<PAGE>
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, 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)
<TABLE>
<S> <C>
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 4, 2000, there were 12,333,371 shares of Common Stock, no
par value, outstanding.
<PAGE>
VITAL SIGNS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I.
Financial information 1
ITEM 1. Financial Statements:
Consolidated Balance Sheet as of
December 31, 1999 (Unaudited) and
September 30, 1999 2
Consolidated Statement of Income for the
Three Months ended December 31, 1999 and
1998 (Unaudited) 3
Consolidated Statement of Cash flows for
the Three Months Ended December 31, 1999
and 1998 (Unaudited) 4
Notes to Consolidated Financial
Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6 - 9
ITEM 3. Quantitative and Qualitative Disclosure
About Market Risk 9
PART II.
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on form 8-K 12
Signatures 13
</TABLE>
<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, 1999.
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.
1
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
---- ----
(In thousands)
ASSETS
(Unaudited)
-----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,956 $ 6,655
Accounts receivable, less allowance for doubtful accounts of
$342 and $259 respectively 24,707 21,153
Inventory 23,275 23,892
Prepaid expenses and other current assets 3,578 5,416
---------- -----------
Total Current Assets 58,516 57,116
Property, plant and equipment - net 47,410 45,960
Marketable securities and other investments 10,990 11,006
Goodwill and other intangible assets 34,735 34,978
Deferred income taxes 1,659 1,478
Other assets 6,677 6,772
Total Assets $ 159,987 $ 157,310
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,450 $ 5,629
Current portion of long-term debt 412 423
Accrued expenses 4,010 4,423
Notes payable - bank 4,350 4,850
---------- -----------
Total Current Liabilities 13,222 15,325
Long term debt 1,921 2,179
Other liabilities 4,763 4,827
---------- -----------
Total Liabilities 19,906 22,331
---------- -----------
Commitments and contingencies:
Minority interest in subsidiary 3,946 3,739
---------- -----------
Stockholder's Equity
Common stock - no par value; authorized 40,000,000 shares,
outstanding 12,332,325 and 12,295,162 shares, respectively 16,818 16,095
Accumulated other comprehensive loss (314) (2)
Retained earnings 119,631 115,147
---------- -----------
Stockholders' equity 136,135 131,240
---------- -----------
Total Liabilities and Stockholders' Equity $ 159,987 $ 157,310
---------- -----------
---------- -----------
</TABLE>
(See Notes to Consolidated Financial Statements)
2
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------
December 31,
------------
1999 1998
---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 37,113 $ 30,935
Cost of goods sold 17,570 15,716
----------- ----------
Gross Profit 19,543 15,219
Operating expenses:
Selling, general and administrative 9,684 7,976
Research and development 1,628 1,328
Interest (income) (83) (113)
Interest expense 123 68
Other (income) expense 432 (196)
Goodwill amortization 243 176
----------- ----------
12,027 9,239
----------- ----------
Income before provision for income taxes and minority interest in
income of consolidated subsidiary 7,516 5,980
Provision for income taxes 2,334 1,912
----------- ----------
Income before minority interest in income of consolidated
subsidiary (see Note 5) 5,182 4,068
Minority interest in income of consolidated subsidiary 207 ---
----------- ----------
Income from continuing operations 4,975 4,068
----------- ----------
Discontinued Operations (Note 6):
Income (loss) from operations of Vital Pharma Machine Division
(net of income taxes of $41) --- (93)
----------- ----------
Net income $ 4,975 $ 3,975
----------- ----------
----------- ----------
Other comprehensive income:
Foreign currency translation net of tax benefit of $139 (312) (---)
----------- ----------
Comprehensive income $ 4,663 $ 3,975
----------- ----------
----------- ----------
Earnings per Common Share:
Basic income per share from continuing operations $ .41 $ .33
----------- ----------
----------- ----------
Diluted income per share from continuing operations $ .40 $ .33
----------- ----------
----------- ----------
Cumulative effect of discontinued operations per share $ --- $ (.01)
----------- ----------
----------- ----------
Basic net income per share $ .41 $ .32
----------- ----------
----------- ----------
Diluted net income per share $ .40 $ .32
----------- ----------
----------- ----------
Basic weighted average number of shares 12,182 12,432
----------- ----------
----------- ----------
Diluted weighted average number of shares 12,365 12,479
----------- ----------
----------- ----------
</TABLE>
(see Notes to Consolidated Financial Statements)
3
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
1999 1998
------------------------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,975 $ 3,975
Adjustments to Reconcile Net Income to Net Cash Provided by (used
in) Operating Activities:
Depreciation and amortization 1,058 913
Increase in income tax asset (42) (69)
Minority interest in income of consolidated subsidiary 207 ---
Amortization of goodwill 243 176
Amortization of deferred credit --- (26)
Net loss on sales of available for sale securities --- 16
Changes in operating assets and liabilities:
Increase in accounts receivable (3,773) (1,856)
Decrease (increase) in inventory 431 (1,164)
Decrease (increase) in prepaid expenses and other current
assets 1,785 (491)
Decrease in accounts payable and accrued expenses (1,387) (2,125)
Decrease (Increase) in other, net 31 (22)
----------- ----------
Net cash provided by (used in) operating activities 3,528 (673)
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities 13 4,138
Purchases of available-for-sale securities and other investments --- (1,045)
Acquisition of property, plant and equipment (2,703) (848)
Other --- ---
----------- ----------
Net cash provided (used in) investing activities (2,690) 2,245
----------- ----------
Cash Flows from Financing Activities:
Net reissuance (purchase) of treasury stock 262 (2,478)
Dividends paid (491) (503)
Proceeds from exercise of stock options and warrants 461 8
Principal payments of long-term debt and notes payable (769) (243)
----------- ----------
Net cash used in financing activities (537) (3,216)
----------- ----------
Net increase (Decrease) in cash and cash equivalents 301 (1,644)
Cash and cash equivalents at beginning of period 6,655 2,600
----------- ----------
Cash and cash equivalents at end of period $ 6,956 $ 956
----------- ----------
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the three months for:
Interest $ 183 $ 106
Income taxes 222 1,084
</TABLE>
4
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 1999, the consolidated
statement of income for the three months ended December 31, 1999 and 1998
and the consolidated statement of cash flows for the three months ended
December 31, 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 December 31, 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, 1999 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
3. The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" at
September 30, 1999. The Company designs, manufactures and distributes
single-use medical products. The Company's other business segments do not
meet the criteria for separate disclosures.
4. 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 $5.5 million was expended in June 1999. Vital Signs has reflected
the operations of Breas as a consolidated subsidiary for the three months
ended December 31, 1999 with sales of $4,173,000. Breas contributed net
income after minority interest of $246,000 to Vital Signs' operating
results for the three months ended December 31, 1999.
5. In September 1999, the Company made a decision to sell its Blow-Fill-Seal
("BFS") Machine Fabrication division consisting of net assets of
approximately $4 million. Accordingly, the statement of income for the
three months ended December 31, 1998 has been restated to reflect the net
operations as a discontinued operation. The Company expects to realize
an immaterial gain from the sale of the BFS division.
5
<PAGE>
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 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, (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.
6
<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 December 31, 1999
vs.
Three Months Ended December 31, 1998
<S> <C>
Net sales 20.0%
Cost of goods sold 11.8
Gross profit 28.4
Selling, general and administrative expense 21.4
Research and development expenses 22.6
Income from continuing operations before provision
for income taxes and minority interest in income
of consolidated subsidiary 25.7
Provision for income taxes 22.1
Net income 25.2
</TABLE>
7
<PAGE>
COMPARISON: QUARTER ENDED DECEMBER 31, 1999
AND QUARTER ENDED DECEMBER 31, 1998
Net sales for the quarter ended December 31, 1999 increased by 20.0%
compared with the same period last year. The increase was due to unit increases
offset in part by very modest selling price declines and inclusion of Breas AB
acquired in June, 1999 (see Note 5).
Sales of anesthesia products, representing 45.1% of net sales grew 14.6%
from the quarter ended December 31, 1998. Sales of respiratory/critical care
products, representing 44.0% of net sales decreased by .4% largely due to the
poor performance of several distributors who market the Company's pre-hospital
and emergency products. Sales of sleep/ventilator products, representing 10.8%
of net sales, increased due to the acquisition of a 52% interest in Breas AB.
While net sales increased in dollars by 20.0%, gross profit dollars
increased by 28.4%. The increase in gross profit is primarily the result of the
Company's cost improvement program whereby significant cost reduction efforts
have been undertaken in several manufacturing facilities. The Company's gross
profit percentage for the quarter ended December 31, 1999 was 52.7% compared to
49.2% in the same time period of the last fiscal year.
Selling, general and administrative expenses (S, G & A) increased by
$1,708,000 primarily due to the acquisition of Breas AB. Breas AB incurred
$1,544,000 of S, G & A expenses in the current quarter.
Research and development expenses ("R&D") increased by $300,000
primarily due to the acquisition of a 52% interest in Breas AB.
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 $628,000 from the quarter ended
December 31, 1998 to the quarter ended December 31, 1999 partially due to
product contributions of $264,000.
The Company's effective tax rates were 31.1% and 32.0% for the quarters
ended December 31, 1999 and 1998, respectively.
8
<PAGE>
Liquidity and Capital Resources
The Company relies upon cash flow from its operations as well as credit
lines established with the Company's lender. During the three months ended
December 31, 1999, cash and cash equivalents increased by $301,000 and long-term
marketable securities and other investments decreased by $16,000. During the
period, the Company paid dividends of approximately $491,000, spent $2,703,000
on capital expenditures and reduced long term debt and notes payable by
$769,000. The combined total of cash and cash equivalents, long-term marketable
securities and other investments was approximately $17.9 million at December 31,
1999 as compared to $17.7 million at September 30, 1999.
At December 31, 1999, the Company had approximately $7.0 million in cash
and cash equivalents. On that date, the Company's working capital was $45.3
million and the current ratio was 4.4 to 1, as compared to $41.8 million and 3.7
to 1 at September 30, 1999.
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 amount outstanding at December 31, 1999 was $4,350,000. 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NOT APPLICABLE
9
<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, 1999.
(b) In the pending patent infringement action against the Company brought
by a competitor regarding manual resuscitators, the parties held
settlement discussions with the federal magistrate on February 3, 2000.
No settlement was reached. At the hearing held on February 10, 2000,
the U.S. District Court determined that it would not permit the Company
to solicit further evidence or to present further arguments to the
Court to rebut the Court's view that the Company's Vital Blue products
infringe the competitor's patent. The Court instructed the parties to
exchange updated information concerning sales and damages on Vital Blue
products by March 13, 2000 and to submit briefs to the Court by March
28, 2000 on the issue of whether the Company's Code Blue products also
infringe the same patent. The Company believes that the plaintiff will
seek approximately $6 million in actual damages for Vital Blue product
sales through mid-November, 1999, plus three times actual damages for
alleged willful infringement of the patent, and attorney fees. The
Company continues to believe that its manual resuscitators do not
infringe the plaintiff's patent and will continue to vigorously defend
the action. The Company also disputes the amount of the alleged damages
claimed on Vital Blue products. If the District Court enters a finding
of infringement on the Vital Blue products, the Company will appeal
such decision.
(c) In the pending patent infringement action in Japan against a
distributor of the Company's ABG syringe products, additional evidence
and arguments of non infringement and in opposition to the plaintiff's
damage claim were filed with the Court at the January 19, 2000 hearing.
The Court has concluded the evidentiary phase of the action but will
permit a further response from the plaintiffs by the end of February,
2000 as to its alleged damages. The Court is expected to render its
decision on the action at the next hearing scheduled for March 21,
2000. 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. In addition, the Company filed a patent infringement
action in Japan against the same competitor for infringement of an ABG
patent recently issued to the Company in Japan. On January 11, 2000,
such competitor filed its Answer with the Court denying infringement.
The initial hearing on the Company's complaint was held on January 17,
2000. The Court directed the Company to file its first brief by
February 18, 2000 and scheduled another hearing for March 13, 2000.
(d) The Company's Vital Pharma, Inc. subsidiary settled the patent
infringement and theft of trade secrets action against VPI and a VPI
employee, brought by a competitor of VPI in the United States District
Court for the Southern District of Florida regarding blow-fill-seal
technology, as well as the action by VPI in the same Court against the
plaintiff's former sister company seeking a declaratory judgment that
five other blow-fill-seal patents are invalid, non infringed and
unenforceable. Both cases have been discontinued with prejudice and
without payment by any of the parties. In addition, VPI received a
royalty bearing license from the competitor for the patent that was the
subject of their action against VPI.
10
<PAGE>
(e) On December 15, 1999, a former shareholder of Vital Pharma, Inc. (VPI),
a Company subsidiary, on his own behalf and purportedly on behalf of
several other former VPI shareholders, commenced an action alleging
breach of contract, fraud and several other claims against the Company
in the United States District Court for the District of New Jersey.
The Complaint asserts that the plaintiffs were improperly denied the
full amount of their pay-outs for 1997 and 1998 allegedly owed to
the plaintiffs in connection with their sale of VPI to the Company,
and seeks compensatory and punitive damages and attorneys fees and
interest. On January 18, 2000, the Company filed an Answer denying the
Complaint, asserting a number of counterclaims against the plaintiffs,
including breach of contract, fraud, misrepresentation, fraudulent
inducement and several other claims, and seeking compensatory and
punitive damages, attorneys fees and interest.
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. 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.
11
<PAGE>
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, 1999:
None.
12
<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 14, 2000
_____________________
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheet at December 31, 1999 and three month income statement
ending December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 6,956
<SECURITIES> 0
<RECEIVABLES> 25,049
<ALLOWANCES> 342
<INVENTORY> 23,275
<CURRENT-ASSETS> 58,516
<PP&E> 62,243
<DEPRECIATION> 14,833
<TOTAL-ASSETS> 159,987
<CURRENT-LIABILITIES> 13,222
<BONDS> 1,921
0
0
<COMMON> 16,818
<OTHER-SE> 119,317
<TOTAL-LIABILITY-AND-EQUITY> 159,987
<SALES> 37,113
<TOTAL-REVENUES> 37,113
<CGS> 17,570
<TOTAL-COSTS> 17,750
<OTHER-EXPENSES> 1,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 7,516
<INCOME-TAX> 2,334
<INCOME-CONTINUING> 5,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,975
<EPS-BASIC> .41
<EPS-DILUTED> .40
</TABLE>
