<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 MARCH 31, 2000 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 May 4, 2000, there were 12,368,242 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:
Independent Accountant's Report 2
Consolidated Balance Sheet as of March 31, 2000
(Unaudited) and September 30, 199 3
Consolidated Statement of Income for the Six Months ended
March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Income for the Three Months
Ended March 31, 2000 and 1999 (Unaudited) 5
Consolidated Statement of Cash Flows for the Six Months
Ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks 12
PART II.
ITEM 1. Legal Proceedings 13-14
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</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. The financial statements included herein for the three and six months
ended March 31, 2000, have been reviewed by the Company's independent
accountants in accordance with Statement on Auditing Standards No. 71.
1
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INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have reviewed the accompanying condensed balance sheet of Vital Signs, Inc.
as of March 31, 2000, and the related condensed statements of income, cash
flows, and changes in stockholders' equity for the three-month and six-month
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 28, 2000
2
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
(Dollars in thousands)
ASSETS
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,880 $ 6,655
Accounts receivable, less allowance for doubtful accounts of
$480 and $244 respectively 22,456 21,153
Inventory 23,649 23,892
Prepaid expenses and other current assets 5,993 5,416
------------ -------------
Total Current Assets 56,978 57,116
Property, plant and equipment - net 49,023 45,960
Other investments and marketable securities 10,990 11,006
Goodwill and other intangible assets 34,355 34,978
Deferred income taxes 1,496 1,478
Other assets 7,237 6,772
------------- -------------
Total Assets $ 160,079 $ 157,310
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,570 $ 5,629
Current portion of long-term debt 383 423
Accrued expenses 4,098 4,423
Notes payable - bank 1,358 4,850
------------- -------------
Total Current Liabilities 10,409 15,325
Long term debt 1,900 2,179
Other liabilities 4,062 4,827
------------ ------------
Total Liabilities 16,371 22,331
------------ ------------
Commitments and contingencies:
Minority interest in subsidiary 4,099 3,739
------------ ------------
Stockholder's Equity
Common stock - no par value; authorized 40,000,000 shares,
outstanding 12,365,663 and 12,295,162 shares, respectively 16,410 16,095
Accumulated other comprehensive loss (428) (2)
Retained earnings 123,627 115,147
------------ ------------
Stockholders' equity 139,609 131,240
------------ ------------
Total Liabilities and Stockholders' Equity $ 160,079 $ 157,310
============ ============
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31
--------
2000 1999
---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 72,594 $ 63,557
Cost of goods sold 34,666 31,679
------------- ------------
Gross profit 37,928 31,878
------------ -------------
Operating expenses:
Selling, general and administrative 19,169 16,164
Research and development 3,863 2,731
Interest (income) (226) (172)
Interest expense 244 168
Other expense 516 143
Goodwill amortization 485 352
------------- ------------
24,051 19,386
------------- ------------
Income before provision for income taxes and minority interest in
income of consolidated subsidiary 13,877 12,492
Provision for income taxes 4,055 3,932
------------- ------------
Income before minority interest in income of consolidated subsidiary
(see Note 5) 9,822 8,560
Minority interest in income of consolidated subsidiary 360 ---
------------- ------------
Income from continuing operations 9,462 8,560
------------- ------------
Discontinued Operations (Note 6):
Loss from operations of Vital Pharma Machine Division (net of
income taxes of of $82) --- (188)
------------- ------------
Net income $ 9,462 $ 8,372
============= ============
Earnings per Common Share:
Basic income per share from continuing operations $ .77 $ .69
============= ============
Diluted income per share from continuing operations $ .76 $ .69
============= ============
Discontinued operations $ --- $ (.02)
============= ============
Basic net income per share $ .77 $ .68
============= ============
Diluted net income per share $ .76 $ .68
============= ============
Basic weighted average number of shares 12,222 12,351
============= ============
Diluted weighted average number of shares 12,400 12,398
============= ============
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
--------
2000 1999
---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C>
Net sales $ 35,481 $ 32,622
Cost of goods sold 17,096 15,963
------------- ------------
Gross profit 18,385 16,659
------------ -------------
Operating expenses:
Selling, general and administrative 9,485 8,188
Research and development 2,235 1,403
Interest (income) (143) (59)
Interest expense 121 100
Other (income) expense 84 339
Goodwill amortization 242 176
------------- ------------
12,024 10,147
------------- ------------
Income before provision for income taxes and minority interest in
income of consolidated subsidiary 6,361 6,512
Provision for income taxes 1,721 2,020
------------- ------------
Income before minority interest in income of consolidated
subsidiary (see Note 5) 4,640 4,492
Minority interest in income of consolidated subsidiary 153 ---
------------- ------------
Income from continuing operations 4,487 4,492
------------- ------------
Discontinued Operations (Note 6):
Loss from operations of Vital Pharma Machine Division
(net of income taxes of of $41) --- (95)
------------- ------------
Net income $ 4,487 $ 4,397
============= ============
Earnings per Common Share:
Basic income per share from continuing operations $ .37 $ .37
============= ===+========
Diluted income per share from continuing operations $ .36 $ .36
============= ==+=========
Discontinued operations $ --- $ (.01)
============= ============
Basic net income per share $ .37 $ .36
============= ============
Diluted net income per share $ .36 $ .36
============= ============
Basic weighted average number of shares 12,263 12,270
============= ============
Diluted weighted average number of shares 12,436 12,317
============= ============
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31
2000 1999
----------------------------
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 9,462 $ 8,372
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and amortization 2,026 1,903
Decrease (increase) in net income tax asset (515) 49
Amortization of goodwill 485 352
Amortization of deferred credit --- (50)
Net loss on sales of available for sale securities --- 16
Minority interest in income of consolidated subsidiary 360 ---
Changes in operating assets and liabilities:
Increase in accounts receivable (1,484) (1,495)
Decrease (increase) in inventory 82 (1,366)
Increase in prepaid expenses and other current assets (614) (1,609)
Increase in other assets (441) (1,831)
Increase (decrease) in accounts payable and accrued expenses (1,223) 258
Decrease in other liabilities (268) (149)
-------------- -------------
Net cash provided by operating activities 7,870 4,450
------------- ------------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities 13 6,138
Purchases of available-for-sale securities and other investments --- (1,034)
Acquisition of property, plant and equipment (5,180) (1,923)
Other --- (564)
------------- -------------
Net cash provided by (used in) investing activities (5,167) 2,617
-------------- -------------
Cash Flows from Financing Activities:
Net purchase of treasury stock (580) (6,530)
Dividends paid (982) (993)
Proceeds from exercise of stock options and warrants 895 26
Proceeds from short term notes payable 1,358 ---
Principal payments of long-term debt and notes payable (5,169) (808)
-------------- -------------
Net cash used in financing activities (4,478) (8,305)
-------------- -------------
Net decrease in cash and cash equivalents (1,775) (1,238)
Cash and cash equivalents at beginning of period 6,655 2,600
------------- -------------
Cash and cash equivalents at end of period $ 4,880 $ 1,362
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the six months for:
Interest $ 224 $ 125
Income taxes 4,696 3,234
</TABLE>
(See Notes to Consolidated Financial Statements)
6
<PAGE>
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of March 31, 2000, the consolidated
statements of income for the three and six months ended March 31, 2000
and 1999 and the consolidated statement of cash flows for the six months
ended March 31, 2000 and 1999 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 March 31, 2000 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. 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.
4. 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.
5. 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 June 1999. Vital Signs has reflected
the operations of Breas as a consolidated subsidiary for the six months
ended March 31, 2000 with sales of $8,126,000. Breas for the six months
ended March 2000 contributed net income after minority interest of
$751,000 to Vital Signs' operating results for the six months ended March
31, 2000.
6. In September 1999, the Company made a decision to sell its Blow-Fill-Seal
("BFS") Machine Fabrication division consisting of net assets of
approximately $4.2 million. Accordingly, the statement of income for the
six months and three months ended March 31, 1999 has been restated to
reflect the operations as a discontinued operation.
7. At March 31, 2000, the Company's inventory was comprised of raw
materials, $15,412,000, work-in-process, $1,070,000 and finished goods,
$7,167,000.
8. For details of Legal proceedings, see Part II, Item 1, "Legal
Proceedings".
7
<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.
8
<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 SIX MONTHS ENDED
MARCH 31, 2000 MARCH 31, 2000
COMPARED WITH COMPARED WITH
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1999
---------------------------------------------
<S> <C> <C>
Net sales 8.8% 14.2%
Cost of goods sold 7.1% 9.4%
Gross profit 10.4% 19.0%
Selling, general and administrative expense 15.8% 18.6%
Research and development expenses 59.3% 41.5%
Income before provision for income taxes and
minority interest in income of
consolidated subsidiary (2.3%) 11.1%
Provision for income taxes (14.8%) 3.1%
Net income 2.0% 13.0%
</TABLE>
9
<PAGE>
COMPARISON: QUARTER ENDED MARCH 31, 2000
AND QUARTER ENDED MARCH 31, 1999
Net sales for the quarter ended March 31, 2000 increased by 8.8%
compared with the same period last year. The increase was due in large part, to
unit increases offset by selling price declines, as well as the acquisition of
Breas AB (see Note 5). Prices on existing products declined on average
approximately .5% in the three months ended March 31, 2000 when compared to the
same period in 1999.
Sales of anesthesia products, representing 44.3% of net sales, grew
3.6% from the quarter ended March 31, 1999 despite selling price declines. Sales
of respiratory/critical care products, representing 45.0% of net sales,
decreased by 8.5%. The Company believes that such declines reflect in part,
increased purchases by certain customers during the quarter ended December 31,
1999 to protect against Y2K concerns, resulting in lesser demand during the
following quarter. Sales of sleep/ventilator products, representing 10.7% of net
sales, increased by 100% due to the acquisition of a 52% interest in Breas AB
effective June 1, 1999.
While net sales increased in dollars by 8.8%, gross profit dollars
increased by 10.4%. 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 March 31, 2000 was 51.8% compared to 51.1% in the same time
period of the last fiscal year.
Selling, general and administrative expenses (S, G & A) increased by
$1,297,000 primarily due to the acquisition of Breas AB in June, 1999. Breas AB
incurred $749,000 of S, G & A expenses in the current quarter. Freight expense
increased by $164,000 due to unit increases and fuel surcharges.
Research and development expenses ("R&D") increased 59.3% primarily due
to the acquisition of a 52% interest in Breas AB effective June 1, 1999.
Other expense, net, which includes dividend income, realized capital
gains and losses and legal and other expenses related to non-operational items,
decreased by $255,000 from the quarter ended March 31, 1999 to the quarter ended
March 31, 2000 primarily due to the reduction of product contributions by
$97,000 and net investment income of $64,000 realized in 1999.
The Company's effective tax rates were 27.1% and 31.0% for the quarters
ended March 31, 2000 and 1999, respectively. The Company's tax rate in the
current period decreased primarily due to federal tax benefits relating to its
international business.
10
<PAGE>
COMPARISON: SIX MONTHS ENDED MARCH 31, 2000
AND SIX MONTHS ENDED MARCH 31, 1999
Net sales for the six months ended March 31, 2000 increased by 14.2%
compared with the same period last year. The increase was due to unit increases
offset by selling price declines and to a large extent to the acquisition of
Breas AB (see Note 5). Prices on existing products declined on average
approximately .6% in the six months ended March 31, 2000 when compared to the
same period in 1999.
Sales of anesthesia products, representing 44.7% of net sales, grew
8.9% from the six months ended March 31, 1999 despite selling price declines.
Sales of respiratory/critical care products, representing 44.5% of net sales,
decreased by 4.5%. Sales of sleep/ventilator products, representing 10.8% of net
sales, increased by 100% due to the acquisition of a 52% interest in Breas AB
effective June 1, 1999.
While net sales increased in dollars by 14.2%, gross profit dollars
increased by 19.0%. The increase in gross profit is primarily the result of the
Company's cost improvement program. The Company's gross profit percentage for
the six ended March 31, 2000 was 52.2% compared to 50.2% in the same time period
of the last fiscal year.
Selling, general and administrative expenses (S, G & A) increased by
$3,005,000 primarily due to the acquisition of Breas AB in June, 1999. Breas AB
incurred $2,292,000 of S, G & A expenses in the current quarter. Freight expense
increased by $313,000 due to unit increases and fuel surcharges.
Research and development expenses ("R&D") increased 41.4% primarily due
to the acquisition of a 52% interest in Breas AB effective June 1, 1999.
Other expense, net, which includes dividend income, realized capital
gains and losses and legal and other expenses related to non-operational items,
increased by $373,000 from the six months ended March 31, 1999 to the six months
ended March 31, 2000 primarily due to net investment income of $122,000 realized
in 1999.
The Company's effective tax rates were 29.2% and 31.5% for the six
months ended March 31, 2000 and 1999, respectively.
11
<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 six months ended March
31, 2000, cash and cash equivalents and short-term marketable securities
decreased by $1,775,000 and long-term marketable securities and other
investments decreased by $16,000. During the period, the Company paid dividends
of approximately $982,000, spent $5,180,000 on capital expenditures and had a
net reduction of long term debt and notes payable by $3,811,000. The combined
total of cash and cash equivalents, long-term marketable securities and other
investments was approximately $15.9 million at March 31, 2000 as compared to
$17.7 million at September 30, 1999.
At March 31, 2000, the Company had approximately $4.9 million in cash
and cash equivalents. On that date, the Company's working capital was $46.6
million and the current ratio was 5.5 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. No amount was outstanding at March 31, 2000 under this line of
credit.
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
12
<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 and to Item 1 of Part II of the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1999.
(b) 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 held that the Smith Industries patent was
invalid and that the Company's products did not infringe. In May, 1999,
the U.S. Court of Appeals for the Federal Circuit reversed the U.S.
District Court's judgement of invalidity, vacated the judgement of
non-infringement and remanded the case to the U.S. District Court for
further proceedings and, in July 1999 clarified that its earlier
decision was applicable to all of the claims of the subject patent. On
remand, the U.S. District Court has received briefs from the parties as
to what further proceedings shall occur. At a hearing held on February
10, 2000, the District Court determined that it would not permit the
Company to solicit further discovery regarding infringement issues. 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 and on
all other outstanding issues.
At a hearing held on April 18, 2000, the Court granted the Company's
request for further damage-related discovery. On April 27, 2000, the
parties filed a Joint Stipulated Order with the Court setting forth a
schedule of document exchange, inspection of the Plaintiff's production
facility, exchange of updated expert damage reports, depositions of
experts, and filing of briefs on remaining issues. Filing of briefs on
remaining issues is scheduled for July 26, 2000.
The parties have exchanged reports of their experts on damage
calculations, which update their calculations provided in connection
with the District Court trial. Plaintiff claims actual damages through
January, 2000 of $5.3 million relating to the Company's Vital Blue line
of products and $21.1 million relating to other allegedly infringing
products. This claim is based upon plaintiff's expert's analysis of
lost profits and reasonable royalties. In addition, Plaintiff has
requested enhanced damages up to three times actual damages for alleged
willful infringement of the patent, as well as attorney fees. The
Company disputes the amount of alleged damages sought by plaintiff and
the method by which they were calculated. The Company's expert rejects
Plaintiff's claims for lost profits and, based upon its analysis of
reasonable royalties, believes that, if the Company's products infringe
Plaintiff's patent, actual damages through January, 2000 would be
$860,000 for the Vital Blue line of products and $2.2 million for all
other allegedly infringing lines of products, exclusive of prejudgment
interest.
13
<PAGE>
The Company anticipates that the District Court will enter judgement
promptly after briefs are submitted in late July, 2000. The Company
continues to believe that its allegedly infringing lines of product do
not infringe the Plaintiff's patent, that the Plaintiff's action is
without merit and will continue to defend this action vigorously.
However, the Company recognizes that the Court may conclude that the
Company's Vital Blue line of products infringe Plaintiff's patent. An
adverse judgement by the District Court on the other allegedly
infringing products is also possible, but the Company believes such
result is less likely. If the District Court enters a finding of
infringement, the Company will consider appealing such decision. If the
Company does not pursue an appeal, or does not prevail in such an
appeal, the damages awarded on the Vital Blue line of products alone
could be materially adverse to the Company's consolidated financial
position. If the Company were also unsuccessful in defending against
the claims that the other allegedly infringing products infringe the
Plaintiff's patent, the damages awarded would likely be materially
adverse to the Company's consolidated financial position. Given the
factual and legal complexities of this case and the inherent
uncertainties involved in litigation, the Company is unable to predict
the ultimate outcome or the ultimate financial impact of this action.
(c) In the pending patent infringement action in Japan against a
distributor of the Company's ABG syringe products that the Company's
predecessor has indemnified, the Court has closed the record in this
action and advised that it will render its decision on this action at
the next hearing scheduled for June 23, 2000. Plaintiff claims damages
of approximately $6.5 million, plus interest and costs. The Company's
damage experts have opined that, if the Company's ABG syringe products
infringe the plaintiff's patent, that the damages would be
approximately $1 million. The Company continues to believe that its ABG
syringe products do not infringe the plaintiff's patent and will
continue to vigorously defend this action. If an adverse judgement is
rendered in this action, the Company will consider appealing such
decision. In the Company's patent infringement action in Japan against
the same competitor for infringement of an ABG patent issued to the
Company in Japan, additional briefs on infringement have been filed
with the Court.
(d) In the pending action by a former shareholder of Vital Pharma, Inc.
(VPI), a Company subsidiary, brought by such shareholder on his own
behalf and purportedly on behalf of several other former VPI
shareholders for breach of contract, fraud and several other claims
against the Company in the United States District Court for the
District of New Jersey, the matter is in pretrial discovery.
The Company cannot predict the outcome of its legal proceedings with
certainty. However, based upon its review of pending legal proceedings,
subject to the above disclosure concerning the patent infringement
action brought by Smith Industries, 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
Private Securities Litigation Reform Act of 1995. 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.
14
<PAGE>
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of shareholders on February 17,
2000. At that meeting, the following individuals were elected to the Board of
Directors by the following votes:
<TABLE>
<CAPTION>
NAME FOR AGAINST
- ---- --- -------
<S> <C> <C>
Terry D. Wall 12,370,821 34,123
David J. Bershad 12,371,048 33,896
Anthony J. Dimun 12,371,048 33,896
Stuart M. Essig 12,370,870 34,074
Joseph J. Thomas 12,370,848 34,096
Barry Wicker 12,371,048 33,896
</TABLE>
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 March 31, 2000:
None.
15
<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: May 12, 2000
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheet at March 31, 2000 and six month income statement ended
March 31, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 4,880
<SECURITIES> 0
<RECEIVABLES> 22,936
<ALLOWANCES> 480
<INVENTORY> 23,649
<CURRENT-ASSETS> 56,978
<PP&E> 64,824
<DEPRECIATION> 15,801
<TOTAL-ASSETS> 160,079
<CURRENT-LIABILITIES> 10,409
<BONDS> 5,962
<COMMON> 16,410
0
0
<OTHER-SE> 123,199
<TOTAL-LIABILITY-AND-EQUITY> 160,079
<SALES> 72,594
<TOTAL-REVENUES> 72,594
<CGS> 34,666
<TOTAL-COSTS> 34,666
<OTHER-EXPENSES> 4,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 13,877
<INCOME-TAX> 4,055
<INCOME-CONTINUING> 9,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,462
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.76
</TABLE>
