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, 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
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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)
-----------------------------------------------------
(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 January 30, 2001, there were 12,413,988 shares of Common Stock, no
par value, outstanding.
VITAL SIGNS, INC.
INDEX
PAGE NUMBER
PART I.
Financial information 1
ITEM 1. Financial Statements:
Independent Accountant's Report 2
Consolidated Balance Sheet as of
December 31, 2000 (Unaudited) and
September 30, 2000 3
Consolidated Statement of Income for the
Three Months ended December 31, 2000
and 1999 (Unaudited) 4
Consolidated Statement of Cash flows for
the Three Months Ended December 31,
2000 and 1999 (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
PART II.
ITEM 1. Legal Proceedings 11
ITEM 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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, 2000.
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, 2000, 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 actual 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
January 31, 2001
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, September 30,
------------ -------------
2000 2000
---- ----
(In thousands)
ASSETS
(Unaudited)
---------
Current Assets:
Cash and cash equivalents $ 10,130 $ 7,606
Accounts receivable, less allowance for doubtful accounts of
$629 and $717 29,072 26,377
Inventory 26,173 23,964
Prepaid expenses and other current assets 5,668 6,361
--------- ---------
Total Current Assets 71,043 64,308
Property, plant and equipment - net 52,100 53,016
Marketable securities and other investments 551 551
Goodwill and other intangible assets 46,828 47,253
Deferred income taxes 2,235 2,235
Other assets 5,723 5,468
--------- ---------
Total Assets $ 178,480 $ 172,831
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,895 $ 4,772
Current portion of long-term debt 652 535
Accrued expenses 5,532 4,858
Notes payable - bank 6,592 8,756
Other current liabilities 6,014 6,103
--------- ---------
Total Current Liabilities 23,685 25,024
Long term debt 2,394 2,711
Other liabilities 245 245
--------- ---------
Total Liabilities 26,324 27,980
Commitments and contingencies:
Minority interest in subsidiary 4,135 4,171
Stockholder's Equity
Common stock - no par value; authorized 40,000,000 shares,
issued and outstanding 12,413,988 and 12,307,831 shares,
respectively 17,137 15,132
Accumulated other comprehensive loss (1,613) (1,540)
Retained earnings 132,497 127,088
--------- ---------
Stockholders' equity 148,021 140,680
--------- ---------
Total Liabilities and Stockholders' Equity $ 178,480 $ 172,831
========= =========
(See Notes to Consolidated Financial Statements)
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Three Months Ended
December 31,
2000 1999
---- ----
(In Thousands Except Per Share Amounts)
Net sales $ 40,598 $ 37,113
Cost of goods sold 19,667 17,570
-------- --------
Gross Profit 20,931 19,543
Operating expenses:
Selling, general and administrative 10,185 9,684
Research and development 1,774 1,628
Interest (income) (104) (83)
Interest expense 234 123
Other expense 173 432
Goodwill amortization 359 243
-------- --------
12,621 12,027
-------- --------
Income before provision for income taxes and minority interest in
income (loss) of consolidated subsidiary 8,310 7,516
Provision for income taxes 2,510 2,334
-------- --------
Income before minority interest in income (loss) of consolidated
subsidiary 5,800 5,182
Minority interest in income (loss) of consolidated subsidiary (103) 207
-------- --------
Net income $ 5,903 $ 4,975
======== ========
Earnings per Common Share:
Basic net income per share $ .48 $ .41
======== ========
Diluted net income per share $ .47 $ .40
======== ========
Basic weighted average number of shares 12,244 12,182
======== ========
Diluted weighted average number of shares 12,650 12,365
======== ========
Dividends paid per share $ .04 $ .04
======== ========
(see Notes to Consolidated Financial Statements)
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
December 31,
2000 1999
-------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income $ 5,903 $ 4,975
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization 1,323 1,058
Increase in income tax asset -- (42)
Minority interest in income (loss) of consolidated subsidiary (103) 207
Amortization of goodwill 359 243
Changes in operating assets and liabilities:
Increase in accounts receivable (2,490) (3,773)
Decrease (increase) in inventory (2,042) 431
Decrease in prepaid expenses and other current assets 693 1,785
Increase (decrease) in accounts payable and accrued expenses 604 (1,387)
Decrease (increase) in other, net (341) 31
-------- --------
Net cash provided by (used in) operating activities 3,906 3,528
-------- --------
Cash Flows from Investing Activities:
Proceeds from sales of available-for-sale securities -- 13
Acquisition of property, plant and equipment (407) (2,703)
-------- --------
Net cash used in investing activities (407) (2,690)
-------- --------
Cash Flows from Financing Activities:
Net reissuance of treasury stock 96 262
Dividends paid (494) (491)
Proceeds from exercise of stock options 1,909 461
Principal payments of long-term debt and notes payable (2,486) (769)
-------- --------
Net cash used in financing activities (975) (537)
-------- --------
Net increase in cash and cash equivalents 2,524 301
Cash and cash equivalents at beginning of period 7,606 6,655
-------- --------
Cash and cash equivalents at end of period $ 10,130 $ 6,956
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the three months for:
Interest $ 270 $ 183
Income taxes 170 222
(See Notes to Consolidated Financial Statements)
5
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 2000, the
consolidated statement of income for the three months ended
December 31, 2000 and 1999 and the consolidated statement of cash
flows for the three months ended December 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 at December 31, 2000 and
September 30, 2000 and the results of operations and cash flows for
the three months ended December 31, 2000 and 1999 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, 2000 (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 does not meet the criteria for separate disclosures.
4. At December 31, 2000, the Company's inventory was comprised of raw
materials, $15,447,000, and finished goods, $10,726,000.
5. In the third quarter of Fiscal 2000, the Company converted its
preferred stock holdings in privately held National Sleep
Technologies, Inc. ("NST") into common stock. Upon such conversion
the Company acquired an 84% ownership in NST. The total value of
the Company's investment in NST as of September 30, 2000 was
$10,439,000. The assets acquired amounted to approximately $4
million and liabilities assumed approximately $6 million. This
acquisition has been accounted for as a purchase resulting in an
excess of purchase price over the fair value of net assets acquired
of approximately $12.8 million. The Company has reflected the
operations of NST as a consolidated subsidiary as of June 1, 2000.
The net sales and net income for the three months ended December
31, 2000 were $3,241,000 and $120,000, respectively.
6. For Details of Legal Proceedings, see Part II, Item 1, "Legal
Proceedings".
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
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
--------------------------
Three Months Ended
December 31, 2000
Net Sales 9.4%
Cost of goods sold 11.9
Gross profit 7.1
Selling, general and administrative expense 5.2
Research and development expenses 9.0
Income before provision for income taxes and minority
interest in income of consolidated subsidiary
10.6
Provision for income taxes 7.5
Net income 18.7
8
COMPARISON: QUARTER ENDED DECEMBER 31, 2000
AND QUARTER ENDED DECEMBER 31, 1999
Net sales for the quarter ended December 31, 2000 increased by 9.4%
compared with the same period last year. The increase was due to unit increases
(offset in part by slight selling price declines) and in part, to the
acquisition of National Sleep Technologies, Inc. ("NST") which was acquired
effective June 1, 2000 (see Note 5). The Company's interest in NST is reflected
in the results of operations for the three months ended December 31, 2000. The
operations of NST are not reflected in the results for the three months ended
December 31, 1999. Prices on existing products declined on average approximately
.1% in the three months ended December 31, 2000 when compared to the same period
in 1999. Foreign currency had a negative effect of approximately $500,000 on
sales for the quarter.
Sales of anesthesia products, representing 41.7% of net sales, grew by
approximately .1% from the quarter ended December 31, 1999 despite selling price
declines. Sales of respiratory/critical care products, representing 40.3% of net
sales, increased by approximately .1%. Sales of sleep services and products,
representing 18.0% of net sales, increased by $4.0 million due largely to the
acquisition of NST, effective June 1, 2000.
While net sales increased in dollars by 9.4%, gross profit dollars
increased by 7.1%. The decrease in gross profit is primarily due to the results
of the Company's blow-fill-seal contract packaging division, offset in part by
the results of the Company's cost improvement program. The Company's gross
profit percentage for the quarter ended December 31, 2000 was 51.6% compared to
52.7% in the same time period of the last fiscal year.
Selling, general and administrative expenses (S, G & A) increased by
$501,000 primarily due to the acquisition of National Sleep Technologies, Inc.,
in June, 2000. NST incurred $824,000 of S, G & A expenses in the current
quarter.
Research and development expenses ("R&D") increased by $146,000
primarily due to the Company's continuing effort to develop new products.
Other expense, which includes dividend income, realized capital gains
and losses, legal and other expenses related to non-operational items and
currency gains and losses, decreased by $259,000 from the quarter ended December
31, 1999 to the quarter ended December 31, 2000 primarily due to the sale of an
investment.
The Company's effective tax rates were 30.2% and 31.1% for the quarters
ended December 31, 2000 and 1999, 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
The Company continues to rely upon cash flow from its operations.
During the three months ended December 31, 2000, cash and cash equivalents
increased by $2,524,000. During the period, the Company paid dividends of
approximately $494,000, spent $407,000 on capital expenditures and reduced long
term debt and notes payable by $2,486,000. The combined total of cash and cash
equivalents, long-term marketable securities was approximately $10.7 million at
December 31, 2000 as compared to $8.2 million at September 30, 2000.
At December 31, 2000, the Company had approximately $10.1 million in
cash and cash equivalents. On that date, the Company's working capital was $47.4
million and the current ratio was 3.0 to 1, as compared to $39.3 million and 2.6
to 1 at September 30, 2000.
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 $25 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. There were no amounts outstanding at December 31, 2000.
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
10
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, 2000.
(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
matter is in the appelate process. The Company continues to believe that
Marquest ABG syringe products do not infringe the plaintiff's patent and
will continue to vigorously defend the action.
(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. An arbitrator
has been selected and the parties are in the process of finalizing the
scope of discovery for the arbitration.
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
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K filed during the quarter ended
December 31, 2000: None.
12
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, 2001
13