10-Q 1 y58349e10-q.txt NOVAMETRIX MEDICAL SYSTEMS INC. 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 January 27, 2002 ----------------- [ ] 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: 8,809,906 shares issued and outstanding as of February 28, 2002 Page 1 of 50 Index to Exhibits at Page 15 NOVAMETRIX MEDICAL SYSTEMS INC. INDEX

Page 2 of 50 PART I - FINANCIAL INFORMATION NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited). Page 3 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited). Page 4 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited). Page 5 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)

See notes to condensed consolidated financial statements (unaudited). Page 6 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited). Page 7 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JANUARY 27, 2002 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 accounting principles generally accepted in the United States ("U.S. GAAP") 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 U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. 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 29, 2001. NOTE 2 - RESTRUCTURING AND OTHER CHARGES: During the fourth quarter of fiscal 2001, approximately $4.25 million was charged against earnings as a result of certain strategic and operating changes initiated by the Company's management and the write-off of an uncollectible account receivable. The restructuring and other charges consisted primarily of a write-down of inventory of $2.3 million, $700,000 of severance costs, $500,000 to settle certain existing litigation, $300,000 for the closing costs associated with the Company's Redmond, Washington facility and $280,000 for an uncollectible account receivable. Approximately $1.2 million remained in accrued liabilities as of April 29, 2001. During the first nine months of fiscal 2002, the Company paid approximately $367,000 of accrued severance costs and terminated an additional 15 employees. Also, approximately $189,000 of litigation related expenses and $118,000 of miscellaneous other costs have been paid. The remaining accrued liability is approximately $535,000 as of January 27, 2002. NOTE 3 - TRANSACTION COSTS: On December 12, 2001, the Company announced that it had entered into a definitive merger agreement with Respironics, Inc.under which Respironics would acquire the Company in a stock-for-stock transaction. A meeting of the Company's stockholders to vote on the proposed merger is scheduled for April 9, 2002. In conjunction with the proposed merger, the Company incurred expenses of $1,266,737 during the third quarter of fiscal year 2002. These expenses are primarily comprised of investment banking fees and legal expenses. NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). Under this statement, goodwill is no longer amortized but rather subjected to annual impairment tests. The Company adopted the statement in the first quarter of fiscal 2002, and as such, discontinued the amortization of its goodwill. Had the Company applied the Page 8 of 50 non-amortization provisions of the statement at the beginning of the first quarter of fiscal 2001, net income for the nine months ended January 28, 2001 would have been $148,000 or $0.02 per diluted share higher than reported. There has been no impairment of goodwill to date. The Company also adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) and its related amendments. This statement requires companies to recognize all derivative financial instruments in their financial statements at fair value regardless of the purpose or intent for holding the instrument. The adoption of FAS 133 had a nominal effect on the Company's financial statements. 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. The following table sets forth the denominators used in the calculation of basic and diluted earnings per share:

Page 9 of 50 NOVAMETRIX MEDICAL SYSTEMS INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Results for the third quarter of fiscal 2002 were affected by the Company's pending merger with Respironics, Inc. (NASDAQ:RESP). Net income for the third quarter was approximately $181,000 or $0.02 per diluted share, including transaction charges, compared to approximately $760,000 or $0.09 per diluted share reported for the third quarter of fiscal 2001. Transaction expenses of approximately $1,267,000 consisted primarily of investment banking and legal fees. Without the transaction expenses, net income for the third quarter of fiscal 2002 would have have been $998,000 or $0.11 per diluted share. Net income for the first nine months of fiscal 2002 was approximately $1,904,000 or $0.21 per diluted share ($2,721,000 or $0.30 per diluted share before transaction expenses) compared to net income of approximately $2,413,000 or $0.27 per diluted share reported for the first nine months of the prior fiscal year. Net income for the quarter and nine months ended January 28, 2001 would have been $808,000 or $0.09 per diluted share and $2,561,000 or $0.29 per diluted share, respectively, had the Company adopted FAS 142 eliminating the amortization of goodwill at the start of fiscal 2001. Net sales for the third quarter of fiscal 2002 were $12.5 million compared to net sales of approximately $14.1 million for the third quarter of fiscal 2001. Domestic sales were planned to be below prior year levels as the Company realigned its resources to focus on its more profitable cardiopulmonary products which provide a substantial growth opportunity. As expected, this strategic change contributed to increased net income before transaction expenses compared to the third quarter of the prior year. International sales also decreased slightly from the third quarter of the prior year. Sales to Original Equipment Manufacturer ("OEM") customers for the third quarter of fiscal 2002 decreased from the prior year due to the temporary reduction in demand of one customer due to an inventory reduction initiative by that partner. OEM sales to this customer, and as a whole, have returned to normal levels. Sales of Children's Medical Ventures ("ChMV") products continued to produce solid growth increasing by 26% for the third quarter of fiscal 2002 compared to the prior year. Net sales for the first nine months of fiscal 2002 were approximately $37.3 million compared to approximately $40.2 million for the first nine months of the prior year. Decreases in domestic and international sales were partially offset by increases in ChMV and OEM sales. Cost of products sold as a percentage of net sales was 46% for both the third quarter and first nine months of fiscal 2002 compared to 45% for the corresponding periods of fiscal 2001. The increase in cost of products sold as a percentage of sales was primarily product mix related resulting from reduced sales in the domestic hospital marketplace as planned. The Company is continuing its efforts to reduce costs and enhance its gross profit as a percentage of sales through manufacturing efficiencies, purchasing alternatives and redesign initiatives. Page 10 of 50 Research and product development ("R&D") spending increased by $29,000 or 3% to approximately $1,131,000 for the third quarter of fiscal 2002 compared to the third quarter of the prior year. R&D spending increased by approximately $158,000 or 5% to $3,417,000 for the first nine months of fiscal 2002 compared to the first nine months of the prior fiscal year. The increase in R&D expense for both periods was primarily attributable to increased salaries and related benefits and spending for clinical research. Partially offsetting these increases were decreases in facilities costs resulting from the closing of the Company's Redmond, Washington office during June 2001, as well as travel and entertainment expenses and outside professional services. Selling, general and administrative ("S,G&A") spending decreased approximately $1.1 million or 21% for the third quarter of the current fiscal year compared to the third quarter of the prior year. S,G&A expenses for the nine months ended January 27, 2002 decreased by approximately $1.7 million or 12% compared to the first nine months of the prior year. Reductions in S,G & A expenses for both the three month and nine month periods were achieved in all areas including sales, marketing, service and general and administrative with the greatest impact coming from the reorganization of the domestic sales force at the beginning of the fiscal year in conjunction with our strategic product refocus. The Company has continued to improve its operating efficiencies overall. Salaries, commissions and related benefits, travel and entertainment, legal and accounting and other professional services were primarily responsible for the reductions in expenses for both periods. Interest expense decreased by approximately $201,000 or 73% and $432,000 or 58%, respectively, for the quarter and nine months ended January 27, 2002 compared to the corresponding periods of the prior year. The reduction in interest expense is related to lower levels of outstanding debt and reduced interest rates. The Company has reduced its debt by $7.7 million during the past twelve months primarily from operating results, and improvements in accounts receivable and inventory management. Goodwill amortization decreased by approximately $74,000 and $229,000, respectively, for the quarter and nine months ended January 27, 2002 as compared to the corresponding periods of the prior fiscal year. During the first quarter of fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which eliminates the requirement to amortize goodwill. Income tax expense for both the third quarter and first nine months of fiscal 2002 and fiscal 2001 reflects an estimated effective tax rate of 35.5%. The effective tax rate includes benefits from R&D tax credits and the Company's Foreign Sales Corporation. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $18.5 million at January 27, 2002 compared to $17.0 million at April 29, 2001 and current ratios of 2.9 to 1 and 2.1 to 1, respectively. The increase in working capital was primarily attributable to cash generated by operating activities of $6.7 million partially offset by repayments toward the revolving credit line facility aggregating $4.2 million in the nine month period. Page 11 of 50 Cash provided by operating activities was approximately $6.7 million for the nine months ended January 27, 2002 compared to cash used of approximately $267,000 for the first nine months of the prior fiscal year. The improvement in cash from operations of approximately $7.0 million is primarily related to decreases in accounts receivable and inventories, partially offset by decreases in accrued expenses, which includes accrued restructuring costs. The Company believes that continued operating improvements will lead to further increases in cash from operations during the remainder of fiscal 2002. Cash provided by operations is expected to be the principal source of capital and sufficient to fund the Company's requirements for the remainder of fiscal 2002 and the next fiscal year. In addition, approximately $3.2 million of proceeds have been realized subsequent to the end of the third quarter from the exercise of the Company's Class B Warrants. The warrants were exercisable at $5.85 per share and expired on March 8, 2002. The Company also has a $10 million revolving credit agreement with $9.5 million of borrowings available as of January 27, 2002. Management believes that additional funds, if needed, are obtainable on commercially acceptable terms. FORWARD LOOKING INFORMATION This Quarterly Report contains forward looking statements about the Company's projected operating results and the proposed merger with Respironics, Inc. The Company's ability to achieve its projected results and to consummate the proposed merger transaction 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, an unanticipated delay or loss of business, or unanticipated market conditions that may impact the proposed merger. The Company does not intend to update publicly any of the forward looking statements contained herein. Page 12 of 50 PART II- OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits: The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the attached Index to Exhibits. (b) Current Reports on Form 8-K: On December 18, 2001, the Company filed a Current Report on Form 8-K to report that it had entered into an Agreement and Plan of Merger with Respironics Holdings, Inc., a subsidiary of Respironics, Inc., pursuant to which the Company would be acquired. Page 13 of 50 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: March 12, 2002 s/William J. Lacourciere -------------- ------------------------ William J. Lacourciere Chairman of the Board and Chief Executive Officer Dated: March 12, 2002 s/Joseph A. Vincent -------------- ------------------- Joseph A. Vincent, CMA Executive Vice President and Chief Financial Officer Page 14 of 50 INDEX TO EXHIBITS

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NOVAMETRIX MEDICAL SYSTEMS INC 10-Q