================================================================================
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, 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 February 4, 2005 there were 12,605,704 shares of Common Stock, no par
value, outstanding.
================================================================================
VITAL SIGNS, INC.
INDEX
Page
Number
------
PART I.
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm......... 2
Consolidated Balance Sheets as of December 31, 2004 (Unaudited)
and September 30, 2004....................................... 3
Consolidated Statements of Income for the Three Months Ended
December 31, 2004 and 2003 (Unaudited)....................... 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2004 and 2003 (Unaudited)....................... 5
Notes to Consolidated Financial Statements (Unaudited).......... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 9-13
Item 3. Quantitative and Qualitative Disclosure About Market Risks...... 13
Item 4. Controls and Procedures......................................... 13
PART II.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 14
Item 6. Exhibits........................................................ 15
Signatures...................................................... 16
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, 2004.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and the related
consolidated statements of income and cash flows for the three months ended
December 31, 2004 and 2003. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board, 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 U.S. generally accepted accounting principles.
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, 2004 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 12,
2004 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, 2004 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
February 1, 2005
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2004 2004
------------ -------------
(In thousands of dollars)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................ 79,883 $ 76,468
Accounts receivable, less allowances for rebates and
doubtful accounts of $7,375 and $8,725, respectively .. 31,548 31,876
Inventory ................................................ 17,750 16,766
Prepaid expenses ......................................... 3,103 2,816
Other current assets ..................................... 1,549 1,596
------- --------
Total Current Assets ............................... 133,833 129,522
Property, plant and equipment--net ....................... 30,154 29,900
Goodwill ................................................. 69,506 69,506
Deferred income taxes .................................... 430 796
Other assets ............................................. 7,092 5,952
------- --------
Total Assets ....................................... 241,015 $235,676
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................... 5,289 $ 5,114
Accrued expenses ......................................... 7,594 7,780
Accrued income taxes ..................................... 4,463 3,387
------- --------
Total Current Liabilities .......................... 17,346 16,281
------- --------
Minority interest in subsidiary ............................. 3,456 3,172
------- --------
Commitments and contingencies
Stockholders' Equity
Common stock--no par value; authorized 40,000,000
shares, issued and outstanding 12,630,974 and
12,715,566 shares, respectively ....................... 21,179 24,279
Accumulated other comprehensive income ................... 5,183 3,059
Retained earnings ........................................ 193,851 188,885
------- --------
Stockholders' equity ..................................... 220,213 216,223
------- --------
Total Liabilities and Stockholders' Equity ......... 241,015 $235,676
======= ========
(See Notes to Consolidated Financial Statements)
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three
Months Ended
December 31,
--------------------
2004 2003
-------- -------
(In thousands, except
per share amounts)
Net Revenues:
Net sales .......................................................................... $37,257 $35,895
Service revenue .................................................................... 8,441 7,953
------- -------
45,698 43,848
------- -------
Cost of goods sold and services performed:
Cost of goods sold ................................................................. 18,514 17,505
Cost of services performed ......................................................... 4,475 4,329
------- -------
22,989 21,834
------- -------
Gross profit .......................................................................... 22,709 22,014
------- -------
Operating expenses:
Selling, general and administrative ................................................ 12,008 12,346
Research and development ........................................................... 1,784 1,506
Restructuring expense .............................................................. 55 --
Other expense--net ................................................................. 38 70
------- -------
Total operating expenses ........................................................ 13,885 13,922
------- -------
Operating Income ...................................................................... 8,824 8,092
------- -------
Other (income) expense
Interest (income) .................................................................. (259) (183)
Interest expense ................................................................... -- 24
------- -------
Total other (income) .................................................................. (259) (159)
------- -------
Income from continuing operations before provision for income taxes and minority
interest in income of consolidated subsidiary ...................................... 9,083 8,251
Provision for income taxes ............................................................ 3,151 2,889
------- -------
Income from continuing operations before minority interest in income of consolidated
subsidiary ......................................................................... 5,932 5,362
Minority interest in income of consolidated subsidiary ................................ 109 138
------- -------
Income from continuing operations ..................................................... 5,823 5,224
Discontinued Operations:
Loss from operations of Vital Pharma, net of income taxes benefit of ($47) and ($83) .. 90 154
------- -------
Net income ............................................................................ $ 5,733 $ 5,070
======= =======
Earnings (loss) per Common Share:
Basic
Income per share from continuing operations ........................................ $ 0.46 $ 0.40
Loss per share from discontinued operations ........................................ $ (0.01) $ (0.01)
------- -------
Net earnings per share ............................................................. $ 0.45 $ 0.39
======= =======
Diluted
Income per share from continuing operations ........................................ $ 0.46 $ 0.40
Loss per share from discontinued operations ........................................ $ (0.01) $ (0.01)
------- -------
Net earnings per share ............................................................. $ 0.45 $ 0.39
======= =======
Basic weighted average number of shares outstanding ................................... 12,618 12,884
Diluted weighted average number of shares outstanding ................................. 12,771 13,018
Dividends paid per share .............................................................. $ 0.06 $ 0.06
(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,
--------------------
2004 2003
------- -------
(In thousands of
dollars)
Cash Flows from Operating Activities:
Net income .................................................................... $ 5,733 $ 5,070
Add loss from discontinued operations ......................................... 90 154
------- -------
Income from continuing operations ............................................. 5,823 5,224
Adjustments to reconcile income from continuing operations to net cash provided by
continuing operations
Depreciation and amortization ................................................. 1,168 1,112
Deferred income taxes ......................................................... 366 178
Minority interest in income of consolidated subsidiary ........................ 284 138
Tax benefit on stock options .................................................. -- 20
Changes in operating assets and liabilities:
Decrease in accounts receivable ............................................... 1,003 402
(Increase) decrease in inventory .............................................. (429) 1,730
(Increase) decrease in prepaid expenses and other current assets .............. (17) 2,619
(Increase) decrease in other assets ........................................... (488) 478
Decrease in accounts payable .................................................. (1,361) (2,159)
(Decrease) in accrued expenses ................................................ (532) (325)
Increase (decrease) in accrued income taxes ................................... 1,076 (966)
Increase (decrease) in other liabilities ...................................... 311 (86)
------- -------
Net cash provided by continuing operations ....................................... 7,204 8,365
Net cash used in discontinued operations ......................................... (90) (192)
------- -------
Net cash provided by operating activities ........................................ 7,114 8,173
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 .................................. (338) (647)
Capitalized software costs .................................................... (741) (468)
Capitalized patent costs ...................................................... (52) (44)
------- -------
Net cash used in investing activities ............................................ (1,131) (2,909)
Cash flows from financing activities:
Dividends paid ................................................................ (767) (779)
Proceeds from exercise of stock options ....................................... 775 312
Purchase of common stock ...................................................... (3,974) (460)
Principal payments on long-term debt and notes payable ........................ -- (1,511)
------- -------
Net cash used in financing activities ............................................ (3,966) (2,438)
Effect of foreign currency translation ........................................... 1,398 1,410
------- -------
Net increase in cash and cash equivalents ........................................ 3,415 7,625
Cash and cash equivalents at beginning of period ................................. 76,468 55,660
------- -------
Cash and cash equivalents at end of period ....................................... $79,883 $63,285
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the nine months for:
Interest ...................................................................... $ -- $ 22
Income taxes .................................................................. $ 1,418 $ 1,111
(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, 2004, the consolidated
statements of income for the three months ended December 31, 2004 and 2003, and
the consolidated statements of cash flows for the three months ended December
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 December 31, 2004 and the results of operations for the three months
ended December 31, 2004 and 2003, and the cash flows for the three months ended
December 31, 2004 and 2003, have been made.
2. See the Company's Annual Report on Form 10-K for the year ended
September 30, 2004 (the "Form 10-K") for additional disclosures relating to the
Company's consolidated financial statements.
3. At December 31, 2004, the Company's inventory was comprised of raw
materials of $11,552,000 and finished goods of $6,198,000. At September 30,
2004, the Company's inventory was comprised of raw materials of $10,563,000 and
finished goods of $6,203,000.
4. Net revenues consist of product sales and service revenues. For all
product sales, revenue is recognized when title to the product passes to the
customer. For substantially all product sales, title passes upon shipment of the
product by the Company, although for certain sales, title passes when the
product is received by 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. A reconciliation of gross to net sales is
provided below:
Three Months Ended
December 31,
--------------------
2004 2003
-------- ---------
Gross sales ............................................. $ 51,380 $ 48,084
Rebates ................................................. (13,241) (11,085)
Other deductions ........................................ (882) (1,104)
-------- --------
Net sales ............................................... 37,257 35,895
Service revenues ........................................ 8,441 7,953
-------- --------
Total net revenues ................................... $ 45,698 $ 43,848
======== ========
Other deductions consist of discounts, returns and allowances for credits.
5. The Company has aggregated its business units into four reportable
segments, Anesthesia, Respiratory/Critical Care, Sleep and Pharmaceutical
Technology Services. There are no material intersegment sales. Anesthesia and
Respiratory/Critical Care share certain manufacturing, 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
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Respiratory Pharmaceutical
Critical Technology
Anesthesia Care Sleep Services Consolidated
---------- ----------- ------- -------------- ------------
For the Three Months Ended
December 31, 2004
Net revenues ................ $ 20,127 $10,148 $10,752 $ 4,671 $ 45,698
Gross profit ................ 10,255 5,744 4,707 2,001 22,707
Gross profit percentage ..... 51.0% 56.6% 43.8% 42.8% 49.7%
Operating income (loss) ..... 5,297 2,670 (36) 893 8,824
Total assets ................ 121,073 61,045 38,707 20,190 241,015
Capital expenditures ........ 401 202 361 167 1,131
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
Gross profit percentage ..... 50.5% 56.7% 45.8% 42.3% 50.2%
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
6. Other comprehensive income for the three months ended December 31, 2004
and 2003 consisted of:
Three Months Ended
December 31,
------------------
2004 2003
------ ------
Net income ................................................ $5,733 $5,070
Foreign currency translation .............................. 2,124 1,612
------ ------
Comprehensive income ...................................... $7,857 $6,682
====== ======
7. In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure, an amendment of 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-month period ended December 31, 2004 and 2003 would approximate the pro
forma amounts indicated in the table below (dollars in thousands):
7
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Month Period
Ended December 31,
------------------
2004 2003
------ ------
Net income--as reported ................................... $5,733 $5,070
Net income--Pro forma ..................................... 5,490 4,883
Basic net income per common share--as reported ............ .45 .39
Diluted net income per common share--as reported .......... .45 .39
Basic net income per common share--Pro forma .............. .44 .38
Diluted net income per common share--Pro forma ............ .43 .38
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, 2004 and 2003,
respectively: expected volatility of 33% and 50%, respectively, risk-free
interest rate of 5.0% and 3.7%, respectively, dividend yield rate of .6% and
.7%, respectively, and all options have expected lives of between five and ten
years.
8. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. SFAS 123(R) is effective for
the Company beginning in the fourth quarter of this fiscal year. The new
standard allows for two transition alternatives, either the modified-prospective
method or the modified-retrospective method. The Company has not completed its
evaluation of SFAS 123(R) and therefore has not selected a transition method or
determined the impact that adopting SFAS 123(R) will have on its results of
operations.
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.
8
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 could 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, 2004 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 from
Prior Period
Three Months
Ended
December 31, 2004
Compared with
Three Months
Ended
December 31, 2003
-----------------
Consolidated Statement of Operations Data:
Net revenues................................................ 4.2%
Gross profit................................................ 3.2%
Research And Development.................................... 18.5%
Total operating expenses.................................... (0.3)%
Income from continuing operations........................... 11.5%
Net income.................................................. 13.1%
Comparison of Results for the Three-Month Period Ended December 31, 2004 to the
Three-Month Period Ended December 31, 2003.
Net Revenue. Net revenues for the three months ended December 31, 2004
increased by 4.2% (an increase of 2.8% excluding the favorable effect of foreign
exchange) to $45.7 million as compared to $43.8 million in the comparable period
last year. Of our total revenues, $33.5 million, or 73.3%, were derived from
domestic sales and $12.2 million, or 26.7%, were derived from international
sales. The following are the net revenues by business segment for the three
months ended December 31, 2004 compared to the three months ended December 31,
2003:
9
REVENUE BY BUSINESS SEGMENT
For the Quarter
Ended December 31,
---------------------- Percent
2004 2003 Change
------- -------- -------
(Dollars in thousands)
Anesthesia .................................... $20,127 $18,496 8.8%
Respiratory/Critical Care ..................... 10,148 10,667 (4.9%)
Sleep ......................................... 10,752 10,956 (1.9%)
Pharmaceutical Technology Services ............ 4,671 3,729 25.3%
------- ------- ----
$45,698 $43,848 4.2%
======= ======= ====
Sales of anesthesia products increased 8.8% from $18.5 million for the
three months ended December 31, 2003 to $20.1 million for the three months ended
December 31, 2004. The increase is due to a 61.2% increase in sales of
Limb-O(TM), our patented anesthesia circuit, to $2,602,000 and an 8.2% increase
in sales of traditional anesthesia circuits to $6,158,000. Domestic sales of
anesthesia products increased 6.2%, from $17,096,000 for the three months ended
December 31, 2003 to $18,154,000 for the three months ended December 31, 2004.
International sales of anesthesia products increased 40.9%, from $1,400,000 for
the three months ended December 31, 2003 to $1,973,000 for the three months
ended December 31, 2004.
Sales of respiratory/critical care products decreased 4.9%, from $10.7
million for the three months ended December 31, 2003 to $10.1 million for the
three months ended December 31, 2004. The most significant factor was a decline
of 39.0% in international sales of our ABG product principally related to
international OEM customers. The remaining products in the Respiratory/Critical
Care segments had an overall increase of 2.6%.
Net revenues in the Sleep segment decreased 1.9% (a decrease of 6.9%
excluding foreign exchange) from $11.0 million for the three months ended
December 31, 2003 to $10.8 million for the three months ended December 31, 2004.
The Net revenues at Sleep Services of America (SSA), the Company's domestic
sleep disorder diagnostic business, decreased 10.7% resulting from the effect of
closing certain less profitable sleep labs between the second and fourth
quarters of fiscal 2004. SSA has experienced a 13.8% sales increase, during the
three months ended December 31, 2004, in the continuing sleep centers over the
same period as last year. Also in this segment, revenues for Breas, our European
manufacturer of personal ventilators and CPAP devices, increased 3.7% primarily
from favorable foreign exchange. This was partially offset be declines resulting
from increased competition in our ventilator product line and the discontinuing
certain OEM products as a result of the increased focus on our own manufactured
products.
Service revenues in the Pharmaceutical Technology Services segment
increased 25.3%, from $3.7 million for the three months ended December 31, 2003
to $4.7 million for the three months ended December 31, 2004, resulting
primarily from the impact of several significant sales of the company's
ComplianceBuilder software to pharmaceutical clients.
Cost of Goods Sold and Services Performed. Cost of goods sold and services
performed increased 5.5% from $21.8 million for the three months ended December
31, 2003 to $23.0 million for the three months ended December 31, 2004.
Cost of goods sold increased $1.0 million, or 5.4%, from $17.5 million for
the three months ended December 31, 2003 to $18.5 million for the three months
ended December 31, 2004 resulting from volume increases of approximately
$674,000 and foreign exchange increases of approximately $334,000. Cost of
services performed increased 4.7%, from $4.3 million for the three months ended
December 31, 2003 to $4.5 million for the three months ended December 31, 2004
resulting primarily from volume increases.
Gross Profit. Our gross profit increased 3.2%; from $22.0 million for the
three months ended December 31, 2003 to $22.7 million for the three months ended
December 31, 2004. Our overall gross profit margin was 49.7% for the three
months ended December 31, 2004; a decrease from the 50.2% achieved in the three
months ended December 31, 2003, resulting from decreased margins at our European
subsidiary, Breas, and increased rebate
10
expense in both the Anesthesia and Respiratory/Critical Care segments. For gross
profit information related to our four segments, refer to Footnote 6 of the
Notes to Consolidated Financial Statements.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 2.7%; from $12.3 million for the three months
ended December 31, 2003 to $12.0 million for the three months ended December 31,
2004. The $300,000 decrease consists primarily of reduced legal expenses of
$265,000 (primarily related to the audit committee investigation during the
first quarter of fiscal 2004), $156,000 for net cost reductions at our Breas
subsidiaries and $113,000 for net cost reductions within the Vital Signs core
business. These savings were offset in part by an increase from foreign exchange
at Breas of approximately $210,000.
Research and Development Expenses. Research and development expenses
increased by approximately $278,000, or 18.5%, from $1.5 million for the three
months ended December 31, 2003 to $1.9 million for the three months ended
December 31, 2004 as the Company invests in the development of the new Breas
family of Sleep CPAP and ventilation equipment, patient interfaces, and single
use products for anesthesia, respiratory and critical care.
Restructuring Expense. Restructuring expense for the three months ended
December 31, 2004, included costs of $55,000 related to the closing of our
California manufacturing plant.
Other (Income) Expense--Net. Other expense included in operating expenses,
decreased by $32,000 from $70,000 for the three months ended December 31, 2003
to $38,000 for the three months ended December 31, 2004.
Other Items
Interest Income and Expense. Interest income increased $76,000, or 41.5%,
from $183,000 for the three months ended December 31, 2003 to $259,000 during
the three months ended December 31, 2004, resulting from the increase in
available cash and cash equivalents. Interest expense decreased 100% from
$24,000 for the three months ended December 31, 2003, as the Company paid down
its Industrial Revenue Bond in December 2003 in its entirety.
Provision for Income Taxes. The provision for income tax expense for the
three months ended December 31, 2004 and 2003 was $3.2 million and $2.9 million,
respectively, reflecting effective tax rates of 34.7% and 35.0% for these
periods, respectively.
Discontinued Operations. The net loss (after applying the taxes) from
discontinued operation was approximately $90,000 for the three months ended
December 31, 2004 and approximately $154,000 for the three months ended December
31, 2003.
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,
2004, we had cash and cash equivalents of approximately $79.9 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, 2004.
Vital Signs continues to generate cash flows from its operations. During
the three-months ended December 31, 2004, cash and cash equivalents increased by
$3.4 million. Operating activities provided $7.1 million net cash, of which $7.2
million was provided from continuing operations and $90,000 was used by our
discontinued operation at Vital Pharma. Investing activities used $1.1 million
for capital additions. Financing activities used $4.0 million, consisting of
$4.0 million for the repurchase of common stock, and $767,000 paid for
dividends, which were offset by $775,000 of cash received from the exercise of
stock options.
Cash and cash equivalents were $79.9 million at December 31, 2004 as
compared to $76.5 million at September 30, 2004. At December 31, 2004 our
working capital was $116.5 million as compared to $113.2 million at September
30, 2004. At December 31, 2004 the current ratio was 7.7 to 1, as compared to
8.0 to 1 at September 30, 2004.
11
Capital additions for the three month period ended December 31, 2004 were
approximately $1.1 million, and included expenditures for equipment at our New
Jersey facility ($105,000), Thomas Medical Products facility ($118,000), new
laboratory equipment ($43,000) for the sleep labs at SSA, computer hardware and
software to upgrade MIS systems ($72,000) and the capitalized costs of software
development ($741,000) and patents ($52,000). We expect that our total capital
expenditures for fiscal 2005 should not exceed our total capital spending of
$5.3 million in fiscal 2004. This statement represents a forward-looking
statement under the Reform Act. Actual results could differ materially from this
statement for a number of reasons, including the possibility that the Company
may determine 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 the buyback of our common stock, 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 fiscal 2003 through the
three-month period ended December 31, 2004, we had repurchased 488,100 shares
for $14.7 million, at an average price of $30.11. 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 and paid $767,000 in dividends
(amounting to $.06 per share) in the current fiscal year.
Critical Accounting Principles and Estimates
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.
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. On an annual basis we conduct an
impairment test of our goodwill and intangible assets. 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 $534,000 at December 31, 2004 and $563,000 at
September 30, 2004. 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 The Company's sales to distributors in the domestic anesthesia and
respiratory/critical care business segments, which represented 25.1%
of the Company's net sales during the three-month period ended
December 31, 2004, are made at the Company's established distributor
price. Since the end-user (i.e., a
12
hospital) is typically entitled, on a case by case basis, to a price
lower than our established price, the distributor is due a rebate (the
difference between the established price and the lower price to which
the end-user is entitled) when shipment is made to the end user. In
order to properly reflect our sales to distributors, the Company
records the gross sale (at our established price), less the amount of
expected rebate to arrive at net sales. The allowance for rebates was
$6,841,000 and $8,162,000 at December 31, 2004 and September 30, 2003,
respectively. Rebate expense for the three-month period ended December
31, 2004 and 2003 was $13,241,000 and $11,085,000, respectively.
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 $979,000 at December 31, 2004
and $1,150,000 at September 30, 2004.
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.
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 26.7% of our total
net revenues. Our Breas subsidiary, located in Sweden, represents 57.0% 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 instrument transactions (i.e.
foreign exchange forward or option contracts) as of December 31, 2004.
Our risk involving price changes relates 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 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.
13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases made by the
Company of its common stock during the quarter ended December 31, 2004:
(c)(1)
Total Number of (d)(1)
Shares Purchased Maximum Dollar
(a) as Part of Amount That
Total (b) Publicly May Yet be
Number of Average Announced Purchased
Shares Price Paid Plans or Under the
Period Purchased Per Share Programs Plans or Programs
------ --------- ---------- ---------------- -----------------
10/1/2004-10/31/2004...... 72,700 $33.99 72,700 $6,788,300
11/1/2004-11/30/2004...... 28,000 $36.33 28,000 $5,769,850
12/1/2004-12/31/2004...... 12,500 $38.88 12,500 $5,283,350
------- ------ ------- ----------
Total.................. 113,200 $35.11 113,200 $5,283,350
======= ====== ======= ==========
----------
(1) In May 2003, our Board of Directors authorized the expenditure of up to $20
million for the repurchase of Vital Signs' stock. 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. On February 8, 2005 our
Board of Directors authorized the expenditure of an additional $15 million
for the repurchase of Vital Signs stock.
Item 6. Exhibits
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 PARA 18
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 PARA
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
14
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: February 9, 2005
15
EXHIBIT INDEX
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 PARA 18
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 PARA
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
16