<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF X
/X/ THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------------------------
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 0-27588
------------------------------
VITALCOM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3662 33-0538926
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
15222 DEL AMO AVENUE
TUSTIN, CALIFORNIA 92680
(714) 546-0147
(Address and telephone number of principal executive offices)
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.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 31, 1996, there were 7,878,623 shares outstanding of the issuer's
common stock.
1
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VITALCOM INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $26,756,321 $ 2,163,645
Accounts receivable 4,684,294 6,399,221
Inventories 2,159,181 1,479,921
Prepaid expenses 225,459 173,097
Deferred tax assets 800,600 800,600
----------- -----------
Total current assets 34,625,855 11,016,484
Property
Machinery and equipment 957,137 864,127
Office furniture and computer equipment 1,059,942 961,138
Leasehold improvements 55,775 73,351
----------- -----------
2,072,855 1,898,616
Less accumulated amortization and depreciation (619,234) (541,922)
----------- -----------
Property, net 1,453,621 1,356,694
Other assets 70,514 268,701
Goodwill, less accumulated amortization of $132,925 and
$143,957 at December 31, 1995 and March 31, 1996 701,007 711,501
----------- -----------
$36,850,997 $13,353,380
=========== ===========
</TABLE>
2
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,208,113 $ 969,350
Current portion of long-term debt - 500,000
Income taxes payable - 312,127
Accrued payroll and related costs 980,646 1,341,040
Accrued warranty costs 626,946 602,362
Customer deposits 485,375 419,528
Accrued liabilities 342,058 615,000
Current portion of capital lease obligations 21,120 21,120
----------- -----------
Total current liabilities 3,664,258 4,780,527
Long-term debt - 1,041,667
Deferred tax liabilities 49,473 49,473
Capital lease obligations, less current portion 100,665 106,151
Commitments
Redeemable preferred stock (5,783,930 shares authorized
at December 31, 1995) $.001 par value:
Series C convertible preferred stock - 8,858,760
Series D convertible preferred stock - 1,489,726
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value;
8,700,000 shares authorized, 1,155,994 and 7,878,623 shares
issued and outstanding at December 31, 1995 and March 31, 1996 36,528,034 519,603
Accumulated deficit (3,491,433) (3,492,527)
----------- -----------
Net stockholders' equity (deficit) 33,036,601 (2,972,924)
----------- -----------
$36,850,997 $13,353,380
=========== ===========
</TABLE>
3
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
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(UNAUDITED)
<S> <C> <C>
Revenues:
Facility wide networks $2,959,973 $1,931,262
Departmental products 3,009,134 2,543,230
---------- ----------
Total revenues 5,969,107 4,474,492
Cost of sales 2,532,250 2,068,327
Gross profit 3,436,857 2,406,165
Operating expenses
Sales and marketing 2,106,225 1,180,813
Research and development 918,348 554,591
General and administration 517,763 325,879
---------- ----------
Total operating expenses 3,542,336 2,061,283
---------- ----------
Operating income (loss) (105,479) 344,882
Other income (expense), net 107,414 (31,358)
---------- ----------
Income before provision for income taxes 1,935 313,524
Provision for income taxes 841 134,784
Net income $ 1,094 $ 178,740
========== ==========
Pro forma net income per common share $ 0.00 $ 0.03
========== ==========
Pro forma weighted average common shares 7,115,598 5,394,211
</TABLE>
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities: (UNAUDITED)
Net income $ 1,094 $ 178,740
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 127,452 230,585
Deferred income taxes - (60,090)
Loss (gain) on disposal of property 7,053 (339)
Changes in operating assets and liabilities:
Accounts receivable 1,714,927 (55,367)
Inventories (679,260) (362,638)
Prepaid expenses and other current assets (52,362) 5,512
Accounts payable 238,763 74,703
Accrued payroll and related costs (360,394) (35,374)
Accrued warranty costs 24,584 (6,076)
Customer deposits 65,847 (38,577)
Income taxes payable (312,127) 10,575
Accrued liabilities (272,942) 47,152
----------- ----------
Net cash provided by operating activities 502,635 (11,194)
Cash flows from investing activities:
Purchases of property (220,937) (68,215)
Decrease in other assets 198,187 116,072
----------- ----------
Net cash provided by (used in) investing activities (22,751) 47,857
Cash flows from financing activities:
Preferred stock dividends - (154,060)
Net Repayment of long-term debt (1,547,153) (125,000)
Net proceeds from issuance of common stock 25,659,945 -
----------- ----------
Net cash provided by (used in) financing activities 24,112,792 (279,060)
Net increase (decrease) in cash and cash equivalents 24,592,676 (242,397)
Cash and cash equivalents, beginning of period 2,163,645 1,223,330
----------- ----------
Cash and cash equivalents, end of period $26,756,321 $ 980,933
=========== ==========
</TABLE>
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VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed financial statements included herein have been prepared
by the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been condensed
or omitted pursuant to such SEC rules and regulations; nevertheless, the
management of the Company believes that the disclosures herein are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's prospectus dated February 14, 1996, for
the year ended December 31, 1995 filed with the SEC in February 1996. In the
opinion of management, the condensed financial statements included herein
reflect all adjustments necessary to present fairly the financial position of
the Company as of March 31, 1996, and the results of its operations and its
cash flows for the three-month periods ended March 31, 1995 and 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. For the three-month
periods ended March 31, 1995 and 1996 weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method and the assumed conversion of all outstanding shares of preferred
stock into shares of common stock.
3. STOCK PLANS
Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") for the three months ended
March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
------------- -------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 652,723 $0.60 to $5.72 98,750
Exercised (3,000) $0.60 to $1.28
Canceled (5,462) $0.60 to $5.72
------- --------------
Balance, March 31, 1996 644,261 $0.60 to $5.72 97,000
======= ==============
</TABLE>
During the three months ended March 31, 1996, no options were granted,
exercised, or canceled under the 1996 Director Option Plan (the "Directors'
Plan"). As of March 31, 1996 there were no options outstanding under the
Directors' Plan.
New Accounting Pronouncement--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation." The Company has determined that it
will not change to the fair value method and will continue to use Accounting
Principle Board Opinion No. 25 for measurement and recognition of employee
stock based transactions.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides communication networks that acquire, interpret
and distribute real-time physiologic data generated by point-of-care patient
monitors located throughout a healthcare facility. The Company sells
facility-wide networks directly to acute care hospitals and integrated health
delivery networks (IHDNs). In addition, the Company sells certain components,
monitoring systems, clinical analysis and display software and wireless
communications components to OEM customers for use in their departmental
monitoring products.
Revenues from sales of facility-wide networks are recognized upon
shipment. The sales cycle for facility-wide networks has typically been from
nine to 18 months. The Company has experienced seasonal variations in sales of
its facility-wide networks, with sales in the first quarter being lower than
the preceding fourth quarter's sales due to customer budget cycles and sales
remaining relatively flat during the third quarter. Furthermore, a large
percentage of a particular quarter's shipments of facility-wide networks have
historically been booked in the last weeks of the quarter.
Revenues from sales of departmental products are recognized upon
shipment. The selling cycle for departmental products varies depending upon
product mix and the extent to which the Company develops customized operating
software for a particular OEM customer.
The Company's revenues have been derived increasingly from direct
sales of its facility-wide networks. The Company plans to increase
expenditures in order to fund a larger direct sales and marketing staff and
greater levels of research and development in 1996 as part of its increased
focus on sales of facility-wide networks. During 1995, the Company increased
the size of its direct sales force from nine to 18 full-time sales persons and
increased the size of its research and development staff from 26 to 34 persons.
The Company intends to continue to increase the size of its direct sales force
at approximately the same rate during 1996 and also anticipates increasing its
research and development expenditures significantly in 1996 to develop new
products and further enhancements to its facility-wide networks. Although the
Company believes that investments in such expenditures will improve long-term
financial results, operating and net income as a percentage of revenues
decreased in 1995 as compared to 1994, and operating and net income for 1996
are expected to be lower in absolute dollars and as a percentage of revenues
than achieved in 1995. If such increased direct sales efforts and research and
development do not ultimately result in an increase in revenues, there would be
a material adverse effect on the Company's long-term business, operating
results and financial condition.
In the first quarter of 1996 VitalCom Inc. expanded its facility-wide
network with the introduction and shipment of OpenNet(TM), an application that
integrates multi-parameter third-party monitoring equipment. OpenNet allows
the hospital to network existing, disparate equipment to create one integrated
system. OpenNet was introduced with initial connections to bedside patient
monitoring equipment from three leading manufacturers: Datascope Corporation,
Johnson & Johnson Medical Inc. and Protocol Systems, Inc.
To date the Company has not capitalized software development expenses.
However, the development of new products or the enhancement of existing
products may require capitalization of such expenses in the future.
Total Revenues. Total revenues consist of revenue from sales of facility-wide
networks and departmental products, together with fees for installation and
servicing of products. Total revenues for the first quarter increased to
$5,969,106 up from $4,474,492 for the same period in 1995. Revenues in the
first quarter were up 33% from the same period in 1995, reflecting a 53%
increase in VitalCom's sales of facility-wide network systems and an 18%
increase in departmental products from the comparable period a year ago.
Facility-wide networks sales represented 49.6% of the quarterly revenues
compared to 43.2% for the same quarter a year ago.
Gross Margins. Cost of goods sold generally includes material, direct labor,
overhead and, for facility-wide networks, installation expenses. Gross profit
as a percentage of revenue in the first quarter of 1996 was 57.6%, up from
53.8% in the comparable quarter a year ago. Cost of goods sold in the first
quarter of 1995 included $153,333 in amortization of developed technology that
was fully amortized by December 31, 1995; therefore the cost of goods sold for
the first quarter of 1996 is relatively lower because it included no such
amortization.
Sales and Marketing expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to direct and OEM sales and
marketing personnel, travel and entertainment expenses, and other promotional
expenses. Sales and marketing expenses of $2,106,225 were 35.3% of revenues in
the first quarter of 1996 compared to $1,180,813 or 26.4% of revenues in the
comparable period a year ago. Sales and marketing increases reflect doubling
of the size of the Company's direct sales force in 1995 as well as continued
increases in selling and marketing investments in 1996.
Research and Development expenses. Research and development expenses include
payroll and related costs attributable to research and development personnel,
prototyping expenses and other costs. Research and development expenses
increased to $918,343 or 15.4% of revenues, up from $554,591, or 12.4% of
revenues for the same period in 1995. Research and development increases are
related to the Company's strategy to increase these expenditures significantly
in 1996 to develop new products and further enhance its facility-wide networks.
The Company previously announced that it began shipping OpenNet to its hospital
customers in March 1996. The OpenNet application permits VitalCom networks to
connect to patient monitoring equipment from various manufacturers.
7
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General and Administrative expenses. General and administrative expense
includes accounting, finance, MIS, human resources, general administration,
executive officers and professional fee expenses. General and administrative
expenses were $517,763, or 8.7% of revenues, as compared to $325,879, or 7.3%
of revenues, for the same period in 1995. The increase was attributable to
professional services and costs associated with strategic staffing to
accommodate the Company's growth.
Other Income (Expense), net. Other income (expense), net consists primarily of
interest payments made in respect to outstanding indebtedness and interest
income from short term investments. Other income (expense) improved from
($31,358) for the first quarter of 1995 to $107,414 for the first quarter of
1996 due to the payoff the five-year term debt, as well as interest income
attributable to the proceeds of the initial public offering.
Effective Tax Rate. The effective rate used for the provision for taxes is
43.5%, consisting of a federal income tax rate of 33.8%, combined with a
weighted average state income tax rate of 9.7%.
LIQUIDITY AND CAPITAL RESOURCES
In February, 1996, the Company raised net proceeds of approximately
$25.7 million through an initial public offering (IPO) of 2,300,000 shares of
Common Stock at $12.50 per share.
At March 31, 1996, the Company had a revolving line of credit
agreement with a commercial bank under which it may borrow up to $1.0 million
at the bank's prime rate plus 0.5%. The agreement expires in May 1996 and is
collateralized by substantially all of the Company's assets. No borrowings
were outstanding under the agreement at March 31, 1996. At December 31, 1995
the Company had a five-year term loan of $1.5 million payable in monthly
installments through December, 1998 with interest payable at the rate of prime
plus 2.5% (through November 30, 1995) or prime plus 3% (after December 1,
1995). This loan was repaid with a portion of the proceeds of the initial
public offering in February, 1996.
In the quarter ending March 31, 1996, the Company generated $502,635
from operating activities compared to using approximately $11,000 from
operating activities in the same quarter of 1995. The Company generated cash
through collections on accounts receivable which was used in targeted inventory
procurement as well as reducing accrued liabilities.
The Company's principal commitments at March 31, 1996 consisted of a
lease on its office and manufacturing facility, and a long-term lease on its
telephone system. Both obligations combined represent a expenditure of
approximately $31,500 per month.
The Company believes that existing cash resources, including cash
flows from operations, if any, and line of credit facilities will be sufficient
to fund the Company's operations for at least the next twelve months.
The information set forth in this 10-Q contains several
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements, including statements
relating to the Company's intent to interface with additional monitoring
devices and the Company's intent to expand its sales and marketing and research
and development expenditures inherently involve risks and uncertainties. The
Company's actual results could differ materially from the results anticipated
in such forward-looking statements. See the description of factors that could
effect results included herein and the "Risk Factors" section of the Company's
Prospectus dated February 14, 1996 for a discussion of the factors that could
result in actual results differing from results currently anticipated.
Item 6. Exhibits and Reports on From 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
8
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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 on May 10, 1996.
VITALCOM INC.
/s/ DAVID L. SCHLOTTERBECK
----------------------------------
David L. Schlotterbeck
President, Chief Executive Officer
/s/ SHELLEY B. THUNEN
----------------------------------
Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 26,756,321
<SECURITIES> 0
<RECEIVABLES> 4,870,972
<ALLOWANCES> 186,678
<INVENTORY> 2,159,181
<CURRENT-ASSETS> 34,625,855
<PP&E> 2,072,855
<DEPRECIATION> 619,234
<TOTAL-ASSETS> 36,850,997
<CURRENT-LIABILITIES> 3,664,258
<BONDS> 0
0
0
<COMMON> 36,528,034
<OTHER-SE> (3,491,433)
<TOTAL-LIABILITY-AND-EQUITY> 36,850,997
<SALES> 5,969,107
<TOTAL-REVENUES> 5,969,107
<CGS> 2,532,250
<TOTAL-COSTS> 2,532,250
<OTHER-EXPENSES> 3,535,246
<LOSS-PROVISION> 7,090
<INTEREST-EXPENSE> (107,414)
<INCOME-PRETAX> 1,935
<INCOME-TAX> 841
<INCOME-CONTINUING> 1,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,094
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
