<PAGE> 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 2, 1998
[ ] 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: 8,640,816 shares issued and outstanding as of
August 31, 1998
Page 1 of 15
Index to Exhibits at Page 13
<PAGE> 2
NOVAMETRIX MEDICAL SYSTEMS INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statements of Income -
Quarters ended August 2, 1998 and August 3, 1997 3
Condensed Consolidated Balance Sheets -
August 2, 1998 and May 3, 1998 4
Condensed Consolidated Statements of Cash Flows -
Quarters ended August 2, 1998 and August 3, 1997 6
Notes to Condensed Consolidated Financial Statements -
August 2, 1998 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
</TABLE>
Page 2 of 15
<PAGE> 3
PART I - FINANCIAL INFORMATION
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
AUGUST 2, 1998 AUGUST 3, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 7,672,209 $ 7,366,461
Costs and expenses:
Cost of products sold 2,960,129 3,114,452
Research and product development 912,145 860,157
Selling, general and administrative 2,932,206 2,538,974
Interest 5,389 84,307
Other expense 10,401 8,713
---------- ----------
6,820,270 6,606,603
---------- ----------
INCOME BEFORE INCOME TAXES 851,939 759,858
Income tax provision 239,000 236,000
---------- ----------
NET INCOME $ 612,939 $ 523,858
========== ==========
Per common share amounts:
Basic $ 0.07 $ 0.07
========== ==========
Diluted $ 0.07 $ 0.06
========== ==========
Weighted average common shares outstanding:
Basic 8,849,661 7,271,559
Diluted 9,373,159 8,830,666
</TABLE>
See notes to consolidated financial statements.
Page 3 of 15
<PAGE> 4
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS AUGUST 2, 1998 MAY 3, 1998
-------------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,928,420 $ 1,783,596
Accounts and notes receivable, less
allowance for losses of $250,000 7,708,771 9,712,814
Inventories:
Finished products 3,061,252 3,067,625
Work in process 2,002,141 1,777,028
Materials 3,514,020 3,028,281
------------ ------------
8,577,413 7,872,934
Deferred income taxes, net 2,414,000 2,414,000
Prepaid expenses 858,252 697,880
------------ ------------
TOTAL CURRENT ASSETS 21,486,856 22,481,224
Notes receivable 1,682,976
Equipment 8,994,921 8,627,726
Accumulated depreciation (deduction) (6,203,864) (6,031,571)
------------ ------------
2,791,057 2,596,209
License, technology, patents and other 7,664,610 7,521,371
Accumulated amortization (deduction) (3,648,300) (3,566,574)
------------ ------------
4,016,310 3,954,797
Deferred income taxes, net 1,756,666 1,969,666
------------ ------------
$ 31,733,865 $ 31,001,896
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 15
<PAGE> 5
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY AUGUST 2, 1998 MAY 3, 1998
- ------------------------------------ -------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,655,619 $ 1,883,234
Accrued expenses 2,240,402 1,961,441
Current portion of capital lease obligation 34,604 33,901
------------ ------------
TOTAL CURRENT LIABILITIES 3,930,625 3,878,576
Capital lease obligation, less current portion 81,962 90,881
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, authorized
20,000,000 shares, issued 9,198,238
at August 2, 1998 and 9,174,355 at May 3, 1998,
including 338,452 Treasury shares 91,982 91,744
Additional paid-in capital 34,830,305 34,754,643
Retained-earnings deficit (4,713,971) (5,326,910)
Treasury stock (2,487,038) (2,487,038)
------------ ------------
27,721,278 27,032,439
------------ ------------
$ 31,733,865 $ 31,001,896
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 5 of 15
<PAGE> 6
NOVAMETRIX MEDICAL SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
AUGUST 2, 1998 AUGUST 3, 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 612,939 $ 523,858
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 172,347 138,822
Amortization 118,729 133,808
Deferred income taxes 213,000 221,000
Increases (decreases) in cash flows as a result
of changes in operating assets and liabilities:
Accounts and notes receivable 321,067 1,851,238
Inventories (704,479) (814,853)
Prepaid expenses (160,372) (60,268)
Accounts payable (227,615) 9,928
Accrued expenses 278,961 (1,103,734)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 624,577 899,799
INVESTING ACTIVITIES
Purchases of equipment (367,195) (192,813)
Purchases of license, technology, patents and other (180,242) (38,554)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (547,437) (231,367)
FINANCING ACTIVITIES
Principal payments on borrowings (8,216) (1,412,314)
Dividends on Preferred Stock (7,500)
Net proceeds from sales of Common Stock 75,900 770,604
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 67,684 (649,210)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 144,824 19,222
Cash and cash equivalents at beginning of period 1,783,596 236,808
------------ -----------
Cash and cash equivalents at end of period $ 1,928,420 $ 256,030
=========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 6 of 15
<PAGE> 7
NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 2, 1998
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 considered necessary
for a fair presentation have been included. Operating results for the quarter
ended August 2, 1998 are not necessarily indicative of the results that may be
expected for the year ending May 2, 1999. 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 3, 1998.
NOTE 2 -- PER SHARE AMOUNTS: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". This Statement replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods presented
have been restated to conform to the Statement No. 128 requirements.
The following table sets forth the calculation of basic and diluted
earnings per share for the three months ended August 2, 1998 and August 3, 1997:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
AUGUST 2, 1998 AUGUST 3, 1997
-------------- --------------
<S> <C> <C>
NUMERATOR
Net Income $612,939 $523,858
Preferred Stock dividends 7,500
-------- --------
Numerator for basic earnings per share 612,939 516,358
Effect of dilutive securities:
Preferred Stock dividends 7,500
-------- --------
Numerator for diluted earnings per share $612,939 $523,858
======== ========
</TABLE>
Page 7 of 15
<PAGE> 8
NOVAMETRIX MEDICAL SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
AUGUST 2, 1998 AUGUST 3, 1997
-------------- --------------
<S> <C> <C>
DENOMINATOR
Denominator for basic earnings per share:
Weighted average shares outstanding 8,849,661 7,271,559
Effect of dilutive securities:
Employee stock options and warrants 523,498 1,114,663
Convertible Preferred Stock 444,444
--------- -------------
Dilutive potential common shares 523,498 1,559,107
--------- -------------
Denominator for diluted earnings per share 9,373,159 8,830,666
========= =============
Basic earnings per share $ 0.07 $ 0.07
========= =============
Diluted earnings per share $ 0.07 $ 0.06
========= =============
</TABLE>
NOTE 3 -- NOTES RECEIVABLE: During the first quarter of fiscal 1999, the Company
entered into several sales financing agreements with certain of its customers
which will result in payments over a multi-year period.
NOTE 4 -- DEBT: On August 1, 1998, the Company replaced its existing revolving
credit facility with a new unsecured revolving credit agreement. The agreement
provides for borrowing to a maximum of $3,500,000, expires August 31, 2000, and
bears interest at the London Interbank Offered Rate ("LIBOR") plus .98% (6.61%
at August 31, 1998). Under the agreement, the Company is required to maintain
certain financial ratios, minimum working capital and net worth, and is limited,
among other things, on the purchases of its capital stock and new borrowings.
NOTE 5 -- SUBSEQUENT EVENT: On August 3, 1998, the Board of Directors approved a
plan to purchase up to $1,000,000 of the Company's Common Stock. On August 24,
1998, the Board of Directors approved a further plan to purchase up to 1,000,000
additional shares of Common Stock. As of August 31, 1998, the Company had
purchased 220,470 shares at a cost of approximately $1,132,000.
Page 8 of 15
<PAGE> 9
NOVAMETRIX MEDICAL SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating results for the first quarter ended August 2, 1998 improved
compared to the corresponding period of the prior fiscal year ended August 3,
1997. Net income for the first quarter of fiscal 1999 increased by 17% to
approximately $613,000 or $0.07 per diluted share compared to net income of
approximately $524,000 or $0.06 per diluted share for the first quarter of
fiscal 1998.
Net sales for the first quarter of fiscal 1999 increased 4% to
approximately $7,672,000 compared to net sales of approximately $7,366,000 for
the first quarter of fiscal 1998. The increase was led by a strong performance
from domestic sales, which was partially offset by a decrease in sales to
original equipment manufacturers (OEM) compared to the first quarter of the
prior fiscal year. The domestic sales improvement, which followed a strong
fourth quarter performance, is expected to continue during fiscal 1999. OEM
sales are also expected to rebound during the second quarter of fiscal 1999.
Cost of products sold as a percentage of net sales was 39% for the first
quarter of fiscal 1999 as compared to 42% for the first quarter of fiscal 1998.
The reduction in cost of products sold for the first quarter was primarily
related to increased domestic sales as a percentage of total sales. Domestic
sales provide higher gross margins compared to sales to other markets for the
Company's products. The Company is continuing to pursue gross margin
enhancements from product cost reductions and manufacturing efficiencies.
Research and product development ("R&D") expenses increased by
approximately $52,000 or 6% for the three months ended August 2, 1998 as
compared to the corresponding period of the prior fiscal year. The increase was
primarily due to higher levels of salaries and related fringe benefits,
depreciation, and travel and entertainment, partially offset by reduced expenses
for outside professional services and engineering materials.
Selling, general and administrative ("S,G&A") expenses increased
approximately $393,000 or 15% for the first quarter of fiscal 1999 as compared
to the first quarter of fiscal 1998. Increased selling expenses, primarily
caused by higher dealer and employee sales commissions on the increased domestic
sales volume, and increased G&A expenses primarily pertaining to salaries and
related benefits and legal expenses, were partially offset by decreased
international selling expenses and reduced service overhead costs.
Interest expense decreased by approximately $79,000 to approximately $5,000
for the quarter ended August 2, 1998 as compared to the quarter ended August 3,
1997 reflecting the Company's elimination of its bank debt and a portion of its
capital lease obligations during the second quarter of fiscal 1998.
Page 9 of 15
<PAGE> 10
Income tax expense of $239,000 for the first three months of fiscal 1999
was based on the effective tax rate of 28% expected for the year ending May 2,
1999. Income tax expense for the corresponding period of the prior year was
$236,000 based upon an estimated income tax rate of 31%. Due to significant net
operating loss carryforwards for federal income tax purposes, the Company
expects income taxes payable to be minimal for fiscal 1999.
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 $17,556,000 at August 2,
1998 compared to approximately $18,603,000 at May 3, 1998. The decrease in
working capital of approximately $1,046,000 was primarily accounted for by the
net decrease of $2,004,000 in accounts receivable and the current portion of
notes receivable, partially offset by inventory increases of approximately
$704,000. As a result, the Company's current ratio was 5.5 to 1 at August 2,
1998 compared to 5.8 to 1 at May 3, 1998.
Approximately $625,000 of cash was provided by operations for the three
months ended August 2, 1998 compared to approximately $900,000 of cash provided
by operations for the corresponding period of the prior fiscal year. The
reduction in cash provided from operations of approximately $275,000 compared to
the first quarter of fiscal 1998 was primarily caused by changes in accounts and
notes receivable and accrued expenses, which were partially offset by an
increase in income before taxes, depreciation and amortization.
On August 1, 1998, the Company replaced its existing revolving credit
facility with a new $3,500,000 unsecured revolving credit agreement. The Company
expects cash from operations and funds available under the Company's revolving
credit agreement to adequately support its planned operating requirements for
the balance of fiscal 1999. In addition, management believes that additional
funds, if needed, could be obtained from other available sources on commercially
reasonable terms.
The Company has addressed the Year 2000 compliance issue with regard to the
potential impact on the Company's business, results of operations and financial
condition and has determined that there will be no material costs or problems
associated with the transition to the Year 2000.
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 of business. The Company does not intend to
update publicly any of the forward-looking statements contained herein.
Page 10 of 15
<PAGE> 11
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 September 1, 1998 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 July
29, 1998, and
(iii) Such nominees were elected.
(c) Matters voted upon at the Meeting were as follows:
<TABLE>
<CAPTION>
Votes Votes Withheld/
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
(i) Election of two Class C directors of
the Company for the next three years:
Thomas M. Haythe 6,796,467 664,648
William J. Lacourciere 6,792,917 668,198
(ii) Ratification of the Board of Directors' 7,346,874 82,183 32,058
selection of Ernst & Young LLP to
serve as the Company's independent
auditors for the fiscal year ended
May 2, 1999.
</TABLE>
Page 11 of 15
<PAGE> 12
ITEM 5. Other Information.
(a) On August 3, 1998, the Board of Directors approved a plan to
purchase up to $1,000,000 of the Company's Common Stock. On August
24, 1998, the Board of Directors approved a further plan to
purchase up to 1,000,000 additional shares of Common Stock. As of
August 31, 1998, the Company had purchased 220,470 shares at a cost
of approximately $1,132,000.
(b) On September 1, 1998, at a meeting of the Board of Directors of the
Company held subsequent to the Annual Meeting of Stockholders, John
P. Mahoney, a director of the Company whose term expired on
September 1, 1998, was elected by the Board of Directors to serve as
a Class B director. Dr. Mahoney's term will expire at the 2000
Annual Meeting.
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 August 2, 1998.
Page 12 of 15
<PAGE> 13
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 15, 1998 s/WILLIAM J. LACOURCIERE
------------------------
William J. Lacourciere
Chairman of the Board,
President and Chief Executive Officer
Dated: September 15, 1998 s/JEFFERY A. BAIRD
------------------
Jeffery A. Baird
Chief Financial Officer and
Principal Accounting Officer
Page 13 of 15
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
27 Financial Data Schedule 15
</TABLE>
Page 14 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED AUGUST 2, 1998 AND THE CONDENSED CONSOLIDATED
BALANCE SHEETS AT AUGUST 2, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-02-1999
<PERIOD-END> AUG-02-1998
<CASH> 1,928,420
<SECURITIES> 0
<RECEIVABLES> 9,641,747
<ALLOWANCES> (250,000)
<INVENTORY> 8,577,413
<CURRENT-ASSETS> 21,486,856
<PP&E> 8,994,921
<DEPRECIATION> (6,203,864)
<TOTAL-ASSETS> 31,733,865
<CURRENT-LIABILITIES> 3,930,625
<BONDS> 81,962
0
0
<COMMON> 91,982
<OTHER-SE> 27,629,296
<TOTAL-LIABILITY-AND-EQUITY> 31,733,865
<SALES> 7,672,209
<TOTAL-REVENUES> 7,672,209
<CGS> 2,960,129
<TOTAL-COSTS> 2,960,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,389
<INCOME-PRETAX> 851,939
<INCOME-TAX> 239,000
<INCOME-CONTINUING> 612,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 612,939
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
