10-Q 1 y43468e10-q.txt NOVAMETRIX MEDICAL SYSTEMS, INC. 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 October 29, 2000 [ ] 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: 8,683,068 shares issued and outstanding as of November 30, 2000 Page 1 of 19 Index to Exhibits at Page 18 2 NOVAMETRIX MEDICAL SYSTEMS INC. INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Statements of Income - Quarters ended October 29, 2000 and October 31, 1999 3 Six months ended October 29, 2000 and October 31, 1999 4 Condensed Consolidated Balance Sheets - October 29, 2000 and April 30, 2000 5 Condensed Consolidated Statements of Cash Flows - Six months ended October 29, 2000 and October 31, 1999 7 Notes to Condensed Consolidated Financial Statements - October 29, 2000 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 Page 2 of 19 3 PART I - FINANCIAL INFORMATION NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

QUARTER ENDED QUARTER ENDED ~~JULY~~OCTOBER 3029, 2000 ~~AUGUST~~OCTOBER 131, 1999 ---------------- ---------------- Net sales $ 1213,~~605~~521,~~339~~516 $ 710,~~684~~508,~~741~~325 Costs and expenses: Cost of products sold 56,~~307~~482,~~056~~539 34,~~232~~377,~~647~~492 Research and product development 1,~~109~~047,~~273~~504 ~~972~~1,~~191~~040,494 Selling, general and administrative 4,~~253~~673,~~347~~738 3,~~216,~~910,102 Interest expense ~~221~~251,~~122~~307 ~~156~~296,~~963~~402 Goodwill amortization 77,~~578~~577 2576,~~757~~931 Other expense 27(income) 35,~~875~~743 8(20,~~163~~624) ------------ ------------ 1012,~~996~~568,~~251~~408 79,~~612~~680,~~631~~797 ------------ ------------ Income before income taxes ~~and cumulative effect of a change in accounting principle 1~~953,~~609,088~~108 72827,~~110~~528 Income taxes ~~571~~338,000 23265,~~100~~000 ------------ ------------ ~~Income before cumulative effect of a change in accounting principle 1,038,088 49,010 Cumulative effect of a change in accounting principle (223,544) ------------ ------------~~ Net income ~~(loss)~~ $ 1615,~~038,088~~108 $ ~~(174~~562,~~534)~~528 ============ ============ Per common share amounts: ~~Income before cumulative effect of a change in accounting principle~~ Basic $ 0.1207 $ 0.0107 Diluted $ 0.1207 $ 0.~~01 Cumulative effect of a change in accounting principle Basic $ (0.03) Diluted $ (0.03) Net income (loss) Basic $ 0.12 $ (0.02) Diluted $ 0.12 $ (0.02)~~07

See notes to condensed consolidated financial statements (unaudited). Page 3 of 19 4 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

~~ASSETS~~SIX ~~JULY~~MONTHS 30ENDED SIX MONTHS ENDED OCTOBER 29, 2000 ~~APRIL~~OCTOBER 3031, ~~2000~~1999 ------ ---------- --- -------------- ~~CURRENT~~Net ~~ASSETS~~sales ~~Cash and cash equivalents~~ $ ~~277~~26,~~917~~126,855 $ ~~283~~18,~~262 Accounts receivable~~193,066 ~~less~~Costs ~~allowance~~and ~~for~~expenses: ~~losses~~Cost of ~~$300,000~~products 17sold 11,~~936~~789,~~058~~595 157,~~412~~610,~~529~~139 ~~Current~~Research ~~portion~~and ofproduct ~~notes~~development ~~receivable~~2,156,777 ~~136~~2,~~430~~012,685 ~~260~~Selling,~~722~~ ~~Inventories:~~general ~~Finished~~and ~~products~~administrative 58,~~199~~927,~~622~~085 47,~~450~~127,~~432~~012 ~~Work~~Interest inexpense ~~process~~472,429 1453,~~958~~365 Goodwill amortization 155,~~993~~155 1102,~~321,196~~688 ~~Materials~~Other 4expense (income) 63,~~076,902~~618 4(12,~~091,089~~461) ------------ ------------ 1123,~~235~~564,~~517~~659 917,~~862~~293,~~717~~428 ~~Deferred income taxes, net 1,409,866 1,880,866 Prepaid expenses 975,894 854,839~~ ------------ ------------ ~~TOTAL~~Income ~~CURRENT~~before ~~ASSETS~~income ~~31,971,682~~taxes ~~28,554,935~~and ~~Notes~~cumulative ~~receivable,~~effect ~~less~~of ~~current~~a ~~portion~~change ~~1,653,113~~in ~~1,607,563~~accounting ~~Equipment,~~principle ~~less accumulated depreciation and amortization of $8~~2,~~300~~562,~~148~~196 ~~and $8~~899,~~028,572,~~638 ~~respectively~~Income ~~3,393,408~~tax ~~3,350,115~~provision ~~License~~909,000 ~~technology~~288,100 ~~patents~~------------ ~~and~~------------ ~~other~~Income ~~costs~~before ~~less~~cumulative ~~accumulated~~effect ~~amortization~~ of ~~$4,559,360~~a ~~and~~change ~~$4,409,429,~~in ~~respectively~~accounting ~~5,160,048~~principle 51,~~118~~653,~~945~~196 ~~Goodwill~~611,538 ~~less~~Cumulative ~~accumulated~~effect ~~amortization~~ of ~~$336,169~~a ~~and~~change ~~$258,591,~~in ~~respectively~~accounting ~~7,367,270~~principle 7(223,~~444,848~~544) ~~Deferred income taxes, net 1,074,261 1,074,261~~ ------------ ------------ Net income $50 1,~~619~~653,~~782~~196 $47 387,~~150,667~~994 ============ ============ Per common share amounts: Income before cumulative effect of a change in accounting principle Basic $ 0.19 $ 0.08 Diluted $ 0.19 $ 0.08 Cumulative effect of a change in accounting principle Basic $ (0.03) Diluted $ (0.03) Net income Basic $ 0.19 $ 0.05 Diluted $ 0.19 $ 0.05

See notes to condensed consolidated financial statements (unaudited). Page 4 of 19 5 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

~~LIABILITIES~~ASSETS ~~AND~~OCTOBER ~~SHAREHOLDERS' EQUITY JULY 30~~29, 2000 APRIL 30, 2000 ------ ----------------~~--------------~~ ------------- -~~-------------~~ CURRENT ~~LIABILITIES~~ASSETS ~~Accounts~~Cash ~~payable~~and cash equivalents $ 4305,~~028,650~~120 $ 2283,~~968~~262 Accounts receivable,~~833~~ ~~Accrued~~less ~~expenses~~allowance 3for losses of $300,~~539~~000 19,~~393~~253,373 315,~~730~~412,~~147~~529 Current portion of ~~debt~~notes ~~and~~receivable ~~capital~~133,174 ~~lease~~260,722 ~~obligation~~Inventories: 6Finished products 4,534,389 4,450,~~826~~432 Work in process 2,163,679 1,321,196 Materials 5,808,117 4,~~335~~091,~~264~~089 ----------- ----------- ~~TOTAL~~12,506,185 ~~CURRENT~~9,862,717 ~~LIABILITIES~~Deferred 14income taxes 1,~~018~~171,~~869~~866 111,~~034~~880,~~244~~866 ~~Long~~Prepaid expenses 1,253,421 854,839 -~~term~~---------- ~~debt~~----------- ~~and~~TOTAL ~~capital~~CURRENT ~~lease~~ASSETS ~~obligation~~34,623,139 28,554,935 Notes receivable, less current portion 51,~~213~~663,~~558~~801 51,~~850~~607,~~601~~563 ~~SHAREHOLDERS'~~Equipment, ~~EQUITY~~less ~~Common~~accumulated ~~Stock,~~depreciation ~~$.01~~and ~~par~~amortization ~~value~~of $8,582,528 ~~authorized~~and 20$8,~~000~~028,~~000 shares~~572, ~~issued~~respectively 93,~~470~~584,~~590~~774 at3,350,115 ~~July~~License, 30technology, ~~2000~~patents and ~~9,450,304~~other atcosts ~~April~~less ~~30,~~accumulated ~~2000,~~amortization ~~including~~of ~~Treasury~~$4,773,965 ~~shares~~and 94$4,~~706 94~~409,~~503~~429, ~~Additional~~respectively ~~paid-in capital 35~~5,~~080~~163,~~584~~949 345,~~997~~118,~~342~~945 ~~Retained-earnings~~Goodwill, ~~(deficit)~~less ~~19,126~~accumulated ~~(1,018,962)~~amortization ~~Treasury~~of ~~stock~~$413,746 -and ~~799~~$258,~~355~~591, ~~shares~~respectively (37,~~807~~289,~~061)~~692 (37,~~807~~444,~~061)~~848 ~~-----------~~Deferred ~~-----------~~income 31taxes 1,~~387~~074,~~355~~261 301,~~265~~074,~~822~~261 ----------- ----------- $5053,~~619~~399,~~782~~616 $47,150,667 =========== ===========

See notes to condensed consolidated financial statements (unaudited). Page 5 of 19 6 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)

~~QUARTER~~LIABILITIES ~~ENDED~~AND ~~QUARTER~~SHAREHOLDERS' ~~ENDED~~EQUITY ~~JULY~~OCTOBER 3029, 2000 ~~AUGUST~~APRIL 130, ~~1999~~2000 ------------------------------------ ---------------- ~~OPERATING~~-------------- ~~ACTIVITIES~~CURRENT ~~Net~~LIABILITIES ~~income~~Accounts ~~(loss)~~payable $ 14,~~038~~636,~~088~~705 $ ~~(174~~2,~~534) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation 271~~968,~~801~~833 ~~257,438~~Accrued ~~Amortization~~expenses ~~262~~3,~~947 168~~824,~~548~~426 ~~Deferred income taxes 471~~3,~~000 23~~730,~~100~~147 ~~Cumulative~~Current ~~effect~~portion of ~~change~~debt ~~in accounting principle 223,544 Changes in operating assets~~ and ~~liabilities:~~capital ~~Accounts~~lease ~~and~~obligation ~~notes receivable (2~~8,~~444~~333,~~787)~~150 ~~(121~~4,~~854) Inventories (1~~335,~~372,800)~~264 ~~(1,015,586) Prepaid expenses (121,055) (246,328) Accounts payable 1,059,817 (90,874) Accrued expenses (190,754) (174,072)~~ ------------ ------------ ~~NET~~TOTAL ~~CASH~~CURRENT ~~USED~~LIABILITIES ~~BY OPERATING ACTIVITIES (1~~16,~~025~~794,~~743)~~281 (111,~~150~~034,~~618)~~244 ~~INVESTING~~Long-term ~~ACTIVITIES~~debt ~~Purchases~~and ofcapital ~~equipment~~lease ~~(314~~obligation,~~644)~~ ~~(198,453)~~less ~~Purchases~~current ofportion ~~licenses~~4,580,000 ~~technology~~5,850,601 ~~patents~~SHAREHOLDERS' ~~and~~EQUITY ~~other~~Common ~~(226~~Stock,~~472)~~ ~~(211,246)~~$.01 ~~Purchase~~par ofvalue, ~~Children's~~authorized ~~Medical Ventures~~20,000,000 ~~Inc.~~shares, ~~less~~issued ~~cash acquired (~~9,~~118~~482,~~386)~~423 ~~-----------~~at ~~-----------~~October ~~NET~~29, ~~CASH~~2000 ~~USED~~and ~~BY INVESTING ACTIVITIES (541,116) (~~9,~~528~~450,~~085)~~304 ~~FINANCING~~at ~~ACTIVITIES~~April ~~Revolving~~30, ~~line~~2000, ofincluding ~~credit,~~Treasury ~~net~~shares 294,~~115,000~~824 194,~~200,000~~503 ~~Proceeds~~Additional ~~from~~paid-in ~~notes~~capital ~~payable~~35,103,338 934,~~600~~997,~~000~~342 ~~Principal~~Retained ~~payments~~earnings ~~on borrowings~~ (~~636,481~~deficit) 634,234 (~~161~~1,~~934~~018,962) ~~Net~~Treasury ~~proceeds from~~ stock ~~option~~- ~~exercises 83~~799,~~445~~355 ~~41,641~~shares ~~----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1~~(3,~~561~~807,~~964~~061) 10(3,~~679~~807,~~707~~061) ------------ ------------ ~~(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5~~32,~~345) 1~~025,~~004~~335 ~~Cash and cash equivalents at beginning of period 283~~30,~~262 269~~265,~~399~~822 ------------ ------------ ~~Cash and cash equivalents at end of period~~ $ ~~277~~53,~~917~~399,616 $ ~~270~~47,~~403~~150,667 ============ ============

See notes to condensed consolidated financial statements (unaudited). Page 6 of 19 7 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~Quarter~~SIX ~~Ended~~MONTHS ~~August~~ENDED 1SIX MONTHS ENDED OCTOBER 29, 2000 OCTOBER 31, 1999 ---------------- ---------------- OPERATING ACTIVITIES Net ~~revenue~~income $ 81,~~924~~653,~~000~~196 ~~Loss~~$ ~~before~~387,994 ~~cumulative~~Adjustments to reconcile net income to net cash used by operating activities: Depreciation 553,956 534,187 Amortization 555,129 409,175 Deferred income taxes 709,000 258,100 Cumulative effect of a change in accounting principle 223,544 Changes in operating assets and liabilities: Accounts and notes receivable (~~123~~3,769,534) (719,832) Inventories (2,643,468) (1,114,777) Prepaid expenses (398,582) (555,275) Accounts payable 1,667,872 153,162 Accrued expenses 94,279 (89,322) ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES (1,578,152) (513,044) INVESTING ACTIVITIES Purchases of equipment (788,615) (369,137) Purchases of licenses, technology, patents and other (444,977) (302,258) Purchase of Children's Medical Ventures, Inc., less cash acquired (9,118,386) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (1,233,592) (9,789,781) FINANCING ACTIVITIES Revolving line of credit, net borrowings 4,007,000 1,400,000 Proceeds from notes payable 9,600,000 Principal payments on term debt and capital lease obligations (1,279,715) (801,102) Net ~~loss~~proceeds from stock option exercises 106,317 62,549 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 2,833,602 10,261,447 ------------ ------------ INCREASE/(~~346~~DECREASE) IN CASH AND CASH EQUIVALENTS 21,~~000~~858 (41,378) Cash and cash equivalents at beginning of period 283,262 269,399 ------------ ------------ Cash and cash equivalents at end of period $ 305,120 $ 228,021 ============ ============

See notes to condensed consolidated financial statements (unaudited). Page 7 of 19 8 NOVAMETRIX MEDICAL SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OCTOBER 29, 2000 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 (consisting of normal recurring accruals and the cumulative effect of a change in accounting principle for the quarter ended August 1, 1999) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended October 29, 2000 are not necessarily indicative of the results that may be expected for the year ending April 29, 2001. 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 30, 2000. NOTE 2 -- ACQUISITION OF BUSINESS: On June 30, 1999, the Company acquired 100% of the capital stock of Children's Medical Ventures, Inc., a privately held developer and marketer of neonatal and pediatric care products and services. The purchase price was comprised of $8.7 million in cash and a 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 was accounted for as a purchase; accordingly, the purchase price was 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 statement of income does 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 six months ended October 31, 1999 assuming that the acquisition had taken place at the beginning of that period:

~~Quarter~~Six Months Ended ~~August~~October 131, 1999 ---------------- ~~Per~~Net ~~common~~revenue ~~share~~$ ~~amounts:~~19,432,000 ~~Loss~~Income before cumulative effect of a change in accounting principle ~~Basic~~439,000 ~~$ (0.02) Diluted $ (0.02)~~ Net ~~loss~~income ~~Basic $ (0.04) Diluted $ (0.04) Weighted average common shares: Basic 7~~216,~~939,814 Diluted 8,130,074~~000

Page 8 of 19 9

~~Quarters~~Six Months Ended ~~July~~October 3031, ~~2000 August 1,~~ 1999 ------------- ---~~-----------~~ ~~NUMERATOR~~Per common share amounts: Income before cumulative effect of a change in accounting principle Basic $0.06 ~~1,038,088~~Diluted $0.05 ~~49,010 Cumulative effect of a change in accounting principle (223,544) ----------- ----------~~ Net income ~~(loss)~~Basic $0.03 ~~1,038,088~~Diluted $0.03 ~~(174,534) =========== ========== DENOMINATOR Denominator for basic earnings per share:~~ Weighted average common shares: ~~outstanding~~Basic ~~8,659,333~~ 7,~~939~~946,~~814~~291 ~~Effect~~Diluted ~~of dilutive securities: Stock options and warrants 272,331 190,260 ----------- ---------- Denominator for diluted earnings per share~~ 8,~~931~~138,~~664 8,130,074 =========== ========== Basic earnings (loss) per share $ 0.12 $ (0.02) Diluted earnings (loss) per share $ 0.12 $ (0.02)~~253

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 the period 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 non-invasive monitors, sensors and accessories, and developmental care products for the critical care marketplace. 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 required 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 the prior fiscal year 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. NOTE 5 -- PER SHARE AMOUNTS: The calculation of basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The calculation of diluted earnings per share excludes anti-dilutive options and warrants whose exercise price exceeds the average market price. Page 9 of 19 10 The following table sets forth the calculation of basic and diluted earnings per share for the quarters and six months ended October 29, 2000 and October 31, 1999:

~~July~~OCTOBER 3029, 2000 ~~April~~OCTOBER 3031, ~~2000~~1999 Quarter Six Months Quarter Six Months Ended Ended Ended Ended ----------- ----------- ----------- ----------- ~~Note~~NUMERATOR ~~payable~~Income tobefore ~~bank~~cumulative ~~under~~effect ~~revolving~~of ~~credit~~a ~~agreement~~change in accounting principle $ 3615,~~890,000~~108 $ 1,~~775~~653,~~000~~196 ~~Term~~$ ~~loans~~562,528 ~~payable~~$ to611,538 ~~banks~~Cumulative ~~7,730,000~~effect ~~8,360,000~~of ~~Capital~~a ~~lease~~change ~~obligation~~in ~~44,384~~accounting 50principle (223,~~865~~544) ----------- ----------- 11----------- ----------- Net income $ 615,~~664~~108 $ 1,~~384~~653,196 10$ 562,~~185~~528 $ 387,~~865~~994 ~~Less~~=========== ~~current~~=========== ~~portion~~=========== 6=========== DENOMINATOR Denominator for basic earnings per share: Weighted average shares outstanding 8,~~450~~680,~~826~~416 48,~~335~~669,~~264~~875 7,952,768 7,946,291 Effect of dilutive securities: Stock options and warrants 199,355 237,765 176,823 191,962 ----------- ----------- $----------- 5----------- Denominator for diluted earnings per share 8,~~213~~879,~~558~~771 $8,907,640 58,~~850~~129,~~601~~591 8,138,253 =========== =========== =========== =========== Basic earnings per share $ 0.07 $ 0.19 $ 0.07 $ 0.05 Diluted earnings per share $ 0.07 $ 0.19 $ 0.07 $ 0.05

NOTE 6-- DEBT AND CAPITAL LEASE OBLIGATIONS: The Company maintains a revolving credit agreement with its primary bank which provides for borrowing to a maximum of $10,000,000, as amended December 1, 2000 which expires August 31, 2001 and bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.6% (8.22% at October 29, 2000). The Company also has a term loan with its primary bank which provides for monthly installments of $50,000 plus interest at LIBOR plus 1.4% (8.02% at October 29, 2000) through November 2003. The Company entered into an interest rate swap agreement during fiscal 1999 to hedge a notional amount equal to the remaining principal balance of the term loan. The rate is fixed at 6.77% and the agreement expires November 2003. During June 1999, the Company entered into two additional term loans each in the amount of $4,800,000 to finance the acquisition of Children's Medical Ventures, Inc. Under an amended and restated agreement with the Company's primary bank, the Company entered into a five year term loan which is payable in monthly installments of $80,000 plus interest at LIBOR plus 1.8% (8.42% at October 29, 2000) and expires during June 2004. The Company also entered into a five year term loan with another bank which is payable in monthly installments of $80,000 plus interest at LIBOR plus 1.6% (8.22% at October 29, 2000) and expires during June 2004. Page 10 of 19 11 Pursuant to the terms of the amended and restated bank agreements and the new term loan agreements, 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 OBLIGATIONS CONSIST OF:

Page 11 of 19 12 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 second quarter of fiscal 2001 increased by approximately $3.0 million or 29% to $13.5 million compared to net sales of approximately $10.5 million for the second quarter of fiscal 2000. Sales to international and Original Equipment Manufacturer ("OEM") customers were primarily responsible for the growth in overall sales. International sales grew approximately 72% over the second quarter of the prior fiscal year while sales to OEM customers increased approximately 64% over the second quarter of the prior fiscal year. Net sales for the first six months of fiscal 2001 increased by approximately $7.9 million or 44% compared to the first six months of the prior year. Sales increased in nearly all markets for the company's products including the domestic hospital marketplace, international markets and sales to OEM customers. Cost of products sold as a percentage of net sales was 48% for the second quarter of fiscal 2001 compared to 42% for the second quarter of fiscal 2000. Lower than anticipated domestic sales volume and gross margins and increased costs for components used in the Company's products were the primary cause of the increase in cost of sales. Cost of products sold as a percentage of net sales was 45% for the first six months of fiscal 2001 compared to 42% for the first six months of the prior year due to the second quarter increase in cost of products sold. The Company expects that component cost increases, driven by the tight supply pressures, will continue to affect cost of products sold during the remainder of the fiscal year while cost of products sold in the domestic hospital marketplace should begin to return to normal levels. The Company is pursuing purchasing or design alternatives and other product cost reductions to improve its gross profit. Research and product development ("R&D") spending increased by 1% to approximately $1,048,000 for the second quarter of fiscal 2001 compared to the second quarter of the prior year. R&D spending increased by approximately $144,000 or 7% for the first six months of fiscal 2001 compared to the first six months of the prior fiscal year. The increase in R&D expense was primarily attributable to increased salaries and related benefits, increased costs for outside professional services and increased travel and entertainment expenses. R&D expenses as a percentage of sales for the quarter and six months ended October 29, 2000 were 7.7% and 8.3% respectively, compared to 9.9% and 11.1% for the corresponding periods of the prior year. The addition on June 30th of the prior year of Children's Medical Ventures, Inc. ("ChMV"), which is not an R&D intensive business, lowered the quarter-to-quarter comparison for the Company. Management expects R&D spending to approximate 8% to 9% of sales for fiscal 2001. Selling, general and administrative ("S,G&A") expenses as a percentage of sales improved to 34.6% in the second quarter of fiscal 2001 compared to 37.2% in the second quarter of fiscal 2000. S,G&A spending increased approximately $764,000 or 20% for the second quarter of the current year compared to the second quarter of the prior year on the increase of 29% in revenue. S,G&A expenses improved to Page 12 of 19 13 34.2% of sales for the six months ended October 29, 2000 compared to 39.2% for the first six months of the prior fiscal year. S,G&A expenses increased approximately $1.8 million or 25% for the first six months of the current fiscal year compared to the prior fiscal year on the revenue increase of 44%. Selling expenses, which accounted for the majority of the increase in S,G&A expenses for both the quarter and six months ended October 29, 2000, increased primarily as a result of the higher sales volume and the incremental sales staff required to support the Company's pulse oximetry hospital conversion programs, and increased spending for advertising. General and administrative expenses accounted for approximately 21% of the overall increase in S,G&A for both the quarter and six months ended October 29, 2000 as a result of increased salaries and related benefits and increased legal, financial and insurance expenses. Interest expense decreased approximately $45,000 for the second quarter of fiscal 2001 compared to the second quarter of the prior fiscal year. Term debt reduction partially offset by increases in the revolving credit facility was responsible for the decrease in interest expense. Interest expense for the first six months of fiscal 2001 increased approximately $19,000 compared to the first six months of fiscal 2000. Interest expense for the first quarter of the prior fiscal year included only one month of debt associated with the acquisition of ChMV on June 30, 1999. Goodwill amortization for the second quarter of both fiscal 2001 and 2000 was approximately $77,000. Goodwill amortization increased approximately $52,000 for the first six months of fiscal 2001 compared to the first six months of fiscal 2000 due to the full quarter effect in the first quarter of the current year of the amortization associated with the ChMV acquisition. Income tax expense for the quarter and six months ended October 29, 2000 was $338,000 and $909,000 respectively, compared to $265,000 and $288,100 for the quarter and six months ended October 31, 1999 as a result of higher pre-tax earnings and an increased effective tax rate. The effective income tax rate for fiscal year 2001 was 35.5% compared to 32.0% for the first half of fiscal year 2000 as a result of reductions in certain income tax benefits. The Company anticipates that it will fully utilize effectively all of its net operating loss carryforwards and business tax credits for federal income tax purposes by the end of the fiscal year. Net income for the second quarter of fiscal 2001 increased by 9.3% to approximately $615,000 or $0.07 per diluted share compared to approximately $563,000 or $0.07 per diluted share for the second quarter of fiscal 2000. Net income for the first six months ended October 29, 2000 increased by 170% to approximately $1,653,000 or $0.19 per diluted share compared to income before the cumulative effect of a change in accounting principle of approximately $612,000 or $0.08 per diluted share for the six months ended October 31, 1999. The prior year was impacted by the adoption of an accounting standard requiring the expensing of start-up costs previously capitalized, a one-time charge of approximately $224,000 or $0.03 per diluted share. This resulted in net income of approximately $388,000 or $0.05 per diluted share for the first six months of the prior fiscal year. Except for orders pursuant to long-term 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. Page 13 of 19 14 LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $17.8 million at October 29, 2000 compared to $17.5 million at April 30, 2000. Increases in accounts receivable, inventories and prepaid expenses were offset by increases in accounts payable and borrowings under the revolving credit facility, and a decrease in deferred income taxes. The Company's current ratio was 2.1 to 1 at October 29, 2000 compared to 2.6 to 1 at April 30, 2000. Approximately $1.6 million of cash was used by operating activities for the six months ended October 29, 2000 compared to approximately $513,000 for the first six months of the prior fiscal year. Increases in inventories and accounts receivable, partially offset by increases in accounts payable and earnings before deferred taxes, depreciation and amortization accounted for the majority of cash used from operations. Approximately $2.8 million was provided from financing activities during the first six months of fiscal 2001 compared to approximately $10.3 million for the first six months of the prior fiscal year. During the first quarter of fiscal 2000, the Company borrowed approximately $9.6 million to finance the acquisition of Children's Medical Ventures, Inc. Funds provided from financing activities for the first six months of fiscal 2001 were primarily related to additional borrowings under the revolving credit facility for working capital requirements, partially offset by principal payments under term debt agreements. 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 2001. In addition, approximately $3.3 million of additional proceeds may potentially be realized from the exercise of the Company's Class B Warrants, which are callable under specified conditions, exercisable at $5.85 per share and, as amended, expire on December 8, 2001. Management believes that additional funds, if needed, are obtainable on commercially reasonable terms. 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 delay or loss of business. The Company does not intend to update publicly any of the forward looking statements contained herein. Page 14 of 19 15 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 3, 2000 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 August 23, 2000, (iii) Such nominees were elected. (c) Matters voted upon at the Meeting were as follows:

Page 15 of 19 16 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 October 29, 2000. Page 16 of 19 17 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 12, 2000 s/William J. Lacourciere ----------------- --------------------------- William J. Lacourciere Chairman of the Board and Chief Executive Officer Dated: December 12, 2000 s/Joseph A. Vincent ----------------- --------------------------- Joseph A. Vincent, CMA Executive Vice President and Chief Financial Officer Page 17 of 19 18 INDEX TO EXHIBITS PAGE 27 Financial Data Schedule 19 Page 18 of 19

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