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 December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____to _____
Commission file number: 0-18793
VITAL SIGNS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Campus Road
Totowa, New Jersey 07512
(Address of principal executive office, including zip code)
973-790-1330
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At February 1, 1998, there were 12,819,175 shares of Common Stock, no
par value, outstanding.
<PAGE>
VITAL SIGNS, INC.
INDEX
Page
Number
PART I.
Financial Information 1
Item 1. Financial Statements
Consolidated Balance Sheet as of
December 31, 1997 (Unaudited) and
September 30, 1997 2
Consolidated Statement of Income
for the Three Months Ended
December 31, 1997 and 1996 (Unaudited) 3
Consolidated Statement of Cash
Flows for the Three Months Ended
December 31, 1997 and 1996 (Unaudited) 4
Notes to Consolidated Financial
Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6-9
PART II.
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I.
Financial Information
Item 1. Financial Statements
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Vital Signs, Inc. (the "registrant" or the
"Company" or "Vital Signs") believes that the disclosures are adequate to assure
that the information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the registrant's Annual Report on Form 10-K for the year
ended September 30, 1997.
The results of operations for the interim periods presented herein are
not necessarily indicative of the results to be expected for the entire fiscal
year.
<PAGE>
<TABLE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31, September 30,
1997 1997
(In Thousands)
ASSETS
(Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,142 $ 3,685
Marketable securities 300 425
Accounts receivable, less allowance for
doubtful accounts of $136 and $101, respectively 20,735 16,405
Inventory 20,092 19,559
Prepaid expenses and other current assets 8,841 11,187
---------- ----------
Total Current Assets 51,110 51,261
Property, plant and equipment - net 36,057 33,825
Marketable securities 13,696 18,206
Goodwill 28,724 28,907
Other assets 8,705 4,749
------------ ------------
Total Assets $ 138,292 $ 136,948
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,198 $ 6,204
Current portion of long-term debt 557 611
Accrued expenses 5,730 6,114
Amounts payable relating to acquisitions 230 230
------------ ------------
Total Current Liabilities 11,715 13,159
Deferred Income Taxes Payable 1,385 1,366
Long-term debt 5,312 5,529
Other 4,283 4,665
------------ ------------
Total Liabilities 22,695 24,719
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock - no par value:
authorized 40,000,000 shares, issued
12,698,955 and 12,674,673 shares, respectively 22,567 22,149
Allowance for aggregate unrealized loss
on marketable securities (67) (129)
Retained earnings 93,097 90,209
------------ ------------
Stockholders' Equity 115,597 112,229
------------ ------------
Total Liabilities and Stockholders' Equity $ 138,292 $ 136,948
============ ============
</TABLE>
<PAGE>
<TABLE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
For the Three Months Ended
December 31,
1997 1996
---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 30,924 $ 22,830
Cost of goods sold 14,998 9,853
----------- -----------
Gross profit 15,926 12,977
Operating expenses:
Selling, general and administrative 9,777 5,766
Research and development 962 916
Interest income (262) (626)
Interest expense 121 63
Other income, net (98) (665)
Goodwill amortization 218 136
----------- -----------
Income before provision for income taxes 5,208 7,387
Provision for income taxes 1,797 2,485
----------- -----------
Net income $ 3,411 $ 4,902
=========== ===========
Basic net income per share $ .27 $ .38
=========== ===========
Basic weighted average number of shares 12,702 13,035
=========== ===========
Diluted net income per share $ .27 $ .37
=========== ===========
Diluted weighted average number of shares 12,770 13,123
=========== ===========
</TABLE>
<PAGE>
<TABLE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1997 1996
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income $ 3,411 $ 4,902
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 894 566
(Increase) decrease in deferred income taxes 19 (79)
Amortization of goodwill 218 136
Amortization of deferred credit (25) (25)
Net gain on sales of available for sale securities (59) (776)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (4,330) (322)
(Increase) in inventory (533) (1,685)
Decrease in prepaid expenses and
other current assets 2,346 2,675
Decrease in other assets 707 477
(Decrease) in accounts payable
and accrued expenses (1,390) (1,065)
Decrease in other liabilities (317) ---
------------ -----------
Net cash provided by operating activities 941 4,804
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities. 5,632 5,891
Purchases of available-for-sale securities (876) (5,541)
Acquisition of property, plant and equipment (3,126) (2,149)
Purchase of shares (4,663) ---
Other (75) (40)
------------ ------------
Net cash provided by (used in) investing activities (3,108) (1,839)
------------ ------------
Cash Flows from Financing Activities:
Net reissuance (purchase) of treasury stock 410 (2,231)
Dividends paid (523) (524)
Proceeds from exercise of stock options and warrants 8 170
Principal payments of long-term debt and
notes payable (271) (500)
------------ ------------
Net cash used in financing activities (376) (3,085)
------------ ------------
Net decrease in cash and cash equivalents (2,543) (120)
Cash and cash equivalents at beginning of period 3,685 17,747
----------- -----------
Cash and cash equivalents at end of period $ 1,142 $ 17,627
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the three
months for:
Interest $ 119 $ 133
Income taxes 277 619
</TABLE>
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 1997, the consolidated
statement of income for the three months ended December 31, 1997 and 1996
and the consolidated statement of cash flows for the three months ended
December 31, 1997 and 1996 have been prepared by Vital Signs, Inc. (the
"Company" or "VSI") and are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at December 31, 1997 and 1996 and for all periods presented have been
made.
2. The Company has adopted the Financial Accounting Standards Board Statement
No. 128, Earnings Per Share ("SFAS 128") as required effective December 15,
1997. SFAS 128 requires the disclosure of basic and diluted earnings per
share.
3. See the Company's Annual Report on Form 10-K for the year ended September
30, 1997 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time the
Company expects to make, certain forward-looking statements regarding its
business, financial condition and results of operations. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"), the Company intends to caution investors that there are
important factors that could cause the Company's actual results to differ
materially from those projected in its forward-looking statements, whether
written or oral, made herein or that may be made from time to time by or on
behalf of the Company. Investors are cautioned that such forward-looking
statements are only predictions and that actual events or results may differ
materially from such statements. The Company undertakes no obligation to
publicly release the results of any revisions to its forward-looking statements
to reflect subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
The Company intends that any forward-looking statements are accompanied by
meaningful cautionary statements in order to comply with the terms of the safe
harbor provided by the Reform Act. Accordingly, the Company has set forth a list
of important factors that could cause the Company's actual results to differ
materially from those expressed in forward-looking statements or predictions
made herein and from time to time by the Company. Specifically, the Company's
business, financial condition, liquidity and results of operations could be
materially different from such forward-looking statements and predictions as a
result of (i) competitive factors that could affect the Company's primary
markets, including the results of competitive bidding procedures implemented by
Group Purchasing Organizations and/or the success of the Company's expanded
sales force, (ii) interruptions or delays in manufacturing and/or sources of
supply, (iii) the Company's ability to control costs, (iv) timing of the
introduction of new products, (v) market acceptance of competitors' existing or
new products, (vi) adverse determinations arising in the context of regulatory
matters or legal proceedings (see Part II, Item 1 of this Quarterly Report on
Form 10Q) and (vi) legislative changes impacting the healthcare market.
Recent Acquisition
On March 14, 1997, Vital Signs, Inc. announced that it had entered into a
definitive agreement to acquire Marquest Medical Products, Inc. ("Marquest").
Concurrent with that transaction, the Company entered into an agreement with
Scherer Healthcare, Inc. ("Scherer"), which was the majority shareholder of
Marquest, to acquire, for cash, certain product rights previously sold by
Marquest to Scherer. The Company entered into inducement agreements with Scherer
and Robert Scherer, Scherer's principal shareholder, in connection with the
commitment of Scherer and Robert Scherer to vote their shares in favor of the
transaction. The transaction was approved by the shareholders of Marquest and
Scherer on July 28, 1997. The effective date of this acquisition for financial
reporting purposes is April 1, 1997.
The Company paid approximately $20 million including acquisition costs and
incurred a $2,500,000 writeoff of in process research and development, which was
charged to 1997 operations. The assets acquired amounted to approximately
$15,000,000 and liabilities assumed approximated $13,000,000. This transaction
has been accounted for as a purchase. Goodwill as a result of this acquisition
approximated $15,000,000. See the Current Reports on Form 8-K filed on March 20,
1997 and August 1, 1997 and the notes to the Company's financial statements
included in the Annual Report on Form 10-K for the year ended September 30, 1997
for additional information.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
increase (decrease) of certain items included in the Company's consolidated
statement of income.
Increase/(Decrease) From
Prior Period
Three Months Ended December 31, 1997
Compared With
Three Months Ended December 31, 1996
Net sales 35.5%
Cost of goods sold 52.2
Gross profit 22.7
Selling, general and administrative
expense 69.6
Research and development expenses 5.0
Income before provision for
income taxes (29.5)
Provision for income taxes (27.7)
Net income (30.4)
<PAGE>
COMPARISON: QUARTER ENDED DECEMBER 31, 1997
AND QUARTER ENDED DECEMBER 31, 1996
Net sales for the quarter ended December 31, 1997 increased by 35.5%
compared with the same period last year. The increase was due to the acquisition
of Marquest (22%), and growth in existing product lines (13.5%). Prices on
existing products declined on average approximately 1.5% in the three months
ended December 31, 1997 when compared to the same period in 1996.
Sales of anesthesia products representing 40.9% of net sales grew 10.5%
from the quarter ended December 31, 1996 despite selling price declines. Sales
of critical care and respiratory products representing 42.8% of net sales
increased by 85.9% due to internal growth and the acquisition of Marquest.
Excluding the sales base acquired in the Marquest transaction, critical
care/respiratory sales increased by 14.7%. Other business segments, accounting
for 16.3% of net sales, increased by 18.2% from the comparable period in Fiscal
1996, reflecting the increased activity at VPI.
While net sales increased in dollars by 35.5%, gross profit increased by
22.7%. The discrepancy between the increase in sales and the increase in gross
profit is the result of higher sales of certain products with gross margins
below the Company's average gross margin (primarily sales of Marquest products
and the increase in activity at VPI). On a consolidated basis the Company's
gross profit percentage for the quarter ended December 31, 1997 was 51.5%
compared to 56.8% in the same time period of the last fiscal year.
On a sequential comparison to the fourth quarter of 1997 the Company's
gross profit percentage has increased by 1% from 50.5% reflecting improvements
in gross profits in the Marquest Operations. Earnings per share for the quarter
ended December 31, 1997 of $.27 were impacted by approximately $.10 per share by
the expansion of the Company's sales force from 90 to 180 personnel while the
December 31, 1996 quarter earnings per share of $.38 included the benefit of
capital gains of approximately $.06 per share.
Selling, general and administrative expenses increased by 69.6% in dollar
amount, as the result of the acquisition of Marquest, increased activity at VPI,
and the full implementation of the Company's previously announced plan to expand
its sales force by adding a ninety person respiratory/critical care sales force.
Research and development expenses ("R&D") increased 5.0%, primarily due to
the acquisition of Marquest.
Other income, net, which includes dividend income, realized capital gains
and losses, legal and other expenses related to non-operational items and
currency gains and losses, decreased by $567,000 from the quarter ended December
31, 1996 to the quarter ended December 31, 1997. In the 1996 period the Company
realized significant capital gains of approximately $750,000, which did not
recur in the current quarter.
The Company's effective tax rates were 34.5% and 33.6% for the quarters
ended December 31, 1997 and 1996, respectively. The rate for the three months
ended December 31, 1997 is less than the federal and state combined statutory
rate due to the utilization of deductions for tax return purposes which do not
effect book earnings. The rate for the three months ended December 31, 1996 is
less than the combined Federal and State statutory rates primarily as a result
of the utilization of capital loss carryforwards.
<PAGE>
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations as well as
the funds generated from its initial and secondary public offerings. During the
three months ended December 31, 1997, cash and cash equivalents and short-term
marketable securities decreased by $2,668,000 and long-term marketable
securities decreased by $4,510,000. As a result of the sales growth in the
December 31, 1997 quarter, $5.9 million was invested in accounts receivable,
inventory and other working capital. In addition, the Company had capital
expenditures of approximately $3.1 million and paid dividends, of approximately
$523,000. The combined total of cash and cash equivalents, short-term marketable
securities and long-term investments was approximately $15.1 million at December
31, 1997 as compared to $22.3 million at September 30, 1997.
At December 31, 1997, the Company had $1.1 million in cash and cash
equivalents. On that date, the Company's working capital was $39.4 million and
the current ratio was 4.4 to 1, as compared to $38.1 million and 3.9 to 1 at
September 30, 1997.
The Company's current policy is to retain working capital and earnings for
use in its business, subject to the payment of certain cash dividends and
treasury stock repurchases. Such funds may be used for product development,
product acquisitions and business acquisitions, among other things. The Company
regularly evaluates and negotiates with domestic and foreign medical device
companies regarding potential business or product line acquisitions or licensing
arrangements by the Company. . The Company has a $10 million line of credit with
Chase Manhattan Bank ("Chase"). Chase has also expressed its intention to
provide additional funds for the Company's future acquisitions, provided that
each such acquisition meets certain criteria. The terms for any borrowing would
be negotiated at the date of origination.
Management believes that the funds generated from operations, along with
the Company's current working capital position and bank credit, will be
sufficient to satisfy the Company's capital requirements for the foreseeable
future. This statement constitutes a forward-looking statement under the Reform
Act. The Company's liquidity could be adversely impacted and its need for
capital could materially change if costs are higher than anticipated, the
Company were to undertake acquisitions demanding significant capital, operating
results differ significantly from recent experience or adverse events affect the
Company's operations.
<PAGE>
PART II.
Other Information
Item 1. Legal Proceedings.
(a) Reference is made to Item 3 of the Company's Annual Report
on Form 10-K for the year ended September 30, 1997.
(b) On November 12, 1997, a declaratory judgment action was
commenced against the Company in the U.S. District court in
the Central District of California by a competitor seeking
to invalidate a patent held by the Company in connection
with its Isocath(TM) product. This action is related to an
infringement notice filed against the plaintiff by the
Company. On January 12, 1998 both parties executed mutual
releases and ended this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27.1 - Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended December
31, 1997: None.
<PAGE>
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.
VITAL SIGNS, INC.
By: /s/ Anthony J. Dimun
Anthony J. Dimun
Executive Vice President of
Finance and Chief Financial Officer
Date: February 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S BALANCE SHEET AT DECEMBER 31, 1997 AND THREE MONTH
INCOME STATEMENT ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,142
<SECURITIES> 300
<RECEIVABLES> 20,871
<ALLOWANCES> 136
<INVENTORY> 20,092
<CURRENT-ASSETS> 51,110
<PP&E> 45,474
<DEPRECIATION> 9,417
<TOTAL-ASSETS> 138,292
<CURRENT-LIABILITIES> 11,715
<BONDS> 5,312
0
0
<COMMON> 22,567
<OTHER-SE> 90,330
<TOTAL-LIABILITY-AND-EQUITY> 138,292
<SALES> 30,924
<TOTAL-REVENUES> 30,924
<CGS> 14,998
<TOTAL-COSTS> 14,998
<OTHER-EXPENSES> 1,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> 5,208
<INCOME-TAX> 1,797
<INCOME-CONTINUING> 3,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,411
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
