<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 THE SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended June 30, 1998
--------------------------------------
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)
DELAWARE 33-0538926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15222 DEL AMO AVENUE
TUSTIN, CALIFORNIA 92780
(Address of principal executive offices and zip code)
(714) 546-0147
(Registrants telephone number, including area code)
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 August 12, 1998, there were 8,220,260 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>
--------------------------
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $17,467,386 $18,157,160
Accounts receivable, net 3,032,332 3,853,066
Inventories 1,792,707 1,812,499
Prepaid expenses 289,784 269,462
----------- -----------
Total current assets 22,582,209 24,092,187
Property
Machinery and equipment 1,520,811 1,464,903
Office furniture and computer equipment 2,120,320 2,044,083
Leasehold improvements 89,271 87,351
------------ -----------
3,730,402 3,596,337
Less accumulated amortization and depreciation (1,982,940) (1,659,939)
----------- -----------
Property, net 1,747,462 1,936,398
Other assets 201,653 51,935
Goodwill, net 606,561 627,549
----------- -----------
$25,137,885 $26,708,069
=========== ===========
</TABLE>
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
---------------------------
JUNE 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 316,252 $ 585,744
Accrued payroll and related costs 803,697 1,198,055
Accrued warranty costs 881,625 968,245
Accrued liabilities 1,388,051 1,353,675
Current portion of capital lease obligations 24,990 21,120
------------ ------------
Total current liabilities 3,414,615 4,126,839
Capital lease obligations, less current portion 44,337 60,296
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively -- --
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value;
25,000,000 shares authorized, 8,205,682 and 8,038,547
shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 37,219,965 37,031,165
Accumulated deficit (15,541,032) (14,510,231)
------------ ------------
Net stockholders' equity 21,678,933 22,520,934
------------ ------------
$ 25,137,885 $ 26,708,069
============ ============
</TABLE>
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------ --------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues 5,427,579 5,629,599 10,528,305 9,602,963
Cost of sales 2,362,916 3,000,656 4,842,451 5,283,258
---------- ----------- ----------- -----------
Gross profit 3,064,663 2,628,943 5,685,854 4,319,705
Operating expenses
Sales and marketing 1,814,631 2,290,038 3,535,541 4,651,498
Research and development 1,337,210 1,219,890 2,514,600 2,289,247
General and administration 501,060 582,542 1,115,909 1,258,220
---------- ----------- ----------- -----------
Total operating expenses 3,652,901 4,092,470 7,166,050 8,198,965
Operating loss (588,238) (1,463,527) (1,480,196) (3,879,260)
Other income, net 243,726 238,963 461,994 461,960
--------- ----------- ----------- -----------
Loss before provision for income
taxes (344,512) (1,224,564) (1,018,202) (3,417,300)
Provision for income taxes 6,300 6,290 12,600 13,590
--------- ----------- ----------- -----------
Net loss $(350,812) $(1,230,854) $(1,030,802) $(3,430,890)
========= =========== =========== ===========
Net loss per basic and diluted
common share $ (0.04) $ (0.15) $ (0.13) $ (0.43)
Weighted average basic and diluted
common shares 8,193,699 8,001,354 8,121,867 7,992,521
</TABLE>
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------
SIX MONTHS ENDED
JUNE 30,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,030,802) $(3,430,890)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 343,989 360,544
Loss on disposal of property 7,176 7,759
Changes in operating assets and liabilities:
Accounts receivable 820,734 (312,854)
Inventories 19,792 376,114
Income taxes receivable 2,717,968
Prepaid expenses and other current assets (20,322) (304,515)
Accounts payable (269,492) (748,395)
Accrued payroll and related costs (394,358) 154,944
Accrued warranty costs (86,620) (26,978)
Accrued marketing commitments (309,377)
Income taxes payable 3,785
Accrued liabilities 34,461 (115,151)
----------- -----------
Net cash used in operating activities (571,657) (1,630,831)
Cash flows from investing activities:
Purchases of property (141,241) (244,877)
(Increase) decrease in other assets (149,718) 20,988
----------- -----------
Net cash used in investing activities (290,959) (223,889)
Cash flows from financing activities:
Repayment of capital lease obligation and
long-term debt (15,959) (10,030)
Net proceeds from issuance of common stock 188,801 105,443
----------- -----------
Net cash provided by financing activities 172,842 95,413
Net decrease in cash and cash equivalents (689,774) (1,759,307)
Cash and cash equivalents, beginning of period 18,157,160 20,120,203
----------- -----------
Cash and cash equivalents, end of period $17,467,386 $18,360,896
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 8,327 $ 20,395
Income taxes paid $ 9,666 $ 7,956
Supplemental schedule of noncash transactions:
Notes receivable for stock sales $ 457,052 $ 195,000
</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 Form 10-K for the year ended December 31, 1997 and
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 June 30, 1998, and
the results of its operations and its cash flows for the three-month and
six-month periods ended June 30, 1998 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 PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding. For the three-month
and six-month periods ended June 30, 1998 and 1997, the diluted weighted average
shares were equal to the basic weighted average shares due the anti-dilutive
effect the conversion of options would have given the Company's net loss for the
period.
3. STOCK PLANS AND STOCKHOLDERS' EQUITY
Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") for the six months ended June
30, 1998:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
------------------- ------------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1997 1,604,853 $0.60 to $15.75
Granted 246,825 $4.00 to $4.4375
Exercised (19,500) $0.60 to $1.41
Canceled (288,649) $1.28 to $15.75
==================
Balance, June 30, 1998 1,543,529 $0.60 to $15.75 324,167
==================
</TABLE>
At June 30, 1998, 682,529 options were available for grant under the 1993 Plan.
The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
------------------- ------------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1997 69,325 $5.50 to $6.00
Canceled (11,281) $4.97 to $6.00
==================
Balance, June 30, 1998 58,044 $4.97 to $6.00 20,714
==================
</TABLE>
At June 30, 1998, 41,956 options were available for grant under the 1996
Plan.
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There were no stock transactions under the 1996 Director Option Plan (the
"Director Plan") for the six months ended June 30, 1998. At June 30, 1998,
60,000 options were available for grant under the Director Plan and no options
were exercisable.
The Company has reserved an aggregate of 300,000 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. In May 1998 the Company's stockholders approved an increase in
the number of shares available for issuance under the ESPP from 150,000 shares
to 300,000 shares. 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 will be 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 years ended December 31, 1996 and 1997 the Company issued
32,815 and 47,359 shares of Common Stock under the ESPP for $153,410 and
$191,218, respectively. In the six months ended June 30, 1998 the Company issued
26,099 shares of Common Stock under the ESPP for $88,737.
During the six months ended June 30, 1998, the Company issued 103,000 shares of
its common stock, under an interest-bearing, non-recourse note in the amount of
$457,052 and received net proceeds of $11.
SUBSEQUENT EVENTS
Note Purchase Agreements - In February 1997, the Company issued an aggregate of
25,000 shares of its Common Stock to a consultant of the Company for a purchase
price of $4.875 per share payable in cash and a non-recourse promissory note
secured by the pledge of the Common Stock to the Company. On July 14, 1998 the
consultant chose to default on the note, therefore the Company cancelled the
25,000 shares of Common Stock pursuant to the note and stock pledge.
In July 1998, the Company issued an aggregate of 10,000 shares of its Common
Stock, $.0001 par value, to a consultant of the Company for a purchase price of
$3.06 per share. The aggregate purchase price paid to the Company is in a
combination of a minor cash payment and a non-recourse promissory note secured
by a pledge of the shares to the Company.
Recent Accounting Pronouncements--In June 1997, the FASB issued Statement of
Financial Accounting Standard No. 130 (SFAS 130), Reporting Comprehensive
Income, and No. 131 (SFAS 131), Disclosures About Segments of an Enterprise and
Related Information. The Company has adopted SFAS 130 for the period ending June
30, 1998. The Company has no reportable differences between comprehensive loss
and net loss, as reported at June 30, 1998 and June 30, 1997.
For the current fiscal year ending December 31, 1998 the Company will adopt SFAS
No. 131, which is based on the management approach to segment reporting. SFAS
No. 131 establishes requirements to report selected segment information
quarterly and to report entity-wide disclosures about products and services,
major customers and the material countries in which the entity holds assets and
reports revenue. The Company has determined that the effect the statement will
have on its financial statements and disclosures is not material.
In October 1997, the American Institute of Certified Public Accountants issued
SOP 97-2, Software Revenue Recognition, which supercedes SOP 91-1. The
provisions of SOP 97-2 are effective for fiscal years beginning after December
15, 1997. The Company has determined that the effect that these new standards
has on its consolidated financial statements and disclosures is not material.
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<PAGE> 8
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 SEASONAL VARIATIONS IN SALES
OF ITS NETWORKED MONITORING(TM) PRODUCTS AND ITS OEM PRODUCTS, SALES CYCLE FOR
NETWORKED MONITORING SYSTEMS AND OEM PRODUCTS, THE COMPANY'S ABILITY TO SHIP
ORDERS AS THEY ARE RECEIVED, THE CONTINUING ABILITY OF THE COMPANY TO MEET YEAR
2000 COMPLIANCE, THE ESTIMATE OF YEAR 2000 EXPENDITURES AS BEING LIMITED TO
$50,000 TO $200,000, INCREASED DEMAND FOR THE COMPANY'S PRODUCTS FOR NETWORKED
MONITORING PRODUCTS, IMPROVEMENTS IN THE COMPANY'S GROSS MARGINS, REDUCTIONS IN
MATERIAL AND OVERHEAD COSTS, HIGHER MARGINS IN NETWORKED MONITORING PRODUCTS,
MORE EFFICIENT ABSORPTION OF OVERHEAD EXPENSES, THE EXPECTATION THAT THE COMPANY
WILL SPEND APPROXIMATELY $500,000 FOR CAPITAL EXPENDITURES IN THE REMAINING SIX
MONTHS OF 1998 AND THAT THE COMPANY'S WORKING CAPITAL POSITION IS SUFFICIENT TO
FUND THE COMPANY'S OPERATIONS FOR AT LEAST THE NEXT TWELVE MONTHS. ACTUAL
RESULTS MAY VARY SUBSTANTIALLY FROM THESE FORWARD LOOKING STATEMENTS FOR MANY
REASONS. SEE ALSO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS,
INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, 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
VitalCom Inc. (the "Company"), provides computer networks and related
communications products that acquire, interpret and distribute real time patient
monitoring information. The Company's computer and radio networks acquire
physiologic data generated by the Company's own proprietary ECG monitors and
other manufacturers' bedside equipment located throughout a healthcare facility.
The Company's networks consist of proprietary radio frequency ("RF")
communications components, clinical analysis software and display and networking
software to provide personal computer-based central station surveillance of
physiologic data from patients throughout a healthcare facility. The Networked
Monitoring(TM) systems sold to acute care hospitaLS and integrated health
delivery networks ("IHDNs") through the Company's direct sales force are
networked systems designed for facility-wide coverage that provide access to
real-time information at remote displays as well as at the central monitor,
remote access through a wide area network ("WAN") as well as local area network
("LAN"), offer the capability to acquire data from the Company's own ambulatory
ECG monitors as well as a variety of other manufacturers' bedside monitors and
are typically located in multiple departments throughout the healthcare
facility. The Company's Original Equipment Manufacturer ("OEM") customers
purchase central monitoring systems as well as individual components for use in
their monitoring products, which are generally for smaller departments that
require customized systems. OEM products offered by the Company acquire data
from the Company's ambulatory ECG monitor and from the OEM customer's bedside
monitoring devices or life support equipment. The central monitoring system and
display software for each OEM customer is developed specifically to meet the
specifications of a particular department specialty.
Revenues from sales of Networked Monitoring systems sold by the
Company's direct sales force are recognized upon shipment. The sales cycle for
Networked Monitoring systems has typically been from nine to 18 months. The
Company has experienced seasonal variations in sales of its Networked Monitoring
systems, 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 Networked Monitoring systems has historically
been booked in the last weeks of the quarter.
Revenues from sales of OEM products are recognized upon shipment. The
selling cycle for OEM 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 OEM products, with sales in the first quarter typically lower than the
preceding fourth quarter's sales and third quarter sales of OEM products
generally being lower than other quarters.
8
<PAGE> 9
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.
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.
In the next two years, many companies will face a potentially serious
information systems (computer) problem because many software application and
operational programs written in the past may not properly recognize calendar
dates beginning in the Year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company is presently in
the process of examining its computer systems and contacting its software
providers to determine whether the Company's software applications are compliant
with the Year 2000. As of June 30, 1998, the Company's enterprise business
system has been validated to be Year 2000 compliant. While it is difficult to
quantify the anticipated cost involved, the Company's best estimate of
expenditures is between $50,000 to $200,000 for such upgrades since they are
part of the software and hardware that the Company's third party suppliers
normally provide to the Company. While the Company believes that its systems are
fully Year 2000 compliant, the Company intends to continue to review its
information systems for any possible problems as well as monitor its key
customers and suppliers for any impact that the Year 2000 may have on their
information systems which could then impact the Company. 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.
RESULTS OF OPERATIONS - THREE-MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1998
AND JUNE 30, 1997
Total Revenues. Total revenues consist of revenue from sales of Networked
Monitoring systems and OEM products, together with fees for installation and
servicing of Networked Monitoring products. Total revenues decreased 3.6% to
$5.4 million in the three months ended June 30, 1998 from $5.6 million for the
three months ended June 30, 1997. This was due to lower OEM products business in
the quarter.
Total revenues increased 9.6% to $10.5 million in the six months ended June 30,
1998 from $9.6 million in the six months ended June 30, 1997. This increase was
due to the increased sales of Networked Monitoring systems with sales through
the Company's OEM distribution channel remaining relatively flat.
Gross Margins. Cost of goods sold generally includes material, direct labor,
overhead and, for Networked Monitoring systems, installation expenses. Cost of
sales decreased 21.3% to $2.4 million in the three months ended June 30, 1998
from $3.0 million in the three months ended June 30, 1997. Gross margin improved
to 56.5% in the second quarter of 1998 compared to 46.7% for the second quarter
of 1997. The increase in gross margin in the second quarter of 1998 as compared
to the second quarter of 1997 was due to the combination of a greater percentage
of Networked Monitoring systems sold, whose distribution channel is directly to
the hospital which generates a higher margin, and reductions in material and
overhead costs.
Cost of goods sold decreased 8.3% to $4.8 million for the six month period ended
June 30, 1998 from $5.3 million in the six months ended June 30, 1997. Gross
margin improved to 54.0% in the six months ended June 30, 1998 compared to 45.0%
for the six months ended June 30, 1997. The increase in gross margin in the
first six months of 1998 as compared to the same period of 1997 was due
primarily to the greater percentage of Networked Monitoring systems sold,
reductions in overhead and materials costs combined with the more efficient
absorption associated with the higher revenue base.
Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to Networked Monitoring systems and
OEM sales and marketing personnel, travel and entertainment expenses and other
promotional expenses. Sales and marketing expenses were $1.8 million, or 33.4%
of total revenue in the three months ended June 30, 1998, as compared to $2.3
million or 40.7% of total revenue for the three months ended June 30, 1997. The
$475,407 decrease in sales and marketing expenses in the second quarter of 1998
as compared to the second quarter of 1997 was primarily due to lower salary and
travel charges related to lower headcount.
9
<PAGE> 10
Sales and marketing expenses were $3.5 million, or 33.6% of total revenue in the
six months ended June 30, 1998, as compared to $4.7 million or 48.4% of total
revenue in the six months ended June 30, 1997. The $1,115,957 decrease in sales
and marketing expenses in the six months ended June 30, 1998 as compared to the
six months ended June 30, 1997 was due to the lower salary and travel expenses
related to lower headcount.
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 were
$1.3 million or 24.6% of total revenue in the three months ended June 30, 1998,
as compared to $1.2 million or 21.7% of total revenue in the three months ended
June 30, 1997. The $117,320 increase in research and development expenses in the
second quarter of 1998 as compared to the second quarter of 1997 was due
primarily to the $200,000 in accrued expenses associated with the departure of
the Vice President of Research and Development.
Research and development expenses were $2.5 million, or 23.9% of total revenue
in the six months ended June 30, 1998, as compared to $2.3 million or 23.8% of
total revenue in the six months ended June 30, 1997. The $225,353 increase in
research and development expenses in the first six months of 1998 as compared to
the first six months of 1997 was due to the combination of the accrued expenses
associated with the departure of the Vice President of Research and Development
in addition to the cost of supplies incurred for development work on prototype
products.
General and Administrative Expenses. General and administrative expense includes
accounting, finance, information systems, human resources, general
administration, executive officers and professional fee expenses. General and
administrative expenses were $501,060 or 9.2% of total revenue in the three
months ended June 30, 1998, as compared to $582,542 or 10.3% of total revenue in
the three months ended June 30, 1997. The $81,482 decrease in general and
administrative expenses in the second quarter of 1998 as compared to the second
quarter of 1997 was primarily attributable to lower professional fees.
General and administrative expenses were $1.1 million, or 10.6% of total revenue
in the six months ended June 30, 1998, as compared to $1.3 million or 13.1% of
total revenue in the six months ended June 30, 1997. The $142,311 decrease in
general and administrative expenses in the first six months of 1998 as compared
to the first six months of 1997 was due to lower salary and related charges in
addition to reduced professional fees.
Other Income, Net. Other income, net, consists primarily of interest income
earned on proceeds from the Company's initial public offering, net of payments
made in respect of outstanding indebtedness. Other income, net increased to
$243,726 in the three months ended June 30, 1998, as compared to $238,963 in the
three months ended June 30, 1997. The increase resulted from higher income
derived from the Company's short-term investments.
Other income, net, was $461,994 in the six months ended June 30, 1998, as
compared to $461,960 in the six months ended June 30, 1997.
Provision for Income Taxes: The Company had minimal state tax provisions of
$6,300 and $6,290 in the three months ended June 30, 1998 and June 30, 1997,
respectively. For the six months ended June 30, 1998 the Company had $12,600 in
comparison to $13,590 for the six months ended June 30, 1997. This represented
minimum state taxes. Due to the Company's net loss position, the utilization of
its credit carryforwards depends upon future income and may be subject to an
annual limitation required by the Internal Revenue Code of 1986 and similar
state provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations, including capital expenditures,
through net proceeds from the Company's February 1996 initial public offering,
cash and cash equivalent balances, a bank line of credit and long-term debt.
During the first quarter of 1996, the Company issued 2,300,000 shares of common
stock in its initial public offering, raising $25.6 million, net of expenses. At
June 30, 1998 the Company had $17.5 million in cash and cash equivalents as
compared to $18.2 million at December 31, 1997.
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<PAGE> 11
In the first six months of 1998, the Company used cash in operating
activities of $571,657 to fund a $1,030,802 net loss. In addition, $394,358 was
used for payroll and related costs, $269,492 was used to pay down accounts
payable and $86,620 was attributable to the reduction in the accrued warranty
charges. Uses of cash were partially offset by $820,734 in cash provided from
the $820,734 reduction in accounts receivable and $343,989 in non-cash
adjustments provided by depreciation and amortization of fixed assets and
intangible assets.
The Company used $290,959 for investing activities in the first six
months of 1998. The principal components were $141,241 to purchase capital
equipment and $149,718 for the prepayment of Directors and Officers' Liability
Insurance.
The Company received $172,842 in net cash from financing activities in
the first six months of 1998. This included $188,801 in net proceeds from the
issuance of common stock offset partially by $15,959 in cash used in the
repayment of capital lease obligations.
In the first six months of 1997, the Company used cash in operating
activities of $1,630,831 to fund a $3,430,890 net loss. In addition, $748,395
was used for the reduction in accounts payable, $312,854 was used in relation to
the increase in accounts receivable, $309,377 for the reduction in accrued
marketing commitments and $304,515 in increased prepaid expenses. The Company
generated cash through a decrease in income taxes receivable of $2,717,968 and
the reduction of inventories of $376,114. In the same period, the Company used
$223,889 for investing activities which consisted of $244,877 for purchases of
property and equipment and generated $20,988 from other long-term assets. In
addition, $95,413 was provided by financing activities which consisted of
$105,443 from the issuance of common stock, offset, in part, by $10,030 for
payments on capital lease obligations.
At June 30, 1998, the Company's principal sources of liquidity consisted
of $17.5 million of cash and cash equivalents and $5.0 million of available
credit facilities. In August 1997, the Company renewed 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. 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. The Company is
currently negotiating the Agreement and anticipates completing the Agreement in
the third quarter of 1998 with terms similar to those currently in place. At
June 30, 1998, there were no borrowings outstanding under the Agreement and the
Company was in compliance with all covenants. The financial covenants require
that the Company maintain a quick assets ratio of not less than 2 to 1, maintain
tangible net worth of not less than $20,000,000, maintain a ratio of total
liabilities to tangible net worth of not more than 1 to 1 and maintain an
aggregate total of cash and marketable securities in an amount at least equal to
the product of two times the maximum amount of the Credit Line. As such, the
bank held no security interest in any of the Company's assets.
The Company's principal commitment at June 30, 1998 consisted of a lease
on its office and manufacturing facility. The Company expects to spend
approximately $500,000 for capital expenditures during the remaining six months
of 1998.
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 Networked Monitoring
Systems. Although the Company experienced increased Networked Monitoring revenue
growth in each quarter of 1997, sales of the Company's Network Monitoring
systems cannot be expected to achieve sequential quarter to quarter growth in
1998 and sales of the Company's Networked Monitoring systems have not returned
to 1995 sales levels and the Company's operating results since 1995 have been
affected by the lower sales levels. If the Company is not successful in
marketing and selling its Networked Monitoring systems, the Company's business,
operating results and financial condition would be materially adversely
affected. In addition, although the Company's Networked Monitoring products have
been installed in more
11
<PAGE> 12
than 100 hospitals, there is no assurance that the Company's products will
achieve the hospital penetration that the Company anticipates.
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 expanding its sales and marketing programs and the effects
of changes in sales force alignment; 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 Networked Monitoring systems and OEM 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; costs associated with responding software "bugs" or errors;
regulatory compliance and timing of regulatory clearances 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. In addition, a significant portion of the Company's
expenses are relatively fixed, and the amount and timing of increases in such
expenses are based in large part on the Company's expectations for future
revenues. 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, and
this review and approval process is becoming more complex, more financially
oriented and increasingly subject to overall integration into the hospital's
information systems planning. The sales cycle for the Company's Networked
Monitoring systems has typically been nine to 18 months from initial contact to
receipt of a purchase order. During this period, the Company expends substantial
time, effort and funds preparing a contract proposal and negotiating a purchase
order without any guarantee that the Company will complete the transaction. The
significant or ongoing failure to reach definitive agreements with customers has
in the past and may in the future have a material adverse effect on the
Company's business, operating results and financial condition.
Competition. The Company's Networked Monitoring systems compete with
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 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
applications 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. In addition, the Company's success in selling its
multi-parameter OpenNet networks to hospitals and IHDNs will depend to a large
extent on its ability to interface with patient monitoring and life support
devices of other vendors. Any action on the part of such other vendors to make
such 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 OEM products is also intensely competitive. The Company
sells 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
12
<PAGE> 13
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.
In addition, the Company has elected to incorporate into some of its OEM
product offerings the hardware and software for slightly larger networks and
real-time redistribution of information to remote viewing stations for use in
specialty departments of hospitals for which the Company's OEM customers design
and sell their products. As the Company incorporates these or other features
into its OEM products, the Company believes that its OEM customers would not
compete with its Networked Monitoring systems because the Networked Monitoring
systems are sold to hospitals and IHDNs who elect to install larger, more
dispersed systems. However, the Company could face competition with its OEM
customers to the extent hospitals forego purchasing the Company's facility-wide
Networked Monitoring systems for the smaller departmental systems of its OEM
customers.
Customer Concentration; Dependence on Departmental Products. The
Company's OEM product sales, which represented approximately 55.6% and 53.7% of
the Company's total net revenues in 1996 and 1997, respectively, have
historically been to a small number of OEM customers. In 1996, Quinton
Instrument Company ("Quinton") and Datascope Corporation ("Datascope") accounted
for approximately 18.4% and 17.7%, respectively, of the Company's total revenues
and in 1997 Quinton and Datascope accounted for approximately 12.7% and 25.0%,
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. Historically, the Company derived substantially all of its revenue
from sales of its Networked Monitoring systems and OEM products. The Company
believes that as the market for these 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. 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, or if the Company's new products or product enhancements,
such as SiteLink, do not achieve market acceptance, 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
13
<PAGE> 14
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.
Year 2000 Compliance. In the next two years, many companies will face a
potentially serious information systems (computer) problem because many software
application and operational programs written in the past may not properly
recognize calendar dates beginning in the Year 2000. This problem could force
computers to either shut down or provide incorrect data or information. The
Company is presently in the process of examining its computer systems and
contacting its software providers to determine whether the Company's software
applications are compliant with the Year 2000. As of June 30, 1998, the
Company's enterprise business system has been validated to be Year 2000
compliant. While it is difficult to quantify the anticipated cost involved, the
Company's best estimate of expenditures is between $50,000 to $200,000 for such
upgrades since they are part of the software and hardware that the Company's
third party suppliers normally provide to the Company. While the Company
believes that its systems are fully Year 2000 compliant, the Company intends to
continue to review its information systems for any possible problems as well as
monitor its key customers and suppliers for any impact that the Year 2000 may
have on their information systems which could then impact the Company. 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.
Dependence on Sole Source Components. Certain of the Company's products
use 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. During 1997, the
Company 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 J. 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 President and Chief
Executive Officer, with Mr. Judson stepping down as such. In July 1998 the
Company's Vice President, Research and Development departed from the Company.
The addition of new senior management has involved increased salary levels that
the Company anticipates will result in increased administrative expenses in
future periods. Such management changes can also involve disruptions in the
Company's day-to-day operations, can interrupt continuity in customers
relationships and create delays in sales the cycles or product release
schedules. Although the Company believes that its senior management 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 Key Personnel. The Company's success depends to a large
extent on its ability to attract and retain key personnel. The loss of the
services, either temporarily or permanently, of any of the members of senior
management
14
<PAGE> 15
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.
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 FDA'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.
The Company's radio frequency transmitter devices are subject to
regulation by the Federal Communication Commission ("FCC"), and applicable
approvals must be obtained before shipment of such products. The Company
believes that all of its products designated for sale in the United States meet
applicable Federal Communications Commission (FCC) regulations, including US FCC
Part 15 for electromagnetic emissions. The FCC approval process starts with the
collection of test data that demonstrates that a product meets the requirements
stated in Part 15 of the FCC regulations. This data is then included as part of
a report and application that is submitted to the FCC requesting approval. The
FCC may grant or request additional information or withhold approval. Any
failure of the Company's products to conform to governmental regulations or any
delay or failure to obtain required FCC approvals in the future, if any, could
cause the delay or loss of sales of the Company's products and therefore have a
material adverse effect on the Company's business, financial condition and
result of operations.
The Company's proprietary radio frequency (RF) communication products transmit
real-time physiologic information from the patient to the central surveillance
station. These communication products currently operate in three radio bands:
VHF (174 MHz to 216 MHz, shared with TV channels 7-13); UHF (450 MHz to 470 MHz,
shared with land mobile users); and the 900 MHz radio band (902 MHz to 928 MHz
licensed for Spread Spectrum operation). The majority of the Company's RF
products use the vacant television frequencies in the VHF band. The FCC is
requiring all television stations to implement digital broadcasting transmission
for High Definition Television (HDTV). Major metropolitan areas will be required
to implement HDTV by December 31, 1998 and other markets by December 31, 2006.
In order to implement HDTV the FCC has granted each TV channel an additional 6
MHz channel for digital broadcasting until the transition period ends, at which
time the broadcaster would return one of the two channels. As TV stations use
the additional 6 MHz channel for the digital broadcasting transition, which may
take years, they may overlap into the radio spectrum which has been used for
medical RF applications. Customers of the Company's lower power RF communication
products may begin seeing more interference in the future. This interference may
result in the Company's hospital biomedical personnel having to re-tune the
Company's RF transmitters to other channels in order to reduce interference. In
the event of high interference the Company's customers may need to purchase
equipment to transmit in the UHF frequency range. The FCC also announced that
they will be expanding the usable UHF frequencies for medical RF from the
licensed 450 MHz to 470 MHz band to the unlicensed 470 MHz to 668 MHz frequency
range. With VHF frequency ranges available for medical RF use potentially
becoming more limited and the UHF frequency ranges expanding, the Company's
competitors who have historically focused their RF products in what was the more
limited UHF band, may now have a competitive advantage as compared to the
Company, until such time as the
15
<PAGE> 16
Company expands its UHF RF product offerings. Any such competitive advantage of
the Company's competitors and any additional development costs associated with
expanding the Company's UHF RF product offerings could have a material adverse
effect on the Company's business, operating results and financial condition.
Additionally, future regulatory changes could significantly affect the Company's
operations by diverting the Company's development efforts, making current
products obsolete or increasing the opportunity for additional competition that
could have a material adverse effect on the Company's business, operating
results and financial condition.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company issued an aggregate of 10,000 shares of its Common
Stock, $.0001 par value, to a consultant of the Company for a purchase price of
$3.06 per share. The aggregate purchase price paid to the Company is in a
combination of a minor cash payment and a non-recourse promissory note secured
by a pledge of the shares to the Company. The issuance of the 10,000 shares of
Common Stock to the above mentioned individual was exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) as a transaction not involving a public offering.
In March 1998, the Company issued an aggregate of 103,000 shares of its Common
Stock, $.0001 par value, to a former employee and director of the Company for a
purchase price of $4.4375 per share. The aggregate purchase price paid to the
Company is in a combination of a minor cash payment and a non-recourse
promissory note secured by a pledge of the shares to the Company. The issuance
of the 103,000 shares of Common Stock to the above mentioned individual was
exempt from registration under the Securities Act pursuant to Section 4(2) as a
transaction not involving a public offering.
In March 1998, the Company issued an aggregate of 18,535 shares of its common
stock at a fair market value of $4.4377 per share pursuant to the Company's
401(k) Plan matching program. The issuance of the shares pursuant to the
Company's 401(k) Plan matching program is exempt from registration under the
Securities Act on the basis that the issuance of the shares to the 401(k) Plan
does not constitute a "sale" within the meaning of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held an Annual Meeting of Stockholders on May 21, 1998. At
the Annual Meeting, the following votes were cast for the proposals indicated:
Proposal One: Election of Directors:
Name For Withheld
------------------------------------------------------
Frank T. Sample 7,045,423 11,956
Patrick T. Hackett 7,049,164 8,215
Jack W. Lasersohn 7,049,164 8,215
Timothy T. Weglicki 7,049,164 8,215
Proposal Two: Ratification and approval of amendments of the Corporation's 1996
Employee Stock Purchase Plan to increase the shares reserved under the plan by
150,000 to 300,000 shares and make other administrative changes:
For 7,039,401
Against 8,493
Abstain 9,845
Proposal Three: Ratification of the appointment of Deloitte & Touche LLP as
independent public accountants of the Company for the fiscal period ending
December 31, 1998:
For 7,056,279
Against 100
Abstain 1,000
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<PAGE> 17
ITEM 5. OTHER INFORMATION
Pursuant to the Company's Bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the secretary of the Company
not less than the ninety (90) days prior to the first anniversary of the 1998
annual meeting (i.e., May 21, 1999), unless such matters are included in the
Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange
Act, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
17
<PAGE> 18
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 August 12, 1998.
VITALCOM INC.
/s/ Frank T. Sample
--------------------------------
Frank T. Sample
President, Chief Executive Officer
/s/ Shelley B. Thunen
--------------------------------
Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,467
<SECURITIES> 0
<RECEIVABLES> 3,318
<ALLOWANCES> 286
<INVENTORY> 1,793
<CURRENT-ASSETS> 22,582
<PP&E> 3,730
<DEPRECIATION> 1,983
<TOTAL-ASSETS> 25,138
<CURRENT-LIABILITIES> 3,415
<BONDS> 0
0
0
<COMMON> 37,220
<OTHER-SE> (15,541)
<TOTAL-LIABILITY-AND-EQUITY> 25,138
<SALES> 5,428
<TOTAL-REVENUES> 5,428
<CGS> 2,363
<TOTAL-COSTS> 2,363
<OTHER-EXPENSES> 3,644
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> (244)
<INCOME-PRETAX> (345)
<INCOME-TAX> 6
<INCOME-CONTINUING> (345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (351)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
