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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 March 31, 2004 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 May 12, 2004 there were 12,812,253 shares of Common Stock, no par
value, outstanding.
VITAL SIGNS, INC.
INDEX
PART I.
PAGE NUMBER
Financial information........................................................ 1
Item 1. Financial Statements
Independent Accountant's Report.............................................. 2
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and September 30, 2003....................................................... 3
Consolidated Statements of Income for the Three Months ended
March 31, 2004 and 2003 (Unaudited).......................................... 4
Consolidated Statements of Income for the Six Months ended
March 31, 2004 and 2003 (Unaudited).......................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2004 and 2003 (Unaudited).................................... 6
Notes to Consolidated Financial Statements (Unaudited)....................... 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 11 - 22
Item 3. Quantitative and Qualitative Disclosure About Market Risks................... 22
Item 4. Controls and Procedures...................................................... 23
PART II.
Item 1. Legal Proceedings............................................................ 24 - 25
Item 2. Changes in Securities and Use of Proceeds.................................... 26
Item 6. Exhibits and Reports on Form 8-K............................................. 27
Signatures................................................................... 29
Exhibit 31.1................................................................. 30
Exhibit 31.2................................................................. 31
Exhibit 32.1................................................................. 32
Exhibit 32.2................................................................. 33
1
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 periods presented herein are
not necessarily indicative of the results to be expected for the entire fiscal
year, or any other period.
2
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 March 31, 2004 and the related consolidated
statements of operations for the three months and six months ended March 31,
2004 and 2003, and the consolidated statements of cash flows for the six months
ended March 31, 2004 and 2003. 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
April 22, 2004
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
--------- -------------
2004 2003
---- ----
(IN THOUSANDS OF DOLLARS)
-----------------------
ASSETS
(Unaudited)
---------
Current Assets:
Cash and cash equivalents................................................ $ 66,990 $ 55,660
Accounts receivable, less allowance for rebates and doubtful accounts of
$8,573 and $7,075 respectively....................................... 28,020 29,436
Inventory................................................................ 19,077 21,857
Prepaid expenses......................................................... 2,367 3,239
Other current assets..................................................... 3,007 4,129
Assets of discontinued business.......................................... -- 2,104
-------- --------
Total Current Assets................................................ 119,461 116,425
Property, plant and equipment - net...................................... 32,164 32,306
Goodwill ................................................................ 69,506 69,506
Deferred income taxes.................................................... 1,162 1,519
Other assets............................................................. 2,709 3,322
-------- --------
Total Assets....................................................... $225,002 $223,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 6,424 $ 6,072
Current portion of long-term debt........................................ -- 1,690
Accrued expenses......................................................... 5,907 6,071
Accrued income taxes .................................................... 1,020 3,392
Other current liabilities................................................ 345 228
Liabilities of discontinued business..................................... -- 503
-------- --------
Total Current Liabilities 13,696 17,956
Minority interest in subsidiary.............................................. 3,154 2,900
Commitments and contingencies
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares, issued and
outstanding 12,812,253 and 12,915,566 shares, respectively.......... 27,058 30,467
Accumulated other comprehensive income................................... 2,255 1,827
Retained earnings........................................................ 178,839 169,928
-------- --------
Stockholders' equity..................................................... 208,152 202,222
-------- --------
Total Liabilities and Stockholders' Equity.......................... $225,002 $223,078
======== ========
(See Notes to Consolidated Financial Statements)
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED
March 31,
2004 2003
------------------------------------------
(In Thousands, Except Per Share Amounts)
------------------------------------------
Net Revenues:
Net sales............................................................. $38,583 $33,038
Service revenue....................................................... 8,054 9,026
------- -------
46,637 42,064
Cost of goods sold and services performed:
Cost of goods sold.................................................... 18,933 17,676
Cost of services performed............................................ 4,466 4,674
------- -------
23,399 22,350
Gross profit............................................................... 23,238 19,714
Operating expenses:
Selling, general and administrative.................................... 12,724 12,544
Research and development............................................... 2,033 1,418
Impairment charge for China operations................................. --- 553
Other expense - net.................................................... 151 754
------- -------
Total operating expenses.......................................... 14,908 15,269
Operating Income........................................................... 8,330 4,445
Other (income) expense.....................................................
Interest (income)...................................................... (202) (155)
Interest expense....................................................... 1 685
------- -------
Total other (income) expense............................................... (201) 530
Income from continuing operations before provision for income taxes and
minority interest in income of consolidated subsidiary................. 8,531 3,915
Provision for income taxes................................................. 3,001 2,508
------- -------
Income from continuing operations before minority interest in income of
consolidated subsidiary................................................ 5,530 1,407
Minority interest in income of consolidated subsidiary..................... 116 74
------- -------
Income from continuing operations.......................................... 5,414 1,333
Discontinued Operations:
Loss from operations of Vital Pharma, net of income tax benefit of ($9) and
($1,325)............................................................... (17) (2,555)
------- -------
Net income (loss).......................................................... $ 5,397 $(1,222)
======= =======
Earnings (loss) per Common Share:
Basic
Income per share from continuing operations............................ $ 0.42 $ 0.10
Loss per share from discontinued operations............................ $ 0.00 $ (0.19)
Net earnings (loss).................................................... $ 0.42 $ (0.09)
Diluted
Income per share from continuing operations............................ $ 0.42 $ 0.10
Loss per share from discontinued operations............................ $ 0.00 $ (0.19)
Net earnings (loss).................................................... $ 0.42 $ (0.09)
Basic weighted average number of shares outstanding........................ 12,837 12,945
Diluted weighted average number of shares outstanding...................... 12,982 13,024
Dividends paid per share................................................... $ 0.06 $ 0.05
(see Notes to Consolidated Financial Statements)
5
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED
March 31,
2004 2003
----------------------------------------
(In Thousands, Except Per Share Amounts)
----------------------------------------
Net Revenues:
Net sales............................................................. $74,478 $68,093
Service revenue....................................................... 16,007 18,728
------- -------
90,485 86,821
Cost of goods sold and services performed:
Cost of goods sold.................................................... 36,438 33,801
Cost of services performed............................................ 8,795 10,091
------- -------
45,233 43,892
Gross profit............................................................... 45,252 42,929
Operating expenses:
Selling, general and administrative.................................... 25,070 24,635
Research and development............................................... 3,539 2,921
Impairment charge for China operations................................. -- 553
Other expense - net.................................................... 221 586
------- -------
Total operating expenses.......................................... 28,830 28,695
Operating Income........................................................... 16,422 14,234
Other (income) expense
Interest (income)...................................................... (385) (289)
Interest expense....................................................... 25 727
------- -------
Total other (income) expense............................................... (360) 438
Income from continuing operations before provision for income taxes and
minority interest in income of consolidated subsidiary................. 16,782 13,796
Provision for income taxes................................................. 5,890 5,772
------- -------
Income from continuing operations before minority interest in income of
consolidated subsidiary................................................ 10,892 8,024
Minority interest in income of consolidated subsidiary..................... 254 129
------- -------
Income from continuing operations.......................................... 10,638 7,895
Discontinued Operations:
Loss from operations of Vital Pharma, net of income tax benefit of ($92) and
($1,500)............................................................... (171) (2,912)
------- -------
Net income................................................................. $10,467 $ 4,983
======= =======
Earnings (loss) per Common Share:
Basic
Income per share from continuing operations............................ $ 0.83 $ 0.61
Loss per share from discontinued operations............................ $ (0.02) $ (0.22)
Net earnings........................................................... $ 0.81 $ 0.39
Diluted
Income per share from continuing operations............................ $ 0.82 $ 0.61
Loss per share from discontinued operations............................ $ (0.02) $ (0.23)
Net earnings........................................................... $ 0.80 $ 0.38
Basic weighted average number of shares outstanding........................ 12,873 12,901
Diluted weighted average number of shares outstanding...................... 13,013 12,988
Dividends paid per share................................................... $ 0.12 $ 0.10
(see Notes to Consolidated Financial Statements)
6
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED
March 31,
2004 2003
-----------------------------------------
(IN THOUSANDS OF DOLLARS)
-----------------------------------------
Cash Flows from Operating Activities:
Net income..................................................................... $10,467 $ 4,983
Add loss from discontinued operations.......................................... 171 2,912
------- -------
Income from continuing operations.............................................. 10,638 7,895
Adjustments to reconcile income from continuing operations to net cash provided by
continuing operations
Depreciation and amortization.................................................. 2,104 2,219
Deferred income taxes.......................................................... 356 276
Minority interest in income of consolidated subsidiary......................... 254 129
Non cash loss on write off of China receivable................................. --- 553
Increase in rebate allowance................................................... --- 3,300
Changes in operating assets and liabilities:
Decrease in accounts receivable................................................ 1,765 1,251
Decrease (increase) in inventory............................................... 3,274 (317)
Decrease in prepaid expenses and other current assets ......................... 2,075 1,209
Decrease (increase) in other assets ........................................... 614 (185)
(Decrease) increase in accounts payable........................................ (336) 887
Decrease in accrued expenses................................................... (324) (997)
(Decrease) increase in accrued income taxes ................................... (2,372) 1,231
Increase in other liabilities.................................................. 197 839
------- -------
Net cash provided by continuing operations........................................ 18,245 18,290
Net cash used in discontinued operations.......................................... (209) (193)
------- -------
Net cash provided by operating activities......................................... 18,036 18,097
Cash flows from investing activities:
Net proceeds from sales of assets of Vital Pharma.............................. 417 ---
Net proceeds from sale of Vital Pharma real estate............................. 1,222 ---
Acquisition of property, plant and equipment................................... (1,156) (1,717)
Capitalized software costs..................................................... (386) (268)
Capitalized patent costs....................................................... (75) (204)
Proceeds from sales of available for sale securities........................... --- 109
------- -------
Net cash provided by (used in) investing activities............................... 22 (2,080)
Cash flows from financing activities:
Dividends paid................................................................. (1,556) (1,169)
Proceeds from exercise of stock options........................................ 349 331
Purchase of common stock....................................................... (3,778) ---
Principal payments on long-term debt and notes payable......................... (1,535) (232)
------- -------
Net cash used in financing activities.............................................. (6,520) (1,070)
Effect of foreign currency translation............................................ (208) 521
------- -------
Net increase in cash and cash equivalents......................................... 11,330 15,468
Cash and cash equivalents at beginning of period.................................. 55,660 29,303
------- -------
Cash and cash equivalents at end of period........................................ $66,990 $44,771
======= =======
Supplemental disclosures of cash flow information: Cash paid during the six
months for:
Interest....................................................................... $ 65 $ 82
Income taxes................................................................... $ 5,414 $ 2,595
(See Notes to Consolidated Financial Statements)
7
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of March 31, 2004, the consolidated
statements of operations for the three and six months ended March 31, 2004
and 2003, and the consolidated statements of cash flows for the six months
ended March 31, 2004 and 2003, 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 March 31, 2004 and the results of
operations for the three months and six months ended March 31, 2004 and
2003, and the cash flows for the six months ended March 31, 2004 and 2003,
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 March 31, 2004, the Company's inventory was comprised of raw materials
of $11,600,000 and finished goods of $7,477,000. 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 10). A reconciliation of
gross to net sales is provided below:
- -----------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(In thousands of Dollars) March 31, March 31,
- -----------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Gross sales $ 51,165 $ 46,893 $ 99,249 $ 93,019
Rebates (11,669) (12,484) (22,754) (22,525)
Other deductions (913) (1,371) (2,017) (2,401)
-------- -------- -------- --------
Net sales 38,583 33,038 74,478 68,093
Service revenues 8,054 9,026 16,007 18,728
-------- -------- -------- --------
Total net revenues $ 46,637 $ 42,064 $ 90,485 $ 86,821
======== ======== ======== ========
- ------------------------------------------------------------------------------------
Other deductions consist 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
8
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:
- ---------------------------------------------------------------------------------------------------
RESPIRATORY/ PHARMACEUTICAL
CRITICAL TECHNOLOGY
ANESTHESIA CARE SLEEP SERVICES OTHER* CONSOLIDATED
---------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
2004
Net revenues $19,654 $10,969 $12,221 $3,793 $ -- $46,637
Gross profit 10,799 5,667 5,343 1,429 -- 23,238
Operating income 4,913 2,746 428 243 -- 8,330
2003
Net revenues $17,599 $11,029 $12,136 $4,600 $(3,300) $42,064
Gross profit 9,503 5,863 5,239 2,409 (3,300) 19,714
Operating income 3,457 2,166 1,279 843 (3,300) 4,445
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
RESPIRATORY/ PHARMACEUTICAL
CRITICAL TECHNOLOGY
ANESTHESIA CARE SLEEP SERVICES OTHER * CONSOLIDATED
-------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS)
-------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED MARCH 31,
2004
Net revenues $ 38,152 $21,634 $23,177 $ 7,522 --- $ 90,485
Gross profit 20,131 11,747 10,369 3,005 --- 45,252
Operating income 9,192 5,213 1,390 627 --- 16,422
Total assets 108,942 61,775 35,836 18,449 --- 225,002
Capital expenditures 410 232 219 295 --- 1,156
2003
Net revenues $ 34,613 $22,222 $23,420 $ 9,866 $(3,300) $ 86,821
Gross profit 18,845 12,311 10,418 4,655 (3,300) 42,929
Operating income 8,388 5,385 2,028 1,733 (3,300) 14,234
Total assets 97,311 62,475 34,702 20,114 --- 214,602
Capital expenditures 996 640 59 22 -- 1,717
- --------------------------------------------------------------------------------------------------------------------
(*)"Other" relates to an adjustment for the allowance for rebates in the three
and six months ended March 31, 2003 in the anesthesia and
respiratory/critical care business segments.
9
7. Other comprehensive income for the three months and six months ended March
31, 2004 and 2003 consisted of:
------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
(IN THOUSANDS OF DOLLARS) ENDED MARCH 31, ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 5,397 $(1,222) $10,467 $4,983
Foreign currency translation (1,164) (29) 448 900
Other -- -- -- 2
------- ------- ------- ------
Comprehensive income $ 4,233 $(1,251) $10,915 $5,885
======= ======= ======= ======
------------------------------------------------------------------------------------------------------------------
8. During the second quarter of fiscal 2004, the Company's Breas subsidiary
expensed $175,000 of discontinued product inventory, $94,000 of estimated
costs for a field upgrade, and $94,000 to increase the reserve for service
stock inventory.
9. During the first quarter of fiscal 2004, included in selling, general and
administrative expenses are $235,000 of expenses related to a special
review performed by the Company's Audit Committee, and $139,000 of
unamortized cost related to the prepayment of the Company's Industrial
Revenue Bond of $1,500,000.
10. During the second quarter of fiscal 2003, the Company reviewed and adjusted
its estimate for rebates due to distributors. As background, the Company's
sales to distributors in the domestic anesthesia and respiratory/critical
care business segments, which represented 24.3% of the Company's net sales
during the second 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 the documentation
from the distributor. At the time that the distributor remits payment to
the Company for the products purchased, the distributor deducts an amount
for the related rebates. The allowance for rebates is recorded at the time
the Company records the revenue for the product shipped to the distributor.
The rebate is recorded as a sales allowance, as a reduction of net revenue.
The Company had, for several years utilized a historical moving average to
estimate the allowance for rebates. Based on the Company's review in the
second quarter of fiscal 2003, the Company concluded that the moving
average estimate does not necessarily result in the appropriate liability
due to the distributor. 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. As a result of
its review of the rebate allowance, the Company recorded an additional
allowance for rebates of $3,300,000 in the second quarter of fiscal 2003 to
assure that Vital Signs established an appropriate reserve for rebate
claims.
11. In fiscal 2003, the Internal Revenue Service (IRS) performed, in their
normal course, a routine examination of the Company's 1997, 1998 and 1999
Federal tax returns. As a result of views expressed by the IRS, the Company
increased its tax provision in the second quarter of fiscal 2003 by
$1,081,000, and increased interest expense by $650,000 ($429,000 after tax)
for the related interest due. On October 6, 2003, the Company finalized the
IRS tax audit for the years 1997, 1998 and 1999.
10
12. During the second quarter of fiscal 2003, the Company concluded that it
would be unable to collect its remaining receivable under normal terms from
its China distributor, and provided a reserve against the receivable
balance of $553,000. In May 2003, the Company retained counsel in China to
commence certain legal actions against its distributor in China to collect
its receivable. In September 2003, the Company received and recognized as
income in the fourth quarter of fiscal 2003 $420,000 in cash from this
distributor and also received the right to receive certain inventory. The
Company has not received the inventory and continues to litigate for the
return of its inventory.
13. In the second quarter of fiscal 2003, income from continuing operations
included $322,000 of expenses relating to costs for a public offering that
was discontinued due to market conditions.
14. During the second quarter of fiscal 2003, the Company had received several
non-binding bids for its Vital Pharma business. Based on the non-binding
bids received, the Company reduced the amount of its investment in Vital
Pharma, which is included in discontinued operations, and expensed
$3,300,000 in the second quarter of fiscal 2003, and subsequently in the
third quarter of fiscal 2003 expensed an additional $2,033,000. In October
2003, the Company sold Vital Pharma to ProClinical, Inc. for $500,000 in
cash and a three-year note receivable from ProClinical for $2,000,000. No
gain or loss was recorded on the transaction.
15. In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
No. 123". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation", to require prominent disclosures in annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect in measuring compensation expense. The
disclosure requirements of SFAS No. 148 are effective for periods beginning
after December 15, 2002.
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 and six months ended March 31,
2004 and 2003 would approximate the pro forma amounts indicated in the
table below (dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss)- as reported............................... $5,397 $ (1,222) $10,467 $4,983
Net income (loss)- pro forma................................. 5,097 (1,376) 9,869 4,676
Basic net income (loss) per common share - as reported....... .42 (.09) .81 .39
Diluted net income (loss) per common share - as reported..... .42 (.09) .80 .38
Basic net income (loss) per common share - Pro forma......... .40 (.11) .77 .36
Diluted net income (loss) per common share - Pro forma....... .39 (.11) .76 .36
- ----------------------------------------------------------------------------------------------------------------
11
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 and six months ended March 31, 2004
and 2003, respectively: expected volatility of 50% and 50%, respectively,
risk-free interest rate of 3.7% and 5.2%, respectively, dividend yield rate
of .7% and .5%, respectively, and all options have expected lives of 5
years.
16. 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 was effective for the Company's second quarter ended 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 the Company's results of
operations and financial condition.
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.
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.
12
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 FROM PRIOR PERIOD INCREASE FROM PRIOR PERIOD
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2004
COMPARED WITH COMPARED WITH
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2003
--------------------------------------------------------
Consolidated Statement of Operations Data:
Net revenues.................................. 10.9% 4.2%
Gross profit.................................. 17.9% 5.4%
Total operating expenses...................... (2.4)% 0.5%
Income from continuing operations............. 306.2% 34.7%
Net income.................................... 541.7% 110.1%
- ------------------------------------------------------------------------------------------------------
13
Comparison of Results for the Three-Month Period Ended March 31, 2004 to the
Three-Month Period Ended March 31, 2003.
Net Revenue. Net revenues for the three months ended March 31, 2004
increased by 10.9% (an increase of 7.7% excluding the favorable effect of
foreign exchange) to $46.6 million as compared to $42.1 million in the
comparable period last year. Of our total revenues, $33.4 million (or 71.7%)
were derived from domestic sales and $13.2 million (or 28.3%) were derived from
international sales. The following are the net revenues by business segment for
the three months ended March 31, 2004 compared to the three months ended March
31, 2003.
REVENUE BY BUSINESS SEGMENT
- -------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
MARCH 31
------------------------------------- PERCENT
Dollars in Thousands 2004 2003 CHANGE
- ------------------------------------------------------------------ ---------- ---------
Anesthesia $19,654 $17,599 11.7%
Respiratory/Critical Care 10,969 11,029 (0.5)%
Sleep 12,221 12,136 0.7%
Pharmaceutical Technology Services 3,793 4,600 (17.5%)
Rebate allowance adjustment -- (3,300) --
---------------- ----------------- ----------------
$46,637 $42,064 10.9%
- -------------------------------------------------------------------------------------------------------
The rebate allowance of $3.3 million relates to our anesthesia and
respiratory/critical care segments. Refer to Footnote 10 of the Notes
to Consolidated Financial Statements for a description of the rebate
allowance.
Sales of anesthesia products increased 11.7% from $17.6 million for
the three months ended March 31, 2003 to $19.7 million for the three months
ended March 31, 2004. The increase is due to an 85.2% increase in sales of
Limb-[th]'TM', a patented anesthesia circuit, to $1,921,000, a 16.9% increase
in sales of anesthesia circuits to $6,167,000, and a 23.6% increase in sales by
the Company's Thomas Medical subsidiary to $5,000,000. Domestic sales of
anesthesia products increased 11.2%, from $16,081,000 for the three months ended
March 31, 2003 to $17,886,000 for the three months ended March 31, 2004.
International sales of anesthesia products increased 16.5%, from $1,518,000 for
the three months ended March 31, 2003 to $1,768,000 for the three months ended
March 31, 2004.
Sales of respiratory/critical care products decreased 0.5%, from $11.0
million for the three months ended March 31, 2003 to $10.9 million for the three
months ended March 31, 2004, as an 8.4% decline in domestic sales offset a 22.0%
increase in international sales. Domestic sales of respiratory/critical care
products decreased from $8,177,000 for the three months ended March 31, 2003 to
$7,490,000 for the three months ended March 31, 2004, primarily due to volume
declines. International sales of respiratory/critical care products increased
21.9%, from $2,852,000 for the three months ended March 31, 2003 to $3,479,000
for the three months ended March 31, 2004 which resulted from increased volume
levels.
Net revenues in the sleep business segment increased 0.7% (a decrease
of 8.5% excluding foreign exchange) from $12.1 million for the three months
ended March 31, 2003 to $12.2 million for the three months ended March 31, 2004.
The growth in our sleep segment, which includes sleep diagnostic services and
therapy products, was due primarily to increased revenue of 3.2% in our Breas
subsidiary, our sleep ventilation business, resulting principally from favorable
exchange rates. Excluding the effect
14
of favorable exchange rates, Breas revenues declined 10.9%. This decline is due
primarily to a volume decrease in our personal ventilator business, as well as
the phase out of certain distributed product lines, as Breas focuses its
strategy on self-manufactured equipment. Also included in this segment is Sleep
Services of America, our sleep diagnostics and therapy company, whose revenues
decreased by 3.7%, as the business continues to close sleep labs that are not
returning an appropriate margin. In the sleep labs which remain open, revenue
increased 16.5%. Pre-tax margins in our SSA business improved to 14.7% in the
second quarter of fiscal 2004, as compared to 9.0% in the comparable period
last year.
Service revenues in the Pharmaceutical Technology Services segment
decreased 17.5%, from $4.6 million for the three months ended March 31, 2004 to
$3.8 million for the three months ended March 31, 2004, as our larger
pharmaceutical customers reduced their external resource usage with regards to
21 CFR Part 11 FDA regulatory compliance needs.
Cost of Goods Sold and Services Performed. Cost of goods sold and
services performed increased 4.7% from $22.4 million for the three months ended
March 31, 2004 to $23.4 million for the three months ended March 31, 2004.
Cost of goods sold increased 7.1%, from $17.7 million for the three
months ended March 31, 2003 to $18.9 million for the three months ended March
31, 2004. The $1,257,000 increase results primarily from the corresponding
increase in sales volume in our anesthesia segment, resulting in an increase in
cost of goods sold of approximately $1.0 million, an increase of approximately
$670,000 at our Breas subsidiary due to foreign exchange rate changes and
$363,000 relating to additional inventory provisions at Breas. See Footnote 8 of
the Notes to the Consolidated Financial Statements. These increases are
partially offset by sales volume decreases at Breas of approximately $380,000
and cost savings programs of approximately $396,000 at our New Jersey and
Colorado manufacturing plants.
Cost of services performed decreased 4.5%, from $4.7 million for the
three months ended March 31, 2003 to $4.5 million for the three months ended
March 31, 2004, resulting primarily from reduced sales volumes in our
Pharmaceutical Technology Services segment and at Sleep Services of America, our
sleep diagnostics company, where the business continues to close sleep labs that
are not returning an appropriate margin.
Gross Profit. Our gross profit increased 17.9%, from $19.7 million for
the three months ended March 31, 2003 to $23.2 million for the three months
ended March 31, 2004. Our overall gross profit margin was 49.8% for the three
months ended March 31, 2004, an increase from the 46.9% achieved in the three
months ended March 31, 2003, due to the effect of the rebate adjustment of
$3,300,000 described in Footnote 10 of the Notes to Consolidated Financial
Statements. For gross profit information related to our four segments, refer to
Footnote 6 of the Notes to Consolidated Financial Statements. Gross Profit as a
percent of gross revenues was 60.5% for the three months ended March 31, 2004,
slightly higher than 60.0% recorded for the three months ended March 31, 2003.
For a reconciliation of gross revenues to net revenues, refer to Footnote 5 of
the Notes to Consolidated Financial Statements.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 1.4%, from $12.5 million for the three months
ended March 31, 2003 to $12.7 million for the three months ended March 31, 2004.
The $200,000 increase was primarily due to an increase of approximately $350,000
at our Breas subsidiary due to foreign exchange rate changes, increased business
insurance costs of $125,000 and increased legal expense of $123,000. These
increases were partially offset by cost savings at our Breas and Stelex
subsidiaries of approximately $400,000.
15
Research and Development Expenses. Research and development expenses
increased by approximately $615,000, or 43.4%, from $1.4 million for the three
months ended March 31, 2003 to $2.0 million for the three months ended March 31,
2004 as the Company invests in the development of new Sleep CPAP and ventilation
equipment and patient interfaces for our Breas subsidiary.
Impairment charge for China operations. During the second quarter of
fiscal 2003, the Company concluded that it would be unable to collect its
remaining receivable under normal terms from its China distributor, and provided
a reserve against the receivable balance of $553,000. In May 2003, the Company
retained counsel in China to commence certain legal actions against its
distributor in China to collect its receivable. In September 2003, the Company
received and recognized as income in the fourth quarter of fiscal 2003 $420,000
in cash from this distributor and also received the right to receive certain
inventory. The company has not received the inventory and continues to litigate
for the return of its inventory.
Other (Income) Expense--Net. Other expense included in operating
expenses, decreased by $603,000 from $754,000 for the three months ended March
31, 2004 to $151,000 for the three months ended March 31, 2004. Included in the
three months ended March 31, 2003 were $322,000 of costs for a public offering
that was discontinued due to market conditions, $205,000 for the closing cost
of the Breas U.K. sales offices and $29,000 for the closing of redundant
Stelex offices and higher donations cost.
Other Items
Interest Income and Expense. Interest income increased 30.3%, from
$155,000 for the three months ended March 31, 2003 to $202,000 during the three
months ended March 31, 2004, resulting from the increase in the level of cash
and cash equivalents being invested. Interest expense decreased 99.9%, from
$685,000 for the three months ended March 31, 2003 to $1,000 during the three
months ended March 31, 2004. Interest expense for the three months ended March
31, 2003 included $650,000 of interest relating to past taxes due resulting from
an Internal Revenue Service examination and interest of $35,000 on our IRB loan,
which was paid off in December 2003. Refer to Footnote 11 of the Notes to
Consolidated Financial Statements.
Provision for Income Taxes. The provision for income tax expense for
the three months ended March 31, 2004 and 2003 was $3.0 million and $2.5
million, respectively, reflecting effective tax rates of 35.2% and 64.1% for
these periods, respectively. Included in the provision for the three months
ended March 31, 2003 is an additional provision of $1.1 million resulting from
an examination by the Internal Revenue Service of the Company's 1997, 1998 and
1999 Federal income tax returns. The effective tax rate excluding this item was
36.4%. Refer to Footnote 11 of the Notes to Consolidated Financial Statements.
Discontinued Operations. On October 30, 2003 the Company sold the
assets of its Vital Pharma subsidiary to Pro-Clinical, Inc. The Company received
$500,000 in cash and a three-year note receivable from ProClinical in the
principal amount of $2,000,000. The note is secured by a first lien against all
of the assets sold. No gain or further loss was recorded on the sale. On
December 29, 2003 the Company sold certain related real estate. The Company has
accounted for these sales on a cost recovery basis. The net loss (after applying
the tax benefit) from discontinued operation was approximately $17,000 for the
three months ended March 31, 2004 and approximately $2,555,000 for the three
months ended March 31, 2003. Refer to Footnote 14 of the Notes to Consolidated
Financial Statements.
16
Comparison of Results for the Six-month Period Ended March 31, 2004 to the
Six-month Period Ended March 31, 2003
Net Revenue. Net revenues for the six months ended March 31, 2004
increased by 4.2% (an increase of 1.2% excluding the favorable effect of foreign
exchange) to $90.5 million as compared to $86.8 million in the comparable period
last year. Of our total revenues, $65.9 million (or 72.8%) were derived from
domestic sales and $24.6 million (or 27.2%) were derived from international
sales. Following are the net revenues by business segment for the six months
ended March 31, 2004 compared to the six months ended March 31, 2003.
REVENUE BY BUSINESS SEGMENT
- --------------------------------------------------------------------------------------------
FOR THE SIX-MONTHS ENDED
MARCH 31,
------------------------------------- PERCENT
2004 2003 CHANGE
---------------- ----------------- -------------
Anesthesia $38,152 $34,613 10.2%
Respiratory/Critical Care 21,634 22,222 (2.6%)
Sleep 23,177 23,420 (1.0)%
Pharmaceutical Technology Services 7,522 9,866 (23.8)%
Rebate allowance adjustment -- (3,300) N/A
---------------- ----------------- -------------
$90,485 $86,821 4.2%
- --------------------------------------------------------------------------------------------
The rebate allowance of $3.3 million relates to our anesthesia and
respiratory/critical care segments. Refer to Footnote 10 of the Notes
to Consolidated Financial Statements for a description of the rebate
allowance.
Sales of anesthesia products increased 10.2% from $34.6 million for
the six months ended March 31, 2003 to $38.2 million for the six months ended
March 31, 2004. This increase was due to volume growth in anesthesia circuits
including our Limb-[theta]'TM', a patented anesthesia circuit, which increased
68.8% to $3.5 million and volume increases in our Thomas Medical Products
subsidiary, which increased 28% to $9.2 million. Domestic sales of anesthesia
products increased 8.9%, from $32.1 million to $35.0 million. International
sales of anesthesia products increased 27.5%, from $2.5 million to $3.2 million.
Sales of respiratory/critical care products decreased 2.6%, from $22.2
million for the six months ended March 31, 2003 to $21.6 million for the six
months ended March 31, 2004. This was due primarily to lower domestic sales
volumes, with domestic sales declining 12.6%, from $17.1 million to $14.9
million. International sales of respiratory/critical care products increased
30.4% from $5.1 million for the six months ended March 31, 2003 to $6.7 million
for the six months ended March 31, 2004 reflecting higher sales volume.
Our sleep segment revenues decreased 1.0% (a decrease of 10.8%
excluding favorable foreign exchange), from $23.4 million for the six months
ended March 31, 2003 to $23.2 million for the six months ended March 31, 2004.
Sleep Services of America's revenues decreased 4.2% from $8.9 million for the
six months ended March 31, 2003 to $8.5 million for the six months ended March
31, 2004 as the business continues to close sleep labs that are not returning an
appropriate margin. In the sleep labs which remain open, revenue increased
16.5%. Pre-tax margins in our SSA business improved to 16.2% in the second
quarter of fiscal 2004, as compared to 8.0% in the comparable period last
year. Revenues at our Breas subsidiary increased 0.9% (a decrease of 14.2%
excluding
17
favorable foreign exchange) from $14.6 million for the six months ended March
31, 2003 to $14.7 million for the six months ended March 31, 2004.
Service revenues in the Pharmaceutical Technology Services segment decreased
23.8%, from $9.9 million for the six months ended March 31, 2003 to $7.5 million
for the six months ended March 31, 2004, in the second quarter of fiscal 2004,
as our larger pharmaceutical customers reduce their external resource usage with
regards to 21 CFR Part 11 FDA regulatory compliance needs.
Cost of Goods Sold and Services Performed. Cost of goods sold and
services performed increased 3.1% from $43.9 million for the six months ended
March 31, 2003 to $45.2 million for the six months ended March 31, 2004.
Cost of goods sold increased 7.8%, from $33.8 million for the six
months ended March 31, 2003 to $36.4 million for the six months ended March 31,
2004. The $2.6 million increase results primarily the corresponding increase in
sales volume in our anesthesia segment, resulting in an increase in cost of
goods sold of approximately $2.1 million, an increase of approximately $1.3
million at our Breas subsidiary due to foreign exchange rate changes and
$363,000 relating to additional inventory provisions at Breas. See Footnote 8 of
the Notes to Consolidated Financial Statements. These increases are partially
offset by sales volume decreases at Breas of approximately $880,000 and cost
savings programs of approximately $280,000 at our New Jersey and Colorado
manufacturing plants.
Cost of services performed decreased 12.8%, from $10.1 million for the
six months ended March 31, 2003 to $8.8 million for the six months ended March
31, 2004, resulting primarily from reduced sales volumes in our Pharmaceutical
Technology Services segment and at Sleep Services of America, our sleep
diagnostics company, where the business continues to close sleep labs that are
not returning an appropriate margin.
Gross Profit. Our gross profit increased 5.4%, from $42.9 million for
the six months ended March 31, 2003 to $45.3 million for the six months ended
March 31, 2004. Our overall gross profit margin was 50.0% for the six months
ended March 31, 2004 and 49.4% for the six months ended March 31, 2003. For
gross profit information related to our four segments, refer to Footnote 6 of
the Notes to Consolidated Financial Statements. Gross Profit as a percent of
gross revenues was 60.8% for the six months ended March 31, 2004, slightly
higher than 60.7% recorded for the six months ended March 31, 2003. For a
reconciliation of gross revenues to net revenues, refer to Footnote 5 of the
Notes to Consolidated Financial Statements.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 1.8%, from $24.6 million for the six months
ended March 31, 2003 to $25.1 million for the six months ended March 31, 2004.
The $500,000 increase is primarily due to an increase of $750,000 at our Breas
subsidiary for unfavorable foreign exchange rate changes, increased business
insurance costs of $300,000 and increased legal expense of $250,000. These
increases were partially offset by cost savings at our Breas and Stelex
subsidiaries of approximately $900,000.
Research and Development Expenses. Research and development expenses
increased by approximately $600,000, or 21.2%, from $2.9 million for the six
months ended March 31, 2003 to $3.5 million for the six months ended March 31,
2004 as the Company invests in the development of new Sleep CPAP and ventilation
equipment and interfaces for our Breas subsidiary.
18
Impairment charge for China operations. As noted above, during the
second quarter of fiscal 2003, the Company concluded that it would be unable to
collect its remaining receivable under normal terms from its China distributor,
and provided a reserve against the receivable balance of $553,000.
Other (Income) Expense--Net. Other (income) expense included in
operating expense decreased $365,000 from $586,000 for the six months ended
March 31, 2003 to $221,000 for the six months ended March 31, 2004. Included in
the six months ended March 31, 2003 were one time costs of $322,000 for the
costs of a public offering that was discontinued due to market conditions,
$205,000 for the closing cost for several European sales offices and $29,000 for
the closing of redundant Stelex offices.
Other Items
Interest Income and Expense. Interest income increased 33.2%, from
$289,000 for the six months ended March 31, 2003 to $385,000 during the six
months ended March 31, 2004, resulting from the increase in the level of cash
and cash equivalents being invested. Interest expense decreased $702,000, from
$727,000 for the six months ended March 31, 2003 to $25,000 during the six
months ended March 31, 2004. Interest expense for the six months ended March 31,
2003 included $650,000 of interest relating to past taxes due resulting from an
Internal Revenue Service examination and interest of $35,000 on our IRB loan,
which was paid off in December 2003. (see Footnote 11 of the Notes to
Consolidated Financial Statements).
Provision for Income Taxes. The provision for income tax expense for
the six months ended March 31, 2004 and 2003 was $5.9 million and $5.8 million,
respectively, reflecting effective tax rates of 35.1% and 41.8% for these
periods, respectively. Included in the provision for the six months ended March
31, 2003 is an additional provision of $1.1 million resulting from an
examination by the Internal Revenue Service of the Company's 1997, 1998 and 1999
Federal income tax returns. The effective tax rate excluding this item was
34.0%. (See Footnote 11 of the Notes to Consolidated Financial Statements).
Discontinued Operations. On October 30, 2003 the Company sold the
assets of 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 is secured by a first lien against all of the assets sold.
No gain or further loss was recorded on the sale. On December 29, 2003 the
Company sold certain related real estate. The Company has accounted for these
sales on a cost recovery basis. The net loss (after applying the tax benefit)
from discontinued operation was approximately $171,000 for the six months ended
March 31, 2004 and approximately $2,912,000 for the six months ended March 31,
2003. (See Footnote 14 of the Notes to Consolidated Financial Statements).
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 March 31,
2004, we had cash and cash equivalents of approximately $67 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 March 31, 2004.
Vital Signs continues to generate cash flows from its operations.
During the six months ended March 31, 2004, cash and cash equivalents increased
by $11.3 million. Operating activities provided $18.0 million net cash, of which
$18.2 million was provided from continuing operations and $200,000 was used by
our discontinued operation at Vital Pharma. Investing activities provided
$400,000 of net proceeds from the sale of Vital Pharma's assets and $1.2 million
net proceeds on the sale of Vital Pharma's real estate which was fully offset by
$1.6 million used for capital expenditures. Financing activities used $6.5
19
million, consisting of $3.8 million for the repurchase of common stock, $1.5
million used to pay down an Industrial Revenue Bond, and $1.5 million paid for
dividends, offset by $349,000 of cash received from the exercise of stock
options.
Cash and cash equivalents were $67 million at March 31, 2004 as
compared to $55.7 million at September 30, 2003. At March 31, 2004 our working
capital was $105.8 million as compared to $98.5 million at September 30, 2003.
At March 31, 2004 the current ratio was 8.7 to 1, as compared to 6.4 to 1 at
September 30, 2003.
Capital expenditures for the six month period ended March 31, 2004 were
approximately $1.6 million, and included expenditures for equipment used as part
of cost improvement projects at our New Jersey facility ($381,000), Colorado
facility ($370,000), California facility ($87,000) and Thomas Medical Products
facility ($120,000), new laboratory equipment ($120,000) for the sleep labs at
SSA and the capitalized costs of software development ($386,000) and patents
($75,000). We expect that our total capital expenditures for fiscal 2004
should not exceed our total capital spending of $4.6 million in fiscal 2003.
This statement represents a forward-looking statement under the Reform Act.
Actual results may differ from this statement for a number of reasons, including
the possibility that the Company determines that its business requires new
equipment in order to meet competitive and/or technological challenges.
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 has authorized the expenditure of up to $20
million for the repurchase of Vital Signs' stock. From November 14, 2003 to
March 31, 2004, we had repurchased 217,600 shares for $6.4 million, at an
average price of $29.22. 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 $1.6 million in dividends
(amounting to $.12 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. 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. We state these accounting policies in the notes to our
consolidated financial statements and at relevant places in this discussion and
analysis. Actual results could vary from these estimates under different
assumptions or conditions.
20
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, 2004 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.
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 $708,000 at March 31, 2004 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
$7,865,000 and $6,156,000 at March 31, 2004 and September 30, 2003,
respectively. Rebate expense was $11,669,000 and $12,484,000 for the
three months ended March 31, 2004 and March 31, 2003, and was
$22,754,000 and $22,525,000 for the six months ended March 31, 2004
and March 31, 2003.
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. In the
quarter ended March 31, 2004, the Company wrote-off certain Breas
inventory amounting to $363,000. Our inventory allowance for
obsolescence was $1,147,000 at March 31, 2004 and $981,000 at
September 30, 2003.
21
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.
Accounting Principles. For information regarding new accounting
principles, see Note 16 of our notes to consolidated financial
statements.
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 27.2% of our
total net revenues. Our Breas subsidiary, located in Sweden, represents 59.8% of
our total international net revenues. We do not enter into any derivative
transactions, including foreign currency transactions, for speculative purposes.
The Company has not entered into any derivative instruments (i.e. foreign
exchange forward or option contracts) as of March 31, 2004.
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.
22
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 Interim 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.
23
PART II.
Other Information
ITEM 1.
Legal Proceedings:
(a) On December 8, 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 the next hearing date scheduled in May 2004. Due to the
introduction of new witnesses, the Arbitrator has permitted additional
discovery during the course of the arbitration proceedings, resulting
in delays in concluding the case.
(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 strongly denies
all of 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. The Company and the individual
defendants filed a Motion for Summary Judgement that has been pending
since September 2003.
(c) 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 also
names Lifecore and Ethicon, Inc. (a subsidiary of Johnson and Johnson)
as defendants. 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 Professions
Code based upon the facts underlying the federal court action. Our
insurance carrier has denied coverage for this matter and we have
begun a dialogue with our insurance carrier over this issue. We have
notified our carrier that the Company believes coverage should be
provided. If our insurance carrier does not provide coverage, we
intend to take legal action to enforce our rights.
24
On May 4, 2004, counsel for Vital Pharma received a copy of a
complaint filed in Florida State Court (Circuit Court, Palm Beach
County) alleging products liability claims against Vital Pharma,
Lifecore, Ethicon and Johnson & Johnson for injuries alleged to have
been caused by the Intergel product. We have not yet been served with
the complaint. Our insurance carrier has been notified of the matter.
We have been informed by counsel for Johnson & Johnson that a total of
seven cases related to the Intergel product have already been filed in
other jurisdictions and that there may be as many as twenty five
lawsuits filed in total.
(d) A detailed description of litigation involving the Company 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. 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.
25
ITEM 2.
Changes in Securities and Use of Proceeds:
The following table provides information about purchases made by the Company
during the quarter ended March 31, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act
(c)(1)
TOTAL NUMBER (d)(1)
OF SHARES MAXIMUM
PURCHASED AS DOLLAR AMOUNT
(a) (b) PART OF THAT MAY YET
TOTAL NUMBER AVERAGE PUBLICLY BE PURCHAED
OF SHARES PRICE PAID ANNOUNCED UNDER THE
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS PLANS OR PROGRAMS
- ------ --------- --------- ----------------- -----------------
1/1/2004-
1/31/2004 16,000 $ 32.75 16,000 $ 16,432,663
- --------------------------------------------------------------------------------------
2/1/2004-
2/29/2004 46,900 $ 32.22 46,900 $ 14,919,880
- --------------------------------------------------------------------------------------
3/1/2004-
3/31/2004 40,200 $ 31.96 40,200 $ 13,633,564
- --------------------------------------------------------------------------------------
Total 103,100 $ 32.20 103,100 $ 13,633,564
========= ========= ========= =============
(1) In May 2003, our Board of Directors authorized the expenditure of up to $20
million for the repurchase of Vital Signs' stock. From November 14, 2003 to
March 31, 2004, we had repurchased 217,600 shares for $6.4 million, including
commissions of $8,700, at an average price of $29.22. 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.
26
ITEM 3 THROUGH 5
Not applicable.
ITEM 6.
Reports on Form 8-K (excluding reports furnished to, but not deemed filed with,
the Commission)
A Current Report on Form 8-K was filed on February 19, 2004, disclosing
(under Item 5) the resignation of Anthony Dimun from the Company's Board of
Directors
27
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 Interim 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] U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Interim Chief Financial Officer Pursuant to[p] U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
28
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/ Richard T. Feigel
-------------------------------
Richard T. Feigel
Corporate Controller and
Interim Chief Financial Officer
Date: May 14, 2004
29
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as.............................. 'TM'
The paragraph symbol shall be expressed as.............................. [p]
The Greek letter theta shall be expressed as............................ [th]