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, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission file number: 0-18793
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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)
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(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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At February 5, 2002 there were 12,947,335 shares of Common Stock, no
par value, outstanding.
VITAL SIGNS, INC.
INDEX
PAGE NUMBER
PART I.
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Financial information 1
Item 1. Financial Statements:
Independent Accountant's Report 2
Consolidated Balance Sheet as of December 31,
2001 (Unaudited) and September 30, 2001
3
Consolidated Statement of Income for the Three
Months ended December 31, 2001 and 2000
(Unaudited) 4
Consolidated Statement of Cash Flows for the
Three Months Ended December 31, 2001 and
2000 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
7 - 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 10 - 11
PART II.
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Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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, 2001.
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
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have reviewed the accompanying consolidated balance sheet of Vital Signs,
Inc. as of December 31, 2001, and the related consolidated statements of income,
and cash flows for the three-month period 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 consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 5, 2002
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, September 30,
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2001 2001
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(In thousands)
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ASSETS
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(Unaudited)
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Current Assets:
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Cash and cash equivalents $ 36,766 $ 31,029
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Accounts receivable, less allowance for doubtful accounts of $491 and $436
respectively 32,159 33,329
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Inventory 26,389 25,984
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Prepaid expenses and other current assets 9,488 8,899
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Total Current Assets 104,802 99,241
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Property, plant and equipment - net 36,274 35,710
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Marketable securities 407 486
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Goodwill 47,750 48,178
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Deferred income taxes 4,579 5,002
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Other assets 2,382 2,943
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Total Assets $196,194 $191,560
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities:
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Accounts payable $ 4,829 $ 5,347
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Current portion of long-term debt 377 357
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Accrued expenses 6,643 5,652
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Notes payable - bank 4,140 5,645
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Other current liabilities 11,720 11,747
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Total Current Liabilities 27,709 28,748
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Long term debt 1,622 1,842
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Total Liabilities 29,331 30,590
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Commitments and contingencies:
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Minority interest in subsidiary 344 344
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Stockholders' Equity
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Common stock - no par value; authorized 40,000,000 shares, issued and
outstanding 12,940,635 and 12,935,656 shares, respectively 27,786 27,679
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Accumulated other comprehensive loss (2,281) (2,270)
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Retained earnings 141,014 135,217
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Stockholders' equity 166,519 160,626
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Total Liabilities and Stockholders' Equity $196,194 $191,560
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(See Notes to Consolidated Financial Statements)
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3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended
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December 31,
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2001 2000
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(In Thousands Except Per Share Amounts)
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Revenue:
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Net sales $36,926 $35,185
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Service revenue 5,173 5,413
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42,099 40,598
Cost of goods sold and services performed:
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Cost of goods sold 18,202 16,535
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Cost of services performed 3,408 3,132
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Gross profit 21,610 19,667
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Operating expenses:
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Selling, general and administrative 10,416 10,185
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Research and development 1,799 1,774
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Interest income (233) (104)
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Interest expense 59 234
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Other expense 67 173
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Goodwill amortization --- 359
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12,108 12,621
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Income before provision for income taxes and minority interest in loss of
consolidated subsidiary 9,502 8,310
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Provision for income taxes 3,186 2,510
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Income before minority interest in loss of consolidated subsidiary
6,316 5,800
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Minority interest in loss of consolidated subsidiary --- (103)
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Net income $ 6,316 $ 5,903
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Earnings per Common Share:
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Basic net income per share $ .49 $ .48
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Diluted net income per share $ .49 $ .47
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Basic weighted average number of shares 12,890 12,244
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Diluted weighted average number of shares 13,013 12,650
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Dividends paid per share $ .04 $ .04
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(see Notes to Consolidated Financial Statements)
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4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
December 31,
2001 2000
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(In thousands)
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Cash Flows from Operating Activities:
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Net income $ 6,316 $ 5,903
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Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
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Depreciation and amortization 1,295 1,323
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Minority interest in income (loss) of consolidated subsidiary --- (103)
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Amortization of goodwill --- 359
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Changes in operating assets and liabilities:
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Decrease (increase) in accounts receivable 1,264 (2,490)
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(Increase) in inventory (236) (2,042)
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Decrease in prepaid expenses and other current assets 277 693
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Increase in accounts payable and accrued expenses 241 604
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Increase (decrease) in other liabilities, net 534 (341)
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Net cash provided by operating activities 9,691 3,906
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Cash Flows from Investing Activities:
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Proceeds from sales of available-for-sale securities 79 ---
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Acquisition of property, plant and equipment (1,859) (407)
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Net cash used in investing activities (1,780) (407)
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Cash Flows from Financing Activities:
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Net reissuance of treasury stock --- 96
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Dividends paid (519) (494)
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Proceeds from exercise of stock options 93 1,909
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Principal payments of long-term debt and notes payable (1,857) (2,486)
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Net cash used in financing activities (2,283) (975)
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Effect of foreign currency translation 109 ---
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Net increase in cash and cash equivalents 5,737 2,524
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Cash and cash equivalents at beginning of period 31,029 7,606
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Cash and cash equivalents at end of period $36,766 $10,130
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Supplemental disclosures of cash flow information:
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Cash paid during the three months for:
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Interest $ 84 $ 270
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Income taxes 198 170
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(See Notes to Consolidated Financial Statements)
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5
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 2001, the consolidated
statement of income for the three months ended December 31, 2001 and 2000 and
the consolidated statement of cash flows for the three months ended
December 31, 2001 and 2000 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 at December 31, 2001 and the results
of operations and cash flows for the three months ended December 31, 2001
and 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,
2001 (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. At December 31, 2001, the Company's inventory was comprised of raw materials,
$16,425,000, and finished goods, $9,964,000.
5. For Details of Legal Proceedings, see Part II, Item 1, "Legal Proceedings".
6. In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is required to be applied for fiscal years beginning
after December 15, 2001. The Company has adopted SFAS 142 as of October 1, 2001.
SFAS 142 eliminates the amortization of goodwill and certain other intangible
assets. It also requires Vital Signs to complete a test for impairment of these
assets annually, as well as a transitional goodwill impairment test within six
months from the date of adoption. The Company is in the process of performing
this impairment test. SFAS 142 also requires disclosure of what net income
would have been in all periods presented had SFAS 142 been in effect.
The following table is provided to disclose what net income would have been
had SFAS 142 been adopted in prior periods:
FOR THE THREE-MONTHS ENDED
DECEMBER 31,
2001 2000
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Reported net income $6,316 $5,903
Add back: goodwill amortization --- 359
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Adjusted net income 6,316 6,262
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Basic earnings per share as reported $ .49 $ .48
Adjusted basic earnings per share .49 .51
Diluted earnings per share as reported .49 .47
Adjusted diluted earnings per share .49 .50
6
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) cost containment pressures on hospitals and
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) slow downs
in the healthcare industry or interruptions or delays in manufacturing and/or
sources of supply, (iii) the Company's ability to develop or acquire new and
improved products and to control costs, (iv) market acceptance of the Company's
new products, (v) technological change in medical technology, (vi) the scope,
timing and effectiveness of changes to manufacturing, marketing and sales
programs and strategies, (vii) intellectual property rights and market
acceptance of competitors' existing or new products, (viii) 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), (ix) healthcare
industry consolidation resulting in customer demands for price concessions, (x)
the reduction of medical procedures in a cost conscious environment, (xi)
efficacy or safety concerns with respect to marketed products, whether
scientifically justified or not, that may lead to product recalls, withdrawals
or declining sales, and (xii) healthcare reform and legislative and regulatory
changes impacting the healthcare market both domestically and internationally.
7
Results of Operations
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The following table sets forth, for the periods indicated, the percentage
increase of certain items included in the Company's consolidated statement of
income.
Increase from prior period
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Three Months Ended
December 31, 2001
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vs.
Three Months Ended
December 31, 2000
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Net revenue 3.7%
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Cost of revenue 4.2
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Gross profit 3.2
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Selling, general and administrative expense 2.3
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Research and development expenses 1.4
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Income before provision for income taxes and minority
interest in income of consolidated subsidiary 14.3
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Provision for income taxes 26.9
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Net income 7.0
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8
COMPARISON: QUARTER ENDED DECEMBER 31, 2001
AND QUARTER ENDED DECEMBER 31, 2000
Net revenue for the quarter ended December 31, 2001 increased 3.7%
compared with the same period last year. The increase was primarily due to an
increase in both the Breas Medical AB sleep and ventilation product revenues
and other revenues generated within the anesthesia product line.
Sales of anesthesia products, representing 44.0% of net revenue, grew
by approximately 9.5% from the quarter ended December 31, 2000 due primarily to
license and other revenue. Sales of respiratory/critical care products,
representing 31.3% of net revenue decreased by approximately 5.1% due
principally to the fact that the flu season has been milder than expected.
Sales of the Breas sleep and ventilation product, representing 12.4% of net
revenue, increased by 27.0%, due largely to sales volume increases in
international markets. Sales of services representing 12.3% of revenue,
decreased by 4.4%, due largely to the temporary effect of the September 11th
tragedy, together with a shutdown of one hospital due to an anthrax infection
scare, had a negative effect on our sleep centers in the New York and
Baltimore/Washington DC areas. We were also negatively effected by the loss
of a major pharmaceutical customer at our subsidiary, The Validation Group,
(TVG). This reduced our revenue and profits at TVG.
Gross profit dollars increased by 3.2% from the quarter ended December
31, 2000. The Company's overall gross profit percentage for the quarter ended
December 31, 2001 was 51.3% compared to 51.6% for the same period last year.
Improved gross profit margins in the anesthesia product lines were offset by
reduced gross profit margins in the respiratory/critical care, sleep center and
ventilator product lines.
Selling, general and administrative expenses increased by $231,000, a
2.3% increase, primarily due to the inclusion in the quarter ended December 31,
2001 of quality assurance and logistics costs which in the prior year were
classified as cost of sales.
Research and development expenses increased by $25,000, an increase of
1.4%.
Other expense, which includes dividend income, realized capital gains
and losses, legal and other expenses and currency gains and losses, decreased by
$106,000 from the quarter ended December 31, 2000 to the quarter ended December
31, 2001 primarily due to reduction in legal expense and contributions.
For information regarding the impact of the new Financial Accounting
Standard on the amortization of goodwill, please refer to Note 6 to the
financial statements.
The Company's effective tax rates were 33.5% and 30.2% for the quarters
ended December 31, 2001 and 2000, respectively. The Company's tax rate in the
current period is lower than statutory rates primarily due to benefits realized
from its international operations.
9
Liquidity and Capital Resources
During the three months ended December 31, 2001, cash and cash
equivalents increased by $5,737,000. The Company continues to rely upon cash
flow from its operations, which generated $9.7 million of cash and cash
equivalents during the first quarter of the current fiscal year. Cash flow from
operations was offset in part by dividends of approximately $519,000, $1,859,000
of capital expenditures and reduction in long term debt and notes payable of
$1,857,000. The combined total of cash, cash equivalents and long-term
marketable securities was approximately $37.2 million at December 31, 2001 as
compared to $31.5 million at September 30, 2001.
At December 31, 2001, the Company had approximately $36.8 million in
cash and cash equivalents. On that date, the Company's working capital was $77.1
million and the current ratio was 3.8 to 1, as compared to $70.5 million and 3.5
to 1 at September 30, 2001.
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 Board of Directors has approved the purchase of
up to $20 million of Vital Signs stock at such times and prices deemed
appropriate to Company management.
The Company has a $25 million line of credit with JP Morgan Chase
("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. There were no amounts outstanding under the Chase line of credit at
December 31, 2001.
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 DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, including the impact of
commodity price changes and changes in the market value of its investments and,
to a lesser extent, interest rate changes and foreign currency fluctuations. In
the normal course of business as described below, the Company employs policies
and procedures with the objective of limiting the impact of market risks on
earnings and cash flows and to lower its overall borrowing costs.
10
The impact of interest rate changes and foreign currency fluctuations
is not material to the Company's financial condition. The Company does not enter
into interest rate and foreign currency transactions for speculative purposes.
It is also the Company's policy to price products from vendors and to customers
in U.S. dollars and to receive payment in U.S. dollars. Historically, the
international portion of the Company's sales has been relatively small and the
effect of changes in interest rates and foreign exchange rates on the Company's
earnings generally has been small relative to other factors that also affect
earnings, such as unit sales and operating margins. However, the international
segment is expected to grow both in terms of actual sales and as a percentage of
the Company's total sales and the Company may in the future need to revise or
change its approach to managing interest rate and foreign currency transactions.
The Company's risks involving commodity price changes relate to prices
of raw materials used in its operations. The Company is exposed to changes in
the prices of latex and various plastics and resins for the manufacture of its
products. The Company does not enter into commodity futures or derivative
instrument transactions. Except with respect to its single source for face
masks, it is the Company's policy to maintain commercial relations with multiple
suppliers and when prices for raw materials rise to attempt to source
alternative supplies.
Subsequent Events
Effective January 1, 2002 the Company's National Sleep Technologies,
Inc. ("NST") subsidiary completed its merger with HSI Medical Services, Inc., a
subsidiary of the Johns Hopkins Health System. Effective with the merger, NST
changed its name to Sleep Services of America, Inc.
11
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, 2001.
(b) In September 1996, a patent infringement action was filed in Japan
against an OEM medical device distributor in connection with the sale in
Japan of Marquest Medical Products, Inc.'s ABG syringe product line. In
July 1999 the Court indicated at a hearing that, based on one exhibit
submitted by the plaintiff, the Marquest ABG syringe products appear to
infringe the plaintiff's patent, and requested that the plaintiff submit
an updated proof of damages. In July 1999, plaintiff filed an updated
proof of damages of approximately $6.5 million, plus interest and costs.
On June 23, 2000 the Court entered a judgment against the Company's
distributor for Yen 336,872,689 ($2,887,645) plus five percent annual
interest. The distributor (which has patent indemnification protection
from Marquest) has appealed the judgment to the Tokyo Supreme Court. The
appelate court has closed the proceedings on the presentation of
additional evidence. A decision is expected by the end of the Company's
second fiscal quarter. The Company continues to believe that Marquest ABG
syringe products do not infringe the plaintiff's patent.
(c) On December 6, 1999 a complaint was filed against the Company on behalf
of the former shareholders of Vital Pharma, Inc. alleging breach of
contract for failure to pay earnout payments allegedly due under the
stock purchase agreement for the sale of VPI in December, 1995. The
Company answered the complaint, filed counter-claims and moved to
transfer the case to arbitration. In August, 2000 the court ordered
plaintiff to submit such claims to binding arbitration and stayed all
other proceedings pending the outcome of the arbitration. The matter is
in the discovery phase before the arbitrator. The arbitrator has ordered
the parties to complete discovery by April, 2002.
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.
12
ITEM 6.
Exhibits and Reports on Form 8-K
a) Reports on Form 8-K filed during the quarter ended December 31,
2001: None.
13
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/ Joseph F. Bourgart
----------------------
Joseph F. Bourgart
Executive Vice President and
Chief Financial Officer
Date: February 14, 2002