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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
X THE SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended June 30, 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 Industrial (I.R.S. Employer
incorporation or 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 7, 1997, there were 8,012,396 shares outstanding of the issuer's
common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITALCOM INC.
BALANCE SHEETS
---------------------------------
JUNE 30, DECEMBER 31,
1997 1996
-------------- ----------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 18,360,896 $ 20,120,203
Accounts receivable, net 2,612,214 2,299,360
Inventories 2,814,929 3,191,043
Prepaid expenses 482,517 361,272
Income tax refund receivable 156,308 2,874,276
-------------- ----------------
Total current assets 24,426,864 28,846,154
Property
Machinery and equipment 1,365,052 1,352,898
Office furniture and computer equipment 1,993,209 1,820,607
Leasehold improvements 87,351 67,919
-------------- ----------------
3,445,611 3,241,424
Less accumulated amortization and depreciation (1,303,940) (976,328)
-------------- ----------------
Property, net 2,141,672 2,265,096
Other assets 323,371 140,101
Goodwill, net 648,537 669,525
------------- ----------------
$ 27,540,444 $ 31,920,876
============== ================
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VITALCOM INC.
BALANCE SHEETS - (CONTINUED)
----------------------------------
JUNE 30, DECEMBER 31,
1997 1996
--------------- -----------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 337,577 $ 1,085,972
Accrued payroll and related costs 1,030,288 875,344
Accrued warranty costs 924,402 951,381
Accrued marketing commitments - 309,377
Accrued liabilities 1,508,128 1,623,278
Current portion of capital lease obligations 21,120 21,120
--------------- -----------------
Total current liabilities 3,821,515 4,866,472
Capital lease obligations, less current portion 71,804 81,834
Redeemable preferred stock, 5,000,000 shares authorized,
$.001 par value; no shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively - -
Stockholders' equity (deficit):
Common stock, including paid-in capital, $.0001 par value; 25,000,000
shares authorized, 8,009,646 and 7,942,688 shares
issued and outstanding at June 30, 1997 and December 31, 1996, 36,938,379 36,832,936
respectively
Accumulated deficit (13,291,254) (9,860,366)
--------------- -----------------
Net stockholders' equity 23,647,125 26,972,570
--------------- -----------------
$ 27,540,444 $ 31,920,876
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VITALCOM INC.
STATEMENTS OF OPERATIONS
---------------------------------- ----------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
-------------- ---------------- ------------------ -------------
(UNAUDITED) (UNAUDITED)
Revenues:
Facility-wide networks ............................$ 2,059,426 $ 3,243,007 $ 3,844,812 $ 6,202,980
Departmental products ............................ 3,570,173 2,761,896 5,758,151 5,771,030
-------------- ---------------- -------------- ------------
Total revenues ........................ 5,629,599 6,004,903 9,602,963 11,974,010
Cost of sales ................................. 3,000,656 2,707,340 5,283,258 5,239,590
-------------- ---------------- -------------- ------------
Gross profit ................................. 2,628,943 3,297,563 4,319,705 6,734,420
Operating expenses ........................
Sales and marketing ............. 2,290,038 2,170,482 4,651,498 4,276,707
Research and development ............. 1,219,890 1,223,029 2,289,247 2,141,377
General and administration ............. 582,542 606,284 1,258,220 1,124,047
Total operating expenses 4,092,470 3,999,795 8,198,965 7,542,131
-------------- ---------------- -------------- ------------
Operating loss ........................ (1,463,527) (702,232) (3,879,260) (807,711)
Other income, net ............. 238,963 302,959 461,960 410,373
-------------- ---------------- -------------- ------------
Loss before provision for income taxes (1,224,564) (399,273) (3,417,300) (397,338)
Provision (benefit) for income taxes ............. 6,290 (173,322) 13,590 (172,481)
-------------- ---------------- -------------- ------------
Net loss .................................$ (1,230,854) $ (225,951) $ (3,430,890) $ (224,857)
============== ================ ============== ============
Pro forma net loss
and net loss per common share $ (0.15) $ (0.03) $ (0.43) $ (0.03)
Weighted average common shares 8,001,354 8,225,982 7,992,521 7,579,145
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VITALCOM INC.
STATEMENTS OF CASH FLOWS
---------------------------------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
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Cash flows from operating activities: (UNAUDITED)
Net (loss) $ (3,430,890) $ (224,857)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 360,544 235,556
Loss on disposal of property 7,759 10,000
Changes in operating assets and liabilities:
Accounts receivable (312,854) 848,264
Inventories 376,114 (986,337)
Income taxes receivable 2,717,968 (249,994)
Prepaid expenses and other current assets (304,515) (63,956)
Accounts payable (748,395) (189,202)
Accrued payroll and related costs 154,944 (115,457)
Accrued warranty costs (26,978) 45,234
Customer deposits - 57,456
Accrued marketing commitments (309,377) -
Income taxes payable - (312,127)
Accrued liabilities (115,151) (174,561)
------------------ -----------------
Net cash used in operating activities (1,630,831) (1,119,981)
Cash flows from investing activities:
Purchases of property (244,877) (578,797)
(Increase) decrease in other assets 20,988 181,264
------------------ -----------------
Net cash used in investing activities (223,889) (397,533)
Cash flows from financing activities:
Repayment of capital lease obligation and long-term debt (10,030) (1,549,160)
Net proceeds from issuance of common stock 105,443 25,656,377
------------------ -----------------
Net cash provided by financing activities 95,413 24,107,217
Net (decrease) increase in cash and cash equivalents (1,759,307) 22,589,703
Cash and cash equivalents, beginning of period 20,120,203 2,163,645
------------------ -----------------
Cash and cash equivalents, end of period $ 18,360,896 $ 24,753,348
================== =================
Supplemental disclosures of cash flow information:
Interest paid $ 20,395 $ 3,169
Income taxes paid $ 7,956 $ 386,400
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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 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 June 30, 1997, and the
results of its operations and its cash flows for the three-month and six-month
periods ended June 30, 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
and six-month periods ended June 30, 1996 the weighted average common and common
equivalent shares include common shares and stock options using the treasury
stock method. For the three-month and six-month periods ended June 30, 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 six months ended June
30, 1997:
NUMBER OF
NUMBER OF PRICE PER OPTIONS
SHARES SHARE EXERCISABLE
----------------------- ---------------------- ---------------
Balance, January 1, 1997 660,224 $0.60 to $15.75
Granted 283,000 $4.75 to $5.50
Exercised (1,250) $1.28
Canceled (223,620) $4.75 to $6.00
=======================
Balance, June 30, 1997 718,354 $0.60 to $15.75 259,795
=======================
At June 30, 1997, 793,704 options were available for grant in the 1993 Plan.
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The following is a summary of stock option transactions under the 1996 Stock
Option Plan (the "1996 Plan") for the six months ended June 30, 1997:
NUMBER OF PRICE PER
SHARES SHARE
----------------------- ----------------------
Balance, January 1, 1997 55,600 $5.50 to $6.00
Granted 35,500 $4.97
Canceled (12,500) $6.00
=======================
Balance, June, 1997 78,600 $4.97 to $6.00
=======================
At June 30, 1997, 21,400 options were available for grant under the
1996 Plan and no options were exercisable.
The following is a summary of stock option transactions under the 1996 Director
Option Plan (the "Director Plan") for the six months ended June 30, 1997:
NUMBER OF PRICE PER
SHARES SHARE
----------------------- ----------------------
Balance, January 1, 1997 0
Granted 6,000 $4.97
=======================
Balance, June 30, 1997 6,000 $4.97
=======================
As of June 30, 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. In the
offering period ended April 30, 1997 the Company issued 25,708 shares of Common
Stock under the ESPP for $102,193.24. At June 30, 1997, $34,466.92 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
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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.
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, IMPROVING SALES FORCE PRODUCTIVITY AND THE RECRUITMENT OF A NEW CHIEF
EXECUTIVE OFFICER. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE FORWARD
LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING WITHOUT
LIMITATION THE SIZE AND TIMING OF PENDING AND FUTURE CUSTOMER ORDERS, THE EFFECT
OF CHANGES IN THE COMPANY'S SALES AND MARKETING EFFORTS, THE COMPANY'S ABILITY
TO CONTROL COSTS, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, CHANGING
MARKET CONDITIONS, HOSPITAL OPERATIONS, GOVERNMENT APPROVAL PROCESSES, THE
ABILITY OF THE COMPANY TO HIRE AND RETAIN A QUALIFIED NEW CHIEF EXECUTIVE
OFFICER, THE HEALTH CONDITION OF THE COMPANY'S CURRENT CHIEF EXECUTIVE OFFICER
AND OTHER RISKS DESCRIBED 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 its 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 six months ended June 30, 1997 direct sales of the
Company's facility-wide computer networks of $3,844,813 were 38.0% lower than
the $6,202,980 achieved in the same period 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
quarters ended June 30, 1997 and March 31, 1997 were 15.3% and 33.5% higher than
the respective preceding quarters, and the Company believes that sales force
productivity will continue to increase in 1997, there can be no
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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 and are not predictable with any degree of certainty. In addition, a
significant portion of the Company's expenses are relatively fixed. If revenues
are below expectations in any given quarter, the adverse effect may be magnified
by the Company's inability to decrease spending to compensate for the revenue
shortfall.
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
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 quarter ended June 30, 1997 were $5,629,599, compared to
$6,004,903 achieved in the same period in 1996. This represents a 6.2% decrease
in total revenues consisting of a 36.5% decrease in facility-wide network
systems sales and a 29.3% increase in departmental sales for the second quarter
of 1997 when compared to the same quarter of 1996. The Company believes that the
reduction in facility-wide total revenues resulted from a mid-1996
implementation of a new selling method which lengthened the sales cycle and
disrupted the building of the funnel of potential customers. The increase in
departmental sales is due to differences in timing of orders between the first
and second quarters as total departmental revenues for the six months ended June
30, 1997 as compared to the comparable six months a year ago is $12,879.
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Total revenues for the six months ended June 30, 1997 were $9,602,963 compared
to $11,974,010 achieved in the same period in 1996. This 19.8% decrease in total
revenues, reflected a 38.0% decrease in the Company's sales of facility-wide
network systems and a 0.2% decrease in departmental products from the comparable
period a year ago. The Company believes that the reduction in facility-wide
total revenues resulted from a mid-1996 implementation of a new selling method
which lengthened the sales cycle and disrupted the building of the funnel of
potential customers.
Total revenues increased for the third consecutive quarter in the quarter ended
June 30, 1997. Total revenues increased 13.6% in the first quarter of 1997 when
compared to the fourth quarter of 1996, and in the quarter ended June 30, 1997,
total revenues increased 41.7% when compared to the first quarter of 1997. In
the quarters ended March 31 and June 30, 1997 facility-wide sales increased
33.5% and 15.3%, respectively, and departmental sales increased 1.3% and 63.2%,
respectively.
Gross Profit. Cost of revenues sold generally includes material, direct labor,
overhead and, for facility-wide networks, installation expenses.
Gross profit in the second quarter of 1997 was 46.7% of revenues as compared to
54.9% in the second quarter of 1996. Total gross profit decreased 20.3% to
$2,628,943 in the second quarter of 1997 from $3,297,563 in the second quarter
of 1996, on a 6.2% decrease in total revenues. The decrease in gross profits was
due to price pressure on facility-wide networks and lower revenues.
Gross profit for the six month period ended June 30, 1997 was 45.0% of total
revenues as compared to 56.2% for the same period in 1996. Total gross profit
decreased 35.9% to $4,319,706 in the six months ended June 30, 1997 from
$6,734,420 for the same period in 1996 on a 19.8% decrease in total revenues.
The decrease in gross profit in the first six months of 1997 as compared to the
same period of 1996 was due to price pressure on facility-wide networks and
lower revenues with fixed costs in overhead constituting a higher percentage of
revenues.
Gross profit increased for the second consecutive quarter during the quarter
ended June 30, 1997. Gross profit increased 62.0% in the first quarter of 1997
when compared to the fourth quarter of 1996 on a 13.6% increase in total
revenues and in the quarter ended June 30, 1997, gross profit increased 55.5%
when compared to the first quarter of 1997 on a 41.7% increase in total
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 increased 42.4% from the first
quarter of 1997 to the second quarter of 1997.
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 for the quarter ended June 30, 1997 were $2,290,038
or 40.7% of revenues as compared to $2,170,482 or 36.1% of revenues in the same
period a year ago. The $119,556 increase in sales and marketing expenses in the
three months ended June 30, 1997 as compared to the comparable three months of
1996 was primarily attributable to increases in marketing and promotional
expenses and professional sales consulting fees.
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Sales and marketing expenses of $4,651,498 were 48.4% of revenues in the six
month period ended June 30, 1997 compared to $4,276,707 or 35.7% of revenues in
the comparable period a year ago. The $374,791 increase in sales and marketing
expenses in the six months ended June 30, 1997 as compared to the comparable six
months of 1996 was primarily attributable to increases in professional sales
consulting fees, marketing and promotional expenses and approximately $133,000
for a market research study. Sales and marketing expenses increased as a
percentage of total revenues primarily due to the lower total revenues. 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 for the quarter ended June 30, 1997 were
$1,219,890 or 21.7% of revenues as compared to $1,223,029 or 20.4% of revenues
in the same period a year ago. The $3,139 increase in the three months ended
June 30, 1997 as compared to the three months ended June 30, 1996 was due
primarily to an increase in depreciation expense on fixed assets offset by lower
recruiting expenses.
Research and development expenses of $2,289,247 were 23.8% of revenues in the
six month period ended June 30, 1997 compared to $2,141,377 or 17.9% of revenues
in the comparable period a year ago. The $147,870 increase in the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996 was due
primarily to an increase in research and development labor and depreciation
expense on fixed assets, offset in part by lower recruiting expenses. Research
and development expenses increased as a percentage of total revenues primarily
due to lower total revenues.
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 for the quarter ended June 30, 1997 were
$582,542, or 10.3% of revenues as compared to $606,284 or 10.1% of revenues for
the same period a year ago. The $23,742 decrease in the three months ended June
30, 1997 as compared to the comparable three months ended June 30, 1996 was due
primarily to lower recruiting costs.
General and administrative expenses in the six month period ended June 30, 1997
were $1,258,220 or 13.1% of revenues as compared to expenses of $1,124,047 or
9.4% of revenues in the comparable period a year ago. The $134,173 increase in
the six months ended June 30, 1997 as compared to the comparable six months
ended June 30, 1996 was due primarily to an increase in the number of
administrative employees and the costs associated with being a public company
offset in part by lower recruiting costs. The Company intends to hire a new
Chief Executive Officer. To the extent the Company is successful in recruiting
and hiring a new Chief Executive Officer, general and administrative expense
levels will increase.
Other Income, Net. Other income, net consists primarily of interest income from
short term investments.
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Other income, net decreased to $238,963 for the second quarter ending June 30,
1997 from $302,959 for the same period in 1996. The decrease was due to the net
use of cash by the Company, primarily from operating losses resulting in reduced
interest income from the Company's short term investment portfolio.
Other income, net improved $51,587 to $461,960 for the six month period ended
June 30, 1997 from $410,373 for the same period a year ago. 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 six
months of 1996 was 43.4%, consisting of a federal income tax rate of 33.8%,
combined with a weighted average state income tax rate of 9.6%. In the six
months of 1997, the Company's tax provision was $13,590, representing minimum
tax payments to various states. In the six months 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. In February 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 six months of 1997, the Company used cash from operating
activities of $1,630,831 to fund a $3,430,890 net loss, a $312,854 increase in
accounts receivable and to pay down accounts payable by $748,395 as well as
increase prepaid expenses and reduce accrued marketing commitments. The Company
generated cash through a decrease in income taxes receivable of $2,717,968 and a
reduction of $376,114 in inventories. The Company used $223,889 for investing
activities which consisted of $244,877 for purchases of property and generated
$20,988 from other assets. The Company generated $95,413 in cash through
financing activities which consisted of $105,443 from the issuance of common
stock offset, in part, by $10,030 for payments on a capital lease obligation.
In the first six months 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 $397,533 for investing activities which consisted of $578,797 for
purchases of property and generated $181,264 from other assets. In the first six
months of 1996 the Company used cash from operating activities of $1,119,981,
generating $848,264 through collections on accounts receivable which was used to
reduce accrued liabilities and increase inventories.
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
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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.
The Company has entered into a letter of commitment with the bank to renew the
line of credit facility with substantially the same terms and conditions. At
June 30, 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 June 30, 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.
SUBSEQUENT EVENTS
On July 23, 1997 the Company announced that Donald W. Judson, its
Chairman of the Board, President and Chief Executive Officer intends to augment
the management team by recruiting a new President and Chief Executive Officer.
Mr. Judson intends to remain active in the Company in his role as Chairman of
the Board, setting the strategic direction of the Company while the new
President and Chief Executive Officer assumes responsibility for operations. A
recent health problem, although not serious, has limited Mr. Judson's ability to
fulfill both the day-to-day operations and strategic roles.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held an Annual Meeting of Stockholders on May 23, 1997. At
the Annual Meeting, the following votes were cast for the proposals indicated:
Proposal One: Election of Directors:
Name For Withheld
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Donald W. Judson 7,139,880 270,700
David L. Schlotterbeck 7,138,673 271,907
Jack W. Lasersohn 7,140,231 270,349
Elizabeth H. Weatherman 7,140,531 270,049
Timothy T. Weglicki 7,140,531 270,049
Proposal Two: Ratification and approval of amendments of the
Corporation's 1993 Stock Option Plan to increase the shares reserved under the
plan by 750,000, allow participation by non-employee directors and make other
administrative changes:
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For 6,461,100
Against 393,228
Abstain 4,146
Broker Non-Votes 552,106
Proposal Three: Ratification of the appointment of Deloitte & Touche
LLP as independent public accountants of the Company for the fiscal period
ending December 31, 1997:
For 7,403,580
Against 4,649
Abstain 2,351
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Full-Recourse Promissory Note Secured by Deed of Trust between
the Registrant and David R. Clare and Jennifer H. Clare
10.2 1993 Stock Option Plan (Amended and Restated April 1997)
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
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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 August 11, 1997.
VITALCOM INC.
/s/ Donald W. Judson
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Donald W. Judson
President, Chief Executive Officer
/s/Shelley B. Thunen
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Shelley B. Thunen
Vice President Finance and
Chief Financial Officer
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