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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 July 29, 2001
[ ] 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 20-8969
NOVAMETRIX MEDICAL SYSTEMS INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-0977422
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Technology Drive, Wallingford, CT 06492
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 265-7701
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(Former name, former address and former
fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.01 par value: 8,763,566 shares issued and outstanding as of
August 24, 2001
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NOVAMETRIX MEDICAL SYSTEMS INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Income -
Quarters ended July 29, 2001 and July 30, 2000 3
Condensed Consolidated Balance Sheets -
July 29, 2001 and April 29, 2001 4
Condensed Consolidated Statements of Cash Flows -
Quarters ended July 29, 2001 and July 30, 2000 6
Notes to Condensed Consolidated Financial Statements - 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
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PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTER ENDED QUARTER ENDED
JULY 29, 2001 JULY 30, 2000
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Net sales $13,266,671 $12,605,339
Costs and expenses:
Cost of products sold 6,302,777 5,307,056
Research and product development 1,138,053 1,109,273
Selling, general and administrative 4,177,335 4,253,347
Interest expense 150,679 221,122
Goodwill amortization 77,578
Other expense 51,119 27,875
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11,819,963 10,996,251
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Income before income taxes 1,446,708 1,609,088
Income taxes 513,600 571,000
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Net income $ 933,108 $ 1,038,088
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Per common share amounts:
Basic $ 0.11 $ 0.12
Diluted $ 0.10 $ 0.12
See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS JULY 29, 2001 APRIL 29, 2001
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CURRENT ASSETS
Cash and cash equivalents $ 137,705 $ 156,065
Accounts receivable, less allowance for
losses of $300,000 16,236,528 17,215,256
Current portion of notes receivable 680,184 565,421
Inventories:
Finished products 4,174,960 4,412,049
Work in process 1,715,564 1,896,426
Materials 4,293,720 4,357,400
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10,184,244 10,665,875
Deferred income taxes 2,279,375 2,485,775
Prepaid expenses 840,651 764,625
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TOTAL CURRENT ASSETS 30,358,687 31,853,017
Notes receivable, less current portion 1,046,560 1,160,711
Equipment, less accumulated depreciation of
$8,918,416 and $8,630,057, respectively 3,254,432 3,423,423
License, technology, patents and other costs
less accumulated amortization of $5,397,586
and $5,192,694, respectively 5,019,609 5,122,462
Goodwill 7,138,519 7,138,519
Deferred income taxes 536,628 633,828
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$47,354,435 $49,331,960
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See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY JULY 29, 2001 APRIL 29, 2001
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt and
capital lease obligation $ 5,860,000 $ 7,205,600
Accounts payable 2,098,267 1,916,323
Other accrued expenses 3,521,625 4,827,349
Accrued product warranty expense 945,375 948,995
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TOTAL CURRENT LIABILITIES 12,425,267 14,898,267
Long-term debt and capital lease obligation, less
current portion 2,690,000 3,320,000
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 9,559,921 shares at
July 29, 2001 and 9,514,052 shares at
April 29, 2001, including treasury shares 95,599 95,141
Additional paid-in capital 35,417,807 35,225,898
Retained earnings (deficit) 532,823 (400,285)
Treasury stock, at cost - 799,355 shares (3,807,061) (3,807,061)
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32,239,168 31,113,693
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$ 47,354,435 $ 49,331,960
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See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED QUARTER ENDED
JULY 29, 2001 JULY 30, 2000
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OPERATING ACTIVITIES
Net income $ 933,108 $ 1,038,088
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation 290,689 271,801
Amorization 204,892 262,947
Deferred income taxes 303,600 471,000
Changes in operating assets and liabilities:
Accounts and notes receivable 978,116 (2,444,787)
Inventories 481,631 (1,372,800)
Prepaid expenses (76,026) (121,055)
Accounts payable 181,944 1,059,817
Accrued expenses (1,309,344) (190,754)
NET CASH PROVIDED (USED) BY ----------- -----------
OPERATING ACTIVITIES 1,988,610 (1,025,743)
INVESTING ACTIVITIES
Purchases of equipment (121,698) (315,094)
Purchases of licenses, technology, patents and other (102,039) (226,472)
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NET CASH USED BY INVESTING ACTIVITIES (223,737) (541,566)
FINANCING ACTIVITIES
Revolving line of credit, net (1,335,000) 2,115,000
Principal payments on borrowings (640,600) (636,481)
Net proceeds from Common Stock issued under
stock purchase plan and stock option exercises 192,367 83,445
NET CASH (USED) PROVIDED BY ----------- -----------
FINANCING ACTIVITIES (1,783,233) 1,561,964
CHANGE IN CASH AND ----------- -----------
CASH EQUIVALENTS (18,360) (5,345)
Cash and cash equivalents at beginning of period 156,065 283,262
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Cash and cash equivalents at end of period $ 137,705 $ 277,917
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See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 29, 2001
NOTE 1 -- BASIS OF PRESENTATION: The accompanying unaudited condensed
consolidated financial statements of Novametrix Medical Systems Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States ("U.S. GAAP") for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for interim
periods are not necessarily indicative of the results that may be expected for
the full year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended April 29, 2001.
NOTE 2 - RESTRUCTURING AND OTHER CHARGES: During the fourth quarter of fiscal
2001, approximately $4.25 million was charged against earnings as a result of
certain strategic and operating changes initiated by the Company's management
and the write-off of an uncollectible account receivable. The restructuring and
other charges consisted primarily of a write-down of inventory of $2.3 million,
$700,000 of severance costs, $500,000 to settle certain existing litigation,
$300,000 for the closing costs associated with the Company's Redmond, Washington
facility and $280,000 for an uncollectible account receivable. Approximately
$1.2 million of these charges remained in accrued liabilities as of April 29,
2001. During the first quarter of fiscal 2002, the Company paid approximately
$240,000 of accrued severance costs and terminated an additional 15 employees.
Also, approximately $165,000 of litigation related expenses and $15,000 of
miscellaneous other costs have been paid. The remaining liability is
approximately $787,000 as of July 29, 2001.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENT: In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142). Under this Statement, goodwill
will no longer be required to be amortized but will be subject to annual
impairment tests in accordance with the new rules. The Company adopted the
Statement in the first quarter of fiscal 2002, and as such, discontinued the
amortization of its goodwill. Had the Company applied the non-amortization
provisions of the Statement at the beginning of the first quarter of fiscal
2001, net income for that period would have been $50,000 higher than reported.
There was no impairment of goodwill at July 29, 2001.
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The Company also adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133) and its
related amendments. This Statement requires companies to recognize all
derivative financial instruments in their financial statements at fair value
regardless of the purpose or intent for holding the instrument. The adoption of
FAS 133 had a nominal effect on the Company's financial statements.
NOTE 4 -- PER SHARE AMOUNTS: The calculation of basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
The calculation of diluted earnings per share excludes anti-dilutive options and
warrants whose exercise price exceeds the average market price.
The following table sets forth the denominators used in the calculation of
basic and diluted earnings per share:
Quarters Ended
July 29, 2001 July 30, 2000
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Denominator for basic earnings per share:
Weighted average shares outstanding 8,728,283 8,659,333
Effect of dilutive stock options and warrants 202,250 272,331
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Denominator for diluted earnings per share 8,930,533 8,931,664
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NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 2002 increased to $13.3 million
compared to net sales of $12.6 million recorded in the first quarter of fiscal
2001. First quarter net sales increased by at least 20% in the current year
compared to the prior year in each of the following sales divisions:
International, Original Equipment Manufacturers ("OEM") and Children's Medical
Ventures ("ChMV"). Sales to domestic hospitals of the Company's pulse oximetry
conversion programs were lower than the first quarter of the prior year,
reflecting the previously announced decision to reduce the Company's reliance on
that revenue stream. Domestic sales of cardiopulmonary products grew by
approximately 45% when comparing the first quarter of fiscal 2002 to the first
quarter of fiscal 2001, reflecting the shift in focus towards cardiopulmonary
products and markets.
Cost of products sold as a percentage of net sales was 47.5% in the first
quarter of fiscal 2002 compared to 42.1% in the first quarter of the prior year.
The majority of the increase was related to product and market mix, as product
sales to the Company's lower margin international and OEM markets increased as a
percentage of overall sales, while domestic sales declined. In fiscal 2002, cost
of products sold as a percentage of net sales is expected to be assisted by
manufacturing efficiencies generated by the "lean enterprise" program begun in
the fourth quarter of fiscal 2001, and from a more favorable higher domestic mix
as the year progresses.
Research and product development ("R&D") spending was approximately $1.1
million for both the first quarter of fiscal 2002 and the first quarter of
fiscal 2001. Spending levels were relatively consistent from year to year as the
Company gained efficiencies by centralizing most of its R&D processes and
administration in one location, eliminating the Redmond, Washington facility in
June 2001. Management expects higher levels of investment in R&D programs for
the remainder of fiscal 2002 and that overall R&D spending will approximate 9.0%
of sales for the year compared to 8.2% in fiscal 2001. ChMV, which requires a
substantially lower level of R&D expense, tends to reduce the overall percentage
of sales spent on R&D. Excluding ChMV revenue and their portion of R&D expense
for the first quarter of fiscal 2002, R&D spending approximated 10.4% of net
sales.
Selling, general and administrative ("S,G&A") expenses decreased to
approximately $4.2 million for the first quarter of the current year compared to
approximately $4.3 million in the first quarter of fiscal 2001. Reductions in
expenses of the domestic sales force as a result of reduced staffing levels
were partially offset by increases in international selling expenses on higher
volume, and increased sales support spending by ChMV as a result of higher
volumes and an expanded sales organization. Marketing expenses were down
slightly as a result of lower spending for outside services and reduced travel
expenses. G&A expenses increased slightly as a result of increased public
relations costs, legal and accounting fees, salaries and related benefits and
travel expenses.
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Interest expense decreased by approximately $70,000 or 32% to $151,000 for
the first quarter of fiscal 2002 compared to $221,000 recorded in the first
quarter of fiscal 2001. The decrease in interest expense resulted from lower
debt levels and lower interest rates in the first quarter of fiscal 2002
compared to the corresponding period of the prior fiscal year. The Company's
debt level decreased to $8.6 million at July 29, 2001 compared to $11.7 million
at July 30, 2000. The lower interest rates resulted from favorable changes in
the London Interbank Offered Rate ("LIBOR"), and a further rate decrease
effective during the second quarter of fiscal 2001 associated with an
improvement in the ratio of senior funded debt to EBITDA (earnings before
interest, taxes, depreciation and amortization), as defined in the Company's
principal bank agreement.
Goodwill amortization decreased by approximately $78,000 as a result of the
Company's adoption during the first quarter of fiscal 2002 of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
which eliminates the requirement to amortize goodwill. The statement requires
the Company to annually test for impairment.
Income tax expense for the first quarter of both fiscal 2002 and fiscal
2001 reflected an estimated effective tax rate of 35.5%. The effective tax rate
reflects benefits derived from R&D tax credits and the Company's Foreign Sales
Corporation. Management believes that current levels of pre-tax earnings will be
sufficient to generate the future taxable income required to utilize the
deferred income tax benefit at July 29, 2001. As a result of the utilization of
the Company's net operating loss carryforwards and an expected reduction in
deferred tax assets, income taxes payable are expected to approximate $850,000
for fiscal 2002.
Net income for the first quarter of 2002 was $933,000 or $0.10 per diluted
share compared to $1,038,000 or $0.12 per diluted share in the first quarter of
the prior year primarily as a result of reduced gross profit as a percentage of
net sales caused largely by product and market mix, driven by the reduction in
domestic sales during this period. Net income for the first quarter of the prior
fiscal year would have been $1,088,000 or $0.12 per diluted share had the
Company adopted FAS 142 at the start of that period, eliminating the
amortization of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $17.9 million at July 29, 2001 compared to $17.0
million at April 29, 2001 with current ratios of 2.4 to 1 and 2.1 to 1,
respectively. The increase in working capital was primarily attributable to
generating net cash from operations of $2.0 millions offset by the repayment of
the revolving credit line facility of $1.3 million.
Cash provided by operating activities was approximately $2.0 million for
the first quarter of fiscal 2002, compared to cash used of approximately $1.0
million for the first quarter of the prior fiscal year. The $3.0 million
increase in cash from operations was primarily led by improvements in accounts
receivable collections and inventories management. This was partially offset by
a decrease in accrued expense in the first quarter of fiscal 2002 primarily due
to payments on accrued restructuring costs, payroll and commissions. The Company
believes that operating improvements will further contribute to increased cash
from operations during the remainder of fiscal 2002.
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The Company has a $10 million revolving credit agreement with approximately
$3.3 million of borrowings outstanding as of July 29, 2001. The revolving credit
agreement expires August 31, 2002.
Cash provided by operations is expected to be the principle source of
capital and sufficient to fund the Company's growth plans in fiscal 2002. In
addition, the Company has $6.7 million available under its revolving credit
facility as of July 29, 2001 and another $3.3 million of additional proceeds
that may potentially be realized from the exercise of the Company's Class B
Warrants. The Warrants are callable under specified conditions, exercisable at
$5.85 per share and, as amended, expire on December 8, 2001. Management further
believes that additional funds are obtainable on commercially acceptable terms.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements about the
Company's business, products and projected operating results. Shareholders and
potential investors are cautioned that such statements are predictions and that
actual events or results may vary significantly. The Company's ability to
achieve its projected results is dependent upon a variety of factors, many of
which are outside of management's control. Such factors would include without
limitation: an unanticipated slowdown in the healthcare industry; unanticipated
technological developments affecting the competitiveness of the Company's
products; or an unanticipated delay or loss of business. The Company does not
intend to update publicly any of the forward-looking statements contained
herein.
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PART II- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: Not applicable.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during
the quarter ended July 29, 2001.
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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.
NOVAMETRIX MEDICAL SYSTEMS INC.
Dated: August 29, 2001 s/William J. Lacourciere
William J. Lacourciere
Chairman of the Board
and Chief Executive Officer
Dated: August 29, 2001 s/Joseph A. Vincent
Joseph A. Vincent, CMA
Executive Vice President
and Chief Financial Officer
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