SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the fiscal year ended September 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] 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 Identification
incorporation or organization) Number)
20 Campus Road, Totowa, New Jersey 07512; (973) 790-1330
(Address and telephone number, including area code, of
registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act: none.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, no par value
Indicate by checkmark 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 by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates as of
December 1, 1998 was approximately $128,099,670.
Number of shares of Common Stock outstanding as of December 1, 1998:
12,628,194.
Documents incorporated by reference: Definitive Proxy Statement for
1999 Annual Meeting of Shareholders (Part III).
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VITAL SIGNS, INC.
TABLE OF CONTENTS
Page
Part I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4A. Executive Officers of the Registrant 15
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data* 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
Part III
Item 10. Directors of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management 26
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
*Financial Statements follow page 25
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
Vital Signs, Inc. was initially incorporated in New York in 1972 and
reincorporated in New Jersey in 1988. Unless otherwise indicated, all references
in this Annual Report to the "Company" refer to Vital Signs, Inc., its
predecessor New York corporation and their consolidated subsidiaries. References
to "Vital Signs" refer solely to the parent company. Vital Signs' principal
executive offices are located at 20 Campus Road, Totowa, New Jersey 07512; its
telephone number at that location is (973) 790-1330.
Vital Signs and its subsidiaries design, manufacture and market
single-patient use medical products for the anesthesia, respiratory, critical
care and emergency markets. A number of single-patient use products are
increasing their share of the medical products market primarily because of their
cost advantages and improved patient care features, including reducing the
potential of transmitting infections from one patient to another.
The Company pioneered the development and introduction of a variety of
single-patient use products. In 1975, the Company commenced the marketing of
clear, non-conductive anesthesia breathing circuits. The first clear plastic,
single-use air-filled cushion face mask for anesthesia delivery and
resuscitation was launched by the Company in 1981. The Company was the first
organization to introduce a single-patient use manual resuscitator in 1984. The
first single-patient use laryngoscope system for use in the anesthesia and
critical care arenas was developed and launched by the Company in 1988. The
Company also developed a general anesthesia kit, which can combine over 20
disposable items in one convenient, cost-effective package and the first
single-patient use infant resuscitation circuit with an adjustable pressure
limiting valve, used to protect the infant's lung against over pressurization.
In 1997, the Company acquired the outstanding stock of Marquest
Medical Products, Inc. ("Marquest"), and began distributing arterial blood gas
syringes and kits, small volume nebulizers and heated humidification circuits.
For additional information regarding these products, see
"Business-Products."
The Company's strategy is to sell its anesthesia, respiratory and
critical care products to hospitals in the United States through its own sales
force. Sales of the Company's products internationally are largely through
distributors except where the Company maintains a direct sales force. The
Company sells its emergency and alternate site/homecare products through third
party distributors.
This Annual Report on Form 10-K 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
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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 wishes to ensure 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 reduced sales force, (ii) interruptions or delays in manufacturing
and/or sources of supply, (iii) the Company's ability to develop or acquire new
products and to control costs, (iv) technological change, including the
Company's ability to assure that its hardware and software are Year 2000
compliant, (v) the scope, timing and effectiveness of changes to manufacturing,
marketing and sales programs and strategies, (vi) market acceptance of
competitors' existing or new products, (vii) adverse determinations arising in
the context of regulatory matters (see "Regulation") or legal proceedings (see
Item 3 of this Annual Report on Form 10-K) and (viii) healthcare reform and
legislative and regulatory changes impacting the healthcare market.
Acquisitions
Historically, the Company has made both product and business
acquisitions. Although no assurances can be given with respect to future
acquisitions, the Company's acquisition strategy is focused upon the following
principal objectives: (i) identification and acquisition of companies and/or
products in the anesthesia, respiratory and critical care and emergency markets
with the goal of expanding the products that can be sold by the Company's direct
sales force, (ii) expansion of sales to international markets, and (iii)
acquiring unique research and development capabilities.
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Principal Products
The Company markets a wide variety of single-patient use anesthesia,
respiratory, critical care and emergency products. Its principal products are
described below:
Anesthesia Products:
Face Masks. In 1981, the Company introduced the first clear plastic
air-filled cushion face mask for single-patient anesthesia and respiratory use.
The soft air-filled cushion face mask has been clinically documented to provide
a better seal on most patients than other face masks, thus improving the
delivery of anesthetic gases and oxygen to the patient. A clear face mask also
permits the clinician to better observe certain patient problems, such as
life-threatening aspiration. The Company offers various sizes and types of face
masks. The Company anticipates that the usage of single-patient use face masks
in surgical procedures internationally will continue to expand as single-patient
use products become increasingly accepted in international hospitals.
Anesthesia Breathing Circuits. The Company offers a wide variety of
single-patient use anesthesia breathing circuits, which are used to connect the
patient to the anesthesia machine and to various patient monitors. Each
breathing circuit consists of flexible hoses, a breathing bag, and a "Y" and
elbow attachment. Since the breathing circuit needs of hospitals vary
significantly, the Company offers a large variety of circuits designed to be
compatible with anesthesia equipment manufactured by numerous other companies.
With the Marquest acquisition in 1997, the Company began offering circuits that
deliver heated humidification to patients. Technological advances in the areas
of gas sampling, temperature monitoring and humidification have provided the
Company with opportunities to expand its breathing circuit offerings.
INFUSABLE[R] Disposable Pressure Infusor. Invasive pressure monitoring
has been used since the early 1970's as a means of monitoring blood and other
fluid pressures of patients in certain critical care situations. The monitoring
process involves inserting a catheter, usually into the artery or vein of the
patient, connecting the catheter to a transducer (a device which converts the
pressure impulse from the patient's blood into an electrical signal), and
transmitting the electrical signal to a monitoring screen. The monitoring
process uses a fluid-filled conduit to connect the catheter to the transducer.
The fluid generally is a saline solution forced into the system by a pressure
infusor. The Company's patented INFUSABLE[R] disposable pressure infusor
consists of an inflatable bladder, a bulb to pump air into the bladder and a
pressure gauge. The infusor also has a mesh netting into which a package of
sterile fluid or "solution bag" is placed. The fluid is connected to the
monitoring system and the pressure on the solution bag is set at a pressure
level designed to maintain the pressure required by the monitoring system.
General Anesthesia Systems. The Company assembles and markets General
Anesthesia System customized anesthesia kits, which can include more than 20
products, such as air-filled cushion face masks, breathing circuits, blood
pressure cuffs and temperature monitoring probes. In marketing the General
Anesthesia System kits, the Company's sales representatives use detailed
questionnaires to assist in determining the particular products the hospital
desires in its anesthesia kits. The Company then assembles a General Anesthesia
System kit to meet the hospital's specific needs.
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Thermadrape[R] Heat Retentive and Insulating Drape is a patented heat
retentive surgical covering designed to be a safe, effective and affordable
alternative to the active warming blanket. Thermadrape[R] products minimize
preoperative heat loss and allow patients to avoid (i) the increased metabolic
rate and oxygen uptake associated with post-operative shivering, (ii)
vasoconstriction, (iii) delayed drug clearance and other side effects of "cold
stress" and (iv) needless discomfort. Configurations include blankets, head
covers, leggings and wraps. Sizes range from pediatric to adult.
Temp Probe[TM] Temperature Probes. The Company offers a variety of
temperature probes (esophageal, tympanic, skin and general purpose) to monitor
patients undergoing anesthetic procedures. The Company has expanded its
temperature line to accommodate the various physiological patient monitors found
in hospitals. The Company's esophageal stethoscope monitors temperature, while
also providing the clinician with the patient's heart and lung sounds. In 1995,
the ESG[TM] esophageal stethoscope with gastric suction was introduced. This
stethoscope adds a gastric suction function to the measurement of temperature
and amplification of heart and lung sounds.
Vital View[TM] Single-Patient Use Fiberoptic Laryngoscope System is
designed to assist the anesthesiologist in correctly placing an endotracheal
tube within the trachea of the patient. This system has several advantages over
traditional metal blade laryngoscope systems, including lowering the risk to
both the patient and physician of infection associated with reusable metal
blades and handles. In addition, hospital capital outlays for stocking emergency
crash carts can be reduced by purchasing the Vital View[TM] system rather than a
reusable Fiberoptic system.
Respiratory and Critical Care Products:
Manual Resuscitator Products. Manual resuscitators are ventilation
devices which are squeezed by hand to force oxygen into a patient's lungs. They
are used throughout the hospital in a variety of settings. For example, patients
on a ventilator require the use of a resuscitator prior to tracheal suctioning
procedures. Another use is in providing oxygen while transporting the patient
between the operating room and other critical care units. In addition,
resuscitators are typically placed strategically throughout the hospital to
provide assistance to patients who have stopped breathing and require
resuscitation.
The Company was the first to offer single-patient use manual
resuscitators. The Company's CODE BLUE[TM] and VITAL BLUE[TM] resuscitators are
used in emergency situations and in a variety of medical procedures. CODE
BLUE[TM] resuscitators are sold in different sizes for infants, children and
adults. Both resuscitators alleviate certain problems involved in mouth-to-mouth
emergency resuscitation, including the risk to both the rescuer and the
individual of transmitting infections. Most reusable manual resuscitators are
costly to sterilize and difficult to fully reassemble. In contrast, CODE
BLUE[TM] and VITAL BLUE[TM] resuscitators are relatively inexpensive, and
already fully assembled. The Company also offers a specialized line of infant
resuscitation products (BabySafe[TM], PediBlue[TM] and BabyBlue[TM]
resuscitators) used in labor and delivery rooms and in neonatal intensive care
units, where controlling the spread of infection is particularly critical.
BabySafe[TM] resuscitators offer the ability to adjust and limit the level of
pressure that can be delivered during resuscitation. Oxygen can be delivered
without the risk of barotrauma. Baby Safe[TM], PediBlue[TM] and BabyBlue[TM]
resuscitators are available in a variety of configurations and sizes to meet the
needs of infants and children.
CleenCuff[TM], Flufficuff[TM], and CUFF-ABLE[R] Blood Pressure Cuffs.
The Company manufactures and sells single-patient use blood pressure cuffs which
provide hospitals with an alternative to traditional reusable blood pressure
cuffs that can become contaminated with blood and other body fluids. While all
patients admitted to hospitals are candidates for their own dedicated blood
pressure cuff, the Company believes that to date the primary market for
disposable cuffs has been for cases where infection control is a high priority.
The Company's cuffs are sold in a variety of sizes (including neonatal) and are
adaptable to all manual and electronic blood pressure monitors that utilize
<PAGE>
blood pressure cuffs.
Gas-Lyte[R] and Quick-ABG[R]. The Company offers a broad line of
disposable arterial blood gas ("ABG") syringes and collection systems. Blood gas
syringes are used to collect blood for blood gas analysis routinely performed in
hospitals on patients suspected of having metabolic, respiratory or other
cardiopulmonary difficulties. The blood gas sample is processed through a blood
gas analyzer. Blood gas analyzers are manufactured by a wide range of
manufacturers. The Company offers its ABG products in both standard
configurations and in kits that are customized to meet a specific hospital's
needs.
RespirGard II[R] Nebulizer System, Acorn II[R] and Whisperjet[TM] .
The Company manufactures a product line of aerosolized medication delivery
systems, consisting primarily of disposable small volume nebulizers. Nebulizers
atomize medications for inhalation into the lungs. A range of nebulizers are
offered to accommodate user preferences as well as the requirements for
different types of respiratory treatment.
Heated Humidification Systems. The Company manufactures a set of
products to provide a flow of warm moist air to patients who are at risk from
loss of body temperature and drying of the lung linings. These products consist
of electronic humidifiers that utilize single use heated and non-heated wire
breathing circuits as well as single use humidification chambers. In addition to
their use in respiratory care, these products also have anesthesia applications.
Continuous Positive Airway Pressure ("CPAP") Systems. The Company's
face mask CPAP systems provide a less invasive and more comfortable way of
providing oxygen to certain patients than conventional ventilator-based systems.
The Company's face mask CPAP systems eliminate the need to insert an
endotracheal tube into the patient's trachea and attach the patient to a
ventilator. The Company believes that its CPAP systems generally represent a
significant advance in the treatment of Adult Respiratory Distress Syndrome
(ARDS) and have been found to be clinically effective in the treatment of
certain traumatic chest injuries and postoperative atelectasis (collapse of the
air sacs in the lungs and other disease states). The system consists of a
compact flow generator connected to a dual-valved, air-filled cushion face mask.
The face mask is attached to a single-patient use PEEP (positive end expiratory
pressure) valve designed to maintain positive airway pressure in the lung, thus
allowing for more oxygen to diffuse into the patient's blood system.
HCH[TM] Heat and Moisture Exchangers are designed to ensure proper
humidification and reduce heat loss for patients either during anesthesia or
while attached to mechanical ventilators. Single-patient use heat and moisture
exchangers also reduce the risk of infection associated with reusable heated
humidifiers.
Kurtis MSD[TM] Meconium Suction Device. The Kurtis MSD[TM] meconium
suction device was developed by a practicing neonatologist, Peter Kurtis, M.D.
When an infant shows signs of having aspirated meconium, the device provides
rapid, controlled intubation and meconium suctioning of newborns in the delivery
room. The Kurtis MSD[TM] meconium suction device combines three devices which
are normally used in the procedure and, therefore, makes the procedure less
cumbersome.
Misty Ox[R] Respiratory Products. The MistyOx[R]line consists of three
respiratory product lines that deliver hydration to a patient. The first is a
pre-filled bubble humidifier to deliver low flow and low concentration of oxygen
to patients, the second is a nebulizer to deliver medium to high flow and high
concentrations of oxygen to patients, and the third is the addition of a
regulated heater to the nebulizer. These products may be used on infants,
children and adults in many areas of the hospital, including emergency, recovery
and critical care.
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Isocath[TM] is a closed suction system designed for hospital patients
on a ventilator. Isocath[TM] is used when an endotracheal tube is inserted in a
patient located in the intensive care setting of a hospital. Suctioning, one of
the most common procedures in intensive care, is performed to keep the patient's
lungs free of secretions. Isocath[TM] allows the suction catheter to be advanced
into the endotracheal tube without disconnecting the patient from the
ventilator. Isocath[TM] was designed with a patented "isolation" chamber to
isolate the catheter from the patient's airway while permitting cleaning of the
catheter without inadvertently lavaging the patient.
Vasceze[R] is a needleless, disposable, pre-filled vascular catheter
flush device used with IV sets in the homecare and hospital market. Vasceze[R]
is a one-piece design, manufactured using a "blow-fill-seal" process. Vasceze[R]
is filled with either sodium chloride or heparin solutions. The product is
uniquely designed to deliver a flush solution at pressures less than those of
10cc syringe and other flush devices. The Company is in the process of expanding
its size offerings of the Vasceze[R] product line to accommodate a wider range
of hospital needs.
Emergency Products
ACTAR[R] and INFANTRY[R] CPR Training Manikins. The Company
manufactures a product line of patented cardiopulmonary resuscitation ("CPR")
training manikins. ACTAR[R] manikins are made from four basic components -- a
head, chest plate, compression piston and disposable lung. The Company also
sells the INFANTRY[R] infant-size CPR training manikins. While maintaining the
necessary features and anatomical landmarks for CPR practices, ACTAR[R] and
INFANTRY[R] manikins are far smaller and less expensive than full size manikins
typically used for CPR training. The smaller size and affordable pricing enable
each person in a CPR training class to practice with his or her own manikin,
rather than sharing a single demonstration model.
Broselow/Hinkle[TM] Pediatric Emergency System. The
Broselow/Hinkle[TM] pediatric emergency system is the product of extensive
clinical efforts by Dr. James Broselow and Dr. Alan Hinkle which takes advantage
of the direct correlation between a pediatric patient's body length and the
proper size of emergency supplies and correct drug dosages. This patented
system, licensed to the Company, consists of: a tape measure having seven color
zones, a corresponding series of color-coded single-patient use emergency kits
or modules and a nylon organizer bag custom-designed to hold all the supplies
needed in either a trauma, cardiac or respiratory pediatric emergency. With this
system, emergency room and EMS personnel can be confident that all the supplies
necessary to manage a pediatric emergency are readily identified, available and
organized in a manner that minimizes reaction time. The Broselow/Hinkle[TM]
pediatric emergency system may also be sold by the Company in the pediatrician
office market.
Thomas Medical Products.
Thomas Medical Products, Inc. ("TMP") is an OEM manufacturer and
contract development organization which is driven by significant scientific,
technical, engineering, manufacturing and QA/Regulatory expertise in the
disposable medical device area. TMP manufactures devices which provide access
primarily to the vascular system by medical professionals and include products
such as introducers, sheaths, dilators, hemostasis valves and catheters. TMP's
products are sold primarily to other healthcare product providers to be used in
their product or as part of surgical kits. TMP sells to many of the major
medical device manufacturers.
Vital Pharma, Inc.
Vital Pharma, Inc. ("Vital Pharma") was acquired in January 1996.
Vital Pharma's principal focus is utilization of the Company's expertise in
blow-fill-seal technology for manufacturing the Vasceze[R] product line and for
third party contract packaging customers that require sterile packaging
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(primarily pharmaceutical and medical device manufacturers). Vital Pharma
designs and assembles blow-fill-seal machines for sale to customers that desire
to manufacture in their own facilities.
Services
Another division of Vital Pharma, The Validation Group, provides
consulting services to companies engaged in the manufacture of medical devices
and pharmaceuticals, mainly in the area of compliance with regulations
promulgated by the Food and Drug Administration ("FDA").
Market Data
The following table sets forth, for each of the past three fiscal
years, the dollar amount and approximate percentage of net sales--continuing
product lines represented by the Company's anesthesia products, respiratory and
critical care products, and other products/services:
Year Ended September 30,
1998 1997 ____ 1996 ____
Amount % Amount % Amount %
(Dollars in Millions)
Anesthesia $ 60.2 47.6 $ 58.0 56.0 $ 56.5 62.9
Critical Care 28.0 22.2 18.4 17.8 15.5 17.2
Respiratory 38.2 30.2 27.2 26.2 17.9 19.9
Total $ 126.4 100.0% $103.6 100.0% $ 89.9 100.0%
Sales, Marketing and Customers
Historically, the Company's principal strategy has been to sell its
anesthesia and respiratory products to hospitals in the United States through
its own sales force. The Company's sales to hospitals through national
distributors, such as Allegiance, Owens & Minor and McKesson/General Medical,
approximate 33% of sales for fiscal 1998. The Company's sales force participates
with these national distributors in making sales to the hospital.
In each of the fiscal years 1998 and 1997, one of the large national
distributors represented approximately 13% of net sales. The same customer
represented approximately 16% and 10% of outstanding accounts receivable at
September 30, 1998 and 1997, respectively.
The Company utilizes an independent distributor in the United States
for its Actar[R] CPR training manikins and other pre-hospital and emergency care
products.
As new products are developed which can be sold by the Company's sales
force, management educates and trains the sales force in the need, use,
application and advantages of the Company's products. The Company also holds
quarterly training sessions for all salespersons and conducts additional
training as it deems appropriate.
The Company's marketing staff, which works closely with its sales
force, collects and analyzes customer responses to new and existing products,
participates in the Company's product development program and assists in product
training. In addition, the Company's marketing staff develops and helps
implement various internal and external promotional activities.
As have other providers within the medical and healthcare industries,
the Company has been challenged with the rising purchasing power of buying
groups such as Premier Purchasing Partners, Tenet, Columbia Healthcare and
others. While the Company has been successful in signing an
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agreement with Premier for a broad range of anesthesia products and certain
respiratory/critical care products, Tenet for both anesthesia and
respiratory/critical care products, Columbia for its ABG products and other
buying groups, no assurances can be given as to the Company's ability to secure
other contracts or as to the impact of such contracts on the Company. The buying
power exerted by these entities is expected to continue to have a negative
impact on the Company's margins. Industry wide estimates anticipate that such
buying groups will continue to exert their power to decrease prices.
The Company doubled its sales force during 1997 to maximize the
broader portfolio resulting from the acquisition of Marquest as well as to
maximize the Company's performance under several group purchasing organization
contract awards. While the expanded sales force produced gains in both the
anesthesia and respiratory categories, sales growth slowed during the third
quarter and the Company decided during the third quarter to reduce its domestic
sales force to approximately 90 sales personnel from approximately 180 sales
personnel.
International Sales
For the year ended September 30, 1998, international sales accounted
for approximately 12% of net sales as compared with approximately 10% during
fiscal 1997 and approximately 8% during fiscal 1996.
Historically, the Company has sold its products in European and other
international markets through distributors. However, approximately four years
ago the Company sought expansion in Europe by establishing a direct sales
organization in the United Kingdom. The Company has built a network of over 85
independent distributors to sell the Company's anesthesia, respiratory, critical
care and emergency products in major international markets. The Company also has
a sales office in Beijing and Shanghai to support sales development in the
Peoples Republic of China and Hong Kong through distributors.
It is the Company's intention to augment the international sales
effort through strategic alliances wherever possible, although no assurance can
be made that any such alliances can be completed.
Research and Development
The Company regards the element of innovation in its product line to
be an essential part of its overall success. The principal focus of the
Company's research and development effort is to develop product solutions to
problems experienced by healthcare professionals. The Company's principal
development activities are directed toward expanding clinical applications of
the Company's existing products, resulting in improvements to the products (such
as the face mask, breathing circuits and anesthesia kits) where the Company
maintains a substantial market position. Moreover, the internal research and
development ("R&D") staff maintains collaborative relationships with external
professionals.
During fiscal 1998 the Company continued to principally focus its R&D
efforts on two products. The first product, a flush device for vascular access
catheters (Vasceze[R]), can be utilized in both the hospital setting and in the
rapidly expanding alternate site field. Versions of the device are offered for
both saline and heparin applications. R & D efforts focused on the development
of additional sizes of Vasceze[R] which will accommodate needs at a wider
variety of hospitals and alternate site providers.
The second product focused upon during 1998 was the Company's
Isocath[TM] product. The Company continues to enhance the features of the
Isocath[TM] closed suction system designed for use on ventilated patients. The
single-use system reduces the risk of infection for both patient and care giver.
See "Principal Products - Respiratory and Critical Care Products - Isocath[TM]".
<PAGE>
The Company has also undertaken research and development efforts in
fiscal 1998 in the following areas: (i) developing new versions of its
resuscitator products; (ii) new versions of its heated humidifiers; (iii) new
versions of blood gas syringes to enhance the ABG product line and (iv) various
other projects in both the anesthesia and critical care areas.
The Company expects to continue to rely in part on its internal staff
and on outside professionals to perform research and development on anesthesia
and respiratory products. The Company's research and development expenses
aggregated $3,595,000, $3,869,000 and $6,150,000, respectively, for fiscal 1996,
1997 and 1998.
Medical Advisor
The Company retains the services of Bernard Wetchler, M.D., as the
Company's Medical Director, in order to provide the Company with medical
expertise in all facets of the delivery of anesthesia services. Dr. Wetchler is
Clinical Professor of Anesthesiology at the University of Illinois College of
Medicine, as well as Vice President, World Federation of Societies of
Anaesthesiologists; and past President of: the American Society of
Anesthesiologists; the Society for Ambulatory Anesthesia; and the Illinois
Society of Anesthesiologists.
Product Liability Exposure
As with other healthcare product suppliers, the Company is exposed to
potential product liability resulting from the use of the Company's products.
The Company presently carries product liability insurance coverage which
generally protects the Company against claims of bodily injury or property
damage arising out of any products manufactured, sold or distributed by the
Company. If a product liability suit were filed and a judgment entered against
the Company or the Company entered into a settlement agreement, the business,
results of operations and financial condition of the Company could be materially
adversely affected if such judgment or settlement exceeded the limits of the
Company's coverage.
There can be no assurance that the Company's insurance will be
sufficient to cover product liability claims that could arise or that such
coverage will remain available to the Company on satisfactory terms, if at all.
Manufacturing and Quality Control
General
The Company's facilities in Totowa, New Jersey; Englewood, Colorado;
Burnsville, Minnesota; Malvern, Pennsylvania; Orange, California; and Riviera
Beach, Florida, are the principal manufacturing locations for the Company's
products, including anesthesia breathing circuits, filters, blood pressure
cuffs, infusables, ABG syringes, heated humidification circuits, nebulizers,
manual resuscitators and catheters, Vasceze[R] and blow-fill-seal products. The
Company performs assembly, testing and packaging in these locations. In many
instances, plastic components incorporated in certain products are molded to the
Company's specifications by outside custom injection molders who utilize molds
that are designed and, in most instances, owned by the Company. The Company's
suppliers typically are presented with written specifications to assure that
components are manufactured in conformity with the Company's design.
Pursuant to a decision made in 1997, the Company closed its
manufacturing facilities in Barkan, Israel in 1998. Manufacturing operations
from the Israeli facility were moved to and consolidated with manufacturing
operations in the Company's Englewood, Colorado facility. See Note 2 to the
Company's Consolidated Financial Statements.
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Given the ultimate use of many of the Company's products within the
operating room and critical care units of hospitals, the Company conducts
quality control testing in its various facilities. Substantially all such
testing is subject to governmental regulation. Pursuant to United States Food
and Drug Administration ("FDA") regulations, the Company is required to maintain
records of all raw materials received and used in the manufacturing process
along with complete histories of all devices manufactured. See "Regulation."
Significant Suppliers
In 1980, the Company acquired the rights to its air-filled cushion
face mask through a collaboration arrangement with Respironics, Inc.
("Respironics"). Face masks are used in a variety of the Company's circuits and
are sold individually to customers. The Company purchases its face masks from
Respironics, a single source which manufactures the face mask in the People's
Republic of China. The Company's supply agreement with Respironics requires
Respironics to supply air-filled cushion face masks of various specifications to
the Company on an exclusive basis for anesthesia purposes, and obligates the
Company to purchase all of its anesthesia face masks from Respironics as long as
Respironics is the low cost supplier. The Company has had a series of supply
agreements with Respironics since June 1980; the current supply agreement will
govern the supply of anesthesia face masks by Respironics to the Company through
June 2001.
If the supply of face masks from Respironics should be interrupted or
cease for any reason, the Company would seek to find alternative developers and
suppliers of face masks. In such event, the Company would experience disruption
in its business. No assurance can be given that, in the event of such an
interruption or cessation, the Company could, in fact, maintain its required
supply of face masks in a quantity and at a cost that would not have a material
adverse effect on the business and operating results of the Company. The
Company's policy is to maintain a sufficient stock of face masks to lessen the
impact of any temporary production or supply disruption. The Company's agreement
with Respironics provides certain protections to the Company with respect to
molds utilized by Respironics.
Sales Backlog
The Company does not believe that backlog is a meaningful measure of
its business, since its objective is to ship all orders within relatively short
time frames.
Competition
The principal competitive factors in the Company's markets include
innovative product design, product quality, established customer relationships,
name recognition, distribution and price. The Company believes that its products
compete favorably with respect to these factors, although certain of the
Company's competitors may have greater financial and marketing resources or
broader product lines.
The Company's competitive environment can be characterized as
fragmented, often with many different companies competing with regard to a
specific product. As a result, the Company's competition varies from product to
product but includes a number of competitors with substantially greater
resources. The Company's primary competitors include SIMS Portex, Inc., a
subsidiary of Smith Industries, PLC (face masks, breathing circuits,
resuscitators, nebulizers, ABG kits, anesthesia kits and closed suction
products), Baxter International Inc., (breathing circuits and anesthesia kits),
King Systems (face masks and anesthesia circuits), Hudson Respiratory Care, Inc.
(heated humidification systems and other respiratory products), Allegiance, Inc.
(nebulizers and heated humidification systems), Ballard Medical Products, Inc.
(Isocath[TM] closed suction products) and
<PAGE>
Critikon (blood pressure cuffs). The Company's Vasceze[R] product faces
competition from Wyeth/Ayerst International, Inc., and Abbott Laboratories,
Hospital Product Division, who provide pre-filled syringe catheter flush
devices.
Competition for Vital Pharma's contract manufacturing business comes
from Automated Liquid Processing and Holopak both of whom are larger in scope
than VPI. The Validation Group competes with a large number of privately held
organizations.
Regulation
As a manufacturer of medical devices, the Company is subject to
regulation by, among other governmental entities, the FDA and the corresponding
agencies of the states and foreign countries in which the Company sells its
products. The Company must comply with a variety of regulations, including the
Quality System Regulations ("QSR") of the FDA, and is subject to periodic
inspections by the FDA and applicable state and foreign agencies. Enforcement of
QSR requirements has increased significantly in recent years, and the FDA has
publicly stated that compliance would be more strictly scrutinized. If the FDA
believes that its regulations have not been fulfilled, it may invoke extensive
enforcement powers. Noncompliance with applicable requirements can result in,
among other things, warning letters, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, failure to
receive pre-market clearances or approvals, withdrawal of approvals and criminal
prosecution. The FDA also has the authority to request, recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Medical devices are classified by the FDA into three classes that
determine the degree of regulatory control to which the manufacturer of the
device is subject. In general, Class I devices involve compliance with QSR
requirements and are subject to other general controls including pre-market
notification ("510k"). Class II devices are subject to the same controls as
Class I and also may be subject to specific controls (for example; design
controls, performance standards, postmarket surveillance, patient registries and
FDA guidelines) and can be subject to pre-market notification. Class III devices
are those devices for which pre-market approval ("PMA") (as distinct from
pre-market notification) is required before commercial marketing to assure the
products' safety and effectiveness.
To date, all of the Company's products are classified as either Class
I or Class II. Many new medical devices and some modifications to existing
medical devices, including most of the Company's products, are subject to a
pre-market notification process pursuant to Section 510(k) of the Federal Food,
Drug and Cosmetic Act. Further, current FDA enforcement policy prohibits the
marketing of approved or cleared medical devices for unapproved or uncleared
uses. Products which do not receive clearance through the FDA's 510(k)
notification process are subject to much lengthier and more complex PMA
procedures.
No assurance can be given that the FDA or foreign regulatory agencies
will give on a timely basis, if at all, the requisite clearances or approvals
for any of the Company's medical devices which are under development. Moreover,
after clearance or approval is given, these agencies may withdraw clearances or
approvals or require the Company to change the device or its manufacturing
process or labeling, to supply additional proof of its safety and effectiveness
or to recall, repair, replace or refund the cost of the medical device, if it is
shown to be hazardous or defective. The process of obtaining clearances or
approvals to market products can be costly and time consuming and can delay the
marketing and sale of the Company's products.
Federal, state and foreign regulations regarding the manufacture and
sale of medical devices are subject to change. In the future, the Company cannot
predict what impact, if any, such changes might have on its business.
<PAGE>
Over the past several years, the public and the federal government
have focused considerable attention on reforming the healthcare system in the
United States. The Clinton Administration pledged to bring about a reform of the
nation's healthcare system and, in September 1993, presented a plan for
healthcare reform. Included in the proposal were calls to control or reduce
public and private spending on healthcare, to reform the payment methodology for
healthcare goods and services by both the public (Medicare and Medicaid) and
private sectors, which could include overall limitations on federal spending for
healthcare benefits, and to provide universal access to healthcare. While the
political climate appears to have changed with respect to sweeping healthcare
reform, healthcare reforms on an issue by issue basis are being enacted. No
assurance can be given that any such reforms will not have a material adverse
effect on the Company. Any such effect may be magnified by the advent of
"managed care," which has rendered sales to hospitals more cost sensitive.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, environmental protection
and fire hazard control. There can be no assurance that the Company will not be
required to incur significant expenses to comply with such laws and regulations
in the future.
Patents
The Company possesses 70 domestic and 34 foreign patents and licensed
patents, has filed certain patent applications and has increased its efforts to
acquire and develop patented products. While the Company believes that the
ownership of patents is not critical to its ability to compete with respect to
most of the products in its product line, the Company has, however, pursued
patent protection when in the reasonable judgment of management such efforts may
tend to provide the Company with competitive advantages.
Employees
At September 30, 1998, the Company had 1,052 full-time employees and
10 part-time employees. The Company believes that its relations with its
employees are satisfactory.
Item 2. Properties
The Company's executive offices, principal manufacturing plant and
principal warehouse facilities are located in Totowa, New Jersey. These
facilities, consisting of approximately 154,000 square feet, are owned by the
Company. The Company also owns manufacturing, warehouse and office space in
Englewood, Colorado consisting of 88,000 square feet and also owns the facility
utilized by Vital Pharma consisting of 13,600 square feet in Riviera Beach,
Florida. The Company's other substantial facilities - approximately 35,000
square feet in Burnsville, Minnesota; 26,000 square feet in Aurora, Colorado;
20,000 square feet in Malvern, Pennsylvania; and 18,000 square feet in Orange,
California -- are leased by the Company. The Company also leases office,
assembly and warehouse space in Riviera Beach, Florida, Conshohocken,
Pennsylvania and in Barnham, the United Kingdom.
Item 3. Legal Proceedings
In October 1997, the U.S. District Court in the Northern District of
Illinois entered a judgment in favor of the Company in a patent infringement
action brought by Smith Industries regarding manual resuscitators. The Court
found the Smith Industries patent to be invalid and that the Company's products
did not infringe. Smith Industries appealed that decision and oral argument on
its motion was heard by the U.S. Court of Appeals for the Federal Circuit on
November 3, 1998.
<PAGE>
In March 1997 an action was commenced against the Company and its
Marquest subsidiary in the U.S. District Court in New Jersey, by two related
Marquest dealers who had received notification that their dealer relationships
with Marquest were to be terminated. The action asserts claims related to
misappropriation of confidential information and violation of certain statutory
provisions relating to the protection of dealership rights. The action was
settled on terms favorable to the Company during the first quarter of fiscal
1999.
In September 1996, a patent infringement action was filed in Japan
against a Marquest distributor in connection with the sale in Japan of
Marquest's ABG syringes product line. Pursuant to a written agreement with the
distributor, Marquest agreed to provide indemnification to the distributor for
the patent infringement action. Marquest has been honoring the terms of that
indemnification and has reimbursed the legal fees associated with defending the
litigation. The Company continues to honor the indemnification since acquiring
Marquest.
The Company is also involved in other legal proceedings arising in the
ordinary course of business.
The Company cannot predict the outcome of its legal proceedings with
certainty. However, based upon its review of pending legal proceedings, the
Company does not believe the ultimate disposition of its pending legal
proceedings will be material to its financial condition, its results of
operations or its liquidity. Predictions regarding the impact of pending legal
proceedings constitute forward-looking statements under the Reform Act. The
actual results and impact of such proceedings could differ materially from the
impact anticipated, primarily as a result of uncertainties involved in the proof
of facts in legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
Item 4A. Executive Officers of the Registrant
The Company's executive officers are as follows:
<TABLE>
Positions with
Name Age* the Company
<S> <C> <C>
Terence D. Wall 57 President, Chief Executive
Officer and Director
Anthony J. Dimun 55 Executive Vice President,
Chief Financial Officer,
Treasurer and
Director
Dennis Fenstermaker 52 Vice President - Manufacturing
and General Manager
Christian Malmqvist 47 Vice President - International
Operations
Daniel L. Reuvers 35 Vice President - Marketing and
National Accounts
Scott L. Spitzer 47 Vice President, General Counsel and
Secretary
Barry Wicker 58 Executive Vice President -
Chief Operating Officer and Director
</TABLE>
* As of September 30, 1998.
Terence D. Wall founded the Company in 1972 and has been President,
Chief Executive Officer and a director of the Company since that time. He has
also invested in and serves on the Board of Directors of certain healthcare
businesses, including Bionx Implants, Inc., a manufacturer of biosorbable
medical devices for orthopedic and other applications ("Bionx"), and Exogen
Inc., a manufacturer of an ultrasonic bone healing device. Until September 18,
1997, Mr. Wall also served as a Director of EchoCath Inc., a developer and
manufacturer of catheter products that use ultrasound video technology. Prior to
founding the Company, he held various sales and marketing positions with The
Foregger Co. (a manufacturer of anesthesia products and a division of Air
Products and Chemicals, Inc.), the medical division of Westinghouse Corporation
and the medical division of American Optical Corporation. He received a Bachelor
of Science degree in 1963 from the University of Maryland and a Master of
Business Administration degree from Pace University in 1975. For the foreseeable
future, the Company will remain dependent upon the efforts of Mr. Wall. The
Company does not maintain key man life insurance on Mr. Wall's life.
Anthony J. Dimun, a certified public accountant, has been a director
of the Company since August 1987. On March 1, 1991, Mr. Dimun became an
Executive Vice President and the Chief Financial Officer of the Company and on
December 1, 1991 he became the Secretary and Treasurer of the Company. Mr. Dimun
is also a shareholder and Board member of EchoCath, Inc. and Bionx Implants,
Inc. From July 1989 through February 1991, he served as Senior Vice President of
First
<PAGE>
Atlantic Capital Ltd., a United States affiliate of an international merchant
banking group. From August 1987 until December 1987, he served as Executive Vice
President, Chief Financial Officer and Treasurer of the Company. From 1978 until
August 1987, he was a partner in the accounting firm of Goldstein Golub Kessler
LLP, which has examined the Company's financial statements for more than the
past five years. He served as a senior audit manager with Ernst & Whinney (a
predecessor of Ernst & Young) prior to joining Goldstein Golub Kessler LLP in
1976. He received a Bachelor of Science degree from Rider University in 1965.
Dennis Fenstermaker joined the Company in June 1992 as Director of
Manufacturing and became Vice President --Manufacturing and General Manager in
October 1993. Prior to joining the Company, he held various manufacturing and
engineering management positions with Sterling Drug Inc. (a pharmaceutical
manufacturer and distributor) for more than ten years, including Director of
Engineering Services and Plant Manager, and with Johnson & Johnson (a
manufacturer and distributor of healthcare products) for more than ten years.
Mr. Fenstermaker earned a Bachelor of Science degree in Commerce and Engineering
Sciences from Drexel University in 1969 and a Master of Business Administration
degree from Rider University in 1973.
Christian Malmqvist joined the Company in July, 1995 as Vice President
- - International Operations. Prior to joining the Company he held various sales
and marketing positions with Ohmeda, Inc., a healthcare supplier serving the
anesthesia and critical care fields, during a 17 year tenure. Mr. Malmqvist has
a masters degree in Business Administration from Stockholm University and a
Bachelor's degree in Business Administration from Lund University (Sweden).
Dan Reuvers joined the Company in 1987. He has served virtually all
sales related functions over the last 10 years, including Vice President of
Sales and his current position of Vice President of Marketing and National
Accounts. In addition to his experience at Vital Signs, Mr. Reuvers previously
served as Director of Sales for a start-up respiratory equipment company.
Scott Spitzer joined the Company in 1998 as Vice President and General
Counsel. Prior to joining the Company, he has held legal positions for 21 years
including as Senior Director and Senior Counsel of United States Surgical
Corporation from 1991 to 1998; Vice President, General Counsel and Secretary of
Balfour Maclaine Corporation (an American Stock Exchange listed trading
company); Assistant Vice President of First Boston Corporation (an investment
banking company); and Senior Attorney at the American Stock Exchange. Mr.
Spitzer graduated Magna Cum Laude with a Bachelor of Arts degree in Government
and Law from Lafayette College in 1973, received a masters degree from the
Cornell University Graduate School of Business and Public Administration in 1976
and received a law degree from the Cornell University Law School in 1977.
Barry Wicker has served as a director and an Executive Vice President
of the Company since 1985 (with primary responsibility for sales and marketing).
Mr. Wicker joined the Company in 1978 as National Sales Manager and became Vice
President - Sales in 1981. Prior to joining the Company, he held various
marketing and sales positions with The Foregger Co. over a 20 year period.
Each of the Company's executive officers serves as such at the
pleasure of the Board.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock (the "Common Stock") is traded in the
over-the-counter market and quoted on the National Market System of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). The
following table sets forth the high and low closing sales prices of the Common
Stock on the NASDAQ National Market System, and the cash dividends declared per
share of Common Stock for the periods indicated:
<TABLE>
<CAPTION>
Dividend
High Low Per Share
Fiscal Year Ended September 30, 1997:
<S> <C> <C> <C>
Quarter ended December 31, 1996 $ 27-3/8 $ 19-1/2 $ .04
Quarter ended March 31, 1997 25-7/8 21-3/4 .04
Quarter ended June 30, 1997 24-3/4 16-3/4 .04
Quarter ended September 30, 1997 19-1/4 15-3/8 .04
Fiscal Year Ended September 30, 1998:
Quarter Ended December 31, 1997 $ 21 $ 17-1/4 $ .04
Quarter Ended March 31, 1998 22-5/8 18-1/16 .04
Quarter Ended June 30, 1998 22-1/8 16-5/8 .04
Quarter Ended September 30 1998 20-1/2 15-1/4 .04
</TABLE>
As of September 30, 1998, there were approximately 457 holders of
record of the Common Stock.
During Fiscal 1998, the Company declared and paid cash dividends of
$0.16 per share. Payment of cash dividends in the future will depend upon the
financial condition, capital requirements, loan agreement restrictions and
earnings of the Company, as well as such other factors as the Board of Directors
may deem relevant.
Item 6. Selected Financial Data
The following selected consolidated financial data have been derived
from the Company's audited consolidated financial statements. The information
below should be read in conjunction with the consolidated financial statements
and related notes included elsewhere in this Annual Report on Form 10-K.
Certain acquisitions occurring on or before September 30, 1998,
including Marquest Medical Products, Inc. (effective for financial reporting
purposes on April 1, 1997), Vital Pharma, Inc. (formerly known as HealthStar
Pharmaceutical Services, Inc.) (acquired in January 1996), Misty Ox (acquired in
December 1995), and Coast Medical, Inc. (acquired in October 1995), have been
accounted for as purchases and, accordingly, are only reflected herein for dates
and periods on and after the respective dates noted above. See Note 2 of the
Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended
September 30,
1998 1997 1996 1995 1994
(In thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales--continuing product lines $ 126,417 $ 103,562 $ 89,922 $ 87,651 $ 82,937
Net sales--product line disposed() --- --- 808 1,902 2,187
Cost of goods sold 62,193 48,840 38,418 38,279 37,594
------- --------- ------- ------ ------
Gross profit 64,224 54,722 52,312 51,274 47,530
Operating expenses:
Selling, general and administrative 37,060 27,247 23,491 23,629 27,317
Research and development 6,150 3,869 3,595 3,865 4,493
Interest income (893) (2,242) (2,508) (2,406) (781)
Interest expense 399 537 346 382 555
Special charges 1,100 6,700 --- --- 10,643
Other (income) expense 816 844 (1,635) 162 (969)
Goodwill amortization 700 862 643 354 462
----- ------- ------ ----- -------
Income before provision for income taxes 18,892 16,905 28,380 25,288 5,810
Provision for income taxes 5,757 5,619 9,591 9,154 4,132
------ ------- ------ ------ ------
Income before cumulative effect of change
in accounting principle 13,135 11,286 18,789 16,134 1,678
Cumulative effect of change in accounting
principle (net of income tax of $803) 1,524 --- --- --- ---
------ ------- ------ ------ ------
Net income $ 11,611 $ 11,286 $ 18,789 $ 16,134 $ 1,678
====== ======= ====== ====== =====
Basic income per share before cumulative
effect of change in accounting principle $ 1.04 $ .88 $ 1.44 $ 1.24 $ .13
====== ====== ===== ====== =====
Diluted income per share before cumulative
effect of change in accounting principle $ 1.03 $ .87 $ 1.43 $ 1.24 $ .13
====== ====== ===== ===== =====
Cumulative effect of change in accounting
principle per share $ .12 $ --- $ --- $ --- $ ---
====== ====== ===== ===== =====
Basic net income per share $ .92 $ .88 $ 1.42 $ 1.24 $ .13
====== ====== ===== ===== =====
Diluted net income per share $ .91 $ .87 $ 1.41 $ 1.24 $ .13
====== ====== ====== ====== ======
Basic weighted average number of shares 12,665 12,881 13,045 12,991 12,994
====== ====== ====== ====== ======
Diluted weighted average number of shares 12,746 12,953 13,146 13,053 13,039
====== ====== ====== ====== ======
September 30
1998 1997 1996 1995 1994
(In thousands)
Balance Sheet Data:
Working capital $ 35,579 $ 38,102(2) $ 44,820 $ 32,885(3) $ 50,409
Total assets 138,186 136,948 123,756 110,421 91,773
Long-term debt, excluding current installments 2,462 5,529 2,700 3,200 3,700
Total stockholders' equity 121,310 112,229 110,239 92,645 77,658
1 The Company disposed of its endoscopic product line during Fiscal 1996 and
has reflected net sales of that product line s a separate line item in the
table set forth above.
2 The decrease in working capital and increase in long-term debt in Fiscal
1997 is due primarily to the acquisition of Marquest Medical Products, Inc.
and the acquisition of shares pursuant to a previously announced stock
buyback.
3 The reduction in working capital in Fiscal 1995 is primarily attributable
to certain marketable securities which are not classified as current
assets.
</TABLE>
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Introduction
The Company disposed of its endoscopic product line during Fiscal
1996. See Item 6 of this Annual Report on Form 10-K. In its analysis of the
Company's results of operations, management views net sales from continuing
product lines (i.e., excluding the revenues derived from its endoscopic product
line) as the relevant revenue base from which to make analytic comparisons.
Since the expenses of the endoscopic product line were not material to the
Company's results of operations and did not vary substantially prior to the
discontinuation of that product line, management's analysis below includes
within all line items other than sales the results of operations of both the
Company's continuing product lines and the Company's discontinued endoscopic
product line.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage increase or decrease of certain items included in the Company's
consolidated statements of income.
<TABLE>
<CAPTION>
Increase (Decrease) from Previous Year
Fiscal 1998 Fiscal 1997
Compared with Compared with
Fiscal 1997 Fiscal 1996
<S> <C> <C>
Net sales 22.1% 15.2%
Cost of goods sold 27.3% 27.1
Gross profit 17.4% 4.6
Selling, general and administrative expenses 36.0% 16.0
Research and development expenses 59.0% 7.6
Income before provision for income taxes 11.8% (40.4)
Provision for income taxes 2.5% (41.4)
Net income 2.9% (39.9)
</TABLE>
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended September 30, 1998 increased by 22.1%
compared with the same period last year. The increase was attributable to an
3.8% increase in anesthesia products, a 40.4% increase in respiratory products,
primarily due to the acquisition of Marquest Medical Products, Inc.
("Marquest"), 21% increase in OEM product sales, and 70% from increased activity
at Vital Pharma, Inc. ("VPI") offset in part by a 50% decline in the Company's
emergency product sales. Prices on existing products declined on average
approximately 1.5% in the year ended September 30, 1998 when compared to the
same period in 1997.
While net sales increased by 22.1%, gross profit increased by 17.4% in
absolute dollar amount. 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). The effect of the sales
price pressures was approximately 1.3% decline in gross margins. On a
consolidated basis the Company's gross profit percentage for the year ended
September 30, 1998 was 50.8% compared to 52.8% in the same time period of the
last fiscal year.
<PAGE>
Selling, general and administrative expenses increased by 36.0% in
dollar amount, as the result of the acquisition of Marquest, increases in costs
to support international sales growth, the increased activity at VPI and an
increase in the Company's domestic sales force. The domestic sales force was
doubled in late fiscal 1997 to take advantage of the respiratory product lines
acquired in the Marquest Medical Products acquisition and to increase
participation in dual source group purchasing contracts. While the two primary
objectives were met in the first half of 1998, the cost of maintaining the
second sales force (approximately $5.7 million in 1998) was no longer justified
from financial perspective. Accordingly, in the third quarter of fiscal 1998,
the Company decided to reduce the sales force to slightly above its early 1997
level and took a one-time charge of $1,100,000 to cover the costs associated
with the reduction.
Research and development expenses ("R&D") increased 59%, largely due
to an expanded effort to complete the Vasceze[R] and Isocath[TM] product lines.
The Company continues to make an active commitment to new product development.
Other income/expense, which includes dividend income, realized capital
gains and losses, legal and other expenses related to non-operational items,
decreased by $28,000 from the year ended September 30, 1997 to the year ended
September 30, 1998. In the 1997 period the Company realized net capital gains on
marketable securities of $698,000 offset by approximately $1,800,000 of legal
expenses in conjunction with the successful defense of a patent infringement
lawsuit which impacted other income/expense adversely. In the 1998 period, the
reduced litigation costs were offset by negligible capital gains. For a further
discussion of this legal action see Part I, Item 3.
The Company's effective tax rates were 30.5% and 33.2% for the years
ended September 30, 1998 and 1997 respectively. The rate for the year ended
September 30, 1998 is less than the federal and state statutory rates due to
product contributions and a tax credit for research and development. The tax
rate for the year ended September 30, 1997 is less than the combined federal and
state statutory rates primarily as a result of the utilization of capital loss
carryforwards. The Company's effective tax rate is expected to be somewhat
higher in fiscal 1999 than the fiscal 1998 rate.
For information regarding a change in accounting principle, see Note 1
of the Notes to the Company's Consolidated Financial Statements.
Fiscal 1997 Compared to Fiscal 1996
Net sales--continuing product lines for the year ended September 30,
1997 increased by 15.2% compared with the same period last year. The increase
was due primarily to the acquisition of Marquest Medical Products, Inc.
("Marquest") and increased activity at Vital Pharma, Inc. ("VPI"). Prices on
existing products declined on average approximately 1.7% in the year ended
September 30, 1997 when compared to the same period in 1996.
Sales of anesthesia products (representing 56% of net
sales--continuing product lines) grew 2.7% from the prior year as unit increases
offset selling price declines. Sales of respiratory products (representing 26.2%
of net sales--continuing product lines) increased by 52% largely due to the
acquisition of Marquest. Critical care products, accounting for 17.8% of net
sales -- continuing product lines, increased by 18.7% from the comparable period
in Fiscal 1996, reflecting the increased activity at VPI.
While net sales increased by 15.2%, gross profit increased by 4.6% in
absolute dollar amount. 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), as well as the sales
price pressure that is evident within the cost conscious healthcare industry
today. On a consolidated basis the Company's
<PAGE>
gross profit percentage for the year ended September 30, 1997 was 52.8% compared
to 57.6% in the same time period of the last fiscal year.
Selling, general and administrative expenses increased by 16.0% in
dollar amount, as the result of the acquisition of Marquest, increases in costs
to support international sales growth and the increased activity at VPI.
Research and development expenses ("R&D") increased 7.6%, due to the
acquisition of Marquest. The Company continues to make an active commitment to
new product development.
In the third quarter of fiscal 1997, the Company recorded a special
charge related to the acquisition of Marquest in the amount of $6,700,000.
$2,500,000 ($.20 per share net of tax) of this charge represents the cost of in
process research and development acquired in the Marquest transaction (which
must be expensed in accordance with purchase accounting rules) and $4,200,000 of
this charge represents costs to consolidate certain duplicate manufacturing
facilities as a result of the Marquest transaction ($.22 per share net of tax).
Other income/expense, 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 $2,479,000 from the year ended September
30, 1996 to the year ended September 30, 1997. In the 1996 period the Company
realized significant capital gain and other income, particularly a gain of
$1,000,000 realized as the sale of a joint venture in 1996, while in the 1997
period the level of capital gain and other income declined. In addition, higher
legal costs (approximately $1,800,000) incurred in conjunction with the defense
of the Smith Industries lawsuit impacted other income/expense adversely. For a
further discussion of this action see Part I, Item 3.
The Company's effective tax rates were 33.2% and 33.8% for the year
ended September 30, 1997 and 1996 respectively. The rate for the year ended
September 30, 1997 is less than the federal and state combined statutory rate
due to certain non-recurring deductions and the utilization of capital loss
carryforwards. The rate for the year ended September 30, 1996 is less than the
combined federal and state statutory rates primarily as a result of the
utilization of capital loss carryforwards.
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations as
well as the funds remaining from its initial and second public offerings. During
the year ended September 30, 1998, cash and cash equivalents and short-term
marketable securities increased by $647,000 and long-term marketable securities
and other investments decreased by $467,000. Capital expenditures of $10,620,000
were made to improve efficiencies and support new business opportunities. In
addition, $656,000 of treasury stock was acquired pursuant to a previously
announced buy-back plan, and the Company paid $2,044,000 of dividends during
Fiscal 1998. The combined total of cash and cash equivalents, short-term
marketable securities and other long-term investments was approximately $22.5
million at September 30, 1998 as compared to $22.3 million at September 30,
1997.
The Company manages its cash flow by investing in marketable
securities and, from time to time, supplementing its portfolio by making
investments in privately held healthcare companies, typically not in the
Company's principal businesses. The aggregate investment in long term marketable
securities and other investments as of September 30, 1998 was $17,739,000 (see
Note 5 to the Company's Consolidated Financial Statements).
At September 30, 1998, the Company had $2.6 million in cash and cash
equivalents. On that date, the Company's working capital was $35.6 million and
the current ratio was 4.5 to 1, as compared to $38.1 million and 3.9 to 1 at
September 30, 1997.
<PAGE>
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 $15 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.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs written with
two digits (rather than four) to define the applicable year. A computer program
written in that manner would recognize the entry of "00" in a date field as
referring to the year 1900 and not the year 2000. An error of this type could
result in various types of miscalculations, systems failures and business
process interruption. This issue is not unique to the Company and is sometimes
known as "Y2K", Year 2000 or the millennium bug (collectively, "Y2K issues").
The Company has examined its products and systems to assess and
minimize what problems may be encountered with regard to the Y2K issues and the
Company's ability to transact business without interruption. The Company's
primary focus on Y2K issues is to assure the ability to continue to provide safe
and effective products to its customers and end users. A technical review of the
Company's product lines addressing Y2K issues has been completed. None of the
Company's single use products are affected by Y2K issues because their
components do not include any form of microprocessor or clock. The Company has
also inquired of its major suppliers of raw materials to obtain their assurances
that key raw materials sold to the Company will not be impacted by Y2K issues.
There can be no assurance, however, that there will not be any interruption in
supply of any raw materials. In order to determine the potential impact of Y2K
issues on the Company's products, the Company has inquired of its suppliers or
subcontractors, as appropriate, to obtain an understanding that products will
not be affected by Y2K issues.
The Company has not as yet developed a formal contingency plan for
addressing problems resulting from vendors and suppliers of goods and services
who are not Year 2000 compliant. However, based upon the Company's Y2K issues
compliance investigations, the Company believes that as to most of the raw
materials, supplies and services used in its business, alternative means of
supply would be available to the extent a supplier or vendor was unable to
continue to provide such materials, supplies or services due to Y2K issues.
Notwithstanding the foregoing, if the supply of face masks from Respironics,
Inc. were interrupted as a result of Y2K issues (including, without limitation,
Y2K issues relating to common carriers in transporting face masks from the place
of manufacture in China), no assurance can be given that the Company could
maintain the required supply of face masks in the quantity and at a cost that
would not have a material adverse effect on the Company's business, including
sale of compatible products. The Company will continue its communication with
its suppliers
<PAGE>
including Respironics to address adverse consequence of Y2K issues. However, no
assurance can be given and the Company's policy is to maintain a sufficient
inventory of face masks to lessen the impact of temporary interruptions.
The Company began a process of upgrading its computer software
approximately two years ago. While this effort was not undertaken in order to
address Y2K issues, the need to upgrade the software occurred contemporaneously
with an increased awareness of Y2K issues. The hardware and software components
purchased or licensed by the Company in connection with the upgrade of the
computer software were analyzed for Y2K issues compliance. The Company believes
that when the new software is fully installed and operational, all material
computer systems will be Y2K compliant. Certain components of the system have
already been installed and are operating generally as anticipated. The Company
anticipates that the software upgrade will be fully operational during the
second quarter of calendar year 1999. Because the upgrade of the computer
software was to address increases in volume, number of users and unsupported
software, the Company has not ascribed any of these computer costs to Y2K issues
compliance, but as capital expenditures made in the ordinary course of business.
Several of the Company's in-house manufacturing lines used to
manufacture raw materials into component parts are controlled by equipment
incorporating microprocessors. The Company also has certain other operating
equipment which incorporate microprocessors. The Company has made inquiry of
manufacturers and providers of certain key equipment and device contract
companies and is upgrading certain equipment. The Company believes that the
costs to upgrade such equipment are not expected to be material to the Company
and that such other equipment material to the Company's operations will not be
materially affected by Y2K issues.
THE ESTIMATES AND CONCLUSIONS HEREIN WITH RESPECT TO Y2K ISSUES ARE
FORWARD-LOOKING STATEMENTS UNDER THE REFORM ACT AND ARE BASED ON MANAGEMENT'S
BEST ESTIMATES OF FUTURE EVENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
COMPANY'S ESTIMATES AND CONCLUSIONS AS A RESULT OF A NUMBER OF FACTORS INCLUIDNG
THE AVAILABILITY OF RESOURCES, THE ABILITY TO DISCOVER AND CORRECT THE POTENTIAL
Y2K SENSITIVE ISSUES WHICH COULD HAVE A SERIOUS IMPACT ON CERTAIN OPERATIONS AND
THE ABILITY OF THE COMPANY'S VENDORS, SUPPLIERS, PROVIDERS OF GOODS AND SERVICES
AND CUSTOMERS TO BRING THEIR SYSTEMS INTO Y2K ISSUES COMPLIANCE.
Recent Accounting Pronouncements
The Company adopted the Financial Accounting Standards Board Statement
No. 128 Earning Per Share, beginning with the quarter ended December 31, 1997.
Earnings per share data for all prior years have been restated to conform to the
provisions of this statement. Basic earnings per common share is computed using
the weighted average number of shares outstanding. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options and
warrants to purchase common stock. Incremental shares of 81,000, 72,000 and
101,000 in 1998, 1997 and 1996, respectively, were used in the calculation of
diluted earnings per common share.
The Company does not believe that any recently issued, but not yet
effective accounting standards will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks including the impact of
commodity price changes and changes in the market value of its investments and,
to a lesser extent interest rate changes and foreign currency fluctuations. In
the normal course of business as described below, the Company employs policies
and procedures with the objective of limiting the impact of market risks on
earnings and cash flows and to lower its overall borrowing costs.
The impact of interest rate changes and foreign currency fluctuations
is not material to the Company's financial condition. The Company does not enter
into interest rate and foreign currency transactions for speculative purposes.
It is also the Company's policy to price products from vendors and to customers
in U.S. dollars and to receive payment in U.S. dollars. Historically, the
international portion of the Company's sales has been relatively small and the
effect of changes in interest rates and foreign exchange rates on the Company's
earnings generally has been small relative to other factors that also affect
earnings, such as unit sales and operating margins. However, the international
segment is expected to grow both in terms of actual sales and as a percentage of
the Company's total sales and the Company may in the future need to revise or
change its approach to managing interest rate and foreign currency transactions.
The Company's risks involving commodity price changes relate to prices
of raw materials used in its operations. The Company is exposed to changes in
the prices of latex and various plastics and resins for the manufacture of its
products. The Company does not enter into commodity futures or derivative
instrument transactions. Except with respect to its single source for face masks
discussed above in Item 1, it is the Company's policy to maintain commercial
relations with multiple suppliers and when prices for raw materials rise to
attempt to source alternative supplies.
The Company's marketable securities and other investments are subject
to a variety of market risks, including interest rates for U.S. Government and
federal mortgage obligations, and operating and a wide variety of other business
risks of corporate obligations. The Company's other investments in healthcare
companies are subject to the wide variety of business risks to which those
companies are subject, including generally all of those to which the Company is
subject, and the lack of liquidity due to the fact that the investments are in
non-public companies. The Company's policy is to diversify its debt investments
among U.S. government obligations, corporate obligations and federal mortgage
obligations and to further diversify such portfolio by utilizing a lattered
portfolio of maturities for such instruments. This portion of the Company's
portfolio primarily matures over the next 5 years (See Note 5 to the Company's
Consolidated Financial Statements). It is also the Company's policy to limit and
monitor the market risks exposure to its other investments.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following audited consolidated financial statements and related
report are set forth in this Annual Report on the following pages:
Page
Independent Auditor's Report F-1
Consolidated Balance Sheet as of
September 30, 1997 and 1998 F-2
Consolidated Statement of Income
for the years ended September 30, 1996, 1997 and 1998 F-3
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996, 1997 and 1998 F-4
Consolidated Statement of Cash Flows
for the years ended September 30, 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-6
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have audited the accompanying consolidated balance sheets of Vital
Signs, Inc. and Subsidiaries as of September 30, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vital Signs, Inc. and
Subsidiaries as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 1 of notes to the consolidated financial statements,
in 1998 the Company changed its method of accounting for sales rebates.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
November 13, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
1998 1997
(in thousands)
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents (Note 1) $ 2,600 $ 3,685
Marketable securities (Notes 1 and 5) 2,157 425
Accounts receivable, less allowance for doubtful accounts
of $638 and $101, respectively (Notes 16 and 17) 17,837 16,405
Inventory (Notes 1 and 3) 19,322 19,559
Prepaid expenses and other current assets (Note 4) 3,903 11,187
------ ------
Total current assets 45,819 51,261
Property, plant and equipment - net (Notes 1 and 6) 41,009 33,825
Marketable securities and other investments (Notes 1 and 5) 17,739 18,206
Goodwill and other intangible assets (Notes 1 and 2) 25,495 28,907
Deferred income taxes (Notes 1 and 14) 1,918 ---
Other assets 6,206 4,749
------- -------
Total Assets $ 138,186 $ 136,948
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,462 $ 6,204
Current portion of long-term debt (Note 7) 1,022 611
Accrued expenses (Note 8) 3,756 6,344
----- ------
Total current liabilities 10,240 13,159
Deferred income taxes payable (Notes 1 and 14) --- 1,366
Long-term Debt (Note 7) 2,462 5,529
Other liabilities (Note 9) 4,174 4,665
------ ------
Total Liabilities 16,876 24,719
------ ------
Commitments and contingencies (Notes 2, 11 and 12)
Stockholders' Equity (Note 13)
Common stock - no par value; authorized 40,000,000 shares,
outstanding 12,628,194 and 12,674,673 shares, respectively 21,520 22,149
Allowance for aggregate unrealized gain (loss) on
marketable securities (Notes 1 and 5) 14 (129)
Retained earnings 99,776 90,209
------- -------
Stockholders' equity 121,310 112,229
------- -------
Total Liabilities and Stockholders' Equity $ 138,186 $ 136,948
======= =======
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended
September 30,
1998 1997 1996
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales-continuing product lines (Notes 1, 17 and 18) $ 126,417 $ 103,562 $ 89,922
Net sales-product line disposed (Note 2) --- --- 808
Cost of goods sold 62,193 48,840 38,418
------- ------- ------
Gross profit 64,224 54,722 52,312
------- --------- ------
Operating expenses:
Selling, general and administrative 37,060 27,247 23,491
Research and development 6,150 3,869 3,595
Interest (income) (893) (2,242) (2,508)
Interest expense (Note 7) 399 537 346
Special charges (Note 2) 1,100 6,700 ---
Other (income) expense (Notes 1, 10 and 15) 816 844 (1,635)
Goodwill amortization 700 862 643
----- ------ -------
45,332 37,817 23,932
------ ------ -------
Income before provision for income taxes 18,892 16,905 28,380
Provision for income taxes (Notes 1 and 14) 5,757 5,619 9,591
------ ------ -------
Income before cumulative effect of change in
accounting principle
13,135 11,286 18,789
Cumulative effect of change in accounting principle
(net of income taxes of $803) (Note 1) 1,524 --- ---
------ ------ -------
Net income $ 11,611 $ 11,286 $ 18,789
========= ========= =========
Earnings per Common Share:
Basic income per share before cumulative effect
of change in accounting principle $ 1.04 $ .88 $ 1.44
========== ========== ========
Diluted income per share before cumulative effect
of change in accounting principle $ 1.03 $ .87 $ 1.43
========== ========== ========
Cumulative effect of change in accounting principle per share $ .12 $ --- $ ---
========== ========== =========
Basic net income per share $ .92 $ .88 $ 1.44
========== ========== =========
Diluted net income per share $ .91 $ .87 $ 1.43
========== ========== =========
Basic weighted average number of shares 12,665 12,881 13,045
========== ========== =========
Diluted weighted average number of shares 12,746 12,953 13,146
========== ========== =========
The unaudited Pro forma Information (assuming the change in
accounting principle was applied retroactively)
( Note 1):
Net income $ 12,876 $ 11,172 $ 18,592
========== ========== ========
Basic net income per share $ 1.02 $ .87 $ 1.43
========== ========== ========
Diluted net income per share $ 1.01 $ .86 $ 1.41
========== ========== =========
Basic weighted average number of shares 12,665 12,881 13,045
========== ========== =========
Diluted weighted average number of shares 12,746 12,953 13,146
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Allowance for
Aggregate Unrealized
Gain (Loss) on
Common Stock Marketable Retained Stockholders'
Shares Amount Securities Earnings Equity
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 12,999,078 $ 29,015 $ (100) $ 63,730 $ 92,645
Reissuance of common stock
net of purchase 4,129 (8) 45 37
Exercise of stock options 59,494 659 659
Adjustment to the allowance for aggregate
unrealized loss on marketable securities (326) (326)
Dividends paid ($.12 per share) (1,565) (1,565)
Net income 18,789 18,789
--------- ------ ----- ------ -------
Balance at September 30, 1996 13,062,701 29,666 (426) 80,999 110,239
Purchase of common
stock net of reissuance (410,689) (7,788) 6 (7,782)
Exercise of stock options 22,661 271 271
Adjustment to the allowance for aggregate
unrealized loss on marketable securities 297 297
Dividends paid ($.16 per share) (2,082) (2,082)
Net income
11,286 11,286
---------- ------ ---- ------ -------
Balance at September 30, 1997 12,674,673 22,149 (129) 90,209 112,229
Purchase of common
stock net of reissuance (48,749) (656) (656)
Exercise of stock options 2,270 27 27
Adjustment to the allowance for aggregate
unrealized gain on marketable
securities 143 143
Dividends paid ($.16 per share) (2,044) (2,044)
Net income 11,611 11,611
---------- --------- ------- --------- ----------
Balance at September 30, 1998 12,628,194 $ 21,520 $ 14 $ 99,776 $ 121,310
========== ========= ======= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended
September 30,
1998 1997 1996
Cash flows from operating activities: (in thousands)
<S> <C> <C> <C>
Net income $ 11,611 $ 11,286 $ 18,789
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,436 2,891 2,322
Deferred income taxes (116) (1,628) 438
Amortization of goodwill 700 862 643
Amortization of deferred credit (100) (100) (100)
Net gain on sales of available-for-sale securities (42) (698) (608)
Net gain on sale of product line --- --- (174)
Net gain on sale of fixed assets --- (27) ---
Write off of purchased research and development --- 2,500 ---
Plant consolidation special charge --- 4,200 ---
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,432) 82 2,319
(Increase) decrease in inventory 37 (3,738) (1,963)
(Increase) decrease in prepaid expenses and other current assets 7,622 (2,069) (1,481)
Increase in other assets (1,651) (841) (431)
Decrease in accounts payable and accrued expenses (4,121) (495) (4,068)
------ ------ -------
Net cash provided by operating activities 15,944 12,225 15,686
------- ------ -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (10,620) (9,988) (8,611)
Sale of property, plant and equipment --- 543 ---
Cash received for the sale of product line --- --- 2,786
Purchases of available-for-sale securities (15,910) (57,165) (44,882)
Proceeds from sales of available-for-sale securities 14,830 68,318 53,057
Acquisition of subsidiaries, net of $3,200 of cash acquired (1997) --- (16,791) (7,254)
------- ------ -------
Net cash used in investing activities (11,700) (15,083) (4,904)
-------- ------- -------
Cash flows from financing activities:
Dividends paid (2,044) (2,082) (1,565)
(Purchase) reissuance of common stock (656) (7,782) 37
Proceeds from exercise of stock options 27 271 659
Increase in long-term debt and notes payable --- 8,282 ---
Principal payments of long-term debt and notes payable (2,656) (9,893) (500)
------ ------- ------
Net cash used in financing activities (5,329) (11,204) (1,369)
------ ------- ------
Net increase (decrease) in cash and cash equivalents (1,085) (14,062) 9,413
Cash and cash equivalents at beginning of year 3,685 17,747 8,334
Cash and cash equivalents at end of year $ 2,600 $ 3,685 $ 17,747
========= ========== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 378 $ 379 $ 394
Income taxes $ 1,781 $ 9,660 $ 9,306
Supplemental schedule of noncash investing activities:
Accrued amounts relating to purchase of subsidiaries $ 0 $ 100 $ 125
Forgiveness of note receivable as payment for purchase of subsidiary $ 0 $ 67 $ 333
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
Note 1 - Summary of Significant Accounting Policies and Principal Business
Activities:
Business Activities:
Vital Signs, Inc. ("VSI") and its subsidiaries (collectively the
"Company") design, manufacture and market single-patient use products for the
anesthesia, respiratory, critical care and emergency markets.
Principles of Consolidation:
The consolidated financial statements include the accounts of VSI and
its majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Inventory:
Inventory is stated at the lower of cost (first-in, first-out method)
or market.
Depreciation:
Depreciation and amortization of property, plant and equipment is
provided for by the straight-line method over the estimated useful lives of the
related assets.
Income Taxes:
Income taxes are based upon amounts included in the consolidated
statement of income. Deferred income taxes result from differences between the
time certain expenses are recognized for financial reporting purposes and the
time when the items are actually reported for income tax purposes.
Revenue Recognition:
Revenue from sales of products is recognized at the date of shipment
to customers.
Goodwill and Other Intangible Assets:
Goodwill and other intangible assets arising from business
acquisitions accounted for under the purchase method are amortized over periods
up to 40 years using the straight-line method.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company believes
it is not exposed to any significant credit risk with respect to its highly
liquid investments in money market securities and its commercial banking
facilities.
Net Income Per Share of Common Stock:
The Company adopted the Financial Accounting Standards Board Statement
No. 128, Earnings Per Share, beginning with the quarter ended December 31, 1997.
Earnings per share data for all prior years have been restated to conform to the
provisions of this statement. Basic earnings per common share is computed using
the weighted average number of shares outstanding. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options and
warrants to purchase common stock. Incremental shares of 81,000, 72,000 and
101,000 in 1998, 1997 and 1996, respectively, were used in the calculation of
diluted earnings per common share.
<PAGE>
Note 1 - Summary of Significant Accounting Policies and Principal Business
Activities (continued):
Marketable Securities:
Management determines the appropriate classification of securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and discounts to maturity. Such amortization is
included in investment income. Interest on securities classified as
held-to-maturity is included in investment income.
Certain marketable equity securities and debt securities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and discounts to maturity. Such amortization is
included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Dividends on securities classified as available-for-sale are included in
other (income) expenses.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements. Actual
results could differ from those estimates.
Change in Accounting Principle:
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. The cumulative effect of this change in accounting principle results in
a reduction in net income of $1,524,000 or $.12 per share. Pro forma information
is included in the income statement indicating the results of operations as if
the newly adopted accounting principle had been in effect since October 1, 1995.
Accounting for Stock-Based Compensation:
The Company measures stock-based compensation cost using Accounting
Principles Board ("APB") Opinion No. 25 as is permitted by the Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Recent Accounting Pronouncements:
The Company does not believe that any recently issued, but not yet
effective accounting standards will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
<PAGE>
Note 2 - Acquisitions/Dispositions:
1997 Acquisition
The Company acquired all of the outstanding stock of Marquest Medical
Products, Inc. ("Marquest"), a company engaged in the manufacture of respiratory
products. The Company paid approximately $20 million in cash including
acquisition costs and incurred a $2.5 million writeoff of in process research
and development, which was charged to 1997 operations, as discussed below. The
assets acquired amounted to approximately $19 million and liabilities assumed
approximately $13 million. This transaction has been accounted for as a
purchase, and resulted in an excess of purchase price over net assets acquired
of approximately $15 million; subsequently this amount was reduced by $4 million
relating to the realizability of the tax benefit from acquired tax losses.
The effective date of the acquisition for financial reporting purposes
is April 1,1997. The balance sheet and results of operations for Marquest have
been included in these consolidated financial statements as of April 1, 1997.
In connection with the acquisition of Marquest, 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 costs acquired in
the Marquest transaction (which must be expensed in accordance with purchase
accounting rules) along with $4,200,000 in costs for the consolidation of
duplicative manufacturing operations as a result of this transaction.
The Company recorded a special charge of $1.1 million in the quarter
ended June 30, 1998. The charge represents severance and other costs associated
with reducing the domestic sales force originally hired to sell the expanded
product line acquired in the Marquest acquisition.
The following summary, pro forma, unaudited data of the Company
reflects the acquisition of Marquest as if it had occurred on October 1, 1996
and 1995, respectively:
Pro forma/Unaudited
(dollars in thousands)
Fiscal 1997 Fiscal 1996
Net sales-continuing operations $ 114,801 $ 112,693
============= ============
Net income $ 10,904 $ 17,955
============= ============
Diluted net income per common share $ .84 $ 1.37
============= ============
1996 Acquisitions/Disposition
In January 1996, the Company acquired, in a purchase transaction, all
of the outstanding stock of HealthStar Pharmaceutical Services, Inc.
("HealthStar"), a company engaged in both the manufacture of equipment and
contract manufacturing services utilizing specialized blow-fill-seal
manufacturing technology for the pharmaceutical and medical industry.
HealthStar's name was changed to Vital Pharma, Inc. ("VPI") in 1997. The Company
paid $1,595,000 at closing. The sellers are also eligible to receive contingent
payments based on earnings before taxes, as defined, in each year ending
December 31, 1996, 1997 and 1998. The December 31, 1996 and the December 31,
1997 targets were not achieved. The estimated fair value of the assets acquired
approximated $2,850,000 and liabilities assumed approximated $1,550,000 with
goodwill of approximately $1,300,000 reflected at the date of acquisition.
<PAGE>
Note 2 - Acquisitions/Dispositions (continued):
In December 1995 the Company entered into a purchase agreement for all
of the net assets related to the Misty Ox product line. The purchase price paid
at closing by the Company was $2,025,000. The estimated fair value of the assets
acquired amounted to $2,014,000 and liabilities assumed amounted to $113,000
with goodwill of $250,000 reflected at the date of acquisition.
During fiscal 1996, the Company sold its O.R. Concepts endoscopic
product line and recognized a gain of $174,000 (see Note 10).
The effect of the operations of VPI and the Misty Ox product line from
October 1, 1995 to the dates of acquisition on the Company's results of
operations for the year ended September 30, 1996 was immaterial.
Note 3 - Inventory:
Inventory consists of the following:
September 30,
1998 1997
(in thousands)
Raw materials $ 12,061 $ 14,474
Finished goods 7,261 5,085
--------- --------
$ 19,322 $ 19,559
========== ========
Note 4 - Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the following:
September 30,
1998 1997
(in thousands)
Prepaid employee fringe benefits $ --- $ 3,744
Notes and interest receivable 1,678 1,468
Prepaid income taxes 314 3,923
Deferred tax asset (see Note 14) 492 160
Prepaid insurance 341 340
Other 1,078 1,552
-------- ------
$ 3,903 $ 11,187
======== ======
<PAGE>
Note 5 - Marketable Securities and Other Investments:
The following is a summary of available-for-sale securities and other
investments:
<TABLE>
<CAPTION>
Available-for-Sale-Securities
September 30, 1998 September 30, 1997
(in thousands)
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
Value Cost Gains Value Cost Losses
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
obligations $ 2,458 $ 2,457 $ 1 $ 11,039 $ 11,127 $ (88)
Corporate obligations --- --- --- 2,970 3,000 (30)
Federal mortgage
obligations 3,980 3,957 23 4,197 4,297 (100)
Total available-for-sale
securities 6,438 6,414 24 18,206 18,424 (218)
Other Investments 13,458 13,458 --- --- --- ---
------ ------ ------- --------- ------ --------
$ 19,896 $ 19,872 $ 24 $ 18,206 $ 18,424 $ (218)
========== ======== ======== ========== ======== ========
</TABLE>
At September 30, 1998 investments in debt securities classified as
available-for-sale securities mature as follows:
<TABLE>
<CAPTION>
Maturity
(in thousands)
1 - 5 Years 5 - 10 Years 10 - 30 Years
<S> <C> <C> <C>
U.S. Government obligations $ 2,436 $ --- $ 22
Federal mortgage obligations 3,864 62 54
---------- --------- ----------
$ 6,300 $ 62 $ 76
========== ========== ==========
</TABLE>
The Company manages its cash flow by investing in marketable
securities and from time to time supplements its portfolio by making investments
in privately held companies in the healthcare field typically not in the
Company's principal line of business. As of September 30, 1998, other
investments in privately held companies aggregated $13,458,000.
Investments in privately held companies are accounted for under the
equity method of accounting whereby earnings or losses from investments in which
the Company maintains a minority interest are reflected in the Company's
earnings based on the Company's pro rata ownership interest. Net earnings from
these investments for the year ended September 30, 1998 aggregated $106,000. The
excess of the Company's carrying value over the proportionate share of the
underlying net assets of the privately held companies aggregated $12,332,000.
Such amount is being amortized over 40 years.
<PAGE>
Note 5 - Marketable Securities and Other Investments (continued):
Realized gains and losses are determined on the basis of specific
identification. During the year ended September 30, 1998, sales proceeds and
gross realized gains and losses on securities classified as available for sale
securities were $14,830,852, $79,489 and $(37,311), respectively. During the
year ended September 30, 1997, sales proceeds and gross realized gains and
losses on securities classified as available-for-sale securities were
$68,318,052, $784,014 and $(86,576), respectively. During the year ended
September 30, 1996, sales proceeds and gross realized gains and losses on
securities classified as available-for-sale securities were $53,056,643,
$652,000 and ($44,000), respectively.
There were no trading securities at September 30, 1998. Trading
securities at September 30, 1997 amounted to $425,000 and results of operations
for the year ended September 30, 1997 includes an unrealized gain of $46,000.
There were no unrealized gains or losses during the years ended September 30,
1998 or 1996 on trading securities. Stockholders' equity at September 30, 1998,
1997 and 1996 includes an unrealized holding gain (loss), net of related tax
effect, on available-for-sale securities of $14,000, ($129,000), and ($426,000),
respectively.
Note 6 - Property, Plant and Equipment:
Property, plant and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
September 30, Estimated
1998 1997 Useful Life
(in thousands)
<S> <C> <C> <C>
Land $ 3,015 $ 3,015
Building and building improvements 17,821 15,430 30 to 40 years
Equipment and molds 30,342 23,778 5 to 20 years
Fixtures and office equipment 1,085 1,009 5 to 15 years
Transportation equipment 131 309 5 years
------- ------
52,394 43,541
Less accumulated depreciation
and amortization 11,385 9,716
------ ------
$ 41,009 $ 33,825
========= ========
</TABLE>
Certain portions of the Company's property, plant and equipment are
pledged as collateral for the Company's long-term debt (see Note 7).
Note 7 - Long-term Debt:
Long-term debt consists of the following: September 30,
1998 1997
(in thousands)
Industrial Revenue Bonds ("IRB") payable $ 2,500 $ 2,700
Swiss Notes Payable 683 3,007
Other 301 433
----- -----
Total long-term debt 3,484 6,140
Less current portion 1,022 611
----- -----
$ 2,462 $ 5,529
======== ========
<PAGE>
Note 7 - Long-term Debt (continued):
Based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities, the fair value of the long-term
debt approximates the carrying amount.
The Company entered into the IRB payable in varying installments with
interest at rates ranging from 6.75% to 8.625% per annum through December 2009.
The IRB, among other matters, contains certain financial covenants, limits the
payment of dividends to any class of stock and restricts the incurrence of
additional debt, as defined in the agreement. For the year ended September 30,
1998, the Company was in compliance with all of the required financial covenants
with the exception of an interest coverage ratio for which the Company has
received a waiver.
The Swiss notes bear interest at a rate of 8% per annum, payable on a
semi-annual basis. The notes are due on March 31, 1999.
Maturities of long-term debt are as follows:
Year ending September 30, (in thousands)
1999 $ 1,022
2000 263
2001 263
2002 236
2003 200
Thereafter 1,500
-----
$ 3,484
==========
At September 30, 1998, the Company had a $10,000,000 line of credit
with a bank, which was subsequently increased to $15,000,000. This line of
credit expires on November 30, 1999. No balance was outstanding under this line
of credit at September 30, 1998.
Note 8 - Accrued Expenses:
Accrued expenses consist of the following:
September 30,
1998 1997
(in thousands)
Manufacturing plant consolidation $ 218 $ 1,879
Commissions --- 501
Interest 220 437
Payroll and vacations 1,688 1,485
Professional fees 382 322
Sales expenses 65 90
Income and other taxes payable 435 696
Other 748 934
----- -----
$ 3,756 $ 6,344
=========== =======
<PAGE>
Note 9 - Other Liabilities:
Other liabilities consist of:
September 30,
1998 1997
(in thousands)
Amount related to acquisitions $ 4,083 $ 4,474
Deferred tax credits 91 191
-------- ---------
$ 4,174 $ 4,665
======== =========
Note 10 - Other (Income) Expense:
Other (income) expense consists of the following:
<TABLE>
<CAPTION>
For the Year Ended
September 30,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Dividend income $ (14) $ (46) $ (75)
Amortization of deferred credit (100) (100) (100)
Charitable contributions of inventory 138 156 563
Net capital (gain) loss on sale of
marketable securities 4 (698) (609)
Gain on sale of building --- (20) ---
Gain on sale of endoscopic product line --- --- (174)
Gain on sale of Cardiologics (Note 15) --- --- (1,000)
Litigation costs 472 1,878 263
Other 316 (326) (503)
------ ------ -------
$ 816 $ 844 $ (1,635)
====== ====== ========
</TABLE>
Note 11 - Commitments:
Leases:
The Company has entered into noncancelable operating leases providing
for the lease of office and warehouse facilities, equipment and certain other
assets. Rent expense, aggregating $1,861,000 $1,185,000, and $724,000, has been
charged to operations for the years ended September 30, 1998, 1997 and 1996,
respectively. The Company's commitment under such leases is as follows:
Year ending September 30, (in thousands)
1999 $ 1,477
2000 1,268
2001 1,223
2002 835
2003 134
----------
$ 4,937
===========
Employment Agreements:
The Company has entered into employment agreements, approximating
$942,000 annually which expire at various dates through September 2002.
<PAGE>
Note 12 - Contingent Liabilities:
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company in the normal course of business,
including those pertaining to patent and trademark issues and product liability
matters. While the amounts claimed or expected to be claimed may be substantial,
the ultimate liability cannot now be determined because of the inherent
uncertainties surrounding the litigation and the considerable uncertainties that
exist. Therefore, it is possible that results of operations or liquidity in a
particular period could be materially affected by certain contingencies.
However, based on facts currently available, management believes that the
disposition of matters that are pending or asserted will not have a materially
adverse effect on the financial position of the Company.
For a detailed discussion of current legal actions, see Item 3 of this
annual report on Form 10-K.
Note 13 - Stockholders' Equity:
Preferred Stock:
The Company has authorized 10,000,000 shares of no par value preferred
stock. No shares were issued or outstanding at September 30, 1998 or 1997.
Stock Options:
Transactions relating to stock options are as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Price
of Shares Per Share
<S> <C> <C>
Balance September 30, 1995 541,135 $ 15.16
Granted 409,044 $ 22.03
Exercised (59,494) $ 11.09
Expired/canceled (274,225) $ 17.21
-------- ------
Balance September 30, 1996 616,460 $ 19.20
Granted 67,607 $ 19.44
Exercised (22,661) $ 12.04
Expired/canceled (27,091) $ 20.16
-------- ------
Balance September 30, 1997 634,315 $ 19.44
Granted 467,982 $ 17.99
Exercised (2,270) $ 12.13
Expired/canceled (74,162) $ 18.68
-------- ------
Balance September 30, 1998 1,025,865 $ 18.84
========= =======
</TABLE>
The weighted average fair value per share of options granted during
the years ended September 30, 1998, 1997, and 1996 amounted to $6.82, $7.60, and
$9.38, respectively.
F-14
<PAGE>
Note 13 - Stockholders' Equity (continued):
The Company's Board of Directors and stockholders have approved the
adoption of a stock option plan for employees, a stock option plan for directors
and a stock option plan for two executive officers which provide for the grant
of options to purchase a maximum of 775,000 shares, 100,000 shares and 200,000
shares, respectively, of the Company's common stock. Options may be granted at
prices not less than fair value at the date of grant. The Company has also
granted options pursuant to contractual arrangements.
Additionally, the Company has adopted a stock option and investment
plan (covering a maximum of 900,000 shares), whereby participants were granted
two stock options for each share of the Company's common stock that they
acquired. The options are granted at fair value at date of grant. Such stock
options are subject to a defined vesting schedule. Shares purchased by employees
may be financed by payroll deductions.
In connection with the plans described above, options covering
1,025,965 shares (excluding lapsed shares) have been granted through September
30, 1998.
The Company has elected, in accordance with the provisions of SFAS No.
123, to apply the current accounting rules under APB Option No. 25 and related
interpretations in accounting for its stock options and, accordingly, has
presented the disclosure-only information as required by SFAS No. 123. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at the grant date as prescribed by SFAS No. 123, the
Company's net income and diluted net income per common share for the years ended
September 30, 1998, 1997, and 1996 would approximate the pro forma amounts
indicated in the table below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Net income - as reported $ 11,611 $ 11,286 $ 18,789
Net income - pro forma $ 10,199 $ 10,867 $ 18,380
Diluted net income per common share-
as reported $ .91 $ .87 $ 1.43
Diluted net income per common share-
pro forma $ .80 $ .84 $ 1.40
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the years ended September 30, 1998, 1997 and 1996,
respectively: expected volatility of 37%, 35%, and 39%, respectively, risk-free
interest rate of 5.5%, 6.3%, and 6.4%, respectively, dividend yield rate of .9%,
.8%, and .6%, respectively, and all options have expected lives of 5 years.
<PAGE>
Note 13 - Stockholders' Equity (continued):
The following table summarizes information about fixed stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of September 30, Contractual Exercise September 30, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 5.55 -$ 6.84 59,500 1.7 $ 6.73 59,500 $ 6.73
2 $ 9.25 -$ 10.50 11,478 5.8 $ 9.60 9,215 $ 9.57
3 $ 14.00 -$ 15.25 42,536 4.5 $ 14.74 42,536 $ 14.74
4 $ 16.75 -$ 19.50 483,781 9.2 $ 17.97 30,537 $ 18.51
5 $ 20.63 -$ 22.50 414,758 7.3 $ 22.10 166,486 $ 21.88
6 $ 24.50 -$ 24.50 13,812 8.3 $ 24.50 --- $ ---
--------- --- --------- ------- ---------
Total 1,025,865 7.7 $ 18.84 308,274 $ 17.27
========= ==== ========= ======= =========
</TABLE>
Note 14 - Income Taxes:
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
For the Year Ended
September 30,
1998 1997 1996
(in thousands)
<S> <C> <C> <C> <C>
Current:
Federal $ 5,156 $ 6,293 $ 8,130
State 575 764 1,004
Foreign 142 190 19
Deferred:
Federal 306 (1,295) 383
State (422) (333) 55
--------- ------- -------
$ 5,757 $ 5,619 $ 9,591
======== ====== ========
</TABLE>
<PAGE>
Note 14 - Income Taxes (continued):
The tax effect of temporary differences that give rise to the net
short-term deferred tax assets are presented below:
<TABLE>
<CAPTION>
September 30,
1998 1997
(in thousands)
<S> <C> <C>
Prepaid expenses $ --- $ 1,226
Undistributed DISC earnings 96 96
Manufacturing plant consolidation cost --- (1,482)
Net operating loss carryforward
from acquisition (Note 2) (400) ---
State net operating loss carryforward (242) ---
Other 54 ---
-------- ---------
$ (492) $ (160)
======== ========
</TABLE>
The tax effects of temporary differences that give rise to the net
long-term deferred tax (assets) liabilities are presented below:
<TABLE>
<CAPTION>
September 30,
1998 1997
(in thousands)
<S> <C> <C>
Net operating loss carryforward
from acquisition (Note 2) $ (3,100) $ ---
Accelerated depreciation 943 823
Undistributed DISC earnings 506 599
Other (267) (56)
Capital losses 294 211
Valuation allowance attributable to
capital loss carryforward (294) (211)
--------- ---------
$ (1,918) $ 1,366
========= =========
</TABLE>
The total provision for income taxes differs from that amount which
would be computed by applying the U.S. federal income tax rate to income before
provision for income taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
For the Year Ended
September 30,
1998 1997 1996
<S> <C> <C> <C>
Statutory federal income tax rate 34.3% 35.0% 35.0%
Write off of purchased Research and Development --- 5.2 ---
Net capital gains on investments --- (1.5) (2.0)
State income taxes net of federal tax benefit .5 1.6 2.4
Benefit of tax loss in subsidiary --- (6.9) ---
Dividend exclusion/tax exempt interest --- (0.3) (.3)
Product contributions (1.7) --- ---
Tax credit for Research and Development (1.2) --- ---
Other (1.4) .1 (1.3)
---- ---- -----
Effective income tax rate 30.5% 33.2% 33.8%
==== ==== ====
</TABLE>
Note 15 - Related Party Transactions:
During fiscal 1996, the Company entered into a joint venture
arrangement (Cardiologics, L.L.C.) with the objective to develop specialized
cardio-vascular products, ("Cardiologics"). Approximately $100,000 of research
and development expense was incurred by the Company in fiscal 1996. During
fiscal 1996, the Company's management made a decision to sell its equity
interest in the joint venture for several business reasons, including the time
frame to commercially introduce the product and the research, development and
clinical costs that are likely to be incurred, as well as that the primary
market focus of the product is outside of the core anesthesia and critical care
product focus of the Company.
During September 1996, the Company sold its interest for a note
receivable of $1,000,000 plus repayment of expenses paid on Cardiologics behalf
which resulted in a gain of $1,000,000. The investment was sold to a private
venture capital fund whose primary investor is the President and principal
stockholder of the Company. The note was completely satisfied during the year
ended September 30, 1997.
Note 16 - Allowance for Doubtful Accounts:
Information relating to the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
(in thousands)
Allowance for doubtful accounts:
Year ended September 30,
<S> <C> <C> <C> <C> <C>
1996 $ 285 $ 45 $ 161(A) $ 169
======== ======== ======= ======
1997 $ 169 $ 101 $ 169(A) $ 101
======== ======== ======= ======
1998 $ 101 $ 561 $ 24(A) $ 638
======== ======== ======= ======
</TABLE>
(A) Write-off of uncollectible accounts receivable.
Note 17 - Significant Customers:
A portion of the Company's hospital customers are serviced via
national and regional medical supply distributors. During fiscal years 1998 and
1997, respectively, 33% and 37% of the Company's sales were made in this
distribution channel. In each fiscal year 1998 and 1997, one of the large
national distributors represented approximately 13% of net sales--continuing
product lines. The same customer represented approximately 16% and 10% of
outstanding accounts receivable at September 30, 1998 and 1997, respectively.
Note 18 - Export Sales:
The export sales for the fiscal years ended September 30, 1998, 1997
and 1996 of approximately $15,000,000, $10,700,000 and $7,300,000, respectively,
were sold principally to customers in Europe, Asia and Australia.
<PAGE>
PART III
Item 10. Directors of the Registrant.
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
stockholders that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to stockholders and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
stockholders that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to stockholders and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
stockholders that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to stockholders and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions.
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
stockholders that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to stockholders and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The financial statements listed in the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual
Report.
(b) All schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
(c) The following exhibits are incorporated by reference herein or annexed
to this Annual Report:
Exhibit Description
2.1 Agreement and Plan of Merger, dated March 14, 1997, among the Company,
an acquisition subsidiary, and Marquest Medical Products, Inc.
("MMPI") is incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated March 20, 1997.
2.2 Inducement Agreement, dated March 14, 1997, between the Company and
Scherer Healthcare, Inc., relating to the Registrant's MMPI merger, is
incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K dated March 20, 1997.
3.1 Restated Certificate of Incorporation is incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended September 30, 1995.
3.2 By-laws, as amended, are incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (No. 33-35864)
initially filed with the Commission on July 13, 1990.
4.1 1984 Economic Development Authority Loan Agreement is incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1 (No. 33-35864) initially filed with the Commission on July
13, 1990.
4.2 Amended and Restated Loan Agreement between the Company and the New
Jersey Economic Development Authority, dated as of November 1, 1990,
is incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (No. 33-34107) initially filed with
the Commission on February 21, 1991.
4.3 Letter of Credit and Reimbursement Agreement, dated August 27, 1993,
between the Company and Chemical Bank New Jersey N.A. is incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form
10-K for the year ended September 30, 1993.
10.1 1990 Employee Stock Option Plan, as amended, is incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997.
10.2 1991 Director Stock Option Plan, as amended, is incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1993.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued):
Exhibit Description
10.3 Agreement between the Company and Respironics, Inc., dated effective
as of July 1, 1993, is incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the year ended September
30, 1993.
10.4 Forms of Option Agreements with various employees of the Company are
incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (No. 33-39107) initially filed with
the Commission on February 21, 1991.
10.5 Vital Signs Investment Plan, as amended, is incorporated by reference
to Exhibit 99.1 to the Company's registration statement on Form S-8
(No. 333-37927).
10.6 Stock Option Grants to Terence D. Wall and Barry Wicker, replacing
stock options granted to Messrs. Wall and Wicker pursuant to the 1993
Executive Stock Option Plan, is incorporated by reference to Exhibit
10.8 to the Company's annual report on Form 10-K for the year ended
September 30, 1996.
10.7 Agreement to sell the Registrant's 51% interest in Cardiologics,
L.L.C., including the related promissory note and guarantee, is
incorporated by reference to Exhibit 10.9 to the Company's annual
report on Form 10-K for the year ended September 30, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Goldstein Golub Kessler LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 23rd day of
December, 1998.
VITAL SIGNS, INC.
By: /s/
Anthony J. Dimun,
Anthony J. Dimun
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Terence D. Wall* President, Chief December 23, 1998
Terence D. Wall Executive Officer
and Director
/s/ David J. Bershad* Director December 23, 1998
David J. Bershad
/s/Anthony J. Dimun Executive Vice President, December 23, 1998
Anthony J. Dimun Chief Financial Officer,
Treasurer (Chief Financial
and Accounting Officer)
and Director
/s/ Stuart M. Essig*
Stuart M. Essig Director December 23, 1998
/s/ Joseph J. Thomas* Director December 23, 1998
Joseph J. Thomas
/s/ Barry Wicker* Executive Vice President, December 23, 1998
Barry Wicker Chief Operating Officer
and Director
* By: /s/
Anthony J. Dimun.
Attorney-in-Fact
EXHIBIT 21.1
Name of Subsidiary Jurisdiction of Incorporation
Actar Airforce, Inc. Canada
Coast Medical, Inc. California
Marquest Medical Products, Inc. Colorado
The Validation Group, Inc.
(formerly a division of
Vital Pharma, Inc.) New Jersey
Thomas Medical Products, Inc. Pennsylvania
Vital Pharma, Inc.
(formerly known as HealthStar
Pharmaceutical Services, Inc.) Florida
Vital Signs California, Inc. California
Vital Signs France S.A.R.L. France
Vital Signs GmbH Germany
Vital Signs Limited United Kingdom
Vital Signs MN, Inc.
(formerly Biomedical
Dynamics Corporation) Minnesota
Vital Signs (N) FDM BBO Malaysia
Vital Signs Sales Corporation Delaware
Vital Signs Export, Inc.
(Foreign Sales Corp.) Barbados
EXHIBIT 23.1
We hereby consent to the incorporation of our report dated November 13, 1998,
included in this Form 10-K, into the Company's previously filed Registration
Statements on Form S-8 (Nos. 33-40586, 33-43702, 33-47298. 33-73800, 333-9705
and 333-37927),
/s/GOLDSTEIN GOLUB KESSLER LLP
New York, New York
December 23, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
WHEREAS, the undersigned officers and directors of Vital Signs, Inc.
desire to authorize Terence D. Wall, Anthony J. Dimun and Scott L. Spitzer, to
act as their attorneys-in-fact and agents, for the purpose of executing and
filing the corporation's Annual Report on Form 10-K for the year ended September
30, 1998, including all amendments thereto,
NOW, THEREFORE,
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Terence D. Wall, Anthony J. Dimun and
Scott L. Spitzer and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, to sign the
Corporation's Annual Report on Form 10-K for the year ended September 30, 1998,
including any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of
attorney in the following capacities on this 23rd day of December, 1998.
SIGNATURE TITLE
President, Chief Executive Officer
/s/Terence D. Wall and Director
Director
/s/David J. Bershad
Executive Vice President, Chief
/s/Anthony J. Dimun Financial Officer, Treasurer and
Director (Chief Financial and
Accounting Officer)
/s/Stuart M. Essig Director
/s/Joseph J. Thomas Director
Executive Vice President, Chief
Barry Wicker Operating Officer and Director
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<NAME> VITAL SIGNS, INC.
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<FISCAL-YEAR-END> SEP-30-1998
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0
0
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