<PAGE>
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
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INNOVASIVE DEVICES, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3132641
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
734 Forest Street, Marlborough MA 01752
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(Address of principal executive offices)
Registrant's telephone number, including area code 508/460-8229
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N/A
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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.
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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
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Part I - Financial Information
Item 1. Financial Statements
INNOVASIVE DEVICES, INC.
Condensed Balance Sheet
(unaudited, in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
3
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INNOVASIVE DEVICES, INC.
Condensed Statement of Operations
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
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
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
INNOVASIVE DEVICES, INC.
Condensed Statement of Cash Flows
(In thousands; unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1999 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
5
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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:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------ ------
<S> <C> <C>
Raw materials $1,403 $1,880
Work-in-process 374 640
Finished goods 4,356 3,076
------ ------
Totals $6,133 $5,596
====== ======
</TABLE>
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
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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
<PAGE>
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
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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
<PAGE>
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
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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
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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
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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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,715
<SECURITIES> 7
<RECEIVABLES> 2,703
<ALLOWANCES> 156
<INVENTORY> 6,133
<CURRENT-ASSETS> 10,580
<PP&E> 4,437
<DEPRECIATION> 2,700
<TOTAL-ASSETS> 13,340
<CURRENT-LIABILITIES> 2,168
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 11,172
<TOTAL-LIABILITY-AND-EQUITY> 13,340
<SALES> 4,062
<TOTAL-REVENUES> 4,062
<CGS> 1,132
<TOTAL-COSTS> 1,132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,271)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,271)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
