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, 2002 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission file number: 0-18793
-------------------------------
VITAL SIGNS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 11-2279807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Campus Road
Totowa, New Jersey 07512
(Address of principal executive office, including zip code)
973-790-1330
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At May 10, 2002 there were 12,906,232 shares of Common Stock, no par
value, outstanding.
VITAL SIGNS, INC.
INDEX
PAGE NUMBER
PART I.
Financial information 1
Item 1. Financial Statements:
Independent Accountant's Report 2
Consolidated Balance Sheets as of March 31, 2002
(Unaudited) and September 30, 2001 3
Consolidated Statements of Income for the Six Months
ended March 31, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Income for the Three Months
ended March 31, 2002 and 2001 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2002 and 2001 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosure About Market
Risks 14
PART II.
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I.
Financial Information
Item 1.
Financial Statements
Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed or omitted
from the following consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. Vital
Signs, Inc. (the "registrant" or the "Company" or "Vital Signs")
believes that the disclosures are adequate to assure that the
information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read
in conjunction with the year-end consolidated financial statements and
notes thereto included in the registrant's Annual Report on Form 10-K
for the year ended September 30, 2001.
The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for
the entire fiscal year.
1
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Vital Signs, Inc.
We have reviewed the accompanying consolidated balance sheet of Vital
Signs, Inc. as of March 31, 2002 and the related consolidated
statements of income for the three-month and six-month periods ended
March 31, 2002 and 2001, and cash flows for the six-month periods
ended March 31, 2002 and 2001. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 8, 2002
2
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
--------- -------------
2002 2001
---- ----
(In thousands)
ASSETS
(Unaudited)
-----------
Current Assets:
Cash and cash equivalents $ 33,002 $ 31,029
Accounts receivable, less allowance for doubtful accounts of
$840 and $436 respectively 35,548 33,329
Inventory 24,812 25,984
Prepaid expenses and other current assets 8,669 8,899
-------- --------
Total Current Assets 102,031 99,241
Property, plant and equipment - net 36,576 35,710
Marketable securities 465 486
Goodwill 65,601 48,178
Deferred income taxes 2,817 5,002
Other assets 2,727 2,943
-------- --------
Total Assets $210,217 $191,560
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,075 $ 5,347
Current portion of long-term debt 394 357
Accrued expenses 7,813 5,652
Notes payable - bank 4,943 5,645
Other current liabilities 8,691 11,747
-------- --------
Total Current Liabilities 27,916 28,748
Long term debt 1,634 1,842
-------- --------
Total Liabilities 29,550 30,590
Commitments and contingencies
Minority interest in subsidiary 3,019 344
Stockholders' Equity
Common stock - no par value; authorized 40,000,000 shares,
issued and outstanding 12,959,032 and 12,935,656 shares,
respectively 31,500 27,679
Accumulated other comprehensive loss (2,281) (2,270)
Retained earnings 148,429 135,217
-------- --------
Stockholders' equity 177,648 160,626
-------- --------
Total Liabilities and Stockholders' Equity $210,217 $191,560
======== ========
(See Notes to Consolidated Financial Statements)
3
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Six Months Ended
------------------------
March 31,
---------
2002 2001
---- ----
(In Thousands Except Per Share Amounts)
Revenue:
Net sales $74,623 $70,185
Service revenue 10,935 11,287
------- -------
85,558 81,472
Cost of goods sold and services performed:
Cost of goods sold 37,035 33,359
Cost of services performed 6,499 6,163
------- -------
43,534 39,522
------- -------
Gross profit 42,024 41,950
Operating expenses:
Selling, general and administrative 21,766 20,669
Research and development 3,670 3,830
------- -------
Total operating expenses 25,436 24,499
Operating Income 16,588 17,451
Other (income) expense:
Interest income (385) (489)
Interest expense 59 233
Other expense (income) 142 (143)
Reversal of litigation accrual (5,006) ---
Goodwill amortization --- 657
------- -------
Total other (income) expense (5,190) 258
Income before provision for income taxes and minority interest in income of
consolidated subsidiary 21,778 17,193
Provision for income taxes 7,367 5,171
------- -------
Income before minority interest in income of consolidated subsidiary 14,411 12,022
Minority interest in income of consolidated subsidiary 154 31
------- -------
Net income $14,257 $11,991
======= =======
Earnings per Common Share:
Basic net income per share $ 1.11 $ .97
======= =======
Diluted net income per share $ 1.09 $ .94
======= =======
Basic weighted average number of shares 12,890 12,396
======= =======
Diluted weighted average number of shares 13,036 12,701
======= =======
Dividends paid per share $ .08 $ .08
======= =======
(See Notes to Consolidated Financial Statements)
4
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
--------------------------
March 31,
---------
2002 2001
---- ----
(In Thousands Except Per Share Amounts)
Revenue:
Net sales $37,697 $35,000
Service revenue 5,762 5,874
------- -------
43,459 40,874
Cost of goods sold and services performed:
Cost of goods sold 19,773 16,645
Cost of services performed 3,272 3,210
------- -------
23,045 19,855
------- -------
Gross Profit 20,414 21,019
Operating expenses:
Selling, general and administrative 11,354 10,484
Research and development 1,867 2,056
------- -------
Total operating expenses 13,221 12,540
Operating income: 7,193 8,479
Other (income) expense:
Interest income (154) (385)
Interest expense --- 82
Other expense (income) 74 (399)
Reversal of litigation accrual (5,006) ---
Goodwill amortization --- 298
------- -------
Total other (income) expense (5,086) (404)
Income before provision for income taxes and minority interest in income of
consolidated subsidiary 12,279 8,883
Provision for income taxes 4,181 2,661
------- -------
Income before minority interest in income of consolidated subsidiary
8,098 6,222
Minority interest in income of consolidated subsidiary 154 134
------- -------
Net income $ 7,944 $ 6,088
======= =======
Earnings per Common Share:
Basic net income per share $ 0.62 $ .49
======= =======
Diluted net income per share $ 0.61 $ .48
======= =======
Basic weighted average number of shares 12,909 12,549
======= =======
Diluted weighted average number of shares 13,060 12,752
======= =======
Dividends paid per share $ .04 $ .04
======= =======
(See Notes to Consolidated Financial Statements)
5
VITAL SIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
March 31,
2002 2001
Cash Flows from Operating Activities:
Net income $ 14,257 $11,991
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization 2,195 2,685
Foreign currency gain -- (500)
Amortization of goodwill -- 657
Deferred taxes 1,914 --
Non cash gain on litigation accrual reversal (5,006) --
Minority interest in income of consolidated subsidiary 154 31
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 39 (2,366)
Decrease (increase) in inventory 1,421 (3,097)
Decrease in prepaid expenses and other current assets 2,548 261
Decrease in other current liabilities (495) (131)
Decrease in other assets 342 594
Increase in accounts payable and accrued expenses 1,033 635
-------- -------
Net cash provided by operating activities 18,402 10,760
-------- -------
Cash Flows from Investing Activities:
Acquisition of subsidiaries, net of cash acquired (12,615) --
Proceeds from sales of available-for-sale securities 10 --
Acquisition of property, plant and equipment (1,874) (832)
-------- -------
Net cash used in investing activities (14,479) (832)
-------- -------
Cash Flows from Financing Activities:
Purchase of treasury stock (267) (58)
Issuance of treasury stock 196 87
Dividends paid (1,036) (991)
Proceeds from exercise of stock options 572 10,955
Principal payments of long-term debt and notes payable (1,198) (2,748)
-------- -------
Net cash provided by (used in) financing activities (1,733) 7,244
-------- -------
Effect of exchange rate changes in cash (217) --
-------- -------
Net increase in cash and cash equivalents 1,973 17,172
Cash and cash equivalents at beginning of period 31,029 7,606
-------- -------
Cash and cash equivalents at end of period $ 33,002 $24,778
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the six months for:
Interest $ 84 $ 529
Income taxes 198 4,395
(See Notes to Consolidated Financial Statements)
6
VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet as of March 31, 2002, the consolidated
statements of income for the three and six months ended March 31, 2002 and 2001
and the consolidated statement of cash flows for the six months ended March 31,
2002 and 2001 have been prepared by Vital Signs, Inc. (the "Company" or "VSI")
and are unaudited. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly the
financial position at March 31, 2002 and the results of operations for the
three-month and six-month periods ended March 31, 2002 and 2001 and cash flows
for the six-month periods ended March 31, 2002 and 2001 have been made.
2. See the Company's Annual Report on Form 10-K for the year ended September 30,
2001 (the "Form 10-K") for additional disclosures relating to the Company's
consolidated financial statements.
3. The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" at
September 30, 1999. The Company designs, manufactures and distributes single-use
medical products. The Company's other business segments do not meet the criteria
for separate disclosures.
4. At March 31, 2002, the Company's inventory was comprised of raw materials,
$13,826,000, and finished goods, $10,986,000.
5. For details of legal proceedings, see Part II, Item 1, "Legal Proceedings".
6. In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is required to be applied for fiscal years beginning
after December 15, 2001. The Company has adopted SFAS 142 as of October 1, 2001.
SFAS 142 eliminates the amortization of goodwill and certain other intangible
assets. It also requires Vital Signs to complete a test for impairment of these
assets annually, as well as a transitional goodwill impairment test within six
months from the date of adoption. The Company has completed this impairment
test, and has found no impairment. SFAS 142 also requires disclosure of what net
income would have been in all periods presented had SFAS 142 been in effect. The
following table is provided to disclose what net income would have been had SFAS
142 been adopted in prior periods:
FOR THE SIX-MONTHS ENDED
MARCH 31,
In thousands except per share amounts 2002 2001
------------------------------------- ------- ------
Reported net income $14,257 $11,991
Add back: goodwill amortization, net of tax -- 588
------- -------
Adjusted net income $14,257 $12,579
======= =======
Basic earnings per share as reported $ 1.11 $ .97
Adjusted basic earnings per share 1.11 1.01
Diluted earnings per share as reported 1.09 .94
Adjusted diluted earnings per share 1.09 .99
7
(Notes to Consolidated Financial Statements continued from previous page)
7. On January 1, 2002 the Company's National Sleep Technologies, Inc. ("NST")
subsidiary completed its merger with HSI Medical Services, Inc. ("HSI"), a
subsidiary of the Johns Hopkins Health System, with the merged entity to be
known as Sleep Services of America, Inc. NST issued 7,921,408 shares of its
Common Stock with a fair value of approximately $4,753,000, along with warrants
to purchase 326,791 shares of NST's common stock in exchange for all of the
outstanding common stock of HSI. The excess of the purchase price over the fair
value of the net assets acquired, goodwill, was approximately $3,490,000. The
Company's interest in the combined NST entity is approximately 62%. Goodwill
was recognized in accordance with Statement of Financial Accounting Standards
No. 142 ("Goodwill and Other Intangible Assets").
8. On March 28, 2002, the Company consummated the merger of Stelex, Inc.
("Stelex") into the Company's wholly owned subsidiary, The Validation Group,
Inc. ("TVG"). The surviving entity is to be known as Stelex/TVG, Inc. The
purchase price for the acquisition of Stelex was approximately $13,300,000. The
purchase price was allocated to the assets acquired based on their estimated
fair values. The excess of the purchase price over the fair value of the net
assets acquired, goodwill, was approximately $12,657,000. Goodwill was
recognized in accordance with Statement of Financial Accounting Standards No.
142 ("Goodwill and Other Intangible Assets").
9. The following unaudited proforma information presents a summary of the
Company's consolidated results of operations and the Stelex and HSI business as
if the acquisition had occurred on October 31, 2000:
FOR THE SIX-MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------ ------------------------
2002 2001 2002 2001
------------------------ ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------
Net sales and revenues 93,280 86,958 46,885 43,412
Net earnings 15,129 12,316 8,141 5,970
Basic net earnings per Common Share 1.17 0.99 0.63 0.48
Diluted net earnings per Common Share 1.16 0.97 0.62 0.47
These unaudited proforma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the combinations been in effect on October 1,
2000 or of future results of operations.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and from time to time the
Company expects to make, certain forward-looking statements regarding its
business, financial condition and results of operations. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"), the Company intends to caution investors that there are
important factors that could cause the Company's actual results to differ
materially from those projected in its forward-looking statements, whether
written or oral, made herein or that may be made from time to time by or on
behalf of the Company. Investors are cautioned that such forward-looking
statements are only predictions and that actual events or results could differ
materially from such statements. The Company undertakes no obligation to
publicly release the results of any revisions to its forward-looking statements
to reflect subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to comply with the
terms of the safe harbor provided by the Reform Act. Accordingly, the Company
has set forth a list of important factors that could cause the Company's actual
results to differ materially from those expressed in forward-looking statements
or predictions made herein and from time to time by the Company. Specifically,
the Company's business, financial condition, liquidity and results of operations
could be materially different from such forward-looking statements and
predictions as a result of (i) cost containment pressures on hospitals and
competitive factors that could affect the Company's primary markets, including
the results of competitive bidding procedures implemented by group purchasing
organizations and/or the success of the Company's sales force, (ii) slow-downs
in the healthcare industry or interruptions or delays in manufacturing and/or
sources of supply, (iii) the Company's ability to develop or acquire new and
improved products and to control costs, (iv) market acceptance of the Company's
new products, (v) technological change in medical technology, (vi) the scope,
timing and effectiveness of changes to manufacturing, marketing and sales
programs and strategies, (vii) intellectual property rights and market
acceptance of competitors' existing or new products, (viii) adverse
determinations arising in the context of regulatory matters or legal proceedings
(see Part II, Item 1 of this Quarterly Report on Form 10-Q), (ix) healthcare
industry consolidation resulting in customer demands for price concessions, (x)
the reduction of medical procedures in a cost conscious environment, (xi)
efficacy or safety concerns with respect to marketed products, whether
scientifically justified or not, that may lead to product recalls, withdrawals
or declining sales, and (xii) healthcare reform and legislative and regulatory
changes impacting the healthcare market both domestically and internationally.
9
Results of Operations
The following table sets forth, for the periods indicated, the
percentage increase of certain items included in the Company's
consolidated statement of income.
INCREASE/(DECREASE) FROM PRIOR PERIOD
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002
COMPARED WITH COMPARED WITH
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2001
Revenues 6.3% 5.0%
Cost of goods sold and services performed 16.1% 10.2%
Gross profit (2.9)% 0.2%
Selling, general and administrative
expense 8.3% 5.3%
Research and development expenses (9.2)% (4.2)%
Income before provision for income taxes and
minority interest in income of
consolidated subsidiary 38.2% 26.7%
Provision for income taxes 57.1 42.5%
Net income 30.5% 18.9%
10
COMPARISON: QUARTER ENDED MARCH 31, 2002
AND QUARTER ENDED MARCH 31, 2001
Net sales and revenues for the quarter ended March 31, 2002 increased
by $2,585,000 or 6.3% compared with the same period last year. The increase was
primarily due to the growth within the Company's sleep companies, Breas Medical
and Sleep Services of America, and the growth in the anesthesia business.
Sales of anesthesia products, representing 39.2% of net sales and
revenues, increased by approximately $1,498,000 or 9.6% from the quarter ended
March 31, 2001 due primarily to volume growth in anesthesia circuit sales led by
the Company's new anesthesia breathing circuit Limb-O'TM'. Sales of
respiratory/critical care products, representing 37.0% of net sales and
revenues, decreased by approximately $1,791,000 or 10.0%, primarily due to the
loss of a major customer by the Company's validation consulting service company.
Sales by the Company's sleep service companies, representing 23.8% of net sales
and revenues, increased by $2,878,000, or 38.7% due primarily to a growth in
sales of the Company's Breas subsidiary, and the merger of NST with HSI,
effective January, 1, 2002.
The Company's reported gross profit percentage for the quarter ended
Mach 31, 2002 was 47.0% compared to 51.4% in the same time period of the last
fiscal year. The decrease in gross profit percentage is primarily due to a
re-evaluation of the carrying value of the Company's inventory. The inventory
reserve balance was increased by approximately $1,500,000 and additional
reserves of approximately $400,000 were established for product costs relating
to sales returns. Adjusting for these events the Company's gross profit
percentage for the quarter ended March 31, 2002 would have been 51.3%
Selling, general and administrative expenses (S, G & A) for the quarter
ended March 31, 2002 increased by $870,000 or 8.3% over the prior year's quarter
primarily due to additional employees resulting from the merger of NST and HSI,
and an increase of approximately $200,000 in the provision for doubtful accounts
for certain international receivables and an increase of approximately $190,000
in legal accruals.
Research and development expenses ("R&D") decreased by $189,000 due to
reduced expenditures on R & D projects.
Other income, net of other expense, (including interest income and
expense) for the quarter ended March 31, 2002, decreased by $622,000 from the
prior year's quarter primarily due to the benefit in the quarter ended March 31,
2001 of a foreign currency translation gains, and reduced interest income in
the quarter ended March 31, 2002 resulting from lower interest rates available.
During the quarter ended March 31, 2002, the Company reversed $5.0
million in litigation accruals as a result of the successful conclusion of a
patent infringement action filed in Japan. See "Legal Proceedings".
The Company's effective tax rates were 34.1% and 30.0% for the quarters
ended March 31, 2002 and 2001, respectively. The increase in the effective tax
rate is related to an increase in the tax rate and subsequently the tax expense
at our Breas operation.
11
COMPARISON: SIX MONTHS ENDED MARCH 31, 2002
AND SIX MONTHS ENDED MARCH 31, 2001
Net sales and revenues for the six months ended March 31, 2002
increased by $4,086,000 or 5.0% compared with the same period last year. The
increase was primarily due to the growth within the Company's sleep companies,
Breas and Sleep Services of America, and the growth in the anesthesia business.
Sales of anesthesia products, representing 41.6% of net sales and
revenues, increased by approximately $3,098,000 or 9.6% from the six-month
period ended March 31, 2001 due primarily to volume growth in anesthesia circuit
sales led by the Company's new anesthesia breathing circuit Limb-O'TM'. Sales of
respiratory/critical care products, representing 36.9% of net sales and
revenues, decreased by approximately $2,650,000 or 7.7% primarily due to the
loss of a major customer by the Company's validation service company. Sales by
the Company's sleep service companies, representing 21.5% of net sales and
revenues, increased by $3,638,000, or 24.6% due primarily to a growth in sales
of the Company's Breas subsidiary and the merger of NST with HSI to form Sleep
Services of America, effective January, 1, 2002.
The Company's reported gross profit percentage for the six months ended
March 31, 2002 was 49.1% compared to 51.5% in the same time period of the last
fiscal year. The decrease in gross profit percentage is primarily due to the to
a re-evaluation of the carrying value of the Company's inventory. The inventory
reserve balance was increased by approximately $1,500,000 and additional
reserves of approximately $400,000 were established for product costs relating
to sales returns and rebates. Adjusting for these events, the Company's gross
profit percentage would have been equivalent to the prior year at 51.3%.
Selling, general and administrative expenses (S, G & A) increased by
$1,097,000 or 5.3% primarily due to additional employees resulting from the
merger of NST and HSI, and an increase of approximately $200,000 in the
provision for doubtful accounts for certain international receivables and an
increase of approximately $190,000 in legal accruals.
Research and development expenses ("R&D") decreased by $160,000 or 4.2%
due to reduced expenditures on R & D projects.
Other income, net of other expense, (including interest income and
expense) for the six-month period ended March 31, 2002, decreased by $215,000
from the prior year's quarter primarily due to the benefit in the six months
ended March 31, 2001 of a foreign currency translation gains, and reduced
interest income during the six months ended March 31, 2002 resulting from lower
interest rates available and a reduction in the amount of contributions.
During the quarter ended March 31, 2002, the Company reversed $5.0
million in litigation accruals as a result of the successful conclusion of a
patent infringement action filed in Japan. See "Legal Proceedings".
The Company's effective tax rates were 33.8% and 30.1% for the six
month period ended March 31, 2002 and 2001 respectively. The increase in
effective tax rate over the prior year's six-month period reflects an increase
in taxable income.
12
Liquidity and Capital Resources
The Company continues to rely upon cash flow from its operations.
During the six-month period ended March 31, 2002, cash and cash equivalents
increased by approximately $1,973,000. The increase was primarily due to net
cash provided by operations of approximately $18.4 million and the proceeds from
the exercise of stock options of $0.6 million. These increases were partially
offset by cash used for the acquisition of Stelex, Inc. of approximately $12.6
million, net of cash acquired; capital expenditures of approximately $1.9;
dividend payments of approximately $1.0 million; and principal payments on notes
payable and debt of approximately 1.2 million. The combined total of cash and
cash equivalents and long-term marketable securities was approximately $33.4
million at March 31, 2002 as compared to $31.5 million at September 30, 2001.
At March 31, 2002, the Company had approximately $33,002,000 in cash
and cash equivalents. On that date, the Company's working capital was
$74,115,000 and the current ratio was 3.7 to 1, as compared to $70,493,000 and
3.5 to 1 at September 30, 2001.
Capital expenditures of approximately $1.9 million for the six-month
period primarily reflected the buy-out of its operating lease for the fair
market value of the Company's Colorado plant equipment and the purchase of a
packaging line for that facility.
The Company's current policy is to retain working capital and earnings
for use in its business, subject to the payment of certain cash dividends and
treasury stock repurchases. Such funds may be used for product development,
product acquisitions and business acquisitions, among other things. The Company
regularly evaluates and negotiates with domestic and foreign medical device
companies regarding potential business or product line acquisitions or licensing
arrangements by the Company.
The Company has a $25 million line of credit with Chase Manhattan Bank
("Chase"). Chase has also expressed its intention to provide additional funds
for the Company's future acquisitions, provided that each such acquisition meets
certain criteria. The terms for any borrowing would be negotiated at the date of
origination. There were no amounts outstanding at March 31, 2002.
Management believes that the funds generated from operations, along
with the Company's current working capital position and available bank credit,
will be sufficient to satisfy the Company's capital requirements for the
foreseeable future. This statement constitutes a forward-looking statement under
the Reform Act. The Company's liquidity could be adversely impacted and its need
for capital could materially change if costs are higher than anticipated, the
Company were to undertake acquisitions demanding significant capital, operating
results were to differ significantly from recent experience or adverse events
were to affect the Company's operations.
13
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, including the impact of
commodity price changes and changes in the market value of its investments and,
to a lesser extent, interest rate changes and foreign currency fluctuations. In
the normal course of business as described below, the Company employs policies
and procedures with the objective of limiting the impact of market risks on
earnings and cash flows and to lower its overall borrowing costs.
The Company believes that the impact of interest rate changes and
foreign currency fluctuations is not material to the Company's financial
condition. The Company does not enter into interest rate and foreign currency
transactions for speculative purposes. It is also the Company's policy to price
products from vendors and to customers in U.S. dollars and to receive payment in
U.S. dollars. Historically, the international portion of the Company's sales has
been relatively small and the effect of changes in interest rates and foreign
exchange rates on the Company's earnings generally has been small relative to
other factors that also affect earnings, such as unit sales and operating
margins. However, the international segment is expected to grow both in terms of
actual sales and as a percentage of the Company's total sales and the Company
may in the future need to revise or change its approach to managing interest
rate and foreign currency transactions.
The Company's risks involving commodity price changes relate to prices
of raw materials used in its operations. The Company is exposed to changes in
the prices of latex and various plastics and resins for the manufacture of its
products. The Company does not enter into commodity futures or derivative
instrument transactions. Except with respect to its single source for face
masks, it is the Company's policy to maintain commercial relations with multiple
suppliers and when prices for raw materials rise to attempt to source
alternative supplies.
Subsequent Events
On May 1, 2002, the Board of Directors terminated the Company's
previously announced buy-back program, under which the Company acquired a total
of 61,000 shares of Common Stock since the inception of the program in February,
2002.
In April 2002, the Company paid approximately $8.2 million in cash to
settle liabilities relating to the purchase of the remaining shares in Breas
Medical, AB. The Company now owns 100% of Breas Medical, AB.
14
PART II.
Other Information
ITEM 1.
Legal Proceedings:
(a) Reference is made to Item 3 of the Company's Annual Report on Form 10-K
for the year ended September 30, 2001.
(b) In September 1996, a patent infringement action was filed in Japan
against an OEM medical device distributor in connection with the sale in
Japan of Marquest Medical Products, Inc.'s ABG syringe product line. In
July 1999 the Court indicated at a hearing that, based on one exhibit
submitted by the plaintiff, the Marquest ABG syringe products appeared to
infringe the plaintiff's patent, and requested that the plaintiff submit
an updated proof of damages. In July 1999, plaintiff filed an updated
proof of damages of approximately $6.5 million, plus interest and costs.
On June 23, 2000 the Court entered a judgment against the Company's
distributor for Yen 336,872,689 ($2,887,645) plus five percent annual
interest. The distributor (which has patent indemnification protection
from the Company's Marquest subsidiary) appealed the judgment to the
Tokyo Supreme Court. On March 28, 2002, the appellate court ruled in
favor of the distributor, thereby ending the litigation and ending the
Company's exposure with respect to this proceeding.
(c) On December 6, 1999 a complaint was filed against the Company on behalf
of the former shareholders of Vital Pharma, Inc. ("VPI") alleging breach
of contract for failure to pay earnout payments allegedly due under the
stock purchase agreement for the sale of VPI in December, 1995. The
Company answered the complaint, filed counter-claims and moved to
transfer the case to arbitration. In August, 2000 the court ordered
plaintiff to submit such claims to binding arbitration and stayed all
other proceedings pending the outcome of the arbitration. The matter is
in the discovery phase before the arbitrator. Notwithstanding an order by
the arbitrator to complete discovery by April, 2002, the only discovery
which has taken place has been the exchange of documents. The remainder
of discovery is expected to be completed by the end of the current fiscal
year.
The Company is also involved in other legal proceedings arising in the
ordinary course of business.
The Company cannot predict the outcome of its legal proceedings with
certainty. However, based upon its review of pending legal proceedings,
the Company does not believe the ultimate disposition of its pending
legal proceedings will be material to its financial condition.
Predictions regarding the impact of pending legal proceedings constitute
forward-looking statements under the Reform Act. The actual results and
impact of such proceedings could differ materially from the impact
anticipated, primarily as a result of uncertainties involved in the proof
of facts in legal proceedings.
15
ITEM 6.
Exhibits and Reports on Form 8-K
A) A Current Report on Form 8-K was filed on April 8, 2002,
announcing (under Item 5) the Company's acquisition of Stelex,
Inc.
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VITAL SIGNS, INC.
By: /s/ Joseph F. Bourgart
----------------------
Joseph F. Bourgart
Executive Vice President and
Chief Financial Officer
Date: May 15, 2002
17
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'