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 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: 0-18793
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 August 5, 1998, there were 12,727,244 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
June 30, 1998 (Unaudited) and
September 30, 1997 2
Consolidated Statement of Operations
for the Nine Months Ended
June 30, 1998 and 1997 (Unaudited) 3
Consolidated Statement of Operations
for the Three Months Ended
June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Cash
Flows for the Nine Months Ended
June 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7-11
PART II.
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<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>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, September 30,
1998 1997
(In Thousands)
ASSETS
(Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 4,925 $ 3,685
Marketable securities 2,547 425
Accounts receivable, less allowance for
doubtful accounts of $231 and $101, respectively 18,158 16,405
Inventory 20,024 19,559
Prepaid expenses and other current assets 6,088 11,187
----------- ----------
Total Current Assets 51,742 51,261
Property, plant and equipment - net 38,894 33,825
Marketable securities and other investments 14,277 18,206
Goodwill 28,950 28,907
Other assets 6,459 4,749
----------- ------------
Total Assets $ 140,322 $ 136,948
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,842 $ 6,204
Current portion of long-term debt 993 611
Accrued expenses 5,696 6,114
Amounts payable relating to acquisitions 281 230
------------ ------------
Total Current Liabilities 12,812 13,159
Deferred Income Taxes Payable 1,560 1,366
Long-term debt 2,439 5,529
Other 3,822 4,665
------------ ------------
Total Liabilities 20,633 24,719
------------ ------------
Commitments and Contingencies
Stockholders' Equity Common stock - no par value:
authorized 40,000,000 shares, issued
12,727,244 and 12,674,673 shares, respectively 23,114 22,149
Allowance for aggregate unrealized loss
on marketable securities (39) (129)
Retained earnings 96,614 90,209
------------ -----------
Stockholders' Equity 119,689 112,229
------------ -----------
Total Liabilities and Stockholders' Equity $ 140,322 $ 136,948
============ ===========
</TABLE>
(See notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Nine Months Ended June 30,
1998 1997
---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 95,089 $ 75,036
Cost of goods sold 46,954 34,743
----------- -----------
Gross profit 48,135 40,293
Operating expenses:
Selling, general and administrative 28,746 19,340
Research and development 4,328 2,791
Interest income (784) (1,828)
Interest expense 307 371
Other expense, net 22 116
Goodwill amortization 602 438
Special charge (see Notes 4 and 5) 1,100 6,700
----------- ----------
Income before provision for income taxes 13,814 12,365
Provision for income taxes 4,314 4,817
----------- ----------
Net income before cumulative effect of change in accounting principle 9,500 7,548
Cumulative effect of change in accounting principle
(net of income tax effect of $803) 1,524 ---
----------- -----------
Net Income $ 7,976 $ 7,548
=========== ===========
Basic net income per share before cumulative effect of change
in accounting principle $ .75 $ .58
=========== ===========
Diluted net income per share before cumulative effect of change
in accounting principle $ .74 $ .58
=========== ===========
Cumulative effect of change in accounting principle per share $ .12 $ ---
=========== ===========
Basic net income per share $ .63 $ .58
=========== ===========
Diluted net income per share $ .62 $ .58
=========== ===========
Basic weighted average number of shares 12,691 12,947
=========== ===========
Diluted weighted average number of shares 12,769 13,024
=========== ===========
Proforma Information (assuming the change in accounting principle was applied
retroactively) (see Note 6):
Net income $ 9,213 $ 7,641
=========== ===========
Basic net income per share $ .73 $ .59
=========== ===========
Diluted net income per share $ .72 $ .59
=========== ===========
Basic weighted average number of shares 12,691 12,947
=========== ===========
Diluted weighted average number of shares 12,769 13,024
=========== ===========
</TABLE>
(See notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended June 30,
1998 1997
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 31,861 $ 28,361
Cost of goods sold 15,856 14,397
------------- -------------
Gross profit 16,005 13,964
Operating expenses:
Selling, general and administrative 9,711 7,733
Research and development 1,899 1,064
Interest income (221) (594)
Interest expense 69 232
Other (income)/expense, net (100) 626
Goodwill amortization 189 151
Special charge (see Notes 4 and 5) 1,100 6,700
------------- --------------
Income/(loss) before provision for income taxes 3,358 (1,948)
Provision for income taxes 707 153
------------- ---------------
Net income/(loss) before cumulative effect of change in accounting principle $ 2,651 $ (2,101)
Basic net income/(loss) per share $ .21 $ (.16)
============= ==============
Diluted net income/(loss) per share $ .21 $ (.16)
============= ==============
Basic weighted average number of shares 12,686 12,819
============= ==============
Diluted weighted average number of shares 12,766 12,875
============= ==============
Proforma Information (assuming the second quarter change in accounting principle
was applied retroactively) (see Note 6):
Net Income/(loss) $ 2,651 $ (2,032)
============= ==============
Basic net income/(loss) per share $ .21 $ (.16)
============= ==============
Diluted net income per/(loss) share $ .21 $ (.16)
============= ==============
Basic weighted average number of shares 12,686 12,819
============= ==============
Diluted weighted average number of shares 12,766 12,875
============= ==============
</TABLE>
(See notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended June 30,
1998 1997
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 7,976 $ 7,548
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Cumulative effect of change in accounting principle 1,524 ---
Depreciation and amortization 2,751 1,684
Deferred income taxes 194 (324)
Amortization of goodwill 602 438
Amortization of deferred credit (75) (75)
Net (gain) loss on sales of available for sale securities 2 (772)
Special charge related to acquisition --- 4,200
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,277) (1,064)
(Increase) in inventory (465) (3,767)
(Increase)decrease in prepaid expenses and
other current assets 5,099 (590)
(Increase) in other assets (1,909) (327)
(Decrease) Increase in accounts payable and accrued expenses (1,380) 3,138
Decrease in other liabilities (394) ---
------------ -----------
Net cash provided by operating activities 10,648 10,089
------------ -----------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities 13,881 16,404
Purchases of available-for-sale securities and other investments (11,844) (16,453)
Acquisition of property, plant and equipment (7,820) (6,498)
Other (311) (137)
------------ ------------
Net cash used in investing activities (6,094) (6,684)
------------ ------------
Cash Flows from Financing Activities:
Proceeds of sales of common stock to employees
pursuant to the Vital Signs Investment Plan 3,403 184
Purchase of treasury stock (2,450) (8,250)
Dividends paid (1,571) (1,569)
Proceeds from exercise of stock options and warrants 12 264
Principal payments of long-term debt and notes payable (2,708) (500)
------------ ------------
Net cash used in financing activities (3,314) (9,871)
------------ ------------
Net increase/(decrease) in cash and cash equivalents 1,240 (6,466)
Cash and cash equivalents at beginning of period 3,685 17,747
----------- -----------
Cash and cash equivalents at end of period $ 4,925 $ 11,281
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the nine
months for:
Interest $ 349 $ 247
Income taxes 1,747 7,703
Supplemental schedule of non cash investing activities:
Accrued amounts relating to purchase of subsidiaries $ 600 $ 18,649
</TABLE>
(See notes to Consolidated Financial Statements)
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of June 30, 1998, the consolidated
statements of income for the nine and three months ended June 30, 1998 and
1997 and the consolidated statement of cash flows for the nine months ended
June 30, 1998 and 1997 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 June 30, 1998 and 1997 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 for additional disclosures relating to the Company's consolidated
financial statements.
4. In connection with the acquisition of Marquest Medical Products, Inc.
(effective date April 1, 1997), the Company recorded a special charge of
$6.7 million in the quarter ended June 30, 1997. This charge represents
$2,500,000 of in process research and development acquired in the Marquest
transaction (which was expensed in accordance with purchase accounting
rules) along with $4,200,000 in costs for the consolidation of certain
manufacturing operations.
5. The Company decided during the 1998 third quarter to reduce its domestic
sales force to approximately 90 sales personnel from approximately 180
sales personnel. This decision resulted in a pretax charge of $1.1 million,
or $0.06 per share (net of tax).
6. Effective as of the beginning of the second quarter of fiscal 1998, the
Company adopted a new accounting principle related to the accrual of
distributor rebates. This change in principle was adopted to more precisely
record the amounts due distributors who service the Company's hospital
customers. The Company's prior method resulted in fluctuations for
financial reporting purposes that were the result of activities outside the
Company's control. Net income for the nine month period ended June 30, 1998
was impacted by the charge for the cumulative effect of a change in
accounting principle related to distributor rebates. This charge reduced
net income by $1,524,000 or $.12 per share. Proforma information is
included in the income statement indicating the results of operations if
the newly adopted accounting principle had been in effect since October 1,
1996. Below is a table containing proforma information for the three month
periods ending December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
PROFORMA INFORMATION FOR THE PERIODS ENDING
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands Except Per Share Amounts)
As Reported: 1997 1996
------------ ---- ----
<S> <C> <C>
Net income, as reported $ 3,411 $ 4,902
========== ===========
Basic net income per share $ .27 $ .38
========== ===========
Diluted net income per share $ .27 $ .37
========== ===========
Assuming change in accounting principle is applied retroactively:
Net income $ 3,124 $ 4,832
========== ===========
Basic net income per share $ .25 $ .37
========== ===========
Diluted net income per share $ .24 $ .37
========== ===========
Basic weighted average number of shares 12,702 13,035
========== ===========
Diluted weighted average number of shares 12,770 13,123
========== ===========
</TABLE>
<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 a number of factors including, without limitation,
(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 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 10-Q); and
(vi) legislative changes impacting the healthcare market.
In addition, any statement made related to expectations involving or
related to future cost savings, the reduced relative size, cost and
effectiveness of the sales force, severance and other costs associated with the
reductions in the sales force, the level, timing and ability to realize future
cost savings with respect to that reduction and the ability to maintain current
sales or the current company-wide sales growth rate, constitute Forward-Looking
Statements. Actual results may differ materially from the Company's expectations
and from such Forward-Looking Statements as a result of a wide variety of
material risks and uncertainties including, without limitation, (a) factors
arising from or related to the capacity of the reduced sales force to meet the
Company's sales objectives; (b) the costs that may be incurred in providing
appropriate incentives to sales personnel; (c) unanticipated expenses that may
be incurred in connection with the decision to reduce the sales force; (d) sales
and managerial personnel retention; (e) reorganization and retraining issues;
(f) scope, timing and effectiveness of changes to marketing and sales plans,
programs and strategies; (g) market conditions; (h) customer response; (i)
technological change; and (j) competition.
1997 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 transaction was approved by the shareholders of
Marquest and Scherer on July 28, 1997. The effective date of this acquisition
for financial reporting purposes was April 1, 1997.
<PAGE>
In connection with these transactions, the Company paid approximately
$20 million, including acquisition costs, and incurred a $2,500,000 write-off 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 $15,500,000. 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.
<TABLE>
<CAPTION>
Increase/(Decrease) From
Prior Period
Three Months Ended Nine Months Ended
June 30, 1998 compared June 30, 1998 compared
with Three Months Ended with Nine Months Ended
June 30, 1997 June 30, 1997
<S> <C> <C>
Net sales 12.3% 26.7%
Cost of goods sold 10.1 35.1
Gross profit 14.6 19.5
Selling, general and administrative
expense 25.6 48.6
Research and development expenses 78.5 55.1
Income before provision for
income taxes N/A 11.7
Provision for income taxes 462.1 (10.4)
Net income before cumulative effect of
change in accounting principle N/A 25.9
Net income N/A 5.7
N/A - not a meaningful presentation
</TABLE>
<PAGE>
COMPARISON: QUARTER ENDED JUNE 30, 1998
AND QUARTER ENDED JUNE 30, 1997
Net sales for the quarter ended June 30, 1998 increased by 12.3% compared
with the same period last year. Sales mix changes and price reductions adversely
affected net sales in the quarter ended June 30, 1998. The Company estimates the
effect of price reductions to be approximately $340,000 or 1% of net sales
during the third quarter of fiscal 1998.
Sales of anesthesia products, representing 41.6% of net sales, grew 8.8%
from the quarter ended June 30, 1997. Sales of critical care and respiratory
products, representing 38.1% of net sales, decreased by 2.3%. Sales of
respiratory products were effected by a decline in the sales of arterial blood
gas syringe products, primarily due to seasonal factors. Sales of the Company's
emergency products, representing 2.9% of net sales, increased by 18.3% due to an
increase in orders from the Company exclusive emergency distributor. Other
business segments, accounting for 17.4% of net sales, increased by 86.5% from
the comparable period in Fiscal 1997, reflecting the increased activity at the
Company's Vital Pharma, Inc. ("VPI") and Thomas Medical Products, Inc. ("TMP")
subsidiaries.
Gross profit increased by 14.6% as a result of Company wide cost reduction
efforts and the higher sales of emergency products (which carry higher than
average margins) offset by 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 and TMP). On a consolidated basis the
Company's gross profit percentage for the quarter ended June 30, 1998 was 50.2%
compared to 49.2% in the same time period of the last fiscal year.
Selling, general and administrative expenses increased by 25.6% in dollar
amount, primarily as the result 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. Earnings
for the quarter ended June 30, 1998 were impacted by approximately $1.8 million
(pre-tax), or $.10 per share (net of tax) by the expansion of the Company's
sales force from 90 to 180 personnel.
The Company decided during the 1998 third quarter to reduce its domestic
sales force to approximately 90 sales personnel from approximately 180 sales
personnel. This decision resulted in a special charge of $1.1 million (pre-tax),
or $0.06 per share (net of tax). The full impact of the cost savings will not be
realized until the first quarter of Fiscal 1999 (this statement is considered a
Forward-Looking Statement under the Reform Act - see discussion of
Forward-Looking Statements above).
Research and development expenses ("R&D") increased 78.5%, primarily due to
increased in-house activity on new products (including Vasceze(TM), Isocath(TM)
and other new products).
During the third quarter of 1997, the Company recorded a special charge
related to the acquisition of Marquest in the amount of $6.7 million. $2,500,000
($.20 per share net of tax) of this charge represents the cost of in process
research and development acquired in the Marquest transaction (which was
expensed in accordance with purchasing accounting rules) and $4,200,000 in costs
to consolidate certain manufacturing operations as a result of the Marquest
transaction ($.22 per share net of tax).
Other (income)/expense net, which includes dividend income, realized
capital gains and losses, legal and other expenses related to non-operational
items, decreased by $726,000 from the quarter ended June 30, 1997 to the quarter
ended June 30, 1998. The decrease resulted primarily from reduced legal expense
reflecting the completion of certain matters pending during the same period last
year.
The Company's effective tax rates were 21.1% and (7.9)% for the three
months June 30, ended 1998 and 1997, respectively. The rate for the three months
ended June 30, 1998 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 (permanent tax differences). The rate of tax benefit for the three
months ended June 30, 1997 is less than the expected Federal and State rate of
tax benefit primarily as a result of the charge for research and development
purchased in the Marquest acquisition for which no tax benefit is available.
<PAGE>
COMPARISON: NINE MONTHS ENDED JUNE 30, 1998
AND NINE MONTHS ENDED JUNE 30, 1997
Net sales for the nine months ended June 30, 1998 increased by 26.7%
compared with the same period last year. The increase was due to the acquisition
of Marquest (16.5%), and growth in existing product lines (10.2%). Sales mix
changes and price reductions adversely effected net sales in the nine months
ended June 30, 1998. The Company estimates the effect of price reductions to be
approximately $1.4 million or 1.5% of net sale during the nine months ended June
30, 1998.
Sales of anesthesia products, representing 41.2% of net sales, grew 4.5%
from the nine months ended June 30, 1997 despite selling price declines. Sales
of critical care and respiratory products, representing 41.3% of net sales,
increased by 46.9% due to internal growth and the acquisition of Marquest.
Excluding the products acquired in the Marquest transaction, critical
care/respiratory sales increased by less than 1%. Sales of the Company's
emergency products, representing 2.4% of net sales, declined by 18.4% due to a
shortfall in orders from the Company's exclusive emergency distributor. Other
business segments, accounting for 15.1% of net sales, increased by 79.5% from
the comparable period in Fiscal 1997, reflecting the increased activity at VPI
and TMP.
While net sales increased in dollars by 26.7%, gross profit increased by
19.5%. 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 and TMP) and the lower sales of emergency
products (which carry higher than average margins). On a consolidated basis the
Company's gross profit percentage for the nine months ended June 30, 1998 was
50.6% compared to 53.7% in the same time period of the last fiscal year.
Selling, general and administrative expenses increased by 48.6% 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.
Earnings for the nine months ended June 30, 1998 were impacted by approximately
$5.3 million (pre-tax) or $.29 per share (net of tax) by the expansion of the
Company's sales force.
The Company decided during the 1998 third quarter to reduce its domestic
sales force to approximately 90 sales personnel from approximately 180 sales
personnel. This decision resulted in a special charge of $1.1 million (pretax),
or $0.06 per share (net of tax). The full impact of the cost savings will not be
realized until the first quarter of Fiscal 1999 (this statement is considered a
Forward-Looking Statement under the Reform Act - see discussion of
Forward-Looking Statements above).
R&D increased 55.1%, primarily due to the acquisition of Marquest and
increased in-house activity on new products (including Vasceze(TM), Isocath(TM)
and other new products).
During the third quarter of 1997, the Company recorded a special charge
related to the acquisition of Marquest in the amount of $6.7 million. $2,500,000
($.20 per share net of tax) of this charge represents the cost of in process
research and development acquired in the Marquest transaction (which was
expensed in accordance with purchasing accounting rules) and $4,200,000 in costs
to consolidate certain manufacturing operations as a result of the Marquest
transaction ($.22 per share net of tax).
The Company's effective tax rates were 31.2% and 39.0% for the nine months
June 30, ended 1998 and 1997, respectively. The rate for the nine months ended
June 30, 1998 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 (permanent tax differences). The rate for the nine months ended June
30, 1997 is higher than the combined Federal and State statutory rates primarily
as a result of the charge for research and development purchased in the Marquest
acquisition for which no tax benefit is available.
<PAGE>
The Company implemented a change in accounting principle concerning
distributor rebates, effective at the beginning of the three month period ended
March 31, 1998. This change resulted in a charge that reduced net income for the
period by $1,524,000 or $.12 per share. The change in principle was implemented
to reduce financial reporting fluctuations that were caused by activities that
were outside the Company's control, such as distributor inventory levels (see
note 6 of the Notes to the Consolidated Financial Statements).
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
nine months ended June 30, 1998, cash and cash equivalents and short-term
marketable securities increased by approximately $3.4 million and long-term
marketable securities decreased by approximately $14.1 million. During that
period, operating activities contributed $10.6 million of cash (reflecting net
income of $8.0 million, a reduction in prepaid expenses and other current assets
of $5.1 million and depreciation and amortization of $2.8 million, offset in
part by a $3.3 million increase in accounts receivable), investing activities
utilized $6.1 million in cash (as $13.9 million in securities sales were offset
by capital expenditures of $7.8 million and $11.9 million in purchases of
available for sale securities and other investments) and financing activities
utilized $3.3 million in cash (reflecting the Company's on-going repurchase of
its Common Stock in the market, the repayment of long-term debt and regular
dividend payments, offset in part by employee investments in the Company's
Common Stock). The combined total of cash and cash equivalents, short-term
marketable securities and long-term investments was approximately $11.6 million
at June 30, 1998 as compared to $22.3 million at September 30, 1997.
At June 30, 1998, the Company had $4.9 million in cash and cash
equivalents. On that date, the Company's working capital was $38.9 million and
the current ratio was 4.0 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.
The Effect Of The Year 2000 On The Company's Computer Systems.
The Company has evaluated its MIS systems in regard to compliance with any
new requirements related to so-called Year 2000 issues and has implemented a
plan of corrective measures. The Company anticipates completing this program in
early calendar 1999. The Company does not believe any additional costs, whether
for the repair of existing systems or the purchase of new software will have a
material effect on the Company's consolidated financial condition or results of
operations. This statement constitutes a Forward-Looking Statement under the
Reform Act. The financial impact of Year 2000 could vary materially from that
projected if unanticipated technological problems arise or if vendors are unable
to provide Year 2000 compliant services and materials.
<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 3 of the Company's Annual Report on Form
10-K for the year ended September 30, 1997 for a description of
pending litigation.
Since September 30, 1997, the following significant matters have
occurred:
a) With respect to the appeal to the United States Court of
Appeals for the Federal Circuit by Smith Industries of the
judgment in favor of the Company by the United States District
Court for the Northern District of Illinois concerning
allegations of patent infringement by the Company's manual
resuscitators, the parties are awaiting the scheduling of oral
argument.
b) With respect to the action against the Company in California
by a former Marquest dealer, the dealer terminated the action,
gave a general release and paid the Company the outstanding
receivable owed by it to the Company.
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 June 30,
1998: 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: August 14, 1998
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheet at June 30, 1998 and nine month income statement
ended June 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
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<NAME> VITAL SIGNS, INC.
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