<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------------
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 92780
(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 November 4, 1997 there were 8,037,048 shares outstanding of the issuer's
common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITALCOM INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 18,227,121 $ 20,120,203
Accounts receivable, net 3,197,614 2,299,360
Inventories 2,169,283 3,191,043
Prepaid expenses 318,951 361,272
Income tax refund receivable 186,531 2,874,276
------------- -------------
Total current assets 24,099,500 28,846,154
Property
Machinery and equipment 1,416,226 1,352,898
Office furniture and computer equipment 2,047,897 1,820,607
Leasehold improvements 87,351 67,919
------------- -------------
3,551,474 3,241,424
Less accumulated amortization and depreciation (1,487,834) (976,328)
------------- -------------
Property, net 2,063,640 2,265,096
Other assets 250,664 140,101
Goodwill, net 638,043 669,525
------------- -------------
$ 27,051,847 $ 31,920,876
============= =============
</TABLE>
2
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 521,168 $ 1,085,972
Accrued payroll and related costs 1,061,615 875,344
Accrued warranty costs 927,314 951,381
Accrued marketing -- 309,377
commitments
Accrued liabilities 1,645,335 1,623,278
Current portion of capital lease obligations 21,120 21,120
------------- -------------
Total current liabilities 4,176,552 4,866,472
Capital lease obligations, less current portion 66,121 81,834
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at September 30, 1997 and December 31, 1996, respectively -- --
Stockholders' equity:
Common stock, including paid-in capital, $.0001 par value; 25,000,000
shares authorized, 8,014,396 and 7,942,688 shares
issued and outstanding at September 30, 1997
and December 31, 1996, respectively 36,941,909 36,832,936
Accumulated deficit (14,132,735) (9,860,366)
------------- -------------
Net stockholders' equity 22,809,174 26,972,570
------------- -------------
$ 27,051,847 $ 31,920,876
============= =============
</TABLE>
3
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Facility-wide networks $ 2,462,778 $ 623,400 $ 6,307,590 $ 6,826,380
Departmental products 3,260,547 2,278,854 9,018,698 8,049,884
------------ ------------ ------------ ------------
Total revenues 5,723,325 2,902,254 15,326,288 14,876,264
Cost of sales 2,947,150 1,988,072 8,230,408 7,227,662
------------ ------------ ------------ ------------
Gross profit 2,776,175 914,182 7,095,880 7,648,602
Operating expenses:
Sales and marketing 2,081,625 2,720,234 6,733,123 6,996,941
Research and development 1,195,981 1,786,880 3,485,228 3,928,257
General and administration 580,345 596,214 1,838,565 1,720,260
------------ ------------ ------------ ------------
Total operating expenses 3,857,951 5,103,328 12,056,916 12,645,458
Operating loss (1,081,776) (4,189,146) (4,961,036) (4,996,856)
Other income, net 246,597 280,152 708,557 690,524
------------ ------------ ------------ ------------
Loss before provision for income taxes (835,179) (3,908,994) (4,252,479) (4,306,332)
Provision (benefit) for income taxes 6,300 (1,700,773) 19,890 (1,873,254)
------------ ------------ ------------ ------------
Net loss $ (841,479) $ (2,208,221) $ (4,272,369) $ (2,433,078)
============ ============ ============ ============
Pro forma net loss
and net loss per common share $ (0.11) $ (0.27) $ (0.53) $ (0.32)
Weighted average common shares 8,012,814 8,090,211 7,991,115 7,681,189
</TABLE>
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<PAGE> 5
VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities: (UNAUDITED)
Net loss $ (4,272,369) $ (2,433,078)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 549,997 366,630
Loss on disposal of property 10,446 12,248
Changes in operating assets and liabilities:
Accounts receivable (898,254) 3,365,933
Inventories 1,021,760 (1,731,802)
Income taxes receivable 2,687,745 (2,379,656)
Prepaid expenses and other current assets (68,242) (85,518)
Accounts payable (564,806) (202,686)
Accrued payroll and related costs 186,271 (267,538)
Accrued warranty costs (24,067) 121,631
Customer deposits -- 40,523
Accrued marketing commitments (309,377) --
Accrued liabilities 22,057 335,062
------------ ------------
Net cash used in operating activities (1,658,839) (2,858,251)
Cash flows from investing activities:
Purchases of property (366,012) (951,653)
Proceeds from sale of property 7,027 --
Decrease in other assets 31,482 168,346
------------ ------------
Net cash used in investing activities (327,503) (783,307)
Cash flows from financing activities:
Repayment of capital lease obligation and (15,713) (1,560,705)
long-term debt
Net proceeds from issuance of common stock 108,973 25,759,964
------------ ------------
Net cash provided by financing activities 93,260 24,199,259
Net (decrease) increase in cash and cash equivalents (1,893,082) 20,557,701
Cash and cash equivalents, beginning of period 20,120,203 2,163,645
------------ ------------
Cash and cash equivalents, end of period $ 18,227,121 $ 22,721,346
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 9,833 $ 9,331
Income taxes paid $ 21,341 $ 229,665
</TABLE>
5
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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 Form 10-K/A for the year ended December 31, 1996 filed
with the SEC. In the opinion of management, the condensed financial statements
included herein reflect all normal, recurring adjustments necessary to present
fairly the financial position of the Company as of September 30, 1997, and the
results of its operations and its cash flows for the three-month and nine-month
periods ended September 30, 1996 and 1997. The results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year.
2. NET LOSS AND PROFORMA NET LOSS PER SHARE AND STOCKHOLDERS' EQUITY AND
EARNINGS (LOSS) PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding. Normally the weighted
average common and common equivalent shares for pro forma net loss per share
include common shares and stock options using the treasury stock method.
However, for the three-month and nine-month periods ended September 30, 1996 and
1997, the adjusted weighted average shares are equal to the basic weighted
average shares due to the anti-dilutive effect the conversion of options would
have given the Company's net loss for the period.
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 nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, January 1, 1997 660,224 $0.60 to $15.75
Granted 452,919 $4.75 to $5.50
Exercised (6,000) $0.60 to $1.28
Canceled (262,181) $0.60 to $6.00
------------
Balance, September 30, 1997 844,962 $0.60 to $15.75 265,863
============
</TABLE>
At September 30, 1997, 667,096 options were available for grant in the 1993
Plan.
6
<PAGE> 7
The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------------- -----------------
<S> <C> <C>
Balance, January 1, 1997 55,600 $5.50 to $6.00
Granted 35,500 $4.97
Canceled (20,400) $6.00
----------------
Balance, September 30, 1997 70,700 $4.97 to $6.00
================
</TABLE>
At September 30, 1997, 20,300 options were available for grant under the 1996
Plan and no options were exercisable.
The following is a summary of stock option transactions under the 1996 Director
Option Plan (the "Director Plan") for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------------- -----------------
<S> <C> <C>
Balance, January 1, 1997 0
Granted 6,000 $4.97
----------------
Balance, September 30, 1997 6,000 $4.97
================
</TABLE>
As of September 30, 1997 54,000 options were available for grant under the
Director Plan and no options were exercisable.
The Company has reserved an aggregate of 150,000 shares of Common Stock for
issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in January 1996 and approved by the Company's
stockholders prior to the consummation of the Company's initial public offering
in February 1996. The ESPP is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, and permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to 10% of
their compensation provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP was implemented by an offering
period commencing on February 14, 1996 and ending on the last business day in
the period ending October 31, 1996. Each subsequent offering period (an
"Offering Period") commences on the day following the end of the prior Offering
Period and has a duration of six months. The price of Common Stock purchased
under the ESPP is 85% of the lower of the fair market value of the Common Stock
on the first or last day of each offering period. The ESPP will expire in the
year 2006. In the year ended December 31, 1996 the Company issued 32,815 shares
of Common Stock under the ESPP for $153,410. In the offering period ended April
30, 1997 the Company issued 25,708 shares of Common Stock under the ESPP for
$102,193. At September 30, 1997, $82,230 had been withheld from employee
earnings for stock purchases under the ESPP.
7
<PAGE> 8
New Accounting Pronouncements--In February 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
`Earnings Per Share'. This new standard requires dual presentation of basic and
diluted earnings per share (EPS) on the face of the earnings statement and
requires a reconciliation of the numerators and denominators of basic and
diluted EPS calculations. This statement will be effective for the Company's
1997 fiscal year. Proforma basic and diluted earnings per share calculated in
accordance with SFAS No. 128 would be the same for the three and nine month
periods ended September 30, 1997 and 1996, respectively.
For the fiscal years beginning after December 28, 1997, the Company will adopt
SFAS No. 130, `Reporting Comprehensive Income' and SFAS No. 131 `Disclosures
About Segments of an Enterprise and Related Information.' The Company is
reviewing the impact of such statements on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q,
INCLUDING THE INFORMATION SET FORTH IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, ARE 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. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE THOSE REGARDING THE COMPANY'S IMPROVING SALES
FORCE PRODUCTIVITY, CONTINUED REFINEMENT OF ITS SELLING METHODS, RE-BUILDING THE
FACILITY-WIDE NETWORK FUNNEL OF POTENTIAL OF NEW BUSINESS, STRONG DEMAND FOR OEM
CUSTOMERS' DEPARTMENTAL PRODUCTS, ABILITY TO SEQUENTIALLY IMPROVE
QUARTER-TO-QUARTER REVENUES OF FACILITY-WIDE NETWORKS AND WORKING CAPITAL
POSITION. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION THE
FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" AS
WELL AS THOSE DESCRIBED IN THE COMPANY'S FORM 10-K/A FOR THE YEAR ENDED DECEMBER
31, 1996, ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. ADDITIONAL
INFORMATION IS AVAILABLE IN OTHER COMPANY REPORTS AND OTHER DOCUMENTS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
The Company provides facility-wide computer networks that acquire,
interpret and distribute real-time patient monitoring information. The Company's
networks acquire physiologic data generated by its own proprietary ambulatory
ECG monitors and other manufacturers' bedside equipment located throughout a
healthcare facility. The Company's products are sold directly to acute care
hospitals and integrated healthcare delivery networks ("IHDNs") and on an OEM
basis to patient monitoring equipment manufacturers.
8
<PAGE> 9
During the nine months ended September 30, 1997 direct sales of the
Company's facility-wide computer networks of $6,307,590 were 7.6% lower than the
$6,826,380 achieved in the same period in 1996. However, during the three months
ended September 30, 1997, direct sales of the Company's facility-wide computer
networks of $2,467,778 were 295.1% higher than the $623,400 achieved in the same
period in 1996. The Company believes that the reduction in sales resulted from a
mid-1996 restructuring of the sales force and implementation of a new selling
method focused on quantifying the financial benefits and re-engineering
opportunities enabled by its facility-wide network. These changes shifted the
Company's sales strategy from a clinical to a financial and information systems
focus. This new strategy lengthened the sales cycle and disrupted focus on the
Company's selling its core competency in clinical applications, resulting in
significantly lower sales in the third and fourth quarters of 1996 in
facility-wide networks. During fiscal 1997, the Company has achieved sequential
quarter-to-quarter growth in direct sales, with sales of facility-wide networks
in the quarters ended September 30, 1997, June 30, 1997 and March 31, 1997 being
19.6%, 15.3% and 33.5% higher, respectively, than the preceding quarter. While
the Company believes that sales force productivity will continue to increase,
there can be no assurance that the Company's sales efforts will continue to
result in sequentially increasing or historical sales levels in future periods.
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 typically 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 has
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. In addition, the Company has experienced seasonal
variations in sales of its departmental products, with third quarter sales of
departmental products generally lower than the preceding second quarter.
The Company's products are generally shipped as orders are received and,
accordingly, the Company typically operates with limited backlog. As a result,
sales in any quarter are dependent on orders booked and shipped in that quarter
and are not predictable with any degree of certainty. In addition, a significant
portion of the Company's expenses are relatively fixed. If revenues are below
expectations in any given quarter, the adverse effect may be magnified by the
Company's inability to decrease spending to compensate for the revenue
shortfall.
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.
9
<PAGE> 10
RESULTS OF OPERATIONS
Total Revenues. Total revenues consist of revenue from sales of facility-wide
networks and departmental products, together with fees for installation and
servicing of facility-wide networks.
Total revenues for the quarter ended September 30, 1997 were $5,723,325,
compared to $2,902,254 achieved in the same period in 1996. This represents a
97.2% increase in total revenues consisting of a 295.1% increase in
facility-wide network systems sales and a 43.1% increase in departmental sales
for the third quarter of 1997 when compared to the same quarter of 1996. In
mid-1996 the Company implemented a new selling method which lengthened the sales
cycle and disrupted selling efforts to the existing funnel of potential
customers. This resulted in significantly lower facility-wide network sales in
the third and fourth quarters of 1996. The increase in revenues in the third
quarter ended September 30, 1997 as compared to the third quarter of 1996
reflects a rebuilding and quarter-to-quarter sequential growth of facility-wide
network sales. In the quarters ended March 31, June 30 and September 30, 1997
facility-wide sales increased 33.5%, 15.3% and 19.6%, respectively, as the
Company continued to refine its selling methods and re-build the funnel of
potential new business. The increase in sales through the Company's OEM
customers reflects strong demand of their departmental products and expansion of
the Company's product offering to its OEM customer, Datascope Corporation.
Total revenues for the nine months ended September 30, 1997 were $15,326,288
compared to $14,876,264 achieved in the same period in 1996. This 3.0% increase
in total revenues, reflected a 7.6% decrease in the Company's sales of
facility-wide network systems and a 12.0% increase in departmental products from
the comparable period a year ago. The Company believes the reduction in
facility-wide revenues resulted from a mid-1996 implementation of a new selling
method that lengthened the sales cycle and disrupted the selling efforts to the
existing funnel of potential customers which resulted in significantly lower
revenues in the third and fourth quarter of 1996. During 1997, the Company has
sequentially improved quarter-to-quarter revenues of facility-wide networks as
it continued to refine its selling methods and re-build the funnel of potential
new business, but has not been able to increase revenues to the level of
revenues in the first and second quarter of 1996 before the implementation of
the new selling method. The 12.0% increase in departmental sales through the
Company's OEM customers reflects strong demand of their products and expansion
of the Company's product offering to its OEM customer, Datascope Corporation.
Gross Profit. Cost of sales sold generally includes material, direct labor,
overhead and, installation expenses for facility-wide networks.
Gross profit in the third quarter of 1997 was 48.5% of revenues as compared to
31.5% in the third quarter of 1996. Total gross profit increased 203.7% to
$2,776,175 in the third quarter of 1997 from $914,182 in the third quarter of
1996, on a 97.2% increase in total
10
<PAGE> 11
revenues. Gross profit primarily increased due to fixed costs of overhead
constituting a smaller percentage of total revenues as revenues increased.
Gross profit for the nine month period ended September 30, 1997 was 46.3% of
total revenues as compared to 51.4% for the same period in 1996. Total gross
profit decreased 7.2% to $7,095,880 in the nine months ended September 30, 1997
from $7,648,602 for the same period in 1996 on a 3.0% increase in total
revenues. The decrease in gross profit in the first nine months of 1997 as
compared to the same period of 1996 was primarily due to price pressure on
facility-wide network sales.
Gross profit increased for the third consecutive quarter during the quarter
ended September 30, 1997. Gross profit increased 62.0% in the first quarter of
1997 when compared to the fourth quarter of 1996 on a 13.6% increase in total
revenues. In the quarter ended June 30, 1997, gross profit increased 55.5% when
compared to the first quarter of 1997 on a 41.7% increase in total revenues. In
the quarter ended September 30, 1997, gross profit increased 5.6% when compared
to the second quarter of 1997 on a 1.7% increase in total revenues. Gross
profits increased on a quarter-to-quarter basis primarily as the fixed costs of
overhead constituted a smaller percentage of total revenues as revenues
increased.
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 marketing and promotional
expenses.
Sales and marketing expenses for the quarter ended September 30, 1997 were
$2,081,625 or 36.4% of revenues as compared to $2,720,234 or 93.7% of revenues
in the same period a year ago. The $638,609 decrease in sales and marketing
expenses in the three months ended September 30, 1997 as compared to the same
period in 1996 was primarily attributable to lower salaries and related benefits
expenses associated with a lower headcount, a decrease in customer relations
expense as 1996 expenses included voluntary upgrades to selected facility-wide
network customers to provide an upgrade path for future expansions, lower
recruiting expenses and a reduction in advertising and sales literature expense.
Sales and marketing expenses of $6,733,123 were 43.9% of revenues in the nine
month period ended September 30, 1997 compared to $6,996,941 or 47.0% of
revenues in the comparable period a year ago. The $263,818 decrease in sales and
marketing expenses in the nine months ended September 30, 1997 as compared to
the comparable nine months of 1996 was primarily attributable to a decrease in
customer relations expense as 1996 expenses included voluntary upgrades to
selected facility-wide network customers to provide an upgrade path for future
expansions, lower recruiting expenses, a reduction in advertising expenditures,
offset partially by a 1997 expenditure for an outside market analysis. Sales and
marketing expenses decreased as a percentage of total revenues primarily due to
higher total revenues.
11
<PAGE> 12
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 for the quarter ended September 30, 1997 were
$1,195,981 or 20.9% of revenues as compared to $1,786,880 or 61.6% of revenues
in the same period a year ago. The $590,899 decrease in the three months ended
September 30, 1997 as compared to the three months ended September 30, 1996 was
due primarily to lower recruiting expenses, a reduction in hardware and
prototype expense, a reduction in market acceptance test equipment and lower
salaries and related benefits due to a reduction in headcount.
Research and development expenses of $3,485,228 were 22.7% of revenues in the
nine month period ended September 30, 1997 compared to $3,928,257 or 26.4% of
revenues in the comparable period a year ago. The $443,029 decrease in the nine
months ended September 30, 1997 as compared to the nine months ended September
30, 1996 was due primarily to lower recruiting expenses, a reduction in hardware
and prototyping expenses and lower expenses for salaries and related benefits
due to a reduction in headcount.
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 for the quarter ended September 30, 1997
were $580,345, or 10.1% of revenues as compared to $596,214 or 20.5% of revenues
for the same period a year ago. The $15,869 decrease in the three months ended
September 30, 1997 as compared to the comparable three months ended September
30, 1996 was due primarily to lower salary expenses.
General and administrative expenses in the nine month period ended September 30,
1997 were $1,838,565 or 12.0% of revenues as compared to expenses of $1,720,260
or 11.6% of revenues in the comparable period a year ago. The $118,305 increase
in the nine months ended September 30, 1997 as compared to the comparable nine
months ended September 30, 1996 was due primarily to the costs associated with
being a public company for the entire nine months of 1997 offset in part by
lower payroll-related expenses. In October 1997 the Company hired a new Chief
Executive Officer, therefore it is anticipated that general and administrative
expense levels will increase in future periods.
Other Income, Net. Other income, net consists primarily of interest income from
short term investments.
Other income, net decreased to $246,597 for the third quarter ending September
30, 1997 from $280,152 for the same period in 1996. The decrease was due to a
lower average cash balance during the quarter due to the net use of cash by the
Company, primarily from
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<PAGE> 13
operating losses, resulting in reduced interest income from the Company's
short-term investment portfolio.
Other income, net improved $18,033 to $708,557 for the nine month period ended
September 30, 1997 from $690,524 for the same period a year ago. The improvement
resulted from the payoff of the Company's long term debt in February 1996 which
caused a reduction in interest expense.
Provision (Benefit) for Income Taxes. In 1996 the Company recorded a net tax
benefit equal to the Company's federal tax loss carrybacks, less a valuation
allowance of $1,527,821 made in the quarter ending December 31, 1996, to write
down deferred tax assets. In the first nine months of 1997, the Company's tax
provision was $19,890, representing minimum tax payments to various states. In
the nine months of 1997, a tax benefit for net operating losses was not
recognized as all federal tax loss carrybacks were recognized in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations, including capital
expenditures, through cash flow from operations, cash and cash equivalent
balances, a bank line of credit and long-term debt. In February 1996, the
Company issued 2,300,000 shares of common stock in its initial public offering,
raising $25.6 million, net of expenses.
In the first nine months of 1997, the Company used cash from operating
activities of $1,658,839 to fund a $4,272,369 net loss, a $898,254 increase in
accounts receivable, a decrease in accounts payable of $564,806 and a reduction
of accrued marketing commitments of $309,377. The Company generated cash through
a decrease in income taxes receivable of $2,687,745 and a reduction of
$1,021,760 in inventories. The Company used $327,504 for investing activities
which consisted of $366,012 for purchases of property and generated $7,027 of
proceeds from the sale of property, as well as generating $31,482 from a
decrease in other assets. The Company generated $93,260 in cash through
financing activities which consisted of $108,973 from the issuance of common
stock offset, in part, by $15,713 for payments on a capital lease obligation.
In the first nine months of 1996, the Company generated approximately
$24.2 million of cash from financing activities which consisted of $25.8
million, net, from the sale of 2,300,000 shares of common stock in the Company's
initial public offering and used $1.5 million to pay off long-term debt. The
Company used $783,307 for investing activities which consisted of $951,653 for
purchases of property and generated $168,346 from a decrease in other assets. In
the first nine months of 1996 the Company used cash from operating activities of
$2,858,251 to fund a $2,433,078 net loss, increase inventories $1,731,802,
reduce accounts payable $202,686, and reduce accrued payroll and related costs
by $267,538. The Company generated cash through a decrease in accounts
receivable of $3,365,933.
13
<PAGE> 14
At December 31, 1995, the Company had a secured promissory note in the
amount of $1,541,667 due to Silicon Valley Bank which bore interest at the
bank's prime rate plus 3.0% (11.75% at December 31, 1995) per annum, payable
monthly in arrears. In February 1996 the Company paid the loan off in full,
without pre-payment penalty. In August 1996, the Company entered into a secured
lending arrangement (the "Agreement") with Silicon Valley Bank, providing for a
$5.0 million revolving line of credit bearing interest at the bank's prime rate,
which was renewed on substantially the same terms and conditions in August 1997.
The bank does not have a security interest in any of the Company's assets unless
the Company is borrowing under the line of credit and fails to comply with
certain financial covenants. The Agreement expires in August 1998 and has
certain financial and other covenants. At September 30, 1997, there were no
borrowings outstanding under the Agreement and the Company was in compliance
with all covenants. As such the bank held no security interest in any of the
Company's assets.
The Company's principal commitment at September 30, 1997 consisted of a
lease on its office and manufacturing facility. The Company expects to spend
approximately $500,000 for capital expenditures during 1997.
The Company believes that existing cash resources, 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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Dependence on Increased Market Acceptance of Facility-Wide Computer
Networks. In 1996, sales of the Company's facility-wide networks decreased 37.9%
to $8.2 million from $13.1 million in 1995, and in the nine months ended
September 30, 1997, such sales decreased 7.6% as compared with the same period
in 1996. The Company believes that these sales declines are attributable to a
mid-1996 restructuring of the sales force that shifted the Company's sales
strategy from a clinical to a financial and information systems focus and
resulted in lengthened sales cycles and disruptions in the Company's focus on
selling its core competency in clinical applications. Although the Company has
achieved sequential quarter-to-quarter growth in sales of its facility-wide
networks during the last four quarters, there can be no assurance that the
Company's direct sales force productivity will continue to increase sequentially
or at all, that the Company's direct sales revenues will achieve historic
levels, or that the Company's facility-wide networks will achieve market
acceptance at the levels anticipated by the Company. If the Company is not
successful in marketing and selling its facility-wide network solutions, or if
the facility-wide networks fail to achieve the market acceptance at anticipated
levels the Company's business, operating results and financial condition would
be materially adversely affected.
14
<PAGE> 15
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly from quarter
to quarter in the future as a result of a number of factors, including, but not
limited to the size and timing of orders; the length of the sales cycle; the
Company's success in its sales and marketing programs and the effects of changes
in sales force alignments; the ability of the Company's customers to obtain
budget allocations for the purchase of the Company's products; changes in
pricing policies or price reductions by the Company or its competitors; mix of
sales between facility-wide networks and departmental products; the timing of
new product announcements and introductions by the Company or its competitors;
deferrals of customer orders in anticipation of new products or product
enhancements; the Company's ability to develop, introduce and market new
products and product enhancements; market acceptance of new products or product
enhancements; the Company's ability to control costs; the availability of
components; regulatory compliance and timing of regulatory approvals; and
general economic factors.
The Company's products are generally shipped as orders are received and,
accordingly, the Company has historically operated with limited backlog. As a
result, sales in any quarter are dependent on orders booked and shipped in that
quarter and are not predictable with any degree of certainty. Further, a large
percentage of any quarter's shipments have historically been booked in the last
weeks of the quarter. If revenues are below expectations in any given quarter,
the adverse effect may be magnified by the Company's inability to maintain gross
margins and to decrease spending to compensate for the revenue shortfall.
Further, the Company has sometimes experienced seasonal variations in operating
results, with sales in the first quarter being lower than in the preceding
fourth quarter's sales due to customer budget cycles and sales remaining
relatively flat during the third quarter.
Lengthy Sales Cycle. The decision by a healthcare provider to replace or
substantially upgrade its clinical information systems typically involves a
major commitment of capital and an extended review and approval process. The
sales cycle for the Company's facility-wide networks has typically been nine to
18 months from initial contact to receipt of a purchase order. During this
period, VitalCom may expend substantial time, effort and funds preparing a
contract proposal and negotiating a purchase order without any guarantee that
the Company will complete the transaction. Any significant or ongoing failure to
reach definitive agreements with customers could have a material adverse effect
on the Company's business, operating results and financial condition.
Competition. The Company's facility-wide networks for ECG data compete
with the departmental systems offered by a number of competitors, including
Hewlett-Packard Company, SpaceLabs, Inc. and Marquette Electronics, Inc., most
of which have significantly greater financial, technical, research and
development and marketing resources than the Company. In addition, many of these
competitors have longstanding relationships
15
<PAGE> 16
with acute care hospitals and IHDNs. There can be no assurance that the Company
will be able to sell to such hospitals or IHDNs or that the Company will be able
to compete successfully with such vendors, and any inability to do so could have
a material adverse effect on the Company's business, operating results and
financial condition. The Company's OpenNet(TM) networks may face significant
competition in the future from HCIS providers, patient monitoring companies,
life support device companies and general purpose data network providers. Such
potential competitors may elect to enter this market and compete with the
Company using significantly greater financial, technical, research and
development and marketing resources than are available to the Company. Any
action on the part of vendors to make interfacing more difficult or impossible
could have a material adverse effect on the Company's business, operating
results and financial condition. The market for the Company's departmental
products is also intensely competitive. The Company competes in this market
principally as an OEM supplier to a range of patient monitoring and life support
device companies, many of which have significantly greater financial, technical,
research and development and marketing resources than the Company. There can be
no assurance that current OEM customers will not elect to design and manufacture
patient monitoring and system components currently supplied by the Company or
elect to contract with other OEM suppliers. Any such election by one or more of
such companies could have a material adverse effect on the Company's business,
operating results and financial condition.
Customer Concentration; Dependence on Departmental Products. The Company's
departmental product sales, which represented approximately 45.2%, 55.6% and
58.8% of the Company's total net revenues in 1995, 1996 and the nine months
ending September 30, 1997, respectively, have historically been to a small
number of OEM customers. In 1995, Quinton Instrument Company ("Quinton") and
Datascope Corporation ("Datascope") accounted for approximately 14.3% and 9.7%,
respectively, of the Company's total revenues, in 1996 Quinton and Datascope
accounted for approximately 18.4% and 17.7%, respectively, of the Company's
total revenues and in the nine months ending September 30, 1997 Quinton and
Datascope accounted for approximately 10.4% and 29.1%, respectively, of the
Company's total revenues. The loss of, or a reduction in sales to, any such OEM
customer would have a material adverse effect on the Company's business,
operating results and financial condition.
Technological Change; Need to Develop New Products. Many aspects of the
medical equipment industry are undergoing rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards. The Company believes that as the market for its products matures,
VitalCom's future success will depend upon its ability to develop and introduce
on a timely basis new products and product enhancements that keep pace with
technological developments and that address the increasingly sophisticated needs
of acute care hospitals and IHDNs. In addition, the introduction of competing
products embodying new technologies and the emergence of new industry standards
could render the Company's existing products unmarketable or obsolete.
16
<PAGE> 17
If the Company is unable to develop and introduce product enhancements and new
products in a timely and cost-effective manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially adversely affected.
Uncertainty and Consolidation in Healthcare Industry. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operation of healthcare providers.
Many healthcare providers are consolidating to create larger hospitals and
IHDNs. This consolidation reduces the number of potential customers for the
Company's products, and the increased bargaining power of these organizations
could lead to reductions in the amounts paid for the Company's products. These
larger hospitals and IHDNs may concentrate their purchases on a small number of
preferred vendors with whom they have had longstanding relationships. There can
be no assurance that the Company will be able to sell to such hospitals or IHDNs
or that the Company will be able to compete successfully with such vendors. The
impact of these developments in the healthcare industry is difficult to predict
and could have a material adverse effect on the Company's business, operating
results and financial condition.
Limited Intellectual Property Protection. The Company relies on a
combination of copyright, trade secret and trademark laws, confidentiality
procedures and contractual provisions to protect its intellectual property. The
Company seeks to protect its software, circuitry documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company cannot assure that its protective measures for
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar or superior technology, duplicate the Company's
products or otherwise circumvent its intellectual property rights. Although the
Company has never received a claim that its products infringe a third party's
intellectual property rights, there can be no assurance that third parties will
not in the future claim infringement by the Company with respect to current or
future products or proprietary rights. Any such claims, regardless of their
merit, could be time consuming, result in costly litigation, delay or prevent
product shipments or require the Company to enter into costly royalty or
licensing agreements. The impact of any of these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.
Risk of Product Liability Claims. Certain of the Company's products
provide applications that relate to patient physiologic status or other
clinically critical information. Any failure by the Company's products to
provide accurate and timely information could result in product liability and
warranty claims against the Company by its customers or their patients. The
Company maintains insurance against claims associated with the use of its
products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage or outside the
scope of the Company's insurance coverage could have a material adverse effect
on the Company's business, operating results and financial condition. Even
unsuccessful claims could result in the expenditure of funds in litigation and
diversion of management time and resources.
17
<PAGE> 18
Dependence on Sole Source Components. Certain of the Company's products
utilize components that are available in the short term only from a single or a
limited number of sources, have been available only on an allocation basis in
the past and could be in scarce supply again in the future. Any inability to
obtain components in the amounts needed on a timely basis or at commercially
reasonable prices could result in delays in product introductions, interruption
in product shipments or increases in product costs, which could have a material
adverse effect on the Company's business, operating results and financial
condition until alternative sources could be developed or design and
manufacturing changes could be completed.
Risks Associated With Recent Management Changes. In 1997, the Company has
had a number of changes in its management team. Effective January 1, 1997, David
L. Schlotterbeck stepped down as the Company's Chief Executive Officer and
Donald W. Judson, the Company's Chairman of the Board assumed such
responsibilities. In March 1997, the Company hired a new Vice President, Direct
Sales and in July 1997 hired a new Vice President, Research and Development. In
October 1997 the Company hired Frank T. Sample as its new Chief Executive
Officer, with Mr. Judson stepping down as such. Although the Company believes
that its addition of new senior management members will be successful in
improving the Company's business, operating results and financial condition,
there can be no assurance that such changes will not have a material adverse
effect on the Company's business, operating results and financial condition in
future periods.
Dependence on and Need to Recruit Key Personnel. The Company's success
depends to a large extent on key members of its senior management team. Mr.
Judson, President and Chief Executive Officer and Chairman of the Board has
experienced back related pain which has periodically prevented him from working
full time. In addition, Mr. Judson had a heart attack in 1989, took a one-week
leave in December 1995 for a balloon angioplasty procedure and returned to work
in January 1996. The loss of the services, either temporarily or permanently, of
any of the members of senior management or other key employees, particularly in
sales and marketing and research and development, could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, the Company's future success depends to a large extent on its ability
to attract and retain additional key management, sales and marketing and
research and development personnel. Competition for such personnel is intense.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel, and the failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
18
<PAGE> 19
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Although the Company
believes that its products are Year 2000 compliant, customers may be affected by
Year 2000 requirement issues as they could expend significant resources to
correct or patch other software systems for Year 2000 compliance. These
expenditures may result in reduced capital equipment budgets for other products,
such as products offered by the Company, which could result in a material
adverse effect on the Company's business, operating results and financial
condition.
Government Regulation. The manufacture and sale of medical devices,
including the Company's products, is subject to extensive regulation by numerous
governmental authorities. In the United States, the Company's products are
regulated as medical devices and are subject to the Food and Drug
Administration's pre-clearance or approval requirements. The Company has
received clearance from the FDA to market its current products through the
510(k) premarket notification process. There can be no assurance that a similar
510(k) clearance for any future product or enhancement of an existing product
will be granted or that the process will not be lengthy. If the Company cannot
establish that a product is "substantially equivalent" to certain legally
marketed devices, or if FDA regulatory changes currently under consideration
with respect to arrhythmia software are adopted, the 510(k) clearance procedure
will be unavailable and Company will be required to utilize the longer and more
expensive premarket approval ("PMA") process. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for extensive
clinical trials or additional data as a prerequisite to clearance or approval,
could have a material adverse effect on the Company's business, operating
results and financial condition. Sales of medical devices and components outside
of the United States are subject to international regulatory requirements that
vary from country to country. There can be no assurance that the Company will be
able to obtain further clearance or approvals for its products or components on
a timely basis or at all, and delays in receipt of, loss of or failure to
receive such approvals or clearances could have a material adverse effect on the
Company's business, operating results and financial condition.
SUBSEQUENT EVENTS
On October 27, 1997 the Company announced the appointment of Frank T.
Sample as the Company's new President and Chief Executive Officer. Before
joining the Company, Mr. Sample served as Executive Vice President at IDX
Systems Corporation in S. Burlington, VT. From December 1990 to July 1997, when
PHAMIS, Inc. was merged into IDX Systems Corporation, he was President and Chief
Executive Officer at PHAMIS, Inc., a provider of patient-centered medical record
information systems. Mr. Sample holds a B.B.A. degree in Business Administration
from Cleveland State University.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Silicon Valley Bank Amendment to Loan Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
20
<PAGE> 21
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 November 13, 1997.
VITALCOM INC.
/s/ Frank T. Sample
-------------------
Frank T. Sample
President and Chief Executive Officer
/s/ Shelley B. Thunen
---------------------
Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
21
<PAGE> 22
EXHIBIT LIST
------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Silicon Valley Bank Amendment to Loan Agreement
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: VITALCOM INC., A DELAWARE CORPORATION
ADDRESS: 15222 DEL AMO AVENUE
TUSTIN, CA 92780
DATED AS OF: AUGUST 6, 1997
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK
("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them dated
February 26, 1993, as amended by that Amendment to Loan Agreement dated December
21, 1993, as amended by that Amendment to Loan Agreement dated April 27, 1994,
as amended by that Amendment to Loan Agreement dated May 5, 1995, as amended by
that Amendment to Loan Agreement dated May 30, 1995, as amended by that
Amendment to Loan Agreement dated December 27, 1995 (the "December 1995
Amendment"), as amended by that Amendment to Loan Agreement dated August 6,
1996, as amended by that Amendment to Loan Agreement dated September 25, 1996,
and as otherwise amended from time to time (the "Loan Agreement"; terms defined
in the Loan Agreement are used herein as therein defined), as follows, effective
as of the date hereof.
1. AMENDED FINANCIAL COVENANTS. The section of the Schedule to the Loan
Agreement entitled "Financial Covenants (Section 4.1)" is amended
effective as of the date hereof to read as follows:
<PAGE> 2
"FINANCIAL COVENANTS
(Section 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the
end of each calendar quarter, except as otherwise
specifically provided below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 2.00 to 1.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not
less than $20,000,000.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities
to tangible net worth of not more than 1.00 to 1.
MINIMUM CASH COVERAGE Borrower shall maintain an aggregate total of cash
and marketable securities (valued at market value) in
an amount at least equal to the product of two times
the maximum amount of the Credit Line.
DEFINITIONS: "Current Assets" and "current liabilities" shall have
the meanings ascribed to them in accordance with
generally accepted accounting principles. "Tangible
net worth" means the excess of total assets over
total liabilities, determined in accordance with
generally accepted accounting principles, excluding
however all assets which would be classified as
intangible assets under generally accepted accounting
principles, including without limitation goodwill,
licenses, patents, trademarks, trade names,
copyrights, and franchises. "Quick Assets" means cash
on hand or on deposit in banks, readily marketable
securities issued by the United States, readily
marketable commercial paper rated "A-1" by Standard &
Poor's Corporation (or a similar rating by a similar
organization), certificates of deposit and banker's
acceptances, and accounts receivable (net of
allowance for doubtful accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants
do not include indebtedness which is subordinated to
the indebtedness to Silicon under a subordination
agreement in form specified by Silicon or by language
in the instrument evidencing the indebtedness which
is acceptable to Silicon.
2. AMENDED MATURITY DATE. The section of the Schedule to the Loan Agreement
entitled "Maturity Date (Section 5.1)" is amended effective as of the date
hereof to read as follows:
"Maturity Date
(Sections 5.1): August 5, 1998."
3. CONSENT TO BORROWER LOANS. Borrower has made (I) a bridge loan to its Vice
President of Direct Sales in the approximate amount of $175,000 and (II)
two loans in an aggregate amount of $194,960 to two consultants of
borrower relating to such persons' purchase of Borrower's stock
(collectively, the "Borrower Loans"). Silicon hereby consents to the
Borrower Loans, and hereby agrees that no Event of Default shall arise
under the Loan Agreement in connection herewith.
4. FEE. It is acknowledged that Borrower shall pay to Silicon a fee in the
amount of $8,250 in connection with this Amendment, which shall be in
addition to all interest and all other fees payable to Silicon and shall
be non-refundable. At such time that any Loans are made hereunder,
Borrower shall, prior to Silicon's making of any such
25
<PAGE> 3
Loans, pay to Silicon a further fee of $8,250, which shall be in addition
to all interest and all other fees payable to Silicon and shall be
non-refundable.
5. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written
amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the
Borrower set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all
prior discussions, representations, agreements and understandings between
the parties with respect to the subject hereof. Except as herein expressly
amended, ,all of the terms and provisions of the Loan Agreement, and all
other documents and agreements between Silicon and the Borrower shall
continue in full force and effect and the same are hereby ratified and
confirmed. This Amendment shall be controlling in the event of any
conflicts between any prior written agreements and amendments between
Silicon and the Borrower, on the one hand, and the Amendment.
Borrower: Silicon:
VITALCOM INC., a Delaware corporation SILICON VALLEY BANK
By /s/Donald W. Judson
- -------------------------------------
President or Vice President
By /s/Kittridge Chamberlain
--------------------------
By/s/ Shelley B. Thunen Title V.P.
----------------------------------- -----------------------
Secretary
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,227,121
<SECURITIES> 0
<RECEIVABLES> 3,197,614
<ALLOWANCES> 137,102
<INVENTORY> 2,169,283
<CURRENT-ASSETS> 24,099,500
<PP&E> 3,551,474
<DEPRECIATION> 1,487,834
<TOTAL-ASSETS> 27,051,847
<CURRENT-LIABILITIES> 4,176,550
<BONDS> 0
0
0
<COMMON> 36,941,9909
<OTHER-SE> (14,132,733)
<TOTAL-LIABILITY-AND-EQUITY> 27,051,847
<SALES> 5,723,325
<TOTAL-REVENUES> 5,723,325
<CGS> 2,947,150
<TOTAL-COSTS> 2,947,150
<OTHER-EXPENSES> 3,857,951
<LOSS-PROVISION> 7,091
<INTEREST-EXPENSE> (246,597)
<INCOME-PRETAX> (835,179)
<INCOME-TAX> 6,300
<INCOME-CONTINUING> (841,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (841,479)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
