<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 March 31, 1999
--------------------
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
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 May 11, 1999, there were 8,185,979 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>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 13,021,630 $ 10,460,810
Short-term investments 2,464,900 5,369,213
Accounts receivable, net 4,787,260 4,615,295
Inventories 1,146,244 1,391,899
Prepaid expenses 164,096 140,647
------------ ------------
Total current assets 21,584,130 21,977,864
Property
Machinery and equipment 1,567,407 1,503,905
Office furniture and computer equipment 2,268,092 2,200,732
Leasehold improvements 181,778 173,883
------------ ------------
4,017,277 3,878,520
Less accumulated amortization and depreciation (2,394,387) (2,223,301)
------------ ------------
Property, net 1,622,890 1,655,219
Other assets 123,877 133,894
Goodwill, net 447,431 455,573
------------ ------------
Total assets $ 23,778,328 $ 24,222,550
============ ============
</TABLE>
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 559,979 $ 429,987
Accrued payroll and related costs 630,074 804,887
Accrued warranty costs 750,096 757,448
Other accrued liabilities 582,302 711,255
Current portion of capital lease obligations 27,574 24,990
------------ ------------
Total current liabilities 2,550,025 2,728,567
Capital lease obligations, less current portion 22,327 31,552
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding at
December 31, 1998 and March 31, 1999, respectively
Stockholders' equity (deficit):
Common stock, including paid-in capital, $0.0001 par
value; 25,000,000 shares authorized, 8,162,972 and
8,192,279 shares issued and outstanding at December
31, 1998 and March 31, 1999, respectively 37,563,228 37,491,563
Note receivable for common stock sales (30,590) (30,590)
Accumulated deficit (16,326,662) (15,998,542)
------------ ------------
Net stockholders' equity 21,205,976 21,462,431
------------ ------------
Total liabilities and stockholders' equity $ 23,778,328 $ 24,222,550
============ ============
</TABLE>
3
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VITALCOM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues $ 4,810,100 $ 5,100,726
Cost of sales 2,025,326 2,479,535
----------- -----------
Gross profit 2,784,774 2,621,191
Operating expenses:
Sales and marketing 1,571,321 1,720,910
Research and development 1,125,474 1,177,390
General and administrative 590,895 614,849
----------- -----------
Total operating expenses 3,287,690 3,513,149
----------- -----------
Operating loss (502,916) (891,958)
Other income, net 183,796 218,268
----------- -----------
Loss before provision for income taxes (319,120) (673,690)
Provision for income taxes 9,000 6,300
Net loss $ (328,120) $ (679,990)
=========== ===========
Net loss per basic and diluted common share $ (0.04) $ (0.08)
=========== ===========
Weighted average basic and diluted common shares 8,182,828 8,049,236
=========== ===========
</TABLE>
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (328,120) $ (679,990)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 179,228 168,922
Loss on disposal of property 939 7,377
Changes in operating assets and liabilities:
Accounts receivable (171,965) 488,192
Inventories 245,655 92,674
Prepaid expenses and other assets (13,432) (263,306)
Accounts payable 129,992 376,532
Accrued payroll and related costs (174,813) (455,804)
Accrued warranty costs (7,352) (8,202)
Accrued liabilities (128,953) (174,261)
------------ ------------
Net cash used in operating activities (268,821) (447,866)
Cash flows from investing activities:
Purchases of property (139,696) (93,688)
Proceeds from sale of short-term investments 2,904,313 6,000,000
------------ ------------
Net cash provided by investing activities 2,764,617 5,906,312
Cash flows from financing activities:
Repayment of capital lease obligation and (6,641) (5,970)
long-term debt
Net proceeds from issuance of common stock 71,665 90,235
------------ ------------
Net cash provided by financing activities 65,024 84,265
Net increase in cash and cash equivalents 2,560,820 5,542,711
Cash and cash equivalents, beginning of period 10,460,810 12,157,160
------------ ------------
Cash and cash equivalents, end of period $ 13,021,630 $ 17,699,871
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,312 $ 4,429
============ ============
Income taxes paid $ 2,180 $ 6,300
============ ============
Supplemental schedule of noncash transactions:
Notes receivable for stock sales $ $ 30,600
============ ============
</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 for the year ended December 31, 1998 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 March 31, 1999, and the
results of its operations and its cash flows for the three-month periods ended
March 31, 1999 and 1998. 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
periods ended March 31, 1999 and 1998, the diluted weighted average shares were
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 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 three months ended
March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- -------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1998 1,440,040 $0.60 to $4.00
Granted 161,000 $3.00
Exercised (2,250) $0.60 to $1.28
Canceled (72,962) $3.00 to $5.72
---------
Balance, March 31, 1999 1,525,828 $0.60 to $4.00 365,433
=========
</TABLE>
At March 31, 1999, 686,980 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 three months ended March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- -------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1998 48,057 $3.00 to $4.00
Canceled (8,775) $3.00 to $6.00
------
Balance, March 31, 1999 39,282 $3.00 to $4.00 18,366
======
</TABLE>
At March 31, 1999, 60,718 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 three months ended March 31, 1999. At March 31, 1999,
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. 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, 1997 and 1998 the Company
issued 32,815, 47,359 and 52,703 shares of Common Stock, under the ESPP for
$153,410, $191,218 and $145,264 respectively. At March 31, 1999, $41,237 has
been withheld from employee earnings for stock purchases under the ESPP.
4. SEGMENT REPORTING
Utilizing the management approach, the Company has broken down its business
based upon sales through its two distribution channels. The Company does not
allocate operating expenses to these segments, nor does it allocate specific
assets to these segments. Therefore, segment information reported includes only
net sales.
Selected information regarding the Company's product sectors is as follows:
<TABLE>
<CAPTION>
OEM Enterprise-wide
Products Products
----------- ---------------
<S> <C> <C>
Three months ended March 31, 1999
Net Sales............................. $2,649,615 $2,160,485
Three months ended March 31, 1998
Net Sales............................. $3,123,860 $1,976,866
</TABLE>
SUBSEQUENT EVENT
Stock Repurchase Program -- In April, 1999, the Company announced it plans to
implement a stock repurchase program whereby up to 800,000 shares of its Common
Stock may be purchased in the open market from time to time.
Recent Accounting Pronouncements -- In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income, and No. 131 (SFAS 131), Disclosures About Segments of an Enterprise and
Related Information. These statements are effective for fiscal years commencing
after December 15, 1997. SFAS 130 establishes standards for the reporting and
disclosure of comprehensive income (revenues, expenses, gains and losses) in a
full set of general purpose financial statements. For the three months ended
March 31, 1999, there was no difference between comprehensive income and amounts
currently reported in the Company's financial statements. SFAS 131 establishes
standards for the reporting of information about operating segments of a
business and is reported in Company's Form 10-K for the year ended December 31,
1998.
In March 1998, the American Institute of Certified Public Accountants issued SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and requires costs incurred in
the application development stage (whether internal or external) to be
capitalized. This SOP is applicable to all financial statements for fiscal years
7
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beginning after December 15, 1998. Management does not believe the
implementation of SOP 98-1 will have a material effect on the Company's
financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. Management does not believe the implementation of SFAS
133 will have a material effect on the Company's financial position or results
of operations.
8
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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
CONSTITUTE 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. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE
FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING BUT NOT LIMITED TO THOSE
SET FORTH IN "- RISK FACTORS". SEE "- FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS". ADDITIONAL INFORMATION IS AVAILABLE IN OTHER COMPANY REPORTS AND OTHER
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
VitalCom provides computer networks and related radio communications
products that acquire, interpret and distribute real-time monitoring
information. The Company's radio and computer networks acquire physiologic data
generated by its own proprietary ECG monitors and other manufacturers' bedside
equipment located throughout a healthcare facility. The Company's products are
sold through a direct sales force to acute care hospitals and integrated
healthcare delivery networks ("IHDNs") and on an Original Equipment Manufacturer
("OEM") basis to patient monitoring equipment manufacturers.
Revenues from sales of Enterprise-wide systems sold by the Company's direct
sales force are recognized upon shipment. The sales cycle for Enterprise-wide
systems has typically been from nine to 18 months. The Company has experienced
seasonal variations in sales of its Enterprise-wide systems, with sales in the
first quarter typically lower than the preceding fourth quarter's sales due to
customer budget cycles. Furthermore, a large percentage of a particular
quarter's shipments of Enterprise-wide 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 departmental products, with sales in the first quarter typically lower
than the preceding fourth quarter's sales.
The Company's products are generally shipped as orders are received.
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Total Revenues. Total revenues consist of revenue from sales of Enterprise-wide
systems and OEM products, together with fees for installation and servicing of
Enterprise-wide products. Total revenues decreased 5.7% to $4.8 million in the
first quarter of 1999 compared to $5.1 million in the first quarter of 1998.
This decrease was due primarily to the decrease in products sold to the
Company's OEM customers.
Gross Margins. Cost of goods sold generally includes material, direct labor,
overhead and, for Enterprise-wide systems, installation expenses. Cost of sales
decreased 18.3% to $2.0 million in the first quarter of 1999 from $2.5 million
in the first quarter of 1998, on a 5.7% decrease in revenues in 1999. Gross
margin improved to 57.9% in the first quarter of 1999 compared to 51.4% for the
first quarter of 1998. The increase in gross margin in the first quarter of 1999
as compared to the first quarter of 1998 was due to higher margins recognized on
Enterprise-wide products in 1999 due to the continuing reduction in material and
overhead costs coupled with the sale of higher margin Enterprise-wide products.
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Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to Enterprise-wide systems and OEM
sales and marketing personnel, travel and entertainment expenses, and other
promotional expenses. Sales and marketing expenses were $1.6 million or 32.7% of
total revenue in the first quarter of 1999, as compared to $1.7 million or 33.7%
of total revenue in the first quarter of 1998. The $149,589 decrease in sales
and marketing expenses in the first quarter of 1999 as compared to the first
quarter of 1998 was primarily attributable to lower salary and commission
expenses.
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
$1.1 million or 23.4% of total revenue in the first quarter of 1999, as compared
to $1.2 million or 23.1% of total revenue in the first quarter of 1998. The
$51,916 decrease in the first quarter of 1999 as compared to the first quarter
of 1998 was due primarily to the lower purchases of supplies incurred for
development work on prototype products.
General and Administrative Expenses. General and administrative expense includes
accounting, finance, MIS, human resources, general administration, executive
officers and professional fee expenses. General and administrative expenses were
$590,895 or 12.3% of total revenue in the first quarter of 1999, as compared to
$614,849 or 12.1% of total revenue in the first quarter of 1998. The $23,954
decrease in the first quarter of 1999 as compared to the first quarter of 1998
was attributable to a decrease in legal and 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 decreased to
$183,796 for the first quarter of 1999 from $218,268 for the first quarter of
1998. The decrease resulted from lower income derived from the Company's
short-term investments.
Provision for Income Taxes. In the first quarters of 1999 and 1998, the Company
recorded minimum state tax provisions of $9,000 and $6,300, respectively. 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 flow from operations, cash and cash equivalent balances, a bank line of
credit and long-term debt. During the year ended December 31, 1996, the Company
issued 2,300,000 shares of common stock in its initial public offering, raising
$25.6 million, net of expenses. At March 31, 1999 the Company had $15.5 million
in cash and cash equivalents as compared to $15.8 million at December 31, 1998.
In the first quarter of 1999, the Company used cash from operating
activities of $268,821 to fund a $328,120 net loss. In addition, $174,813 was
used for payroll and related costs, $171,965 from the increase in accounts
receivable and $128,953 for accrued liabilities. This was partially offset by
the $245,655 reduction in inventories, $179,228 in non-cash adjustments provided
by depreciation and amortization of fixed assets and intangible assets, and
$129,992 in cash provided from the increase in accounts payable.
The Company provided $2,764,617 in cash from investing activities of
which $2,904,313 was provided by the sale of short-term investments. Cash used
for investing activities was $139,696 for the purchase of capital equipment in
the first quarter of 1999. In addition, $65,024 in cash was provided by
financing activities, principally, $71,665 in net proceeds from the issuance of
the Company's Common Stock for the matching contribution to its 401(k) plan.
In the first quarter of 1998 the Company used cash from operating
activities of $447,866 to fund a $679,990 net loss. In addition, $455,804 in
cash was used for payroll and related costs, $263,306 for prepaid insurance and
$174,261 for accrued liabilities. This was partially offset by $488,192 in cash
provided from the reduction in accounts receivable and $376,532 in cash provided
from the increase in accounts payable.
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The Company provided $5,906,312 in cash from investing activities in the
first quarter of 1998 of which $6,000,000 was proceeds from the sale of
short-term investments. During the first quarter of 1998, $93,688 in cash was
used to purchase capital equipment In addition, $84,265 in cash was provided by
financing activities, including $90,235 in net proceeds from the issuance of the
Company's Common Stock to make the matching contribution for its 401(k) plan.
At March 31, 1999, the Company's principal sources of liquidity
consisted of $15.5 million of cash, cash equivalents and short-term investments,
and $5.0 million of available credit facilities. In December 1998, the Company
renewed a secured lending arrangement (the "Agreement") with Silicon Valley
Bank, providing for a $5.0 million revolving line of credit agreement bearing
interest at either the bank's prime rate or LIBOR interbank market rate, as
selected by the Company. The bank does not have security interest in any of the
Company's assets until the Company is borrowing under the line of credit. The
Agreement expires in December 1999. At March 31, 1999, there were no borrowings
outstanding under the Agreement and the Company was in compliance with all
covenants. The financial covenants requires that the Company maintain a quick
assets ratio of not less than 1.75 to 1, maintain tangible net worth of not less
than $18,000,000, maintain a ratio of total liabilities to tangible net worth of
not more than .75 to 1 and not incur a net loss (after taxes) for the fiscal
year ending December 31, 1998 in excess of $3,250,000; nor incur a net loss
(after taxes) for the fiscal year ending December 31, 1999 in excess of
$2,000,000.
The Company's principal commitment at March 31, 1999 consisted of a
lease on its office and manufacturing facility. The Company expects to spend
approximately $700,000 for capital expenditures during the remaining nine months
of 1999.
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
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
constitute 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 sales cycle for Enterprise-wide systems, seasonal variations in sales of its
Enterprise-wide systems and OEM product sales, continued reduction in the cost
of material and manufacturing overhead, lower costs, that the Company expects to
spend appoximately $700,000 in capital expenditures in the next nine months,
that the Company believes that existing cash resources and its line of credit
facilities will be sufficient to fund the Company's operations for the next
twelve months, that the Company intends to implement a stock repurchase program,
the outcome of any regulatory development, the probable FCC licensing of a new
band for medical telemetry and the Company's intent to develop RF products to
operate in this new band, potential new products, rebuilding of the Company's
funnel of potential new Enterprise-wide systems sales, the Company's estimated
expenditures for Year 2000 compliance, the expected effect of Year 2000
compliance on the Company and the effect and timing of Year 2000 compliance on
the Company's customers. Actual results may vary substantially from these
forward-looking statements for many reasons, including but not limited to those
set forth in "-- Risk Factors".
RISK FACTORS
Dependence on Increased Market Acceptance of Enterprise-wide Monitoring
Systems. Since 1995, the Company's sales levels for its Enterprise-wide systems
has been lower than expected, which, together with investments and expense
levels that are incurred based on the expectation of higher sales, has resulted
in net losses in each year since 1995 and has had a material adverse effect on
the Company's business, operating results and financial condition. If the
Company is not successful in increasing sales levels of its Enterprise-wide
systems in future periods, the Company's business, operating results and
financial condition will continue to be materially adversely affected.
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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
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 Enterprise-wide 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 to software "bugs"
or errors; regulatory compliance and timing of regulatory clearances; changes in
government regulations and other regulatory developments; and general economic
factors.
The Company's products are generally shipped as orders are received.
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. This dynamic has
contributed to the Company's net losses in the past. 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.
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 Enterprise-wide
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. Any
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.
Possible Delisting of Securities from the Nasdaq National Market. The
Company's Common Stock trades on the Nasdaq National Market. The Nasdaq National
Market's continued listing standards require the Company to have (i) 750,000
shares publicly held; (ii) a market value of publicly held shares of $5 million;
(iii) net tangible assets of at least $4 million; (iv) 400 shareholders of round
lots; and (v) a minimum bid price of at least $1 per share. The Company believes
that it currently does not meet item (ii) above, and it is possible that the
Company could fall below other criteria in the future. Accordingly, the Company
may be subject to possible delisting procedures in the future from the Nasdaq
National Market. In this regard, the Company received notice from the Nasdaq
National Market that Nasdaq would review the Company's compliance in July 1999.
If the Company does not achieve compliance by that time, it may become delisted
from the Nasdaq National Market, which would adversely affect the ability or
willingness of investors to purchase the Company's securities and therefore
would severely adversely affect the market liquidity for the Company's
securities.
Competition. The Company's Enterprise-wide systems compete with systems
offered by a number of competitors, including Hewlett-Packard Company,
SpaceLabs, Inc. and General Electric Company, all 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. While the Company is not
aware of any competitive open system multi-parameter Enterprise-wide systems
currently available, 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
12
<PAGE> 13
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 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 may in the future elect to incorporate in its OEM
products the hardware and software for larger networks and expand the number of
OEM customers with the hardware and software required for 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. Although the Company believes that its OEM customers would not
compete with its Enterprise-wide systems because the Enterprise-wide systems are
sold to hospitals and IHDNs who elect to install larger, more dispersed systems,
the Company could face competition with its OEM customers to the extent
hospitals forego purchasing the Company's facility-wide Enterprise-wide 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%, 53.7% and 57.9% of the
Company's total net revenues in 1996, 1997 and 1998, respectively, have
historically been to a small number of OEM customers. In 1998, Quinton
Instrument Company and Datascope Corporation accounted for approximately 19.7%
and 22.6%, respectively, of the Company's total revenues. In the three months
ended March 31, 1999, Quinton Instrument Company and Datascope Corporation
accounted for approximately 21% and 27%, 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 Enterprise-wide 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 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.
13
<PAGE> 14
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.
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
were required to implement HDTV by December 31, 1998 and other markets will be
required to implement 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. In 1998 the FCC expanded the usable UHF frequencies
for medical RF from the licensed 450 MHz to 470 MHz band to the previously
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 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.
During 1998 the Company joined a task force created by the American
Hospital Association (AHA) and the FDA called the Spectrum Selection Workgroup
Medical Telemetry Task Force (the "Task Force") along with several other
14
<PAGE> 15
medical RF users, including its competitors. The purpose of the Task Force is to
respond to potential interference problems from HDTV, land mobile users and low
power television to wireless patient monitoring devices. The Task Force's
mission is to identify spectrum candidates for future medical telemetry use,
evaluate use and make recommendations to the FCC. As such, the Task Force has
petitioned the FCC to license the UHF 608 MHz to 614 MHz band, currently
reserved for radio astronomy, for medical use. It is anticipated that the Task
Force will submit its petition during the first half of 1999, with proposed rule
making and public commentary to follow. The Task Force will ask the FCC to
expedite licensing for medical RF applications in the 608 MHz to 614 MHz band.
In the event the FCC approves this license, which the Company believes is
probable, the Company may be at a disadvantage in the marketplace if one or more
of its competitors develop and introduce RF products in this new band before the
Company introduces products in the new band, resulting in lost or delayed
revenues. In addition, the costs of developing RF transmitter and receiver
products in this new band could be expensive or divert research and development
resources from other projects resulting in higher costs and delayed projects.
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 which 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. The Company in the past had to incur
warranty expenditures for upgrades that had adverse expenses to the periods.
Even unsuccessful claims could result in the expenditure of funds in litigation
and diversion of management time and resources.
Year 2000 Computer Systems Compliance. Many computer systems, software,
and electronic equipment accept only two-digit entries in the date code field.
Therefore "00" for the year 2000 could be interpreted to be the year 1900,
resulting in an invalid date. These systems will need to be changed to
distinguish 21st century dates. In addition, certain systems and products do not
correctly process "leap year" dates. As a result, in the next 12 months,
computer systems, software ("IT Systems"), and other equipment, such as
elevators, phones, office equipment, and manufacturing equipment used by many
companies may need to be upgraded, repaired, or replaced to comply with "Year
2000" and "leap year" requirements.
The Company's Enterprise-wide systems and OEM central stations use a
personal computer (PC) platform and include operating system, display, clinical
analysis and networking software. The Company's research and development
department has evaluated all Company Enterprise-wide products built and shipped
on or after January 1, 1990. Test procedures included testing for (a) transition
dates of December 31, 1999 to January 1, 2000 and December 31, 2000 to
15
<PAGE> 16
January 1, 2001; (b) leap year transition dates of February 28, 2000 to February
29, 2000 and February 29, 2000 to March 1, 2000; (c) a powered-down rollover
test; (d) a powered-up rollover test; (e) a check of the date and time of
history events and full disclosure on monitor displays; (f) alarms set and check
for correct functioning after the transition dates and times and (f)
verification for printouts for a three month period during the transition dates.
The Company tested a total of 111 hardware and software combinations. All
products the Company is currently selling and installing are Y2K compliant. Of
the 111 product combinations tested 40 combinations are compliant and Y2K
certified, 35 are compliant with a simple workaround such as a power-down and
power-up, 32 are not fully compliant, but which have relatively simple
workarounds to provide a solution for the product to make it compliant, and 4
that are not compliant and have no work around. All of the Company's
Enterprise-wide customers have received a technical bulletin explaining the
status of the Company's Y2K compliance requirements and applicable workarounds,
if necessary. Recently the Company expanded its testing beyond the generally
accepted Y2K criteria enumerated above to include testing for dates of January
1, 2001 and beyond. Testing has been completed for the expanded year 2001 and
beyond analysis. Tests verify that the Company's 486 based personal computer
products that print reports with an invalid date are limited to two of the four
Y2K tested software versions found non-compliant and for which there is no work
around. The Company believes that it does not have any contractual obligation to
update or replace any software or equipment for its customers at no charge. The
Company's OEM customers are responsible for Y2K compliance and support for their
end user customers. All of the Company's transmitters, receivers (RF products)
and display monitors are year 2000 compliant based on the fact that none of
these devices contain a real time clock that would pose a Year 2000 date
compliance issue.
The Company has conducted an internal review of most of its internal
systems, including inventory, manufacturing, planning, finance, human resources,
payroll, automation, laboratory, and research systems. The systems affected by
the Year 2000 problem are divided into eight categories including the Company's
Enterprise-wide systems and OEM central stations discussed above. Business
Computer Systems comprise any mainframe, midrange, or PC based computer system
used in corporate operations. These systems generally involve application code
provided by third-party vendors supported by internal staff. Technical
Infrastructure are specific computer and process control software systems. End
User Computing comprise the PC and server based office automation. Suppliers,
Agents, and Service Providers comprise the software formulated by our suppliers,
banks, utilities, and other suppliers. Manufacturing, Warehousing, Servicing
Equipment comprise the equipment on our factory floor and warehouse areas that
may be date dependent, especially micro-processor controlled devices.
Environmental Operations in Plant, Offices and Other Sites comprise the
Company's HVAC, security/access system, elevators, PBX, fire and alarm systems,
and other systems of this nature. Dedicated Research and Development Test
Facilities comprise controllers, devices, instruments etc. in the Company's test
facilities.
As part of the Company's review to assure compliance with Year 2000, the
Company has formed a task force (the "Task Force") to oversee Year 2000 and leap
year issues. The Task Force has reviewed all IT Systems and Non-IT Systems that
have been determined not to be Year 2000 and leap year compliant and has
identified and begun implementation of solutions to ensure such compliance. The
Company has prioritized the remediation effort to fix critical business systems
first, non-critical systems second, and cosmetic changes to reports and displays
last. Key critical business systems, such as Financials (General Ledger,
Purchasing, Accounts Payable, Accounts Receivable and Fixed Assets) and Material
Requirements Planning, are currently 100% compliant. Remaining critical and
non-critical business systems is expected to be completed by mid-1999 and
cosmetic changes to reports and displays are anticipated to be completed in the
fourth quarter of 1999. As part of contingency planning, the Company is
developing procedures for those areas that are critical to its business. These
plans will be designed to mitigate serious disruptions to the business beyond
the end of 1999. The major efforts in contingency planning occurred in the last
quarter of 1998 with the expectation that contingency plans will be in place by
the end of the second quarter of 1999. Based on current plans and efforts to
date, the Company does not anticipate that Year 2000 problems will have a
material adverse effect on results of operations or financial condition.
The Company has contacted its major customers, vendors, and service
suppliers whose systems failures potentially could have a significant impact on
the Company's operations to verify their Year 2000 readiness to determine
potential exposure to Year 2000 issues. The Company has been informed by 75
percent of its major customers, vendors, and service suppliers that such
suppliers will be Year 2000 compliant by the Year 2000. Failure of these third
parties systems to timely achieve Year 2000 compliance could have a material
adverse effect on the business, financial
16
<PAGE> 17
condition, results of operations and prospects of the Company. Year 2000
problems could affect many of the Company's production, distribution, plant
equipment, financial and administrative operations. Systems critical to the
business which have been identified as non-Year 2000 compliant are either being
replaced or corrected through programming modifications.
Remediation of problems discovered will be corrected through internal
efforts, vendor upgrades, replacement, or decommissioning of obsolete systems
and equipment. External and internal costs associated with these efforts are
currently expected to be approximately $200,000. As of March 31, 1999, the
Company had spent less than $20,000 on costs associated with the Year 2000
effort. The Company does not expect the costs relating to Year 2000 remediation
to have a material effect on results of operations or financial condition.
The Company has not determined the state of compliance of certain
third-party suppliers of services such as phone companies, long distance
carriers, financial institutions and electric companies. The failure of any one
could severely disrupt the Company's ability to carry on its business as will as
disrupt the business of the Company's customers.
Failure to provide Year 2000 and leap year compliant business solutions to
customers or to receive such business solutions from its suppliers could result
in liability to the Company or otherwise have a material adverse effect on the
Company's business, results of operations or financial condition. The Company
could be affected through disruptions in the operation of the enterprises with
which the Company interacts or from general widespread problems or an economic
crisis resulting from non-compliant Year 2000 systems. Despite the Company's
efforts to address the Year 2000 effect on its internal systems and business
operations, such effect could result in a material disruption of its business or
have a material adverse effect on the Company's business, financial condition or
results of operations.
Dependence on Sole Source Components; Component, Assembly & Systems
Obsolescence. 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. In addition, from time to time, certain components, subassemblies and
systems used by the Company are discontinued by manufacturers, requiring the
Company to replace the components, subassembly or system with an equivalent
product or if no such equivalent can be identified to modify and re-validate the
product design. Any inability to obtain such components on a timely basis or at
commercially reasonable prices or to redesign the product in a timely manner
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 recent years, the
Company has experienced a high degree of turnover in its senior management team.
These management changes have involved disruptions to the Company's day-to-day
operations, has interrupted continuity in customer relationships and has created
delays in sales cycles or product release schedules. Although the Company
believes that its existing 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 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.
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<PAGE> 18
Quantitative and Qualitative Disclosures About Market Risk. The Company's
financial instruments include cash and long-term debt. At March 31, 1999, the
carrying values of the Company's financial instruments approximated their fair
values based on current market prices and rates.
It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies. Due
to this, the Company does not have significant overall currency exposure at
March 31, 1999. The Company's market risk disclosures are not material and are
therefore not required.
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.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 11, 1999.
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
19
<PAGE> 20
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,022
<SECURITIES> 2,465
<RECEIVABLES> 5,144
<ALLOWANCES> 357
<INVENTORY> 1,146
<CURRENT-ASSETS> 21,584
<PP&E> 4,017
<DEPRECIATION> 2,394
<TOTAL-ASSETS> 23,778
<CURRENT-LIABILITIES> 2,550
<BONDS> 0
0
0
<COMMON> 37,563
<OTHER-SE> (16,358)
<TOTAL-LIABILITY-AND-EQUITY> 23,778
<SALES> 4,810
<TOTAL-REVENUES> 4,810
<CGS> 2,025
<TOTAL-COSTS> 2,025
<OTHER-EXPENSES> 3,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (184)
<INCOME-PRETAX> (319)
<INCOME-TAX> 9
<INCOME-CONTINUING> (328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (328)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
