1
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 November 2, 1997
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 06-0977422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Technology Drive, Wallingford, CT 06492
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 265-7701
(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: 8,787,230 shares issued and outstanding as of
December 15, 1997
Page 1 of 34
Index to Exhibits at Page 16
2
NOVAMETRIX MEDICAL SYSTEMS INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Operations -
Quarters ended November 2, 1997 and October 27, 1996 3
Six months ended November 2, 1997 and October 27, 1996 4
Condensed Consolidated Balance Sheets -
November 2, 1997 and April 27, 1997 5
Condensed Consolidated Statements of Cash Flows -
Six months ended November 2, 1997 and October 27, 1996 7
Notes to Condensed Consolidated Financial Statements -
November 2, 1997 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 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
Page 2 of 34
3
PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED QUARTER ENDED
NOVEMBER 2, 1997 OCTOBER 27, 1996
---------------- ----------------
Net sales $ 7,505,960 $ 6,591,346
Costs and expenses:
Cost of products sold 3,278,430 2,840,473
Research and product development 851,156 842,662
Selling, general and administrative 2,495,182 2,264,158
Interest 20,025 46,769
Other expense 23,379 1,126
----------- -----------
6,668,172 5,995,188
----------- -----------
INCOME BEFORE INCOME TAXES 837,788 596,158
Income tax provision (benefit) 211,000 (100,000)
----------- -----------
NET INCOME $ 626,788 $ 696,158
=========== ===========
Earnings per common share:
Primary $ 0.07 $ 0.09
=========== ===========
Fully diluted $ 0.07 $ 0.08
=========== ===========
Weighted average common shares outstanding:
Primary 9,082,105 8,153,379
Fully diluted 9,304,236 8,359,407
See accompanying notes.
Page 3 of 34
4
PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 2, 1997 OCTOBER 27, 1996
---------------- ----------------
Net sales $14,872,421 $ 13,013,347
Costs and expenses:
Cost of products sold 6,392,882 5,578,844
Research and product development 1,711,313 1,641,956
Selling, general and administrative 5,034,156 4,541,312
Interest 104,332 99,059
Other expense 32,092 8,144
----------- ------------
13,274,775 11,869,315
----------- ------------
INCOME BEFORE INCOME TAXES 1,597,646 1,144,032
Income tax provision (benefit) 447,000 (200,000)
----------- ------------
NET INCOME $ 1,150,646 $ 1,344,032
=========== ============
Earnings per common share:
Primary $ 0.13 $ 0.17
=========== ============
Fully diluted $ 0.13 $ 0.16
=========== ============
Weighted average common shares outstanding:
Primary 8,660,543 7,980,756
Fully diluted 9,171,078 8,328,146
See accompanying notes.
Page 4 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS NOVEMBER 2, 1997 APRIL 27, 1997
- ------ ---------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 303,466 $ 236,808
Accounts receivable, less
allowance for losses of $250,000 6,762,292 8,328,515
Inventories:
Finished products 2,138,598 1,741,426
Work in process 1,914,648 1,851,736
Materials 3,366,001 3,241,653
------------ ------------
7,419,247 6,834,815
Deferred income taxes, net 2,450,000 2,450,000
Prepaid expenses and other current assets 380,428 313,220
------------ ------------
TOTAL CURRENT ASSETS 17,315,433 18,163,358
Equipment 8,045,161 7,683,006
Less accumulated depreciation (5,679,620) (5,396,091)
------------ ------------
2,365,541 2,286,915
License, technology, patents and other costs 7,645,592 7,849,401
Less accumulated amortization (3,569,678) (3,675,242)
------------ ------------
4,075,914 4,174,159
Deferred income taxes, net 2,183,000 2,600,000
------------ ------------
$ 25,939,888 $ 27,224,432
============ ============
See accompanying notes.
Page 5 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY NOVEMBER 2, 1997 APRIL 27, 1997
- ------------------------------------ ---------------- --------------
CURRENT LIABILITIES
Accounts payable $ 1,471,424 $ 2,058,142
Accrued expenses 1,427,871 2,299,709
Current portion of capital lease obligations 32,987 79,380
Current portion of long-term debt 2,895,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,932,282 7,332,231
Capital lease obligations, less current portion 102,510 198,942
Long-term debt, less current portion 583,333
Redeemable Preferred Stock, $1 par value,
40,000 shares at redemption and liquidation value
at April 27, 1997 1,000,000
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 8,738,967 at
November 2, 1997 and 7,525,539 at April 27, 1997,
including 338,452 Treasury shares 87,390 75,255
Additional paid-in capital 32,384,606 28,737,217
Retained-earnings (deficit) (7,079,862) (8,215,508)
Treasury stock (2,487,038) (2,487,038)
------------ ------------
22,905,096 18,109,926
------------ ------------
$ 25,939,888 $ 27,224,432
============ ============
See accompanying notes.
Page 6 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 2, 1997 OCTOBER 27, 1996
---------------- ----------------
OPERATING ACTIVITIES
Net income $ 1,150,646 $ 1,344,032
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation 283,755 194,743
Amortization 270,625 261,790
Deferred income taxes 417,000 (230,000)
Increases (decreases) in cash flows as
a result of changes in operating assets and liabilities:
Accounts receivable 1,619,474 (1,823,981)
Inventories (584,432) (45,147)
Prepaid expenses and other current assets (67,208) (865,833)
Accounts payable (586,718) 345,425
Accrued expenses (871,838) 325,330
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES ----------- -----------
1,631,304 (493,641)
INVESTING ACTIVITIES
Purchases of equipment (362,381) (509,604)
Purchases of license, technology, patents and other (225,631) (26,024)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (588,012) (535,628)
FINANCING ACTIVITIES
Proceeds from borrowings 720,000
Principal payments on borrowings (3,621,158) (250,000)
Dividends on Preferred Stock (15,000) (15,000)
Net proceeds from sales of Common Stock 2,659,524 593,285
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES ----------- -----------
(976,634) 1,048,285
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 66,658 19,016
Cash and cash equivalents at beginning of period 236,808 283,003
----------- -----------
Cash and cash equivalents at end of period $ 303,466 $ 302,019
=========== ===========
NON-CASH INVESTING ACTIVITIES:
Capital lease obligation $ 149,052
See accompanying notes.
Page 7 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 2, 1997
NOTE 1 - BASIS OF PRESENTATION: The accompanying 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. Due to the Company's 52/53 week fiscal
year reporting structure ending on the Sunday closest to April 30th, the first
quarter of the current fiscal year included an extra week with the six month
period containing 27 weeks compared to 26 weeks in the prior fiscal year.
Operating results for the quarter and six months ended November 2, 1997 are not
necessarily indicative of the results that may be expected for the year ending
May 3, 1998. 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 27, 1997.
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Statement No. 128
simplifies the standards for computing earnings per share and improves their
comparability to international standards. The Company will adopt this standard,
as required, in the third quarter of fiscal 1998, at which time it will change
the method currently used to compute earnings per share and restate all prior
periods presented. Had this standard been adopted at November 2, 1997, the
Company would have reported basic earnings per share of $0.08 and $0.10,
respectively, for the quarters ended November 2, 1997 and October 27, 1996, and
$0.15 and $0.20, respectively, for the six-month periods ended November 2, 1997
and October 27, 1996. The impact of Statement No. 128 on the calculation of
fully diluted earnings per share would not have been material.
Page 8 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 3 - CAPITAL STOCK: On September 26, 1997, the Company's primary lender,
First Union Corporation, the holder of the outstanding Preferred Stock,
Series B, and 271,738 warrants to purchase common stock of the Company,
converted all of such Preferred Stock and exercised all of such warrants.
As a result of the December 8, 1997 expiration date of the Company's Class A
Warrants, approximately 373,000 Class A Warrants were exercised subsequent to
the end of the second quarter.
NOTE 4 - INCOME TAXES: For the second quarter and six months ended November 2,
1997, the provision for income taxes is based upon the Company's estimated
income tax expense for fiscal 1998. The computed effective tax rate differed
from the statutory tax rate due to certain timing differences for book to tax
purposes and the establishment of a Foreign Sales Corporation which is expected
to result in a reduction in the Company's overall effective tax rate.
NOTE 5 - CONTINGENCIES: 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.
Page 9 of 34
10
NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating results for both the second quarter and the first six months
ended November 2, 1997 improved compared to the corresponding periods of the
prior fiscal year ended October 27, 1996. On a comparable, fully diluted, fully
taxed basis, net income for the quarter ended November 2, 1997 increased to
approximately $627,000 or $0.07 per share compared to $393,000 or $0.05 per
share for the quarter ended October 27, 1996. Net income for the six months
ended November 2, 1997 increased to approximately $1,151,000 or $0.13 per share
as compared to approximately $755,000 or $0.09 per share for the first six
months of the prior year when comparing both periods on a fully diluted, fully
taxed basis. Reported net income for the quarter and six months ended October
27, 1996 which included certain deferred tax benefits described below, was
approximately $696,000 or $0.08 per fully diluted share and approximately
$1,344,000, or $0.16 per fully diluted share, respectively.
Revenues for the second quarter of fiscal 1998 increased 14% to
approximately $7,506,000 compared to revenues of approximately $6,591,000 for
the second quarter of fiscal 1997. Revenues for the first six months of fiscal
1998 increased 14% to approximately $14,872,000 as compared to revenues of
approximately $13,013,000 for the first six months of fiscal 1997. The increase
in revenues for both periods was primarily led by an increase in international
sales and sales to original equipment manufacturers (OEMs), partially offset by
delays in domestic orders.
Cost of products sold as a percentage of revenues was approximately 43.7%
and 43.0%, respectively, for the second quarter and first six months of fiscal
1998 as compared to 43.1% and 42.9% for the second quarter and first six months
of fiscal 1997. Cost of products sold as a percentage of revenues was relatively
unchanged from year to year. The Company is continuing to pursue improvements in
gross margins from product cost reductions and manufacturing efficiencies.
Research and product development ("R&D") expenses increased by 1% to
approximately $851,000 or 11% of revenue for the second quarter of fiscal 1998
compared to approximately $843,000 or 13% of revenue for the second quarter of
fiscal 1997. R & D expenses increased by 4% to approximately $1,711,000 or 12%
of revenue for the first six months of fiscal 1998 compared to approximately
$1,642,000 or 13% of revenue for the first six months of the prior fiscal year.
Increases in salaries and related fringe benefits and depreciation were
partially offset by decreased outside professional services for both periods
reported.
Selling, general and administrative ("S,G&A") expenses increased by 10% to
approximately $2,495,000 or 33% of revenues for the second quarter of fiscal
1998 compared to approximately $2,264,000 or 34% of revenues for the second
quarter of fiscal 1997. Increases in marketing promotional costs, international
selling expenses required to support increased international sales, and G & A
expenditures including legal, accounting and insurance were responsible for the
overall
Page 10 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increase in S,G & A expenses during this period. S, G & A expenditures increased
by $493,000 or 11% to approximately $5,034,000 or 34% of revenues for the first
six months of fiscal 1998 compared to approximately $4,541,000 or 35% of
revenues for the first six months of fiscal 1997. Increased marketing salaries
and related fringe benefits, marketing promotional costs primarily related to
new product support, and international selling expenses were largely responsible
for the increase in S, G & A expenses for the first six months of fiscal 1998 as
compared to the first six months of the prior year. Increases in G & A expenses
including salaries and related fringe benefits, legal costs, insurance and
depreciation contributed to the balance of the increase in S,G & A.
Interest expense decreased by approximately $27,000 or 57% for the second
quarter ended November 2, 1997 as compared to the quarter ended October 27,
1996. The decrease resulted from the Company's repayment of its term loan and
revolving credit facility during October 1997 funded by cash from operations and
exercises of the Company's warrants. Interest expense increased by approximately
$5,000 for the first six months of fiscal 1998 compared to fiscal 1997 primarily
as a result of increased working capital requirements in the first quarter.
Income taxes of $211,000 and $447,000, respectively, for the second quarter
and six months ended November 2, 1997, are recorded on a fully taxed basis as
compared to the prior year which included $15,000 and $30,000, respectively, of
income tax expense. For the second quarter and six months ended October 27,
1996, the Company recognized $115,000 and $230,000, respectively, of deferred
income tax benefit. As a result of reductions in the valuation allowance during
fiscal 1996 and fiscal 1997 totaling $1,020,000 and $3,864,000, respectively,
the Company began recording income tax expense on a fully-taxed basis for
financial reporting purposes during the first quarter of fiscal 1998. Due to
significant net operating loss carryforwards for federal income tax purposes,
the Company expects cash payments for income taxes to be minimal for fiscal
1998.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had working capital of approximately $14,383,000 at November 2,
1997 compared to approximately $10,831,000 at April 27, 1997. The increase in
working capital of approximately $3,552,000 was primarily generated by increases
in inventory of approximately $584,000, decreases in accrued expenses and
accounts payable of approximately $1,459,000 and reductions in the current
portion of long-term bank debt of approximately $2,895,000 offset by decreases
in accounts receivable of approximately $1,566,000. As a result, the Company's
current ratio increased to 5.9 to 1 at November 2, 1997 from 2.5 to 1 at April
27, 1997.
Page 11 of 34
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NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Approximately $1,631,000 of cash was provided by operations for the first
six months of fiscal 1998 as compared to cash used of approximately $494,000 for
the first six months of fiscal 1997. Decreases in accounts receivable, partially
offset by increases in inventory and decreases in accounts payable and accrued
expenses, were primarily responsible for the improvement in cash provided from
operations. Approximately $551,000 of increased cash from operations was
provided from income before taxes, amortization and depreciation for the first
six months of fiscal 1998 compared to the corresponding period of the prior
fiscal year.
Available cash was used to pay off effectively all of the Company's
long-term debt. Debt payments of approximately $3,621,000 were issued during the
six months ended November 2, 1997 as the Company repaid its bank term note,
revolving credit facility and a portion of its capital lease obligations.
Approximately $2,660,000 of funds were provided from exercises of the Company's
options and warrants while the remaining funds were provided from operations.
The Company expects cash from operations to adequately fund its planned
operating requirements for the balance of fiscal 1998 and that additional funds,
if needed, could be obtained from the Company's available revolving credit
facility or from other available sources on commercially reasonable terms.
* * * * * * * * * *
This Quarterly Report 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, an unanticipated
slowdown in the healthcare industry, unanticipated technological developments
which affect the competitiveness of the Company's products, or an unanticipated
loss of business. The Company does not intend to update publicly any of the
forward-looking statements contained herein.
Page 12 of 34
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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 14, 1997 at the Company's headquarters in Wallingford,
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 12, 1997, and
(iii) Such nominees were elected.
(c) Matters voted upon at the Meeting were as follows:
Votes Votes Withheld/
For Against Abstain
--- ------- -------
(i) Election of Photios T. Paulson 5,934,577 23,440
as a Class C director for the next
three years.
(ii) Election of Steven J. Shulman 5,876,997 81,020
as a Class C director for the next
three years.
(iii) Approval of the Company's 1997 2,889,843 503,822 25,327
Long Term Incentive Plan.
(iv) Ratification of the Board of Directors' 5,910,198 34,242 13,577
selection of Ernst & Young LLP
to serve as the Company's
independent auditors for the fiscal
year ending May 3, 1998.
Page 13 of 34
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PART II- OTHER INFORMATION (CONTINUED)
ITEM 5. Other Information.
(a) The Company entered into a Stockholders Agreement dated as
of September 30, 1997 with the members of the
Charles F. Manning, Jr., M.D., Group (the "Manning Group").
Under the the Stockholders Agreement, the members of the
Manning Group agreed to vote their shares of Common Stock at
the 1997 Annual Meeting of the Stockholders for the election
of the Company's nominees for director. The Stockholders
Agreement also provides that, if there shall not have been
any solicitation of proxies on or after the date of the
Stockholders Agreement (whether or not any members of the
Manning Group participate in such solicitation) not publicly
supported by a resolution of a majority of the current
members of the Board of Directors, the Company and the Board
of Directors increase by one the number of Class C directors
of the Company, elect John P. Mahoney, M.D., a member of the
Manning Group, as the new Class C director promptly following
the Meeting and nominate Dr. Mahoney for reelection as
a Class C director at the 1998 Annual Meeting of Stockholders.
(b) Effective September 30, 1997, the By-Laws of the Company were
amended to provide that the appointment of directors by the
Board of Directors, a change in the number or classification
of directors or the election or removal of officers be made by
the affirmative vote of a majority of the full Board of
Directors.
(c) On October 14, 1997, the Board of Directors of the Company
appointed John P. Mahoney, M.D., as a Class C director.
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: There were no reports filed on Form 8-K
filed during the quarter ended November 2, 1997.
Page 14 of 34
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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: December 15, 1997 /s/ WILLIAM J. LACOURCIERE
-----------------------------------
William J. Lacourciere
Chairman of the Board,
President and
Chief Executive Officer
Dated: December 15, 1997 /s/ JEFFERY A. BAIRD
-----------------------------------
Jeffery A. Baird
Chief Financial Officer and
Principal Accounting Officer
Page 15 of 34
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INDEX TO EXHIBITS
PAGE
3(e) Amendment to By-Laws of the Company effective 16
September 30, 1997
10(hh) Stockholders Agreement between the Company and the 19
Charles F. Manning, Jr., M.D., Group dated as of September 30, 1997
11 Statement Re: Computation of Per Share Earnings 33
27 Financial Data Schedule 34
Page 16 of 34