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 October 28, 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: 8,772,566 shares issued and outstanding as of
November 23, 2001
Page 1 of 14
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 October 28, 2001 and October 29, 2000 3
Six months ended October 28, 2001 and October 29, 2000 4
Condensed Consolidated Balance Sheets -
October 28, 2001 and April 29, 2001 5
Condensed Consolidated Statements of Cash Flows -
Six months ended October 28, 2001 and October 29, 2000 7
Notes to Condensed Consolidated Financial Statements -
October 28, 2001 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
Page 2 of 14
PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTER ENDED QUARTER ENDED
OCTOBER 28, 2001 OCTOBER 29, 2000
----------- -----------
Net sales $11,522,340 $13,521,516
Costs and expenses:
Cost of products sold 4,967,464 6,482,539
Research and product development 1,148,119 1,047,504
Selling, general and administrative 4,073,130 4,673,738
Interest expense 91,448 251,307
Goodwill amortization 77,577
Other expense 18,604 35,743
----------- -----------
10,298,765 12,568,408
----------- -----------
Income before income taxes 1,223,575 953,108
Income taxes 434,400 338,000
----------- -----------
Net income $ 789,175 $ 615,108
=========== ===========
Per common share amounts:
Basic $ 0.09 $ 0.07
Diluted $ 0.09 $ 0.07
See notes to condensed consolidated financial statements (unaudited).
Page 3 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 28, 2001 OCTOBER 29, 2000
----------- -----------
Net sales $24,789,011 $26,126,855
Costs and expenses:
Cost of products sold 11,270,241 11,789,595
Research and product development 2,286,172 2,156,777
Selling, general and administrative 8,250,465 8,927,085
Interest expense 242,127 472,429
Goodwill amortization 155,155
Other expense 69,723 63,618
----------- -----------
22,118,728 23,564,659
----------- -----------
Income before income taxes 2,670,283 2,562,196
Income taxes 948,000 909,000
----------- -----------
Net income $ 1,722,283 $ 1,653,196
=========== ===========
Per common share amounts:
Basic $ 0.20 $ 0.19
Diluted $ 0.19 $ 0.19
See notes to condensed consolidated financial statements (unaudited).
Page 4 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS OCTOBER 28, 2001 APRIL 29, 2001
------ ----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 205,426 $ 156,065
Accounts receivable, less allowance for
losses of $300,000 14,528,536 17,215,256
Current portion of notes receivable 578,283 565,421
Inventories:
Finished products 4,391,584 4,412,049
Work in process 3,072,168 1,896,426
Materials 2,486,199 4,357,400
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9,949,951 10,665,875
Deferred income taxes 2,103,875 2,485,775
Prepaid expenses 737,085 764,625
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TOTAL CURRENT ASSETS 28,103,156 31,853,017
Notes receivable, less current portion 1,081,563 1,160,711
Equipment, less accumulated depreciation of
$9,213,945 and $8,630,057, respectively 3,158,840 3,423,423
License, technology, patents and other costs
less accumulated amortization of
$5,626,650 and $5,192,694, respectively 5,008,788 5,122,462
Goodwill 7,138,519 7,138,519
Deferred income taxes 456,228 633,828
----------- -----------
$44,947,094 $49,331,960
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
Page 5 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY OCTOBER 28, 2001 APRIL 29, 2001
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt 3,953,000 7,205,600
Accounts payable 1,608,521 1,916,323
Other accrued expenses 3,388,501 4,827,349
Accrued product warranty expense 848,355 948,995
------------ ------------
TOTAL CURRENT LIABILITIES 9,798,377 14,898,267
Long-term debt, less current portion 2,060,000 3,320,000
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 9,571,921 at
October 28, 2001 and 9,514,052 shares at
April 29, 2001, including treasury shares 95,719 95,141
Additional paid-in capital 35,478,061 35,225,898
Retained earnings (deficit) 1,321,998 (400,285)
Treasury stock, at cost - 799,355 shares (3,807,061) (3,807,061)
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33,088,717 31,113,693
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$ 44,947,094 $ 49,331,960
============ ============
See notes to condensed consolidated financial statements (unaudited).
Page 6 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
OCTOBER 28, 2001 OCTOBER 29, 2000
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,722,283 $ 1,653,196
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation 586,218 553,956
Amortization 433,956 555,129
Deferred income taxes 559,500 709,000
Changes in operating assets and liabilities:
Accounts and notes receivable 2,753,006 (3,769,534)
Inventories 715,924 (2,643,468)
Prepaid expenses 27,540 (398,582)
Accounts payable (307,802) 1,667,872
Accrued expenses (1,539,488) 94,279
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,951,137 (1,578,152)
INVESTING ACTIVITIES
Purchases of equipment (321,635) (788,615)
Purchases of licenses, technology, patents and other (320,282) (444,977)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (641,917) (1,233,592)
FINANCING ACTIVITIES
Revolving line of credit, net (repayments) borrowings (3,242,000) 4,007,000
Principal payments on other borrowings (1,270,600) (1,279,715)
Proceeds from Common Stock issued under stock
purchase plan and stock option exercises 252,741 106,317
NET CASH (USED) PROVIDED BY ----------- -----------
FINANCING ACTIVITIES (4,259,859) 2,833,602
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CHANGE IN CASH AND
CASH EQUIVALENTS 49,361 21,858
Cash and cash equivalents at beginning of period 156,065 283,262
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Cash and cash equivalents at end of period $ 205,426 $ 305,120
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
Page 7 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 28, 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 remained in accrued liabilities as of April 29, 2001. During the
first six months of fiscal 2002, the Company paid approximately $345,000 of
accrued severance costs and terminated an additional 15 employees. Also,
approximately $178,000 of litigation related expenses and $109,000 of
miscellaneous other costs have been utilized. The remaining accrued liability is
approximately $577,000 as of October 28, 2001.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS: 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 is no longer required to be amortized but is subject to
annual impairment tests. The Company adopted FAS 142 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 FAS 142 at the beginning
of the first quarter of fiscal 2001, net income for the six months ended
October 29, 2000 would have been $100,000 higher than reported. There has been
no impairment of goodwill through October 28, 2001.
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.
Page 8 of 14
NOTE 4 -- PER SHARE AMOUNTS: The calculation of basic earnings per share
excludes any dilutive effects of options and warrants. The calculation of
diluted earnings per share excludes anti-dilutive options and warrants. Options
and warrants are anti-dilutive when their exercise price exceeds the average
market price for the applicable period.
The following table sets forth the denominators used in the calculation of
basic and diluted earnings per share:
OCTOBER 28, 2001 OCTOBER 29, 2000
-------------------------- --------------------------
Quarter Six Months Quarter Six Months
Ended Ended Ended Ended
--------- --------- --------- ---------
Denominator for basic earnings per share:
Weighted average shares outstanding 8,746,441 8,764,599 8,680,416 8,669,875
Effect of dilutive stock options and warrants 298,511 108,605 199,355 237,765
--------- --------- --------- ---------
Denominator for diluted earnings per share 9,044,952 8,873,204 8,879,771 8,907,640
========= ========= ========= =========
Page 9 of 14
NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results for the second quarter of fiscal 2002 reflect the impact of the
domestic sales reorganization and other restructuring changes made at the end of
fiscal 2001. As such, the Company realized a 28% increase in net income
compared to the second quarter of the prior year. The refocused attention on
our cardiopulmonary products by the domestic sales group resulted in a 59%
increase in net sales of these products compared to the prior year as that
portion of our business continues to ramp up from 2001 levels. Pulse oximetry
(conversions) product sales decreased by approximately $1.0 million for the
second quarter as a result of our refocus on the cardiopulmonary products.
While this resulted in planned lower domestic revenues for the second quarter
of the current year, operating expenses also decreased by approximately
$500,000, primarily as the result of the Company's restructuring initiatives,
while interest expense decreased by approximately $160,000 compared to the
second quarter of fiscal 2001. The elimination of goodwill amortization in
fiscal 2002 also contributed approximately $50,000 to the increase in net
income.
Net sales for the second quarter of fiscal 2002 decreased by 15% compared
to the second quarter of fiscal 2001. Net sales decreased by 5% for the
corresponding six-month periods. Domestic sales were below prior year as
planned. International sales were also lower specifically due to two orders
from the middle east that were delayed beyond the second quarter. Sales of
Children's Medical Ventures ("ChMV") products and Original Equipment
Manufacturer ("OEM") sales each increased for the second quarter comparisons
and both reflected a 20% increase compared to sales reported for the first six
months of fiscal 2001. The Company expects international sales to rebound
during the remainder of fiscal 2002 and domestic sales to meet or exceed the
Company's fiscal 2002 operating plans.
Cost of products sold as a percentage of net sales was 43% for the second
quarter of fiscal 2002 compared to 48% for the second quarter of fiscal 2001.
Improved domestic margins from product mix and lower than anticipated
international product sales, which provide lower overall margins, were the
primary contributors to the improvement in cost of sales for this period. Cost
of products sold as a percentage of net sales was 45% for the first six months
of both fiscal years. The Company is pursuing purchasing and design
alternatives, as well as other product cost reduction opportunities to lower
cost of products sold and enhance its gross profit as a percentage of sales.
Research and product development ("R&D") spending increased by
approximately $100,000 or 10% to approximately $1,148,000 for the second
quarter of fiscal 2002 compared to the second quarter of the prior year. R&D
spending increased by approximately $129,000 or 6% to $2,286,000 for the first
six months of fiscal 2002 compared to the first six months of the prior fiscal
year. The increase in R&D expense for both periods was primarily attributable
to increased salaries and related benefits, outside professional services and
investing in clinical research. Partially offsetting these increases were
decreases in facilities costs related to the closing of the Company's Redmond,
Washington office in June 2001.
Page 10 of 14
Selling, general and administrative ("S,G&A") expenses decreased by
approximately $601,000 or 13% for the second quarter of the current fiscal year
compared to the second quarter of the prior year. Overall selling expenses,
marketing expenses and general & administrative ("G&A") expenses were all below
prior year levels as the Company improved its operating efficiencies.
Reductions in expenses related to the domestic sales force, including salaries,
commissions and related fringe benefits, outside consultants, and travel and
entertainment expenses, accounted for the majority of the overall reduction in
S,G&A expenses. Reductions in marketing related expenses, including salaries
and related fringe benefits, professional services and travel and
entertainment, and reductions in G&A expenses primarily related to legal,
accounting and other professional services, were responsible for the balance of
the decrease in S,G&A expenses. For the six months ended October 28, 2001,
S,G&A expenses decreased by approximately $677,000 or 8% compared to the first
six months of the prior year. Spending reductions were driven by decreases in
domestic sales expenses and marketing expenses for the same reasons noted
above.
Interest expense decreased by approximately $160,000 or 64% and $230,000 or
49%, respectively, for the quarter and six months ended October 28, 2001
compared to the corresponding periods of the prior year. The reduction in
interest expense is related to lower levels of outstanding debt and reduced
borrowing costs. The Company reduced its debt by $4.5 million during the
first six months of fiscal 2002 primarily from operating results, including
improvements in accounts receivable and inventory management.
Goodwill amortization decreased by approximately $78,000 and $155,000,
respectively, for the quarter and six months ended October 28, 2001 as compared
to the corresponding periods of the prior fiscal year. During the first quarter
of fiscal 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", which eliminates the
requirement to amortize goodwill.
Income tax expense for both the second quarter and the first six months of
fiscal 2002 and fiscal 2001 reflects an estimated effective tax rate of 35.5%.
The effective tax rate includes benefits from R&D tax credits and the Company's
Foreign Sales Corporation.
Net income for the second quarter of fiscal 2002 increased by 28% to
approximately $789,000 or $0.09 per diluted share compared to approximately
$615,000 or $0.07 per diluted share for the second quarter of fiscal 2001. Net
income for the first six months of fiscal 2002 increased by 4% to approximately
$1,722,000 or $0.19 per diluted share compared to net income of approximately
$1,653,000 or $0.19 per diluted share for the first six months of the prior
fiscal year. Net income for the quarter and six months ended October 29, 2000
would have been approximately $665,000 or $0.07 per diluted share and
$1,753,000 or $0.20 per diluted share, respectively, had the Company adopted
FAS 142 at the start of fiscal 2001.
Page 11 of 14
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18.3 million at October 28, 2001
compared to $17.0 million at April 29, 2001 with current ratios of 2.9 to 1 and
2.1 to 1, respectively. The increase in working capital was primarily
attributable to cash generated from operations of $5.0 million offset by the
repayment of $3.2 million of borrowings uinder the Company's revolving credit
line facility.
Cash provided by operating activities of approximately $5.0 million for the
six months ended October 28, 2001 compared favorably to cash used of
approximately $1.6 million for the first six months of the prior fiscal year.
The improvement in cash from operations of approximately $6.6 million is
primarily related to decreases in inventories and accounts receivable, partially
offset by decreases in accounts payable and accrued expenses. The Company
believes that continued operating improvements will enhance cash from operations
during the remainder of fiscal 2002.
Cash provided by operations is expected to be the Company's principal
source of capital and sufficient to fund its requirements for the remainder of
fiscal 2002. The Company has a $10 million revolving credit agreement with
approximately $8.6 million of available borrowings as of October 28, 2001. In
addition, approximately $3.3 million of additional proceeds 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 March 8, 2002. The Company does not intend to extend the
expiration date of its Class B Warrants beyond March 8, 2002. Management also
believes that additional funds, if needed, are obtainable on commercially
acceptable terms.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward looking statements
about the Company's projected operating results. 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, including without limitation, global
economic changes, an unanticipated slowdown in the healthcare industry,
unanticipated technological developments which affect 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.
Page 12 of 14
PART II- OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders (the "Meeting") of the Company was
held on October 11, 2001 at the Ramada Plaza Hotel in Meriden,
Connecticut.
(b) Not applicable because:
(i) Proxies for the Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934,
(ii) There was no solicitation in opposition to management's
nominees as listed in the Company's Proxy Statement dated
September 5, 2001,
(iii) Such nominees were elected.
(c) Matters voted upon at the Meeting were as follows:
Votes Votes Withheld/
For Against Abstain
--- ------- -------
(i) Election of two Class C directors of the Company for the next
three years
Thomas M. Haythe 8,227,035 113,175
William J. Lacourciere 7,734,574 605,636
(ii) Ratification of the Board of Directors selection of Ernst &
Young LLP to serve as the Company's independent auditors for
the fiscal year ended April 28, 2002 8,315,531 21,261 3,418
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: There are no exhibits required to be filed as part of the
Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
quarter ended October 28, 2001.
Page 13 of 14
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: November 28, 2001 s/William J. Lacourciere
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William J. Lacourciere
Chairman of the Board and
Chief Executive Officer
Dated: November 28, 2001 s/Joseph A. Vincent
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Joseph A. Vincent, CMA
Executive Vice President and
Chief Financial Officer
Page 14 of 14