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 August 1, 1999
[ ] 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: 7,952,074 shares issued and outstanding as of
September 1, 1999
Page 1 of 17
Index to Exhibits at Page 16
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NOVAMETRIX MEDICAL SYSTEMS INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Operations -
Three months ended August 1, 1999 and August 2, 1998 3
Condensed Consolidated Balance Sheets -
August 1, 1999 and May 2, 1999 4
Condensed Consolidated Statements of Cash Flows -
Three months ended August 1, 1999 and August 2, 1998 6
Notes to Condensed Consolidated Financial Statements -
August 1, 1999 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
Page 2 of 17
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PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
AUGUST 1, 1999 AUGUST 2, 1998
-------------- --------------
Net sales $ 7,684,741 $ 7,027,885
Costs and expenses:
Cost of products sold 3,232,647 2,747,874
Research and product development 972,191 912,146
Selling, general and administrative 3,216,910 2,796,390
Interest expense 156,963 5,389
Other expense 33,920 10,401
----------- -----------
7,612,631 6,472,200
----------- -----------
INCOME BEFORE INCOMES TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 72,110 555,685
Income tax provision 23,100 155,600
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE $ 49,010 $ 400,085
Cumulative effect of a change in
accounting principle (223,544)
----------- -----------
NET (LOSS) INCOME $ (174,534) $ 400,085
=========== ===========
Per common share amounts:
Income before cumulative effect of a
change in accounting principle
Basic $ 0.01 $ 0.05
Diluted $ 0.01 $ 0.04
Net income
Basic $ (0.02) $ 0.05
Diluted $ (0.02) $ 0.04
See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS AUGUST 1, 1999 MAY 2, 1999
------ -------------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 270,403 $ 269,399
Accounts receivable, less allowance for
losses of $300,000 at August 1, 1999 and
$250,000 at May 2, 1999 12,748,260 11,613,251
Current portion of notes receivable 329,072 380,003
Inventories:
Finished products 5,242,983 4,193,808
Work in process 1,735,496 1,224,991
Materials 4,570,907 3,933,648
------------ ------------
11,549,386 9,352,447
Deferred income taxes, net 1,768,688 1,768,688
Prepaid expenses 911,184 915,610
------------ ------------
TOTAL CURRENT ASSETS 27,576,993 24,299,398
Notes receivable, less current portion 1,598,876 1,501,118
Equipment 11,189,444 10,614,053
Accumulated depreciation (7,441,294) (6,931,927)
------------ ------------
3,748,150 3,682,126
License, technology, patents and other 8,677,086 8,526,620
Accumulated amortization (4,008,933) (3,982,188)
------------ ------------
4,668,153 4,544,432
Goodwill, net of amortization of $25,757 7,701,327
Deferred income taxes, net 2,030,900 1,948,800
------------ ------------
$ 47,324,399 $ 35,975,874
============ ============
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 AUGUST 1, 1999 MAY 2, 1999
- ------------------------------------ -------------- -----------
CURRENT LIABILITIES
Accounts payable $ 2,710,381 $ 2,384,925
Accrued expenses 3,310,771 2,844,124
Notes payable to bank, current portion 6,920,000 3,800,000
Capital lease obligation, current portion 37,838 36,810
------------ ------------
TOTAL CURRENT LIABILITIES 12,978,990 9,065,859
Notes payable to bank, less current portion 9,730,000 2,200,000
Capital lease obligation, less current portion 41,109 54,071
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 9,246,951 at
August 1, 1999 and 9,232,659 at
May 2, 1999, including Treasury shares 92,470 92,327
Additional paid-in capital 35,058,716 34,965,970
Retained-earnings deficit (3,434,776) (3,260,243)
Treasury stock - 1,299,355 shares (7,142,110) (7,142,110)
------------ ------------
24,574,300 24,655,944
------------ ------------
$ 47,324,399 $ 35,975,874
============ ============
See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
AUGUST 1, 1999 AUGUST 2, 1998
OPERATING ACTIVITIES
Net (loss) income $ (174,534) $ 400,085
Adjustments to reconcile net (loss) income
to net cash (used) provided by operating activities:
Depreciation 257,438 172,347
Amortization 168,548 118,729
Deferred income taxes 23,100 129,600
Cumulative effect of change in accounting principle 223,544
Net investment in sales-type lease (911,986)
Changes in operating assets and liabilities:
Accounts and notes receivable (121,854) 2,330,110
Inventories (1,015,586) (910,820)
Prepaid expenses (246,328) (160,372)
Accounts payable (90,874) (227,615)
Accrued expenses (174,072) (315,502)
------------ ------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (1,150,618) 624,576
INVESTING ACTIVITIES
Purchases of equipment (198,453) (367,195)
Purchases of licenses, technology, patents and other (211,246) (180,242)
Purchase of Children's Medical Ventures, Inc.,
less cash acquired (9,118,386)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (9,528,085) (547,437)
FINANCING ACTIVITIES
Revolving line of credit, net 1,200,000
Proceeds from notes payable 9,600,000
Principal payments on borrowings (161,934) (8,216)
Net proceeds from sales of Common Stock 41,641 75,901
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 10,679,707 67,685
------------ ------------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,004 144,824
Cash and cash equivalents at beginning of period 269,399 1,783,596
------------ ------------
Cash and cash equivalents at end of period $ 270,403 $ 1,928,420
============ ============
See notes to condensed consolidated financial statements (unaudited).
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NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 1, 1999
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 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 considered necessary for a fair presentation have been included.
Operating results for the three months ended August 1, 1999 are not necessarily
indicative of the results that may be expected for the year ending April 30,
2000. 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 May 2, 1999.
NOTE 2 - ACQUISITION OF BUSINESS: On June 30, 1999, the Company acquired 100% of
the capital stock of Children's Medical Ventures, Inc. ("ChMV"), a privately
owned developer and marketer of neonatal and pediatric care products and
services. The purchase price was comprised of $8.7 million in cash and a five
year warrant to purchase 25,000 shares of the Company's Common Stock at an
exercise price of $4.3625 per share. The purchase price and related costs were
financed with two term loans aggregating $9.6 million. The acquisition has been
accounted for as a purchase; accordingly, the purchase price has been allocated
to the underlying assets and liabilities based upon their respective estimated
fair values at the date of acquisition. The excess of the fair value of the net
assets acquired (goodwill) was approximately $7.7 million and is being amortized
on a straight-line basis over 25 years. The accompanying condensed consolidated
statements of operations do not include any revenues or expenses related to this
acquisition prior to the closing date. Following are the Company's unaudited pro
forma results for the first three months of fiscal 2000 and 1999 assuming that
the acquisition had taken place at the beginning of each period:
Three Three
Months Ended Months Ended
August 1, 1999 August 2, 1998
($000's) ($000's)
-------- --------
Net revenue $ 8,924 $ 8,004
Income (loss) before cumulative effect of a
change in accounting principle (123) 277
Net (loss) income (346) 277
Page 7 of 17
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Three Three
Months Ended Months Ended
August 1, 1999 August 2, 1998
($000's) ($000's)
-------------- --------------
Per common share amounts:
Income (loss) before cumulative effect of a
change in accounting principle
Basic ($0.02) $0.03
Diluted ($0.02) $0.03
Net (loss) income
Basic ($0.04) $0.03
Diluted ($0.04) $0.03
Weighted average common shares:
Basic 7,939,814 8,849,661
Diluted 8,130,074 9,373,159
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the acquisition been in effect as of the first
day of each of the periods presented above.
NOTE 3 - REPORTABLE SEGMENTS: The Company is domiciled in the United States and
operates in one industry segment - the design, manufacture and marketing of cost
effective medical products that improve patient outcomes, including non-invasive
monitors, sensors, accessories and developmental care products. The Company's
acquisition of ChMV did not affect the composition of Company's reportable
segments.
NOTE 4 - ACCOUNTING CHANGE: Effective May 3, 1999, the Company adopted Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities". The SOP
requires the Company to write-off any start-up costs which had been previously
capitalized and to expense any future start-up costs as incurred. Earnings
during the first quarter of fiscal 2000 were reduced by $223,544 (approximately
$329,000 before taxes) or $0.03 per diluted share as a result of the adoption of
SOP 98-5.
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NOTE 5 - PER SHARE AMOUNTS: The following table sets forth the calculation of
basic and diluted earnings per share for the three months ended August 1, 1999
and August 2, 1998:
Three Three
Months Ended Months Ended
August 1, 1999 August 2, 1998
-------------- --------------
EARNINGS PER COMMON SHARE - BASIC
Income before cumulative effect of a
change in accounting principle $ 0.01 $ 0.05
Cumulative effect of a change in
accounting principle $ (0.03)
------------- -------------
Net income per common share $ (0.02) $ 0.05
============= =============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Income before cumulative effect of a
change in accounting principle $ 0.01 $ 0.04
Cumulative effect of a change in
accounting principle $ (0.03)
------------- -------------
Net income per common share $ (0.02) $ 0.04
============= =============
Weighted Average Common Stock and Common
Stock Equivalent Shares Outstanding:
Basic 7,939,814 8,849,661
Effect of dilutive securities 190,260 523,498
------------- -------------
Diluted 8,130,074 9,373,159
============= =============
NOTE 6 - DEBT AND CAPITAL LEASE OBLIGATION: On June 30, 1999, the Company
purchased Children's Medical Ventures, Inc. for $8.7 million in cash and a
warrant to purchase 25,000 shares of the Company's Common Stock. The acquisition
and related costs were financed with two term loans, each in the amount of $4.8
million, aggregating $9.6 million. Under an amended and restated agreement with
the Company's primary lender, the Company borrowed $4.8 million in the form of a
five year term loan which is payable in monthly installments of $80,000 plus
interest at the London Interbank Offered Rate ("LIBOR") plus 1.8% (6.98% at
August 1, 1999) and expires during June 2004. The
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Company also entered into a $4.8 million five year term loan with another bank
which is payable in monthly installments of $80,000 plus interest at LIBOR plus
1.6% (6.80% at August 1, 1999) and expires during June 2004.
In addition, the Company increased the amount of credit available under its
revolving credit agreement from $5.0 million to $6.0 million, modified the
interest rate to LIBOR plus 1.60% (6.80% at August 1, 1999) and extended the
maturity date to August 2001.
Pursuant to the terms of the amended and restated bank agreements and the new
term loan agreement, the Company is required, among other things, to maintain
certain financial ratios, minimum levels of working capital and net worth, and
is restricted from the payment of dividends.
DEBT AND CAPITAL LEASE OBLIGATION CONSIST OF:
August 1, 1999 May 2, 1999
-------------- -----------
Term loans payable to banks $12,250,000 $ 2,800,000
Note payable to bank under revolving
credit agreement 4,400,000 3,200,000
Capital lease obligation 78,947 90,881
----------- -----------
16,728,947 6,090,881
Less current portion 6,957,838 3,836,810
----------- -----------
$ 9,771,109 $ 2,254,071
=========== ===========
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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 2000 increased 9% to approximately
$7,685,000 compared to net sales of approximately $7,028,000 for the first
quarter of fiscal 1999. The increase was primarily due to the incremental net
sales provided by Children's Medical Ventures, Inc. ("ChMV") which was acquired
by the Company on June 30, 1999. While sales to international markets, OEM
customers, and domestic non-hospital markets all demonstrated growth over the
first quarter of the prior fiscal year, domestic hospital sales were below both
prior year and expected sales levels. Domestic sales, which experienced strong
levels of growth for fiscal 1999, are expected to rebound during the balance of
fiscal 2000.
Cost of products sold as a percentage of net sales was 42% for the first
quarter of fiscal 2000 compared to 39% for the first three months of fiscal
1999. The increase in the cost of products sold for the three months ended
August 1, 1999 was primarily related to decreased domestic sales as a percentage
of total sales and product mix. The Company is continuing to pursue product cost
reductions.
Research and product development ("R&D") expenses increased by approximately
$60,000 or 7% for the first quarter of fiscal 2000 compared to the first quarter
of the prior fiscal year. The increase was caused by higher levels of salaries
and related fringe benefits, increased expenditures for engineering materials
and R&D expenses associated with ChMV, which were partially offset by reduced
expenditures for outside professional services and travel expenses.
Selling, general and administrative ("S,G&A") expenses increased approximately
$421,000, or 15%, for the first quarter of fiscal 2000 compared to the first
quarter of fiscal 1999. Approximately 56% of the increase pertained to ChMV
expenses. S,G&A expenses, excluding ChMV, increased approximately 7% over the
first quarter of the prior year primarily as a result of increased international
dealer commissions, and increased marketing expenses, primarily salaries and
related benefits, outside professional services and promotional related
expenditures. Partially offsetting these increases were reductions in domestic
sales commissions on the lower sales volume and reductions in G&A expenses,
primarily outside professional services and legal expenses.
Interest expense increased approximately $152,000 for the quarter ended August
1, 1999 compared to the corresponding quarter of the prior fiscal year.
Increased borrowings associated with the Company's Common Stock repurchase
program, certain customer sales financing agreements, general working capital
requirements and the acquisition of ChMV were responsible for the increase in
interest expense for this period.
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Income tax expense for the first three months of fiscal 2000, excluding the
cumulative effect of a change in accounting principle, decreased approximately
$133,000 from the first three months of the prior year as a result of the lower
pre-tax earnings. The Company expects its income tax rate to approximate 32% for
fiscal 2000. Due to net operating loss carryforwards for federal income tax
purposes, the Company expects income taxes payable, calculated on an alternative
minimum tax basis, to be minimal for fiscal 2000.
Net income for the three months ended August 1, 1999 was impacted by the
adoption of an accounting standard which required the expensing of start-up
costs which were previously capitalized, resulting in a one-time charge of
approximately $224,000 or $0.03 per diluted share. The adoption, effective for
the Company as of May 3, 1999, resulted in a reported net loss of approximately
$175,000 or $0.02 per diluted share as compared to net income of approximately
$400,000 or $0.04 per diluted share for the three months ended August 2, 1998.
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 levels to be a meaningful indicator of future sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $14,598,000 at August 1, 1999
compared to approximately $15,234,000 at May 2, 1999. The decrease in working
capital of approximately $636,000 was primarily attributable to an increase in
bank debt resulting from the Company's acquisition of ChMV, partially offset by
the increase in working capital provided by ChMV and an increase in inventory
(before the effect of the acquisition). This resulted in a current ratio of 2.1
to 1 at August 1, 1999 compared to 2.7 to 1 at May 2, 1999.
Approximately $1,151,000 of cash was used by the combined operations for the
three months ended August 1, 1999 compared to approximately $625,000 of cash
provided by operations for the corresponding period of the prior fiscal year.
Increases in inventory and prepaid expenses and decreases in accrued expenses
(before the effect of the acquisition), and a reduction in income before taxes,
depreciation and amortization, were primarily responsible for the reduction in
cash provided from operations.
Net cash provided by financing activities was approximately $10,680,000 for
the first three months of fiscal 2000, the majority of which was used to fund
the acquisition of ChMV net of the effects of related transaction costs and cash
acquired by the Company.
The Company expects cash from operations and funds available under the
Company's revolving credit agreement to adequately support its planned operating
and debt service requirements for the balance of fiscal 2000. In addition,
management believes that additional funds, if needed, could be obtained on
commercially reasonable terms.
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YEAR 2000 COMPLIANCE
Year 2000 compliance is a potentially significant issue for most, if not all
companies, the impact of which cannot be predicted with any degree of certainty.
The risk to the Company resulting from the failure of its own systems or those
of third parties with which it does business to attain Year 2000 readiness is
similar to that of other manufacturing firms or business enterprises. The risks
include, but are not limited to, disruptions in transacting or processing
information, disruptions in the supply of material from major vendors and delays
in shipment to customers due to the Year 2000 non-compliance. The Company has
established a Year 2000 program designed to assess the potential impact on its
business, results of operations and financial condition. The Company has
conducted a thorough review of its installed base of monitoring equipment and
has determined that its current products are Year 2000 compliant. The results of
the Company's examination have been posted on its web site for its customers to
review. During fiscal 1999, the Company completed the installation of a new
fully-integrated operating system and has recently completed an upgrade of its
communication systems to achieve Year 2000 compliance. To date, the Company has
capitalized approximately $375,000 to upgrade its operating and information
systems and does not expect to incur additional capital or non-capital
expenditures of a material amount for Year 2000 compliance purposes. As a result
of these expenditures, management believes that the Year 2000 issue will not
pose significant operational problems for its internal operating systems. The
Company has also contacted its major suppliers to assess their Year 2000
readiness and is continuing to address this issue with other suppliers and third
parties with which the Company conducts business. While the Company has not
identified any Year 2000 issues as a result of this effort, the Company cannot
be certain that its suppliers will attain Year 2000 readiness and is developing
contingency plans to mitigate exposure resulting from non-compliance including
considering the substitution of those suppliers that provide an unacceptable
response. However, it would be impractical for the Company to attempt to address
all potential Year 2000 problems of its own suppliers and other third parties.
The Company will continue to refine its contingency plans as conditions warrant.
FORWARD LOOKING INFORMATION
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, 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 loss or delay 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: 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 15, 1999, the Company filed Form 8-K to
report the acquisition of Children's Medical Ventures, Inc. dated July
1, 1999. On September 15, 1999 the Company filed Form 8-KA to amend
Item 7, sections (a) and (b) to include financial statements and pro
forma financial information relating to such acquisition.
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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: September 11, 1999 /s/William J. Lacourciere
- -------------------------- -------------------------------------
William J. Lacourciere
Chairman of the Board,
President and Chief Executive Officer
Dated: September 11, 1999 /s/Jeffery A. Baird
- -------------------------- -------------------------------------
Jeffery A. Baird
Chief Financial Officer and
Principal Accounting Officer
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INDEX TO EXHIBITS
PAGE
27 Financial Data Schedule 17
Page 16 of 17