Back to GetFilings.com
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, 2003 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 12, 2004 there were 12,925,523 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 December 31, 2003 (Unaudited) and September
30, 2003...................................................................... 3
Consolidated Statements of Income for the Three Months ended December 31,
2003 and 2002 (Unaudited)..................................................... 4
Consolidated Statements of Cash Flows for the Three Months Ended December 31,
2003 and 2002 (Unaudited)..................................................... 5
Notes to Consolidated Financial Statements (Unaudited)........................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 10-15
Item 3. Quantitative and Qualitative Disclosure About Market Risks....................... 16
Item 4. Controls and Procedures.......................................................... 16
PART II.
Item 1. Legal Proceedings................................................................ 17-18
Item 6. Exhibits and Reports on Form 8-K................................................. 19
Signatures....................................................................... 21
Exhibit 31.1.....................................................................
Exhibit 31.2.....................................................................
Exhibit 32.1.....................................................................
Exhibit 32.2.....................................................................
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, 2003.
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,
or any other period.
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, 2003 and the related consolidated
statements of income and cash flows for the three months ended December 31, 2003
and 2002. 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 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 consolidated 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 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, 2003 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 5,
2003, except for the fourth paragraph of Note 16, as to which the date is
December 26, 2003, 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, 2003 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 30, 2004
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
2003 2003
------------ -------------
(IN THOUSANDS OF DOLLARS)
(Unaudited)
------------
ASSETS
Current Assets:
Cash and cash equivalents .............................................. $ 63,285 $ 55,660
Accounts receivable, less allowance for rebates and doubtful accounts of
$6,999 and $7,075 respectively ...................................... 29,342 29,436
Inventory .............................................................. 20,600 21,857
Prepaid expenses ....................................................... 2,462 3,239
Other current assets ................................................... 2,355 4,129
Assets of discontinued business ........................................ -- 2,104
-------- --------
Total Current Assets ................................................ 118,044 116,425
Property, plant and equipment - net .................................... 32,752 32,306
Goodwill ............................................................... 69,506 69,506
Deferred income taxes .................................................. 1,341 1,519
Other assets ........................................................... 2,845 3,322
-------- --------
Total Assets ........................................................ $224,488 $223,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................................... $ 4,694 $ 6,072
Current portion of long-term debt ...................................... 179 1,690
Accrued other expenses ................................................. 5,858 6,071
Income taxes payable ................................................... 2,426 3,392
Other current liabilities .............................................. 297 228
Liabilities of discontinued business ................................... -- 503
-------- --------
Total Current Liabilities ........................................... 13,454 17,956
Minority interest in subsidiary ........................................... 3,038 2,900
Commitments and contingencies
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares, issued and
outstanding 12,914,118 and 12,915,566 shares, respectively........... 30,338 30,467
Accumulated other comprehensive income ................................. 3,439 1,827
Retained earnings ...................................................... 174,219 169,928
-------- --------
Stockholders' equity ................................................... 207,996 202,222
-------- --------
Total Liabilities and Stockholders' Equity .......................... $224,488 $223,078
======== ========
- ----------------------------------------------------------------------------------------------------------
(See Notes to Consolidated Financial Statements)
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
2003 2002
------- -------
(In Thousands, Except
Per Share Amounts)
---------------------
Revenues:
Net sales ............................................................... 35,895 35,055
Service revenue ......................................................... 7,953 9,702
------- -------
43,848 44,757
Cost of goods sold and services performed:
Cost of goods sold ...................................................... 17,505 16,125
Cost of services performed .............................................. 4,329 5,417
------- -------
21,834 21,542
Gross profit ............................................................... 22,014 23,215
Operating expenses:
Selling, general and administrative ..................................... 12,346 12,091
Research and development ................................................ 1,506 1,503
Other (income) expense ................................................. 70 (168)
------- -------
Total operating expenses ............................................. 13,922 13,426
Operating Income ........................................................... 8,092 9,789
Interest (income) expense:
Interest (income) ....................................................... (183) (134)
Interest expense ........................................................ 24 42
------- -------
Total interest (income) expense ............................................ (159) (92)
Income from continuing operations before provision for income taxes and
minority interest ....................................................... 8,251 9,881
Provision for income taxes ................................................. 2,889 3,264
------- -------
Income from continuing operations before minority interest..................
5,362 6,617
Minority interest .......................................................... 138 55
------- -------
Income from continuing operations .......................................... 5,224 6,562
Discontinued Operations:
Loss from operations of Vital Pharma, net of income tax benefit of ($83) and
($174) .................................................................. 154 357
------- -------
Net income ................................................................. $ 5,070 $ 6,205
======= =======
Earnings (loss) per Common Share:
Basic
Income per share from continuing operations ............................. $ 0.40 $ 0.51
Loss per share from discontinued operations ............................. $ (0.01) $ (0.03)
Net earnings ............................................................ $ 0.39 $ 0.48
Diluted
Income per share from continuing operations ............................. $ 0.40 $ 0.51
Loss per share from discontinued operations ............................. $ (0.01) $ (0.03)
Net earnings ............................................................ $ 0.39 $ 0.48
Basic weighted average number of shares outstanding ........................ 12,884 12,898
Diluted weighted average number of shares outstanding ...................... 13,018 12,994
Dividends paid per share ................................................... $ 0.06 $ 0.04
- ---------------------------------------------------------------------------------------------------------
(See Notes to Consolidated Financial Statements)
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2003 2002
--------------------------
Cash Flows from Operating Activities: (IN THOUSANDS OF DOLLARS)
--------------------------
Net income .................................................................... $ 5,070 $ 6,205
Add loss from discontinued operations ......................................... 154 357
------- -------
Income from continuing operations ............................................. 5,224 6,562
Adjustments to reconcile income from continuing operations to net cash provided by
continuing operations
Depreciation and amortization .............................................. 1,112 1,085
Deferred income taxes ...................................................... 178 49
Minority interest in income of consolidated subsidiary ..................... 138 55
Tax benefit for stock options .............................................. 20 --
Changes in operating assets and liabilities:
Decrease in accounts receivable ............................................ 402 1,821
Decrease in inventory ...................................................... 1,730 96
Decrease (increase) in prepaid expenses and other current assets ........... 2,619 (48)
Decrease (increase) in other assets ........................................ 478 (397)
(Decrease) in accounts payable ............................................. (2,159) (220)
(Decrease) increase in accrued expenses .................................... (325) 905
(Decrease) increase in accrued income taxes ................................ (966) 2,115
(Decrease) in other liabilities ............................................ (86) (218)
------- -------
Net cash provided by continuing operations ....................................... 8,365 11,805
------- -------
Net cash (used) in discontinued operations ...................................... (192) (749)
------- -------
Net cash provided by operating activities ........................................ 8,173 11,056
Cash flows from investing activities:
Net proceeds from sale of assets of Vital Pharma ........................... 417 --
Net proceeds from sale of Vital Pharma real estate ......................... 1,222 --
Acquisition of property, plant and equipment ............................... (647) (197)
Capitalized software costs ................................................. (468) (118)
Capitalized patent costs ................................................... (44) (209)
Proceeds from sales of available for sale securities ....................... -- 50
------- -------
Net cash used in investing activities ............................................ 480 (474)
Cash flows from financing activities:
Dividends paid ............................................................. (779) (520)
Proceeds from exercise of stock options .................................... 312 316
Purchase of common stock ................................................... (460) --
Principal payments on long-term debt and notes payable ..................... (1,511) (287)
------- -------
Net cash used in financing activities ............................................ (2,438) (491)
Effect of foreign currency translation ........................................... 1,410 636
------- -------
Net increase in cash and cash equivalents ........................................ 7,625 10,727
Cash and cash equivalents at beginning of period ................................. 55,660 29,303
------- -------
Cash and cash equivalents at end of period ....................................... $63,285 $40,030
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the nine months for:
Interest ...................................................................... $ 22 $ 82
Income taxes .................................................................. $ 1,111 $ 167
- ---------------------------------------------------------------------------------------------------------------
(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, 2003, the consolidated
statements of operations for the three months ended December 31, 2003 and
2002, and the consolidated statements of cash flows for the three months
ended December 31, 2003 and 2002, 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 necessary to
present fairly the financial position at December 31, 2003 and the results
of operations for the three months ended December 31, 2003 and 2002, and
the cash flows for the three months ended December 31, 2003 and 2002, have
been made.
2. See the Company's Annual Report on Form 10-K for the year ended September
30, 2003 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
3. At December 31, 2003, the Company's inventory was comprised of raw
materials of $12,592,000, and finished goods of $8,008,000. At September
30, 2003, the Company's inventory was comprised of raw materials of
$12,570,000 and finished goods of $9,287,000.
4. For Details of Legal Proceedings, see Part II, Item 1, "Legal Proceedings".
5. Net revenues consist of product sales and service revenues. For product
sales, revenue is recognized in the same period as title to the product
passes to the customer. For service revenue, revenue is recorded when the
service is performed. A component of product sales is a deduction for
rebates due on sales to distributors (see Footnote 9). A reconciliation of
gross to net sales is provided below:
- -----------------------------------------------
THREE MONTHS
(IN THOUSANDS OF DOLLARS) ENDED DECEMBER 31,
- -----------------------------------------------
2003 2002
-------- --------
Gross sales $ 48,084 $ 46,126
Rebates (11,085) (10,041)
Other deductions (1,104) (1,030)
-------- --------
Net sales 35,895 35,055
Service revenues 7,953 9,702
-------- --------
Total net revenues $ 43,848 $ 44,757
======== ========
- -----------------------------------------------
Other deductions consists of discounts, returns and allowances for credits
6. 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, sales and
administration costs; therefore the operating profit, total assets, and
capital expenditures are not specifically identifiable. However the Company
has allocated these shared costs on a net sales basis to arrive at
operating profit for the anesthesia and respiratory/critical care segments.
Total assets and capital expenditures for anesthesia and
respiratory/critical care have also been allocated on a net sales basis.
Management evaluates performance on the basis of the 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:
6
- ------------------------------------------------------------------------------------------
RESPIRATORY/ PHARMACEUTICAL
CRITICAL TECHNOLOGY
ANESTHESIA CARE SLEEP SERVICES CONSOLIDATED
---------- ------------ ------- -------------- ------------
FOR THE THREE MONTHS
ENDED DECEMBER 31,
2003
Net revenues $ 18,496 $10,667 $10,956 $ 3,729 $ 43,848
Gross profit 9,332 6,080 5,026 1,576 22,014
Operating income 4,279 2,467 962 384 8,092
Total assets 107,424 61,954 36,194 18,916 224,488
Capital expenditures 388 223 373 175 1,159
2002
Net revenues $ 17,017 $11,190 $11,283 $ 5,267 $ 44,757
Gross profit 9,477 6,277 5,215 2,246 23,215
Operating income 4,890 3,216 793 890 9,789
Total assets 97,309 63,988 34,445 20,806 216,548
Capital expenditures 250 164 88 22 524
- ------------------------------------------------------------------------------------------
In Fiscal 2003 capital expenditures include $647,000 for the acquisition
of property, plant and equipment, $468,000 for the capitalization of
software development costs and $44,000 for the capitalization of patent
costs. In Fiscal 2002 capital expenditures include $197,000 for the
acquisition of property, plant and equipment, $118,000 for the
capitalization of software development costs and $209,000 for the
capitalization of patent costs.
7. Other comprehensive income for the three months ended December 31, 2003 and
2002 consisted of:
- -------------------------------------------------
THREE MONTHS
(IN THOUSANDS OF DOLLARS) ENDED DECEMBER 31,
- -------------------------------------------------
2003 2002
------ ------
Net income $5,070 $6,205
Foreign currency translation 1,612 929
Other -- 4
------ ------
Comprehensive income $6,682 $7,138
====== ======
- -------------------------------------------------
8. On May 7, 2003 a complaint was filed against the Company and two of its
officers by a former CFO of the Company. At the request of management, the
Company's Audit Committee performed an independent investigation of the
allegations and hired outside independent accountants and legal counsel to
assist in the matter. Accounting and legal expenses of $235,000 included in
selling, general and administrative expenses, were incurred during the
first quarter of fiscal 2004 in connection with the Audit Committee review.
These expenses were allocated (on a net sales basis) to the anesthesia and
respiratory/critical segments.
7
9. During the second quarter of fiscal 2003, the Company reviewed and adjusted
its estimate for rebates due to distributors. These rebates apply to the
Company's anesthesia and respiratory/critical care segments. As background,
the Company's sales to distributors, which represented 26.2% of the
Company's net sales during the first quarter of fiscal 2004, are made at
the Company's established price. Each distributor subsequently provides the
Company with documentation that the Company's products have been shipped to
particular end-users (i.e. particular hospitals). In general, the end-user
is entitled, on a case by case basis, to a price lower than the Company's
established price. Accordingly, the Company owes the distributor a rebate -
the difference between the established price and the lower price to which
the end user is entitled - upon the Company's receipt of applicable
documentation from the distributor.
The Company had, for several years, utilized a historical moving average to
estimate the allowance for rebates. Based upon the Company's review, during
the second quarter of fiscal 2003, the Company concluded that the moving
average estimate did not necessarily result in the appropriate liability
due to distributors. Accordingly, the Company changed its method of
estimating rebate claims to record the allowance for rebates based upon the
documentation provided by the distributor of the shipments to the end-user,
as well as estimates for inventory not yet sold by the distributor,
adjusting from estimate to actual at the time of remittance.
The allowance for rebates is recorded for financial statement purposes at
the time the Company records the revenue for the product shipped to the
distributor. The rebate is recorded as a sales allowance, reducing gross
revenue. The allowance for rebates was $6,250,000 and $6,156,000 at
December 31, 2003 and September 30, 2003, respectively. Rebate expense was
$11,085,000 and $10,041,000 for the three months ended December 31, 2003
and December 31, 2002.
10. The Company has elected, in accordance with the provisions of SFAS No. 123,
as amended by SFAS No. 148, to apply the current accounting rules under APB
Opinion No. 25 and related interpretations in accounting for its stock
options and, accordingly, has presented the disclosure-only information as
required by SFAS No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the
grant date as prescribed by SFAS No. 123, the Company's net income and net
income per common share for the three months ended December 31, 2003 and
2002 (pro forma effect has been adjusted for income taxes) would
approximate the pro forma amounts indicated in the table below (dollars in
thousands):
- ------------------------------------------------------------------------------
THREE MONTH PERIOD
ENDED DECEMBER 31,
------------------
2003 2002
------ ------
Net income - as reported................................. $5,070 $6,205
Net income- pro forma.................................... 4,883 6,112
Basic net income per common share - as reported.......... .39 .48
Diluted net income per common share - as reported....... .39 .48
Basic net income per common share - Pro forma............ .38 .47
Diluted net income per common share - Pro forma......... .38 .47
- ------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the three months ended December 31, 2003 and 2002,
respectively: expected volatility of 50% and 50%, respectively, risk-free
interest rate of 3.69% and 3.94%, respectively, dividend yield rate of .7%
and .6%, respectively, and all options have expected lives of 5 years.
8
11. In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") 46, Consolidation of Variable Interest
Entities--an Interpretation of ARB No. 51. This interpretation provides
guidance related to identifying variable interest entities (previously
known as special purpose entities or SPEs) and determining whether such
entities should be consolidated. Certain disclosures are required if it is
reasonably possible that a company will consolidate or disclose information
about a variable interest entity when it initially applies FIN 46. This
interpretation will be effective for the Company's second quarter ending
March 31, 2004. The Company has no investment in or contractual
relationship or other business relationship with a variable interest entity
and therefore the adoption of FIN 46 will not have any impact on our
results of operations and financial condition. However, if the Company
enters into any such arrangement with a variable interest entity in the
future (or an entity with which we currently have a relationship is
reconsidered based on guidance in FIN 46 to be a variable interest entity),
the Company's results of operations and financial condition will be
impacted.
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 operations.
9
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, 2003 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, 2003
COMPARED WITH
THREE MONTHS ENDED
DECEMBER 31, 2002
-------------------
Consolidated Statement of Operations Data:
Net revenues................................. (2.0)%
Gross profit................................. (5.2)%
Total operating expenses..................... 3.7%
Income from continuing operations............ (20.4%)
Net income................................... (18.3%)
- ----------------------------------------------------------------
10
Comparison of Results for the Three-Month Period Ended December 31, 2003 to the
Three-Month Period Ended December 31, 2002.
Net Revenue. Net revenues for the three months ended December 31, 2003
decreased by 2.0% (a decrease of 4.8% excluding the favorable effect of foreign
exchange) to $43.8 million as compared to $44.8 million in the comparable period
last year. Of our total revenues, $32.5 million (or 74.2%) were derived from
domestic sales and $11.3 million (or 25.9%) were derived from international
sales. Following are the net revenues by business segment for the three months
ended December 31, 2003 compared to the three months ended December 31, 2002.
REVENUE BY BUSINESS SEGMENT
FOR THE QUARTER ENDED
DECEMBER 31 PERCENT
---------------------
2003 2002 CHANGE
------- ------- -------
Anesthesia $18,496 $17,017 8.7%
Respiratory/Critical Care 10,667 11,190 (4.7)%
Sleep 10,956 11,283 (2.9)%
Pharmaceutical Technology Services 3,729 5,267 (29.2%)
------- ------- -----
$43,848 $44,757 (2.0)%
------- ------- -----
Sales of anesthesia products for the three months ended December 31, 2003,
increased 8.7% from $17.0 million for the three months ended December 31, 2002
to $18.5 million for the three months ended December 31, 2003. This increase was
due primarily to growth at our Thomas Medical Products subsidiary, which
increased 33.7% to $4.2 million and volume growth in our Limb-(O)'TM'
product, a patented anesthesia circuit, which increased 52.7% to $1.6 million.
Domestic sales of anesthesia products increased 6.5%, from $16.0 million to
$17.1 million. International sales of anesthesia products increased 44.3%, from
$1.0 million to $1.4 million.
Sales of respiratory/critical care products decreased 4.7%, from $11.2
million for the three months ended December 31, 2002 to $10.7 million for the
three months ended December 31, 2003. Domestic sales of respiratory/critical
care products decreased 17.0%, from $9.0 million to $7.4 million primarily due
to volume declines attributed to decreased market share. International sales of
respiratory/critical care products increased 44.7%, from $2.2 million to $3.2
million which resulted from increased volume levels attributable to our
distribution agreement with Rusch.
As noted above, our international sales in anesthesia and
respiratory/critical businesses together increased 44.6% to $4,638,000 in the
first quarter of fiscal 2004 compared to the first quarter of fiscal 2003.
Our sleep segment revenues decreased 2.9% (a decrease of 13.1% excluding
favorable foreign exchange), from $11.3 million for the three months ended
December 31, 2002 to $11.0 million for the three months ended December 31, 2003.
The decline in our sleep segment, which includes sleep diagnostic services and
therapy products, was due primarily to decreased revenue of 1.7% (a decrease of
17.6% excluding favorable foreign exchange) to $6,732,000, resulting principally
from a slow start to our fiscal year in the Breas ventilation business, . Also
included in this segment is Sleep Services of America, our sleep diagnostics and
therapy company, whose revenues decreased by 4.7%, to $4,224,000 primarily due
to the closing of certain sleep labs that have not returned appropriate margins.
Service revenues in the Pharmaceutical Technology Services segment
decreased 29.2%, from $5.3 million for the three months ended December 31, 2002
to $3.7 million for the three months ended
11
December 31, 2003 resulting from changes in the FDA regulatory climate,
particularly changes in the 21 CFR Part 11 regulation, and significant budget
constraints at several large pharmaceutical clients.
Rebates, which relate to our domestic anesthesia and respiratory/critical
care businesses, for the three months ended December 31, 2003 were $11.1 million
compared to $10.0 million for the three months ended December 31, 2002. The
increase in rebates is due to higher sales by our distributors to hospitals, as
well as our change in methodology for estimating rebates made effective in the
second quarter of fiscal 2003. (See Footnote 9).
Cost of Goods Sold and Services Performed. Cost of goods sold and services
performed increased 1.4% from $21.5 million for the three months ended December
31, 2002 to $21.8 million for the three months ended December 31, 2003. Cost of
goods sold and services performed as a per cent of gross revenues were 39.0% for
the first quarter of fiscal 2004, slightly higher than 38.6% recorded in the
first quarter of fiscal 2003.
Cost of goods sold increased 8.6%, from $16.1 million for the three months
ended December 31, 2002 to $17.5 million for the three months ended December 31,
2003. The $1.4 million increase results primarily from foreign exchange changes
of approximately $700,000 and volume related cost increases, consistent with the
increase in net revenues, of approximately $600,000 in our anesthesia segment.
Cost of services performed decreased 20.1%, from $5.4 million for the three
months ended December 31, 2002 to $4.3 million for the three months ended
December 31, 2003, resulting primarily from reduced sales volumes in our
Pharmaceutical Technology Services segment and decreased sales volumes at Sleep
Services of America, our sleep diagnostics company.
Gross Profit. Our gross profit decreased 5.2%, from $23.2 million for the
three months ended December 31, 2002 to $22.0 million for the three months ended
December 31, 2003. Gross Profit as a per cent of gross revenues was 61.0% for
the three months ended December 31, 2003, slightly lower than 61.4% recorded for
the three months ended December 31, 2002. For a reconciliation of gross revenues
to net revenues, refer to Footnote 5 to our financial statements. For gross
profit information related to our four segments, refer to Footnote 6 to our
financial statements.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 2.1%, from $12.1 million for the three months
ended December 31, 2002 to $12.3 million for the three months ended December 31,
2002. The approximately $250,000 increase was primarily due to an increase of
approximately $387,000 at our Breas subsidiary due to foreign exchange changes;
an increase of approximately $235,000 in legal and accounting expense s
applicable to the audit committee investigation related to a complaint filed
against the company by a former Chief Financial Officer of the Company (see
Footnote 8)) and approximately $139,000 for a non-cash charge for the
write-off of the deferred debt acquisition costs relating to the recently
paid down $1.5 million Industrial Revenue Bond ("IRB"). These increases were
partly offset primarily by cost reductions at our Breas and Stelex
subsidiaries of approximately $450,000. Research and Development Expenses.
Research and development expenses were $1.5 million for the three months
ended December 31, 2003 and 2002.
Other (Income) Expense - net. Other (income) and expense - net was
approximately $70,000 of net expense (primarily donations) for the three months
ended December 31, 2003 and was approximately $168,000 of net other income for
the three months ended December 31, 2002. Included in fiscal 2002 was $122,000
of income related to the reversal of accrued interest due to the expiration date
of certain overseas bonds.
12
Other Items
Interest Income and Expense. Interest income increased 36.6%, from $134,000
for the three months ended December 31, 2002 to $183,000 during the three months
ended December 31, 2003, resulting from the increase in the level of cash and
cash equivalents being invested. Interest expense decreased 42.9%, from $42,000
for the three months ended December 31, 2002 to $24,000 during the three months
ended December 31, 2003, due to the payment in full of our IRB loan on December
1, 2003.
Provision for Income Taxes. The provision for income tax expense for the
three months ended December 31, 2003 and 2002 was $2.9 million and $3.3 million,
respectively, reflecting effective tax rates of 35.0% and 33.0% for these
periods, respectively. The increase in the tax rate is primarily due to the
requirement for higher state income taxes.
Discontinued Operations. In September 2002, we decided to sell our Vital
Pharma, Inc. subsidiary. Accordingly the results for Vital Pharma have been
classified as a discontinued operation. On October 30, 2003 the Company sold its
Vital Pharma subsidiary to Pro-Clinical, Inc. The Company received $500,000 in
cash and a three-year note receivable from ProClinical for $2,000,000. The note
accrues interest at 8%, 10%, and 12% in the first, second and third year of the
note, respectively. Interest is payable monthly. Should ProClinical pay down the
entire note in the first twelve months, the note will be reduced by $300,000.
Should ProClinical pay down the entire note between the thirteenth and
eighteenth month, the note will be reduced by $200,000. The note is secured by a
first lien against all of the assets sold. No gain or further loss was recorded
on the sale. The Company has established a valuation reserve on the full value
of the Pro-Clinical note receivable. On December 29, 2003 the Company sold
certain related real estate. The net loss (after applying the tax benefit) from
discontinued operation was approximately $154,000 for the three months ended
December 31, 2003 and approximately $357,000 for the three months ended December
31, 2002. Included in the net loss of $154,000 for the three months ended
December 31, 2003 is net operating losses of approximately $226,000 offset by
approximately $72,000 of income which represents the cash received upon the
sales in excess of the cost basis of the assets.
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,
2003, we had cash and cash equivalents of $63.3 million and we had no long-term
debt. We have a $20 million line of credit with JP Morgan Chase Bank. There were
no amounts outstanding on the JP Morgan Chase Bank line of credit at December
31, 2003.
Vital Signs continues to generate cash flows from its operations. During
the three months ended December 31, 2003, cash and cash equivalents increased by
$7.6 million. Operating activities provided $8.2 million net cash, of which $8.4
million was provided from continuing operations and $200,000 was used by our
discontinued operation at Vital Pharma. Investing activities provided
approximately $500,000 net cash including $400,000 net proceeds on the sale of
Vital Pharma assets, $1.2 million net proceeds on the sale of Vital Pharma real
estate and $1.1 million used for capital expenditures. Financing activities used
$2.4 million, consisting of $1.5 million used to pay down the Industrial Revenue
Bond, $460,000 for the repurchase of common stock and $779,000 paid for
dividends, offset by $312,000 of cash received from the exercise of stock
options.
Cash and cash equivalents were $63.3 million at December 31, 2003 as
compared to $55.7 million at September 30, 2003. At December 31, 2003 our
working capital was $104.6 million as compared to
13
$98.5 million at September 30, 2003. At December 31, 2003 the current ratio was
8.8 to 1, as compared to 6.5 to 1 at September 30, 2003.
Our capital investments vary from year to year, based in part on capital
demands of cost improvement plans and newly acquired businesses. Capital
expenditures for the three month period ended December 31, 2003 were
approximately $1.1 million, and included expenditures for equipment used as part
of cost improvement projects at our New Jersey facility ($175,000), Colorado
facility ($337,000), and the capitalized costs of software development
($468,000) and patents ($44,000).
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 business acquisitions, product acquisitions, and product development,
among other things. We regularly evaluate and negotiate with domestic and
foreign medical device companies regarding potential business or product line
acquisitions, licensing arrangements and strategic alliances.
Our Board of Directors authorized the expenditure of up to $20 million for
the repurchase of Vital Signs' stock in May 2003. Through December 31, 2003, we
had purchased 114,500 shares for $3,043,000, including commissions of $5,000, at
an average price of $26.53. During the first quarter of fiscal 2004, we
purchased 14,200 shares at a cost of $459,388. Any purchases under Vital Signs'
stock repurchase program may be made from time-to-time in the open market,
through block trades or otherwise. Depending on market conditions and other
factors, these purchases may be commenced or suspended at any time or from
time-to-time without prior notice.
Our Board of Directors has approved $779,000 in dividends (amounting to
$.06 per share) in the current fiscal year.
Critical Accounting Principles and Estimates
We have identified the following critical accounting principles 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 principles 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 we
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. We completed this impairment test during
the three month period ended March 31, 2003 and found no impairment.
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.
14
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 $749,000 at December 31, 2003 and $919,000 at
September 30, 2003. 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 Our sales to distributors are made at our established price. Each
distributor subsequently provides us with documentation that our
products have been shipped to particular end-users (i.e.. particular
hospitals). In general, the end-user is entitled, on a case by case
basis, to a price lower than our established price. Accordingly, we
owe the distributor a rebate - the difference between the established
price and the lower price to which the end-user is entitled - upon our
receipt of the documentation from the distributor. At the time that
the distributor remits payment to us for the products purchased, the
distributor deducts an amount for the related rebates.
The allowance for rebates is recorded at the time we record the
revenue for the product shipped to the distributor. The rebate is
recorded as sales allowance reducing gross revenue.
We had, for several years, utilized an historical moving average to
estimate the allowance for rebates. Based upon our review during the
second quarter of fiscal 2003, we concluded that the moving average
estimate did not necessarily result in the appropriate liability due
to the distributor. Accordingly, we changed our method of estimating
rebate claims in the second quarter of fiscal 2003, to record the
allowance for rebates based upon the documentation provided by the
distributor of the shipments to the end-user as well as estimates for
inventory not yet sold by the distributor, adjusting from estimate to
actual at the time of remittance. The allowance for rebates was
$6,250,000 and $6,156,000 at December 31, 2003 and September 30, 2003,
respectively. Rebate expense was $11,085,000 and $10,041,000 for the
three months ended December 31, 2003 and December 31, 2002.
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 $902,000 at December 31, 2003
and $981,000 at September 30, 2003.
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 our financial position and results of operations, 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.
15
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 is not material to our financial
condition. We do not enter into interest rate transactions for speculative
purposes.
Our international net revenue represents approximately 25.9% of our total
net revenues. Our Breas subsidiary, located in Sweden, represents 59.2% of our
total international net revenues. The Company has not entered into any
derivative instruments (i.e. foreign exchange forward or option contracts) as of
December 31, 2003. However, the Board of directors has approved the use of a
foreign currency cash flow hedge, where a derivative is used to hedge the risk
of the variable cash flow of an anticipated or forecasted transaction that is
probable of occurring in the future.
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 facemasks, 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
(a) Disclosure controls and procedures. As of the end of the Company's most
recently completed fiscal quarter covered by this report, the Company carried
out an evaluation, with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There have been
no changes in the Company's internal controls over financial reporting that
occurred during the Company's last fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
16
PART II.
Other Information
ITEM 1.
Legal Proceedings:
(a) 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
arbitration hearing commenced on January 26, 2004. The hearing is being
held on an intermittent schedule with hearing dates scheduled through March
2004. A decision may be rendered by the arbitrator before the end of the
third quarter of fiscal 2004.
(b) On May 7, 2003 a complaint was filed against the Company and two of its
officers by Joseph Bourgart, a former chief financial officer of the
Company. A detailed description of this litigation is set forth in Item 3,
Legal Proceedings, of the Company's Annual Report on Form 10-K for the year
ended September 30, 2003. The Company denies Plaintiff's allegations, that
it had engaged in improper conduct both as regards its accounting practices
and with regard to its treatment of the Plaintiff. Notwithstanding the
Company's belief that the filing of the complaint was a retaliatory action
by Plaintiff, in accordance with the Sarbanes-Oxley Act, the issues raised
in the complaint were referred to the Audit Committee, which conducted its
own independent analysis of those matters. On December 26, 2003 the Audit
Committee reported to the Board of Directors on the results of its
investigation and determined that no evidence of fraud had been discovered
during the course of the investigation. The Audit Committee also
determined that any decision regarding the potential restatement of the
Company's previously published financial statements is to be made by the
Company's management in concurrence with the Company's auditors. Based
upon the results of the investigation, the Audit Committee did not
recommend that any restatement be made to the Company's previously
published financial statements. The Company is in agreement with the
Audit Committee that no restatement is required. As a result of the
investigation the Audit Committee compiled a list of areas in which the
Committee believes the Company needs to improve its record keeping,
documentation, policies, procedures and financial controls. Management
has been apprised of the recommendations and has begun an action program
to implement them.
(c) On May 16, 2003 the Company was served with a complaint answerable in
Belgium by its former distributor. The complaint alleges breach of contract
and seeks damages of 185,040 Euro (representing approximately $233,000 U.S.
dollars based on exchange rates in effect on December 30, 2003). The demand
represents a statutory notice provision, salary and related costs for the
distributor's employees associated with selling the Company's product line
and the value of the customer base inherited by the new distributor. The
Company has recorded a reserve for a possible settlement or loss.
(d) A first amended complaint was filed against the Company's Vital Pharma
subsidiary on September 8, 2003 in the U.S. District Court for the Northern
District of California related to the packaging services it provides to
Lifecore Biomedical, Inc. ("Lifecore"). The complaint asserts multiple
theories of negligence and product liability claims against the defendants
for injuries allegedly sustained through the use of Lifecore's Gynecare
Intergel ("Intergel") product during surgery. Lifecore manufactures the
product, which is approved for the purpose of reducing post-surgical
adhesions. The Company's insurance carrier has responded and has also
notified Lifecore of its obligation under its agreement with Vital Pharma
to indemnify it for complaints related to product defects. On January 28,
2004 plaintiff filed a nearly identical lawsuit in California state court
on her own behalf and on behalf of the general public alleging violation of
the California Business and
17
Professions Code based upon the facts underlying the federal court action.
While the Company's insurance carrier is on notice of the new action, it
has not yet responded as to coverage.
(e) 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.
18
ITEM 2 THROUGH 5
Not applicable.
ITEM 6.
Reports on Form 8-K
A Current Report on Form 8-K was filed on December 30, 2003, disclosing (under
Items 5 and 7) Vital Signs' press release regarding the results of the
independent investigation conducted by the Audit Committee of the Company's
Board of Directors.
A Current Report on Form 8-K was filed on November 5, 2003, disclosing (under
Items 7 and 12) Vital Signs' press release regarding results for the three
months and the year ended September 30, 2003.
19
Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to [p] 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to [p] 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
20
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 13, 2004
21
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as................................ 'TM'
The paragraph symbol shall be expressed as................................ [p]