodwill, patents, copyrights and trademarks. This covenant shall be tested annually based on Mortgagor's June 30 fiscal year end financial statements. 12. Debt to Tangible Net Worth. Mortgagor shall maintain a maximum debt to tangible net worth ratio of 2.0 to 1 during the term of this loan. This covenant shall be tested annually based on Mortgagor's June 30 fiscal year end financial statements. 13. Status and Priority of Security Instruments. All of the property encumbered by the Security Instruments on the date hereof shall continue in all respects to be subject to the lien, charge and encumbrance of the Security Instruments. Nothing contained herein or done hereby shall affect the lien, charge or encumbrance of the above-mentioned documents or the priority thereof, over other liens, charges, encumbrances or conveyances. Nothing contained herein shall invalidate, impair or release any covenants, conditions, agreements or stipulations contained therein and the documents shall continue in full force and effect. 14. Hazardous Wastes. The Mortgagor expressly represents to the Mortgagee that, to the best of its knowledge the Property and the improvements thereon have not in the past been used, and are not presently being used, and will not in the future be used for the manufacture, handling, storage, transportation, or disposal of hazardous or toxic materials. The Mortgagor agrees to indemnify, defend, and hold the Mortgagee harmless from and against any loss to the Mortgagee as a result of such past, present or future use, manufacture, handling, storage, transportation or disposal of hazardous or toxic materials. The Mortgagee, at the Mortgagee's sole option, may obtain at the Mortgagor's expense a report from a reputable environmental consultant of the Mortgagee's choice as to whether the Property and the improvements have been or are presently being used for the manufacture, handling, storage, transportation, or disposal of hazardous or toxic materials. If the report indicates such past or present use, manufacturing, handling, storage, transportation or disposal, the Mortgagee may require that all violations of law with respect to hazardous or toxic materials be corrected and/or that the Mortgagor obtain all necessary environmental permits before the Mortgagee shall fund any advance under this Mortgage. 15. Change in Ownership/Sale of Assets. During the term of this Mortgage, there shall be no transfer of title without the prior written consent of Mortgagee. Mortgagor shall not transfer, sell, assign, pledge, encumber or otherwise dispose of any of Mortgagor's assets so as to materially adversely affect Mortgagor's financial condition, without the prior written consent of Mortgagee, in the Mortgagee's sole discretion. Furthermore, no shares or other ownership or equity interest in Mortgagor may be sold, assigned, transferred, pledged, encumbered or otherwise disposed of without the prior written consent of Mortgagee. 16. Default. Any default under the terms and conditions of this Agreement or of any instrument set forth herein or contemplated hereby shall be and is a default under every other instrument set forth herein or contemplated hereby. 17. Other Provisions. Except as set forth in this Agreement, all other terms, conditions, and obligations set forth in the Note, the Mortgage and the other Security Instruments shall remain in full force and effect and shall be fully complied with. 18. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provisions hereof shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity only, without invalidating the remainder of such provision or of the remaining provisions of this Agreement. 19. Headings. The headings of the paragraphs contained in this Agreement are for convenience of reference only and do not form a part hereof and in no way modify, interpret or construe the meaning of the parties hereto. 40 4 20. Governing Law. All questions with respect to the construction of this Agreement, and the rights and liabilities of the parties to this Agreement, shall be governed by the laws of the State of Florida. 21. Parties Bound. This Agreement shall inure to the benefit of, and shall be binding on, the assigns, successors in interest, personal representatives, estates, heirs, and legatees of each of the parties to this Agreement. 22. Entire Agreement; Modifications. This Agreement contains the entire agreement of the parties and supersedes any prior written or oral agreements among them concerning the subject matter of this Agreement. There are no representations, agreements, arrangements, or understandings, oral or written, between and among the parties relating to the subject matter contained in this Agreement that are not fully expressed in this Agreement. This Agreement may only be modified in writing. 23. WAIVER OF JURY TRIAL. ALL PARTIES TO THIS AGREEMENT, WHETHER MORTGAGOR OR MORTGAGEE, HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY, AFTER CAREFUL CONSIDERATION AND AN OPPORTUNITY TO SEEK LEGAL ADVISE, WAIVE THEIR RIGHTS TO HAVE A TRIAL BY JURY IN RESPECT TO ANY LITIGATION ARISING OUT OF OR IN ANY WAY CONNECTED WITH ANY OF THE PROVISIONS OF THE NOTE, THE MORTGAGE, THE INSTRUMENTS OF SECURITY OR ANY OTHER DOCUMENTS EXECUTED IN CONJUNCTION WITH THE LOAN SECURED BY THE MORTGAGE DATED OCTOBER 8, 1992 OR ANY MODIFICATIONS OR EXTENSIONS THEREOF. IN WITNESS WHEREOF, the Mortgagor has caused this Agreement to be duly executed as of the date first set forth above. Signed and sealed in the presence of: "MORTGAGOR" INVIVO RESEARCH, INC., an Oklahoma corporation --------------------------- By: Name: -------------------------------- ---------------------- Stuart Baumgarten President Name: Address: 12601 Research Parkway Orlando, Florida 32826 "MORTGAGEE" SUNTRUST BANK By: ---------------------------------- Name: Karen A. Harrington Assistant Vice President Name: Address: 200 South Orange Ave. Orlando, Florida 32801 41 EX-21.01 4 f75943ex21-01.txt EXHIBIT 21.01 1 EXHIBIT 21.01 INVIVO CORPORATION SUBSIDIARIES OF REGISTRANT Linear Laboratories Corporation Sierra Precision Lumidor Safety Corporation Invivo Research Inc. 43 EX-23.01 5 f75943ex23-01.txt EXHIBIT 23.01 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Invivo Corporation: The audits referred to in our report dated August 3, 2001 included the related consolidated financial statement schedule, Valuation and Qualifying Accounts, as of June 30, 2001, and for each of the years in the three-year period ended June 30, 2001, included in the June 30, 2001, annual report on Form 10-K of Invivo Corporation. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in the registration statement (Nos. 33-32749, 33-68831, and 33-48450) on Form S-8 of Invivo Corporation of our report dated August 3, 2001, relating to the consolidated balance sheets of Invivo Corporation and subsidiaries as of June 30, 2001, and 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2001, and the related schedule, which report appears in the June 30, 2001, annual report on Form 10-K of Invivo Corporation. San Francisco, California September 27, 2001