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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_________
Commission file number: 0-18793
-----------------
VITAL SIGNS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Campus Road
Totowa, New Jersey 07512
(Address of principal executive office, including zip code)
973-790-1330
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At August 5, 2002 there were 12,919,068 shares of Common Stock, no par
value, outstanding.
VITAL SIGNS, INC.
-----------------
INDEX
PAGE NUMBER
PART I.
Financial information 1
Item 1. Financial Statements:
Independent Accountant's Report 2
Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
September 30, 2001 3
Consolidated Statements of Income for the Nine Months ended June
30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Income for the Three Months ended June
30, 2002 and 2001 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2002 and 2001 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosure About Market Risks
15
PART II.
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I.
Financial Information
Item 1.
Financial Statements
- --------------------
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Vital Signs, Inc. (the "registrant" or the
"Company" or "Vital Signs") believes that the disclosures are adequate to assure
that the information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the registrant's Annual Report on Form 10-K for the year
ended September 30, 2001.
The results of operations for the interim periods presented herein are
not necessarily indicative of the results to be expected for the entire fiscal
year.
1
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have reviewed the accompanying consolidated balance sheet of Vital Signs,
Inc. as of June 30, 2002 and the related consolidated statements of income
(operations) for the three-month and nine-month periods ended June 30, 2002 and
2001, and cash flows for the nine-month periods ended June 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
August 1, 2002
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------
JUNE 30, SEPTEMBER 30,
2002 2001
(In thousands)
----------------------------------------
ASSETS (UNAUDITED)
---------
Current Assets:
Cash and cash equivalents $ 24,737 $ 31,029
Accounts receivable, less allowance for doubtful accounts of $379 and $436
respectively 34,829 33,329
Inventory 26,399 25,984
Prepaid expenses and other current assets 6,439 8,899
-------- --------
Total Current Assets 92,404 99,241
Property, plant and equipment - net 37,846 35,710
Marketable securities 269 486
Goodwill 66,525 48,178
Deferred income taxes 1,987 5,002
Other assets 2,606 2,943
-------- --------
Total Assets $201,637 $191,560
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,799 $ 5,347
Current portion of long-term debt 422 357
Accrued expenses 7,378 5,652
Notes payable - bank 1,670 5,645
Other current liabilities --- 11,747
-------- --------
Total Current Liabilities 15,269 28,748
Long term debt 1,596 1,842
-------- --------
Total Liabilities 16,865 30,590
Commitments and contingencies
Minority interest in subsidiary 2,755 344
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares, issued and
outstanding 12,919,068 and 12,935,656 shares, respectively 29,715 27,679
Accumulated other comprehensive loss (1,069) (2,270)
Retained earnings 153,371 135,217
Stockholders' equity 182,017 160,626
-------- --------
Total Liabilities and Stockholders' Equity $201,637 $191,560
======== ========
See Notes to Consolidated Financial Statements
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
------------------------------------------
FOR THE NINE MONTHS ENDED
JUNE 30,
2002 2001
------------------------------------------
(In Thousands Except Per Share Amounts)
------------------------------------------
Revenue:
Net sales $112,048 $106,854
Service revenue 19,887 17,122
-------- --------
131,935 123,976
Cost of goods sold and services performed:
Cost of goods sold 54,413 50,836
Cost of services performed 11,528 9,404
-------- --------
65,941 60,240
-------- --------
Gross profit 65,994 63,736
Operating expenses:
Selling, general and administrative 33,618 31,728
Research and development 5,541 5,903
Special operating (credits) charges (3,428) 20,351
Goodwill amortization --- 957
Other expense - net 393 648
-------- --------
Total operating expenses 36,124 59,588
Operating Income 29,870 4,148
Other (income) expense:
Interest income (522) (641)
Interest expense 184 586
Other (income) --- (773)
-------- --------
Total other (income) (338) (828)
Income before provision for income taxes and minority interest in income of
consolidated subsidiary 30,208 4,976
Provision for income taxes 10,156 1,292
-------- --------
Income before minority interest in income of consolidated subsidiary 20,052 3,684
Minority interest in income of consolidated subsidiary 345 26
-------- --------
Net income $ 19,707 $ 3,658
======== ========
Net income per Common Share:
Basic net income per share $ 1.53 $ .29
======== ========
Diluted net income per share $ 1.51 $ .29
======== ========
Basic weighted average number of shares outstanding 12,893 12,554
======== ========
Diluted weighted average number of shares outstanding 13,040 12,810
======== ========
Dividends paid per share $ .12 $ .12
======== ========
See Notes to Consolidated Financial Statements
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(Unaudited)
----------------------------------------
FOR THE THREE MONTHS ENDED
JUNE 30,
2002 2001
----------------------------------------
(In Thousands Except Per Share Amounts)
---------------------------------------
Revenue:
Net sales $37,425 $36,669
Service revenue 8,952 5,835
------- -------
46,377 42,504
Cost of goods sold and services performed:
Cost of goods sold 17,378 17,477
Cost of services performed 5,029 3,241
------- -------
22,407 20,718
------- -------
Gross Profit 23,970 21,786
Operating expenses:
Selling, general and administrative 11,852 11,060
Research and development 1,871 2,073
Special operating charges 1,578 20,351
Goodwill amortization --- 300
Other expense - net 251 190
------- -------
Total operating expenses 15,552 33,974
Operating income (loss) 8,418 (12,188)
Other (income) expense:
Interest income (137) (152)
Interest expense 125 181
------- -------
Total other (income) expense (12) 29
Income (loss) before provision (benefit) for income taxes and minority interest in
income (loss) of consolidated subsidiary 8,430 (12,217)
Provision (benefit) for income taxes 2,789 (3,879)
------- -------
Income (loss) before minority interest in income (loss) of consolidated subsidiary
5,641 (8,338)
Minority interest in income (loss) of consolidated subsidiary 191 (5)
------- -------
Net income (loss) $ 5,450 $(8,333)
======= =======
Net income per Common Share:
Basic net income (loss) per share $ .42 $ (.65)
======= =======
Diluted net income (loss) per share $ .42 $ (.65)
======= =======
Basic weighted average number of shares outstanding 12,879 12,875
======= =======
Diluted weighted average number of shares outstanding 13,049 12,875
======= =======
Dividends paid per share $ .04 $ .04
======= =======
See Notes to Consolidated Financial Statements
5
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
---------------------------------
FOR THE NINE MONTHS ENDED
JUNE 30,
---------------------------------
2002 2001
--------- ----------
(In Thousands)
---------------------------------
Cash Flows from Operating Activities:
Net income $19,707 $ 3,658
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization 2,943 3,307
Impairment charge 1,578 20,351
Amortization of goodwill --- 957
Deferred taxes 2,106 (368)
Non cash gain on litigation accrual reversal (5,006) ---
Minority interest in income of consolidated subsidiary 345 26
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 633 (4,834)
Decrease (increase) in inventory 469 (3,144)
Decrease (increase) in prepaid expenses and other current assets 5,901 (2,719)
Increase (decrease) in other current liabilities (1,449) 200
Decrease (increase) in other assets 804 (5,417)
(Decrease) increase in accounts payable and accrued expenses (698) 608
------- -------
Net cash provided by operating activities 27,333 12,625
------- -------
Cash Flows from Investing Activities:
Acquisition of subsidiaries, net of cash acquired (21,796) (3,698)
Proceeds from sales of available-for-sale securities 76 65
Acquisition of property, plant and equipment (3,235) (2,002)
------- -------
Net cash used in investing activities (24,955) (5,635)
------- -------
Cash Flows from Financing Activities:
Purchase of treasury stock (2,265) (155)
Issuance of treasury stock 191 96
Dividends paid (1,553) (1,507)
Proceeds from exercise of stock options 810 11,204
Proceeds from short term note payable --- 4,761
Principal payments of long-term debt and notes payable (5,622) (4,478)
------- -------
Net cash provided by (used in) financing activities (8,439) 9,957
------- -------
Effect of exchange rate changes on cash (231) (53)
------- -------
Net increase (decrease) in cash and cash equivalents (6,292) 16,894
Cash and cash equivalents at beginning of period 31,029 7,606
------- -------
Cash and cash equivalents at end of period $24,737 $24,500
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the nine months for:
Interest $ 157 $ 768
Income taxes 455 7,245
See Notes to Consolidated Financial Statements
6
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of June 30, 2002, the consolidated
statements of income (operations) for the three and nine months ended June 30,
2002 and 2001 and the consolidated statement of cash flows for the nine months
ended June 30, 2002 and 2001 have been prepared by Vital Signs, Inc. (the
"Company" or "VSI") and are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly the financial position at June 30, 2002, the results of
operations for the three-month and nine-month periods ended June 30, 2002 and
2001 and cash flows for the nine-month periods ended June 30, 2002 and 2001 have
been made.
2. See the Company's Annual Report on Form 10-K for the year ended September 30,
2001 (the "Form 10-K") for additional disclosures relating to the Company's
consolidated financial statements.
3. The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" at
September 30, 1999. The Company designs, manufactures and distributes single-use
medical products. The Company's other business segments do not meet the criteria
for separate disclosures.
4. At June 30, 2002, the Company's inventory was comprised of raw materials,
$15,744,000, and finished goods, $10,227,000.
5. For details of legal proceedings, see Part II, Item 1, "Legal Proceedings".
6. In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is required to be applied for fiscal years beginning
after December 15, 2001. The Company has adopted SFAS 142 as of October 1, 2001.
SFAS 142 eliminates the amortization of goodwill and certain other intangible
assets. It also requires Vital Signs to complete a test for impairment of these
assets annually, as well as a transitional goodwill impairment test within six
months from the date of adoption. The Company has completed this impairment
test, and has found no impairment other than the impairment identified for China
operations. SFAS 142 also requires disclosure of what net income would have been
in all periods presented had SFAS 142 been in effect. The following table is
provided to disclose what net income would have been had SFAS 142 been adopted
in prior periods:
--------------------------------------------------------------------------------------
FOR THE NINE-MONTHS ENDED
JUNE 30,
----------------------------------------
2002 2001
------ -----
(In Thousands, Except Per Share Amounts)
----------------------------------------
Reported net income $19,707 $3,658
Add back: goodwill amortization --- 875
------- ------
Adjusted net income, net of tax $19,707 $4,533
======= ======
Basic earnings per share as reported $ 1.53 $ .29
Adjusted basic earnings per share 1.53 .36
Diluted earnings per share as reported 1.51 .29
Adjusted diluted earnings per share 1.51 .35
--------------------------------------------------------------------------------------
7
(Notes to Consolidated Financial Statements continued from previous page)
7. On January 1, 2002 the Company's National Sleep Technologies, Inc. ("NST")
subsidiary completed its merger with HSI Medical Services, Inc. ("HSI"), a
subsidiary of the Johns Hopkins Health System, with the merged entity to be
known as Sleep Services of America, Inc. NST issued 7,921,408 shares of its
Common Stock with a fair value of approximately $4,753,000, along with warrants
to purchase 326,791 shares of NST's common stock in exchange for all of the
outstanding common stock of HSI. The excess of the purchase price over the fair
value of the net assets acquired, goodwill, was approximately $3,203,000. The
Company's interest in the combined NST entity is approximately 68%. Goodwill was
recognized in accordance with Statement of Financial Accounting Standards No.
142 ("Goodwill and Other Intangible Assets").
8. On March 28, 2002, the Company consummated the merger of Stelex, Inc.
("Stelex") into the Company's wholly owned subsidiary, The Validation Group,
Inc. ("TVG"). The surviving entity is to be known as Stelex/TVG, Inc. The
purchase price for the acquisition of Stelex was approximately $13,087,000. The
purchase price was allocated to the assets acquired based on their estimated
fair values. The excess of the purchase price over the fair value of the net
assets acquired, goodwill, was approximately $12,657,000. Goodwill was
recognized in accordance with Statement of Financial Accounting Standards No.
142 ("Goodwill and Other Intangible Assets").
9. The following unaudited proforma information presents a summary of the
Company's consolidated results of operations and the Stelex and HSI business as
if the acquisition had occurred on October 1, 2000:
- ---------------------------------------------------------------------------------------------------------------------
FOR THE NINE-MONTHS ENDED FOR THE THREE-MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------------------------- ----------------------------------
(In Thousands, Except Per Share Amounts)
Net sales and revenues 139,097 131,857 46,373 45,603
Net earnings 21,152 3,862 5,450 (7,697)
Basic net earnings per Common Share 1.64 .31 .42 .60
Diluted net earnings per Common Share 1.62 .30 .42 .60
- ---------------------------------------------------------------------------------------------------------------------
These unaudited proforma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the combinations been in effect on October 1,
2000 or of future results of operations.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time the
Company expects to make, certain forward-looking statements regarding its
business, financial condition and results of operations. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"), the Company intends to caution investors that there are
important factors that could cause the Company's actual results to differ
materially from those projected in its forward-looking statements, whether
written or oral, made herein or that may be made from time to time by or on
behalf of the Company. Investors are cautioned that such forward-looking
statements are only predictions and that actual events or results could differ
materially from such statements. The Company undertakes no obligation to
publicly release the results of any revisions to its forward-looking statements
to reflect subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to comply with the
terms of the safe harbor provided by the Reform Act. Accordingly, the Company
has set forth a list of important factors that could cause the Company's actual
results to differ materially from those expressed in forward-looking statements
or predictions made herein and from time to time by the Company. Specifically,
the Company's business, financial condition, liquidity and results of operations
could be materially different from such forward-looking statements and
predictions as a result of (i) cost containment pressures on hospitals and
competitive factors that could affect the Company's primary markets, including
the results of competitive bidding procedures implemented by group purchasing
organizations and/or the success of the Company's sales force, (ii) slow-downs
in the healthcare industry or interruptions or delays in manufacturing and/or
sources of supply, (iii) the Company's ability to develop or acquire new and
improved products and to control costs, (iv) market acceptance of the Company's
new products, (v) technological change in medical technology, (vi) the scope,
timing and effectiveness of changes to manufacturing, marketing and sales
programs and strategies, (vii) intellectual property rights and market
acceptance of competitors' existing or new products, (viii) adverse
determinations arising in the context of regulatory matters or legal proceedings
(see Part II, Item 1 of this Quarterly Report on Form 10-Q), (ix) healthcare
industry consolidation resulting in customer demands for price concessions, (x)
the reduction of medical procedures in a cost conscious environment, (xi)
efficacy or safety concerns with respect to marketed products, whether
scientifically justified or not, that may lead to product recalls, withdrawals
or declining sales, and (xii) healthcare reform and legislative and regulatory
changes impacting the healthcare market both domestically and internationally.
9
Results of Operations
The following table sets forth, for the periods indicated, the percentage
increase of certain items included in the Company's consolidated statement of
income.
----------------------------------------------------------------
INCREASE/(DECREASE) FROM PRIOR PERIOD
----------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30,2002 COMPARED WITH JUNE 30, 2002 COMPARED WITH
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
--------------------------- ----------------------------
Revenues 9.1% 6.4%
Cost of goods sold and services performed 8.2% 9.5%
Gross profit 10.0% 3.5%
Operating expenses:
Selling, general and administrative expense 7.2% 6.0%
Research and development expenses (9.7)% (6.1)%
Total operating expenses (54.2)% (39.4)%
Provision for income taxes 171.9% 686.1%
Net income 165.4% 438.7%
--------------------------------------------------------------------------------------------------------------------
10
COMPARISON: QUARTER ENDED JUNE 30, 2002
AND QUARTER ENDED JUNE 30, 2001
Net sales and revenues for the quarter ended June 30, 2002 increased by
$3,873,000 or 9.1% compared with the same period last year. The increase was
primarily due to the growth within the Company's sleep companies, Breas Medical
and Sleep Services of America, and the growth due to the merger of Stelex, Inc.
and The Validation Group to form Stelex-TVG.
Sales of anesthesia products, representing 37.9% of net sales and
revenues, decreased by approximately $409,000 or 2.3% from the quarter ended
June 30, 2001 due primarily to reduced sales by Thomas Medical Products, Inc.,
which were partially offset by volume growth in anesthesia circuit sales. Sales
of respiratory/critical care products, representing 39.1% of net sales and
revenues, increased by approximately $2,063,000 or 12.8%, primarily due to the
acquisition of Stelex, Inc., to be part of the Company's validation consulting
service company. Sales by the Company's sleep service companies, representing
22.9% of net sales and revenues, increased by $2,221,000, or 26.4% due primarily
to a growth in sales of the Company's Breas subsidiary, and the merger of NST
with HSI, effective January, 1, 2002.
The Company's reported gross profit percentage for the quarter was
51.7%, compared to 51.3% in the same period of the last fiscal year. Improved
gross profits in our anesthesia, respiratory/critical care and Vital Pharma
unit, resulted from cost improvement programs.
Selling, general and administrative expenses (S, G & A) for the quarter
ended June 30, 2002 increased by $792,000 or 7.2% over the prior year's quarter
primarily due to additional employees resulting from the merger of NST and HSI,
and the merger of Stelex, Inc. and The Validation Group.
Research and development expenses ("R&D") decreased by $202,000 due to
reduced expenditures on R & D projects.
Other expense, net, for the quarter ended June 30, 2002 increased
$61,000 from $190,000 in the quarter ended June 30, 2001 to $251,000, primarily
resulting increased contributions.
The Company recorded an impairment charge of $1.6 million related
principally to its Chinese subsidiary due to unusual circumstances effecting
that subsidiary's operations, which are the subject of an on-going internal
investigation. Our Chinese operations have not been profitable. We are
re-evaluating our strategy of selling direct in China and may consider selling
through distributors.
Interest income decreased 9.9%, from $152,000 during the three months
ended June 30, 2001 to $137,000 during the three months ended June 30, 2002,
reflecting lower interest rates. Interest expense decreased 30.9% from $181,000
during the three months ended June 30, 2001 to $125,000 during the three months
ended June 30, 2002 reflecting reduced loan balances.
During the quarter ended June 30, 2001, a major consulting firm was
engaged to assist the Company in an impairment analysis of the Company's
subsidiary, Vital Pharma,Inc. which has sustained significant sales erosion and
operating losses. The Company recorded a special charge relating to the Vital
Pharma subsidiary of approximately $18.2 million dollars. Further special
charges were taken for various other impairments and charges aggregating $2.2
million.
The Company's effective tax rates were a provision of 33.0% and a
benefit of 31.8% for the quarters ended June 30, 2002 and 2001, respectively.
The increase in the effective tax rate is related to the higher tax bracket
resulting from increased operating profits.
11
COMPARISON: NINE MONTHS ENDED JUNE 30, 2002
AND NINE MONTHS ENDED JUNE 30, 2001
Net sales and revenues for the nine months ended June 30, 2002
increased by $7,959,000 or 6.4% compared with the same period last year. The
increase was primarily due to the growth within the Company's sleep companies,
Breas and Sleep Services of America, the growth due to the merger of Stelex,
Inc. and The Validation Group to form Stelex-TVG, and the growth in the
anesthesia business.
Sales of anesthesia products, representing 40.3% of net sales and
revenues, increased by approximately $2,694,000 or 5.3% from the nine-month
period ended June 30, 2001 due primarily to volume growth in anesthesia circuit
sales led by the Company's new anesthesia breathing circuit Limb-O'TM'. Sales
ofrespiratory/critical care products, representing 37.7% of net sales and
revenues, decreased by approximately $516,000 or 1.0% primarily due to the loss
of a major customer by the Company's validation service company. This loss is
partially offset by increased revenues from the acquisition of Stelex, Inc.
Sales by the Company's sleep service companies, representing 22.0% of net sales
and revenues, increased by $5,781,000 or 24.9% due primarily to a growth in
sales of the Company's Breas subsidiary and the merger of NST with HSI to form
Sleep Services of America, effective January, 1, 2002.
The Company's reported gross profit percentage for the nine months
ended June 30, 2002 was 50.0% compared to 51.4% in the same time period of the
last fiscal year. The decrease in gross profit percentage is primarily due to
two factors. One factor was the re-evaluation of the carrying value of the
Company's inventory, charges to Cost of Goods of approximately $1,400,000 were
taken in the current fiscal year. The second factor is an increase in service
revenue of approximately $2,765,000 at a lower gross profit. The gross profit
percentage in anesthesia, respiratory/critical care and Breas averaged 52.7%
(before inventory reserves), for the nine month periods ended June 30, 2002 and
averaged 52.4% for the nine months ended June 30, 2001.
Selling, general and administrative expenses (S, G & A) increased by
$1,889,600 or 6.0% primarily due to additional employees resulting from the
merger of NST and HSI, (approximately $1.1 million), the acquisition of Stelex,
Inc. (approximately $463,000), with the balance of the increase related to
increased legal accruals and bad debt expense.
Research and development expenses ("R&D") decreased by $362,000 or 6.1%
due to reduced expenditures on R & D projects.
During the nine months ended June 30, 2002, we reversed $5.0 million
in litigation accruals as a result of the successful conclusion of a patent
infringement suit. This litigation predated our 1997 acquisition of Marquest
Medical Products. At the time of this acquisition, we were advised that Marquest
had potential liability as the indemnitor of a distributor which was being sued
for patent infringement in Japan. We recorded a sizable reserve at the time of
the Marquest acquisition and increased that reserve during the pendency of the
litigation as a result of a lower court decision against us. The accruals were
reversed during the quarter ended March 31, 2002 when the Tokyo Supreme Court
ruled in favor of our distributor, thereby ending the legal proceeding.
Other expense, net of other income included in operating income,
decreased by 39.4% from a net expense of $648,000 for the nine months ended June
30, 2001 to $393,000 for the nine months ended June 30, 2002. This change
resulted from a decrease in expense related to charitable contributions.
12
The Company took an impairment charge of $1.5 million in its Chinese
subsidiary due to unusual circumstances effecting that subsidiary's operations,
which are the subject of an on-going internal investigation. Our Chinese
operations have not been profitable. We are re-evaluating our strategy of
selling direct in China and may consider selling through distributors.
Interest income decreased 18.6%, from $641,000 during the nine months
ended June 30, 2001 to $522,000 during the nine months ended June 30, 2002,
reflecting lower interest rates. Interest expense decreased 68.6% from $586,000
during the nine months ended June 30, 2001 to $184,000 during the nine months
ended June 30, 2002 reflecting pay-downs of existing debt and loans.
Other income and expense in the nine month period ended June 30, 2001
consisted of gain on certain investments. There was no gain in the nine month
period ended June 30, 2002.
During the quarter ended June 30, 2001, a major consulting firm was
engaged to assist the Company in an impairment analysis of the Company's
subsidiary, Vital Pharma, Inc, which has sustained significant sales erosion and
operating losses. The Company recorded a special charge relating to the Vital
Pharma subsidiary of approximately $18.2 million dollars. Further special
charges were taken for various other impairments and charges aggregating $2.2
million.
The Company's effective tax rates were 33.6% and 26.0% for the nine
month period ended June 30, 2002 and 2001 respectively. The increase in
effective tax rate over the prior year's nine-month period reflects the higher
tax bracket resulting from the increase in taxable income.
13
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations.
During the nine-month period ended June 30, 2002, cash and cash equivalents
decreased by approximately $6,292,000, reflecting net cash provided by
operations of approximately $27.3 million and from the proceeds from the
exercise of stock options of $810,000, offset by cash used for the acquisition
of Stelex, Inc., Breas and certain SSA shareholders of approximately $21.8
million, net of cash acquired; capital expenditures of approximately $3.2
million; dividend payments of approximately $1.6 million; the purchase of
treasury stock of approximately $2.3 million; and principal payments on notes
payable and debt of approximately $5.6 million. The combined total of cash and
cash equivalents and long-term marketable securities was approximately $25.0
million at June 30, 2002 as compared to $31.5 million at September 30, 2001.
At June 30, 2002, the Company had approximately $24,737,000 in cash and
cash equivalents. On that date, the Company's working capital was $77,135,000
and the current ratio was 6.2 to 1, as compared to $70,493,000 and 3.5 to 1 at
September 30, 2001.
Capital expenditures of approximately $3.2 million for the nine-month
period primarily reflected the buy-out of its operating lease for the fair
market value of the Company's Colorado plant equipment, the purchase of a
packaging line for that facility, and other equipment.
The Company's current policy is to retain working capital and earnings
for use in its business, subject to the payment of certain cash dividends and
treasury stock repurchases. Such funds may be used for product development,
product acquisitions and business acquisitions, among other things. The Company
regularly evaluates and negotiates with domestic and foreign medical device
companies regarding potential business or product line acquisitions or licensing
arrangements by the Company.
The Company has a $20 million line of credit with Chase Manhattan Bank
("Chase"). Chase has also expressed its intention to provide additional funds
for the Company's future acquisitions, provided that each such acquisition meets
certain criteria. The terms for any borrowing would be negotiated at the date of
origination. There were no amounts outstanding at June 30, 2002.
Management believes that the funds generated from operations, along
with the Company's current working capital position and available bank credit,
will be sufficient to satisfy the Company's capital requirements for the
foreseeable future. This statement constitutes a forward-looking statement under
the Reform Act. The Company's liquidity could be adversely impacted and its need
for capital could materially change if costs are higher than anticipated, the
Company were to undertake acquisitions demanding significant capital, operating
results were to differ significantly from recent experience or adverse events
were to affect the Company's operations.
14
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, including the impact of
commodity price changes and changes in the market value of its investments and,
to a lesser extent, interest rate changes and foreign currency fluctuations. In
the normal course of business as described below, the Company employs policies
and procedures with the objective of limiting the impact of market risks on
earnings and cash flows and to lower its overall borrowing costs. The Company
does not believe that its exposure to market risks would be material to the
consolidated statements as a whole.
The Company believes that 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. Other than for its operations at Breas
Medical, which is headquartered in Sweden, it is the Company's policy to
price products from vendors and to customers in U.S. dollars and to receive
payment in U.S. dollars. Historically, the international portion of the
Company's sales has been relatively small and the effect of changes in interest
rates and foreign exchange rates on the Company's earnings generally has been
small relative to other factors that also affect earnings, such as unit sales
and operating margins. However, the international segment is expected to grow
both in terms of actual sales and as a percentage of the Company's total sales
and the Company may in the future need to revise or change its approach to
managing interest rate and foreign currency transactions.
The Company's risks involving commodity price changes relate to prices
of raw materials used in its operations. The Company is exposed to changes in
the prices of latex and various plastics and resins for the manufacture of its
products. The Company does not enter into commodity futures or derivative
instrument transactions. Except with respect to its single source for face
masks, it is the Company's policy to maintain commercial relations with multiple
suppliers and when prices for raw materials rise to attempt to source
alternative supplies.
CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
We have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements. The preparation of our consolidated
financial statements in conformity with generally accepted accounting principles
requires us to make estimates and judgments that affect our reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to asset impairment, revenue recognition,
allowance for doubtful accounts, and contingencies and litigation. We state
these accounting policies in the notes to our consolidated financial statements
and at relevant places in this discussion and analysis. These estimates are
based on the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from these estimates under different assumptions or
conditions.
We believe that the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
o Through September 30, 2001, we amortized goodwill and intangibles
on a straight-line basis over their estimated lives. Upon our
adoption of SFAS No. 142 on October 1, 2001, we ceased amortizing
goodwill and will perform an annual impairment analysis based
upon discounted cash flows to assess the recoverability of the
goodwill, in accordance with the provisions of SFAS No. 142.
During the quarter ended [March 31, 2002] we completed this
impairment test and found no impairment. If we are required to
record an impairment charge in the future, it would have an
adverse impact on our results of operations and financial
condition.
o We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments, which results in bad debt expense. As of June
30, 2002, the allowance for doubtful accounts was $379,000. We
determine the adequacy of this allowance by evaluating individual
customer receivables, considering the customer's financial
condition and credit history and analyzing current economic
conditions. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
o For each accounting period, we estimate the amount of rebates
that we will credit to our distributors, based on sales made to
those distributors during such period. We utilize a moving
average based on prior history to make these estimates.
o We are subject to various claims and legal actions in the
ordinary course of our business. These matters frequently arise
in disputes regarding the rights to intellectual property, where
it is difficult to assess the likelihood of success and even more
difficult to assess the probable ranges of recovery. Although we
currently are not aware of any legal proceeding that is
reasonably likely to have a material adverse effect on us, if we
become aware of any such claims against us, we will evaluate the
probability of an adverse outcome and provide accruals for such
contingencies as necessary.
o We have established a reserve for inventory obsolescence. The
reserve was determined by performing an aging analysis of the
inventory, and reserving for that portion of the inventory that
was estimated to be in excess of one year. As of June 30, 2002,
our inventory reserves were $1,341,000.
15
PART II.
OTHER INFORMATION
ITEM 1.
Legal Proceedings:
(a) Reference is made to Item 3 of the Company's Annual Report on Form 10-K
for the year ended September 30, 2001.
(b) On December 6, 1999 a complaint was filed against the Company on behalf
of the former shareholders of Vital Pharma, Inc. ("VPI") alleging breach
of contract for failure to pay earnout payments allegedly due under the
stock purchase agreement for the sale of VPI in December, 1995. The
Company answered the complaint, filed counter-claims and moved to
transfer the case to arbitration. In August, 2000 the court ordered
plaintiff to submit such claims to binding arbitration and stayed all
other proceedings pending the outcome of the arbitration. The matter is
in the discovery phase before the arbitrator.
(c) On April 4, 1997 a complaint was filed against us for an incident which
occurred on April 6, 1995. The plaintiff, representing the estate of the
alleged victim, alleges that her mother died due to defects in a valve
manufactured by us. Such defects are alleged to include inadequate
labeling and instructions. The plaintiff seeks an unspecified amount of
compensation for damages for wrongful death and for recovery under the
Illinois Survival Act. In addition, the plaintiff has sought to amend the
complaint to add an additional cause of action for punitive damages. On
June 20, 2002, the Magistrate issued a Report and Recommendation that the
plaintiff's motion with the District Court Judge to amend the complaint
be denied. The plaintiff has filed an objection to the Magistrate's
Report and Recommendation. No decision has been rendered by the District
Court. A claim for punitive damages would not be covered by our product
liability insurance. Our excess liability carrier has denied its coverage
responsibility on the grounds that plaintiff's entire claim falls outside
of the applicable policy period. On August 9, 2002 we began a lawsuit
seeking a judicial determination that if it becomes necessary to access
our excess liability policy, either the carrier or our insurance broker
will be liable to provide us with coverage.
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.
16
ITEM 6.
Exhibits and Reports on Form 8-K
A) There were no reports on Form 8-K filed in the period.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITAL SIGNS, INC.
By: /s/ Joseph F. Bourgart
-----------------------
Joseph F. Bourgart
Executive Vice President and
Chief Financial Officer
Date: August 14, 2002
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STATEMENT OF DIFFERENCES
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The trademark symbol shall be expressed as ............................... 'TM'