SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission file number: 0-18793
VITAL SIGNS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Campus Road
Totowa, New Jersey 07512
(Address of principal executive office, including zip code)
973-790-1330
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At February 1, 1999, there were 12,438,002 shares of Common Stock, no
par value, outstanding.
<PAGE>
VITAL SIGNS, INC.
INDEX
Page
PART I Number
Financial Information 1
Item 1. Financial Statements
Consolidated Balance Sheet
as of December 31, 1998 (Unaudited)
and September 30, 1998 2
Consolidated Statement of Income
for the Three Months Ended
December 31, 1998 and 1997 (Unaudited) 3
Consolidated Statement of Cash Flows
For the Three Months Ended
December 31, 1998 and 1997 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-8
PART II.
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
PART I.
Financial Information
Item 1.
Financial Statements
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Vital Signs, Inc. (the "registrant" or the
"Company" or "Vital Signs") believes that the disclosures are adequate to assure
that the information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the registrant's Annual Report on Form 10-K for the year
ended September 30, 1998.
The results of operations for the interim periods presented herein are
not necessarily indicative of the results to be expected for the entire fiscal
year.
<PAGE>
<TABLE>
VITAL SIGNS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
December 31, September 30,
1998 1998
(In thousands)
(Unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 956 $ 2,600
Marketable securities 2,001 2,157
Accounts receivable, less allowance for doubtful accounts of
$456 and $638 respectively 19,693 17,837
Inventory 20,486 19,322
Prepaid expenses and other current assets 4,394 3,903
-------- --------
Total Current Assets 47,530 45,819
Property, plant and equipment - net 40,944 41,009
Marketable securities and other investments 14,770 17,739
Goodwill and other intangible assets 25,319 25,495
Deferred income taxes 1,987 1,918
Other assets 6,228 6,206
-------- --------
Total Assets $ 136,778 $ 138,186
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,122 $ 5,462
Current portion of long-term debt 1,001 1,022
Accrued expenses 2,971 3,756
---------- -----------
Total current liabilities 8,094 10,240
Long term debt 2,240 2,462
Other liabilities 4,148 4,174
---------- -----------
Total Liabilities 14,482 16,876
---------- -----------
Commitments and contingencies:
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares,
outstanding 12,481,630 and 12,628,194 shares, respectively 19,050 21,520
Allowance for aggregate unrealized gain (loss) on
marketable securities (2) 14
Retained earnings 103,248 99,776
---------- -----------
Stockholders' equity 122,296 121,310
---------- -----------
Total Liabilities and Stockholders' Equity $ 136,778 $ 138,186
========== ===========
</TABLE>
<PAGE>
<TABLE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three Months Ended
December 31,
1998 1997
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 31,013 $ 30,924
Cost of goods sold 15,815 14,998
---------- -----------
Gross Profit 15,198 15,926
Operating expenses:
Selling, general and administrative 8,001 9,777
Research and development 1,408 962
Interest income (113) (262)
Interest expense 68 121
Other income, net (188) (98)
Goodwill amortization 176 218
---------- -----------
Income before provision for income taxes 5,846 5,208
Provision for income taxes 1,871 1,797
---------- -----------
Net income before cumulative effect of change
in accounting principle $ 3,975 $ 3,411
========== ===========
Cumulative effect of change in accounting principle
(net of income tax effect of $803) (See Note 3) --- 1,524
---------- -----------
Net income $ 3,975 $ 1,887
========== ===========
Basic net income per share before cumulative effect
of change in accounting principle $ .32 $ .27
========== ===========
Diluted net income per share before cumulative effect
of change in accounting principle $ .32 $ .27
========== ===========
Cumulative effect of change in accounting principle
per share $ --- $ .12
========== ===========
Basic net income per share $ .32 $ .15
========== ===========
Diluted net income per share $ .32 $ .15
========== ===========
Basic weighted average number of shares 12,432 12,702
========== ===========
Diluted weighted average number of shares 12,479 12,770
========== ===========
</TABLE>
<PAGE>
<TABLE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
For the three months ended
December 31,
1998 1997
(In thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income $ 3,975 $ 1,887
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Cumulative effect of change in accounting principle --- 1,524
Depreciation and amortization 913 894
(Increase) decrease in deferred income taxes (69) 19
Amortization of goodwill 176 218
Amortization of deferred credit (26) (25)
Net (gain) loss on sales of available for sale securities 16 (59)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,856) (4,330)
(Increase) in inventory (1,164) (533)
Decrease (increase) in prepaid expenses and
other current assets (491) 2,346
(Increase) decrease in other assets (22) 707
(Decrease) in accounts payable
and accrued expenses (2,125) (1,390)
(Decrease) in other liabilities --- (317)
----------- ------------
Net cash (used in) provided by operating activities (673) 941
------------ -----------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities 4,138 5,632
Purchases of available-for-sale securities (1,045) (876)
Acquisition of property, plant and equipment (848) (3,126)
Purchase of other investments --- (4,663)
Other --- (75)
----------- ------------
Net cash provided by (used in) investing activities 2,245 (3,108)
----------- ------------
Cash Flows from Financing Activities:
Net reissuance (purchase) of treasury stock (2,478) 410
Dividends paid (503) (523)
Proceeds from exercise of stock options and warrants 8 8
Principal payments of long-term debt and
notes payable (243) (271)
------------ ------------
Net cash used in financing activities (3,216) (376)
------------ ------------
Net decrease in cash and cash equivalents (1,644) (2,543)
Cash and cash equivalents at beginning of period 2,600 3,685
----------- -----------
Cash and cash equivalents at end of period $ 956 $ 1,142
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the three months for:
Interest $ 106 $ 119
Income taxes 1,084 277
</TABLE>
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 1998, the consolidated
statement of income for the three months ended December 31, 1998 and 1997
and the consolidated statement of cash flows for the three months ended
December 31, 1998 and 1997 have been prepared by Vital Signs, Inc. (the
"Company" or "VSI") and are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at December 31, 1998 and 1997 and for all periods presented have
been made.
2. See the Company's Annual Report on Form 10-K for the year ended September
30, 1998 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
3. In 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
charge has been shown in the Company's consolidated statement of
operations as if the charge occurred in the first quarter of fiscal 1998
in accordance with Generally Accepted Accounting Principles.
4. Financial Accounting Standards Board No. 130 "Reporting Comprehensive
Income" has not been applied since it is not material to the Company's
financial statements.
5. The Company plans to adopt Financial Accounting Standards Board No. 131
"Disclosures about segments of an enterprise and related information" at
September 30, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time the
Company expects to make, certain forward-looking statements regarding its
business, financial condition and results of operations. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"), the Company intends to caution investors that there are
important factors that could cause the Company's actual results to differ
materially from those projected in its forward-looking statements, whether
written or oral, made herein or that may be made from time to time by or on
<PAGE>
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 or legal proceedings (see Part II, Item 1 of
this Quarterly Report on Form 10-Q) and (viii) healthcare reform and legislative
and regulatory changes impacting the healthcare market.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
increase (decrease) of certain items included in the Company's consolidated
statement of income.
<TABLE>
<CAPTION>
Increase/(Decrease) From Prior Period
Three Months Ended December 31, 1998
Compared With
Three Months Ended December 31, 1997
<S> <C>
Net sales .3%
Cost of goods sold 5.4
Gross profit (4.6)
Selling, general and administrative
expense (18.2)
Research and development expenses 46.4
Income before provision for
income taxes 12.3
Provision for income taxes 4.1
Net income before cumulative effect of change
in accounting principle 16.5
Net income 110.7
</TABLE>
<PAGE>
Net sales for the quarter ended December 31, 1998 increased by .3%
compared with the same period last year. The increase was due to unit increases
offset by selling price declines. Prices on existing products declined on
average approximately 1.4% in the three months ended December 31, 1998 when
compared to the same period in 1997. While domestic sales growth for the quarter
was impacted by reduced sales to national distributors by $1,600,000, sales to
"end users" from the Company and national distributors increased by 4% compared
with the same quarter last year.
Sales of anesthesia products, representing 46.3% of net sales, grew 1.8%
from the quarter ended December 31, 1997 despite selling price declines. Sales
of critical care products, representing 22.6% of net sales, increased by 18.5%
due to the growth of The Validation Group. Sales of respiratory products,
representing 31.1% of net sales, decreased by 11.6% due to decreased sales to
national distributors.
While net sales increased in dollars by .3%, gross profit dollars
decreased by 4.6%. The discrepancy between the increase in sales and the
decrease in gross profit is the result of higher sales of certain product lines
with gross margins below the Company's average gross margin. Additionally, the
aforementioned price decline in existing products contributed to the gross
margin decline. On a consolidated basis the Company's gross profit percentage
for the quarter ended December 31, 1998 was 49.0% compared to 51.5% in the same
time period of the last fiscal year.
Selling, general and administrative expenses decreased by $1,776,000
primarily due to the realignment of the Company's sales force from 182 to 90
sales personnel, representing a reduction in sales expenses of $1,556,000 in the
current quarter.
Research and development expenses ("R&D") increased 46.4%, primarily
due to the increased efforts of Vital Pharma, Inc. on the Vasceze product line.
Other income, net, which includes dividend income, realized capital
gains and losses, legal and other expenses related to non-operational items and
currency gains and losses, increased by $90,000 from the quarter ended December
31, 1997 to the quarter ended December 31, 1998 due to profits earned on
investments.
The Company's effective tax rates were 32.0% and 34.5% for the quarters
ended December 31, 1998 and 1997, respectively. The rate for the three months
ended December 31, 1998 and 1997 are less than the federal and state combined
statutory rate due to the utilization of deductions for tax return purposes
which do not effect book earnings.
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations as
well as the funds previously generated from its initial and secondary public
offerings. During the three months ended December 31, 1998, cash and cash
equivalents and short-term marketable securities decreased by $1,800,000 and
<PAGE>
long-term marketable securities and other investments decreased by $2,969,000.
During the quarter, $2,478,000 was expended to acquire approximately 148,000 of
the Company shares of Common Stock pursuant to a previously announced buy-back
plan and the Company paid dividends, of approximately $503,000. In addition,
accounts receivable increased by $1.9 million and inventory increased by $1.2
million. The combined total of cash and cash equivalents, short-term marketable
securities, long-term marketable securities and other investments was
approximately $17.7 million at December 31, 1998 as compared to $22.5 million at
September 30, 1998.
At December 31, 1998, the Company had $1.0 million in cash and cash
equivalents. On that date, the Company's working capital was $39.4 million and
the current ratio was 5.9 to 1, as compared to $35.6 million and 4.5 to 1 at
September 30, 1998.
<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 were to differ significantly from recent experience or adverse events
were to affect the Company's operations.
<PAGE>
PART II.
Other Information
Item 1.
Legal Proceedings:
a) Reference is made to Item 3 of the Company's Annual Report
on Form 10-K for the year ended September 30, 1998.
b) On January 5, 1999, an action was commenced against one of the
Company's subsidiaries in the United States District Court for
the Southern District of Florida by a competitor alleging
patent infringement by such subsidiary of a single U.S. patent
and theft of trade secrets by an employee in connection with
the subsidiary's blow-fill-seal machinery technology. The
Company has obtained a 30 day extension of time to answer,
plead or otherwise appear in the action. The Company believes
that there are meritorious defenses to this action and intends
to defend the matter vigorously.
Item 6.
Exhibits and Reports on Form 8-K
(a)Exhibits: 27.1 - Financial Data Schedule
(b)Reports on Form 8-K filed during the quarter ended December
31, 1998: None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITAL SIGNS, INC.
By: /s/ Anthony J. Dimun
Anthony J. Dimun
Executive Vice President of
Finance and Chief Financial Officer
Date: February 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Company's balance sheet at December 31, 1998 and three month income
statement ending December 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000865846
<NAME> VITAL SIGNS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 956
<SECURITIES> 2,001
<RECEIVABLES> 20,149
<ALLOWANCES> 456
<INVENTORY> 20,486
<CURRENT-ASSETS> 47,530
<PP&E> 52,621
<DEPRECIATION> 11,677
<TOTAL-ASSETS> 136,778
<CURRENT-LIABILITIES> 8,094
<BONDS> 2,240
0
0
<COMMON> 19,050
<OTHER-SE> 103,246
<TOTAL-LIABILITY-AND-EQUITY> 136,778
<SALES> 31,013
<TOTAL-REVENUES> 31,013
<CGS> 15,815
<TOTAL-COSTS> 15,815
<OTHER-EXPENSES> 1,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 5,846
<INCOME-TAX> 1,871
<INCOME-CONTINUING> 3,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,975
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
