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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 December 31, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 February 3, 2003 there were 12,994,029 shares of Common Stock, no par
value, outstanding.
VITAL SIGNS, INC.
-----------------
INDEX
PAGE
NUMBER
PART I.
-------
Financial information......................................................... 1
Item 1. Financial Statements
Independent Accountant's Report............................................... 2
Consolidated Balance Sheet as of December 31, 2002 (Unaudited) and September
30, 2002...................................................................... 3
Consolidated Statement of Income for the Three Months ended December 31, 2002
and 2001 (Unaudited).......................................................... 4
Consolidated Statement of Cash Flows for the Three Months Ended December 31,
2002 and 2001 (Unaudited)..................................................... 5
Notes to Consolidated Financial Statements (Unaudited)........................ 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 8-12
Item 3. Quantitative and Qualitative Disclosure About Market Risks.................... 12
Item 4. Controls and Procedures....................................................... 12-14
PART II.
--------
Item 1. Legal Proceedings............................................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................................. 16
Signatures.................................................................... 17
Certifications................................................................ 18-19
Exhibit 99.1.................................................................. 20
Exhibit 99.2.................................................................. 21
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", the
"Company", "Vital Signs", "we", "us", or "our") 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, 2002.
The results of operations for the interim period 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. and Subsidiaries as of December 31, 2002 and the related consolidated
statements of income and cash flows for the three-month periods ended December
31, 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 referred to above
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Vital Signs, Inc. and Subsidiaries as of September 30, 2002, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated November 22,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of September 30, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
January 31, 2003
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
2002 2002
(IN THOUSANDS OF DOLLARS)
ASSETS
(Unaudited)
---------
Current Assets:
Cash and cash equivalents................................................ $ 40,030 $ 29,303
Accounts receivable, less allowance for doubtful accounts of $631 and $638
respectively......................................................... 33,897 35,392
Inventory................................................................ 21,431 21,024
Prepaid expenses and other current assets................................ 6,249 6,085
Assets of discontinued business.......................................... 8,190 7,846
-------- --------
Total Current Assets................................................ 109,797 99,650
Property, plant and equipment - net...................................... 30,689 30,867
Marketable securities ................................................... 137 186
Goodwill ................................................................ 69,632 69,516
Deferred income taxes.................................................... 1,802 1,851
Other assets............................................................. 4,491 3,007
-------- --------
Total Assets....................................................... $216,548 $205,077
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 4,497 $ 3,940
Current portion of long-term debt........................................ 328 395
Accrued expenses......................................................... 10,134 6,980
Other current liabilities................................................ 830 1,015
Liabilities of discontinued business..................................... 672 720
-------- --------
Total Current Liabilities 16,461 13,050
Long term debt............................................................... 1,340 1,560
-------- --------
Total Liabilities................................................... 17,801 14,610
Minority interest in subsidiary.............................................. 2,706 2,652
Commitments and contingencies
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares, issued and
outstanding 12,991,394 and 12,938,002 shares, respectively.........
32,420 30,812
Accumulated other comprehensive loss..................................... (256) (1,189)
Retained earnings........................................................ 163,877 158,192
-------- --------
Stockholders' equity..................................................... 196,041 187,815
-------- --------
Total Liabilities and Stockholders' Equity.......................... $216,548 $205,077
======== ========
(See Notes to Consolidated Financial Statements)
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
FOR THE THREE-MONTHS ENDED
DECEMBER 31,
2002 2001
------------------------------------------
(In Thousands Except Per Share Amounts)
------------------------------------------
Revenue:
Net sales............................................................. $35,055 $35,743
Service revenue....................................................... 9,702 5,413
------- -------
44,757 41,156
Cost of goods sold and services performed:
Cost of goods sold.................................................... 16,125 16,642
Cost of services performed............................................ 5,417 3,132
------- -------
21,542 19,774
Gross profit............................................................... 23,215 21,382
Operating expenses:
Selling, general and administrative.................................... 12,091 10,150
Research and development............................................... 1,503 1,638
Other (income) expense-net............................................. (6) 67
-------- -------
Total operating expenses.......................................... 13,588 11,855
Operating Income........................................................... 9,627 9,527
Net interest income.................................................... 254 174
------- -------
Income from continuing operations before provision for income taxes and
minority interest in income of consolidated subsidiary................. 9,881 9,701
Provision for income taxes................................................. 3,264 3,256
------- -------
Income from continuing operations before minority interest in income of
consolidated subsidiary................................................ 6,617 6,445
Minority interest in income of consolidated subsidiary..................... 55 ---
------- -------
Income from continuing operations.......................................... 6,562 6,445
Discontinued Operations:
Loss from operations of Vital Pharma, net of income tax benefit of ($174) and
($70).................................................................. (357) (129)
-------- --------
Net income................................................................. $ 6,205 $ 6,316
======= =======
Earnings (loss) per Common Share:
Basic
Income per share from continuing operations............................ $ 0.51 $ 0.50
(Loss) per share from discontinued operations.......................... $(0.03) $(0.01)
Net earnings $ 0.48 $ 0.49
Diluted
Income per share from continuing operations............................ $ 0.51 $ 0.50
(Loss) per share from discontinued operations.......................... $(0.03) $ (0.01)
Net earnings $ 0.48 $ 0.49
Basic weighted average number of shares outstanding........................ 12,898 12,890
Diluted weighted average number of shares outstanding...................... 12,994 13,013
(see Notes to Consolidated Financial Statements)
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
FOR THE THREE-MONTHS ENDED
DECEMBER 31,
2002 2001
------------------------------------------
(IN THOUSANDS OF DOLLARS)
------------------------------------------
Cash Flows from Operating Activities:
Net income..................................................................... $ 6,205 $ 6,316
Add loss from discontinued operations.......................................... 357 129
-------- --------
Income from continuing operations............................................. 6,562 6,445
Adjustments to reconcile income from continuing operations to net cash provided by
continuing operations
Depreciation and amortization................................................ 1,085 1,295
Deferred income taxes........................................................ 49 ---
Minority interest in income of consolidated subsidiary....................... 55 ---
Changes in operating assets and liabilities:
Decrease in accounts receivable.............................................. 1,821 1,300
Decrease (increase) in inventory............................................. 96 (72)
(Increase) in prepaid expenses and other current assets...................... (48) 340
(Increase) decrease in other assets.......................................... (397) 17
Increase in accounts payable and accrued expenses............................ 2,800 392
(Decrease) increase in other liabilities..................................... (218) 534
--------- --------
Net cash provided by continuing operations........................................ 11,805 10,251
-------- --------
Net cash used in discontinued operations.......................................... (749) (534)
--------- ---------
Net cash provided by operating activities......................................... 11,056 9,717
Cash flows from investing activities:
Acquisition of property, plant and equipment................................. (524) (1,885)
Proceeds from sales of available for sale securities......................... 50 79
-------- --------
Net cash used in investing activities............................................. (474) (1,806)
Cash flows from financing activities:
Dividends paid............................................................... (520) (519)
Proceeds from exercise of stock options...................................... 316 93
Principal payments on long-term debt and notes payable....................... (287) (1,857)
--------- ---------
Net cash used in financing activities............................................ (491) (2,283)
Effect of foreign currency translation............................................ 636 109
-------- --------
Net increase in cash and cash equivalents......................................... 10,727 5,737
Cash and cash equivalents at beginning of period.................................. 29,303 31,029
-------- --------
Cash and cash equivalents at end of period........................................ $ 40,030 $ 36,766
======== ========
Cash paid during the three months for:
Interest..................................................................... $ 82 $ 84
Income taxes................................................................. $ 167 $ 198
(See Notes to Consolidated Financial Statements)
5
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of December 31, 2002, and the
consolidated statements of income and cash flows for the three months ended
December 31, 2002 and 2001, have been prepared by Vital Signs, Inc. (the
"registrant", the "Company", "Vital Signs", "we", "us", or "our") and are
unaudited. In the opinion of management, all adjustments (consisting solely
of normal recurring adjustments) necessary to present fairly the financial
position at December 31, 2002 and the results of operations and cash flows
for the three months ended December 31, 2002 and 2001.
2. See the Company's Annual Report on Form 10-K for the year ended September
30, 2002 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
3. At December 31, 2002, the Company's inventory was comprised of raw
materials, $11,990,000, and finished goods, $9,441,000. At September 30,
2002 the Company's inventory was comprised of raw materials of $12,095,000
and finished goods of $8,929,000.
4. For Details of Legal Proceedings, see Part II, Item 1, "Legal Proceedings".
5. The Company has aggregated its business units into four reportable
segments, anesthesia, respiratory/critical care, sleep and pharmaceutical
technology services. There are no material intersegment sales. Anesthesia
and Respiratory/Critical Care share certain manufacturing facilities, sales
and administration support; therefore the operating profit, total assets,
and capital expenditures are not specifically identifiable. However the
Company has allocated operating profit, total assets, and capital
expenditures on a net sales basis. Management evaluates performance on
gross profits and operating results of the four business segments.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
RESPIRATORY/ PHARMACEUTICAL
CRITICAL TECHNOLOGY
ANESTHESIA CARE SLEEP SERVICES OTHER* CONSOLIDATED
------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED DECEMBER 31,
2002
- ----
Net sales $ 17,017 $11,190 $11,283 $ 5,267 $ --- $ 44,757
Gross profit 9,477 6,277 5,215 2,246 --- 23,215
Operating profit 4,793 3,151 793 890 --- 9,627
Total assets 97,309 63,988 34,445 20,806 --- 216,548
Capital expenditures 250 164 88 22 --- 524
2001
- ----
Net sales $ 16,945 $11,740 8,085 $ 2,747 $1,639 $ 41,156
Gross profit 8,986 6,445 3,641 871 1,439 21,382
Operating profit (loss) 4,359 3,662 (367) 434 1,439 9,527
Total assets 102,869 64,985 24,204 4,136 --- 196,194
Capital expenditures 1,155 730 --- --- --- 1,885
*"Other" relates primarily to one-time licensing revenue recorded in the
quarter ended December 31, 2001 in the anesthesia business segment.
6
6. In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123." This Statement amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The Company has determined that it will continue to
account for stock-based compensation to employees under the provisions of
Accounting Principles Board opinion No. 25 and will make all required
disclosures in its annual and interim financial statements.
The Company does not believe that any other recently issued but not yet
effective accounting standards will have a material effect on the Company's
financial position or results of operation.
7. Other comprehensive income for the three month periods ended December 31,
2002 and 2001 consisted of:
2002 2001
---- ----
Net income $6,205 $6,316
Foreign currency translation 929 (7)
Other 4 (4)
------ ------
Comprehensive income $7,138 $6,305
====== ======
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time we
expect to make, certain forward-looking statements regarding our 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"), we intend to
caution investors that there are important factors that could cause our actual
results to differ materially from those projected in our forward-looking
statements, whether written or oral, made herein or that may be made from time
to time by or on behalf of us. Investors are cautioned that such forward-looking
statements are only predictions and that actual events or results may differ
materially from such statements. We undertake no obligation to publicly release
the results of any revisions to our forward-looking statements to reflect
subsequent events or circumstances or to reflect the occurrence of unanticipated
events.
We wish 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, we have set forth in Exhibit
99.1 to our Annual Report on Form 10-K for the year ended September 30, 2002 a
list of important factors, certain of which are outside of management's control,
that could cause our actual results to differ materially from those expressed in
forward-looking statements or predictions made herein and from time to time by
us. Reference is made to such Exhibit 99.1 for a list of such risk factors.
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
statement of income.
INCREASE/(DECREASE) FROM
PRIOR PERIOD
THREE MONTH'S ENDED
DECEMBER 31, 2002
COMPARED WITH
THREE MONTHS ENDED
DECEMBER 31, 2001
-------------------------
Consolidated Statement of Operations Data:
Net revenue.................................................. 8.7%
Gross profit................................................. 8.6
Total operating expenses..................................... 14.6
Interest income, net......................................... 46.0
Income from continuing operations............................ 1.8
Net income................................................... (1.8)
8
Comparison of Results for the Three-Month Period Ended December 31, 2002 to the
Three-Month Period Ended December 31, 2001
Net Revenue. Total net revenue increased 8.7%, from $41.2 million for the
three-month period ended December 31, 2001 to $44.8 million for the three-month
period ended December 31, 2002. Of the 8.7% increase, approximately 2% is
attributable to favorable foreign exchange rates and 6.7% to volume increases.
Net sales decreased 1.9%, from $35.7 million to $35.1 million primarily due to a
reduction in license and other revenue, offset in part by growth in anesthesia
circuits. Service revenue increased 79.2 %, from $5.4 million to $9.7 million.
This increase was primarily due to the growth in our sleep and pharmaceutical
technology services businesses through the merger of our National Sleep
Technologies subsidiary with a subsidiary of Johns Hopkins Health System and our
acquisition of Stelex, Inc.
REVENUE BY BUSINESS SEGMENT
FOR THE QUARTER ENDED
DECEMBER 31,
-------------------------- PERCENT
2002 2001 CHANGE
------- ------- -----
Anesthesia $17,017 $16,945 .4%
Respiratory/Critical Care 11,190 11,740 (4.7%)
Sleep 11,283 8,085 39.6%
Pharmaceutical Technology Services 5,267 2,747 91.7%
Other* --- 1,639 N/A
------- ------- ----
$44,757 $41,156 8.7%
======= ======= =====
* "Other" relates primarily to one-time licensing revenue recorded in the
quarter ended December 31, 2001 in the anesthesia business segment.
Our sleep segment, representing 25.2% of net revenue during the
three-months ended December 31, 2002, increased revenues 39.6%, from $8.1
million for the three month period ended December 31, 2001 to $11.3 million for
the three-month period ended December 31, 2002. The growth in our sleep segment,
which includes sleep therapy services and diagnostic products, was due primarily
to the above-mentioned merger in the second quarter of fiscal 2002 and increased
revenue of 34.7% from our Breas subsidiary. Approximately one-half of this 34.7%
increase is attributed to foreign exchange rate gains.
Service revenues in the Pharmaceutical Technology Services segment,
representing 11.8% of net revenues, increased 91.7%, from $2.7 million for the
three-month period ended December 31, 2001 to $5.3 million for the three-month
period ended December 31, 2002, primarily due to the acquisition of Stelex, Inc,
in the third quarter of fiscal 2002.
Sales of anesthesia products, representing 38.0% of net revenue for the
three-month period ended December 31, 2002, increased 0.4% from $16.9 million
for the three-month period ended December 31, 2001 to $17.0 million for the
three-month period ended December 31, 2002. This increase was due to volume
growth in anesthesia circuits including our Limb-[T]'TM', a patented
anesthesia circuit, which increased 84% to $1.1 million, offset by lower
international sales.
9
Sales of respiratory/critical care products, representing 25.0% of net
revenue for the three-month period ended December 31, 2002, decreased 4.7%, from
$11.7 million for the three-month period ended December 31, 2001 to $11.2
million for the three-month period ended December 31, 2002. This was due
primarily to lower international sales.
Cost of Goods Sold and Services Performed. Cost of goods sold and services
performed increased 8.9%, consistent with the percentage increase in total
revenue of 8.7%. Cost of goods sold decreased 3.1%, from $16.6 million for the
three-month period ended December 31, 2001 to $16.1 million for the three-month
period ended December 31, 2002. This decrease was due to productivity
improvement plans in the anesthesia and respiratory/critical care segments and
sales volume reduction in the respiratory / critical care segment. Cost of
services performed increased 73.0%, from $3.1 million for the three-month period
ended December 31, 2001 to $5.4 million for the three-month period ended
December 31, 2002, reflecting the increased volume in sleep services revenue
resulting from the merger in the second quarter of fiscal 2002 of our National
Sleep Technologies subsidiary with the Johns Hopkins Health System subsidiary
and the increased pharmaceutical technology outsourcing services achieved with
the acquisition of Stelex, Inc., in the third quarter of fiscal 2002.
Gross Profit. Our gross profit increased 8.6%, from $21.4 million for the
three-month period ended December 31, 2001 to $23.2 million for the three-month
period ended December 31, 2002. Our overall gross profit margin was 52% for both
the three-month period ended December 31, 2001 and the three-month period ended
December 31, 2002. Improved margins in our anesthesia segment have offset the
lower gross margin realized from a change in mix attributable to an increase in
the revenues of our sleep and pharmaceutical technology outsourcing segments,
which operate at lower gross margins. For gross profit information related to
our four segments, refer to Note 5 to our financial statements.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 19.1%, from $10.1 million for the three-month
period ended December 31, 2001 to $12.1 million for the three-month period ended
December 31, 2002. The increase in such expenses was primarily due to additional
employee levels resulting from the acquisition of Stelex, Inc, and the merger of
the Johns Hopkins Health System subsidiary into our Sleep Services of America
subsidiary.
Research and Development Expenses. Research and development expenses
declined by approximately $100,000, or 8.2%, from $1.6 million for the
three-month period ended December 31, 2001 to $1.5 million for the three-month
period ended December 31, 2002.
Other (Income) Expense--Net. Other (income) expense included in operating
income, changed $73,000, or by 109.0% from a net expense of $67,000 for the
three-month period ended December 31, 2001 to a net income of $6,000 for the
three-month period ended December 31, 2002.
Other Items
Net Interest Income. Net interest income increased 46.0%, from $174,000
during the three-months ended December 31, 2001 to $254,000 during the
three-month period ended December 31, 2002. The
10
change includes the reversal (due to expiration date of the coupons) of accrual
interest expense related to certain bonds payable of $122,000, offset by
reduction in interest income of $42,000 due to reduced interest rates.
Provision for Income Taxes. The provision for income tax expense for the
three-month periods ended December 31, 2002 and 2001 was $3.3 million,
reflecting effective tax rates of 33.0% and 33.6% for these periods,
respectively. The decrease in the effective tax rate primarily reflects the
impact of increased profits at our Swedish subsidiary, Breas, which incur taxes
at a lower rate than in the United States.
Discontinued Operations. In September 2002, we decided to sell our Vital
Pharma, Inc. subsidiary, a fully integrated contract manufacturer that utilizes
blow-fill-seal technology. Accordingly, effective September 2002 the results for
Vital Pharma have been reclassified for all periods presented. The loss from
operations, net of tax benefits, of Vital Pharma for the three-month period
ended December 31, 2002 of $357,000 represented an additional loss of $228,000
over the loss from operations of Vital Pharma of $129,000 experienced in the
three-month period ended December 31, 2001.
Liquidity and Capital Resources
Historically, our primary liquidity requirements have been to finance
business acquisitions and to support operations. We have funded these
requirements principally through internally generated cash flow. At December 31,
2002, we had cash and cash equivalents of $40.0 million and we had long-term
debt of $1.3 million, representing industrial revenue bonds payable in varying
installments through 2009. We have a $20 million line of credit with JPMorgan
Chase Bank. There were no amounts outstanding on the JPMorgan Chase Bank line of
credit at December 31, 2002.
Vital Signs continues to rely upon cash flows from its operations. During
the three-month period ended December 31, 2002, cash and cash equivalents
increased by $10.7 million. Operating activities provided $11.1 million net
cash, of which $11.8 million was provided from continuing operations, offset by
$749,000 used in our discontinued operation at Vital Pharma. Investing
activities used approximately $500,000 for capital expenditures. Financing
activities used $491,000 consisting of $287,000 used to pay down long term debt;
$520,000 paid for dividends; offset by $316,000 of cash received from the
exercise of stock options.
Cash and cash equivalents were $40.0 million and together with long-term
marketable securities aggregated $40.1 million as compared to $29.5 million at
September 30, 2002. At December 31, 2002 our working capital was $93.3 million
as compared to $86.6 million at September 30, 2002. At December 31, 2002 the
current ratio was 6.7 to 1, as compared to 7.6 to 1 at September 30, 2002.
Our capital investments vary from year to year, based in part on capital
demands of newly acquired businesses. Capital expenditures for the three-month
period ended December 31, 2002 were approximately $500,000, and included
expenditures for equipment used as part of cost improvement projects at our New
Jersey and Colorado facilities.
Our current policy is to retain working capital and earnings for use in our
business, subject to the payment of certain cash dividends. Such funds may be
used for product development, product
11
acquisitions and business acquisitions, among other things. We regularly
evaluate and negotiate with domestic and foreign medical device companies
regarding potential business or product line acquisitions or licensing
arrangements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, including the impact of material price
changes and changes in the market value of our investments and, to a lesser
extent, interest rate changes and foreign currency fluctuations. In the normal
course of business as described below, we employ policies and procedures with
the objective of limiting the impact of market risks on earnings and cash flows
and to lower our overall borrowing costs.
The impact of interest rate changes and foreign currency fluctuations is
not material to our financial condition. We do not enter into interest rate and
foreign currency transactions for speculative purposes. To the maximum extent
feasible, we price products from vendors and to customers in U.S. dollars and to
receive payment in U.S. dollars. Historically, the international portion of our
sales has been relatively small and the effect of changes in interest rates and
foreign exchange rates on our 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 our total sales and we may in the future
need to revise or change our approach to managing interest rate and foreign
currency transactions.
Our risk involving price changes relate to raw materials used in our
operations. We are exposed to changes in the prices of resins and latex for the
manufacture of our products. We do not enter into commodity futures or
derivative instrument transactions. Except with respect to our single source of
supply for face masks, it is our policy to maintain commercial relations with
multiple suppliers and when prices for raw materials rise to attempt to source
alternative supplies.
ITEM 4.
CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we have carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
12
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. For the year ended September 30, 2002 we
completed this impairment test. If we are required to record impairment
charges 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. Our allowance for doubtful
accounts was $631,000 at December 31, 2002 and $638,000 at September
30, 2002. 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 Sales to distributors are made at above our list price. When the
distributor provides us with documentation verifying that the product
has been shipped to an end-user that is entitled to a price lower than
our list price, we owe the distributor a rebate equal to the difference
between our invoice price and the lower price to which that end-user is
entitled. We record these sales upon shipment of the product in
accordance with our sales policy and in the same period record an
estimated sales allowance for the expected sales rebate to the
distributor. We record this sales rebate allowance as a reduction of
gross revenue. We utilize a moving average based on prior history to
make these estimates. Sales rebates were $10.1 million and $8.9
million, respectively, for the three-month periods ended December 31,
2002 and 2001.
13
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 an allowance for inventory obsolescence. The
allowance was determined by performing an aging analysis of the
inventory; based upon this review, inventory is stated at the lower of
cost (first in, first out method) or its net realizable value. Our
inventory allowance for obsolescence was $461,000 at December 31, 2002
and $438,000 at September 30, 2002.
14
PART II.
Other Information
ITEM 1.
Legal Proceedings:
(a) Reference is made to Item 3 of our Annual Report on Form 10-K for the
year ended September 30, 2002.
(b) On December 6, 1999, a complaint was filed against us on behalf of the
former shareholders of our Vital Pharma subsidiary alleging breach of
contract for failure to pay earnout payments allegedly due under the
stock purchase agreement executed in connection with our purchase of
Vital Pharma in December 1995. We have answered the complaint, filed
counter-claims and moved to transfer the case to arbitration. In August
2000, the court ordered the plaintiff to submit such claims to binding
arbitration and stayed all other proceedings pending the outcome of the
arbitration. The parties are in the discovery phase of the arbitration
proceeding. The arbitration is anticipated to take place by the end of
the second quarter of fiscal 2003.
(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 September 26, 2002, the court
rejected the plaintiff's motion to add the claim for punitive damages.
With this rejection of plaintiff's punitive damage demand, the matter
is being defended within the limits of our primary insurance policy.
(d) We are also involved in other legal proceedings arising in the ordinary
course of business. We cannot predict the outcome of our legal
proceedings with certainty. However, based upon our review of pending
legal proceedings, we do not believe the ultimate disposition of our
pending legal proceedings will be material to our financial condition.
Predictions regarding the impact of pending legal proceedings
constitute forward-looking statements. 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 2 THROUGH 5
Not applicable
15
ITEM 6.
Reports on Form 8-K
a) A report on Form 8-K (Under Item 5) was filed on October 9, 2002
reporting the resignation of Stuart Essig from the Board of Directors.
Exhibits
99.1 Certification Pursuant to[p]. U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to[p]. U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
16
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/ Frederick S. Schiff
--------------------------------
Frederick S. Schiff
Executive Vice President and
Chief Financial Officer
Date: February 14, 2003
17
CERTIFICATIONS
I, Terry D. Wall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vital Signs, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/Terry D. Wall
- ----------------
Terry D. Wall
Chief Executive Officer
18
I, Frederick S. Schiff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vital Signs, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/Frederick S. Schiff
- ----------------------
Frederick S. Schiff
Chief Financial and Accounting Officer
19
STATEMENT OF DIFFERENCES
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The trademark symbol shall be expressed as............................. 'TM'
The paragraph symbol shall be expressed as............................. [p]
The Greek letter theta shall be expressed as............................ [T]