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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, 1997
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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
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VITALCOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3662 33-0538926
(State or other jurisdiction of (Primary Standard or Industrial (I.R.S. Employer
incorporation organization) Classification Code Number) Identification Number)
15222 DEL AMO AVENUE
TUSTIN, CALIFORNIA 92780
(714) 546-0147
(Address and telephone number of principal executive offices)
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 2, 1997, there were 8,009,503 shares outstanding of the issuer's
common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITALCOM INC.
BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1997 1996
---------------- ------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 17,434,550 $ 20,120,203
Accounts receivable, net 2,736,002 2,299,360
Inventories 3,092,645 3,191,043
Prepaid expenses 458,736 361,272
Income tax refund receivable 2,660,064 2,874,276
------------ ------------
Total current assets 26,381,997 28,846,154
Property
Machinery and equipment 1,359,337 1,352,898
Office furniture and computer equipment 1,889,604 1,820,607
Leasehold improvements 67,919 67,919
------------ ------------
3,316,860 3,241,424
Less accumulated amortization and depreciation (1,128,833) (976,328)
------------ ------------
Property, net 2,188,027 2,265,096
Other assets 165,626 140,101
Goodwill, net 659,031 669,525
------------ ------------
$ 29,394,681 $ 31,920,876
============ ============
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
--------------------------------
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,002,426 $ 1,085,972
Accrued payroll and related costs 864,486 875,344
Accrued warranty costs 944,308 951,381
Accrued marketing commitments 110,908 309,377
Other accrued liabilities 1,600,228 1,623,278
Current portion of capital lease obligations 21,120 21,120
------------ ------------
Total current liabilities 4,543,476 4,866,472
Capital lease obligations, less current portion 77,349 81,834
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at December 31, 1996 and March 31, 1997, respectively -- --
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value; 25,000,000
shares authorized, 7,983,688 and 7,942,688 shares
issued and outstanding at March 31, 1997 and December 31, 1996, 36,834,256 36,832,936
respectively
Accumulated deficit (12,060,400) (9,860,366)
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Net stockholders' equity 24,773,856 26,972,570
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$ 29,394,681 $ 31,920,876
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VITALCOM INC.
STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
MARCH 31,
1997 1996
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(UNAUDITED)
Revenues:
Facility wide networks $ 1,785,386 $ 2,959,973
Departmental products 2,187,978 3,009,134
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Total revenues 3,973,364 5,969,107
Cost of revenues 2,282,602 2,532,250
Gross profit 1,690,762 3,436,857
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Operating expenses:
Sales and marketing 2,361,460 2,106,225
Research and development 1,069,357 918,348
General and administration 675,678 517,763
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Total operating expenses 4,106,495 3,542,336
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Operating loss (2,415,733) (105,479)
Other income, net 222,997 107,414
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Income (loss) before provision for income taxes (2,192,736) 1,935
Provision for income taxes 7,300 841
Net income (loss) $(2,200,036) $ 1,094
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Pro forma and net income (loss) per common share $ (0.28) $ 0.00
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Pro forma and weighted average common shares 7,958,274 7,115,598
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
MARCH 31,
1997 1996
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(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ (2,200,036) $ 1,094
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 156,789 127,452
Loss on disposal of property 6,211 7,053
Changes in operating assets and liabilities:
Accounts receivable (436,641) 1,714,927
Inventories 98,398 (679,260)
Income taxes receivable 214,213 (312,127)
Prepaid expenses and other current assets (97,465) (52,362)
Accounts payable (83,546) 238,763
Accrued payroll and related costs (10,858) (360,394)
Accrued warranty costs (7,073) 24,584
Accrued marketing commitments (198,469) 53,824
Accrued liabilities (23,051) (260,919)
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Net cash (used in ) provided by operating activities (2,581,528) 502,635
Cash flows from investing activities:
Purchases of property (75,436) (220,937)
(Increase) decrease in other assets (25,525) 198,186
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Net cash used in investing activities (100,961) (22,751)
Cash flows from financing activities:
Repayment of capital lease obligation and long-term debt (4,484) (1,547,153)
Net proceeds from issuance of common stock 1,320 25,659,945
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Net cash (used in) provided by financing activities (3,164) 24,112,792
Net (decrease) increase in cash and cash equivalents (2,685,653) 24,592,676
Cash and cash equivalents, beginning of period 20,120,203 2,163,645
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Cash and cash equivalents, end of period $ 17,434,550 $ 26,756,321
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Supplemental disclosures of cash flow information:
Interest paid $ 6,211 $ 40,361
Income taxes paid $ 7,956 $ 380,600
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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/A for the year ended December 31, 1996 and
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, 1997,
and the results of its operations and its cash flows for the three-month periods
ended March 31, 1996 and 1997. The results of operations for the interim periods
are not necessarily indicative of the results of operations for the full year.
2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. For the three-month
periods ended March 31, 1996 and 1997 weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method. For the three-month period ended March 31, 1997, the adjusted
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
Stock Option Plans - The following is a summary of stock option transactions
under the 1993 Stock Option Plan (the "1993 Plan") for the three months ended
March 31, 1997:
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
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Balance, December 31, 1996 660,224 $0.60 to $15.75
Granted 283,000 $4.75 to $5.50
Exercised (1,000) $1.28
Canceled (203,114) $4.75 to $6.00
========== ===============
Balance, March 31,1997 739,110 $0.60 to $15.75 248,603
========== ===============
At March 31, 1997, 22,176 options were available for grant the 1996 Plan.
The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the three months ended March 31, 1997:
NUMBER OF PRICE PER
SHARES SHARE
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Balance, December 31, 1996 55,600 $5.50 to $6.00
Granted 35,500 $4.97
Canceled (6,000) $6.00
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Balance, March 31, 1997 85,100 $4.97 to $6.00
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At March 31, 1997, 14,900 options were available for grant under the 1996 Plan
and no options were exercisable.
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The following is a summary of stock option transactions under the 1996 Director
Option Plan (the "Director Plan") for the three months ended March 31, 1997:
NUMBER OF PRICE PER
SHARES SHARE
------- -------
Balance, December 31, 1996 0
Granted 6,000 $4.97
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Balance, March 31, 1997 6,000 $4.97
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As of March 31, 1997 54,000 options were available for grant under the Director
Plan and no options were exercisable.
The Company has reserved an aggregate of 150,000 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") will commence on the day following the end of the prior
Offering Period and will have a duration of six months. The price of Common
Stock purchased under the ESPP will be 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 year ended December 31, 1996 the Company
issued 32,815 shares of Common Stock under the ESPP for $153,410. At March 31,
1997, $101,901 had been withheld from employee earnings for stock purchases
under the ESPP.
New Accounting Pronouncement--In March 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, `Earnings Per
Share'. This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the earnings statement and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. This statement will be effective for the Company's 1997 fiscal
year. The Company's current EPS calculation conforms to basic EPS. Diluted EPS
will not be materially different from basic EPS since potential common shares in
the form of stock options are not materially dilutive.
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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,
INCLUDING THE INFORMATION SET FORTH IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, ARE 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. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE THOSE REGARDING THE COMPANY'S WORKING CAPITAL
POSITION AND IMPROVING SALES FORCE PRODUCTIVITY. ACTUAL RESULTS MAY VARY
SUBSTANTIALLY FROM THESE FORWARD LOOKING STATEMENTS FOR MANY REASONS. SEE ALSO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS - FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS, INCLUDED IN THE
COMPANY'S FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1996, ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION . ADDITIONAL INFORMATION IS AVAILABLE IN
OTHER COMPANY REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
GENERAL
The Company provides facility-wide computer networks that acquire,
interpret and distribute real-time patient monitoring information. The Company's
networks acquire physiologic data generated by proprietary ambulatory ECG
monitors and other manufacturers' bedside equipment located throughout a
healthcare facility. The Company's products are sold directly to acute care
hospitals and integrated healthcare delivery networks ("IHDNs") and on an OEM
basis to patient monitoring equipment manufacturers.
During the quarter ended March 31, 1997 direct sales of the Company's
facility-wide computer networks of $1,785,386 were 39.7% lower than the
$2,959,973 achieved in the same quarter in 1996. The Company believes that the
reduction in sales resulted from a mid-1996 restructuring of the sales force and
implementation of a new selling method focused on quantifying the financial
benefits and re-engineering opportunities enabled by its facility-wide network.
These changes shifted the Company's sales strategy from a clinical to a
financial and information systems focus. This new strategy lengthened the sales
cycle and disrupted focus on the Company's selling its core competency in
clinical applications. Although direct sales of facility-wide networks in the
quarter ended March 31, 1997 were 33.5% higher than the preceding quarter ended
December 31, 1996, and the Company believes that sales force productivity will
continue to increase in 1997, there can be no assurance that the Company's sales
efforts will result in sequentially increasing or historical sales levels in
future periods.
Revenues from sales of facility-wide networks are recognized upon shipment.
The sales cycle for facility-wide networks has typically been from nine to 18
months. The Company has experienced seasonal variations in sales of its
facility-wide networks, with sales in the first quarter typically lower than the
preceding fourth quarter's sales due to customer budget cycles and sales
remaining relatively flat during the third quarter. Furthermore, a large
percentage of a particular quarter's shipments of facility-wide networks has
historically been booked in the last weeks of the quarter.
Revenues from sales of departmental products are recognized upon shipment.
The selling cycle for departmental 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 departmental products, with third quarter sales of
departmental products generally being lower than other quarters.
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 booked and shipped in that quarter.
To date the Company has not capitalized software development expenses.
However, the development of new products or the enhancement of existing products
may require capitalization of such expenses in the future.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Total Revenues. Total revenues consist of revenue from sales of facility-wide
networks and departmental products, together with fees for installation and
servicing of products. Total revenues for the first quarter were $3,973,364,
compared to $5,969,107 achieved in the same period in 1996 and $3,496,151 in the
fourth quarter of 1996. Revenues in the first quarter of 1997 were 33.4% lower
than the same period in 1996, reflecting a 39.7% decrease in the Company's sales
of facility-wide network systems and a 27.3% decrease in departmental products
from the comparable period a year ago. When compared to the fourth quarter of
1996, total revenues were up 13.6%, with facility-wide sales increasing 33.5%
over the fourth quarter of 1996 and departmental sales up 1.4% from the fourth
quarter of 1996. Facility-wide network sales represented 44.9% of the revenues
in the quarter ended March 31, 1997 compared to 49.6% for the same quarter a
year ago.
Gross Profit. Cost of revenues sold generally includes material, direct labor,
overhead and, for facility-wide networks, installation expenses. Gross profits
in the first quarter of 1997 were 42.6% of revenues as compared to 57.6% in the
first quarter of 1996. Total gross profit decreased 50.8% to $1,690,762 in the
first quarter of 1997 from $3,436,897 in the first quarter of 1996, on a 33.4%
decrease in revenues. The decrease in gross profit in the first quarter of 1997
as compared to the first quarter of 1996 was due to lower revenues with fixed
costs in overhead constituting a higher percentage of revenues. In the first
quarter of 1997, the Company accrued one-time costs of $155,000 associated with
the termination of the Vice President of Operations; without this charge, gross
profit would have been 3.9% higher, or 46.5% of revenues.
Sales and Marketing Expenses. Sales and marketing expenses include payroll,
commissions and related costs attributable to direct and OEM sales and marketing
personnel, travel and entertainment expenses, and other promotional expenses.
Sales and marketing expenses of $2,361,460 were 59.4% of revenues in the first
quarter of 1997 compared to $2,106,225 in the
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first quarter of 1996, or 35.3% of revenues in the comparable period a year ago.
The $255,235 increase in sales and marketing expenses in the first quarter of
1997 as compared to the first quarter of 1996 was primarily attributable to an
increase in sales and marketing payroll and related support and travel and
entertainment expenses associated with the increased number of sales and
marketing personnel.
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 of
$1,069,357 were 26.9% of revenues in the first quarter of 1997 as compared to
$918,348 or 15.4% of revenues for the first quarter of 1996. The $151,014
increase in the first quarter of 1997 as compared to the first quarter of 1996
was due primarily to an increase in the number of research and development
personnel and an increasing number of projects.
General and Administrative Expenses. General and administrative expense includes
accounting, finance, MIS, human resources, general administration, executive
officers and professional fee expenses. General and administrative expenses in
the first quarter of 1997 were $675,678, or 17.0% of revenues, as compared to
$517,763, or 8.7% of revenues for the same period in 1996. The $157,915 increase
in the first quarter of 1997 as compared to the first quarter of 1996 was
attributable to an increase in the number of administrative employees and the
costs associated with being a public company.
Other Income, Net. Other income, net consists primarily of interest income from
short term investments. Other income, net improved from $107,414 for the first
quarter of 1996 to $222,997 for the first quarter of 1997. The improvement
resulted from the payoff of the Company's long term debt in February 1996 which
caused a reduction in interest expense.
Provision for Income Taxes: The Company's effective tax rate for the first
quarter of 1996 was 43.5%, consisting of a federal income tax rate of 33.8%,
combined with a weighted average state income tax rate of 9.7%. In the first
quarter of 1997, the Company's tax provision was $7,300, representing minimum
tax payments to various states. In the first quarter of 1997 a tax benefit for
net operating losses was not recognized as all federal tax loss carrybacks were
recognized in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations, including capital
expenditures, through cash flow from operations, cash and cash equivalent
balances, a bank line of credit and long-term debt. During the first quarter of
1996, the Company issued 2,300,000 shares of common stock in its initial public
offering, raising $25.6 million, net of expenses.
In the first quarter of 1997, the Company used cash from operating
activities of $2,581,528 to fund a $2,200,036 net loss and an increase in
accounts receivable and generated cash through a decrease in income taxes
receivable. In the same period approximately $104,000 of cash was used for
investing and financing activities.
In the first quarter of 1996, the Company generated approximately $24.1
million of cash from financing activities which consisted of $25.6 million, net,
from the sale of 2,300,000 shares of common stock in the Company's initial
public offering and used $1.5 million to pay off long-term debt. The Company
used $22,751 for investing activities which consisted of $220,937 for purchases
of property and generated $198,186 from other assets. In the first quarter of
1996 the Company generated $502,635 from operating activities through
collections on accounts receivable which was used in targeted inventory
procurement as well as reducing accrued liabilities.
At December 31, 1995, the Company had a secured promissory note in the
amount of $1,541,667 due to Silicon Valley Bank which bore interest at the
bank's prime rate plus 3.0% (11.75% at December 31, 1995) per annum, payable
monthly in arrears. In February 1996 the Company paid the loan off in full,
without pre-payment penalty. In August 1996, the Company entered into a secured
lending arrangement (the "Agreement") with Silicon Valley Bank, providing for a
$5.0 million revolving line of credit bearing interest at the bank's prime rate.
The bank does not have a security interest in any of the Company's assets unless
the Company is borrowing under the line of credit and fails to comply with
certain financial covenants. The Agreement expires in August 1997 and has
certain financial and other covenants. At March 31, 1997, there were no
borrowings outstanding under the Agreement and the Company was in compliance
with all covenants. As such the bank held no security interest in any of the
Company's assets.
The Company's principal commitment at March 31, 1997 consisted of a lease
on its office and manufacturing facility. The Company expects to spend
approximately $1.5 million for capital expenditures during 1997.
The Company believes that existing cash resources, cash flows from
operations, if any, and line of credit facilities will be sufficient to fund the
Company's operations for at least the next twelve months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Second Amendment to Employment Agreement dated January 1, 1997 between
the Registrant and David L. Schlotterbeck
10.2 Consulting Agreement dated January 1, 1997 between the Registrant and
David L. Schlotterbeck
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10.3 Outside Board of Directors Agreement dated February 20, 1997 between
the Registrant and David L. Schlotterbeck
10.4 Stock Option Amendment Agreement dated February 20, 1997 between the
Registrant and David L. Schlotterbeck
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, 1997.
VITALCOM INC.
/s/ Donald W. Judson
-------------------------------------
Donald W. Judson
President, Chief Executive Officer
/s/ Shelley B. Thunen
-------------------------------------
Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
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