-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gzip21fwtTWgC1tzdpf+aQSjQuYvjEOV9y2uSPLX8NaVrdeYTDzNF0ecKW0G72ao A+7GIJqJXhcDEmBGs7/k6w== 0000927016-99-003732.txt : 19991117 0000927016-99-003732.hdr.sgml : 19991117 ACCESSION NUMBER: 0000927016-99-003732 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVASIVE DEVICES INC CENTRAL INDEX KEY: 0001003608 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 043132641 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28492 FILM NUMBER: 99752255 BUSINESS ADDRESS: STREET 1: 734 FOREST ST CITY: MARLBOROUGH STATE: MA ZIP: 01752 BUSINESS PHONE: 5084346000 MAIL ADDRESS: STREET 1: 734 FOREST STREET CITY: MARLBOROUGH STATE: MA ZIP: 01752 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended September 30,1999 Commission file number 0-28492 - -------------------------------------------------------------------------------- INNOVASIVE DEVICES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3132641 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 734 Forest Street, Marlborough MA 01752 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code 508/460-8229 ------------ N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. (1) YES [X] NO [ ] (2) YES [ ] NO [X] The number of shares outstanding of the registrant's common stock as of November 12, 1999 was 9,274,462. INNOVASIVE DEVICES, INC. INDEX Page ---- Part I: FINANCIAL INFORMATION Item 1. Condensed Financial Statements Unaudited Condensed Balance Sheet at September 30, 1999 and December 31, 1998 3 Unaudited Condensed Statement of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 4 Unaudited Condensed Statement of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Unaudited Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submissions of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K a) Exhibits 12 b) Reports on Form 8-K 12 SIGNATURES 13 2 Part I - Financial Information Item 1. Financial Statements INNOVASIVE DEVICES, INC. Condensed Balance Sheet (unaudited, in thousands)
September 30, December 31, 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 1,715 $ 3,724 Marketable securities 7 1,043 Accounts receivable, net of allowance for doubtful accounts of $156 at September 30, 1999 and $140 at December 31, 1998 2,547 2,189 Inventories 6,133 5,596 Prepaid expenses 178 175 -------- -------- Total current assets 10,580 12,727 Fixed assets, net 1,737 2,212 Other assets, net 1,023 1,120 -------- -------- $ 13,340 $ 16,059 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 395 $ 682 Accounts payable to related party 69 60 Other current liabilities 1,704 2,103 -------- -------- Total current liabilities 2,168 2,845 Stockholders' equity: Common stock 1 1 Additional paid-in capital 55,102 54,918 Accumulated deficit (43,926) (41,655) Deferred compensation (5) (50) -------- -------- 11,172 13,214 -------- -------- $ 13,340 $ 16,059 ======== ========
The accompanying notes are an integral part of these condensed financial statements. 3 INNOVASIVE DEVICES, INC. Condensed Statement of Operations (In thousands, except per share data; unaudited)
Three months ended Nine months ended September 30, September 30, ------------------------ ------------------------- 1999 1998 1999 1998 ------- ------- -------- ------- Net sales $ 4,062 $ 2,748 $ 12,608 $ 8,261 Cost of sales 1,132 769 3,679 2,313 ------- ------- -------- ------- Gross profit 2,930 1,979 8,929 5,948 Selling, general and administrative expenses 2,789 2,708 8,866 8,179 Research and development 860 971 2,543 3,232 ------- ------- -------- ------- Loss from operations (719) (1,700) (2,480) (5,463) Interest income, net 31 104 117 423 Other income -- -- 92 -- ------- ------- -------- ------- Net loss $ (688) $(1,596) $ (2,271) $(5,040) ======= ======= ======== ======= Basic and diluted net loss per share $ (0.07) $ (0.17) $ (0.25) $ (0.55) ======= ======= ======== ======= Shares used in computing basic and diluted net loss per share 9,260 9,188 9,232 9,176 ======= ======= ======== =======
The accompanying notes are an integral part of these condensed financial statements. 4 INNOVASIVE DEVICES, INC. Condensed Statement of Cash Flows (In thousands; unaudited)
Nine months ended September 30, ------------------------ 1999 1998 ------- ------- Cash flows from operating activities Net loss $(2,271) $(5,040) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 798 723 Amortization of deferred compensation 45 339 Common Stock issued for performance of services 78 - Changes in assets and liabilities: Accounts receivable (358) (220) Inventories (537) (1,973) Prepaid expenses (3) (69) Other assets - 110 Accounts payable (287) (218) Accounts payable to related party 9 (176) Other current liabilities (399) 202 ------- ------- Net cash used for operating activities (2,925) (6,322) ------- ------- Cash flows from investing activities Purchases of fixed assets (226) (688) Purchases of marketable securities - (6,874) Redemption of marketable securities 1,036 16,189 ------- ------- Net cash provided by investing activities 810 8,627 ------- ------- Cash flows from financing activities Proceeds from issuance of common stock, net of issuance costs 106 107 ------- ------- Net (decrease) increase in cash and cash equivalents (2,009) 2,412 Cash and cash equivalents at beginning of period 3,724 2,916 ------- ------- Cash and cash equivalents at end of period $ 1,715 $ 5,328 ======= =======
The accompanying notes are an integral part of these condensed financial statements. 5 INNOVASIVE DEVICES, INC. Notes to Unaudited Condensed Financial Statements (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of Innovasive Devices, Inc. (the "Company") include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position as of September 30, 1999 and the results of its operations for the three and nine month periods ended September 30, 1999 and 1998. Results of operations for interim periods are not necessarily indicative of those to be achieved for the full year. Pursuant to accounting requirements of the Securities and Exchange Commission (the "SEC") applicable to quarterly reports on Form 10-Q, the accompanying unaudited condensed financial statements and these notes do not include all disclosures required by generally accepted accounting principles for complete financial statements. Accordingly, these statements should be read in conjunction with the financial statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the SEC on March 31, 1999. 2. INVENTORIES Inventories consist of the following:
September 30, December 31, 1999 1998 ------ ------ Raw materials $1,403 $1,880 Work-in-process 374 640 Finished goods 4,356 3,076 ------ ------ Totals $6,133 $5,596 ====== ======
3. NET LOSS PER SHARE Basic earnings per share is computed by dividing the income available to common stockholders by the weighted average number of common shares outstanding for the period. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of common shares outstanding and potential dilutive common shares outstanding for the period. For each of the periods presented, basic and diluted earnings per share are the same due to the antidilutive effect of potential common shares outstanding. Antidilutive potential common shares excluded from the 1999 and 1998 computation include 2,003,321 and 1,677,794 common shares, respectively, issuable upon the exercise of stock options. 6 4. SUBSEQUENT EVENT On November 8, 1999, Innovasive Devices, Inc. and Johnson & Johnson entered into a definitive merger agreement pursuant to which Johnson & Johnson will acquire Innovasive Devices. The transaction will be accounted for under the purchase method and is valued at approximately $85 million. Innovasive shareholders will receive $8.25 in Johnson & Johnson stock for each share of Innovasive held. The merger is subject to customary conditions, including approval by a majority of the shareholders of Innovasive Devices and Hart-Scott-Rodino clearance. The companies expect the transaction to be complete during the first quarter of 2000. 7 INNOVASIVE DEVICES, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Since its inception in 1990, the Company has been primarily engaged in the development, manufacture and marketing of proprietary devices and instrumentation which facilitate the reattachment of soft tissue structures, such as ligaments and tendons, to bones and other tissues. The Company has a limited operating history and as of September 30, 1999, had an accumulated deficit of $43.9 million. These losses have resulted principally from expenditures to fund research and development, the establishment of its manufacturing capabilities and the expansion of its marketing and sales organization. Although the Company's sales were principally derived from the sale of its family of shoulder related products, the Company now markets five product platforms: suture anchors and suturing systems used primarily in shoulder repair procedures, cartilage repair products, anterior cruciate ligament ("ACL") reconstruction products and meniscal repair products, used primarily in knee repair procedures. The Company's strategy is to continue to develop innovative products for the sports medicine/arthroscopy market and to leverage its core proprietary technology in other markets. The Company markets its products to surgeons in the United States through a network of clinically proficient employee sales representatives and independent sales agents and internationally through established distributors of orthopaedic medical devices. The following information should be read in conjunction with the unaudited condensed financial statements and notes thereto included in this Quarterly Report and with the Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 Annual Report on Form 10-K filed with the SEC on March 31, 1999. Any statements in this report expressing the beliefs and expectations of management regarding the Company's future results and performance are forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations that involve a number of risks and uncertainties. The Company wishes to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. Such forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks include the receipt of regulatory approvals, progress of product development programs, clinical efficacy of and market demand for the products. Certain of such risks and uncertainties are described in Exhibit 99 of the Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1999. 8 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998 Net sales for the third quarter of 1999 of $4,062,000 represents an increase of $1,314,000 or 48% from $2,748,000 for the same period in the prior year. The increase resulted primarily from a higher level of sales of Clearfix Meniscal repair products, ACL reconstruction products, and suture anchors. Sales of the Company's ACL reconstruction products included contributions from two recently introduced products: the IntraFix Tibial Fastener used in attaching soft tissue grafts to the tibia, and the Absolute Absorbable Interference Screw, used in ACL procedures utilizing a patellar tendon graft. Sales of suture anchors recognized a contribution from the recently introduced ConTack Labral Anchor, a bioabsorbable device used to reattach tissue in the shoulder that has been torn by traumatic injury. Suture systems experienced modest growth over the same quarter in 1998 while COR system sales experienced a slight decrease versus the same quarter last year. Gross profit increased to $2,930,000 in the third quarter of 1999 from $1,979,000 in the third quarter of 1998. As a percentage of sales, gross profit was 72.1% in the third quarter of 1999 as compared to 72.0% in the third quarter of 1998. Selling, general and administrative expenses increased to $2,789,000 in the third quarter of 1999 from $2,708,000 in the third quarter of 1998. The increase resulted primarily from higher selling commissions and royalties resulting from the higher sales volume. Research and development expenses decreased to $860,000 in the third quarter of 1999 from $971,000 in the third quarter of 1998. The decrease was primarily attributable to a non-recurrence of expenditures made in the prior year to obtain CE Mark certification required to sell certain products in the European community. Interest income decreased to $31,000 in the third quarter of 1999 from $104,000 in the third quarter of 1998 primarily as a result of investment returns earned on lower average cash balances maintained during the third quarter of 1999 as compared to the prior year. As a result of the foregoing, the net loss decreased to $688,000 in the third quarter of 1999 from a loss of $2,271,000 in the third quarter of 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Net sales for the first nine months of 1999 of $12,608,000 increased $4,347,000 or 53% from $8,261,000 for the same period in the prior year. The increase resulted primarily from a higher level of sales of all five core product families including: Clearfix Meniscal repair products, ACL reconstruction products, ROC suture anchors, suture systems and COR System cartilage repair products. Gross profit increased to $8,929,000 for the first nine months of 1999 from $5,948,000 for the first nine months of 1998. As a percentage of sales, gross profit decreased to 70.8% for the first nine months of 1999 from 72.0% for the first nine months of 1998. Gross profits were impacted by a higher percentage of sales to international distributors versus the same period in the prior year. The average selling price of products to international distributors are typically below that of domestic average selling prices. Gross margins were also affected by the higher mix of meniscal repair products and ACL reconstruction products versus the same period last year. Sales of these product families in the first nine months of 1999 included a higher percentage of procedural instruments which are primarily sold at margins below that of product implants. 9 Selling, general and administrative expenses increased to $8,866,000 for the first nine months of 1999 from $8,179,000 for the first nine months of 1998. The increase resulted primarily from higher selling commissions and royalties resulting from the higher sales volume and increased legal costs resulting from the Company's defense of a patent infringement claim. Research and development expenses decreased to $2,543,000 in the first nine months of 1999 from $3,232,000 in the first nine months of 1998. The decrease was primarily attributable to a non-cash compensation charge recognized in the second quarter of 1998 resulting from the vesting of options granted to non- employee consultants. The Company also experienced a decrease in salary costs versus the same period last year as a result of lower employment levels. Interest income decreased to $117,000 in the first nine months of 1999 from $423,000 in the first nine months of 1999 primarily as a result of investment returns earned on lower average cash balances maintained during the first nine months of 1999 compared to the prior year. Other income includes cash received from a termination agreement in which the Company waived its exclusive right to manufacture product for a third party. This manufacturing right was originally established from technology developed by the Company and subsequently licensed to the third party. As a result of the foregoing, the net loss decreased to $2,271,000 in the first nine months of 1999 from a loss of $5,040,000 in the first nine months of 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had cash, cash equivalents and marketable securities of $1.7 million as compared to a balance of $4.8 million at December 31, 1998. Working capital decreased to $8.4 million at September 30, 1999 from $9.9 million at December 31, 1998. Cash used in the Company's operations amounted to $2.9 million for the nine months ended September 30, 1999 primarily resulting from the net loss of $2.3 million. Cash used for working capital requirements of $1.5 million was partially offset by depreciation and amortization of $843,000. Cash provided by investing activities totaled $810,000 for the nine months ended September 30, 1999 resulting from net redemptions of marketable securities of $1.0 million offset by capital expenditures of $226,000. On December 31, 1998, the Company entered into a working capital line of credit with a bank that provides the Company with a maximum borrowing availability of $2.5 million, limited by certain receivable and inventory balances. Borrowings under this agreement bear interest at the prime rate of 8.00%. The line of credit expires and all outstanding amounts thereunder are due December 31, 1999. Under the line of credit, the Company is obligated to comply with certain financial covenants. Borrowings available based on certain receivable and inventory balances at September 30, 1999 amounted to $1.7 million. There were no borrowings outstanding under the line of credit at September 30, 1999. The Company expects that its balance of cash, cash equivalents, marketable securities and line of credit will be adequate to fund the next twelve months cash requirements for operations, working capital and fixed assets. The Company's long term liquidity and capital requirements will depend upon the progress of research and development programs, regulatory matters and the expansion of its manufacturing capabilities to satisfy increasing volume requirements. In addition, the Company's capital requirements will depend upon, among other factors, the timing of the establishment of effective sales channels in the United States and abroad and the extent to which the Company's products gain market acceptance resulting in increased sales sufficient to 10 generate a profit from operations. Therefore the Company cannot provide assurances that it will not require additional financing in the future. If additional financing is necessary, the Company would seek to raise these funds through bank facilities or debt or equity offerings. There can be no assurance that such funds would be available at all or on terms acceptable to the Company. On November 8, 1999, Innovasive Devices, Inc. and Johnson & Johnson entered into a definitive merger agreement pursuant to which Johnson & Johnson will acquire Innovasive Devices. The transaction will be accounted for under the purchase method and is valued at approximately $85 million. Innovasive shareholders will receive $8.25 in Johnson & Johnson stock for each share of Innovasive held. The merger is subject to customary conditions, including approval by a majority of the shareholders of Innovasive Devices and Hart-Scott-Rodino clearance. The companies expect the transaction to be complete during the first quarter of 2000. IMPACT OF THE YEAR 2000 ISSUE The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company believes that its primary business and research and development systems are Y2K compliant based on its internal evaluations and testing of these systems. The Company does not rely materially on IT related technology in its manufacturing processes and thereby does not anticipate that Y2K issues will affect its ability to manufacture finished goods. The Company has communicated with its significant suppliers through the issuance of questionnaires. Based on replies received through September 30, 1999, the Company believes that its significant suppliers have obtained Y2K compliance. However, because their systems are not directly under the Company's control, the Company is at risk that all required external Y2K compliance efforts will not be completed on a timely basis. In the event that the Company's significant suppliers do not successfully and timely achieve Y2K compliance, and the Company is unable to replace them with alternate suppliers, the Company's operations could be adversely affected. The Company does not anticipate incurring additional costs outside of the scope of its current IT budget to complete future testing and compliance activities. At this time, the Company believes that the Y2K problem will not pose significant operational problems for the Company's computer systems. Since no significant issues have arisen, the Company does not have a contingency plan to address any material Y2K issues. If significant Y2K issues arise, the Company may not be able to timely develop and implement a contingency plan and the Company's operations could be adversely affected. The disclosure in this Section is a Y2K Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act of 1998. 11 INNOVASIVE DEVICES, INC. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- On July 13, 1999, the Company was sued for patent infringement by Arthrex, Inc. in the United States District Court for the Middle District of Florida, Orlando Division. Arthrex alleges that elements of two of the Company's knee systems related to cartilage and ACL repair infringe recently issued Arthrex patents. Arthrex has filed a motion for a preliminary injunction with respect to the sale of products incorporating either patent. A hearing date for this motion has not yet been scheduled. The Company has raised several defenses and continues to evaluate its position relative to this new intellectual property. ITEM 2. CHANGES IN SECURITIES ---------------------- None ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None ITEM 5. OTHER INFORMATION ----------------- None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --------------------------------- a) Exhibits 27 Financial Data Schedule b) Reports on Form 8-K None. 12 SIGNATURES Pursuant to the requirements 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. INNOVASIVE DEVICES, INC, Date: November 13, 1999 By: /s/ Richard D. Randall ---------------------------------- Richard D. Randall President, Chief Executive Officer and Director (Principal Executive Officer) Date: November 13, 1999 By: /s/ James V. Barrile ---------------------------------- James V. Barrile Executive Vice President of Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,715 7 2,703 156 6,133 10,580 4,437 2,700 13,340 2,168 0 0 0 1 11,172 13,340 4,062 4,062 1,132 1,132 0 0 0 (2,271) 0 (2,271) 0 0 0 (2,271) (0.25) (0.25)
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