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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the fiscal year ended September 30, 1999.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 Number)
20 Campus Road, Totowa, New Jersey 07512; (973) 790-1330
(Address and telephone number, including area code, of
registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act: none.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, no par value
Indicate by checkmark 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 by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates as of
November 30, 1999 was approximately $135,503,511.
Number of shares of Common Stock outstanding as of November 30, 1999:
12,297,519.
Documents incorporated by reference: Definitive Proxy Statement for 2000
Annual Meeting of Shareholders (Part III).
VITAL SIGNS, INC.
TABLE OF CONTENTS
PAGE
----
Item 1 Business 2
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security 14
Holders
Item 4A Executive Officers of the Registrant 15
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 17
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition 19
Item 7A Quantitative and Qualitative Disclosures About 24
Market Risk
Item 8 Financial Statements and Supplementary Data* 25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10 Directors of the Registrant 26
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial Owners
and Management 26
Item 13 Certain Relationships and Related Transactions 26
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27-28
*Financial Statements follow page ____25_______
1
PART I
ITEM 1. Business
Introduction
Vital Signs, Inc. was initially incorporated in New York in 1972 and
reincorporated in New Jersey in 1988. Unless otherwise indicated, all references
in this Annual Report to the "Company" refer to Vital Signs, Inc., and its
consolidated subsidiaries. References to "Vital Signs" refer solely to the
parent company. Vital Signs' principal executive offices are located at 20
Campus Road, Totowa, New Jersey 07512; its telephone number at that location is
(973) 790-1330.
Vital Signs and its subsidiaries design, manufacture and market
single-patient use medical products for the anesthesia, respiratory, critical
care and emergency markets. A number of single-patient use products are
increasing their share of the medical products market primarily because of their
cost advantages and improved patient care features, including reducing the
potential of transmitting infections from one patient to another. With the
acquisition of Breas AB ("Breas") (see below), Vital Signs' product focus has
been expanded into the sleep therapy and personal ventilation markets.
The Company pioneered the development and introduction of a variety of
single-patient use products. In 1975, the Company commenced the marketing of
clear, non-conductive anesthesia breathing circuits. The first clear plastic,
single-use air-filled cushion face mask for anesthesia delivery and
resuscitation was launched by the Company in 1981. The Company was the first
organization to introduce a single-patient use manual resuscitator in 1984. The
first single-patient use laryngoscope system for use in the anesthesia and
critical care arenas was developed and launched by the Company in 1988. The
Company also developed a general anesthesia kit, which can combine over 20
disposable items in one convenient, cost-effective package and the first
single-patient use infant resuscitation circuit with an adjustable pressure
limiting valve, used to protect the infant's lung against over pressurization.
In 1997, the Company acquired the outstanding stock of Marquest Medical
Products, Inc. ("Marquest"), and began distributing arterial blood gas syringes
and kits, small volume nebulizers and heated humidification circuits.
In 1999, the Company completed an investment in Breas, a manufacturer of
CPAP machines and personal ventilators based in Sweden. The Company owns a
majority interest in Breas, with substantially all of the remaining minority
interest held by Breas management. Breas has grown to be among the market
leaders in its product categories in Europe through its own direct sales force
in several European markets together with focused distributors. The Breas
products were introduced to the South American and Asian markets in late 1999 by
Vital Signs. The Company plans to introduce the Breas products in the United
States once regulatory clearance has been achieved.
For additional information regarding these products, see
"Business-Products."
2
The Company's sells its anesthesia and respiratory/critical care products
to hospitals in the United States through its own sales force. Sales of the
Company's products internationally are largely through distributors, except in
England where the Company maintains a direct sales force. The Company sells its
emergency and alternate site/homecare products through third party distributors.
This Annual Report on Form 10-K contains, and from time to time the Company
expects to make, certain forward-looking statements regarding its business,
financial condition and results of operations. The forward-looking statements
are typically identified by the words "anticipates", "believes", "expects",
"intends", "forecasts", "plans", "future", "strategy", or words of similar
import. 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 may 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 certain of which are outside of
management's control, 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,
(ii) slowdowns 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) technological
change in medical technology and the Company's ability to assure that its
hardware and software are Year 2000 compliant, (v) the scope, timing and
effectiveness of changes to manufacturing, marketing and sales programs and
strategies, (vi) intellectual property rights and market acceptance of
competitors' existing or new products, (vii) adverse determinations arising in
the context of regulatory matters (see "Regulation") or legal proceedings (see
Item 3 of this Annual Report on Form 10-K), (viii) the sufficiency of the
Company's product liability insurance coverage, and (ix) healthcare reform and
legislative and regulatory changes impacting the healthcare market, both
domestically and internationally.
Acquisitions
Historically, the Company has made both product and business acquisitions.
Although no assurances can be given with respect to future acquisitions, the
Company's acquisition strategy is focused upon the following principal
objectives: (i) identification and acquisition of companies and/or products in
the anesthesia, respiratory/critical care, emergency and homecare markets with
the goal of expanding the products that can be sold by the Company's sales
force, (ii) expansion to international markets, and (iii) acquiring unique
research and development capabilities.
3
Principal Products
The Company markets a wide variety of single-patient use anesthesia,
respiratory/critical care, sleep therapy and emergency products. Its principal
products are described below:
Anesthesia Products:
Face Masks. In 1981, the Company introduced the first clear plastic
air-filled cushion face mask for single-patient anesthesia and respiratory use.
The soft air-filled cushion face mask has been clinically documented to provide
a better seal on most patients than other face masks, thus improving the
delivery of anesthetic gases and oxygen to the patient. A clear face mask also
permits the clinician to better observe certain patient problems, such as
life-threatening aspiration. The Company offers various sizes and types of face
masks. The Company anticipates that the usage of single-patient use face masks
in surgical procedures internationally will continue to expand as single-patient
use products become increasingly accepted in international hospitals.
Anesthesia Breathing Circuits. The Company offers a wide variety of
single-patient use anesthesia breathing circuits, which are used to connect the
patient to the anesthesia machine and to various patient monitors. Each
breathing circuit consists of flexible hoses, a breathing bag, and a "Y" and
elbow attachment. Since the breathing circuit needs of hospitals vary
significantly, the Company offers a large variety of circuits designed to be
compatible with anesthesia equipment manufactured by numerous other companies.
With the Marquest acquisition in 1997, the Company began offering circuits that
deliver heated humidification to patients. Technological advances in the areas
of gas sampling, temperature monitoring and humidification have provided the
Company with opportunities to expand its breathing circuit offerings.
INFUSABLE(R) Disposable Pressure Infusor. Invasive pressure monitoring has
been used since the early 1970's as a means of monitoring blood and other fluid
pressures of patients in certain critical care situations. The monitoring
process involves inserting a catheter into the artery of the patient, connecting
the catheter to a transducer (a device which converts the pressure impulse from
the patient's blood into an electrical signal), and transmitting the electrical
signal to a monitoring screen. The monitoring process uses a fluid-filled
conduit to connect the catheter to the transducer. The fluid generally is a
saline solution forced into the system by a pressure infusor. The Company's
patented INFUSABLE(R) disposable pressure infusor consists of an inflatable
bladder, a bulb to pump air into the bladder and a patented pressure gauge. The
Infusable(R) also has a mesh netting into which a package of sterile fluid or
"solution bag" is placed. The fluid is connected to the monitoring system and
the pressure on the solution bag is set at a pressure level designed to maintain
the pressure required by the monitoring system. The Infusable(R) is also used to
deliver blood or fluids to a patient at a rapid rate; usually under trauma
conditions.
General Anesthesia Systems (GAS(TM)). The Company assembles and markets
General Anesthesia Systems (generically considered customized anesthesia kits),
which can include more than 20 products, such as air-filled cushion face masks,
breathing circuits, blood pressure cuffs and temperature monitoring probes. In
marketing the GAS(TM) kits, the Company's sales representatives use detailed
questionnaires to assist in determining the particular products the hospital
desires in its anesthesia kits. The Company then assembles GAS(TM) kit to meet
the hospital's specific needs.
Vital View(TM) Single-Patient Use Fiberoptic Laryngoscope System is
designed to assist the anesthesiologist in correctly placing an endotracheal
tube within the trachea of the patient. This
4
system has several advantages over traditional metal blade laryngoscope systems,
including lowering the risk to both the patient and physician of infection
associated with reusable metal blades and handles. In addition, hospital capital
outlays for stocking emergency crash carts can be reduced by purchasing the
Vital View(TM) system rather than a reusable fiberoptic system.
Respiratory and Critical Care Products:
Manual Resuscitators. Manual resuscitators are ventilation devices which
are squeezed by hand to force oxygen into a patient's lungs. They are used
throughout the hospital in a variety of settings. For example, patients on a
ventilator require the use of a resuscitator prior to tracheal suctioning
procedures. Another use is in providing oxygen while transporting the patient
between the operating room and other critical care units. In addition,
resuscitators are typically placed strategically throughout the hospital to
provide assistance to patients who have stopped breathing and require
resuscitation.
Code Blue(TM) The Company was the first to offer single-patient use manual
resuscitators. The Company's Code Blue(TM) resuscitators are used in emergency
situations and in a variety of medical procedures. Code Blue(TM) resuscitators
are sold in different sizes for infants, children and adults. These
resuscitators alleviate certain problems involved in mouth-to-mouth emergency
resuscitation, including the risk to both the rescuer and the individual of
transmitting infections. Most reusable manual resuscitators are costly to
sterilize and difficult to fully reassemble. In contrast, Code Blue(TM)
resuscitators are relatively inexpensive, and already fully assembled.
Pocket Blue(TM) Manual Resuscitators . The Pocket Blue(TM) was introduced
at the end of 1999. It combines the utility of a manual resuscitation bag with
the compact design of a pocket mask. This patented device offers first
responders to a patient requiring CPR to perform the life-saving maneuver
without worrying about contaminating either themselves or the victim.
Babysafe(TM) Manual Resuscitators. The Company also offers a specialized
line of infant resuscitation products (BabySafe(TM), PediBlue(TM) and
BabyBlue(TM) resuscitators) used in labor and delivery rooms and in neonatal
intensive care units, where controlling the spread of infection is particularly
critical. BabySafe(TM) resuscitators offer the ability to adjust and limit the
level of pressure that can be delivered during resuscitation. Oxygen can be
delivered without the risk of barotrauma. Baby Safe(TM), PediBlue(TM) and
BabyBlue(TM) resuscitators are available in a variety of configurations and
sizes to meet the needs of infants and children.
CleenCuff(TM), Flufficuff(TM), and CUFF-ABLE(R) Blood Pressure Cuffs. The
Company manufactures and sells single-patient use blood pressure cuffs which
provide hospitals with an alternative to traditional reusable blood pressure
cuffs that can become contaminated with blood and other body fluids. While all
patients admitted to hospitals are candidates for their own dedicated blood
pressure cuff, the Company believes that to date the primary market for
disposable cuffs has been for cases where infection control is a high priority.
The Company's cuffs are sold in a variety of sizes (including neonatal) and are
adaptable to all manual and electronic blood pressure monitors that utilize
blood pressure cuffs.
Gas-Lyte(R) and Quick-ABG(R). The Company offers a broad line of disposable
arterial blood gas ("ABG") syringes and collection systems. Blood gas syringes
are used to collect blood for blood gas analysis routinely performed in
hospitals on patients suspected of having metabolic, respiratory or other
cardiopulmonary difficulties. The blood gas sample is processed through a blood
gas analyzer. Blood gas analyzers are manufactured by a wide range of
manufacturers. The Company offers its ABG products in both standard
configurations and in kits that are customized to meet a specific
5
hospital's needs.
SCT3000(TM) Heated Humidification Systems. The Company manufactures a set
of products to provide a flow of warm moist air to patients who are at risk from
loss of body temperature and drying of the lung linings. These products consist
of an electronic humidifier, the SCT3000(TM) that utilize single use heated and
non-heated wire breathing circuits as well as single use humidification
chambers. In addition to their use in respiratory care, these products also have
anesthesia applications.
Continuous Positive Airway Pressure ("CPAP") Systems. The Company's face
mask CPAP systems provide a less invasive and more comfortable way of providing
oxygen to certain patients than conventional ventilator-based systems. The
Company's face mask CPAP systems eliminate the need to insert an endotracheal
tube into the patient's trachea and attach the patient to a ventilator. The
Company believes that its CPAP systems generally represent a significant advance
in the treatment of Adult Respiratory Distress Syndrome (ARDS) and have been
found to be clinically effective in the treatment of certain traumatic chest
injuries postoperative atelectasis (collapse of the air sacs in the lungs and
other disease states). The system consists of a compact flow generator connected
to a dual-valved, air-filled cushion face mask. The face mask is attached to a
single-patient use PEEP (positive end expiratory pressure) valve designed to
maintain positive airway pressure in the lung, thus allowing for more oxygen to
diffuse into the patient's blood system.
MISTY Ox(R) Respiratory Products. The MistyOx (R) line consists of three
respiratory product lines that deliver hydration to a patient. The first is a
pre-filled bubble humidifier to deliver low flow and low concentration of oxygen
to patients, the second is a nebulizer to deliver medium to high flow and high
concentrations of oxygen to patients, and the third is the addition of a
regulated heater to the nebulizer. These products may be used on infants,
children and adults in many areas of the hospital, including emergency, recovery
and critical care.
VASCEZE(R) is a needleless, disposable, pre-filled vascular catheter flush
device used with IV sets in the homecare and hospital market. Vasceze(R) is a
one-piece design, manufactured using a "blow-fill-seal" process. Vasceze(R) is
filled with either sodium chloride or heparin solutions. The product is uniquely
designed to deliver a flush solution at pressures less than those of 10cc
syringe and other flush devices. The Company is in the process of expanding its
product offerings of the Vasceze(R) product line to accommodate systems that do
not use needles.
ACTAR(R) and INFANTRY(R) CPR Training Manikins. The Company manufactures a
product line of patented cardiopulmonary resuscitation ("CPR") training
manikins. ACTAR(R) manikins are made from four basic components -- a head, chest
plate, compression piston and disposable lung. The Company also sells the
INFANTRY(R) infant-size CPR training manikins. While maintaining the necessary
features and anatomical landmarks for CPR practices, ACTAR(R) and INFANTRY(R)
manikins are far smaller and less expensive than full size manikins typically
used for CPR training. The smaller size and affordable pricing enable each
person in a CPR training class to practice with his or her own manikin, rather
than sharing a single demonstration model.
Broselow/Hinkle(TM) Pediatric Emergency System. The Broselow/Hinkle(TM)
pediatric emergency system is the product of extensive clinical efforts by James
Broselow, M.D., and Alan Hinkle, M.D., which takes advantage of the direct
correlation between a pediatric patient's body length and the proper size of
emergency supplies and correct drug dosages. This patented system, licensed to
the Company, consists of: a tape measure having eight color zones, a
corresponding series of color-coded single-patient use emergency kits or modules
and a nylon organizer bag custom-designed to hold all the supplies needed in
either a trauma, cardiac or respiratory pediatric emergency. With this system,
emergency room and EMS personnel can be confident that all the supplies
necessary to
6
manage a pediatric emergency are readily identified, available and organized in
a manner that minimizes reaction time. The Broselow/Hinkle(TM) pediatric
emergency system may also be sold to the pediatrician office market.
SLEEP THERAPY AND PERSONAL VENTILATION PRODUCTS:
The Breas product line includes the following:
PV100 Nasal CPAP. The PV100 is a nasal CPAP device used to treat patients
suffering from sleep disorders; most typically, obstructive sleep apnea ("OSA").
It delivers continuous positive airway pressure to patients in order to keep
their airway open during sleep. This treatment regime has proven to be an
effective method of caring for OSA patients.
PV102 CPAP. The PV102 produces continuous positive airway pressure with a
series of additional features not available in the PV100.
PV401 Bi-Level Ventilator. The PV400 series ventilator supports the
ventilation needs of patients suffering from, among other things, respiratory
insufficiency. Patients benefiting from the PV401/3 may include neuromuscular
weakened duchene's disease and paralysis, to name a few.
PV501 Ventilator. The PV501 is a fully functioning ventilator. This
life-sustaining device may be used on home ventilator patients as well as the
less acute, longer term vent patients that remain inside a hospital. This
ventilator is a cost effective alternative to the rather narrow range of
competitive products currently available in this field.
OEM AND OTHER ACTIVITIES:
Thomas Medical Products.
Thomas Medical Products, Inc. ("TMP") is an OEM manufacturer and contract
development organization which is driven by significant scientific, technical,
engineering, manufacturing and QA/Regulatory expertise in the disposable medical
device area. TMP manufactures devices which provide access primarily to the
vascular system by medical professionals and include products such as
introducers, sheaths, dilators, hemostasis valves and catheters. TMP's products
are sold primarily to other healthcare product providers to be used in their
product or as part of surgical kits. TMP sells to many of the major
cardiovascular and critical care device manufacturers.
Vital Pharma, Inc.
Vital Pharma, Inc. ("Vital Pharma") was acquired in January 1996. Vital
Pharma's principal focus is utilization of the Company's expertise in
blow-fill-seal technology for manufacturing the Vasceze(R) product line and for
third party contract packaging customers that require sterile packaging
(primarily pharmaceutical and medical device manufacturers).
The Validation Group, provides consulting services to companies engaged in
the manufacture of medical devices and pharmaceuticals, mainly in the area of
compliance with regulations promulgated by the Food and Drug Administration. The
Validation Group's employees includes a professional staff with extensive
knowledge and industry experience involving FDA manufacturing requirements.
Market Data
7
The following table sets forth, for each of the past three fiscal years,
the dollar amount and approximate percentage of net sales--continuing product
lines represented by the Company's anesthesia products, respiratory/critical
care products, and sleep therapy products:
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS
ANESTHESIA $ 61.0 46.8 $ 61.3 49.7 $ 56.2 54.2
RESPIRATORY/CRITICAL CARE 64.6 49.6 62.0 50.3 47.1 45.8
SLEEP THERAPY 4.7 3.6 -- -- -- --
====== ====== ====== ====== ====== ======
TOTAL $130.3 100% $123.3 100% $103.3 100%
====== ====== ====== ====== ====== ======
Sales, Marketing and Customers
The Company's sells its anesthesia and respiratory/critical care products
to hospitals in the United States through its own sales force. The Company also
uses national distributors, such as Cardinal, Owens & Minor and McKesson/General
Medical, approximate 32% of sales for fiscal 1999 to deliver the products to the
hospital.
In each of the fiscal years 1999, and 1998, one of the large national
distributors represented approximately 13% of net sales. The same customer
represented approximately 17% and 16% of outstanding accounts receivable at
September 30, 1999 and 1998 respectively.
The Company utilizes independent distributors in the United States and
internationally for its Actar(R) CPR training manikins and other emergency care
products.
8
As new products are developed which can be sold by the Company's sales
force, management educates and trains the sales force in the need, use,
application and advantages of the Company's products. The Company also holds
quarterly training sessions for all salespersons and conducts additional
training as it deems appropriate.
The Company's marketing staff, which works closely with its sales force,
collects and analyzes customer responses to new and existing products,
participates in the Company's product development program and assists in product
training. In addition, the Company's marketing staff develops and helps
implement various internal and external promotional activities.
As have other providers within the medical and healthcare industries, the
Company has been challenged with the rising purchasing power of buying groups
such as Premier Purchasing Partners, Novation, Tenet, Columbia Healthcare and
others. While the Company has been successful in signing an agreement with
Premier for a broad range of anesthesia products and certain
respiratory/critical care products, Tenet for both anesthesia and
respiratory/critical care products, Columbia for its ABG products and other
buying groups, no assurances can be given as to the Company's ability to secure
other contracts or as to the impact of such contracts on the Company.
International Sales
For the year ended September 30, 1999, international sales accounted for
approximately 17% of net sales as compared with approximately 12% during fiscal
1998 and approximately 10% during fiscal 1997.
Historically, the Company has sold its products in European and other
international markets through distributors. However, approximately five years
ago the Company sought expansion in Europe by establishing a direct sales
organization in the United Kingdom. The Company has 8 international sales
managers and has built a network of over 160 independent distributors to sell
the Company's anesthesia, respiratory, critical care and emergency products in
major international markets.
It is the Company's intention to augment the international sales effort
through strategic alliances wherever possible, although no assurance can be made
that any such alliances can be completed.
Research and Development
The Company regards the element of innovation in its product line to be an
essential part of its overall success. The principal focus of the Company's
research and development effort is to develop product solutions to problems
experienced by healthcare professionals. The Company's development activities
are directed toward expanding our product offering in anesthesia,
respiratory/critical care, emergency and sleep products. The principal activity
is new patentable products as well as improvements to existing products.
Moreover, the internal research and development ("R&D") staff maintains
collaborative relationships with external professionals.
During fiscal 1999, the Company completed and launched the Pocket Blue(TM),
(described above), CUFF-ABLE Plus(R) an antimicrobially treated single patient
blood pressure cuff and ASPIRATOR PLUS(TM), an arterial sampling syringe with an
improved method of venting the air out of the blood sample. Improvements to the
Company's Code Blue(TM) product and PEEP valves and Aspirator ABG products were
introduced as a result of internal development efforts.
Development continued during 1999 on VASCEZE(R). Although VASCEZE(R) was
commercially
9
available in 1999, the addition of a needleless valve compatible product was an
area of focus for the R&D team with sales roll out expected in 2000.
The R&D team also made progress during 1999 in the design of a pharyngeal
airway device intended to allow easy insertion without the use of a laryngoscope
blade. This project offers the Company the opportunity to market a product well
suited for their sale force call pattern, while facing a minimal number of
smaller existing competitors.
The Company expects to continue to rely in part on its internal staff and
on outside professionals to perform research and development in our focused
areas.. The Company's research and development expenses aggregated $3,869,000,
$5,715,000 and $5,810,000 respectively, for fiscal 1997, 1998 and 1999.
Medical Director
The Company utilizes Bernard Wetchler, M.D. as its Medical Director. Dr.
Wetchler is Clinical Professor of Anesthesiology at the University of Illinois
College of Medicine, as well as Vice President, World Federation of Societies of
Anaesthesiologists; and past President of: the American Society of
Anesthesiologists; the Society for Ambulatory Anesthesia; and the Illinois
Society of Anesthesiologists.
Product Liability Exposure
As with other healthcare product suppliers, the Company is exposed to
potential product liability resulting from the use of the Company's products.
The Company presently carries product liability insurance coverage which
generally protects the Company against claims of bodily injury or property
damage arising out of any products manufactured, sold or distributed by the
Company. If a product liability suit were filed and a judgment entered against
the Company or the Company entered into a settlement agreement, the business,
results of operations and financial condition of the Company could be materially
adversely affected if such judgment or settlement exceeded the limits of the
Company's coverage.
There can be no assurance that the Company's insurance will be sufficient
to cover product liability claims that could arise or that such coverage will
remain available to the Company on satisfactory terms, if at all.
Manufacturing and Quality Control
General
The Company's facilities in Totowa, New Jersey; Englewood, Colorado;
Burnsville, Minnesota and Malvern, Pennsylvania, are the principal manufacturing
locations for the Company's products, including anesthesia breathing circuits,
filters, blood pressure cuffs, infusables, ABG syringes, heated humidification
circuits, nebulizers, manual resuscitators and introducers.. The Company
performs extrusion, corrugation, molding, assembly, testing, packaging and
shipping in these locations. In some instances, plastic components incorporated
in certain products are molded to the Company's specifications by outside custom
injection molders who utilize molds that are designed and, in most instances,
owned by the Company. The Company's suppliers typically are presented with
written specifications to assure that components are manufactured in conformity
with the Company's design.
Given the ultimate use of many of the Company's products within the
operating room and critical care units of hospitals, the Company conducts
quality control testing in all of its facilities.
10
Substantially all such testing is subject to governmental regulation. Pursuant
to United States Food and Drug Administration ("FDA") regulations, the Company
is required to maintain records of all raw materials received and used in the
manufacturing process along with complete histories of all devices manufactured.
See "Regulation."
Significant Suppliers
In 1980, the Company acquired the rights to its air-filled cushion face
mask through a collaboration arrangement with Respironics, Inc. ("Respironics").
Face masks are used in a variety of the Company's circuits and are sold
individually to customers. The Company purchases its face masks from
Respironics, a single source which manufactures the face mask in the People's
Republic of China. The Company's supply agreement with Respironics requires
Respironics to supply air-filled cushion face masks of various specifications to
the Company on an exclusive basis for anesthesia purposes, and obligates the
Company to purchase all of its anesthesia face masks from Respironics as long as
Respironics is the low cost supplier. The Company has had a series of supply
agreements with Respironics for many years. The current supply agreement with
Respironics was renewed in 1999 to extend its term until 2006, with an
additional option to further extend the term of the agreement through 2011,
providing the Company with a secure supplier relationship on this key product.
If the supply of face masks from Respironics should be interrupted for any
reason, the Company would seek to find alternative suppliers of face masks. In
such event, the Company may experience disruption in its business. No assurance
can be given that, in the event of such an interruption or cessation, the
Company could, in fact, maintain its required supply of face masks in a quantity
and at a cost that would not have a material adverse effect on the business and
operating results of the Company. The Company's policy is to maintain a
sufficient stock of face masks to lessen the impact of any temporary production
or supply disruption.
Sales Backlog
The Company's objective is to ship all orders within relatively short time
frames.
Competition
The principal competitive factors in the Company's markets include
innovative product design, product quality, established customer relationships,
name recognition, distribution and price. The Company believes that its products
compete favorably with respect to these factors, although certain of the
Company's competitors may have greater financial and marketing resources or
broader product lines.
The Company's competitive environment can be characterized as fragmented,
often with many different companies competing with regard to a specific product.
As a result, the Company's competition varies from product to product but
includes a number of competitors with substantially greater resources. The
Company's primary competitors include SIMS Portex, Inc., a subsidiary of Smith
Industries, PLC (face masks, breathing circuits, resuscitators, nebulizers, ABG
kits, anesthesia kits and closed suction products), Baxter International Inc.,
(breathing circuits and anesthesia kits), King Systems (face masks and
anesthesia circuits), and Critikon, Inc. (blood pressure cuffs), Respironics,
Inc. (CPAP and ventilators), Resmed, Inc. (CPAP) and Mallinckrodt, Inc. (CPAP
and ventilators).
Regulation
11
As a manufacturer of medical devices, the Company is subject to regulation
by, among other governmental entities, the FDA and the corresponding agencies of
the states and foreign countries in which the Company sells its products. The
Company must comply with a variety of regulations, including the Quality System
Regulations ("QSR") of the FDA, and is subject to periodic inspections by the
FDA and applicable state and foreign agencies. Enforcement of QSR requirements
has increased significantly in recent years, and the FDA has publicly stated
that compliance would be more strictly scrutinized. If the FDA believes that its
regulations have not been fulfilled, it may invoke extensive enforcement powers.
Noncompliance with applicable requirements can result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure to receive
pre-market clearances or approvals, withdrawal of approvals and criminal
prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Medical devices are classified by the FDA into three classes that determine
the degree of regulatory control to which the manufacturer of the device is
subject. In general, Class I devices involve compliance with QSR requirements.
Class II devices are subject to the same controls as Class I and also may be
subject to specific controls (for example; design controls, performance
standards, post market surveillance, patient registries and FDA guidelines) and
can be subject to pre-market notification (510k"). Class III devices are those
devices for which pre-market approval ("PMA") (as distinct from pre-market
notification) is required before commercial marketing to assure the products'
safety and effectiveness.
To date, all of the Company's products are classified as either Class I or
Class II. Many new medical devices and some modifications to existing medical
devices, including most of the Company's products, are subject to a pre-market
notification process pursuant to Section 510(k) of the Federal Food, Drug and
Cosmetic Act. Further, current FDA enforcement policy prohibits the marketing of
approved or cleared medical devices for unapproved or uncleared uses. Products
which do not receive clearance through the FDA's 510(k) notification process are
subject to much lengthier and more complex PMA procedures.
No assurance can be given that the FDA or foreign regulatory agencies will
give on a timely basis, if at all, the requisite clearances or approvals for any
of the Company's medical devices which are under development. Moreover, after
clearance or approval is given, these agencies may withdraw clearances or
approvals or require the Company to change the device or its manufacturing
process or labeling, to supply additional proof of its safety and effectiveness
or to recall, repair, replace or refund the cost of the medical device, if it is
shown to be hazardous or defective. The process of obtaining clearances or
approvals to market products can be costly and time consuming and can delay the
marketing and sale of the Company's products.
Federal, state and foreign regulations regarding the manufacture and sale
of medical devices are subject to change. In the future, the Company cannot
predict what impact, if any, such changes might have on its business.
Over the past several years, the public and the federal government have
focused considerable attention on reforming the healthcare system in the United
States. The Clinton Administration pledged to bring about a reform of the
nation's healthcare system and, in September 1993, presented a plan for
healthcare reform. Included in the proposal were calls to control or reduce
public and private spending on healthcare, to reform the payment methodology for
healthcare goods and services by both the public (Medicare and Medicaid) and
private sectors, which could include overall limitations on federal spending for
healthcare benefits, and to provide universal access to healthcare. While the
political climate appears to have changed with respect to sweeping healthcare
reform, healthcare reforms on
12
an issue by issue basis are being enacted. No assurance can be given that any
such reforms will not have a material adverse effect on the Company. Any such
effect may be magnified by the advent of "managed care," which has rendered
sales to hospitals more cost sensitive.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, environmental protection
and fire hazard control. There can be no assurance that the Company will not be
required to incur significant expenses to comply with such laws and regulations
in the future.
Patents
At September 30, 1999, the Company owned or licensed 122 domestic and
foreign patents. The Company has filed certain patent applications and continues
its efforts to acquire and develop patented products. While the Company believes
that the ownership of patents is not critical to its ability to compete with
respect to most of the products in its product line, the Company has, however,
pursued patent protection when in the reasonable judgment of management such
efforts may tend to provide the Company with competitive advantages.
Employees
At September 30, 1999, the Company had 1,064 full-time employees and 24
part-time employees. The Company believe that its relations with its employees
are satisfactory.
Item 2. Properties
The Company's executive offices, principal manufacturing plant and
principal warehouse facilities are located in Totowa, New Jersey. These
facilities, consisting of approximately 154,000 square feet, are owned by the
Company. The Company also owns manufacturing, warehouse and office space in
Englewood, Colorado consisting of 88,000 square feet and also owns the facility
utilized by Vital Pharma consisting of 13,600 square feet in Riviera Beach,
Florida. The Company's other substantial facilities -- approximately 35,000
square feet in Burnsville, Minnesota; 26,000 square feet in Aurora, Colorado;
20,000 square feet in Malvern, Pennsylvania; and 18,000 square feet in Orange,
California -- are leased by the Company. The Company also leases office,
assembly and warehouse space in Riviera Beach, Florida, Conshohocken,
Pennsylvania and in Barnham, the United Kingdom. Breas currently leases
approximately 11,500 square feet in Molndal, Sweden, and expects to move during
2000 to a new facility of approximately 26,000 square feet being constructed on
land owned by Breas in Molndal, Sweden.
Item 3. Legal Proceedings
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
found that the Smith Industries patent to be 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 judgment of invalidity,
vacated the judgment 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 claims of the subject patent. On remand,
the U.S. District Court has received briefs from the parties as to what further
proceedings should occur and has referred the case to a federal magistrate to
conduct settlement discussions scheduled to be held in February 2000. The
Company continues to believe that its manual resuscitators do not infringe the
plaintiff's patent and will continue to vigorously defend the action.
13
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'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. In subsequent court hearings, both parties have filed additional briefs
as to whether or not the exhibit referred to by the Court proves infringement
and the Court has requested a response to plaintiff's proof of damages. 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.
In January 1999, an action was commended in the U.S. District Court for the
Southern District of Florida by a competitor of Vital Pharma, Inc. ("VPI"), a
Company subsidiary, for patent infringement and theft of trade secrets involving
blow-fill-seal technology. VPI filed an answer denying the complaint, asserted a
counterclaim that the plaintiff's patent is invalid, noninfringed and
unenforceable, and requested an award of costs and attorneys fees. In May 1999,
the Court denied the plaintiff's motion to strike VPI's claims of inequitable
conduct in view of VPI's amended answer and counterclaim. Pretrial discovery was
commenced, but the parties have agreed to temporarily stay the proceedings to
discuss possible settlement.
In March 1999, VPI commenced an action in the same Court against the
plaintiff's sister company seeking a declaratory judgment that five other
blow-fill-seal patents are invalid, non infringed and unenforceable and
requesting an award of costs and attorneys fees. In April 1999, the defendant
made a motion to dismiss VPI's complaint claiming the Court lacked personal
jurisdiction over the defendants and VPI submitted its opposition to the motion.
In April 1999, the Court transferred this action to the judge handling the
action referenced above. The parties have agreed to temporarily stay the
proceedings to discuss possible settlement. The Company will continue to
vigorously defend such action, and will continue to pursue the Company's claims
against the competitor in the companion action if a settlement is not reached.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
Item 4A. Executive Officers of the Registrant
The Company's executive officers are as follows:
NAME AGE* POSITIONS WITH THE COMPANY
Terence D. Wall 58 President, Chief Executive Officer and
Director
Anthony J. Dimun 56 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Dennis Fenstermaker 53 Vice President - Manufacturing
Christian Malmqvist 48 Vice President - International Operations
Daniel L. Reuvers 36 Vice President - Marketing and Group Sales
Scott L. Spitzer 48 Vice President, General Counsel and Secretary
Barry Wicker 59 Executive Vice President -Sales and Director
* As of September 30, 1999.
Terence D. Wall founded the Company in 1972 and has been President, Chief
Executive Officer and a director of the Company since that time. He has also
invested in and serves on the Board of Directors of certain healthcare
businesses, including Bionx Implants, Inc., a manufacturer of bioabsorbable
medical devices for orthopedic and other applications ("Bionx"). He received a
Bachelor of Science degree in 1963 from the University of Maryland and a Master
of Business Administration degree from Pace University in 1975. For the
foreseeable future, the Company will remain dependent upon the efforts of Mr.
Wall. The Company does not maintain key man life insurance on Mr. Wall's life.
Anthony J. Dimun, a certified public accountant, has been a director of the
Company since August 1987. On March 1, 1991, Mr. Dimun became an Executive Vice
President and the Chief Financial Officer of the Company and on March 1, 1991 he
became the Treasurer of the Company. Mr. Dimun is also a shareholder and Board
member of EchoCath, Inc. and Bionx Implants, Inc. From July 1989 through
February 1991, he served as Senior Vice President of First Atlantic Capital
Ltd., a United States affiliate of an international merchant banking group. From
1978 until August 1987, he was a partner in the accounting firm of Goldstein
Golub Kessler LLP, which has examined the Company's financial statements for
more than the past five years. He served as a senior audit manager with Ernst &
Whinney (a predecessor of Ernst & Young) prior to joining Goldstein Golub
Kessler LLP, in 1976. He received a Bachelor of Science degree from Rider
University in 1965.
Dennis Fenstermaker joined the Company in June 1992 as Director of
Manufacturing and became Vice President --Manufacturing and General Manager in
October 1993. Prior to joining the Company, he held various manufacturing and
engineering management positions with Sterling Drug Inc. (a pharmaceutical
manufacturer and distributor) for more than ten years, including Director of
Engineering Services and Plant Manager, and with Johnson & Johnson (a
manufacturer and distributor of healthcare products) for more than ten years.
Mr. Fenstermaker earned a Bachelor of Science degree in Commerce and Engineering
Sciences from Drexel University in 1969 and a Master of Business Administration
degree from Rider University in 1973.
15
Christian Malmqvist joined the Company in July, 1995 as Vice President
International Operations. Prior to joining the Company he held various sales and
marketing positions with Ohmeda, Inc., a healthcare supplier serving the
anesthesia and critical care fields, during a 17 year tenure. Mr. Malmqvist has
a masters degree in Business Administration from Stockholm University and a
Bachelor's degree in Business Administration from Lund University (Sweden).
Dan Reuvers joined the Company in 1987. He has served virtually all sales
related functions over the last 12 years, including Vice President of Sales and
his current position of Vice President of Marketing and Group Sales. In addition
to his experience at Vital Signs, Mr. Reuvers previously served as Director of
Sales for a start-up respiratory equipment company.
Scott Spitzer joined the Company in 1998 as Vice President and General
Counsel. On March 3, 1999, Mr. Spitzer became the Secretary of the Company.
Prior to joining the Company, he has held legal positions for 22 years including
as Senior Director and Senior Counsel of United States Surgical Corporation from
1991 to 1998; Vice President, General Counsel and Secretary of Balfour Maclaine
Corporation (an American Stock Exchange listed trading company); Assistant Vice
President of First Boston Corporation (an investment banking company); and
Senior Attorney at the American Stock Exchange. Mr. Spitzer graduated Magna Cum
Laude with a Bachelor of Arts degree in Government and Law from Lafayette
College in 1973, received a masters degree from the Cornell University Graduate
School of Business and Public Administration in 1976 and received a law degree
from the Cornell University Law School in 1977.
Barry Wicker has served as a director and an Executive Vice President of
the Company since 1985 (with primary responsibility for sales and marketing).
Mr. Wicker joined the Company in 1978 as National Sales Manager and became Vice
President - Sales in 1981. Prior to joining the Company, he held various
marketing and sales positions with The Foregger Co. over a 20 year period.
Each of the Company's executive officers serves as such at the pleasure of
the Board.
16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock (the "Common Stock") is traded in the
over-the-counter market and quoted on the National Market System of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). The
following table sets forth the high and low closing sales prices of the Common
Stock on the NASDAQ National Market System, and the cash dividends declared per
share of Common Stock for the periods indicated:
DIVIDEND PER
HIGH LOW SHARE
Fiscal Year Ended September 30, 1998:
Quarter ended December 31, 1997 $21 $17 1/4 $.04
Quarter ended March 31, 1998 22 5/8 18 1/16 .04
Quarter ended June 30, 1998 22 1/8 16 5/18 .04
Quarter ended September 30,1998 20 1/2 15 1/4 .04
Fiscal Year Ended September 30, 1999:
Quarter ended December 31, 1998: $17 1/2 $14 1/2 $.04
Quarter ended March 31, 1999 20 17 1/8 .04
Quarter ended June 30, 1999 21 1/2 17 1/4 .04
Quarter ended September 30,1999 22 1/8 19 .04
As of September 30, 1999, there were approximately 444 holders of record of
the Common Stock.
During Fiscal 1999, the Company declared and paid cash dividends of $.16
per share. Payment of cash dividends in the future will depend upon the
financial condition, capital requirements, loan agreement restrictions and
earnings of the Company, as well as such other factors as the Board of Directors
may deem relevant.
Item 6. Selected Financial Data
The following selected consolidated financial data have been derived from
the Company's audited consolidated financial statements. The information below
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K.
Certain acquisitions occurring on or before September 30, 1998, including
Marquest Medical Products, Inc. (effective for financial reporting purposes on
April 1, 1997), Vital Pharma, Inc. (formerly known as HealthStar Pharmaceutical
Services, Inc.) (acquired in January 1996), Misty Ox (acquired in December
1995), and Coast Medical, Inc. (acquired in October 1995), have been accounted
for as purchases and, accordingly, are only reflected herein for dates and
periods on and after the respective dates noted above. See Note 2 of the
Company's Consolidated Financial Statements.
17
VITAL SIGNS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales--continuing product lines $130,304 $123,335 $103,271 $ 89,539 $ 87,651
Net sales - product line disposed (1) -- -- -- 808 1,902
Cost of goods sold 63,938 60,288 48,610 38,035 38,279
-------- -------- -------- -------- --------
Gross profit 66,366 63,047 54,661 52,312 51,274
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative 33,258 36,513 27,186 23,491 23,629
Research and development 5,810 5,715 3,869 3,595 3,865
Interest (income) (500) (893) (2,242) (2,508) (2,406)
Interest expense 377 399 537 346 382
Special charges -- 1,100 6,700 -- --
Other (income) expense (Notes 1, 10 and 457 815 844 (1,635) 162
Goodwill amortization 796 700 862 643 354
-------- -------- -------- -------- --------
40,198 44,349 37,756 23,932 25,986
-------- -------- -------- -------- --------
Income before provision for income taxes and
minority interest in income of 26,168 18,698 16,905 28,380 25,288
consolidated subsidiary
Provision for income taxes 8,012 5,698 5,619 9,591 9,154
-------- -------- -------- -------- --------
Income before minority interest in income of
consolidated subsidiary (see Note 7) 18,156 13,000 11,286 18,789 16,134
Minority interest in income of consolidated
subsidiary 220 -- -- -- --
-------- -------- -------- -------- --------
Income from continuing operations 17,936 13,000 11,286 18,789 16,134
-------- -------- -------- -------- --------
Discontinued Operations (Note 1):
Income (loss) from operations of Vital
Pharma Machine Division (net of
income taxes of ($265), $59 respectively (590) 135 -- -- --
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principal 17,346 13,135 11,286 18,789 16,134
-------- -------- -------- -------- --------
Cumulative effect of change in accounting
principle (net of income taxes of $803)
(Note 1) -- 1,524 -- -- --
-------- -------- -------- -------- --------
Net Income $ 17,346 $ 11,611 $ 11,286 $ 18,789 $ 16,134
======== ======== ======== ======== ========
Earnings per Common Share:
Basic income per share from continuing operations $ 1.46 $ 1.03 $ .88 $ 1.44 $ 1.24
======== ======== ======== ======== ========
Diluted income per share from continuing operations $ 1.46 $ 1.02 $ .87 $ 1.43 $ 1.24
======== ======== ======== ======== ========
Cumulative effect of discontinued operations per share $ (.04) $ .01 $ -- $ -- $ --
======== ======== ======== ======== ========
Cumulative effect of change in accounting
principle per share $ -- $ (.12) $ -- $ -- $ --
======== ======== ======== ======== ========
Basic net income per share $ 1.42 $ .92 $ .88 $ 1.44 $ 1.24
======== ======== ======== ======== ========
Diluted net income per share $ 1.41 $ .91 $ .87 $ 1.43 $ 1.24
======== ======== ======== ======== ========
Basic weighted average number of shares 12,250 12,665 12,881 13,045 12,991
======== ======== ======== ======== ========
Diluted weighted average number of shares 12,325 12,746 12,953 13,146 13,053
======== ======== ======== ======== ========
- ----------
1 The Company disposed of its endoscopic product line during Fiscal 1996 and has
reflected net sales of that product line as a separate line item in the table
set forth above.
18
-----------------------------------------------------------
SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
Balance Sheet Data:
Working capital: $ 41,791 $ 35,579 $ 38,102 (2) $ 44,820 $32,885 (3)
Total assets 157,310 138,186 136,948 123,756 110,421
Long-term debt, excluding current installments 2,179 2,462 5,529 2,700 3,200
Total stockholders' equity 131,240 121,310 112,229 110,239 92,645
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following table sets forth, for the periods indicated, the percentage
increase or decrease of certain items included in the Company's consolidated
statements of income.
INCREASE (DECREASE) FROM
PREVIOUS YEAR
----------------------------
FISCAL 1999 FISCAL 1998
COMPARED WITH COMPARED WITH
FISCAL 1998 FISCAL 1997
----------------------------
Net sales 5.7% 19.4%
Cost of goods sold 6.1% 24.0%
Gross profit 5.3% 15.3%
Selling, general and administrative expenses (8.9%) 34.3%
Research and development expenses 1.7% 47.7%
Income from continuing operations before
provision for income taxes and minority
interest in income of consolidated subsidiary 40.0% 10.6%
Provision for income taxes 40.6% 1.4%
Net income 49.4% 2.9%
Fiscal 1999 Compared to Fiscal 1998
Net sales for the year ended September 30, 1999 increased by 5.7% compared
with the same period last year. The increase was largely attributable to
sleep/ventilators product line resulting from the acquisition of a controlling
interest in Breas AB, 1.0% increase in respiratory/critical care products, and
an 11.5% increase at Thomas Medical Products, Inc. ("TMP").
- ----------
2 The decrease in working capital and increase in long-term debt in Fiscal 1997
is due primarily to the acquisition of Marquest Medical Products, Inc. and the
acquisition of shares pursuant to a previously announced stock buyback.
3 The reduction in working capital in Fiscal 1995 is primarily attributable to
certain marketable securities which are not classified as current assets.
19
While net sales increased by 5.7%, gross profit increased by 5.3% in
absolute dollar amount. The discrepancy between the increase in sales and the
increase in gross profit is primarily due to higher margin products resulting
from the acquisition of Breas. The effect of the sales price pressures was
offset primarily by the Company's cost reduction program. On a consolidated
basis the Company's gross profit percentage for the year ended September 30,
1999 was 50.9% compared to 51.1% in the same time period of the last fiscal
year.
Selling, general and administrative expenses (S, G & A) decreased by
$3,255,000 primarily due to the realignment of the Company's sales force from
182 to 90 sales personnel, representing a reduction in sales expenses of
$5,372,000 for the year ended September, 1999 offset by $1,765,000 of S, G, & A
expense reported by Breas AB for the four months included in the year ended
September, 1999.
Research and development expenses ("R&D") increased 1.7%, largely due to
the continued effort to expand the VASCEZE(R) product line and the R & D efforts
of Breas AB. The Company continues to make an active commitment to new product
development.
Other expense, which includes dividend income, realized capital gains and
losses, legal and other expenses related to non-operational items, decreased by
$358,000 from the year ended September 30, 1998 to the year ended September 30,
1999 due to lower litigation expenses in 1999.
In the fourth quarter of 1999, the Company made a decision to divest the
Blow-Fill-Seal machine fabrication business within the Vital Pharma operation
resulting in a loss of $.04 per share in 1999.
The Company's effective tax rates were 30.6% and 30.5% for the years ended
September 30, 1999 and 1998 respectively. The rate for the year ended September
30, 1999 is less than the federal and state statutory rates due to the
utilization of deductions for tax return purposes which do not effect book
earnings.
For information regarding a change in accounting principle in 1998, see
Note 1 of the Notes to the Company's Consolidated Financial Statements.
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended September 30, 1998 increased by 19.4% compared
with the same period last year. The increase was attributable to an 11.6%
increase in anesthesia products, a 19.9% increase in respiratory products,
primarily due to the acquisition of Marquest Medical Products, Inc.
("Marquest").
While net sales increased by 19.4%, gross profit increased by 24.0% in
absolute dollar amount. The discrepancy between the increase in sales and the
increase in gross profit is the result of higher sales of certain products with
gross margins below the Company's average gross margin (primarily sales of
Marquest products and the increase in activity at VPI). The effect of the sales
price pressures resulted in a decline in gross margins. On a consolidated basis
the Company's gross profit percentage for the year ended September 30, 1998 was
51.1% compared to 52.9% in 1997.
Selling, general and administrative expenses increased by 34.3% in dollar
amount, as the result of the acquisition of Marquest, increases in costs to
support international sales growth, the increased activity at VPI and an
increase in the Company's domestic sales force. The domestic sales force was
20
doubled in late fiscal 1997 to take advantage of the respiratory product lines
acquired in the Marquest Medical Products acquisition and to increase
participation in dual source group purchasing contracts. While the two primary
objectives were met in the first half of 1998, the cost of maintaining the
second sales force (approximately $5.7 million in 1998) was no longer justified
from financial perspective. Accordingly, in the third quarter of fiscal 1998,
the Company decided to reduce the sales force to slightly above its early 1997
level and took a one-time charge of $1,100,000 to cover the costs associated
with the reduction.
R & D increased 47.7%, largely due to an expanded effort to complete the
Vasceze(R) and Isocath(R) product lines.
Other income/expense, which includes dividend income, realized capital
gains and losses, legal and other expenses related to non-operational items,
decreased by $28,000 from the year ended September 30, 1997 to the year ended
September 30, 1998. In the 1997 period the Company realized net capital gains on
marketable securities of $698,000 offset by approximately $1,800,000 of legal
expenses in conjunction with the successful defense of a patent infringement
lawsuit which impacted other income/expense adversely. In the 1998 period, the
reduced litigation costs were offset by negligible capital gains. For a further
discussion of this legal action see Part I, Item 3.
The Company's effective tax rates were 30.5% and 33.2% for the years ended
September 30, 1998 and 1997 respectively. The rate for the year ended September
30, 1998 is less than the federal and state statutory rates due to product
contributions and a tax credit for research and development. The tax rate for
the year ended September 30, 1997 is less than the combined federal and state
statutory rates primarily as a result of the utilization of capital loss carry
forwards. The Company's effective tax rate is expected to be somewhat higher in
fiscal 1999 than the fiscal 1998 rate.
For information regarding a change in accounting principle in 1998, see
Note 1 of the Notes to the Company's Consolidated Financial Statements.
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations as well as
the funds remaining from its initial and second public offerings. During the
year ended September 30, 1999, cash and cash equivalents and short-term
marketable securities increased by $1,898,000 and long-term marketable
securities and other investments decreased by $6,733,000. Capital expenditures
of $7,533,000 were made to improve efficiencies and support new business
opportunities. Approximately $13 million ($5,500,000 during the year ended
September 30, 1999) was expended to acquire Breas AB. In addition, $5,493,000 of
treasury stock was acquired pursuant to a previously announced buy-back plan,
and the Company paid $1,975,000 of dividends during Fiscal 1999. The combined
total of cash and cash equivalents, short-term marketable securities was
$7,222,000 and together with other long-term investments aggregated $17,661,000
at September 30, 1999 as compared to $22,496,000 at September 30, 1998.
The Company manages its cash flow by investing in marketable securities
and, from time to time, supplementing its portfolio by making investments in
privately held healthcare companies. The aggregate investment in long term
marketable securities and other investments as of September 30, 1999 was
$11,006,000 (see Note 5 to the Company's Consolidated Financial Statements).
At September 30, 1999, the Company had $6.7 million in cash and cash
equivalents. On that
21
date, the Company's working capital was $41.8 million and the current ratio was
3.7 to 1, as compared to 4.5 to 1 at September 30, 1998.
The Company's current policy is to retain working capital and earnings for
use in its business, subject to the payment of certain cash dividends and
treasury stock repurchases. Such funds may be used for product development, and
product 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"). The outstanding amount on this line of credit was $4,850,000 at
September 30, 1999. 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.
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 differ significantly from recent experience or adverse events affect the
Company's operations.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs written with two
digits (rather than four) to define the applicable year. A computer program
written in that manner would recognize the entry of "00" in a date field as
referring to the year 1900 and not the year 2000. An error of this type could
result in various types of miscalculations, systems failures and business
process interruption. This issue is not unique to the Company and is sometimes
known as "Y2K", Year 2000 or the millennium bug (collectively, "Y2K issues").
The Company has examined its products and systems to assess and minimize
what problems may be encountered with regard to the Y2K issues and the Company's
ability to transact business without interruption. The Company's primary focus
on Y2K issues is to assure the ability to continue to provide safe and effective
products to its customers and end users. A technical review of the Company's
product lines addressing Y2K issues has been completed. None of the Company's
single use products are affected by Y2K issues because their components do not
include any form of microprocessor or clock. In order to determine the potential
impact of Y2K issues on the Company's products, the Company has inquired of its
suppliers or subcontractors, as appropriate, to obtain an understanding that
products will not be affected by Y2K issues. Most of these companies have been
aware of this problem for several years and have advised that they have been
working to prevent disruption in the goods and service they provide to
customers.
The Company has not developed a formal contingency plan for addressing
problems resulting from vendors and suppliers of goods and services who are not
Year 2000 compliant. However, based upon the Company's Y2K issues compliance
investigations, the Company believes that as to most of the raw materials,
supplies and services used in its business, alternative means of supply would be
available to the extent a supplier or vendor was unable to continue to provide
such materials, supplies or services due to Y2K issues. Notwithstanding the
foregoing, if the supply of face masks from Respironics, Inc. were interrupted
as a result of Y2K issues (including, without limitation, Y2K issues
22
relating to common carriers in transporting face masks from the place of
manufacture in China), no assurance can be given that the Company could maintain
the required supply of face masks in the quantity and at a cost that would not
have a material adverse effect on the Company's business, including sale of
compatible products. The Company will continue its communication with its
suppliers including Respironics to address adverse consequence of Y2K issues.
However, no assurance can be given and the Company's policy is to maintain a
sufficient inventory of face masks to lessen the impact of temporary
interruptions.
The Company began a process of upgrading its computer software
approximately three years ago. While this effort was not undertaken in order to
address Y2K issues, the need to upgrade the software occurred contemporaneously
with an increased awareness of Y2K issues. The hardware and software components
purchased or licensed by the Company in connection with the upgrade of the
computer software were analyzed for Y2K issues compliance. The Company's
software upgrade became fully operational during the fourth quarter of calendar
year 1999. Because the upgrade of the computer software was to address increases
in volume, number of users and unsupported software, the Company has not
ascribed any of these computer costs to Y2K issues compliance, but as capital
expenditures made in the ordinary course of business.
Several of the Company's in-house manufacturing lines used to manufacture
raw materials into component parts are controlled by equipment incorporating
microprocessors. The Company also has certain other operating equipment which
incorporate microprocessors. The Company has made inquiry of manufacturers and
providers of certain key equipment and device contract companies and is
upgrading certain equipment. The Company believes that the costs to upgrade such
equipment are not expected to be material to the Company and that such other
equipment material to the Company's operations will not be materially effected
by Y2K issues.
THE ESTIMATES AND CONCLUSIONS HEREIN WITH RESPECT TO Y2K ISSUES ARE
FORWARD-LOOKING STATEMENTS UNDER THE REFORM ACT AND ARE BASED ON MANAGEMENT'S
BEST ESTIMATES OF FUTURE EVENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
COMPANY'S ESTIMATES AND CONCLUSIONS AS A RESULT OF A NUMBER OF FACTORS INCLUDING
THE AVAILABILITY OF RESOURCES, THE ABILITY TO DISCOVER AND CORRECT THE POTENTIAL
Y2K SENSITIVE ISSUES WHICH COULD HAVE A SERIOUS IMPACT ON CERTAIN OPERATIONS,
AND THE ABILITY OF THE COMPANY'S VENDORS, SUPPLIERS, PROVIDERS OF GOODS AND
SERVICES, THE UTILITY INFRASTRUCTURE (POWER, TRANSPORT, TELECOMMUNICATIONS) AND
CUSTOMERS TO BRING THEIR SYSTEMS INTO Y2K ISSUES COMPLIANCE.
23
ITEM 7A. 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.
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
discussed above in Item 1, 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.
The Company's marketable securities and other investments are subject to a
variety of market risks, including interest rates for U.S. Government and
federal mortgage obligations, and operating and a wide variety of other business
risks of corporate obligations. The Company's other investments in healthcare
companies are subject to the wide variety of business risks to which those
companies are subject, including generally all of those to which the Company is
subject, and the lack of liquidity due to the fact that the investments are in
non-public companies. The Company's policy is to diversify its debt investments
among U.S. government obligations, corporate obligations and federal mortgage
obligations and to further diversify such portfolio by utilizing a lattered
portfolio of maturities for such instruments. This portion of the Company's
portfolio primarily matures over the next 5 years (See Note 5 to the Company's
Consolidated Financial Statements). It is also the Company's policy to limit and
monitor the market risks exposure to its other investments.
24
Item 8. Financial Statements and Supplementary Data
The following audited consolidated financial statements and related report
are set forth in this Annual Report on the following pages:
PAGE
Independent Auditor's Report F-1
Consolidated Balance sheet as of September 30 1999 and 1998 F-2
Consolidated Statement of Income for the years ended
September 30, 1999, 1998 and 1997 F-3
Consolidated Statement of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997 F-4
Consolidated Statement of Cash flows for the years ended
September 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have audited the accompanying consolidated balance sheets of Vital Signs,
Inc. and Subsidiaries as of September 30, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vital Signs, Inc.
and Subsidiaries as of September 30, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 of notes to the consolidated financial statements, in
1998 the Company changed its method of accounting for sales rebates.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
November 12, 1999
F-1
See notes to consolidated financial statements
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
SEPTEMBER
1999 1998
(IN THOUSANDS)
Current Assets:
Cash and cash equivalents (Note 1) $ 6,655 $ 2,600
Marketable securities (Notes 1 and 5) -- 2,157
Accounts receivable, less allowance for doubtful accounts of
$244 and $638, respectively (Notes 16 and 17) 21,153 17,837
Inventory (Notes 1 and 3) 23,892 19,322
Prepaid expenses and other current assets (Note 4) 5,416 3,903
--------- ---------
Total current assets 57,116 45,819
Property, plant and equipment - net (Notes 1 and 6) 45,960 41,009
Other investments and marketable securities (Notes 1 and 5) 11,006 17,739
Goodwill and other intangible assets (Notes 1 and 2) 34,978 25,495
Deferred income taxes (Notes 1 and 14) 1,478 1,918
Other assets 6,772 6,206
--------- ---------
Total Assets $ 157,310 $ 138,186
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 5,629 5,462
Current portion of long-term debt (Note 7) 423 1,022
Accrued expenses (Note 8) 4,423 3,756
Notes payable - bank (Note 7) 4,850 --
--------- ---------
Total current liabilities 15,325 10,240
Long-term debt (Note 7) 2,179 2,462
Other liabilities (Note 9) 4,827 4,174
--------- ---------
Total Liabilities 22,331 16,876
--------- ---------
Minority interest in subsidiary 3,739 --
--------- ---------
Commitments and contingencies (Notes 2, 11 and 12)
Stockholders' Equity (Note 13)
Common stock - no par value; authorized 40,000,000
shares, issued and outstanding 12,295,162, and 12,628,194
shares respectively, 16,095 21,520
Accumulated other comprehensive income (Loss) (Notes 1 and 5) (2) 14
Retained earnings 115,147 99,776
--------- ---------
Stockholders' equity 131,240 121,310
--------- ---------
Total Liabilities and Stockholders' Equity $ 157,310 $ 138,186
========= =========
See notes to consolidated financial statements
F-2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales-continuing product lines (Notes 1, 16 and 17) $ 130,304 $ 123,335 $ 103,271
Cost of goods sold 63,938 60,288 48,610
--------- --------- ---------
Gross profit 66,366 63,047 54,661
--------- --------- ---------
Operating expenses:
Selling, general and administrative 33,258 36,513 27,186
Research and development 5,810 5,715 3,869
Interest income (500) (893) (2,242)
Interest expense 377 399 537
Special charges (Note 2) -- 1,100 6,700
Other expense-net (Notes 1 and 10) 457 815 844
Goodwill amortization 796 700 862
--------- --------- ---------
40,198 44,349 37,756
--------- --------- ---------
Income before provision for income taxes and minority interest in
income of consolidated subsidiary 26,168 18,698 16,905
Provision for income taxes 8,012 5,698 5,619
--------- --------- ---------
Income before minority interest in
income of consolidated subsidiary 18,156 13,000 11,286
Minority interest in income of consolidated subsidiary 220 -- --
--------- --------- ---------
Income from continuing operations 17,936 13,000 11,286
--------- --------- ---------
Discontinued Operations (Note 2):
Income (loss) from operations of Vital Pharma Machine
Division (net of income taxes (benefit) of ($265),
$59 respectively) (590) 135 --
--------- --------- ---------
Income before cumulative effect of change in accounting
principle 17,346 13,135 11,286
--------- --------- ---------
Cumulative effect of change in accounting principle (net of
income taxes of $803) (Note 1) -- (1,524) --
--------- --------- ---------
Net income $ 17,346 $ 11,611 $ 11,286
========= ========= =========
Earnings per Common Share:
Basic income per share from continuing operations $ 1.46 $ 1.03 $ .88
========= ========= =========
Diluted income per share from continuing operations $ 1.46 $ 1.02 $ .87
========= ========= =========
Discontinued operations per share $ (.04) $ .01 $ --
========= ========= =========
Cumulative effect of change in accounting principle per share $ -- $ (.12) $ --
========= ========= =========
Basic net income per share $ 1.42 $ .92 $ .88
========= ========= =========
Diluted net income per share $ 1.41 $ .91 $ .87
========= ========= =========
Basic weighted average number of shares outstanding 12,250 12,665 12,881
========= ========= =========
Diluted weighted average number of shares outstanding 12,325 12,746 12,953
========= ========= =========
Unaudited Pro Forma Information (assuming the change in
accounting principle was applied retroactively) (Note 1):
Income from continuing operations $ 12,741 $ 11,172
========= =========
Net income $ 12,876 $ 11,172
========= =========
See notes to consolidated financial statements
F-3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER RETAINED COMPREHENSIVE
COMPEHENSIVE EARNINGS STOCKHOLDERS' INCOME
SHARES AMOUNT INCOME (LOSS) EQUITY
-----------------------------------------------------------------------------------
Balance at September 30, 1996: 13,062,701 $ 29,666 $ (426) $ 80,999 $ 110,239
Net income 11,286 11,286 $ 11,286
Purchase of common stock, net of
reissuance (410,689) (7,788) 6 (7,782)
Exercise of stock options 22,661 271 271
Adjustment for aggregate
unrealized gain on
marketable securities 297 297 297
Dividends paid ($.16 per share) (2,082) (2,082)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income 11,583
==========
Balance at September 30, 1997: 12,674,673 22,149 (129) 90,209 112,229
Net income 11,611 11,611 11,611
Purchase of common stock, net of
reissuance (48,749) (656) (656)
Exercise of stock options 2,270 27 27
Adjustment for aggregate unrealized gain on
marketable securities 143 143 143
Dividends paid ($.16 per share) (2,044) (2,044)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income 11,754
==========
Balance at September 30,1998 12,628,194 21,520 14 99,776 121,310
Net income 17,346 17,346 17,346
Purchase of common stock, net of
reissuance (341,057) (5,822) (5,822)
Exercise of stock options 8,025 68 68
Adjustment for aggregate
unrealized loss on
marketable securities (16) (16) (16)
Dividends paid ($.16 per share) (1,975) (1,975)
Tax benefit from employees' and
directors' stock option plans
(Note 14) -- 329 -- -- 329
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income $ 17,330
==========
Balance at September 30, 1999: 12,295,162 $ 16,095 $ (2) $ 115,147 $ 131,240
========== ========== ========== ========== ==========
See notes to consolidated financial statements
F-4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
---------------------------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 17,346 $ 11,611 $ 11,286
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,726 3,436 2,891
Deferred income taxes 431 (116) (1,628)
Minority interest in income of consolidated subsidiary 220
Amortization of goodwill 796 700 862
Amortization of deferred credit (91) (100) (100)
Net (gain) loss on sales of available-for-sale securities 16 (42) (698)
Net gain on sale of fixed assets -- -- (27)
Write-off of purchased research and development -- -- 2,500
Plant consolidation special charge -- -- 4,200
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,005) (1,432) 82
(Increase) decrease in inventory (2,466) 37 (3,738)
(Increase) decrease in prepaid expenses and other current assets 531 7,622 (2,069)
Increase in other assets (566) (1,651) (841)
Decrease in accounts payable and accrued expenses (541) (4,121) (495)
-------- -------- --------
Net cash provided by operating activities 18,397 15,944 12,225
-------- -------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (7,533) (10,620) (9,988)
Sale of property, plant and equipment -- -- 543
Purchases of other investments and available-for-sale securities (6,368) (15,910) (57,165)
Proceeds from sales of available-for-sale securities 6,195 14,830 68,318
Acquisition of subsidiaries, net of $2,344 of cash
acquired (1999), $3,200 of cash acquired (1997) (3,204) -- (16,791)
-------- -------- --------
Net cash used in investing activities (10,910) (11,700) (15,083)
-------- -------- --------
Cash flows from financing activities:
Dividends paid (1,975) (2,044) (2,082)
(Purchase) reissuance of common stock (5,493) (656) (7,782)
Proceeds from exercise of stock options 68 27 271
Increase in short-term notes payable 4,850 -- --
Increase in long-term debt and notes payable -- -- 8,282
Principal payments of long-term debt and notes payable (882) (2,656) (9,893)
-------- -------- --------
Net cash used in financing activities (3,432) (5,329) (11,204)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,055 (1,085) (14,062)
Cash and cash equivalents at beginning of year 2,600 3,685 17,747
-------- -------- --------
Cash and cash equivalents at end of year $ 6,655 $ 2,600 $ 3,685
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 421 $ 378 $ 379
Income taxes $ 6,264 $ 1,781 $ 9,660
Supplemental schedule of noncash investing activities:
Accrued amounts relating to purchase of subsidiaries $ 0 $ 0 $ 100
Forgiveness of note receivable as payment for purchase
of subsidiary $ 0 $ 0 $ 67
See notes to consolidated financial statements
F-5
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies and Principal Business
Activities:
Business Activities:
Vital Signs, Inc. ("VSI") and its subsidiaries (collectively the "Company")
design, manufacture and market single-patient use products for the anesthesia,
respiratory, critical care and emergency markets.
Principles of Consolidation:
The consolidated financial statements include the accounts of VSI and its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Inventory:
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Depreciation:
Depreciation and amortization of property, plant and equipment is provided
for by the straight-line method over the estimated useful lives of the related
assets.
Income Taxes:
Income taxes are based upon amounts included in the consolidated statement
of income. Deferred income taxes result from differences between the time
certain expenses are recognized for financial reporting purposes and the time
when the items are actually reported for income tax purposes.
Revenue Recognition:
Revenue from sales of products is recognized at the date of shipment to
customers.
Goodwill and Other Intangible Assets:
Goodwill and other intangible assets arising from business acquisitions
accounted for under the purchase method are amortized over periods up to 40
years using the straight-line method.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company believes
it is not exposed to any significant credit risk with respect to its highly
liquid investments in money market securities and its commercial banking
facilities.
Net Income per Share of Common Stock:
The Company adopted Statement of Financial Accounting Standards ("SFAS")No.
128, Earning Per Share, beginning with the quarter ended December 31, 1997.
Earnings per share data for the year ended September 30, 1997 has been restated
to conform to the provisions of this
F-6
statement. Basic earnings per common share is computed using the weighted-
average number of shares outstanding. Diluted earnings per common share is
computed using the weighted- average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options and warrants to
purchase common stock. Incremental shares of 75,000, 81,000, and 72,000 in 1999,
1998, and 1997, respectively, were used in the calculation of diluted earnings
per common share.
------------------------------
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
Earnings per Common Share:
Basic income per share from continuing operations $ 1.46 $ 1.03 $ .88
======== ======== ========
Diluted income per share from continuing operations $ 1.46 $ 1.02 $ .87
======== ======== ========
Basic net income per share $ 1.42 $ .92 $ .88
======== ======== ========
Diluted net income per share $ 1.41 $ .91 $ .87
======== ======== ========
Unaudited Proforma Information
(assuming the change in account principle was
applied retroactively):
Basic income per share from continuing operations $ 1.01 $ .87
======== ========
Diluted income per share from continuing operations $ 1.00 $ .86
======== ========
Basic net income per share $ 1.02 $ .87
======== ========
Diluted net income per share $ 1.01 $ .86
======== ========
Marketable Securities:
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's marketable securities are debt securities and are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and discounts to maturity.
Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Dividends on securities classified as available-for-sale are included in
other expenses - net.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements. Actual
results could differ from those estimates.
Change in Accounting Principle:
Effective as of the beginning of the second quarter of fiscal 1998, the
Company adopted a new accounting principle related to the accrual of distributor
rebates. This change in principle was adopted to more precisely record the
amounts due distributors who service the Company's hospital customers.
F-7
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's prior method resulted in fluctuations for financial reporting
purposes that were the result of activities outside the Company's control. The
cumulative effect of this change in accounting principle, after income taxes,
results in a reduction in net income of $1,524,000 or $.12 per share. Pro forma
information is included in the income statement indicating the results of
operations as if the newly adopted accounting principle had been in effect since
October 1, 1996.
Accounting for Stock-Based Compensation:
The Company measures stock-based compensation cost using Accounting
Principles Board ("APB") Opinion No. 25 as is permitted by SFAS No. 123,
Accounting for Stock-Based Compensation.
Business Segment Reporting:
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company designs, manufactures and
distributes single-use medical products. The Company's other business segments
do not meet the criteria for separate disclosures.
Recent Accounting Pronouncements:
The Company does not believe that any recently issued, but not yet
effective accounting standards will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Note 2 - Acquisitions/Dispositions:
1999 Acquisition/Disposition
The Company 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 1999. 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 $10,916,000.
Vital Signs has reflected the operations of Breas as a consolidated
subsidiary effective June 1, 1999 (see Pro forma information below).
In September 1999, the Company made a decision to sell its Blow-Fill-Seal
("BFS") Machine Fabrication division consisting of net assets of $4.2 million.
The net sales for the BFS Machine Fabrication division were $498,000, $3,082,000
and $291,000 in fiscal years 1999, 1998, and 1997 respectively. Accordingly, the
statement of income for all periods presented 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.
1997 Acquisition
The Company acquired all of the outstanding stock of Marquest Medical
Products, Inc. ("Marquest"), a company engaged in the manufacture of respiratory
products. The Company paid approximately $20 million in cash including
acquisition costs and incurred a $2.5 million writeoff of in-process research
and development, which was charged to 1997 operations, as discussed below. The
assets acquired amounted to approximately $19 million and liabilities assumed
approximated $13
F-8
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million. This transaction has been accounted for as a purchase, and resulted in
an excess of purchase price over the fair value of net assets acquired of
approximately $15 million; subsequently this amount was reduced by $4 million
relating to the realizability of the tax benefit from acquired tax losses.
The effective date of the acquisition for financial reporting purposes is
April 1,1997. The balance sheet and results of operations for Marquest have been
included in these consolidated financial statements as of April 1, 1997.
In connection with the acquisition of Marquest, the Company recorded a
special charge of $6.7 million in the quarter ended June 30, 1997. This charge
represents $2,500,000 of in process research and development costs acquired in
the Marquest transaction (which must be expensed in accordance with purchase
accounting rules) along with $4.2 million in costs for the consolidation of
duplicative manufacturing operations as a result of this transaction.
The Company recorded a special charge of $1.1 million in the quarter ended
June 30, 1998. The charge represents severance and other costs associated with
reducing the domestic sales force originally hired to sell the expanded product
line acquired in the Marquest acquisition.
The following summary, pro forma, unaudited data of the Company reflects
the acquisition of Breas as if it had occurred on October 1, 1997 and Marquest
as if it had occurred on October 1, 1996.
----------------------------------------
PRO FORMA/UNAUDITED
----------------------------------------
(DOLLARS IN THOUSANDS)
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
Net sales - continuing operations $139,665 $134,535 $114,801
Net income $ 19,508 $ 13,611 $ 10,904
Diluted net income per share $ 1.58 $ 1.07 $ .84
Note 3 - Inventory:
Inventory consists of the following:
-----------------------------
SEPTEMBER 30,
-----------------------------
1999 1998
-----------------------------
(IN THOUSANDS)
Raw materials $15,366 $12,061
Finished goods 8,526 $ 7,261
------- -------
$23,892 $19,322
======= =======
F-9
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the following:
SEPTEMBER 30,
---------------------
1999 1998
-------- --------
(IN THOUSANDS)
Note and related party receivables $3,115 $1,678
Prepaid income taxes 416 314
Deferred tax asset (see Note 14) 501 492
Prepaid insurance 288 341
Other 1,096 1,078
------ ------
$5,416 $3,903
====== ======
Note 5 - Other Investments and Marketable Securities:
The following is a summary of available-for-sale securities and other
investments:
AVAILABLE-FOR-SALE-SECURITIES
----------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------- -------------------------------
(IN THOUSANDS)
GROSS GROSS
UNREALIZED UNREALIZED
FAIR HOLDING FAIR HOLDING
VALUE COST LOSSES VALUE COST GAINS
----- ---- ------ ----- ---- -----
U.S. Government obligations $ -- $ -- $ -- $ 2,458 $ 2,457 $ 1
Federal mortgage obligations 567 571 (4) 3,980 3,957 23
-------- -------- -------- -------- -------- ----------
Total available-for-sale-securities 567 571 (4) 6,438 6,414 24
Other investments 10,439 10,439 -- 13,458 13,458 --
-------- -------- -------- -------- -------- ----------
$ 11,006 $ 11,010 $ (4) $ 19,896 $ 19,872 $ 24
======== ======== ======== ======== ======== ==========
F-10
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1999 investments in debt securities classified as
available-for-sale securities mature as follows:
-----------------------------------------------
MATURITY
-----------------------------------------------
(IN THOUSANDS)
1 - 5 YEARS 5 - 10 YEARS 10 - 30 YEARS
Federal mortgage
obligations $ -- $ 567 $ --
=========== ============ =============
The Company manages its cash flow by investing in marketable securities
and, from time to time, supplements its portfolio by making investments in
privately held companies in the healthcare field. In 1998, such investments
included: (i) a minority equity ownership in Breas AB, which in 1999 has been
included in the consolidated financial statements upon acquiring a 52%
ownership; (ii) an equity ownership in a medical services business. In 1999, the
common share ownership in the medical services business was renegotiated into a
convertible Preferred Stock investment whereupon VSI increased its investment to
$10,439,000.
The investments in the privately held companies were accounted for under
the equity method of accounting for periods prior to the acquisition of the
controlling interest in Breas and, the conversion of Common Stock to Preferred
Stock in the medical services company. Earnings or losses from investments in
which the Company maintains a minority common stock interest are reflected in
the Company's earnings based on the Company's pro rata ownership interest. Net
earnings from these investments for the year ended September 30, 1999 aggregated
$178,000. The goodwill realized upon conversion of the Company's preferred stock
would be approximately $6,922,000.
Realized gains and losses are determined on the basis of specific
identification. During the year ended September 30, 1999, sales proceeds and
gross realized gains and losses on securities classified as available-for-sale
securities were $6,195,637, $8,622 and $(25,089), respectively. During the year
ended September 30, 1998, sales proceeds and gross realized gains and losses on
securities classified as available-for-sale securities were $14,830,852, $79,489
and $(37,311), respectively. During the year ended September 30, 1997, sales
proceeds and gross realized gains and losses on securities classified as
available-for-sale securities were $68,318,052, $784,014 and $(86,576),
respectively.
There were no trading securities at September 30, 1999 and September 30,
1998. Trading securities at September 30, 1997 amounted to $425,000 and results
of operations for the year ended September 30, 1997 includes an unrealized gain
of $46,000. There were no unrealized gains or losses during the years ended
September 30, 1999 or 1998 on trading securities. Stockholders' equity at
September 30, 1999, 1998, and 1997 includes an unrealized holding gain (loss),
net of related tax effect, on available-for-sale securities of $(2,000),
$14,000, and ($129,000), respectively.
F-11
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Property, Plant and Equipment:
Property, plant and equipment, at cost, consists of the following:
-----------------------------------------
SEPTEMBER 30, ESTIMATED
---------------------
1999 1998 USEFUL LIFE
--------- --------- ------------------
( IN THOUSANDS )
Land $ 4,420 $ 3,015
Building and building improvements 18,474 17,821 30 to 40 years
Equipment and molds 35,239 30,342 5 to 20 years
Fixtures and office equipment 2,389 1,085 5 to 15 years
Transportation equipment 78 131 5 years
------- -------
$60,600 $52,394
Less accumulated depreciation and
amortization 14,640 11,385
------- -------
$45,960 $41,009
======= =======
Certain portions of the Company's property, plant and equipment is pledged
as collateral for the Company's long-term debt (see Note 7).
Note 7 - Notes Payable and Long-term Debt:
At September 30,1999,the Company had a $15,000,000 line of credit with a
bank secured by all of the Company's assets. This line of credit expires on
March 1, 2000. The balance outstanding under this line of credit at September
30, 1999 was $4,850,000 with interest payable at the rate of 6%.
Long term debt consists of the following:
-------------------
SEPTEMBER 30,
1999 1998
(IN THOUSANDS)
Industrial Revenue Bonds ("IRB") payable $2,300 $2,500
Swiss Notes Payable -- 683
Other 302 301
------ ------
Total long-term debt 2,602 3,484
Less current portion 423 1,022
------ ------
$2,179 $2,462
====== ======
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of the long-term debt
approximates the carrying amount.
The IRB is payable in varying installments with interest at rates ranging
from 8.10% to 8.625% per annum through December 2009. The IRB, among other
matters, contains certain financial covenants, limits the payment of dividends
to any class of stock and restricts the incurrence of additional debt, as
defined in the agreement. For the year ended September 30, 1999, the Company was
in compliance with all of the required financial covenants.
F-12
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of notes payable and long-term debt are as follows:
-----------------------------------------------
YEAR ENDING SEPTEMBER 30,
------------------------
(IN THOUSANDS)
--------------
2000 $5,273
2001 261
2002 218
2003 200
2004 200
Thereafter 1,300
------
$7,452
======
Note 8 - Accrued Expenses:
Accrued expenses consist of the following:
--------------------
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Interest $ 193 $ 220
Payroll and vacations 1,997 1,688
Professional fees 444 382
Sales expenses 192 65
Income and other taxes payable 955 435
Other 642 966
------ ------
$4,423 $3,756
====== ======
Note 9 - Other Liabilities:
Other liabilities consist of:
--------------------
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Amount related to acquisitions $4,023 $4,083
Other 804 91
------ ------
$4,827 $4,174
====== ======
F-13
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Other Expense - Net:
Other expense - net consists of the following:
-----------------------------------
FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Amortization of deferred credit $ (91) $ (100) $ (100)
Charitable contributions of inventory 417 138 156
Net capital (gain) loss on sale of
marketable securities 16 4 (698)
Litigation costs 162 472 1,878
Other (47) 301 (392)
------- ------- -------
$ 457 $ 815 $ 844
======= ======= =======
Note 11 - Commitments:
Leases:
The Company has entered into noncancelable operating leases providing for
the lease of office and warehouse facilities, equipment and certain other
assets. Rent expense, aggregating $1,523,000, $1,861,000 and $1,185,000, has
been charged to operations for the years ended September 30, 1999, 1998 and
1997, respectively. The Company's commitment under such leases is as follows:
-------------------------------------------
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
------------------------- --------------
2000 $ 1,500
2001 1,305
2002 947
2003 247
2004 38
-----------
$ 4,037
===========
Employment Agreements:
The Company has entered into employment agreements aggregating $891,000
which expire at various dates through September 2004.
Note 12 - Contingent Liabilities:
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company in the normal course of business, including those
pertaining to patent and trademark issues and product liability matters. While
the amounts claimed or expected to be claimed may be substantial, the ultimate
liability cannot now be determined because of the inherent uncertainties
surrounding the litigation and the considerable uncertainties that exist.
Therefore, it is possible that results of operations or liquidity in a
particular period could be materially affected by certain contingencies.
However, based on facts currently available, management believes that the
disposition of matters that are pending or asserted will not have a material
adverse effect on the financial
F-14
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
position of the Company.
For a detailed discussion of current legal actions, see Item 3 of this
annual report on Form 10-K.
Note 13 - Stockholders' Equity:
Preferred Stock:
The Company has authorized 10,000,000 shares of no par value preferred
stock. No shares were issued or outstanding at September 30, 1999 or 1998.
Stock Options:
Transactions relating to stock options are as follows:
---------------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
---------- ---------------
Balance at September 30, 1996: 616,460 $19.20
Granted 67,607 $19.44
Exercised (22,661) $12.04
Expired/canceled (27,091) $20.16
---------- ------
Balance at September 30, 1997: 634,315 $19.44
Granted 467,982 $17.99
Exercised (2,270) $12.13
Expired/canceled (74,162) $18.68
---------- ------
Balance at September 30, 1998: 1,025,865 $18.84
Granted 150,186 $19.49
Exercised (8,025) $ 8.61
Expired/canceled (61,510) $17.97
---------- ------
Balance at September 30, 1999: 1,106,516 $19.05
========== ======
The weighted-average fair value per share of options granted during the
years ended September 30, 1999, 1998, and 1997 amounted to $7.18, $6.82, and
$7.60, respectively.
The Company's Board of Directors and stockholders have approved the
adoption of a stock option plan for employees, a stock option plan for directors
and a stock option plan for two executive officers which provide for the grant
of options to purchase a maximum of 775,000 shares, 100,000 shares and 200,000
shares, respectively, of the Company's common stock. Options may be granted at
prices not less than fair value at the date of grant. The Company has also
granted options pursuant to contractual arrangements.
Additionally, the Company has adopted a stock option and investment plan
(covering a maximum of 900,000 shares), whereby participants were granted two
stock options for each share of the Company's common stock that they acquired.
The options are granted at fair value at date of grant. Such stock options are
subject to a defined vesting schedule. Shares purchased by employees may be
financed by payroll deductions.
F-15
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the plans described above, options covering 1,114,641
shares (excluding lapsed shares) have been granted through September 30, 1999.
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply the current accounting rules under APB Opinion No. 25 and related
interpretations in accounting for its stock options and, accordingly, has
presented the disclosure-only information as required by SFAS No. 123. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at the grant date as prescribed by SFAS No. 123, the
Company's net income and diluted net income per common share for the years ended
September 30, 1999, 1998, and 1997 would approximate the pro forma amounts
indicated in the table below (dollars in thousands):
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
Net income - as reported $ 17,346 $ 11,611 $ 11,286
Net income - pro forma $ 15,825 $ 10,199 $ 10,867
Diluted net income per common
share - as reported $ 1.41 $ .91 $ .87
Diluted net income per common
share - pro forma $ 1.28 $ .80 $ .84
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the years ended September 30, 1999, 1998 and 1997,
respectively: expected volatility of 35%, 37%, and 35%, respectively, risk-free
interest rate of 5.4%, 5.5%, and 6.3% respectively, dividend yield rate of .8%,
.9%, and .8%, respectively, and all options have expected lives of 5 years.
The following table summarizes information about fixed stock options
outstanding at September 30, 1999:
-----------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT SEPTEMBER CONTRACTUAL EXERCISE AT SEPTEMBER EXERCISE
EXERCISE PRICES 30, 1999 LIFE (YEARS) PRICE 30, 1999 PRICE
--------------- -------------------------------------------- -------------------------
1. $ 5.55 $ 6.84 54,500 .85 $ 6.84 54,500 $ 6.84
2. $ 9.25 $10.50 9,909 4.78 $ 9.60 9,606 $ 9.58
3. $13.75 $15.75 45,402 4.21 $ 14.74 38,902 $14.57
4. $16.75 $19.50 484,967 8.13 $ 17.97 60,431 $18.12
5. $20.63 $22.50 497,970 6.95 $ 21.87 242,859 $22.01
6. $24.50 $24.50 13,768 7.24 $ 24.50 13,768 $24.50
--------- ---- ------- ------- ------
Total: 1,106,516 7.04 $ 19.05 420,066 $18.59
========= ==== ======= ======= ======
F-16
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Income Taxes:
The provision for income taxes consists of the following components:
----------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current:
Federal $ 6,782 $ 5,103 $ 6,293
State 384 569 764
Foreign 415 142 190
Deferred:
Federal 315 306 (1,295)
State 116 (422) (333)
------- ------- -------
$ 8,012 $ 5,698 $ 5,619
======= ======= =======
The tax effect of temporary differences that give rise to the net
short-term deferred tax assets are presented below:
---------------------
SEPTEMBER 30,
---------------------
1999 1998
---------------------
(IN THOUSANDS)
Undistributed DISC earnings $ (96) $ (96)
Net operating loss carryforward
from acquisition (See Note 2) 439 400
State net operating loss
carryforward
100 242
Other 58 (54)
----- -----
$ 501 $ 492
===== =====
F-17
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the net
long-term deferred tax assets are presented below:
---------------------
SEPTEMBER 30,
---------------------
1999 1998
---------------------
(IN THOUSANDS)
Net operating loss carryforward
from acquisition (Note 2) $ 2,654 $ 3,100
Accelerated depreciation (1,042) (943)
State net operating loss carryforward
296 242
Undistributed DISC earnings (413) (506)
Capital losses 294 294
Valuation allowance attributable to
capital loss carryforward (294) (294)
Other (17) 25
------- -------
$ 1,478 $ 1,918
======= =======
The total provision for income taxes differs from that amount which would
be computed by applying the U.S. federal income tax rate to income before
provision for income taxes. The reasons for these differences are as follows:
----------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
------- ------- -------
Statutory federal income tax rate 35.0% 34.3% 35.0%
Write-off of purchased Research and Development -- -- 5.2
Net capital gains on investments -- -- (1.5)
State income taxes, net of federal tax benefit 1.2 0.5 1.6
Benefit of tax loss in subsidiary -- -- (6.9)
Dividend exclusion/tax-exempt interest -- -- (0.3)
Product contributions (.6) (1.7) --
Tax credit for Research and Development (.6) (1.2) --
Benefit from foreign sales corporation (.8) (.7) (.4)
Amortization of acquired intellectual property (.7) (.9) (.5)
Foreign net operating loss carryforward (.8) (1.1) (.6)
Other (2.1) 1.3 1.6
---- ---- ----
Effective income tax rate 30.6% 30.5% 33.2%
==== ==== ====
For the year ended September 30, 1999, the Company recognized for income
tax purposes a tax benefit of $329 for compensation expense related to its stock
option plan for which no corresponding charge to operations has been recorded.
Such amount has been added to common stock at September 30, 1999. No tax benefit
was recorded for the years ended September 30,1998 and 1997.
F-18
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Allowance for Doubtful Accounts:
Information relating to the allowance for doubtful accounts is as follows:
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ended September 30,
1997 $ 169 $ 101 $ 169 (A) $ 101
========== ============= ============ =========
1998 $ 101 $ 561 $ 24 (A) $ 638
========== ============= ============ =========
1999 $ 638 $ 158 $ 552 (A) $ 244
========== ============= ============ =========
(A) Write-off of uncollectible accounts receivable.
Note 16 - Significant Customers:
A portion of the Company's hospital customers are serviced via national and
regional medical supply distributors. During fiscal years 1999 and 1998,
respectively, 32% and 33% of the Company's sales were made in this distribution
channel. In each fiscal year 1999 and 1998, one of the large national
distributors represented approximately 13% of net sales--continuing product
lines. The same customer represented approximately 17% and 16% of outstanding
accounts receivable at September 30, 1999 and 1998, respectively.
Note 17 - International Sales:
The international sales for the fiscal years ended September 30, 1999, 1998
and 1997 of approximately $22,000,000, $15,000,000, and $10,700,000,
respectively, were sold principally to customers in Europe, Asia and Australia.
F-19
PART III
Item 10. Directors of the Registrant
The registrant incorporates by reference herein information to be set forth
in its definitive proxy statement for its 2000 annual meeting of stockholders
that is responsive to the information required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange Commission within 120 days after the end of the registrant's most
recently completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.
Item 11. Executive Compensation
The registrant incorporates by reference herein information to be set forth
in its definitive proxy statement for its 2000 annual meeting of stockholders
that is responsive to the information required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange Commission within 120 days after the end of the registrant's most
recently completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The registrant incorporates by reference herein information to be set forth
in its definitive proxy statement for its 2000 annual meeting of stockholders
that is responsive to the information required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange Commission within 120 days after the end of the registrant's most
recently completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
The registrant incorporates by reference herein information to be set forth
in its definitive proxy statement for its 2000 annual meeting of stockholders
that is responsive to the information required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange Commission within 120 days after the end of the registrant's most
recently completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The financial statements listed in the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual
Report.
(b) All schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
(c) The following exhibits are incorporated by reference herein or annexed
to this Annual Report:
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger, dated March 14, 1997, among the Company,
an acquisition subsidiary, and Marquest Medical Products, Inc. ("MMPI")
is incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated March 20, 1997.
2.2 Inducement Agreement, dated March 14, 1997, between the Company and
Scherer Healthcare, Inc., relating to the Registrant's MMPI merger, is
incorporated by reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated March 20, 1997.
3.1 Restated Certificate of Incorporation is incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended September 30, 1995.
3.2 By-laws, as amended, are incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No. 33-35864) initially
filed with the Commission on July 13, 1990.
4.1 1984 Economic Development Authority Loan Agreement is incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-1 (No. 33 - 35864) initially filed with the Commission on July 13,
1990.
4.2 Amended and Restated Loan Agreement between the Company and the New
Jersey Economic Development Authority, dated as of November 1, 1990, is
incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (No. 33-34107) initially filed with the Commission
on February 21, 1991.
4.3 Letter of Credit and Reimbursement Agreement, dated August 27, 1993,
between the Company and Chemical Bank New Jersey N.A. is incorporated by
reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1993.
27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued):
10.1 1990 Employee Stock Option Plan, as amended, is incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997.
10.2 1991 Director Stock Option Plan, as amended, is attached to this Annual
Report as Exhibit 10.2.
10.3 Agreement between the Company and Respironics, Inc., dated effective as
of July 1, 1993, is incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended September 30,
1993. Amendment to Agreement between the Company and Respironics, Inc.,
dated September 14, 1999 is attached to this Annual Report as Exhibit
10.3.
10.4 Forms of Option Agreements with various employees of the Company are
incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (No. 33-39107) initially filed with the Commission
on February 21, 1991.
10.5 Vital Signs Investment Plan, as amended, is attached to this Annual
Report as Exhibit 10.5.
10.6 Stock Option Grants to Terence D. Wall and Barry Wicker, replacing stock
options granted to Messrs. Wall and Wicker pursuant to the 1993
Executive Stock Option Plan, is incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year ended
September 30, 1996.
10.7 Agreement to sell the Registrant's 51% interest in Cardiologics, L.L.C.,
including the related promissory note and guarantee, is incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Goldstein Golub Kessler LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 10th day of
December, 1999.
VITAL SIGNS, INC.
By: /s/
---------------------------
Anthony J. Dimun
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Terence D. Wall* President, Chief Executive
- ------------------------ Officer and Director --------------
Terence D. Wall
Director --------------
- ------------------------
David J. Bershad
/s/ Anthony J. Dimun Executive Vice President, Chief
- ------------------------ Financial Officer, Treasurer (Chief
Anthony J. Dimun Financial and Accounting Officer)
and Director --------------
/s/ Stuart M. Essig* Director
- ------------------------ --------------
Stuart M. Essig
/s/ Joseph J. Thomas* Director
- ------------------------ --------------
Joseph J. Thomas
/s/ Barry Wicker* Executive Vice President,
- ------------------------ Sales and Director --------------
Barry Wicker
*By: /s/
--------------------------
Anthony J. Dimun
29