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UNITED STATES
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, 2000
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 0-27588
VITALCOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3662 33-0538926
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
15222 DEL AMO AVENUE
TUSTIN, CALIFORNIA 92780
(714) 546-0147
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 10, 2000, there were 8,003,605 shares outstanding of the issuer's
common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITALCOM INC.
BALANCE SHEETS
--------------------------
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets
Cash and cash equivalents $10,105,761 $ 7,107,420
Short-term investments -- 5,273,037
Accounts receivable, net 2,104,126 2,309,392
Inventories 1,350,753 1,504,952
Prepaid expenses 436,318 530,833
----------- -----------
Total current assets 13,996,958 16,725,634
Property
Machinery and equipment 1,624,796 1,560,013
Office furniture and computer equipment 2,632,948 2,558,815
Leasehold improvements 199,469 181,778
----------- -----------
4,457,213 4,300,606
Less accumulated amortization and depreciation (2,971,881) (2,831,090)
----------- -----------
Property, net 1,485,332 1,469,516
Other assets 66,707 68,237
Goodwill, net 414,890 423,025
----------- -----------
Total assets $15,963,887 $18,686,412
=========== ===========
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
---------------------------
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 383,429 $ 508,322
Accrued payroll and related costs 633,894 959,862
Accrued warranty costs 500,746 516,297
Other accrued liabilities 782,061 568,336
Current portion of capital lease obligations 21,408 28,796
----------- -----------
Total current liabilities 2,321,538 2,581,613
Stockholders' equity:
Common stock, including paid-in capital, $0.0001
par value; 25,000,000 shares authorized; 8,318,515
shares issued and 7,954,965 shares outstanding at
March 31, 2000; 8,281,112 shares issued and
7,917,562 shares outstanding at December 31, 1999 37,779,461 37,665,468
Note receivable for common stock sales (30,590) (30,590)
Treasury stock, at cost (740,154) (740,154)
Accumulated deficit (23,366,368) (20,789,925)
----------- -----------
Total stockholders' equity 13,642,349 16,104,799
----------- -----------
Total liabilities and stockholders' equity $15,963,887 $18,686,412
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VITALCOM INC.
STATEMENTS OF OPERATIONS
-----------------------------
THREE MONTHS ENDED
MARCH 31,
2000 1999
----------- ----------
(UNAUDITED)
Revenues $ 3,102,884 $4,810,100
Cost of revenues 1,838,126 2,025,326
----------- ----------
Gross profit 1,264,758 2,784,774
Operating expenses:
Sales and marketing 1,611,526 1,571,321
Research and development 1,808,503 1,125,474
General and administrative 578,487 590,895
----------- ----------
Total operating expenses 3,998,516 3,287,690
----------- ----------
Operating loss (2,733,758) (502,916)
Other income, net 166,315 183,796
----------- ----------
Loss before provision for income taxes (2,567,443) (319,120)
Provision for income taxes 9,000 9,000
Net loss $(2,576,443) $(328,120)
=========== ==========
Net loss per basic and diluted common share $ (0.32) $ (0.04)
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Weighted average basic and diluted common shares 7,934,416 8,182,828
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
-----------------------------
THREE MONTHS ENDED
MARCH 31,
2000 1999
----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net loss $(2,576,443) $ (328,120)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 174,434 179,228
Loss on disposal of property -- 939
Changes in operating assets and liabilities:
Accounts receivable 205,266 (171,965)
Inventories 154,199 245,655
Prepaid expenses and other assets 96,046 (13,432)
Accounts payable (124,893) 129,992
Accrued payroll and related costs (325,968) (174,813)
Accrued warranty costs (15,551) (7,352)
Accrued liabilities 213,725 (128,953)
----------- -----------
Net cash used in operating activities (2,199,185) (268,821)
Cash flows from investing activities:
Purchases of property (182,115) (139,696)
Proceeds from sale of short-term investments 5,273,037 2,904,313
----------- -----------
Net cash provided by investing activities 5,090,922 2,764,617
Cash flows from financing activities:
Repayment of capital lease obligation and
long-term debt (7,388) (6,641)
Net proceeds from issuance of common stock 113,992 71,665
----------- -----------
Net cash provided by financing activities 106,604 65,024
Net increase in cash and cash equivalents 2,998,341 2,560,820
Cash and cash equivalents, beginning of period 7,107,420 10,460,810
----------- -----------
Cash and cash equivalents, end of period $10,105,761 $13,021,630
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Supplemental disclosures of cash flow information:
Interest paid $ 624 $ 1,312
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Income taxes paid $ 4,900 $ 2,180
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VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations; nevertheless, the management
of the Company believes that the disclosures herein are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999 filed
with the SEC. In the opinion of management, the condensed financial statements
included herein reflect all normal, recurring adjustments necessary to present
fairly the financial position of the Company as of March 31, 2000, and the
results of its operations and its cash flows for the three-month periods ended
March 31, 2000 and 1999. The results of operations for the interim periods are
not necessarily indicative of the results of operations for the full year.
2. NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding. For the three-month
periods ended March 31, 2000 and 1999, the diluted weighted average shares were
equal to the basic weighted average shares due to the anti-dilutive effect the
conversion of options would have given the Company's net loss for the period.
3. STOCK PLANS AND STOCKHOLDERS' EQUITY
Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") and 1996 Stock Option Plan
(the "1996 Plan") for the three months ended March 31, 2000:
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
--------- -------------- -----------
Balance, December 31, 1999 1,680,116 $0.60 to $6.00 601,094
Granted 17,500 $2.38
Exercised (37,403) $3.00 to $4.00
Canceled (61,764) $1.50 to $6.00
---------
Balance, March 31, 2000 1,598,449 $0.60 to $6.00 659,196
=========
At March 31, 2000, 727,436 options were available for grant under the 1993 Plan
and 1996 Plan.
There were no stock transactions under the 1996 Director Option Plan (the
"Director Plan") for the three months ended March 31, 2000. At March 31, 2000,
60,000 options were available for grant under the Director Plan and no options
were exercisable.
The Company has reserved an aggregate of 300,000 shares of Common Stock for
issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in January 1996 and approved by the Company's
stockholders prior to the consummation of the Company's initial public offering
in February 1996. The ESPP is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, and permits eligible employees of the
Company to purchase Common Stock through payroll deductions of up to 10% of
their compensation provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP was implemented by an offering
period commencing on February 14, 1996 and ending on the last business day in
the period ending October 31, 1996. Each subsequent offering period (an
"Offering Period") commences on the day following the end of the prior Offering
Period and
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has a duration of six months. The price of Common Stock purchased under the ESPP
is 85% of the lower of the fair market value of the Common Stock on the first or
last day of each offering period. The ESPP will expire in the year 2006. In the
years ended December 31, 1997, 1998 and 1999 the Company issued 47,359, 52,703
and 74,334 shares of Common Stock, under the ESPP for $191,218, $145,264 and
$88,240 respectively. At March 31, 2000, $45,385 has been withheld from employee
earnings for stock purchases under the ESPP.
4. SEGMENT REPORTING
Utilizing the management approach, the Company has broken down its business
based upon sales through its two distribution channels. The Company does not
allocate operating expenses to these segments, nor does it allocate specific
assets to these segments. Therefore, segment information reported includes only
net sales, cost of sales and gross profit.
Selected information regarding the Company's product sectors is as follows:
OEM Enterprise-wide
Products Products Total
----------- --------------- ----------
Three months ended March 31, 2000
Revenues............................... $2,354,675 $ 748,209 $3,102,884
Cost of Revenues....................... 1,296,174 541,952 1,838,126
---------- ---------- ----------
Gross Profit........................... $1,058,501 $ 206,257 $1,264,758
========== ========== ==========
Three months ended March 31, 1999
Revenues............................... $2,649,615 $2,160,485 $4,810,100
Cost of Revenues....................... 1,379,520 645,806 2,025,326
---------- ---------- ----------
Gross Profit........................... $1,270,095 $1,514,679 $2,784,774
========== ========== ==========
5. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for derivatives used for hedging activities. It requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either as an asset or
liability and measured at fair value. SFAS 133 is required to be adopted in
fiscal year 2001. The Company believes that the application of SFAS 133 will not
have a material impact on the Company's financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE
FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING BUT NOT LIMITED TO THOSE
SET FORTH IN "RISK FACTORS". ADDITIONAL INFORMATION IS AVAILABLE IN OTHER
COMPANY REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
GENERAL
VitalCom Inc. provides computer networks and related radio communications
products that acquire, interpret and distribute real-time patient monitoring
information. The Company's computer and radio networks acquire physiologic data
generated by its own proprietary ECG monitors and other manufacturers' bedside
equipment located throughout a healthcare facility. The Company's products are
sold through a direct sales force to acute care hospitals and integrated
healthcare delivery networks ("IHDNs") and on an Original Equipment Manufacturer
("OEM") basis to patient monitoring equipment manufacturers.
Revenues from sales of Enterprise-wide systems sold by the Company's direct
sales force are recognized upon shipment. The sales cycle for Enterprise-wide
systems has historically been from nine to 18 months. The Company has
experienced seasonal variations in sales of its Enterprise-wide systems, with
sales in the first quarter typically lower than the preceding fourth quarter's
sales due to customer budget cycles. This trend continued in the first quarter
of 2000, as Enterprise-wide revenues declined 46.5% from the fourth quarter of
1999. Furthermore, a large percentage of a particular quarter's shipments of
Enterprise-wide systems has historically been recorded in the last weeks of the
quarter.
Revenues from sales of OEM products are recognized upon shipment. The
selling cycle for OEM products varies depending upon product mix and the extent
to which the Company develops customized operating software for a particular OEM
customer. In addition, the Company has experienced seasonal variations in sales
of its OEM products, with sales in the first quarter typically lower than the
preceding fourth quarter's sales. First quarter 2000 OEM sales were $2,364,675
as compared to $2,715,685 in the fourth quarter of 1999.
The Company's products are generally shipped as orders are received, and
accordingly, the Company typically operates with limited backlog. As a result,
sales in any quarter are dependent on orders recorded and shipped the current
quarter.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Total Revenues. Total revenues consist of revenue from sales of
Enterprise-wide systems and OEM products, together with fees for installation
and servicing of products. Total revenues decreased 35.5% to $3.1 million in the
first quarter of 2000 compared to $4.8 million in the first quarter of 1999.
This decrease was primarily due to a decrease in Enterprise-wide product sales.
The Company believes that this decrease in Enterprise-wide revenues in the first
quarter of 2000 was due, in part, to customers delaying their capital
expenditures to focus their resources on resolving outstanding Year 2000 issues.
In addition, uncertainties surrounding the implementation of governmental
regulations such as the Balanced Budget Amendment adversely affected revenues
during the first quarter.
Gross Margins. Cost of goods sold generally includes material, direct labor,
overhead and, for Enterprise-wide systems, installation expenses. Gross margin
declined to 40.8% in the first quarter of 2000 compared to 57.9% for the first
quarter of 1999. The decrease in gross margin in the first quarter of 2000 as
compared to the first quarter of 1999 was due to lower margins recognized on
Enterprise-wide products sales, due to a shift in the Enterprise-wide products
revenue mix to lower margin products in 2000. In addition, OEM sales comprised a
greater portion of the sales mix during the first quarter of 2000 which
negatively impacted gross margins, as historically OEM products gross margins
are lower than Enterprise-wide products gross margins.
Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to Enterprise-wide systems and OEM
sales and marketing personnel, travel and entertainment expenses, and other
promotional
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expenses. Sales and marketing expenses were $1.6 million or 51.9% of total
revenue in the first quarter of 2000, as compared to $1.6 million or 32.7% of
total revenue in the first quarter of 1999. The $40,205 increase in sales and
marketing expenses in the first quarter of 2000 as compared to the first quarter
of 1999 was primarily attributable to higher salary and recruiting expenses,
partially offset by reduced trade show expenditures.
Research and Development Expenses. Research and development expenses include
payroll and related costs attributable to research and development personnel,
prototyping expenses and other costs. Research and development expenses were
$1.8 million or 58.3% of total revenue in the first quarter of 2000, as compared
to $1.1 million or 23.4% of total revenue in the first quarter of 1999. The
$683,029 increase in the first quarter of 2000 as compared to the first quarter
of 1999 was due primarily to increased salaries and benefits, and higher third
party contractor expenses related to the Company's development of its new
software, wireless and Internet-related technology products, such as
PatientBrowser(TM) and Mobile-PatientViewer(TM).
General and Administrative Expenses. General and administrative expenses include
accounting, finance, MIS, human resources, general administration, executive
officers and professional fee costs. General and administrative expenses were
$578,487 or 18.6% of total revenue in the first quarter of 2000, as compared to
$590,895 or 12.3% of total revenue in the first quarter of 1999. The $12,408
decrease in the first quarter of 2000 as compared to the first quarter of 1999
was attributable to a decreases in salaries and information systems expenses,
partially offset by increased professional fees.
Other Income, Net. Other income, net consists primarily of interest income
earned on proceeds from the Company's initial public offering, net of payments
for outstanding indebtedness. Other income, net decreased to $166,315 for the
first quarter of 2000 from $183,796 for the first quarter of 1999. The decrease
resulted from lower income derived from the Company's short-term investments.
Provision for Income Taxes. In the first quarters of 2000 and 1999, the Company
recorded minimum state tax provisions of $9,000, respectively. Due to the
Company's net loss position, the utilization of its credit carryforwards depends
upon future income and may be subject to an annual limitation, required by the
Internal Revenue Code of 1986 and similar state provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations (including capital expenditures)
through net proceeds from the Company's February 1996 initial public offering,
cash and cash equivalent balances, a bank line of credit and long-term debt. At
March 31, 2000 the Company had $10.1 million in cash, cash equivalents and
short-term investments as compared to $12.4 million at December 31, 1999.
In the first quarter of 2000, the Company used cash from operating
activities of $2,199,185 to fund a $2,576,443 net loss. In addition, $325,968
was used for payroll and related costs, and $124,893 from the decrease in
accounts payable. This was partially offset by the $213,725 increase in accrued
liabilities, $205,266 reduction in accounts receivable, $174,434 in non-cash
adjustments provided by depreciation and amortization of fixed assets and
intangible assets, and $154,199 in cash provided from the decrease in
inventories.
The Company provided $5,090,922 in cash from investing activities of which
$5,273,037 was provided by the sale of short-term investments. Cash used for
investing activities was $182,115 for the purchase of capital equipment in the
first quarter of 2000. In addition, $106,604 in cash was provided by financing
activities, principally, $113,992 in net proceeds from the exercise of employee
stock options.
In the first quarter of 1999 the Company used cash from operating
activities of $268,821 to fund a $328,120 net loss. In addition, $174,813 in
cash was used for payroll and related costs, $171,965 from the increase in
accounts receivable and $128,953 for accrued liabilities. This was partially
offset by the $245,655 reduction in inventories, $179,228 in non-cash
adjustments provided by depreciation and amortization of fixed assets and
intangible assets, and $129,992 in cash provided from the increase in accounts
payable.
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In the first quarter of 1999, the Company provided $2,764,617 in cash from
investing activities of which $2,904,313 was provided by the sale of short-term
investments. Cash used for investing activities was $139,696 for the purchase of
capital equipment in the first quarter of 1999. In addition, $65,024 in cash was
provided by financing activities, principally, $71,665 in net proceeds from the
issuance of the Company's Common Stock for the matching contribution to its
401(k) plan.
At March 31, 2000, the Company's principal sources of liquidity consisted
of $10.1 million of cash, cash equivalents and short-term investments, and $5.0
million of available credit facilities. In March 2000, the Company renewed a
secured lending arrangement (the "Agreement") with Silicon Valley Bank,
providing for a $5.0 million revolving line of credit agreement bearing interest
at the bank's prime rate plus .50%. The bank does not have a security interest
in any of the Company's assets until the Company is borrowing under the line of
credit. The Agreement expires in March 2001. The Agreement includes financial
covenants that requires the Company to maintain minimum liquidity levels and
total liabilities to tangible net worth ratios, as well as specified annual and
quarterly net loss (after taxes) amounts. At March 31, 2000, the Company was in
compliance with all covenants and had no borrowings outstanding under the
Agreement, as such the bank held no security interest in any of the Company's
assets.
The Company's principal commitment at March 31, 2000 consisted of a lease
on its office and manufacturing facility. The Company expects to spend
approximately $1.0 million for capital expenditures, primarily equipment and
computer equipment, during the remaining nine months of 2000.
The Company believes that existing cash resources and line of credit
facilities will be sufficient to fund the Company's operations for at least the
next twelve months.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
On January 1, 2000, many companies faced a potentially serious information
technology (IT) systems problem because many software applications and
operational programs written in the past did not properly recognize calendar
dates beginning in the Year 2000. This problem could have forced computers or
machines, which utilize date dependent software to either shut down or provide
incorrect data or information. The Company, led by its Y2K Task Force, examined
its IT and Non-IT Systems to determine whether its software applications and
computer and information systems were compliant with the Year 2000. The
Company's remediation efforts for the systems found not to be Year 2000
compliant included, but were not limited to, internal upgrade efforts, vendor
provided upgrades, replacement, and decommissioning of obsolete systems and
equipment. Based on these efforts the Company considered its critical and
non-critical business systems to be Year 2000 compliant as of December 31, 1999.
At this time the Company has not experienced any material Year 2000 related
problems with its IT systems or software applications, and has not experienced
any material problems with key Company suppliers or customers related to Year
2000. There has been no material impact on the Company's business, financial
condition or results of operations related to the Year 2000.
The Company spent approximately $200,000 on external and internal costs
associated with its Year 2000 compliance efforts. These costs were funded
through the Company's cash flows from operations and did not have a material
effect on results of operations or financial condition.
The Company intends to continue to review its IT systems as well as monitor
its key suppliers and customers for any undetected Year 2000 issues which may
not yet be known. However, the Company does not currently believe that there are
any undetected Year 2000 issues that could have a material impact on the
Company's business, financial condition or results of operations.
RISK FACTORS
Dependence on Increased Market Acceptance of Enterprise-wide Monitoring
Systems. Since 1995, the Company's sales levels for its Enterprise-wide
Monitoring Systems have been lower than expected, which, together with
investments and expense levels that are incurred based on the expectation of
higher sales, has resulted in net losses in each year since
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1995 and have had a material adverse effect on the Company's business, operating
results and financial condition. If the Company is not successful in increasing
sales levels of its Enterprise-wide Monitoring Systems in future periods, the
Company's business, operating results and financial condition will continue to
be materially adversely affected. In addition, although the Company's
Enterprise-wide monitoring products have been installed in more than 100
hospitals, there is no assurance that the Company's products will achieve the
hospital penetration necessary to increase sales.
Customer Concentration; Dependence on Departmental Products. The Company's
OEM product sales, which represented approximately 53.7%, 57.9%, 68.6% and 75.9%
of the Company's total net revenues in 1997, 1998, 1999 and the first quarter of
2000, respectively, have historically been to a small number of OEM customers.
In 1997, Quinton Instrument Company ("Quinton") and Datascope Corporation
("Datascope") accounted for approximately 12.2% and 25.0%, respectively, of the
Company's total revenues and in 1998 Quinton and Datascope accounted for
approximately 19.7% and 22.6%, respectively, of the Company's total revenues. In
1999, Quinton and Datascope accounted for approximately 24.0% and 34.0%,
respectively. In the first quarter of 2000, Quinton and Datascope accounted for
approximately 27.3% and 28.9%, respectively. The loss of, or a reduction in
sales to, any such OEM customer would have a material adverse effect on the
Company's business, operating results and financial condition.
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly from quarter
to quarter in the future as a result of a number of factors, including, but not
limited to the size and timing of orders; the length of the sales cycle; the
Company's success in expanding its sales and marketing programs and the effects
of changes in sales force alignment; the ability of the Company's customers to
obtain budget allocations for the purchase of the Company's products; changes in
pricing policies or price reductions by the Company or its competitors; mix of
sales between Enterprise-wide Monitoring Systems and OEM products; the timing of
new product announcements and introductions by the Company or its competitors;
deferrals of customer orders in anticipation of new products or product
enhancements; the Company's ability to develop, introduce and market new
products and product enhancements; market acceptance of new products or product
enhancements; the Company's ability to control costs; the availability of
components; costs associated with responding to software "bugs" or errors;
regulatory compliance and timing of regulatory clearances; changes in government
regulations and other regulatory developments; and general economic factors.
The Company's products are generally shipped as orders are received and,
accordingly, the Company has historically operated with limited backlog. As a
result, sales in any quarter are dependent on orders booked and shipped in that
quarter and are not predictable with any degree of certainty. Further, a large
percentage of any quarter's shipments have historically been booked in the last
weeks of the quarter. In addition, a significant portion of the Company's
expenses are relatively fixed, and the amount and timing of increases in such
expenses are based in large part on the Company's expectations for future
revenues. If revenues are below expectations in any given quarter, the adverse
effect may be magnified by the Company's inability to maintain gross margins and
to decrease spending to compensate for the revenue shortfall. This dynamic has
contributed to the Company's net losses in the past. Further, the Company has
sometimes experienced seasonal variations in operating results, with sales in
the first quarter being lower than in the preceding fourth quarter's sales due
to customer budget cycles and sales remaining relatively flat during the third
quarter.
Transfer of Securities from the Nasdaq National Market to the Nasdaq
SmallCap Market and Possible Delisting of Securities from the Nasdaq Small Cap
Market. The Company's Common Stock historically traded on the Nasdaq National
Market and was moved to the Nasdaq Small Cap Market during the third quarter of
1999 as the Company did not meet one National Market continued listing
requirement that the market value of publicly held shares must be at least
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$5 million. The Nasdaq Small Cap Market's continued listing standards require
the Company to have (i) at least 500,000 shares publicly held; (ii) a market
value of publicly held shares of at least $1 million; (iii) net tangible assets
of at least $2 million; (iv) at least 300 shareholders of round lots; (v) at
least two market makers and (vi) a minimum bid price of at least $1 per share.
If the Company fails to comply with the listing standards, it may become
delisted from the Nasdaq Small Cap Market which could adversely affect the
ability or willingness of investors to purchase the Company's securities and
therefore would severely adversely affect the market liquidity for the Company's
securities.
Lengthy Sales Cycle. The decision by a healthcare provider to replace or
substantially upgrade its clinical information systems typically involves a
major commitment of capital and an extended review and approval process, and
this review and approval process is becoming more complex, more financially
oriented and increasingly subject to overall integration into the hospital's
information systems planning. The sales cycle for the Company's Enterprise-wide
Monitoring Systems has typically been nine to 18 months from initial contact to
receipt of a purchase order. During this period, the Company expends substantial
time, effort and funds preparing a contract proposal and negotiating a purchase
order without any guarantee that the Company will complete the transaction. Any
significant or ongoing failure to reach definitive agreements with customers has
in the past and may in the future have a material adverse effect on the
Company's business, operating results and financial condition.
Competition. The Company's Enterprise-wide Monitoring Systems compete with
systems offered by a number of competitors, including Agilent, SpaceLabs, Inc.
and GE Marquette Medical Systems, Inc., all of which have significantly greater
financial, technical, research and development and marketing resources than the
Company. In addition, many of these competitors have longstanding relationships
with acute care hospitals and IHDNs. There can be no assurance that the Company
will be able to sell to such hospitals or IHDNs or that the Company will be able
to compete successfully with such vendors, and any inability to do so could have
a material adverse effect on the Company's business, operating results and
financial condition. While the Company is not aware of any competitive open
system multi-parameter Enterprise-wide Monitoring Systems currently available,
the Company's OpenNet applications may face significant competition in the
future from HCIS providers, patient monitoring companies, life support device
companies and general purpose data network providers. Such potential competitors
may elect to enter this market and compete with the Company using significantly
greater financial, technical, research and development and marketing resources
than are available to the Company. In addition, the Company's success in selling
its multi-parameter OpenNet networks to hospitals and IHDNs will depend to a
large extent on its ability to interface with patient monitoring and life
support devices of other vendors. Any action on the part of such other vendors
to make such interfacing more difficult or impossible could have a material
adverse effect on the Company's business, operating results and financial
condition. The market for the Company's OEM products is also intensely
competitive. The Company sells to a range of patient monitoring and life support
device companies, many of which have significantly greater financial, technical,
research and development and marketing resources than the Company. There can be
no assurance that current OEM customers will not elect to design and manufacture
patient monitoring and system components currently supplied by the Company or
elect to contract with other OEM suppliers. Any such election by one or more of
such companies could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, the Company may in the future elect to incorporate in its OEM
products the hardware and software for larger networks and expand the number of
OEM customers with the hardware and software required for real-time
redistribution of information to Remote Viewing Stations for use in specialty
departments of hospitals for which the Company's OEM customers design and sell
their products. Although the Company believes that its OEM customers would not
compete with its Enterprise-wide Monitoring Systems because the Enterprise-wide
Monitoring Systems are sold to hospitals and IHDNs who elect to install larger,
more dispersed systems, the Company could face competition with its OEM
customers to the extent hospitals forego purchasing the Company's facility-wide
Enterprise-wide Monitoring Systems for the smaller departmental systems of its
OEM customers.
Technological Change; Need to Develop New Products. Many aspects of the
medical equipment industry are undergoing rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards. Historically, the Company derived substantially all of its revenue
from sales of its Enterprise-wide Monitoring Systems and OEM products. The
Company believes that as the market for these products matures, the Company's
future success will depend upon its ability to develop and introduce on a timely
basis new products and product enhancements that keep pace with technological
developments and that address the increasingly sophisticated
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needs of acute care hospitals and IHDNs. In addition, the introduction of
competing products embodying new technologies and the emergence of new industry
standards could render the Company's existing products unmarketable or obsolete.
If the Company is unable to develop and introduce product enhancements and new
products in a timely and cost-effective manner in response to changing market
conditions or customer requirements, or if the Company's new products or product
enhancements, such as SiteLink, do not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
Uncertainty and Consolidation in Healthcare Industry. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operation of healthcare providers.
Many healthcare providers are consolidating to create larger hospitals and
IHDNs. This consolidation reduces the number of potential customers for the
Company's products, and the increased bargaining power of these organizations
could lead to reductions in the amounts paid for the Company's products. These
larger hospitals and IHDNs may concentrate their purchases on a small number of
preferred vendors with whom they have had longstanding relationships. There can
be no assurance that the Company will be able to sell to such hospitals or IHDNs
or that the Company will be able to compete successfully with such vendors. The
impact of these developments in the healthcare industry is difficult to predict
and could have a material adverse effect on the Company's business, operating
results and financial condition.
Government Regulation. The manufacturing, marketing and sales of medical
devices, including the Company's products, are subject to extensive regulation
by numerous governmental authorities. In the United States, the Company's
products are regulated by the Food and Drug Administration. The Company has
received clearance from the FDA to market its current products through the
510(k) premarket notification process. There can be no assurance that a similar
510(k) clearance for any future product or enhancement of an existing product
will be granted or that the process will not be lengthy. If the Company cannot
establish that a product is "substantially equivalent" to certain legally
marketed devices, or if FDA regulatory changes currently under consideration
with respect to arrhythmia software are adopted, the 510(k) clearance procedure
will be unavailable and Company will be required to utilize the longer and more
expensive premarket approval ("PMA") process. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for extensive
clinical trials or additional data as a prerequisite to clearance or approval,
could have a material adverse effect on the Company's business, operating
results and financial condition. Sales of medical devices and components outside
of the United States are subject to international regulatory requirements that
vary from country to country. There can be no assurance that the Company will be
able to obtain further clearance or approvals for its products or components on
a timely basis or at all, and delays in receipt of, loss of or failure to
receive such approvals or clearances could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's radio frequency transmitter devices are subject to regulation
by the Federal Communication Commission ("FCC"), and applicable approvals must
be obtained before shipment of such products. The Company believes that all of
its products designated for sale in the United States meet applicable Federal
Communications Commission (FCC) regulations, including US FCC Part 15 for
electromagnetic emissions. The FCC approval process starts with the collection
of test data that demonstrates that a product meets the requirements stated in
Part 15 of the FCC regulations. This data is then included as part of a report
and application that is submitted to the FCC requesting approval. The FCC may
grant or request additional information or withhold approval. Any failure of the
Company's products to conform to governmental regulations or any delay or
failure to obtain required FCC approvals in the future, if any, could cause the
delay or loss of sales of the Company's products and therefore have a material
adverse effect on the Company's business, financial condition and result of
operations.
The Company's proprietary radio frequency (RF) communication products
transmit real-time physiologic information from the patient to the central
surveillance station. These communication products currently operate in three
radio bands: VHF (174 MHz to 216 MHz, shared with TV channels 7-13); UHF (450
MHz to 470 MHz, shared with land mobile users); and the 900 MHz radio band (902
MHz to 928 MHz licensed for Spread Spectrum operation). The majority of the
Company's RF products use the vacant television frequencies in the VHF band. The
FCC is requiring all television stations to implement digital broadcasting
transmission for High Definition Television (HDTV). Major metropolitan areas
were required to implement HDTV by December 31, 1998 and other markets will be
required to implement by December 31, 2006. In order to implement HDTV the FCC
has granted each TV channel an additional 6 MHz channel for digital broadcasting
until the transition period ends, at which time the broadcaster would return one
of
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the two channels. As TV stations use the additional 6 MHz channel for the
digital broadcasting transition, which may take years, they may overlap into the
radio spectrum which has been used for medical RF applications. Customers of the
Company's lower power RF communication products may begin seeing more
interference in the future. This interference may result in the Company's
hospital biomedical personnel having to re-tune the Company's RF transmitters to
other channels in order to reduce interference. In the event of high
interference the Company's customers may need to purchase equipment to transmit
in the UHF frequency range. In 1998 the FCC expanded the usable UHF frequencies
for medical RF from the licensed 450 MHz to 470 MHz band to the previously
unlicensed 470 MHz to 668 MHz frequency range. With VHF frequency ranges
available for medical RF use potentially becoming more limited and the UHF
frequency ranges expanding, the Company's competitors who have historically
focused their RF products in what was the more limited UHF band, may now have a
competitive advantage as compared to the Company, until such time as the Company
expands its UHF RF product offerings. Any such competitive advantage of the
Company's competitors and any additional development costs associated with
expanding the Company's UHF RF product offerings could have a material adverse
effect on the Company's business, operating results and financial condition.
During 1998 the Company joined a task force created by the American
Hospital Association (AHA) and the FDA called the Medical Telemetry Task Force
(the "Task Force") along with other medical RF users, organizations, and
vendors, including its competitors. The purpose of the Task Force was to respond
to potential interference problems from HDTV, land mobile users and low power
television to wireless patient monitoring devices by recommending both rule
making language and specific spectrum allocation to the FCC. The Task Force's
mission was to identify protected spectrum candidates for future medical
telemetry use, evaluate use and make recommendations to the FCC. As such the
Task Force petitioned the FCC to allocate the UHF 608 MHz to 614 MHz band,
currently reserved for radio astronomy, for medical use on a primary basis. The
Task Force submitted its recommendations to the FCC which then filed a Notice of
Proposed Rule Making (NPRM, FCC docket # 99-182). Once the FCC approves the
rulemaking, which the Company believes is probable, the Company may be at a
disadvantage in the marketplace if one or some of its competitors develop and
introduce RF products in this new band before the Company introduces products in
the new band, resulting in lost or delayed revenues. In addition, the costs of
developing RF transmitter and receiver products is expensive and is diverting
research and development resources from other projects resulting in higher costs
and delayed projects. Any such competitive advantage of the Company's
competitors and any additional development costs associated with expanding the
Company's UHF RF product offerings could have a material adverse effect on the
Company's business, operating results and financial condition. Additionally,
future regulatory changes could significantly affect the Company's operations by
diverting the Company's development efforts, making current products obsolete or
increasing the opportunity for additional competition which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Limited Intellectual Property Protection. The Company relies on a
combination of copyright, trade secret and trademark laws, confidentiality
procedures and contractual provisions to protect its intellectual property. The
Company seeks to protect its software, circuitry documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company cannot assure that its protective measures for
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar or superior technology, duplicate the Company's
products or otherwise circumvent its intellectual property rights. Although the
Company has never received a claim that its products infringe a third party's
intellectual property rights, there can be no assurance that third parties will
not in the future claim infringement by the Company with respect to current or
future products or proprietary rights. Any such claims, regardless of their
merit, could be time consuming, result in costly litigation, delay or prevent
product shipments or require the Company to enter into costly royalty or
licensing agreements. The impact of any of these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.
Risk of Product Liability Claims. Certain of the Company's products provide
applications that relate to patient physiologic status or other clinically
critical information. Any failure by the Company's products to provide accurate
and timely information could result in product liability and warranty claims
against the Company by its customers or their patients. The Company maintains
insurance against claims associated with the use of its products, but there can
be no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful claim brought against the Company in
excess of its insurance coverage or outside the scope of the Company's insurance
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coverage could have a material adverse effect on the Company's business,
operating results and financial condition. The Company in the past had to incur
warranty expenditures for upgrades that had adverse expenses to the periods.
Even unsuccessful claims could result in the expenditure of funds in litigation
and diversion of management time and resources.
Dependence on Sole Source Components; Component, Assembly & Systems
Obsolescence. Certain of the Company's products utilize components that are
available in the short term only from a single or a limited number of sources,
have been available only on an allocation basis in the past and could be in
scarce supply again in the future. Any inability to obtain components in the
amounts needed on a timely basis or at commercially reasonable prices could
result in delays in product introductions, interruption in product shipments or
increases in product costs, which could have a material adverse effect on the
Company's business, operating results and financial condition until alternative
sources could be developed or design and manufacturing changes could be
completed. In addition, from time to time, certain components, subassemblies and
systems used by the Company are discontinued by manufacturers, requiring the
Company to replace the components, subassembly or system with an equivalent
product or if no such equivalent can be identified to modify and re-validate the
product design. Any inability to obtain such components on a timely basis or at
commercially reasonable prices or to redesign the product in a timely manner
could have a material adverse effect on the Company's business, operating
results and financial condition until alternative sources could be developed or
design and manufacturing changes could be completed.
Risks Associated With Recent Management Changes. In recent years, the
Company has had a number of changes in its management team. These changes
included the Company's Chief Executive Officer in 1997, Vice President, Research
and Development in 1998, and Vice President, Sales and Chief Financial Officer
in 1999. These management changes have caused disruptions in the Company's
day-to-day operations, have interrupted continuity in customer relationships and
have created delays in sales cycles and product release schedules. Although the
Company believes that its existing senior management will be successful in
improving the Company's business, operating results and financial condition,
there can be no assurance that such changes will not have a material adverse
effect on the Company's business, operating results and financial condition in
future periods.
Dependence on Key Personnel. The Company's success depends to a large
extent on its ability to attract and retain key personnel. The loss of the
services, either temporarily or permanently, of any of the members of senior
management or other key employees, particularly in sales and marketing and
research and development, could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company's
future success depends to a large extent on its ability to attract and retain
additional key management, sales and marketing and research and development
personnel. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting and retaining such personnel,
and the failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.
Volatility of Stock Price. Due to all of the foregoing factors, it is
likely that without advance warning or notice, in some future quarter the
Company's operating results will be below the expectations of market analysts
and investors. This may cause the market price of the Company's common stock to
fall. These risks are impossible to fully determine at present, and should be
considered in evaluating the financial prospects and future growth of the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial instruments include cash and cash equivalents,
trade accounts receivable, accounts payable and accrued liabilities. At March
31, 2000, the carrying values of the Company's financial instruments
approximated their fair values based on current market prices and rates. It is
the Company's policy not to enter into derivative financial instruments. The
Company does not currently have any significant foreign currency exposure since
it does not transact business in foreign currencies. Due to this, the Company
does not have significant overall currency exposure at March 31, 2000.
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EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
The Company's transactions are recorded in U.S. Dollars and the Company
does not currently anticipate future transactions being recorded in the euro.
Based on the lack of transactions recorded in the euro, the Company does not
believe that the euro will have a material effect on the financial position,
results of operations or cash flows of the Company. In addition, the Company has
not incurred and does not expect to incur any significant costs from the
continued implementation of the euro, including any currency risk, which could
materially affect the Company's business, financial condition or results of
operations.
The Company has not experienced any significant operational disruptions to
date and does not currently expect the continued implementation of the euro to
cause any significant operational disruptions.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.5 Silicon Valley Bank Amendment to Loan Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
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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 on May 12, 2000.
VITALCOM INC.
/s/ Frank T. Sample
--------------------------------------------
Frank T. Sample
President and Chief Executive Officer
(Principal Executive and Accounting Officer)
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