SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _____to ______
Commission file number: 0-18793
VITAL SIGNS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Campus Road
Totowa, New Jersey 07512
(Address of principal executive office, including zip code)
973-790-1330
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At August 2, 1999, there were 12,251,837 shares of Common Stock, no
par value, outstanding.
<PAGE>
VITAL SIGNS, INC.
INDEX
Page
Number
Part I.
Financial Information
Item 1. Financial Statements 1
Consolidated Balance Sheet as of
June 30, 1999 (Unaudited) and September 30, 1998 2
Consolidated Statement of Income for the
Nine Months Ended June 30, 1999 and 1998
(Unaudited) 3
Consolidated Statement of Income for the
Three Months Ended June 30, 1999 and 1998
(Unaudited) 4
Consolidated Statement of Cash Flows for the
Nine Months Ended June 30, 1999 and 1998
(Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7 - 13
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 13
Part II.
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<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>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, September 30,
1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,477 $ 2,600
Marketable securities --- 2,157
Accounts receivable, less allowance for doubtful accounts of $293 and $638
respectively 21,475 17,837
Inventory 24,162 19,322
Prepaid expenses and other current assets 4,632 3,903
------------ ------------
Total Current Assets 54,746 45,819
Property, plant and equipment - net 43,196 41,009
Marketable securities and other investments 11,022 17,739
Goodwill and other intangible assets 34,786 25,495
Deferred income taxes 1,506 1,918
Other assets 7,661 6,206
------------- -------------
Total Assets $ 152,917 $ 138,186
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,236 $ 5,462
Current portion of long-term debt 432 1,022
Accrued expenses 4,951 3,756
Notes payable 6,854 ---
------------- -------------
Total Current Liabilities 16,473 10,240
Long term debt 2,181 2,462
Other liabilities 4,452 4,174
------------ ------------
Total Liabilities 23,106 16,876
------------ ------------
Commitments and contingencies:
Minority interest in subsidiary 3,913 ---
Stockholder's Equity
Common stock - no par value; authorized 40,000,000 shares, outstanding
12,251,837 and 12,628,194 shares, respectively 14,881 21,520
Allowance for aggregate unrealized gain (loss) on marketable securities
(10) 14
Retained earnings 111,027 99,776
------------ ------------
Stockholders' equity 125,898 121,310
------------ ------------
Total Liabilities and Stockholders' Equity $ 152,917 $ 138,186
============ ============
(See Notes to Consolidated Financial Statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Nine Months Ended
June 30,
1999 1998
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 96,124 $ 95,089
Cost of goods sold 47,708 46,954
------------- ------------
Gross Profit 48,416 48,135
Operating expenses:
Selling, general and administrative 24,680 28,746
Research and development 4,506 4,328
Interest (income) (187) (784)
Interest expense 230 307
Other expense, net 222 22
Goodwill amortization 528 602
Special charge (see Note 6) --- 1,100
------------- ------------
Income before provision for income taxes and minority interest in income of
consolidated subsidiary 18,437 13,814
Provision for income taxes 5,641 4,314
------------- ------------
Income before minority interest in income of consolidated subsidiary (see Note 7)
12,796 9,500
Minority interest in income of consolidated subsidiary 60 ---
------------- ------------
Net income before cumulative effect of change in accounting principle 12,736 9,500
Cumulative effect of change in accounting principle (net of income tax effect of
$803) (see Note 3) --- 1,524
------------- ------------
Net income $ 12,736 $ 7,976
============= ============
Basic net income per share before cumulative effect of change in accounting
principle $ 1.04 $ .75
============= ============
Diluted net income per share before cumulative effect of change in accounting
principle $ 1.03 $ .74
============= ============
Cumulative effect of change in accounting principle per share $ --- $ .12
============= ============
Basic net income per share $ 1.04 $ .63
============= ============
Diluted net income per share $ 1.03 $ .62
============= ============
Basic weighted average number of shares 12,286 12,691
============= ============
Diluted weighted average number of shares 12,349 12,769
============= ============
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended
June 30,
1999 1998
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 32,410 $ 31,861
Cost of goods sold 15,831 15,856
------------- ------------
Gross Profit 16,579 16,005
Operating expenses:
Selling, general and administrative 8,464 9,711
Research and development 1,615 1,899
Interest income (15) (221)
Interest expense 62 69
Other (income)/expense, net 62 (100)
Goodwill amortization 176 189
Special charge (see Note 6) --- 1,100
------------- ------------
Income before provision for income taxes and minority interest in income of
consolidated subsidiary 6,215 3,358
Provision for income taxes 1,791 707
------------- ------------
Income before minority interest in income of consolidated subsidiary 4,424 2,651
Minority interest in income of consolidated subsidiary
(see Note 7) 60 ---
------------- ------------
Net income $ 4,364 $ 2,651
============= ============
Basic net income per share $ .36 $ .21
============= ============
Diluted net income per share $ .36 $ .21
============= ============
Basic weighted average number of shares 12,155 12,686
============= ============
Diluted weighted average number of shares 12,246 12,766
============= ============
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
<CAPTION>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended June 30,
1999 1998
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 12,736 $ 7,976
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Cumulative effect of change in accounting principle --- 1,524
Depreciation and amortization 2,916 2,751
Decrease in income tax asset 412 194
Amortization of goodwill 528 602
Amortization of deferred credit (75) (75)
Net loss on sales of available for sale securities 16 2
Changes in operating assets and liabilities:
Increase in accounts receivable (683) (3,277)
Increase in inventory (2,736) (465)
Decrease in prepaid expenses and other current assets 669 5,099
Increase in other assets (1,455) (1,909)
Decrease in accounts payable and accrued expenses (2,150) (1,380)
(Decrease) increase in other liabilities (363) (394)
-------------- -------------
Net cash provided by operating activities 9,815 10,648
------------- ------------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities 6,854 13,881
Purchases of available-for-sale securities and other investments (6,436) (11,844)
Acquisition of subsidiary, net of $2,344 of cash acquired (2,256) 0
Acquisition of property, plant and equipment (3,959) (7,820)
Other --- (311)
------------- -------------
Net cash used in investing activities (5,797) (6,094)
-------------- -------------
Cash Flows from Financing Activities:
Net reissuance (purchase) of treasury stock (6,701) 953
Dividends paid (1,485) (1,571)
Proceeds from short-term note payable 6,854 0
Proceeds from exercise of stock options and warrants 62 12
Principal payments of long-term debt and notes payable (871) (2,708)
-------------- -------------
Net cash used in financing activities (2,141) (3,314)
-------------- -------------
Net increase in cash and cash equivalents 1,877 1,240
Cash and cash equivalents at beginning of period 2,600 3,685
------------- -------------
Cash and cash equivalents at end of period $ 4,477 $ 4,925
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the nine months for:
Interest $ 228 $ 349
Income taxes 4,085 1,747
Supplemental schedule of non cash investing activities:
Accrued amounts relating to purchase of subsidiaries $ --- $ 600
</TABLE>
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of June 30, 1999, the consolidated
statement of income for the nine and three months ended June 30, 1999 and
1998 and the consolidated statement of cash flows for the nine months
ended June 30, 1999 and 1998 have been prepared by Vital Signs, Inc. (the
"Company" or "VSI") and are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at June 30, 1999 and 1998 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. Statement of Financial Accounting Standards 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 Statement of Financial Accounting Standards
No. 131 "Disclosures about segments of an enterprise and related
information" at September 30, 1999.
6. The Company decided during the 1998 third quarter to reduce its domestic
sales force to approximately 90 sales personnel from approximately 180
sales personnel. This decision resulted in a pretax charge of $1.1
million, or $0.06 per share (net of tax).
7. Vital Signs acquired a 52% interest in Breas AB, a European manufacturer
of personal ventilators for Obstructive Sleep Apnea (OSA) and other
applications, for an aggregate investment of approximately $13 million of
which $4.6 million was expended in 1999. Vital Signs has reflected the
operations of Breas as a consolidated subsidiary for the month of June,
1999 with sales of $1,013,000. Breas for the month of June contributed
net income after minority interest of $65,000 to Vital Signs' operating
results for the three months and nine months ended June 30, 1999. For its
fiscal year ended December 31, 1998 Breas reported sales of $10.9 million
and net income of approximately $2 million.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time the
Company expects to make, certain forward-looking statements regarding its
business, financial condition and results of operations. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"), the Company intends to caution investors that there are
important factors that could cause the Company's actual results to differ
materially from those projected in its forward-looking statements, whether
written or oral, made herein or that may be made from time to time by or on
behalf of the Company. Investors are cautioned that such forward-looking
statements are only predictions and that actual events or results could 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.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage
increase (decrease) of certain items included in the Company's consolidated
statement of income.
<TABLE>
<CAPTION>
Increase/(Decrease) From Prior Period
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
Compared With Compared With
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
-------------------------------------------------------
<S> <C> <C>
Net sales 1.7% 1.1%
Cost of goods sold (.2) 1.6
Gross profit 3.6 .6
Selling, general and administrative expense (12.8) (14.1)
Research and development expenses (15.0) 4.1
Income before provision for income taxes 85.1 33.5
Provision for income taxes 153.3 30.8
Net income before cumulative effect of
change in accounting principle 66.9 34.1
Net income 64.6 59.7
Basic earnings per share 71.4 65.1
</TABLE>
<PAGE>
COMPARISON: QUARTER ENDED JUNE 30, 1999
AND QUARTER ENDED JUNE 30, 1998
Net sales for the quarter ended June 30, 1999 increased by 1.7%
compared with the same period last year. The increase was due to unit increases
offset by selling price declines and in part to the acquisition of Breas AB (see
Note 7). Prices on existing products declined on average approximately .9% in
the three months ended June 30, 1999 when compared to the same period in 1998.
Sales of anesthesia products, representing 48.4% of net sales grew
1.9% from the quarter ended June 30, 1998 despite selling price declines. Sales
of critical care products, representing 19.3% of net sales decreased by 8.4% due
to lower sales volume at Vital Pharma. Sales of respiratory products,
representing 32.3% of net sales, increased by 8.6% due in part to the
acquisition of a 52% interest in Breas AB effective June 1, 1999. Net sales in
the 1999 third quarter declined by .9% over net sales in the 1999 second quarter
largely as a result of seasonal fluctuations in the Company's respiratory
products lines.
While net sales increased in dollars by 1.7%, gross profit dollars
increased by 3.6%. The increase in gross profit is primarily the result of the
Company's cost improvement program. The Company's gross profit percentage for
the quarter ended June 30, 1999 was 51.2% compared to 50.2% in the same time
period of the last fiscal year.
Selling, general and administrative expenses (S, G & A) decreased by
$1,247,000 primarily due to the realignment of the Company's sales force from
182 to 90 sales personnel, offset by $450,000 of S, G, & A expenses related to
Breas AB in the current quarter.
Research and development expenses ("R&D") decreased 15%, primarily due
to higher R & D costs incurred in 1998 to complete certain projects in the prior
year.
Other expense, 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 $162,000 from the quarter ended June 30,
1998 to the quarter ended June 30, 1999 primarily due to higher non-operational
income in 1998.
The Company's effective tax rates were 28.8% and 21.1% for the
quarters ended June 30, 1999 and 1998, respectively. The rates for the three
months ended June 30, 1999 and 1998 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.
<PAGE>
COMPARISON: NINE MONTHS ENDED JUNE 30, 1999
AND NINE MONTHS JUNE 30, 1998
Net sales for the nine months June 30, 1999 increased by 1.1% compared
with the same period last year. The increase was due to unit increases offset by
selling price declines and in part to the acquisition of Breas AB (see Note 7).
Prices on existing products declined on average approximately 1.1% in the nine
months ended June 30, 1999 when compared to the same period in 1998.
Sales of anesthesia products, representing 48.1% of net sales grew
2.1% from the nine months ended June 30, 1998 despite selling price declines.
Sales of critical care products, representing 19.4% of net sales increased by
1.8% due to the growth of The Validation Group. Sales of respiratory products,
representing 32.5% of net sales, decreased by .8% due to decreased sales in the
ABG product line.
While net sales increased in dollars by 1.1%, gross profit dollars
increased by only .6%. The small discrepancy between the increase in sales and
the increase 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. The Company's gross profit percentage for the nine months ended
June 30, 1999 was 50.4% compared to 50.6% in the same time period of the last
fiscal year.
Selling, general and administrative expenses (S, G, & A) decreased by
$4,066,000 primarily due to the realignment of the Company's sales force from
182 to 90 sales personnel, representing a reduction in sales expenses of
$4,880,000 in the current nine months. The acquisition of a 52% interest in
Breas AB added $450,000 of S, G, & A expense for the month of June, 1999.
Research and development expenses ("R&D") increased 4.1%, primarily
due to higher R & D costs incurred in 1998 to complete certain projects in the
prior year.
Other expense, 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 $200,000 from the nine months ended June
30, 1998 to the nine months ended June 30, 1999.
The Company's effective tax rates were 30.6% and 31.2% for the nine
months ended June 30, 1999 and 1998, respectively. The rates for the nine months
ended June 30, 1999 and 1998 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.
<PAGE>
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 nine months ended June 30, 1999, cash and cash equivalents
and short-term marketable securities decreased by $280,000 and long-term
marketable securities and other investments decreased by $6,717,000. During the
period, $6,610,000 was expended to acquire approximately 380,000 of the Company
shares of Common Stock pursuant to a previously announced buy-back plan and the
Company paid dividends of approximately $1,485,000. The Company acquired a 52%
interest in Breas AB for approximately $13 million of which $4.6 million was
expended in 1999. The combined total of cash and cash equivalents, short-term
marketable securities, long-term marketable securities and other investments was
approximately $15.5 million at June 30, 1999 as compared to $22.5 million at
September 30, 1998.
At June 30, 1999, the Company had approximately $4.5 million in cash
and cash equivalents. On that date, the Company's working capital was $38.3
million and the current ratio was 3.3 to 1, as compared to $35.6 million and 4.5
to 1 at September 30, 1998.
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. The Company borrowed approximately $6,850,000 during the June 1999
quarter. The maximum maturity for the notes payable is 90 days. At maturity, the
Company may renew its obligation fully or in part. The interest rates are below
the U.S. prime rate.
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.
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, as well as other
suppliers and subcontractors to obtain their assurances that key raw materials
sold to the Company will not be impacted by Y2K issues. Most of these suppliers
advise that they are addressing Y2K issues, but none have made unqualified
guarantees or warranties that they are or will be Y2K compliant. There can be no
assurance that there will not be any interruption in supply of any raw materials
or other products and services supplied to the Company.
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 Y2K compliant and does not expect to develop a formal contingency
plan. 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, including Respironics, to address
adverse consequence of Y2K issues. However, no assurance can be given with
respect to suppliers' compliance progress. The Company's policy is to maintain a
sufficient inventory of face masks and other components 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 third
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. The
aggregate amount of such capital expenditures to date is immaterial to the
Company's operations and financial position. All such capital expenditures have
been from the Company's working capital and additional expenditures for Y2K
compliance are expected to come from working capital.
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 likely to be material to the Company and
would come from the Company's working capital, and that such other equipment
material to the Company's operations will not be materially effected 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 AND OF THE COMPANY'S REASONABLY LIKELY WORST
CASE SCENARIO. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE COMPANY'S
ESTIMATES AND CONCLUSIONS AS A RESULT OF A NUMBER OF FACTORS INCLUDING 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. IF THE
COMPANY'S EFFORTS TO ADDRESS Y2K ISSUES ARE NOT SUCCESSFUL, OR IF THE COMPANY'S
VENDORS, SUPPLIERS AND CUSTOMERS DO NOT SUCCESSFULLY ADDRESS THESE ISSUES, THE
COMPANY'S FINANCIAL CONDITION, OPERATING RESULTS AND FUTURE PROSPECTS COULD BE
MATERIALLY ADVERSELY AFFECTED.
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
Not Applicable
<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, Item 1
of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998, and Item 1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
(b) In a patent infringement action against the Company brought
by Smith Industries Medical Systems, Inc. regarding manual
resuscitators, the United States Court of Appeals for the
Federal Circuit issued a decision in May, 1999 reversing the
District Court's judgment of patent invalidity, vacating its
judgement of non-infringement and remanding the case to the
District Court for further proceedings, and in July, 1999
issued a further decision which clarified that the Court of
Appeals' May, 1999 decision was applicable to all claims of
the subject patent. The District Court has scheduled a
hearing for further proceedings. The Company continues to
believe that its manual resuscitators do not infringe the
plaintiff's patent and will continue to vigorously defend
the action.
(c) In a patent infringement and theft of trade secrets action
against Vital Pharma, Inc. (VPI), a Company subsidiary,
brought by Weiler Engineering, Inc. in the United States
District Court for the Southern District of Florida
regarding blow-fill-seal technology, and in an action by VPI
in the same Court against Automated Liquid Packaging, Inc.,
the plaintiff's sister company seeking a declaratory
judgment that five other blow-fill-seal patents are invalid,
non infringed and unenforceable and requesting an award of
costs and attorneys fees, the parties have agreed to
temporarily stay the proceedings.
(d) In a patent infringement action in Japan by Terumo K.K.
against a distributor of the Company's ABG syringe products,
the Court indicated at a hearing on July 6, 1999 that, based
on one exhibit submitted by the plaintiff, the ABG syringe
products appear to infringe the plaintiff's patent, and
requested that the plaintiff submit an updated proof of
damages. The Court permitted the Company to introduce
additional evidence in order to refute the exhibit at the
next court hearing scheduled for August 30, 1999. On July
30, 1999, plaintiff filed its updated proof of damages of
approximately $6.5 million, plus interest and costs. The
Company will file an additional brief and further evidence
in order to refute the exhibit referred to by the Court. The
Company continues to believe that its ABG syringe products
do not infringe the plaintiff's patent and will continue to
vigorously defend the action.
Predictions regarding legal proceedings constitute
forward-looking statements under the Reform Act. The actual
results could differ materially from the Company's
predictions, primarily as a result of uncertainties involved
in the proof of facts in legal proceedings.
Item 6.
Exhibits and Reports on Form 8-K
a) Exhibits: 27.1 - Financial Data Schedule.
b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITAL SIGNS, INC.
By: /s/ Anthony J. Dimun
Anthony J. Dimun
Executive Vice President of
Finance and Chief Financial Officer
Date: August 11, 1999
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<LEGEND>
This schedule contains summary financial information extracted from
the Company's balance sheet at June 30, 1999 and nine month income statement
ending June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<NAME> VITAL SIGNS, INC.
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