1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________________ to ______________________.
Commission file number 20-8969
NOVAMETRIX MEDICAL SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0977422
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
56 Carpenter Lane, Wallingford, CT 06492
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (203) 265-7701
1 Barnes Industrial Park Road, Wallingford, CT 06492
(Former name, former address and former fiscal
year if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $0.01 par value: 6,731,602 shares issued and outstanding as of
August 30, 1996
Page 1 of 15
Index to Exhibits at Page 13
2
NOVAMETRIX MEDICAL SYSTEMS INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations (Unaudited) -
Quarters ended July 28, 1996 and July 30, 1995 3
Condensed Consolidated Balance Sheets (Unaudited) -
July 28, 1996 and April 28, 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Quarters ended July 28, 1996 and July 30, 1995 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) - July 28, 1996 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
Page 2 of 15
3
PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED QUARTER ENDED
JULY 28, 1996 JULY 30, 1995
------------- -------------
Net sales $ 6,422,001 $ 6,080,509
Costs and expenses:
Cost of products sold 2,738,371 2,590,268
Research and product development 799,294 685,253
Selling, general and administrative 2,277,154 2,312,332
Interest 52,290 74,822
Other expense 7,018 21,667
----------- -----------
5,874,127 5,684,342
----------- -----------
INCOME BEFORE INCOME TAXES 547,874 396,167
Income tax (benefit) provision (100,000) 8,000
----------- -----------
NET INCOME $ 647,874 $ 388,167
=========== ===========
Per common share amounts: $ .08 $ .05
=========== ===========
Average common shares outstanding: 8,161,052 8,096,077
See accompanying notes.
Page 3 of 15
4
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS JULY 28, 1996 APRIL 28, 1996
------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 296,817 $ 283,003
Accounts receivable, less
allowance for losses of $250,000 6,624,292 5,934,528
Inventories:
Finished products 1,330,211 1,357,610
Work in process 1,337,267 1,136,200
Materials 2,972,026 3,181,670
------------ ------------
5,639,504 5,675,480
Deferred income taxes, net 363,200 300,540
Prepaid expenses 309,501 131,843
------------ ------------
TOTAL CURRENT ASSETS 13,233,314 12,325,394
Equipment 6,337,008 6,243,454
Accumulated depreciation (deduction) (5,108,907) (5,019,466)
------------ ------------
1,228,101 1,223,988
License, Technology, Patents and Other 7,634,751 7,732,059
Accumulated amortization (deduction) (3,176,648) (3,177,539)
------------ -------------
4,458,103 4,554,520
Deferred income taxes, net 771,800 719,460
------------ ------------
$ 19,691,318 $ 18,823,362
============ ============
See accompanying notes
Page 4 of 15
5
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY JULY 28, 1996 APRIL 28, 1996
------------- --------------
CURRENT LIABILITIES
Current portion long-term debt $ 1,225,000 $ 1,225,000
Accounts payable 1,203,770 1,243,490
Accrued expenses 1,822,992 1,492,990
------------ ------------
TOTAL CURRENT LIABILITIES 4,251,762 3,961,480
Long-term debt, less current portion 1,208,333 1,333,333
Redeemable Preferred Stock, $1 par value,
40,000 shares at redemption and liquidation value 1,000,000 1,000,000
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 7,055,964
at July 28, 1996 and 6,985,964 at April 28, 1996,
including 338,452 Treasury shares 70,560 69,860
Additional paid-in capital 28,116,394 28,054,794
Retained-earnings deficit (12,468,693) (13,109,067)
Treasury stock (2,487,038) (2,487,038)
------------ ------------
13,231,223 12,528,549
------------ ------------
$ 19,691,318 $ 18,823,362
============ ============
See accompanying notes.
Page 5 of 15
6
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER QUARTER
ENDED ENDED
JULY 28, 1996 JULY 30, 1995
------------- -------------
OPERATING ACTIVITIES
Net income $ 647,874 $ 388,167
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 94,330 98,260
Amortization 130,836 124,599
Deferred income taxes (115,000)
Changes in operating assets and liabilities
Increase in accounts receivable (689,764) (11,716)
Decrease (increase) in inventories 35,976 (342,534)
Increase in prepaid expenses (177,658) (8,504)
(Decrease) increase in accounts payable (39,720) 3,288
Increase (decrease) in accrued expenses 330,002 (144,696)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 216,876 106,864
INVESTING ACTIVITIES
Purchases of equipment (98,443) (99,961)
Purchases of license, technology, patents and other (34,419) (37,842)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (132,862) (137,803)
FINANCING ACTIVITIES
Principal payments on borrowings (125,000) (125,000)
Dividends on Preferred Stock (7,500) (18,750)
Net proceeds from sales of Common Stock 62,300 171,758
NET CASH (USED) PROVIDED BY FINANCING ----------- --------------
ACTIVITIES (70,200) 28,008
INCREASE (DECREASE) IN CASH ---------- -------------
AND CASH EQUIVALENTS 13,814 (2,931)
Cash and cash equivalents at beginning of period 283,003 272,033
--------- ---------
Cash and cash equivalents at end of period $ 296,817 $ 269,102
========= =========
See accompanying notes.
Page 6 of 15
7
NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 28, 1996
NOTE 1 -- BASIS OF PRESENTATION: The condensed consolidated financial statements
of Novametrix Medical Systems Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 the quarter ended July 28, 1996 are not
necessarily indicative of the results that may be expected for the year ending
April 27, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended April 28, 1996.
NOTE 2 -- PER SHARE AMOUNTS: Common stock equivalents consist of the Company's
Preferred Stock, stock options, warrants and shares subscribed under the
Company's Employee Stock Purchase Plan. The computation of dilutive common stock
equivalents is based on the if-converted method for the Preferred Stock and on
the treasury stock method for the other common stock equivalents using the
average market price for the primary earnings per share computations and the
higher of average or period-end market price for the fully diluted earnings per
share computations.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES: In January 1996, the Company entered
into an operating lease for a larger facility to house the Company's main plant
and executive offices. During August 1996 construction of the new facility was
completed and the Company relocated from its former leased facilities. The new
lease, which commences with the Company's occupancy, has an initial term of 12
years at a base rent of $34,035 per month subject to adjustment in years six and
eleven. The lease also contains an option to purchase after five years and is
renewable for an additional five-year term.
The Company is a party to various legal proceedings generally incidental to its
business. Management believes that none of such legal proceedings will have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
NOTE 4 -- INCOME TAXES: SFAS No. 109 requires the reduction of the deferred tax
asset by a valuation allowance if, based upon the weight of available evidence,
it is more likely than not that a portion or all of the deferred tax asset will
not be realized. The Company reduced its valuation
Page 7 of 15
8
allowance by $115,000 as of July 28, 1996 due to the Company's continued
improvement in earnings and increased probability of future taxable income.
Based upon the weight of available evidence, in the opinion of the Company's
management, the Company will more likely than not generate sufficient taxable
income to fully utilize the net deferred tax asset recorded on the balance sheet
at July 28, 1996.
NOTE 5 -- SUBSEQUENT EVENT: On July 29, 1996, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Andros Holdings Inc.
("Andros"). Andros manufactures non-dispersive infrared gas analyzers for
medical, automotive and environmental applications. The combined company, which
will retain the Novametrix name, would have recorded sales of $67 million for
the fiscal year ended April 28, 1996, on a proforma basis as compared to
Novametrix stand-alone sales of $25 million for the same period. Under the
Merger Agreement, the Company will issue to the stockholders of Andros shares
of Novametrix common stock constituting 45% of the combined company at the
effective time of the merger and anti-dilution rights enabling such
stockholders to maintain, without additional payment, such 45% ownership level
if options and warrants of the Company which are outstanding at the effective
time of the merger are exercised. The merger is expected to close during
November 1996.
Page 8 of 15
9
NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
Operating results for the first quarter of Fiscal 1997 ended July 28, 1996
were improved compared to the first quarter ended July 30, 1995. Net sales for
the first quarter increased to approximately $6,422,000 compared to
approximately $6,081,000 for the first quarter of the prior fiscal year. Income
before income taxes increased by 38% for the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996 while net income increased by 67%
to approximately $648,000 or $.08 per share for the first quarter of fiscal 1997
compared to net income of approximately $388,000 or $.05 per share reported for
the first quarter of the prior fiscal year. Net income for the first quarter of
fiscal 1997 includes an income tax benefit of $115,000 or $.01 per share
pertaining to the reduction of the Company's deferred tax asset valuation
allowance.
Net sales increased by 6% when comparing the quarter ended July 28, 1996 to
the quarter ended July 30, 1995. The increase was led by continued growth in
sales to international customers and original equipment manufacturers (OEMs)
which were slightly offset by a modest decrease in domestic hospital sales.
Cost of products sold as a percentage of net sales was unchanged overall at
43% for the first quarter of fiscal 1997 compared to the first quarter of the
prior fiscal year. The Company's continued focus on product cost improvements
and new product development is expected to have a favorable effect on margins
during the remainder of fiscal 1997.
Research and product development ("R&D") expenses increased by
approximately $114,000 or 17% for the first quarter of fiscal 1997 compared to
the first quarter of fiscal 1996. The increase was primarily due to higher
levels of salaries and related fringe benefits, development materials, and
outside professional services, and corresponds to the Company's aggressive
product development efforts. The Company expects to maintain its on-going R&D
spending levels at approximately 10% of net sales to continue to enhance its
competitive position.
Selling, general and administrative ("S,G&A") expenses decreased by
approximately $35,000 or 2% for the first three months of fiscal 1997 compared
to the first three months of the prior fiscal year. The decreases in S,G&A
resulted primarily from cost efficiencies generated in both the international
sales and field service areas which were partially offset by increases in
domestic sales expense related to the Company's efforts to strengthen its U.S.
sales operations. Marketing expenditures increased modestly for the first
quarter of fiscal 1997 compared to the first quarter of fiscal 1996 due to
increased personnel related costs and increased travel related expenses to
support the Company's expanded clinical activities. Administrative expenses for
the three months ended July 28, 1996 remained at the same levels as the three
months ended July 30, 1995.
Page 9 of 15
10
Interest expense decreased by approximately $23,000 or 30% for the quarter
ended July 28, 1996 compared to the quarter ended July 30, 1995. The improvement
resulted primarily from reduced bank debt levels as a result of scheduled
principal payments.
Income taxes for the first quarter of fiscal 1997 include $15,000 of
current income tax expense calculated on an alternative minimum tax basis due to
the Company's net operating loss carryforwards. In addition, the Company reduced
its deferred tax asset valuation allowance and recognized a benefit of $115,000
due to continued improvement in earnings and increased probability of future
taxable income. Management will continue to evaluate whether further reductions
in the valuation allowance are warranted based on future operating performance
and other relevant factors.
The Company's backlog of firm orders aggregated approximately $3,619,000 as
of July 28, 1996 compared to approximately $4,292,000 as of April 28, 1996.
Except for orders pursuant to long-term OEM agreements, the Company
traditionally ships its products on a current basis. As such, the Company does
not consider its backlog at any time to be a meaningful indicator of future
sales.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had working capital of approximately $8,982,000 at July 28,
1996 compared to working capital of approximately $8,364,000 at April 28, 1996.
The Company's current ratio of 3.1 to 1 remained unchanged at July 28, 1996 from
April 28, 1996. The increase in working capital of approximately $618,000 was
primarily generated by increases in accounts receivable and prepaid expenses,
offset by increases in accrued expenses. The Company had additional borrowing
capacity of approximately $1,525,000 available for working capital needs under
its revolving credit facility at both July 28, 1996 and April 28, 1996. Further,
the Company has additional funds available from the net proceeds of
approximately $5,600,000 associated with the potential exercise of Class A and
Class B Warrants issued with the Company's June 1994 offering and redeemable by
the Company under specified conditions.
Approximately $217,000 of cash was provided by operations for the three
months ended July 28, 1996 compared to approximately $107,000 for the three
months ended July 30, 1995. Increases in net income before depreciation,
amortization and deferred income tax benefits combined with increases in accrued
expenses, partially offset by increases in accounts receivable and prepaid
expense, accounted for the increase.
The Company expects cash from operations to sufficiently fund its planned
operating requirements for fiscal 1997 and that additional funds, if needed,
could be obtained from the unused portion of the Company's revolving credit
facility, the exercise of the warrants associated with the June 1994 offering,
or from various other sources on commercially reasonable terms.
Page 10 of 15
11
PART II- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: The exhibits required to be filed as part of the Quarterly
Report on Form 10-Q are listed in the attached Index to Exhibits.
(b) Reports on Form 8-K: On July 29, 1996, the Company filed a report on
Form 8-K with the Securities and Exchange Commission in which it
reported that an Agreement and Plan of Merger (the "Merger") had been
executed between Novametrix Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of the Company and Andros
Holdings Inc. ("Andros"), a Delaware corporation and subsidiary of
Genstar Capital Partners II, L.P.("Genstar"), a Delaware limited
partnership. Under the terms of the Merger, which has been unanimously
approved by the Boards of Directors of both the Company and Andros as
well as by Genstar as principal stockholder of Andros, the Company will
issue to the stockholders of Andros and reserve for issuance to option
and warrant holders of Andros, the following: (1) shares of Common
Stock of the Company constituting 45 percent of the combined company at
the effective time of the Merger, and (2) anti-dilution rights enabling
such holders to maintain, without additional payment, such 45 percent
ownership as the Company's options and warrants outstanding at the
effective time of the Merger are exercised.
The Merger, which is subject to customary closing conditions, including
the approval of the stockholders of the Company, bank lender's consents
and the expiration of the relevant waiting period required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is
expected to close during November 1996.
Page 11 of 15
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NOVAMETRIX MEDICAL SYSTEMS INC.
Dated: September 9, 1996 s/WILLIAM J. LACOURCIERE
------------------------
William J. Lacourciere
Chairman of the Board,
President and
Chief Executive Officer
Dated: September 9, 1996 s/JOSEPH A. VINCENT
-------------------
Joseph A. Vincent, CMA
Vice President Finance,
Chief Financial Officer and
Principal Accounting Officer
Page 12 of 15
13
INDEX TO EXHIBITS
PAGE
11 Statement Re: Computation of Per Share Earnings 14
27 Financial Data Schedule 15
Page 13 of 15