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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended April 29, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from to
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Commission file number 20-8969
NOVAMETRIX MEDICAL SYSTEMS INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-0977422
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Technology Drive
Wallingford, Connecticut 06492
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(Address of Principal Executive Offices) (Zip Code)
(203) 265-7701
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock,
$.01 par value Class B Warrants
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(Title of class) (Title of class)
Page 1 of 109 pages
Exhibit Index at page E-1.
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Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant. The aggregate market value shall
be computed by reference to the price at which the common equity was sold, or
the average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
Aggregate market value as of June 29, 2001 ............ $47,482,816
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value, as of June 29, 2001 .. 8,743,900 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents incorporated by reference herein and the
Part of the Form 10-K into which the document is incorporated:
Proxy Statement to be dated on or about August 24, 2001 -- Part III
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ITEM 1. BUSINESS.
GENERAL
Novametrix Medical Systems Inc. ("Novametrix" or the "Company"), a
Delaware corporation, is the world's premier provider of non-invasive
cardiopulmonary (heart and lung) monitors and sensors, and developmental care
products and services to the critical care marketplace. With a record of
creating industry-leading technology and concepts since its inception in 1978,
Novametrix today offers solutions to many of the clinical, technological and
budgetary problems faced by its healthcare customers. Novametrix sells these
products and services principally to hospitals around the world through a
network of direct and independent distribution channels.
Revenues are derived from one industry segment, including product sales
to the four principal areas summarized below, each of which addresses the
particular needs of our various customers. Our products relating to each of
these areas are described in greater detail later in this section.
1. CARDIOPULMONARY PATIENT MONITORS - Since 1979, when the
Company launched its revolutionary Pneumogard monitoring
system, providing mean airway pressure measurements in infants
with serious respiratory conditions, Novametrix has produced a
number of non-invasive monitoring devices which measure
important cardiopulmonary patient parameters. In its current
product offering, Novametrix continues to innovate, selling
stand-alone patient monitors that uniquely and non-invasively
measure such physiologic parameters as cardiac output,
pulmonary deadspace, and carbon dioxide ("CO(2)") production,
while continuing to lead the way with oximetry, capnography
and transcutaneous blood gas monitoring. These monitors, used
in various hospital settings including the operating room,
intensive care units, emergency departments and for patient
transport, provide clinicians with vital information that
improves the quality of patient care while helping to reduce
the hospital length of stay and operating costs.
2. CAPITATED OXIMETRY CONVERSION PROGRAMS - The pulse oximeter,
which measures a patient's pulse rate and blood oxygen levels,
has become a standard of care in most patient monitoring
situations. With the use of disposable, single-patient use
sensors by many hospitals, it is also an area of high and
increasing operating expense for hospitals. For a fraction of
those operating costs and with no capital expenditure by the
customer, hospitals can upgrade to Novametrix'
state-of-the-art pulse oximeters with reusable sensors under
the Novametrix Capitated Oximetry Conversion Program. The
program provides an unconditional guarantee for the sensors
and monitors over the life of the contract, for a fixed,
predictable cost which is often just a fraction of the
hospital's prior spending levels for disposable sensors alone.
3. PARTNER AGREEMENTS - Novametrix has numerous agreements with
many of the leading patient monitoring companies in the world
including GE Medical Systems, Puritan Bennett, Siemens Medical
Systems, Datascope, Spacelabs Medical Systems, Zoll Medical,
Fukuda Denshi and Dixtal Biomedica. These companies utilize
our sensors and electronics in their products which include
multi-parameter monitoring systems, ventilators and
defibrillators. The use of our unique technology by these
companies in their products is not only an endorsement of our
technology, but also
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helps to establish these leading-edge parameters as standards
of care. It also provides an opportunity for Novametrix to
participate in the sale of multi-parameter monitors,
defibrillators, ventilators, etc., all of which are product
offerings that the Company does not produce on its own.
The Company's original equipment manufacturer ("OEM") strategy
gives it a much broader access to the market than it could
achieve on its own. The additional modules placed in the field
also provide a natural market for our follow-on sensors and
accessories. The ability to interface our sensors with the
monitors of our OEM partners is important in a market that
views standardization as an additional method of weeding
excess costs out of the healthcare system. The Company also
leverages the expanded distribution capabilities of some of
its partners, such as GE Medical Systems and Puritan Bennett,
to access the market. Considering its expansive network of OEM
customers and its leading position in stand-alone monitors,
Novametrix is the world leader in providing cardiopulmonary
monitoring technology to the healthcare marketplace.
4. CHILDREN'S MEDICAL VENTURES ("ChMV") - Acquired by Novametrix
in June 1999, ChMV is the world's leading provider of
developmental care products and services to the Neonatal and
Pediatric departments of the hospital. ChMV offers a wide and
growing assortment of developmental care and baby care
products that assist clinicians in providing improved quality
of care for premature and sick babies, helping to improve
medical outcomes, to reduce current and future costs and to
minimize therapy in future years. ChMV is very well known in
the neonatal intensive care unit ("NICU") of the hospital, and
has a solid history of growth. ChMV's separate and uniquely
capable pediatric and neonatal ICU sales distribution
organization also represents Novametrix monitoring products to
that market segment.
With a unique focus and distinctive products and services in each of
these areas, Novametrix is well positioned to work with its customers to help
drive down operating costs while improving the quality of patient care.
PRODUCTS
Novametrix' line of cardiopulmonary patient monitors includes: the
Company's newest breakthrough product, the NICO(R)("NICO"), which among other
parameters non-invasively measures cardiac output; the revolutionary volumetric
CO(2) monitor, CO(2)SMO Plus!(TM) ("CO(2)SMO PLUS"); our state-of-the-art
MARSpO(2)(TM) ("MARS") motion artifact rejection oximetry product; capnographs;
and transcutaneous blood gas monitors. Developmental care products include a
variety of products specifically designed for the care of premature infants.
NICO CARDIOPULMONARY MONITOR.
MEDICAL BACKGROUND: Cardiac Output (the amount of blood pumped by the
heart per minute) and lung function (the level to which the lungs are
transferring oxygen and carbon dioxide to and from the blood stream) are vital
parameters in the treatment of critical care patients. For example, with
mechanically ventilated patients clinicians must carefully balance cardiac
output and ventilator settings, and without sufficient data, selected treatments
may actually be deleterious to a patient. Given this inter-relationship between
heart and lung function in delivering oxygen to human tissue, understanding each
of these functions allows clinicians to
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make improved decisions regarding the appropriate treatment options for these
patients. Cardiac output has traditionally been measured through the use of a
highly invasive thermodilution technique, which requires insertion of a
Swan-Ganz catheter through the heart and into the pulmonary artery ("PA") and
poses a high level of risk to the patient. Another alternative for measuring
cardiac output, the original direct Fick method, also requires invasive
measurements and labor-intensive manual tasks, and is a well-accepted standard
reference technique used to evaluate all other means of determining cardiac
output.
The Company's newest monitor, NICO, is the first commercially available
device to provide clinicians with a complete comprehensive cardiopulmonary
picture of a patient including the measurement of cardiac output non-invasively,
using the indirect Fick partial rebreathing technique.
In addition to cardiac output, NICO provides other critical patient
variables including stroke volume, cardiac index, pulmonary deadspace, total
CO(2) elimination, end-tidal CO(2), respiration, oxygen saturation, and
respiratory mechanics parameters (see descriptions below).
Clinical applications of our new device include monitoring patients
during surgery, in the emergency room and in the intensive care unit. Patient
safety can be enhanced by measuring cardiac output and pulmonary function on all
patients and eliminating the documented hazards of the use of PA catheters which
include infection, embolism and heart or lung tissue damage. NICO is very simple
to use and eliminates the costs, risks and complications associated with the use
of PA catheters. Further, since NICO is non-invasive and easy to operate, the
use of this technology may be expanded to other applications where cardiac
output measurements were previously deemed too risky or costly.
The entire NICO system, including the disposable rebreathing valve and
sensor, is covered by numerous patents and patents pending and is the result of
many years of work by our research and development group.
VOLUMETRIC CO(2) MONITOR.
MEDICAL BACKGROUND: Continuous volumetric CO(2) information provides an
objective measurement to guide the appropriate management of a ventilated
patient as well as the efforts to wean the patient from the ventilator. These
measurements compare favorably to the subjective information currently used by
many clinicians. The clinical management of proper pressure and flow of airway
gases being delivered to a mechanically ventilated patient's lungs allows
therapists to maximize ventilator support and to wean a patient from costly
mechanical ventilation to "spontaneous" breathing at the clinically appropriate
time. Removing the patient from the ventilator earlier reduces potential damage
to the lungs, as well as the length of the patient's stay in the hospital and
the associated costs.
The Company's CO(2)SMO PLUS is the first and only volumetric CO(2)
monitor integrating airway flow measurements with capnography for continuous
bedside monitoring of mechanically ventilated patients. The CO(2)SMO PLUS
monitor provides continuous, non-invasive measurements of flow, pressure and
volume in a patient's airway, as well as
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measurements of other pulmonary mechanics including CO(2) elimination and
arterial oxygenation. The addition of the first combined mainstream CO(2)
adapter/flow sensor provides continuous measurements of pulmonary deadspace (the
portion of the patient's lungs that does not participate in gas exchange) and
CO(2) elimination (the volume of CO(2) exhaled by the patient), two parameters
never before available continuously at the bedside. The use of these parameters,
and the impact of each parameter on patient ventilation, provides the clinician
with important feedback to optimize the patient's care. The use of the CO(2)SMO
PLUS enhances patient care by minimizing the trauma, length of stay and costs
associated with mechanical ventilation.
The Company also sells a family of disposable airway sensors necessary
for the operation of its CO(2) monitoring products.
OTHER GAS MONITORS: CAPNOGRAPHY, OXIMETRY, TRANSCUTANEOUS.
MEDICAL BACKGROUND: Levels of oxygen and carbon dioxide in the blood
are important indicators of the condition of critically ill or injured patients.
These levels are particularly important to doctors, nurses, therapists and other
clinicians who are managing patients undergoing anesthesia in the operating
room, who are assessing patients in the emergency room, and who are monitoring
patients in the various intensive care units in the hospital. Healthy people
have a normal range of oxygen and CO(2) levels in their blood, lungs and other
tissue. In the past, determination of a patient's oxygen and CO(2) levels
involved an invasive technique of withdrawing blood samples from the patient's
artery and waiting for laboratory analysis of the samples. The Company's
products offer healthcare providers the alternative of non-invasive, continuous
and immediate measurement of oxygen and CO(2) in the patient's blood. Our other
gas monitoring products utilize three different technologies described below,
each of which is suitable for various applications.
CAPNOGRAPHS. The Company's capnographs (or end-tidal CO(2) monitors)
provide continuous, non-invasive measurement and display of the amount of CO(2)
in each breath exhaled by the patient. Clinically, end-tidal CO(2) levels have
been correlated to a patient's arterial blood CO(2) levels. These measurements
provide a simple, non-invasive method of estimating the CO(2) levels of the
patient. Applications for capnographs include (i) intubation verification - the
verification of the introduction of an airway tube into the trachea (air tube)
rather than the esophagus (food tube) and the verification of an open and
unobstructed airway; (ii) extubation detection - the disclosure of the
accidental dislodging from the trachea of an airway tube; (iii) ventilation
management through the disclosure of ventilator malfunctions and the proper
adjustment of mechanical ventilation to match a patient's condition and needs;
and (iv) verification of the effectiveness of cardiopulmonary resuscitation
(CPR).
The Company's capnographs utilize a form of infrared spectrometry (a
method of analyzing gas content by measuring the amount of infrared energy
absorbed) developed by the Company to measure levels of expired CO(2) throughout
the patient's respiratory cycle. These monitors provide both a graphical and
digital display of CO(2) levels and respiratory rate. The reliability and
accuracy of capnography have made its use a rapid indicator of proper and
continuous intubation, obstructions in the airway and pulmonary efficiency in
eliminating CO(2). In addition, end-tidal CO(2) and respiratory rate
measurements facilitate proper and cost-efficient ventilator use. In recognition
of its accurate measurement of clinically significant facts, as well as the
added degree of safety that it affords patients, capnography has been
recommended for use in the operating room by the American Society of
Anesthesiologists and in the intensive care unit by the Society of Critical Care
Medicine.
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The Company has two bedside capnographs: the CAPNOGARD(R), and the
CO(2)SMO(R), a combined capnograph and pulse oximeter. These "mainstream" (on
the airway) capnographs are designed to take measurements at the patient's
airway through infrared measurements as compared to "sidestream" measurements of
exhaled breath which involve the drawing of samples through tubes connected to
bedside monitors and which are susceptible to moisture and other secretion
contaminants. All models utilize a durable solid-state sensor developed by the
Company.
The Company's TIDAL WAVE(TM) monitor is the first commercially
available hand-held, battery operated mainstream CO(2) monitor with a graphical
waveform. Applications for this monitor include areas outside the traditional
bedside setting, such as emergency medical services, where a smaller, portable
monitor is required. The Company also offers the TIDAL WAVE Sp, a hand-held
monitor which provides both capnography and pulse oximetry.
PULSE OXIMETERS. The Company's pulse oximeters provide a continuous and
non-invasive measurement and display of pulse rate and arterial blood oxygen
saturation through the detection and measurement of infrared light absorbed by
hemoglobin in the blood. The Company's new MARS technology provides superior
performance during periods of motion or low perfusion (insufficient blood flow).
Reusable finger and multi-position sensors (Y-Sensor(TM)) are available for
adult, pediatric and neonatal applications and eliminate the use of costly
disposable sensors.
Pulse oximeters have been clinically demonstrated as safe, accurate and
cost-effective for the determination and trending of levels of blood oxygen
saturation and pulse rates. Applications for these monitors are widespread since
the level of oxygen in a patient's blood can be as important a vital sign of a
patient's condition as the patient's temperature, blood pressure, respiratory
rate and electrocardiogram. Pulse oximetry is used in many departments of the
hospital, including the operating room by anesthesiologists, emergency rooms and
intensive care units by nurses and respiratory therapists, and neonatal
intensive care units by neonatologists. Additional applications include inter-
and intra-hospital transport situations and clinical applications in surgical
centers, doctors' offices and clinics during outpatient procedures.
The Company has a family of pulse oximeters designed to meet the
individual needs of clinicians in a variety of settings. The Model 2001 MARS is
the third generation of pulse oximetry technology from Novametrix that
significantly enhances performance during motion or low perfusion. MARS provides
exceptional performance by incorporating technological breakthroughs in digital
signal processing, which allow more advance software algorithms to be executed.
The use of this technology assists in minimizing the frustrations associated
with nuisance alarms, which occur with most traditional pulse oximeters, during
those challenging clinical conditions when high levels of motion or poor
perfusion are present.
The Company's OXYPLETH(R) monitor utilizes earlier generation
technology and provides high visibility of the plethysmogram (a graphic display
of arterial pulse) through the use of digital technology combined with advanced
software developed by the Company. This full featured product is offered to
customers seeking superior oximetry performance in a more cost-sensitive
environment. The Model 515B and Model 515C (with plethysmogram) pulse oximeters
utilize the same basic technology and software as our OXYPLETH models to provide
the same oxygen saturation and pulse rate information but with fewer available
added features.
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Our family of pulse oximeters also includes battery operated hand-held
pulse oximeters, the Models 512 and 513. The lightweight (less than 1 pound)
design and portability of these monitors permit wide applications throughout the
hospital, as well as in non-hospital locations including doctors' offices,
clinics, homecare and transport vehicles.
Each oximeter utilizes the Company's reusable Superbright(TM) sensors,
which provide safe and accurate results on all types of patients, including
neonates and poorly perfused patients.
The Company also offers a unique Sensor Management Program designed to
reduce hospital operating costs. Under this program, typically three years or
longer, hospitals are able to achieve significant operating cost reductions by
switching from disposable oximetry sensors to Novametrix reusable sensors. The
program capitates (or limits) contract expenditures while providing the hospital
with new pulse oximetry monitors, sensors, and accessories, each of which is
warranted over the life of the contract.
TRANSCUTANEOUS BLOOD GAS MONITORS. The Company's transcutaneous
(through the skin) blood gas monitor provides continuous and non-invasive
measurements of oxygen and CO(2) levels in the skin tissue of patients. This
monitor utilizes dual parameter sensors attached to the patient's skin surface
to measure the amount of oxygen and CO(2) diffusing through the skin. Based upon
the magnitude of the diffusion of the blood gas molecules, the monitor converts
the sensor readings into a value corresponding to the oxygen or CO(2) at the
patient's skin surface and displays the information on the monitor. Premature
and other critically ill newborn infants are the primary beneficiaries of
transcutaneous monitoring. In view of their limited blood supply, frequent
invasive blood sampling is traumatic and unsatisfactory for these patients.
The TCO(2)M(R) Model 860 is a lightweight, portable unit with a simple
menu system which guides the user through set-up and operation. The TCO(2)M is
the first monitor of its kind to provide on-screen graphical trending
information allowing patient data to be reviewed directly at the bedside.
TCO(2)M accepts combination or single oxygen and CO(2) sensors for optimum
versatility.
DEVELOPMENTAL CARE PRODUCTS AND PROGRAMS.
MEDICAL BACKGROUND: Technology advances which support very premature
("preemie") infants until they have sufficiently developed, often provide a
harsh environment for the immature baby and lead to developmental issues
associated with the long length of stay in the NICU. Environmental issues and
improper handling can lead to sleep deprivation, diminished growth, disorganized
motor activity, adverse physiologic reactions, cranial molding, joint
deformities and delays in development. The average NICU patient is handled over
200 times a day and has 130 different caregivers during their hospital stay. The
cost of caring for premature infants is significant. Infants weighing less than
1,000 grams (2.2 pounds) cost hospitals an average of $140,000 per patient.
While preterm babies represent about 24% of all cases identified as poor or
problematic birth outcomes, they represent nearly 50% of the cost.
The philosophy of developmentally supportive care recognizes that these
issues exist and addresses the long-term developmental implications of care. The
Company's developmental care products and programs support this standard of care
by creating a more "uterine-like" NICU environment, promoting proper
positioning, modifying handling techniques, encouraging advocacy of the infant
by the staff and parents, and requiring staff education and training.
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The benefits of developmentally supportive care include reduced lengths
of stay, reduced days on a ventilator and supplemental oxygen, increased daily
weight gains, and decreased sedation and medication days. Developmental care
contributes to controlling costs as less agitation and increased sleep
accelerates growth and decreases length of stay. It also contributes to
decreased incidents of complications such as IVH, pneumothorax and BPD, and
improves short-term outcomes.
Children's Medical Ventures, a Novametrix company, develops and markets
products and programs which help hospital staff and parents care for premature,
ill, and full-term babies. The Company's products are comprised primarily of
developmental care products, baby care products, medical equipment and
disposables, educational programs and sales to parents.
The Company's developmental care products and programs include:
SnuggleUps(TM), a nesting aid that promotes physiologic stability; Bendy(TM)
Bumper, a bendable positioning aid that provides boundaries and containment;
WeePee(TM) Diaper, appropriately-sized for preemies to minimize hip abduction;
Wee Thumbie(TM) Pacifier, modeled after the size and shape of a preemie thumb;
Enteral-Only Extension sets, which provide a safer method of enteral feeding;
WeeSpecs(TM) eye protectors, and Heel Hugger infant heel warmers, hourglass
shaped to conform and stay in place. The Company also provides education
programs including Wee Care(TM), a comprehensive training in developmental care
for the entire NICU staff; and Preemie For A Day(TM), an experiential learning
program.
Other products offered by the Company include infusion sets, nasal
aspirators, specialty feeding products, gel products for softened positioning
support, saline wipes and educational products such as positioning dolls and
books.
SALES, MARKETING AND CUSTOMERS
Novametrix markets its products domestically and internationally
through direct salespersons and outside distributors and manufacturer
representatives. The Company's products are marketed primarily to hospitals for
use in operating rooms; emergency rooms; adult, pediatric, and neonatal
intensive care units; respiratory therapy departments; and patient transport.
The Company's products are also sold to physician groups, nursing homes,
surgical centers, outpatient clinics, other healthcare facilities and the
homecare market.
The Company employs a direct United States (U.S.) sales organization
and also utilizes a national distributor and several outside manufacturer
representative groups to sell its products throughout the country. Subsequent to
the end of fiscal year 2001, the Company initiated a restructuring program to
increase the focus of its domestic sales and marketing resources on its
cardiopulmonary technology while it continues to support its core oximetry
business. As a result, it eliminated certain non-essential sales and marketing
positions, reorganizing its direct U.S. sales staff to 31 personnel including 8
clinical specialists. Developmental care products and programs are sold through
a network of direct U.S. sales persons, independent representative groups and
the Company's domestic and international distributors. Typically, all of the
Company's distributors and manufacturer representatives sell other medical
instruments and products, but do not sell products which compete directly with
those offered by the Company.
On July 1, 1999, the Company entered into a three year co-marketing
agreement with GE Medical Systems Information Technology ("GE Medical"),
formerly GE Marquette Medical
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Systems, Inc., under which GE Medical would cooperate in a joint program to
market the Company's NICO monitor throughout the United States and Canada.
On June 19, 2001, the Company entered into a three-year marketing and
distribution agreement with Puritan Bennett, a business unit of Tyco Healthcare
Group LP, for the sale of the NICO cardiopulmonary monitor and related
accessories. Under the agreement, Puritan Bennett will cooperate with the
Company to market the NICO monitor throughout the United States.
On July 1, 2001, Children's Medical Ventures entered into a two-year
sole source purchase agreement with Healthtrust Purchasing Group, L.P. ("HPG"),
a group purchasing organization with approximately 650 member hospitals and
non-hospital facilities, to provide developmental care products by HPG's member
participants. Children's Medical also entered into a multi-source agreement for
certain other products.
Internationally, the Company currently employs four sales and marketing
managers and one full-time consultant and has approximately 85 outside
international distributors. The Company markets its products in over 75
countries. The Company's international net sales of products and services
constituted 33%, 32% and 37% of total net sales during fiscal 2001, 2000 and
1999, respectively. The Company is engaged in continuing efforts to improve and
expand the international distribution of its products and expects international
sales to continue to constitute a significant portion of total net sales.
Many of the countries into which the Company sells its products require
governmental approval for the sale of medical instruments. In most countries
which require approval, the approval process is shorter than that in the United
States and, generally, the Company shares the costs associated with the approval
process with its international distributors. The Company believes it has all of
the necessary approvals to sell the products which it currently distributes
internationally.
Since the Company's international sales are denominated in U.S.
dollars, exchange rate fluctuations may affect the competitiveness of the
Company's prices in foreign markets. The Company believes that fluctuations in
the strength of the U.S. dollar have had a minimal impact on its international
sales in fiscal 2001.
The Company also markets its products to original equipment
manufacturers which incorporate certain of the Company's products and
technologies in the manufacture of their own multi-parameter systems,
ventilators and other non-competing products. Generally, the Company sells its
products to OEM customers pursuant to long-term contracts which, in certain
cases, provide for the purchase of minimum quantities of products at specified
prices. The Company designs and assembles products to be sold to OEM customers
and, generally, also agrees to provide maintenance and replacement parts. The
Company continues to seek new agreements with other OEM customers and additional
agreements for other products with its current customers. However, there can be
no assurance that the Company will be successful in obtaining other long-term
OEM contracts.
No customer accounted for more than 10% of the Company's net sales in
fiscal 2001, 2000 and 1999.
Advertising of the Company's products consists primarily of displays at
medical meetings and trade shows. The Company also advertises in trade journals
and periodicals and
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cooperates in the publication of technical papers written by medical authorities
in areas relating to the Company's products.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") activities presently
are, and during the foreseeable future are expected to be, devoted primarily to
the development of new cost-effective monitor and sensor technologies and to the
enhancement of its existing products. To a lesser degree, the Company's R&D
activities also include R&D costs associated with Children's Medical Ventures.
Children's Medical Ventures requires a substantially lower investment in R&D
than that required for the development of the Company's primary electronic
sensors and monitoring products. The Company anticipates offering new products
in the future, however, there can be no assurance that the Company will
introduce new products in successive fiscal years.
For fiscal 2001, 2000 and 1999, the Company incurred R&D costs
aggregating approximately $12,656,000 of which approximately $4,493,000 was
attributable to fiscal 2001, $4,205,000 was attributable to fiscal 2000, and
$3,958,000 was attributable to fiscal 1999. For the fiscal years ended 2001 and
2000, R&D expenses included nominal amounts attributable to Children's Medical
Ventures, Inc. acquired in June 1999.
During the fourth quarter of fiscal 2001, the Company initiated a
program to close its Cascadia Division in Redmond, Washington which was
completed on June 29, 2001. The facility was principally utilized for research
and development activities. Certain of the costs associated with the closure are
included in the restructuring and other charges recorded for fiscal 2001. The
research and development portion of expenses related to this division are
included in the amounts stated in the preceding paragraph.
PRODUCTION AND SERVICE
Substantially all of the components in the Company's products,
including those designed to the Company's specifications, are manufactured by
others and then assembled by the Company. The Company's assembly operations
require a variety of electronic and mechanical components and supplies, as well
as specialized equipment which the Company owns or leases.
The Company does not have any long-term contracts with any of its
suppliers and believes that needed components and supplies are available from
alternate sources. During fiscal 2001, the Company experienced increased costs
for certain components used in its products. The price increases, created by
supply pressures, have been remedied. There can be no assurance, however, that
the Company will not be affected by price increases, or an interruption in
production or deliveries of components, supplies or equipment. Interruption of
the Company's sources of supply or quality problems with the supplied components
could have a material adverse effect on the Company's business and financial
position.
The Company provides maintenance service for its products through
service technicians who are employees of the Company and, to a lesser extent,
through independent service representatives. The Company's products utilize
modular components which have been designed for maximum maintenance
accessibility and ease of removal for repair or replacement. The Company
generally warrants its products against defects in material and workmanship,
including parts and labor, for up to one year. The costs related thereto are
recognized as incurred and are not material to the Company's financial
statements. The Company also enters into multi-
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year sales agreements under which the estimated repair costs are provided for at
the time of sale. The Company also offers extended warranty programs that may be
purchased by its customers.
BACKLOG
Except for orders pursuant to long-term OEM agreements, the Company
ships its products on a current basis and substantially all of the product
backlog at April 29, 2001 is expected to be shipped within its normal operating
cycle. As such, the Company does not consider its backlog to be a meaningful
indicator of future sales.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company holds 50 U.S. patents and has pending applications for 22
additional U.S. patents. The Company's patents primarily cover its capnography
and respiratory flow technologies which the Company believes provide it with a
competitive advantage in the marketplace. Although the Company holds patents and
has patents pending related to certain of the Company's products, the Company
does not believe that its business as a whole is or will be materially dependent
upon patent protection of these products. However, the Company will continue to
seek patents as it deems advisable to protect its research and development and
the market for its products.
Due to extensive patent coverage in the medical electronics instruments
industry and the rapid rate of issuance of new patents, certain components of
the Company's products may involve infringement of existing patents. The Company
believes that any risks presently being assumed with respect to any possible
patent infringement are reasonable business risks similar to those being assumed
by other companies in the industry.
The Company is the owner of approximately 20 trademarks in the United
States including, but not limited to, Novametrix(R), CAPNOGARD(R), CAPNOSTAT(R),
CO(2)SMO(R), CO(2)SMO Plus!(R), NICO(R), Y-Sensor(TM), SPO(2)T[CHECKMARK],
OXYPLETH(R), SuperBright(TM), PNEUMOGARD(R), TIDAL WAVE(R) and TCO(2)M(R).
Several trademarks are related to Children's Medical Ventures products.
The Company relies on trade secrets and proprietary know-how, which it
will seek to protect, in part, by confidentiality agreements with certain of its
employees, suppliers and customers. However, there can be no assurance that the
Company's confidentiality agreements, when in place, will not be breached or
that the Company would have adequate remedies for any breach. There can be no
assurance that the Company's trade secrets or proprietary know-how will not
otherwise become known or be independently discovered by competitors.
COMPETITION
The electronic medical instrumentation industry is extremely
competitive. The Company considers the most significant competitive factors in
its industry to be product capability and performance (including reliability and
ease of use), price and terms of purchase, availability of prompt and effective
maintenance, and an ability to introduce new and improved products with
regularity. The Company believes that it competes effectively in each of these
areas.
While the Company's line of monitoring products is generally available
from several of its competitors, the Company believes that its monitors provide
advantages over currently available competing products in terms of accuracy,
reliability and versatility. Additionally, what
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the Company believes to be the technological superiority in size, performance
and durability of its products provides it with a competitive advantage.
The electronic medical instrumentation industry is characterized by
rapid technological changes and advances. Although the Company believes that its
products are technologically current, the development of new technologies or
refinements of existing ones by the Company's competitors could at any time make
the Company's existing products technologically or economically obsolete.
Although the Company is not aware of any pending technological developments that
would be likely to materially and adversely affect its business or financial
position, there can be no assurance that such developments will not occur at any
time.
Although all of the Company's competitors do not market all of the
products which the Company markets, the Company estimates that it competes with
at least ten competitors. Such competitors vary in size from those which are
smaller than the Company to divisions or subsidiaries of multinational
corporations. There can be no assurance that the Company will be able to compete
successfully with its competitors, some of which also have extensive production
facilities, well-established marketing and service organizations, recognized
reputations in the electronic medical instrumentation industry and/or far
greater financial resources than the Company has or will have in the foreseeable
future.
PRODUCT LIABILITY AND INSURANCE COVERAGE
From time to time, the Company is subject to product liability claims,
suits and complaints incidental to its business. These claims, suits and
complaints are covered by insurance policies maintained by the Company, subject
to certain policy limits. In addition, certain of the Company's OEM agreements
require the Company to maintain certain levels of product liability insurance.
The Company currently maintains product liability insurance in the amount of
$5,000,000 with a $50,000 per occurrence deductible up to an aggregate annual
deductible of $250,000. The Company is not aware of any pending claims, suits or
complaints, the disposition of which, in the opinion of management, would have a
material adverse effect upon the Company's financial position, results of
operations or liquidity. The Company, however, could be materially adversely
affected by successful product liability claims, and there can be no assurance
that the Company will have sufficient resources to satisfy any liability
resulting from claims not covered by existing insurance policies.
REGULATION
The Company's products are subject to regulation in the United States
and in many of the foreign countries where the Company markets or seeks to
market its products.
Certain of the Company's products are "devices" within the meaning of
the Federal Food, Drug and Cosmetics Act. Under that Act, a manufacturer must
obtain approval by the United States Food and Drug Administration ("FDA") of
certain devices before they can be marketed in the United States. The approval
process requires that the safety and efficacy of such devices be demonstrated by
the manufacturer. The FDA has developed industry-wide consensus standards
guidance which, when applicable to products manufactured and sold by the
Company, requires the Company to submit evidence of compliance to the FDA. Under
certain circumstances, the cost of obtaining such pre-marketing approval may be
high and the process lengthy, and no assurance can be given that approval will
be obtained. While all of the products currently marketed domestically by the
Company and requiring pre-marketing clearance from the FDA
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have been so approved, there can be no assurance that the Company's products
will receive the requisite approvals to market any of its future products. Any
failure to receive approvals or non-compliance with performance standards would
have a material adverse effect on the Company's business and financial position.
There can be no assurance that the Company's products will comply with
the applicable industry-wide performance standards when and if adopted or that
the Company will receive the requisite approvals to market any of its future
products. Any failure to receive approvals or non-compliance with performance
standards would have a material adverse effect on the Company's business and
financial position.
Underwriters' Laboratories, Inc. ("UL") has established safety
standards for patient-connective electrical apparatus. These standards, or their
equivalent, have been adopted as purchase specifications by many hospitals. The
Company has obtained UL or equivalent approval with respect to certain of its
products and has applied or intends to apply for approval with respect to all
its other products to which these standards apply. In addition, state and
municipal testing agencies have imposed similar standards with which the
Company's products sold in particular areas may be required to comply. The
Company does not believe that compliance with these state and municipal
standards will involve significant expense.
Various countries in which the Company markets its products have
regulatory agencies which perform functions comparable to those of the FDA.
Compliance to international standards is a growing factor in conducting business
in such markets. Novametrix has obtained ISO 9001 (Quality System), EN46001, and
more recently, ISO 13485 (Medical Device Quality Systems) certification. By
obtaining certification to these standards, the Company and its products are in
compliance with many marketplaces including those in Europe and Canada. To date,
foreign regulations have not adversely affected the Company's business. However,
there can be no assurance that any such regulations will not have a material
adverse effect on the Company's business and financial condition in the future.
Changes within the United States healthcare market continue at a rapid
pace. The move toward managed care, and the growing influence of managed care
networks, hospital group purchasing organizations ("GPOs"), integrated delivery
networks ("IDNs") and hospital cooperatives, have had a major impact on the
healthcare industry by accelerating trends toward shorter hospital stays, the
use of outpatient facilities rather than hospitalization and by lowering annual
cost increases for healthcare spending. Today, hospitals in general have
expanded their efforts toward reducing operating costs and improving cost
controls as well as managing the purchase price of goods and services.
Additional cost saving changes, consolidation and restructuring could further
influence decision-making by hospitals, clinics and other healthcare providers,
which form the Company's customer base. These possible changes could potentially
reduce or delay capital expenditures by these providers, and could change the
users and markets for the Company's products. However, the acute care portion of
a hospital (including the operating room and intensive care unit), which is a
significant market for the Company's products, should not be greatly affected by
the trend toward the use of outpatient facilities as such outpatient facilities
generally care for patients who are not critically ill. In addition, the trend
toward managed competition may improve sales of certain of the Company's
non-disposable products which provide substantial cost savings compared to
similar disposable products sold by its competitors, and may also improve sales
of other Company products that improve patient throughput and thereby result in
shorter hospital stays.
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Although the trend toward managed competition may have a positive
impact on the Company's business by providing increased coverage for medical
procedures utilizing the Company's products, thereby increasing demand for the
Company's products, it is not possible at this time to predict what, if any,
further changes in healthcare will occur.
EMPLOYEES
During fiscal 2001, the Company took substantial steps to enhance and
broaden its management team. In May 2000, the Company hired Thomas M. Patton as
the President and Chief Operating Officer. Later in the year, the Company also
filled three key Vice President positions: Vice President - Marketing, Vice
President - Domestic Sales, and Vice President - Operations.
As of April 29, 2001, the Company had a total of 246 full-time
employees, consisting of 107 production personnel, 36 research and development
personnel, 80 sales, marketing and service personnel and 23 administrative,
managerial and financial personnel.
None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relationship with its employees to be
satisfactory.
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ITEM 2. PROPERTIES.
The Company's main plant and executive offices are located at 5
Technology Drive, Wallingford, Connecticut where it occupies approximately
53,000 square feet of office and manufacturing space under a twelve-year lease
expiring in August 2008. The lease provides for minimum annual lease payments of
$408,425, and contains one five-year renewal option and a purchase option upon
the sixth anniversary of the lease and stipulates a general inflation escalation
clause. The lease requires the Company to pay for property taxes, insurance and
repairs related to the facility.
In August 2000, the Company's subsidiary, Children's Medical Ventures,
Inc., relocated its offices to Norwell, Massachusetts from its previous location
in South Weymouth, Massachusetts. The Norwell facility comprises approximately
4,100 square feet of space under a five-year lease which expires in September
2005. The lease provides for minimum annual lease payments of $73,725 plus
taxes, insurance and other expenses and includes a five-year renewal option.
In October 2000, the Company entered into a three-year lease of
approximately 17,600 square feet of warehouse space adjacent to its main plant
and executive offices in Wallingford, Connecticut. The lease provides for
minimum annual lease payments of $79,623 plus taxes, insurance and other
expenses and includes a three-year renewal option.
The Company closed its 5,200 square foot facility in Redmond,
Washington in June 2001.
The Company believes that its facilities are well maintained, in good
operating condition and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the fourth quarter of 2001, management decided to commence action to
settle certain litigation in order to focus Company resources on operations. In
connection therewith, the Company recorded a $500,000 accrual for the estimated
costs to settle these matters.
From time to time, the Company is a party to various legal proceedings
incidental to its business. The Company believes that none of these legal
proceedings will have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
See also "Patents, Trademarks and Proprietary Rights" and "Product
Liability and Insurance Coverage" under "Item 1. Business."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock, $.01 par value (the "Common Stock"), trades
on The Nasdaq Stock Market(R) under the symbol "NMTX". The following table sets
forth the range of high and low sales prices per share for the Common Stock for
each of fiscal 2001 and 2000.
High Sale Low Sale
--------- --------
FISCAL 2001
First Quarter........................... $7.00 $4.88
Second Quarter.......................... 7.25 4.19
Third Quarter........................... 5.50 3.50
Fourth Quarter.......................... 5.44 3.88
FISCAL 2000
First Quarter........................... $5.44 $3.63
Second Quarter.......................... 4.88 3.00
Third Quarter........................... 5.88 3.38
Fourth Quarter.......................... 8.50 4.63
On July 20, 2001, the last sale price of the Common Stock as reported
on The Nasdaq Stock Market(R) was $6.05.
As of July 20, 2001, there were approximately 789 record holders of the
Common Stock. No dividends have been declared on the Common Stock since the
Company was organized. In addition, loan agreements to which the Company is a
party contain, among other provisions, various covenants restricting the
Company's ability to pay cash dividends to holders of the Common Stock.
In addition, the Company has Class B Warrants that trade on The Nasdaq
Stock Market(R) under the symbol "NMTXZ". The Warrants are each exercisable for
one share of Common Stock at an exercise price of $5.85 and are scheduled to
expire on December 8, 2001. The Warrants are callable by the Company under
specified circumstances.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating data of
the Company as of the end of each fiscal year and for each of the years in the
five-year period ended April 29, 2001.
April 29, April 30, May 2, May 3, April 27,
FOR YEAR ENDED 2001(1)(2) 2000(1)(3)(4) 1999(1) 1998 1997(5)
----------- ------------- ----------- ----------- -----------
Net Sales $54,682,263 $43,682,223 $32,864,673 $31,561,144 $28,253,750
Income Before Income Taxes,
Accounting Change and
Non-recurring Expenses 959,048 3,654,155 2,870,367 3,951,598 3,073,469
Net Income 618,677 2,241,281 2,066,667 2,903,598 4,923,559
Net Income Per Share
Basic 0.07 0.28 0.25 0.35 0.70
Diluted 0.07 0.27 0.24 0.31 0.59
Cash Dividends on Common Stock -- -- -- -- --
AT YEAR END
Total Assets 49,331,960 47,150,667 35,975,874 31,001,896 27,224,432
Working Capital 16,954,750 17,520,691 15,233,539 18,602,648 10,831,127
Long-Term Debt, less
Current Portion 3,320,000 5,850,601 2,254,071 90,881 782,275
Redeemable Preferred Stock -- -- -- -- 1,000,000
Stockholders' Equity 31,113,693 30,265,822 24,655,944 27,032,439 18,109,926
- ----------------------
(1) The above data should be read in conjunction with the consolidated
financial statements and related notes and other financial information
set forth elsewhere herein.
(2) Fiscal 2001 includes a reduction in income before income taxes and
non-recurring expenses of $4,249,883 from restructuring and other
charges recorded during the fourth quarter. Net income for fiscal 2001
was reduced by $2,741,117, or $0.31, per basic and diluted share.
(3) Fiscal 2000 includes a reduction in first quarter earnings of $223,544,
or $.03 per basic and diluted share, from the cumulative effect of a
change in accounting principle. Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities", was adopted by the
Company on May 3, 1999 and required that start-up costs previously
capitalized be written-off and future startup costs be expensed as
incurred.
(4) Reflects the acquisition of Children's Medical Ventures, Inc. on June
30, 1999.
(5) Fiscal 1997 includes income tax benefits of $4,030,000, or $0.58 per
basic share and $0.49 per diluted share, as a result of a reduction in
the Company's net deferred tax asset valuation allowance. Net income
also includes non-recurring expenses of $2,149,910, or $0.31 per basic
share and $0.26 per diluted share, pertaining to an attempted merger
and related proxy contest.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED APRIL 29, 2001 COMPARED TO YEAR ENDED APRIL 30, 2000
The Company achieved record revenues in fiscal 2001 of $54.8 million,
with earnings per diluted share ("EPS") of $0.07 for the year ($0.38 before
charges in the fourth quarter primarily associated with a restructuring and
realignment of the Company's resources). This compared to revenues in fiscal
2000 of $43.9 million and EPS of $0.27 ($0.30 before the cumulative effect of a
change in accounting principle). Results for fiscal 2000 include Children's
Medical Ventures, Inc. ("ChMV") for ten months, from the date of its acquisition
by the Company on June 30, 1999.
Management commenced and completed a comprehensive review of the
Company's operations and strategic direction in the fourth quarter of fiscal
2001, initiated various strategic and operating changes and wrote off an
uncollectible amount receivable, culminating in a charge of $4.25 million.
Approximately $2.3 million of this charge is included in cost of products sold,
and $1.95 million is reported under restructuring and other charges. Management
believes that these strategic, operating and organizational changes, as further
discussed below, will enhance the Company's prospects for financial success.
Net sales in fiscal 2001 increased by 25% to $54.7 million compared to
net sales in fiscal 2000 of $43.7 million. Net sales increased in all markets,
with significant growth in Original Equipment Manufacturer ("OEM") and
international sales. OEM sales increased by 48% compared to the prior year while
international sales grew by 34%. ChMV's sales grew by 32% year over year and 14%
on a pro forma basis after giving effect to the June 1999 acquisition of that
business by the Company as of the beginning of fiscal 2000. Total Company net
sales in fiscal 2001 increased 22% on a pro forma basis. Sales to domestic
hospitals grew by 9% compared to fiscal 2000 primarily as a result of strong
growth in the Company's whole-hospital, pulse oximetry capitated conversion
programs. Net sales for fiscal 2002 are expected to remain relatively flat and
will reflect an increased emphasis on cardiopulmonary products and markets.
Total cost of products sold as a percentage of net sales increased to
49.7% compared to 42.7% in the prior year. Approximately $2.3 million or 4.2% of
net sales related to unusual charges recorded in the fourth quarter. These
unusual charges consisted primarily of inventory being obsoleted by focusing the
scope of products being offered for sale as a result of the revised sales and
marketing strategies for cardiopulmonary products. The remainder of the increase
was primarily related to product and market mix as the Company's lower margin
international and OEM sales increased as a percentage of overall sales. Also
contributing to higher cost of products sold in fiscal 2001 were temporary price
increases for certain components purchased during the earlier part of the fiscal
year, which the Company believes has been remedied. In fiscal 2002, cost of
products sold as a percentage of net sales is expected to benefit from
manufacturing efficiencies generated by the "lean enterprise" program being
implemented by the Company.
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Research and Product Development ("R&D") increased by $288,000 or 6.8%
to approximately $4.5 million for fiscal 2001 compared to $4.2 million in the
prior fiscal year. Although R&D was relatively constant from year to year, the
Company did benefit from a program it implemented in fiscal 2001 to centralize
its R&D processes and administration, thereby eliminating redundancies in
outside locations. Management expects higher levels of investment in R&D
programs for the next twelve months. Overall, R&D is expected to approximate 9%
of sales in fiscal 2002 compared to 8.2% in fiscal 2001. ChMV requires
substantially lower investments in R&D since its products are less technical
compared to electronic sensors and monitors. Excluding ChMV's revenue and R&D
expenses, the Company invested approximately 10% of revenue in R&D in fiscal
2001.
Selling, General and Administrative ("S,G&A") expenses increased by
approximately 18% to $18.9 million in the current year compared to fiscal 2000
levels of $16.0 million. Approximately 59% of the increase related to higher
levels of selling expense, primarily higher salaries and expenses associated
with an increase in domestic sales and clinical support personnel. Approximately
30% of the increase related to higher G&A expenses including expenses resulting
from the hiring of a new president in June 2000, an increase in the Company's
match on employee contributions to their 401(K) retirement accounts, and higher
legal and travel expenses. The majority of the remaining increase in S,G&A was
related to increased marketing expenses, including higher levels of spending for
advertising and travel-related expenditures.
Goodwill amortization was $306,000 for fiscal 2001. This represents an
increase of $47,000 over $259,000 in the prior year, resulting from the
inclusion of a full year of goodwill amortization associated with the
acquisition of ChMV in fiscal 2000.
Restructuring and other charges of approximately $2.1 million in fiscal
2001 included $1.95 million recorded in the fourth quarter, primarily associated
with the Company's strategic and operating changes. These charges included
approximately $1.0 million associated with restructuring and severance costs,
primarily related to the realignment of the domestic sales organization and the
closing of the Redmond, Washington facility. While the Company expects to remain
a strong competitor in pulse oximetry with its state-of-the-art technology and
cost avoidance programs, management believes that its cardiopulmonary technology
provides a significant growth opportunity for the Company over the next several
years. Accordingly, management increased the Company's emphasis on
cardiopulmonary products and markets, completely reorganizing its domestic sales
force and initiating a program to centralize its R&D processes. Also included in
the $1.95 million charge was an estimated $500,000 to settle certain
litigations, $280,000 of bad debt associated with a former distributor, and
miscellaneous other one-time charges. Of the $1.95 million of restructuring and
other charges referred to above, about $1.2 million will be paid in cash.
Interest expense decreased by approximately $46,000, or 4.6%, to
$954,000 for fiscal 2001 compared to $1.0 million for fiscal 2000. Interest
expense from higher debt levels in fiscal 2001, primarily associated with
increased working capital requirements, was partially offset by lower interest
rates reducing interest expense for the year. Fiscal 2001 interest expense also
included a full year of interest on the debt associated with the purchase of
ChMV on June 30, 1999. The lower interest rates resulted from favorable changes
in the London Interbank Offered Rate ("LIBOR"), and a further rate decrease
associated with an improvement in the ratio of senior funded debt to EBITDA
(earnings before interest, taxes, depreciation and amortization), as defined in
the Company's principal bank agreement.
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Income tax expense for fiscal 2001 was approximately $340,000 compared
to $1,189,000 in the prior year, reflecting the Company's higher earnings offset
by the unusual charges recorded in the fourth quarter. The effective tax rate
increased to 35.5% in fiscal 2001 from 32.5% in fiscal 2000, remaining below the
statutory rate primarily as a result of benefits derived from R&D tax credits,
the Company's foreign sales corporation and, in fiscal 2000, the reduction of
the deferred income tax asset valuation allowance. Management believes that
current levels of pre-tax earnings will be sufficient to generate the
approximately $9,000,000 of future taxable income required to utilize deferred
income tax benefits at April 29, 2001. Management expects a similar effective
tax rate for fiscal 2002.
Net income for fiscal 2001 was $619,000, or $0.07 per diluted share compared to
$2.2 million or $0.27 per diluted share, in the prior year. For comparison
purposes, income before the $4.25 million of unusual charges in fiscal 2001
increased 36% to $3.4 million, or $0.38 per diluted share compared to income of
$2.5 million, or $0.30 per diluted share (before the effect of a change in
accounting principle), reported in fiscal 2000.
YEAR ENDED APRIL 30, 2000 COMPARED TO YEAR ENDED MAY 2, 1999
Fiscal 2000 net sales increased by approximately $10.8 million or 32.9%
to approximately $43.7 million compared to $32.9 million reported in fiscal
1999. The increase was primarily attributable to the acquisition of ChMV and
record domestic sales. ChMV, acquired June 30, 1999 accounted for sales of
approximately $7.7 million over the last ten months of fiscal 2000. Domestic
sales performance was led by an increase in pulse oximetry conversion sales and
higher Non-Invasive Cardiac Output ("NICO") sales compared to fiscal 1999.
International sales and OEM sales were also positive compared to the prior year.
Cost of sales as a percentage of net sales increased by 1.4% to 42.7%
in fiscal 2000 compared to 41.3% for fiscal 1999, primarily as the result of
product mix. In fiscal 1999, the Company had recorded certain favorable domestic
sales transactions that had resulted in an overall improvement of 1.1% in cost
of sales as a percentage of sales in that year. The Company continued to target
improvements in product costs to maintain the Company's competitive position.
R&D expenses increased by 6.3% to approximately $4.2 million for fiscal
2000 compared to the prior year. Higher levels of salaries and related expenses,
clinical research and outside consulting were primarily responsible for the
increase. While spending increased approximately $250,000 compared to the prior
year, R&D as a percentage of sales dropped from 12.0% in fiscal 1999 to 9.6% in
fiscal 2000 due to the increase in sales.
S,G&A expenses increased by 29.7% in fiscal 2000 compared to fiscal
1999 levels. Approximately 56% of the overall increase in S,G&A was attributable
to the addition of ChMV in July 1999. The majority of the remaining portion of
the increase was associated with increased sales and marketing expenses in
fiscal 2000 compared to fiscal 1999.
Domestic selling expenses increased by approximately $615,000 compared
to fiscal 1999 due to higher salaries and related headcount expenses offset by
lower dealer commissions than were recorded in the prior year. International
selling expenses increased by approximately $392,000 from the prior year
primarily associated with dealer commissions on tenders awarded to the Company
in fiscal 2000. Marketing related expenses were up approximately $428,000
compared to the prior year. Higher advertising expenses, outside marketing
services and clinical
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research expenses, primarily associated with non-invasive cardiac output and
pulse oximetry, accounted for the year-to-year increase. Administrative expenses
were up 3.3% compared to the prior year before the impact of the ChMV
acquisition, primarily associated with higher costs for accounting/legal
services and general insurance.
Interest expense increased by approximately $787,000 to $1.0 million
for fiscal 2000 compared to the prior year. Higher debt levels in fiscal 2000,
primarily associated with the purchase of ChMV on June 30, 1999, and the full
year effect of borrowings related to the fiscal 1999 stock repurchase programs,
accounted for the increase in interest expense.
Income tax expense for fiscal 2000 of approximately $1,189,000 compared
to $804,000 in the prior year reflected the Company's higher earnings and an
increase in the effective tax rate from 28% to 32.5%. The increase in the
effective tax rate resulted primarily from goodwill amortization associated with
the ChMV acquisition, which is not deductible for income tax purposes. The
Company's effective tax rate for fiscal 2000 remained below the statutory rate
as a result of benefits derived from R&D tax credits, the Company's Foreign
Sales Corporation and the depletion of the deferred tax valuation allowance.
Management expected current levels of pre-tax earnings to be sufficient to
generate approximately $9,000,000 of future taxable income, required to utilize
the deferred income tax benefit at April 30, 2000. Management also expected the
effective tax rate to approximate the statutory rate for fiscal 2001.
Earnings per diluted share, before the impact of a change in accounting
principle, increased by 25% to $0.30 per share for fiscal 2000 compared to $0.24
per share for fiscal 1999. Earnings per diluted share increased in the second
half of fiscal 2000, with earnings per diluted share of $0.22 compared to $0.12
for the last six months of the previous year.
The Company recorded the cumulative effect of a change in accounting
principle of approximately $224,000 (net of income taxes of $105,000) or $0.03
per diluted share in fiscal 2000. As required under Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" issued by the AICPA, in the
first quarter of Fiscal 2000 the Company expensed the unamortized balance of
previously capitalized start-up costs, and began expensing new start-up costs as
incurred.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $17.0 million at April 29, 2001 compared to $17.5
million at April 30, 2000 with current ratios of 2.1 to 1 and 2.6 to 1,
respectively. The decrease in working capital was primarily attributable to a
$2.0 million increase in accrued expenses applicable to the restructuring and
other charges in the fourth quarter. Higher levels of accounts receivable and
inventories were financed with the revolving credit facility but had a minimal
effect on working capital.
Cash provided by operating activities was approximately $1.6 million in
fiscal 2001, compared to approximately $3.6 million in fiscal 2000. The Company
reduced its accounts payable by $1.1 million compared to an increase of $168,000
in the prior year, accounting for $1.2 million of the year-to-year decrease in
cash provided by operating activities. Lower levels of inventory purchases in
the fourth quarter, and a vendor payment discount program contributed to the
decrease in accounts payable. Deferred income taxes, which provided $971,000 of
cash in the prior year, resulted in a $165,000 use of cash in fiscal 2001,
accounting for the remainder of the decrease of $2.0 million in cash provided.
The net change in accounts receivable, inventories
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and prepaid expenses utilized $695,000 more cash from operating activities than
in the previous year. However, initiatives implemented in the second half of
fiscal 2001 to improve accounts receivable and inventory levels contributed to
cash provided by operating activities of over $3.0 million during that six-month
period. The Company believes that these initiatives will further contribute to
improved cash from operations in fiscal 2002.
During fiscal 2000, the Company invested approximately $9.2 million for
the purchase of ChMV; funding was provided by bank term debt. Also in fiscal
2000, the Company received $3.0 million from the sale of treasury shares in a
private transaction, using the proceeds to reduce bank debt.
The Company has a $10 million revolving credit facility with $4.675
million borrowed against it as of April 29, 2001. The agreement, as amended,
expires August 31, 2002.
Cash provided by operating activities is expected to be the principal
source of capital for fiscal 2002 and is expected to be sufficient to fund the
Company's growth plans. In addition, the Company has $5.3 million available
under its revolving credit facility as of April 29, 2001 and another $3.3
million of additional proceeds that may potentially be realized from the
exercise of the Company's Class B Warrants. The Warrants are callable under
specified conditions, and exercisable at $5.85 per share and, as amended, expire
on December 8, 2001. Management further believes that additional funds are
obtainable on commercially acceptable terms.
MARKET RISK
The Company's revolving credit facility and term loan agreements are
based upon LIBOR and, as such, are sensitive to changes in interest rates. The
Company has an interest rate swap agreement on the remaining balance ($2.2
million) of the term loan established in fiscal 1999, which provides an
effective interest rate of 6.77% and limits interest rate risk during times of
fluctuation. The agreement had no material effect on interest expense for fiscal
2001. A hypothetical one percentage point increase in LIBOR would have resulted
in a reduction in pre-tax profit of approximately $100,000 for fiscal 2001. The
Company has not entered into any additional interest rate swap agreements. At
April 29, 2001, the carrying value of debt approximates its fair value. The
Company projects lower debt levels in fiscal 2002, reducing long-term risk
associated with potentially higher interest rates.
GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisition of ChMV in fiscal 2000, the Company
recorded $7.7 million of goodwill representing the excess of the purchase price
over the fair value of net assets acquired. The goodwill is being amortized over
25 years. Based on the operating histories of the Company and ChMV, as well as
other factors, management believes that the amortization period is appropriate.
The Company will adopt the Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangibles" in the first quarter of
fiscal 2002. Under this statement the Company will no longer amortize goodwill
but will be required to test for impairment at least annually.
23
24
IMPACT OF INFLATION
The rate of inflation continues to have a minimal effect on the
operations of the Company and is routinely monitored with respect to its
potential impact on future business plans. Higher prices associated with
specific short-term shortages of material incurred in fiscal 2001 have been
remedied. Management does not expect inflation to have a material impact on the
growth or operating results of the Company during fiscal 2002.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements about the
Company's business, products and projected operating results. Shareholders and
potential investors are cautioned that such statements are predictions and that
actual events or results may vary significantly. 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. Such factors would include without
limitation: an unanticipated slowdown in the healthcare industry; unanticipated
technological developments affecting 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For information concerning this Item, see "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
24
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information as of July 1, 2001 with respect to the executive
officers and directors of the Company is set forth below:
Positions
Name with the Company Age
- ---- ---------------- ---
William J. Lacourciere Chairman of the Board, Chief Executive 61
Officer and Director (Class C)
Thomas M. Patton President and Chief Operating Officer 37
Joseph A. Vincent Executive Vice President, Chief Financial 49
Officer and Secretary
Philip F. Nuzzo Vice President - Product and Business 48
Development
Jeffery A. Baird Corporate Controller and Treasurer 47
Paul A. Cote Director (Class A) 71
Vartan Ghugasian Director (Class A) 56
Thomas M. Haythe Director (Class C) 61
John P. Mahoney Director (Class B) 53
Photios T. Paulson Director (Class B) 62
Steven J. Shulman Director (Class B) 50
William J. Lacourciere has been Chairman of the Board of the Company
since September 1991, Chief Executive Officer since February 1991 and a director
since October 1982. He served as President from August 1986 to May 2000. He
served as Chief Operating Officer from March 1983 to February 1991. Mr.
Lacourciere served as Executive Vice President from March 1983 to August 1986.
From October 1982 to March 1983, he served as Executive Vice President -
Marketing. From April 1980 to October 1982, he served as Vice President -
Domestic Sales.
Thomas M. Patton was named President and Chief Operating Officer of the
Company in May 2000. Prior to joining the Company, Mr. Patton was employed as
President and Chief Executive Officer of Wright Medical Technology, Inc. (a
manufacturer of orthopedic medical devices located in Tennessee) from 1998 until
January 2000. Prior to being named President and CEO of Wright Medical, he was
Executive Vice President, Corporate Development and General Counsel. He joined
Wright Medical in 1993 as general counsel. From 1989 until 1993, Mr. Patton
served as legal associate with the law firm of Williams and Connolly in
Washington, D.C.
25
26
Joseph A. Vincent, CMA is Executive Vice President, Chief Financial
Officer and Secretary of the Company and has been employed by the Company since
1983. He was named Executive Vice President in February 1997, Chief Financial
Officer and Secretary in April 1990. He previously served the Company as Vice
President - Finance, Treasurer, Controller and Chief Operating Officer. Mr.
Vincent held various positions with Picker International, Inc. (Marconi), a
manufacturer of medical diagnostic instruments and supplies, from August 1974
until joining the Company in August 1983. Mr. Vincent was a director of the
Company from February 1994 to November 1996.
Philip F. Nuzzo was appointed Vice President - Product and Business
Development of the Company in October 2000. He was Vice President - Marketing
and Product Development from August 1996 to October 2000. Mr. Nuzzo served as
Director of Marketing from February 1993 to August 1996, as Marketing Manager
from July 1989 to February 1993, and as Product Manager from January 1986 to
July 1989. Prior to joining Novametrix, Mr. Nuzzo, a licensed Respiratory Care
Practitioner, obtained his clinical experience with several hospitals including
St. Joseph's Hospital in Bellingham, Washington and LAC/USC Medical Center in
Los Angles, California.
Jeffery A. Baird is Corporate Controller and Treasurer of the Company
and has been employed by the Company since February 1988. He was named Treasurer
in October 1999 and has been Corporate Controller since February 1993. Mr. Baird
previously served the Company as Director of Budgets and Financial Analysis and
Chief Financial Officer. Prior to joining the Company, Mr. Baird was employed at
Philips Medical Systems, Inc., a manufacturer of diagnostic medical imaging
equipment.
Paul A. Cote has been a director of the Company since November 1996.
Mr. Cote has been a practicing lawyer in Maine since 1955 and is the President
and Director of the law firm of Cote, Cote & Hamann P.A. Mr. Cote was a member
of the Board of Directors of Secor Federal Savings & Loan, Birmingham, Alabama
(1992 -1994) and Northeast Bankshare Association (later became Norstar and
subsequently Fleet) (1975-1989). He also served on the advisory boards of
Norstar and Fleet banks (1990-1992).
Vartan Ghugasian has been a director of the Company since November
1996. Dr. Ghugasian has been a practicing dentist in Boston, Massachusetts since
1972 specializing in prosthodontics. Dr. Ghugasian has enjoyed a number of
academic appointments, including as an associate in prosthetic dentistry,
Harvard University School of Dental Medicine from 1980 until 1993 and Assistant
Clinical Professor at Tufts University School of Dental Medicine from 1974 to
1980. Dr. Ghugasian has also served as a director of the Karagheusian
Commemorative Corporation, New York, New York, and now serves as head of the
Dental Advisory Committee. Dr. Ghugasian has been a member of the Professional
Advisory Board at Delta Dental Corporation since 1999.
Thomas M. Haythe has been a director of the Company since March 1978.
Mr. Haythe has been a legal and business consultant since February 1, 2000. He
was a partner at the law firm of Haythe & Curley (renamed Torys) from 1981
through January 31, 2000. Mr. Haythe also serves as a director of Westerbeke
Corporation, a manufacturer of marine engine products, and Ramsay Youth
Services, Inc., a provider of youth and educational services.
John P. Mahoney has been a director of the Company since October 1997.
Dr. Mahoney has served as a staff pathologist with Pathology Associates, Inc.
(pathology group providing
26
27
services in surgical, cytologic, clinical and forensic pathology) from 1981 to
1994 and since 1996. During such time, Dr. Mahoney has served as Chief of Staff,
Tallahassee Community Hospital; President, Capital Medical Society; and
Associate Medical Examiner, State of Florida, District II. From 1987 to 1995,
Dr. Mahoney was President and Chief Executive Officer of Health Enterprises,
Inc., a holding company that included a 62,000 member health maintenance
organization, which was merged with Coastal Physicians Group in 1995.
Photios T. Paulson has been a director of the Company since July 1992.
Mr. Paulson has served as Vice President of bioMerieux N.A., a privately-held
French holding company in the clinical diagnostics field, since January 1995,
Chairman of bioMerieux Vitek Inc., a manufacturer of clinical diagnostic
systems, from July 1991 to 1995 and as Senior Advisor-Health Care Industry and
International Investment Banking for Prudential Securities Inc. from 1987 to
1991. Prior to that Mr. Paulson spent 27 years with Becton Dickinson and Company
(a major worldwide producer of medical and clinical diagnostics products). His
last position held was that of Executive Vice President and Chief Operating
Officer. Mr. Paulson also serves as a director of Vasomedical, Inc., a provider
of EECP cardiovascular therapy products, and Silliker, Inc., a provider of
laboratory testing services for the food industry.
Steven J. Shulman has been a director of the Company since November
1993. Since September 1999, Mr. Shulman has served as Chairman and Chief
Executive Officer of Internet HealthCare Group, L.L.C., a company which acquires
private equity positions in and builds emerging healthcare related companies.
Prior to that date, he served as President and Chief Executive Officer of
Prudential HealthCare from August 1997 to July 1999. Mr. Shulman was a founder
and director of Value Health, Inc., a provider of specialty managed care
programs, from 1987 to 1997. During that time he served as President of the
Pharmacy and Disease Management Group as well as Executive Vice President. Prior
to 1989, Mr. Shulman was President of the East Central Division at CIGNA
Healthplan, Inc., a provider of group life and health insurance, including
managed care products. Mr. Shulman is also a director of Ramsay Youth Services,
Inc., a provider of youth and educational services.
SIGNIFICANT EMPLOYEES
Certain information with respect to other significant employees of the
Company is set forth below:
Steven A. Brown, 39, is Vice President - Operations and has been
employed by the Company since April 2001. He served as the Vice President of
Operations at C&M Corp. for almost three years, where he earned national
recognition for implementing "lean manufacturing" techniques based on a system
of just-in-time production and "continual improvement." From 1989 to 1998, he
helped implement "lean" principles in his various positions at the Wiremold Co.,
a company that received worldwide recognition for its operational improvements
and efficiencies.
James T. Hook, 52, joined the Company as Vice President - Marketing in
October 2000 from Wright Medical. He served Wright as Vice President-Sales and
Marketing from January 1998 to September 2000; Vice President- Marketing from
June 1995 to January 1998; Vice President Domestic Sales from August 1994 to
June 1995; and Vice President-International Sales and Marketing from July 1993
to August 1994. He also worked in various marketing roles for Dow Corning Wright
from 1984 to 1993.
27
28
Gary McAndrew, 48, is Vice President - Domestic Sales and has been
employed by the Company since April 2001. With over 20 years of sales
performance experience, Gary spent almost three years at Mallinckrodt where he
was responsible for approximately $60 million in annual sales of oximetry,
ventilator and respiratory care products. He spent approximately 14 years at
Nellcor-Puritan Bennett (Puritan Bennett) in various regional business manager
positions before its acquisition by Mallinckrodt.
Robert H. Schiffman, R.A.C., 54, was named Vice President - Regulatory
and Quality Assurance in October 2000 and has served the Company in a variety of
quality and regulatory roles since joining the Company in 1985. He was
previously with Corometrics Medical Systems from 1974 to 1985, serving as Test
Manager.
Patrick J. Shannon, 50, was named Vice President - International Sales
in July 2001, having previously served as Director - International Sales since
joining the Company in 1986. Mr. Shannon was previously employed by Cooper
Biomedical from 1981 to 1986, most recently as Director, Pacific Rim and Latin
America. From 1974 to 1981, he served in various sales and regional manager
positions for Abbott Laboratories (Diagnostics Division).
Paul S. Valentine, 36, was named Vice President - Developmental Care
and President of the Company's Children's Medical Ventures (ChMV) division in
October 2000, having served as General Manager since the acquisition of ChMV by
the Company in June 1999. He joined ChMV in 1997 as Chief Financial Officer and
served as CFO at two previous firms from 1989 through 1997.
For additional information concerning this item, see text under caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this item, see text under the captions
"Executive Compensation," "Compensation of Directors," "Employment Agreements,"
"Compensation and Stock Option Committee Interlocks and Insider Participation,"
"Performance Graph" and "Report of the Compensation and Stock Option Committee"
in the Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
For information concerning this item, see text under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" in the Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning this item, see text under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
information is incorporated herein by reference.
28
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K.
(a) 1. Consolidated Financial Statements:
Information with respect to this Item regarding the
consolidated financial statements is contained on page F-1 of this Annual Report
on Form 10-K.
2. Consolidated Financial Statement Schedule
Information with respect to this Item regarding the
consolidated financial statement schedule is contained on page F-1 of this
Annual Report on Form 10-K.
3. Exhibits
Information with respect to this Item regarding Exhibits
required to be filed pursuant to Item 601 of Regulation S-K is contained in the
attached Index to Exhibits, which Exhibits are incorporated herein by reference.
Exhibits 10(a), 10(b), 10(s), 10(t), 10(u), 10(y), 10(gg), 10(ii), 10(kk),
10(ll), 10(ww), 10(xx), 10(yy) and 10(zz) are the management contracts and
compensatory plans or arrangements required to be filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K
during the fiscal year ended April 29, 2001.
(c) Exhibits:
Information with respect to this Item regarding Exhibits
required to be filed pursuant to Item 601 of Regulation S-K is contained in the
attached Index to Exhibits, which Exhibits are incorporated herein by reference.
Exhibits 10(a), 10(b), 10(s), 10(t), 10(u), 10(y), 10(gg), 10(ii), 10(kk),
10(ll), 10(ww), 10(xx), 10(yy) and 10(zz) are the management contracts and
compensatory plans or arrangements required to be filed as part of this Annual
Report on Form 10-K.
(d) Consolidated Financial Statement Schedule:
Information with respect to this Item regarding the
consolidated financial statement schedule required by Regulation S-X which is
excluded from the annual report to shareholders by Rule 14a-3(b) is contained on
page F-1 in this Annual Report on Form 10-K.
29
30
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby
appoint each of William J. Lacourciere, Thomas M. Patton and Joseph A. Vincent
as attorneys-in-fact with full power of substitution, severally, to execute in
the name and on behalf of the Registrant and each such person, individually and
in each capacity stated below, one or more amendments to this Annual Report on
Form 10-K which amendments may make such changes in this Report as the
attorney-in-fact acting in the premises deems appropriate and to file any such
amendment to this Report with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: July 27, 2001
NOVAMETRIX MEDICAL SYSTEMS INC.
By:/s/ William J. Lacourciere
----------------------------------
William J. Lacourciere
Chairman of the Board,
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: July 27, 2001
By:/s/ William J. Lacourciere
----------------------------------
William J. Lacourciere
Chairman of the Board,
Chief Executive Officer
and Director
30
31
Dated: July 27, 2001
By:/s/ Joseph A. Vincent
----------------------------------
Joseph A. Vincent
Executive Vice President and
Chief Financial Officer
Dated: July 27, 2001
By:/s/ Paul A. Cote
----------------------------------
Paul A. Cote
Director
Dated: July 27, 2001
By:/s/ Vartan Ghugasian
----------------------------------
Vartan Ghugasian
Director
Dated: July 27, 2001
By:/s/ Thomas M. Haythe
----------------------------------
Thomas M. Haythe
Director
Dated: July 27, 2001
By:/s/ John P. Mahoney
----------------------------------
John P. Mahoney
Director
Dated: July 27, 2001
By:/s/ Photios T. Paulson
----------------------------------
Photios T. Paulson
Director
Dated: July 27, 2001
By:/s/ Steven J. Shulman
----------------------------------
Steven J. Shulman
Director
31
32
Annual Report on Form 10-K
Item 8 -- Financial Statements
Item 14(a)(1) and (2) -- List of Financial Statements and
Financial Statement Schedule
Item 14(d) -- Financial Statement Schedule
Year ended April 29, 2001
Novametrix Medical Systems Inc.
Wallingford, Connecticut
33
Novametrix Medical Systems Inc.
Index to Financial Statements and Financial Statement Schedule
The report of Ernst & Young LLP, independent auditors, dated June 18, 2001, and
the following consolidated financial statements of Novametrix Medical Systems
Inc. are included in Item 8:
Consolidated Balance Sheets -- April 29, 2001 and April 30, 2000
Consolidated Statements of Income -- Years ended April 29, 2001, April 30,
2000 and May 2, 1999
Consolidated Statements of Shareholders' Equity -- Years ended April 29,
2001, April 30, 2000 and May 2, 1999
Consolidated Statements of Cash Flows -- Years ended April 29, 2001, April
30, 2000 and May 2, 1999
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Novametrix Medical
Systems Inc. is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
34
Report of Independent Auditors
Board of Directors
Novametrix Medical Systems Inc.
We have audited the accompanying consolidated balance sheets of Novametrix
Medical Systems Inc. as of April 29, 2001 and April 30, 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended April 29, 2001. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Novametrix Medical
Systems Inc. at April 29, 2001 and April 30, 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended April 29, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Hartford, Connecticut
June 18, 2001
F-2
35
Novametrix Medical Systems Inc.
Consolidated Balance Sheets
APRIL 29, 2001 APRIL 30, 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 156,065 $ 283,262
Accounts receivable, less allowance for losses of $300,000
17,215,256 15,412,529
Current portion of notes receivable 565,421 260,722
Inventories:
Finished products 4,412,049 4,450,432
Work in process 1,896,426 1,321,196
Materials 4,357,400 4,091,089
----------- -----------
10,665,875 9,862,717
Deferred income taxes 2,485,775 1,880,866
Prepaid expenses and other current assets 764,625 854,839
----------- -----------
Total current assets 31,853,017 28,554,935
Notes receivable, less current portion 1,160,711 1,607,563
Equipment, less accumulated depreciation and amortization of $8,630,057
in 2001 and $8,028,572 in 2000 3,423,423 3,350,115
License, technology, patent and other intangibles, less accumulated amortization
of $5,192,694 in 2001 and $4,409,429 in 2000
5,122,462 5,118,945
Goodwill, less accumulated amortization of $564,919 in 2001 and $258,591
in 2000 7,138,519 7,444,848
Deferred income taxes 633,828 1,074,261
----------- -----------
$49,331,960 $47,150,667
=========== ===========
F-3
36
APRIL 29, 2001 APRIL 30, 2000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligation $ 7,205,600 $ 4,335,264
Accounts payable 1,916,323 2,968,833
Accrued product warranty expense 948,995 518,970
Other accrued expenses 4,827,349 3,211,177
------------ ------------
Total current liabilities 14,898,267 11,034,244
Long-term debt and capital lease obligation, less current portion 3,320,000 5,850,601
Shareholders' equity:
Common Stock, $.01 par value: authorized 20,000,000 shares; issued
9,514,052 shares in 2001 and 9,450,304 shares in 2000 95,141 94,503
Additional paid-in capital 35,225,898 34,997,342
Retained-earnings deficit (400,285) (1,018,962)
Treasury Stock, 799,355 shares (3,807,061) (3,807,061)
------------ ------------
31,113,693 30,265,822
------------ ------------
$ 49,331,960 $ 47,150,667
============ ============
See accompanying notes.
F-4
37
Novametrix Medical Systems Inc.
Consolidated Statements of Income
YEAR ENDED
---------------------------------------------------------
APRIL 29, 2001 APRIL 30, 2000 MAY 2, 1999
------------ ------------ ------------
Revenues:
Net sales $ 54,682,263 $ 43,682,223 $ 32,864,673
Interest 167,437 170,799 113,491
------------ ------------ ------------
54,849,700 43,853,022 32,978,164
Costs and expenses:
Cost of products sold:
Before inventory write-off 24,882,262 18,669,287 13,568,836
Inventory write-off 2,296,917
------------ ------------ ------------
27,179,179 18,669,287 13,568,836
Research and product development 4,493,019 4,205,157 3,957,760
Selling, general and administrative 18,858,995 15,980,271 12,320,693
Interest 953,596 999,803 212,365
Goodwill amortization 306,328 258,591
Restructuring and other charges 2,099,535 85,758 48,143
------------ ------------ ------------
53,890,652 40,198,867 30,107,797
------------ ------------ ------------
Income before income taxes and cumulative effect of a
change in accounting principle 959,048 3,654,155 2,870,367
Income taxes 340,371 1,189,330 803,700
------------ ------------ ------------
Income before cumulative effect of a change in accounting
principle 618,677 2,464,825 2,066,667
------------ ------------ ------------
Cumulative effect of a change in accounting principle,
net of income taxes of $105,456 (223,544)
------------ ------------ ------------
Net income $ 618,677 $ 2,241,281 $ 2,066,667
============ ============ ============
Earnings per common share:
Income before cumulative effect of a change in accounting
principle:
Basic $ .07 $ .31 $ .25
Diluted $ .07 $ .30 $ .24
Cumulative effect of a change in accounting
principle:
Basic $ (.03)
Diluted $ (.03)
Net income:
Basic $ .07 $ .28 $ .25
Diluted $ .07 $ .27 $ .24
See accompanying notes.
F-5
38
Novametrix Medical Systems Inc.
Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL RETAINED-
--------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
--------- ------------ ------------ ------------
Year ended May 2, 1999:
Balance at May 3, 1998 9,174,355 $ 91,744 $ 34,754,643 $ (5,326,910)
Common Stock issued under stock purchase plan
and stock option and warrant exercises 58,304 583 193,380
Tax benefit related to stock option exercises 17,947
Purchase of Common Stock for treasury
Net income 2,066,667
--------- ------------ ------------ ------------
Balance at May 2, 1999 9,232,659 92,327 34,965,970 (3,260,243)
Year ended April 30, 2000:
Common Stock issued under stock purchase plan
and stock option and warrant exercises 217,645 2,176 297,999
Tax benefit related to stock option exercises 49,049
Issuance of warrants in connection with business
acquisition 51,250
Sale of Common Stock and warrants, net of
transaction fees of $31,877 (366,926)
Net income 2,241,281
--------- ------------ ------------ ------------
Balance at April 30, 2000 9,450,304 94,503 34,997,342 (1,018,962)
Year ended April 29, 2001:
Common Stock issued under stock purchase plan
and stock option exercises 63,748 638 190,559
Tax benefit related to stock option exercises 37,997
Net income 618,677
--------- ------------ ------------ ------------
Balance at April 29, 2001 9,514,052 $ 95,141 $ 35,225,898 $ (400,285)
========= ============ ============ ============
TREASURY STOCK
---------------------------
SHARES AMOUNT TOTAL
-------- ------------ ------------
Year ended May 2, 1999:
Balance at May 3, 1998 (338,452) $ (2,487,038) $ 27,032,439
Common Stock issued under stock purchase plan
and stock option and warrant exercises 193,963
Tax benefit related to stock option exercises 17,947
Purchase of Common Stock for treasury (960,903) (4,655,072) (4,655,072)
Net income 2,066,667
-------- ------------ ------------
Balance at May 2, 1999 (1,299,355) (7,142,110) 24,655,944
Year ended April 30, 2000:
Common Stock issued under stock purchase plan
and stock option and warrant exercises 300,175
Tax benefit related to stock option exercises 49,049
Issuance of warrants in connection with business
acquisition 51,250
Sale of Common Stock and warrants, net of
transaction fees of $31,877 500,000 3,335,049 2,968,123
Net income 2,241,281
-------- ------------ ------------
Balance at April 30, 2000 (799,355) (3,807,061) 30,265,822
Year ended April 29, 2001:
Common Stock issued under stock purchase plan
and stock option exercises 191,197
Tax benefit related to stock option exercises 37,997
Net income 618,677
-------- ------------ ------------
Balance at April 29, 2001 (799,355) $ (3,807,061) $ 31,113,693
======== ============ ============
See accompanying notes.
F-6
39
Novametrix Medical Systems Inc.
Consolidated Statements of Cash Flows
YEAR ENDED
--------------------------------------------------
APRIL 29, 2001 APRIL 30, 2000 MAY 2, 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 618,677 $ 2,241,281 $ 2,066,667
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Deferred income taxes (126,480) 970,940 686,700
Provision for collection losses 306,000 47,000 12,000
Cumulative effect of a change in accounting principle 223,544
Non-cash restructuring 302,202
Depreciation 1,198,015 1,114,645 882,410
Amortization 1,202,597 840,999 501,500
Changes in operating assets and liabilities:
Accounts and notes receivable (1,966,574) (2,666,566) (3,793,558)
Inventories (803,158) 671,082 (1,750,741)
Prepaid expenses and other current assets (110,657) (189,973) (217,730)
Accounts payable (1,052,510) 167,613 501,691
Accrued expenses 2,046,198 225,126 882,683
------------ ------------ ------------
Net cash provided (used) by operating activities 1,614,310 3,645,691 (228,378)
INVESTING ACTIVITIES
Purchases of equipment (1,300,102) (657,625) (1,699,674)
Purchases of licenses, technology, patents and other (972,337) (1,138,499) (1,091,135)
Purchase of Children's Medical Ventures, Inc., less cash acquired (9,198,986)
------------ ------------ ------------
Net cash used by investing activities (2,272,439) (10,995,110) (2,790,809)
FINANCING ACTIVITIES
Revolving line of credit, net 2,900,000 (1,425,000) 3,200,000
Proceeds from term loans 9,600,000 3,000,000
Principal payments on term loans and capital lease obligation (2,560,265) (4,080,016) (233,901)
Proceeds from Common Stock issued under stock purchase plan and stock
option and warrant exercises 191,197 300,175 193,963
Purchase of Common Stock for treasury (4,655,072)
Proceeds from sale of Common Stock, net 2,968,123
------------ ------------ ------------
Net cash provided by financing activities 530,932 7,363,282 1,504,990
------------ ------------ ------------
Change in cash and cash equivalents (127,197) 13,863 (1,514,197)
Cash and cash equivalents at beginning of year 283,262 269,399 1,783,596
------------ ------------ ------------
Cash and cash equivalents at end of year $ 156,065 $ 283,262 $ 269,399
============ ============ ============
See accompanying notes.
F-7
40
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND ACCOUNTING POLICIES
NATURE OF BUSINESS
Novametrix Medical Systems Inc. and subsidiaries (collectively, the "Company")
develop, manufacture and market non-invasive critical care monitors, sensors and
accessories, and developmental care and baby care products and services. The
Company's current product offering and future development plans utilize
leading-edge technologies and developmental care concepts. The Company markets
its products domestically and internationally directly through salespersons and
outside distributors to its customers, most of which are hospitals. The Company
also markets its products to original equipment manufacturers ("OEM's") which
incorporate certain of the Company's products and technologies into the
manufacture of their own products.
BASIS OF PRESENTATION AND CHANGE IN ACCOUNTING PRINCIPLE
The consolidated financial statements include the accounts of Novametrix Medical
Systems Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
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 start-up costs as incurred. Fiscal 2000 earnings were reduced by
$223,544 (net of income taxes of $105,456) or $0.03 per diluted share as a
result of the adoption of SOP 98-5. 1999 pro forma disclosures are not
presented, as the effects of the change in accounting principle would not have
been significant to that year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. While management believes that the
estimates and assumptions used in the preparation of the financial statements
are appropriate, actual results could differ from these estimates.
REVENUE RECOGNITION AND PRODUCT WARRANTY COSTS
Revenues from sales are generally recognized when products are shipped. The
Company generally warrants its products against defects for up to one year;
costs related thereto are recognized as incurred and are not material to the
Company's financial statements. The Company provides for the estimated costs to
repair products under multi-year agreements at the time of sale.
F-8
41
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND ACCOUNTING POLICIES (CONTINUED)
SHIPPING AND HANDLING COSTS
Shipping and handling costs are expensed as incurred and are included in cost of
products sold.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents. These investments are valued at cost,
which approximates fair value.
INTEREST RATE SWAPS
The Company may enter into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. Such agreements involve the
exchange of amounts based on the London Interbank Offered Rate ("LIBOR") for
amounts based on a fixed interest rate over the life of the agreement, without
an exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment to interest expense. The related amount payable or
receivable from counter parties is included in accrued expenses. The fair value
of these agreements is not recognized in the financial statements.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents and accounts and notes
receivable. The Company places its cash equivalents with high credit-quality
financial institutions and has established guidelines that seek to maintain
safety and liquidity. The Company's customer base consists of a large number of
diverse customers. The Company performs ongoing credit evaluations of its
customers and does not require collateral. The Company provides for potential
credit losses; such losses have been within management's expectations.
F-9
42
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Equipment, including assets of $175,480 purchased under a capital lease
obligation, are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is computed over the estimated useful lives of the
assets using the straight-line method. Capital lease amortization is included in
depreciation expense.
Intangible assets (consisting primarily of goodwill, license, technology, patent
and other costs) are stated at cost, less accumulated amortization. Amortization
is computed by the straight-line method over periods ranging from 3 to 25 years.
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. If such impairment indicators are present, the Company recognizes a
loss on the basis of whether these amounts are fully recoverable from projected
discounted cash flows of the related asset or product.
ADVERTISING COSTS
Advertising costs are generally expensed as incurred and are included in
selling, general and administrative expenses. Advertising costs were $1,358,419
in 2001, $998,573 in 2000 and $603,670 in 1999.
DEFERRED INCOME TAXES
Deferred income taxes are provided on temporary differences between the tax and
financial reporting bases of assets and liabilities based on enacted tax rates
applicable to the periods in which the differences are expected to reverse.
EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) savings plan (the "Plan") which
covers all employees who meet the eligibility requirements, as defined.
Participants may contribute a percentage of their compensation, as defined by
the plan agreement. Matching contributions to the Plan are determined annually
by the Company and are equal to a stated percentage of the amount contributed by
the participants. During fiscal year 2001, the Company increased its matching
contributions and enacted other improvements to the Plan in order to attract and
retain its employees. The Company's matching contributions in fiscal years 2001,
2000, and 1999 were $260,495, $58,014 and $55,603, respectively.
F-10
43
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND ACCOUNTING POLICIES (CONTINUED)
The Company maintains an Employee Stock Ownership Plan ("ESOP") under which all
shares have previously been allocated to participants. The 110,135 shares held
by the ESOP in participant accounts are treated as outstanding for the purpose
of computing earnings per share. Expenses pertaining to the ESOP were not
material for fiscal years 2001, 2000 and 1999.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock compensation plans in accordance
with Accounting Principle Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Under APB No. 25, compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date over the amount the
employee must pay to acquire the stock. As required by Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting had been applied, are presented in Note 7.
2. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2001, management commenced and completed a
comprehensive review of the Company's operations and strategic direction and
initiated operating changes. Also in the fourth quarter, the Company wrote off
an uncollectible account receivable. These events culminated in a charge of
$4.25 million. Approximately $2.3 million of this charge is reported under cost
of products sold and $1.95 million is reported under restructuring and other
charges. Of the latter amount about $1.2 million will be paid in cash.
Included in the restructuring and other charges is $700,000 of severance costs
associated with the planned termination of 30 employees and $300,000 associated
with restructuring costs. These costs are primarily related to the realignment
of the domestic sales organization and the closing of the Redmond, Washington
facility. While the Company expects to remain a strong competitor in pulse
oximetry with its state-of-the-art technology and cost avoidance programs,
management believes that its cardiopulmonary technology provides a significant
growth opportunity for the Company over the next several years. Accordingly,
management increased the Company's emphasis on cardiopulmonary products and
markets, completely reorganizing its domestic sales force and initiating a
program to centralize its R&D processes. As a result of the revised sales and
marketing strategies for cardiopulmonary products and focusing the scope of
products being offered for sale, the Company wrote off $2.3 million of inventory
which became obsolete. This amount is included in cost of products sold. Also
included in the restructuring and other charges is an estimated $500,000 to
settle certain existing litigation, $280,000 for an uncollectible account
receivable and miscellaneous other charges of $320,000.
F-13
44
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
2. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
As of April 29, 2001, 4 employees have been terminated and severance payments of
approximately $25,000 have been made. Further, as of April 29, 2001, $1.2
million of the accrual for restructuring and other charges remains unpaid
consisting primarily of severance and litigation expenses.
3. ACQUISITION
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 cash of $8.7 million 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 was 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 on 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, amortized on a
straight-line basis over 25 years. The Company will adopt the Financial
Accounting Standards Board Statement No. 142, "Goodwill and Other Intangibles",
in the first quarter of fiscal 2002. Under this statement, the Company will no
longer amortize goodwill but will be required to test for impairment at least
annually. The accompanying consolidated statements of income do not include any
revenues or expenses related to this acquisition prior to the closing date.
Following are the Company's unaudited proforma results for both fiscal year 2000
and 1999 assuming that the acquisition had taken place at the beginning of the
earliest year presented (in thousands except share and per share data):
FISCAL YEAR ENDED
-----------------------
2000 1999
------- ----------
Net revenue $45,092 $ 39,793
Income before cumulative effect of a change in accounting principle 2,313 1,608
Net income 2,090 1,608
Per common share amounts:
Income before cumulative effect of a change in accounting principle:
Basic $ 0.29 $ 0.19
Diluted 0.28 0.19
F-12
45
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION (CONTINUED)
FISCAL YEAR ENDED
--------------------------------
2000 1999
------------- -------------
Net income:
Basic $ 0.26 $ 0.19
Diluted 0.25 0.19
Weighted average common shares:
Basic 8,086,432 8,299,707
Diluted 8,307,334 8,602,126
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 earliest period presented above.
4. NOTES RECEIVABLE
During fiscal 1999, the Company sold products in exchange for long-term
non-interest bearing notes receivable, generally payable over a period of eight
years. The Company has imputed interest on these notes based upon its estimated
incremental borrowing rate. In addition, the Company has notes receivable from
various officers and directors. These notes bear interest at a fixed rate
determined by the Applicable Federal Rate, as defined (4.63% at April 29, 2001),
and provide for quarterly interest payments until the third anniversary of the
note at which time the principal is due. Notes receivable consist of:
APRIL 29, 2001 APRIL 30, 2000
---------- ----------
Notes exchanged for product sales (net of
unamortized discount of $178,013 in 2001
and $241,964 in 2000) $1,113,544 $1,226,079
Officer and director notes receivable 532,554 532,554
Other 80,034 109,652
---------- ----------
1,726,132 1,868,285
Less current portion 565,421 260,722
---------- ----------
$1,160,711 $1,607,563
========== ==========
F-13
46
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. DEBT AND CAPITAL LEASE OBLIGATION
Debt and capital lease obligation consist of:
APRIL 29, 2001 APRIL 30, 2000
----------- -----------
Note payable to bank under revolving credit agreement $ 4,675,000 $ 1,775,000
Term loans payable to banks 5,840,000 8,360,000
Capital lease obligation 10,600 50,865
----------- -----------
10,525,600 10,185,865
Less current portion 7,205,600 4,335,264
----------- -----------
$ 3,320,000 $ 5,850,601
=========== ===========
The Company's revolving credit agreement, as amended March 30, 2001, limits
borrowing to a maximum of $10,000,000, bears interest at LIBOR plus 1.3% (6.38%
at April 29, 2001), and expires August 31, 2002. The Company is required to pay
an availability fee, as defined, equal to 0.125% of the unused available
principal amount under the revolving credit agreement.
The acquisition of ChMV (see Note 2) and related costs were financed with two
term loans, each in the amount of $4,800,000, aggregating $9,600,000. Under an
amended and restated agreement with the Company's primary lender, the Company
increased its borrowings by an additional $4,800,000 in the form of a five-year
term loan which is payable in monthly installments of $80,000 plus interest at
LIBOR plus 1.6% (6.68% at April 29, 2001) with a revised maturity date of July
2003. The Company also entered into a $4,800,000 five-year term loan with
another bank which is payable in monthly installments of $80,000 plus interest
at LIBOR plus 1.6% (6.68% at April 29, 2001) with a revised maturity date of
July 2003. Total unpaid principal relating to these term loans is $4,240,000 at
April 29, 2001.
The Company also has a term loan payable to its primary bank with an outstanding
principal balance of $1,600,000 at April 29, 2001. The term loan is due in
monthly installments of $50,000, plus interest at LIBOR plus 1.4% (6.48% at
April 29, 2001) through November 30, 2003. In fiscal 1999, the Company entered
into an interest rate swap agreement for 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. The Company believes the interest rate swap
transaction agreement limits the risk of increasing interest rates. The interest
rate swap agreement had no material effect on interest expense in 2001 or 2000.
F-14
47
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. DEBT AND CAPITAL LEASE OBLIGATION (CONTINUED)
Under the terms of the term loans and revolving credit agreement (the
"Facilities"), the Company is required to maintain certain financial ratios and
minimum levels of working capital and net worth. Borrowings under the Facilities
are secured by the Company's business assets.
The capital lease obligation is at a fixed interest rate of 8.87% and is
collateralized by the leased property.
Aggregate annual maturities of debt and the capital lease obligation as of April
29, 2001 follow:
CAPITAL
DEBT LEASE TOTAL
----------- ----------- -----------
2002 $ 2,520,000 $ 10,748 $ 2,530,748
2003 7,195,000 7,195,000
2004 800,000 800,000
----------- ----------- -----------
Total 10,515,000 10,748 10,525,748
Less amount representing interest on
capital lease 148 148
----------- ----------- -----------
$10,515,000 $ 10,600 $10,525,600
=========== =========== ===========
The Company paid interest under its bank debt agreements and capital lease
obligation of $953,393 in 2001, $963,940 in 2000 and $172,768 in 1999.
6. CAPITAL STOCK
The Company has authorized 1,000,000 shares of $1.00 par value Preferred Stock
of which 50,000 shares are designated as Series A (none issued) and 120,000
shares are designated as Series B. The Board of Directors of the Company is
authorized to establish, among other things, the rate of dividends payable,
redemption rights and voting rights prior to issuance. All Series B shares have
been issued and subsequently converted to Common Stock.
At April 29, 2001 there were 8,714,697 preferred share purchase rights
outstanding. Each right entitles the registered holder to purchase one
one-hundredth of a share of Preferred Stock, Series A, for $25.00 upon the
occurrence of certain specified "takeover" events. The rights are redeemable and
exchangeable only in certain specified circumstances. As of April 29, 2001, no
takeover events had occurred and no rights were exercisable.
F-15
48
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
6. CAPITAL STOCK (CONTINUED)
During fiscal 1999, the Company purchased 960,903 shares of its Common Stock for
$4,655,072 under its stock repurchase programs which have expired.
On March 16, 2000, the Company completed a $3,000,000 private equity placement
with GE Marquette Medical Systems Inc. Under the terms of the agreement, the
Company issued 250,000 units (the "Units") at $12 per Unit with each Unit
consisting of two shares of Common Stock and a five-year warrant to purchase one
share of Common Stock at $7.50 per share (a total of 500,000 shares of Common
Stock and warrants for an additional 250,000 shares of Common Stock).
7. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS
In fiscal 2001, the Board of Directors approved the 2000 Long-term Incentive
Plan (the "Incentive Plan") which provides for the granting of nonqualified
stock options, incentive stock options ("ISOs"), and other stock-based awards to
employees, consultants and other individuals providing services to the Company.
The Company reserved 650,000 shares of its Common Stock for issuance under the
Incentive Plan. The Company also has a limited number of remaining issuable
stock options from stock option plans authorized during previous years.
Activity relating to the Company's stock option plans follows:
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 942,283 $5.01 758,453 $5.07 709,953 $5.94
Granted 606,000 5.75 225,000 4.41 65,000 5.03
Exercised (27,333) 1.72 (28,668) 2.06 (9,000) 2.83
Cancelled (59,667) 5.25 (12,502) 4.71 (7,500) 5.44
--------- ----- ------- ----- ------- -----
Outstanding at end
of year 1,461,283 $5.37 942,283 $5.01 758,453 $5.07
========= ===== ======= ===== ======= =====
Options exercisable
at end of year 691,274 $5.25 589,597 $5.05 476,453 $5.01
========= ===== ======= ===== ======= =====
F-16
49
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
Options outstanding as of April 29, 2001 had exercise prices as follows: 634,283
options ranging from $2.63 to $5.06 and 827,000 options ranging from $5.50 to
$6.31. The weighted average remaining contractual life of these options is 7.4
years.
During fiscal 1999, the Company repriced 250,000 options with an exercise price
of $9.125 and 50,000 options with an exercise price of $7.625 to $6.3125, the
fair value of the Company's Common Stock on the date of repricing.
At April 29, 2001, options for 560,670 shares have been authorized but not yet
granted under the Company's stock option plans.
The Company has an employee stock purchase plan expiring on December 31, 2009
for which 100,000 shares of Common Stock have been reserved. As of April 29,
2001, 6,860 shares of Common Stock had been issued under this plan.
The Company has redeemable Class B Warrants outstanding covering an aggregate of
566,785 shares. The warrants, each exercisable into one share of Common Stock at
an exercise price of $5.85, are scheduled to expire on December 8, 2001. They
are callable by the Company under certain circumstances and traded on The Nasdaq
Stock Market(R) under the symbol "NMTXZ". The Company's outstanding warrants
also include warrants issued in fiscal 2000 in connection with the private
equity placement and acquisition of ChMV as well as warrants previously granted
to a director and consultants to purchase shares of the Company's Common Stock.
Data relating to warrants outstanding at April 29, 2001 follows:
NUMBER OF SHARES
FISCAL YEAR RANGE OF COVERED BY OUTSTANDING
WARRANTS GRANTED EXERCISE PRICES WARRANTS
---------------- --------------- --------
1993 $2.625 10,000
1995 $ 4.125 to $ 5.85 639,964
2000 $4.3625 to $ 7.50 275,000
-------
924,964
=======
The warrants were granted at prices which equaled or exceeded the market price
of the Company's Common Stock at the date of grant. The warrants expire at
various dates through March 2005, and are all currently exercisable. During
fiscal 2001, 417 warrants expired.
F-17
50
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
At April 29, 2001, there were 3,040,057 shares of Common Stock reserved for the
issuance and exercise of options and warrants, and purchases through the
Company's employee stock purchase plan.
If compensation costs for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for 2001, 2000 and 1999
consistent with the method prescribed by SFAS No. 123, the Company's net (loss)
income and (loss) earnings per common share would have been adjusted to the pro
forma amounts indicated below:
FISCAL YEAR ENDED
----------------------------------------------------------
2001 2000 1999
---- ---- ----
Pro forma net (loss) income $(108,480) $1,674,576 $1,576,060
Pro forma (loss) earnings per share:
Basic $ (.01) $ .21 $ .19
Diluted (.01) .20 .18
Pro forma compensation cost relating to the stock options is recognized over the
vesting period which ranges from 36 to 60 months. The fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for grants in
fiscal 2001, 2000 and 1999: dividend yield of 0%; expected volatility of .772%
in 2001, .961% in 2000 and .892% in 1999; risk free interest rate of 5.5% in
2001, 6.5% in 2000 and 6% in 1999; and expected life of ten years. The weighted
average fair value of stock options granted in fiscal 2001, 2000 and 1999 was
$4.75, $4.01 and $4.45, respectively.
8. EARNINGS PER SHARE
FISCAL YEAR ENDED
2001 2000 1999
---- ---- ----
NUMERATOR
Income before cumulative effect of a change in
accounting principle $618,677 $2,464,825 $2,066,667
======== ========== ==========
F-18
51
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
8. EARNINGS PER SHARE (CONTINUED)
FISCAL YEAR ENDED
2001 2000 1999
---------- ---------- ----------
DENOMINATOR
Denominator for basic earnings per share -
Weighted average shares outstanding 8,685,278 8,086,432 8,299,707
Effect of dilutive employee stock options and warrants 161,391 220,902 296,455
---------- ---------- ----------
Denominator for diluted earnings per share 8,846,669 8,307,334 8,596,162
========== ========== ==========
Basic earnings per share $ .07 $ .31 $ .25
========== ========== ==========
Diluted earnings per share $ .07 $ .30 $ .24
========== ========== ==========
Certain options and warrants to purchase 1,666,964, 1,342,964 and 919,285 shares
of the Company's Common Stock outstanding in 2001, 2000 and 1999, respectively,
were not included in the computation of diluted earnings per share because their
exercise price was greater than the average market price of the common shares
and, therefore, their inclusion would have been antidilutive.
9. CONTINGENCIES
In the fourth quarter of 2001, management decided to commence action to settle
certain litigation in order to focus Company resources on operations. In
connection therewith, the Company recorded a $500,000 accrual for the estimated
costs to settle these matters.
The Company is a party to various other legal proceedings incidental to its
business. Management believes that these other legal proceedings will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
F-19
52
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
10. OPERATING LEASES
The Company has a noncancellable long-term operating lease for its main plant
and office facility which expires in 2008. The lease requires the Company to pay
for related property taxes and insurance, contains a renewal option for five
years, a purchase option upon the sixth anniversary of the lease and stipulates
a general inflation escalation clause. In addition, the Company leases other
facilities and certain equipment under various noncancellable long-term
operating leases. Future minimum annual lease payments for these long-term
operating leases for the next five years and thereafter are:
2002 $ 651,038
2003 619,671
2004 533,073
2005 496,475
2006 448,692
Thereafter 918,956
-----------
$ 3,667,905
===========
Total rental expense under operating leases was $838,989 in 2001, $756,844 in
2000 and $687,219 in 1999.
11. INCOME TAXES
The components of the Company's deferred income tax accounts follow:
FISCAL YEAR ENDED
2001 2000 1999
---- ---- ----
Deferred income tax assets:
Tax credits $ 682,755 $1,138,886 $1,079,585
Net operating loss carryforwards 710,932 1,976,314
Inventories - valuation allowance and other 1,618,363 679,242 734,492
Pre-production costs 46,403 119,177
Warranty accrual 343,766 187,993
Accrued compensation 294,870
Other 263,304 253,036 190,058
---------- ---------- ----------
Total deferred income tax assets 3,249,461 3,089,266 3,980,449
F-20
53
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
FISCAL YEAR ENDED
2001 2000 1999
---- ---- ----
Valuation allowance for deferred
income tax assets $ (158,780)
---------- ---------- ----------
$3,249,461 $3,089,266 3,821,669
Less deferred income tax liabilities 129,858 134,139 104,181
---------- ---------- ----------
Net deferred income tax assets $3,119,603 $2,955,127 $3,717,488
========== ========== ==========
Income tax expense consists of the following:
FISCAL YEAR ENDED
2001 2000 1999
---- ---- ----
Current tax expense:
Federal $ 304,981 $ 102,470 $ 78,000
State 161,870 115,920 39,000
---------- ---------- ----------
466,851 218,390 117,000
Deferred tax expense (benefit):
Federal (20,685) 983,277 685,700
State (105,795) (12,337) 1,000
---------- ---------- ----------
(126,480) 970,940 686,700
---------- ---------- ----------
Income tax expense $ 340,371 $1,189,330 $ 803,700
========== ========== ==========
The provision for income taxes at the Company's tax rate differed from the
provision for income taxes at the statutory rate as follows:
FISCAL YEAR ENDED
2001 2000 1999
---- ---- ----
Computed tax expense at expected
statutory rate $ 326,076 $1,242,413 $ 975,925
Benefit of foreign sales corporation (163,814) (88,627) (60,629)
State taxes, net of federal effect 44,153 68,365 26,465
Goodwill amortization 104,152 87,921
Other permanent items -- net effect 54,446 34,239 63,689
Tax credits (24,642) 3,799 (32,102)
Reduction in valuation allowance (158,780) (169,648)
---------- ---------- ----------
$ 340,371 $1,189,330 $ 803,700
========== ========== ==========
F-21
54
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
As of April 29, 2001, the Company had unused research tax credits of
approximately $330,000 which expire in varying amounts through 2013 and
alternative minimum tax credits of $352,000 which do not have expiration dates.
During 2000 and 1999, the Company reduced its valuation allowance due to the
increased likelihood that the Company would generate sufficient taxable income
to fully utilize the net deferred income tax asset recorded at the end of each
reporting period.
Income taxes paid in 2001, 2000 and 1999 were not significant.
12. RECENT ACCOUNTING PRONOUNCEMENT
The Company was required to adopt Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements", in the fourth quarter of fiscal
2001. SAB 101 explains how the Securities and Exchange Commission staff believes
existing rules on revenue recognition should be applied to or analogized for
transactions not addressed by existing rules. SAB 101 did not have an impact on
the Company's financial statements.
On April 30, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133) and its related amendments. FAS 133 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.
Changes in the fair value of derivative financial instruments are either
recognized periodically in operations or in shareholders' equity as a component
of accumulated comprehensive income depending on whether the derivative
financial instrument qualifies for hedge accounting, and if so, whether it
qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair
values of derivatives accounted for as fair value hedges are recorded in
operations along with the portions of the changes in the fair values of the
hedged items that relate to the hedged risk(s). Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in accumulated comprehensive income net of deferred
income taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in operations. The adoption of FAS 133 in fiscal 2002 will have a
nominal effect on the Company's financial statements.
F-22
55
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
13. 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. The Company's products are marketed domestically and
internationally with no one customer accounting for more than 10% of net sales.
The Company has earned revenue from sales to customers in the following
geographic locations:
2001 2000 1999
---- ---- ----
United States $36,825,834 $29,742,578 $20,608,666
Europe 6,305,345 5,679,667 4,484,675
Asia 4,666,569 3,184,791 3,234,864
Western Hemisphere (other than U.S.) 5,121,227 3,870,443 3,437,907
Other 1,763,288 1,204,744 1,098,561
----------- ----------- -----------
$54,682,263 $43,682,223 $32,864,673
=========== =========== ===========
14. FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts and notes receivable,
accounts payable and debt as of April 29, 2001 and April 30, 2000 approximate
fair value. The fair value of the interest rate swap was nominal as of April 29,
2001 and April 30, 2000.
F-23
56
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
15. QUARTERLY DATA (UNAUDITED)
Following is a summary of quarterly results of operations for the years ended
April 29, 2001 and April 30, 2000:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2001
Revenues $12,605,339 $13,521,516 $14,101,411 $ 14,621,434
Gross profit(a) 7,298,283 7,038,977 7,700,409 5,632,852
Research and product
development expenses 1,109,273 1,047,504 1,102,540 1,233,702
Selling, general and
administrative expenses 4,253,347 4,673,738 5,030,862 4,901,048
Income taxes 571,000 338,000 419,000 (987,629)
Net income (loss)(a) 1,038,088 615,108 760,053 (1,794,572)
Basic and diluted earnings
(loss) per share(a) $ 0.12 $ 0.07 $ 0.09 $ (0.21)
(a) In the fourth quarter of 2001, the Company recorded a $4.25 million
charge associated with certain restructuring activities and other
charges. Approximately $2.3 million of this charge is reported in cost
of products sold and $1.95 million is reported as restructuring and
other charges. Excluding the $4.25 million charge, fourth quarter basic
and diluted earnings per share were $0.11 (see Note 2).
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2000
Revenues $ 7,684,741 $10,508,325 $12,167,218 $13,492,738
Gross profit 4,452,094 6,130,833 6,982,438 7,618,370
Research and product
development expenses 972,191 1,040,494 1,060,985 1,131,487
Selling, general and
administrative expenses 3,216,910 3,910,102 4,299,736 4,553,523
Income taxes 23,100 265,000 391,000 510,230
F-24
57
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
15. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Income before cumulative
effect of a change in
accounting principle $ 49,010 $ 562,528 $ 830,133 $ 1,023,154
Net income (174,534) 562,528 830,133 1,023,154
Basic and diluted earnings
per share data:
Income before cumulative
effect of a change in
accounting principle $ 0.01 $ 0.07 $ 0.10 $ 0.12
Cumulative effect of a
change in accounting
principle $ (0.03) -- -- --
Net income $ (0.02) $ 0.07 $ 0.10 $ 0.12
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts may
not necessarily equal the total for the year.
F-25
58
Novametrix Medical Systems Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
April 29, 2001
COL. A COL. B COL. C COL. D COL. E
- --------------------------- ------------ ----------------------------- ------------- -------------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- ------ -------- -------- ------------- -------------
Year ended April 29, 2001:
Allowance for doubtful
accounts deducted from
accounts receivable $ 300,000 $ 306,000 $ -- $ 306,000 $ 300,000
========== ========== ========= ========== ==========
Year ended April 30, 2000:
Allowance for doubtful
accounts deducted from
accounts receivable $ 250,000 $ 47,000 $ 50,000 $ 47,000 $ 300,000
========== ========== ========= ========== ==========
Year ended May 2, 1999:
Allowance for doubtful
accounts deducted from
accounts receivable $ 250,000 $ 12,000 $ -- $ 12,000 $ 250,000
========== ========== ========= ========== ==========
- ----------
(1) Uncollectible accounts written off, net of recoveries.
F-26
59
Index to Exhibits*
Page
3(a) Certificate of Incorporation of the Company, as amended (incorporated by --
reference to Exhibit 3(a) and 3(e) to the Company's Registration Statement on
Form SB-2 dated June 8, 1994).
3(b) Certificate of Designation of Series A Preferred Stock of the Company filed with --
the Secretary of State of the State of Delaware on March 17, 1989 (incorporated
by reference to Exhibit 3(b) to the Company's Registration Statement on Form SB-2
dated June 8, 1994).
3(c) Certificate of Designation of Series B Preferred Stock of the Company filed with --
the Secretary of State of the State of Delaware on August 29, 1991 (incorporated
by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated
August 29, 1992).
3(d) By-Laws of the Company, as amended to date (incorporated by reference to Exhibit --
3(d) of the Company's Form 10-KSB for the year ended April 28, 1996).
3(e) Amendment to By-Laws of the Company effective September 30, 1997 (incorporated by --
reference to Exhibit 3(e) of the Company's Form 10-QSB for the quarter ended
November 2, 1997).
3(f) Amendment to Certificate of Designation of Series A Preferred Stock of the --
Company filed with the Secretary of State of the State of Delaware on December
30, 1999 (incorporated by reference to Exhibit 10(ss) of the Company's Current
Report of Form 8-K dated January 13, 2000).
10(a) Employment Agreement dated as of June 1, 1988 between the Company and William J. --
Lacourciere, as amended (incorporated by reference to Exhibit 10(a) to the
Company's Registration Statement on Form SB-2 dated June 8, 1994).
10(b) Amendment dated as of August 1, 1988 to the Employment Agreement between the --
Company and William J. Lacourciere (incorporated by reference to Exhibit 10(b) to
the Company's Registration Statement on Form SB-2 dated June 8, 1994).
* Copies of exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to stockholders of the Company. The Company will furnish a copy of any of such
exhibits to any stockholder requesting the same for a nominal charge to cover
duplicating costs.
E-1
60
Page
10(c) Warrant Certificate of the Company, the warrants evidenced thereby exercisable --
commencing on December 29, 1989, together with Schedule of substantially
identical warrants (incorporated by reference to Exhibit 10(c) to the Company's
Form 10-KSB for the year ended April 28, 1996).
10(d) Warrant Certificate of the Company, the warrants evidenced thereby exercisable --
commencing on May 23, 1990 (incorporated by reference to Exhibit 10(d) to the
Company's Form 10-KSB for the year ended April 28, 1996).
10(e) Warrant Certificate of the Company, the warrants evidenced thereby exercisable --
commencing on September 15, 1988, together with Schedule of substantially
identical warrants (incorporated by reference to Exhibit 10(e) to the Company's
Registration Statement on Form SB-2 dated June 8, 1994).
10(f) First Amendment to Warrant Certificate of the Company dated as of September 19, --
1989, together with Schedule of substantially identical amendments (incorporated
by reference to Exhibit 10(f) to the Company's Form 10-KSB for the year ended
April 28, 1996).
10(g) Warrant Certificate of the Company, the warrants evidenced thereby exercisable --
commencing on May 1, 1989, together with Schedule of substantially identical
warrants (incorporated by reference to Exhibit 10(g) to the Company's
Registration Statement on Form SB-2 dated June 8, 1994).
10(h) First Amendment to Warrant Certificate of the Company dated as of September 19, --
1989, together with Schedule of substantially identical amendments (incorporated
by reference to Exhibit 10(h) to the Company's Form 10-KSB for the year ended
April 28, 1996).
10(i) Warrant Certificate of the Company, the warrants evidenced thereby exercisable --
commencing on January 2, 1991 (incorporated by reference to Exhibit 10(dd) to the
Company's Registration Statement on Form S-1 dated December 30, 1991).
10(j) Form of Warrant Certificate of the Company, the warrants evidenced thereby --
exercisable commencing on December 2, 1991 (incorporated by reference to Exhibit
10(ee) to the Company's Registration Statement on Form S-1 dated December 30,
1991).
E-2
61
Page
10(k) Rights Agreement dated as of March 14, 1989 between the Company and The --
Connecticut Bank and Trust Company, N.A., as Rights Agent ("CBT"), which includes
the form of Certificate of Designation setting forth the terms of the Series A
Preferred Stock, $1.00 par value, as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C
(incorporated by reference to Exhibit 10(l) to the Company's Registration
Statement on Form SB-2 dated June 8, 1994).
10(l) Amendment to Rights Agreement dated as of October 30, 1990 among the Company, CBT --
and Mellon Bank, N.A. (incorporated by reference to Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the year ended April 28, 1991).
10(m) Amendment to Rights Agreement dated as of August 29, 1991 between the Company and --
Mellon Bank, N.A. (incorporated by reference to Exhibit 10(p) to the Company's
Registration Statement on Form S-1 dated December 30, 1991).
10(p) Securities Purchase Agreement dated as of August 29, 1991 among the Company, --
William W. Nicholson, Auric Partners Limited, a Michigan limited partnership, and
Union Trust Company (incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated August 29, 1991).
10(q) Third Amended and Restated Loan and Security Agreement dated as of August 29, --
1991 among the Company, NTC Technology Inc., a Delaware corporation ("NTC"), and
Union Trust Company (incorporated by reference to Exhibit 3 to the Company's
Current Report on Form 8-K dated August 29, 1991).
10(r) First Amendment to Third Amended and Restated Loan and Security Agreement dated --
as of April 29, 1993 among the Company, NTC and Union Trust Company (incorporated
by reference to Exhibit 5(a) to the Company's Current Report on Form 8-K dated
April 28, 1993).
10(s) 1979 Stock Option Plan, as amended (incorporated by reference to Exhibit 10(ee) --
to the Company's Annual Report on Form 10-K for the year ended May 2, 1993).
10(t) 1990 Stock Option Plan (incorporated by reference to Exhibit 10(ff) to the --
Company's Annual Report on Form 10-K for the year ended May 2, 1993).
E-3
62
Page
10(u) 1992 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10(gg) to --
the Company's Annual Report on Form 10-K for the year ended May 2, 1993)
(incorporated by reference to Exhibit 10(y) to the Company's Registration
Statement on Form SB-2 dated June 8, 1994).
10(v) Form of Letter Agreement between the Company and Keane Securities Co., Inc. --
("Keane") pursuant to which Keane will act as finder for the Company
(incorporated by reference to Exhibit 10(z) to the Company's Registration
Statement on Form SB-2 dated June 8, 1994).
10(w) Fourth Amended and Restated Loan and Security Agreement dated as of June 16, 1994 --
among the Company, NTC and Union Trust Company (incorporated by reference to
Exhibit 10A to the Company's Quarterly Report on Form 10-QSB for the three month
period ended July 31, 1994).
10(x) Amendment to Securities Purchase Agreement dated as of June 16, 1994 among the --
Company, William W. Nicholson, Auric Partners Limited and Union Trust Company
(incorporated by reference to Exhibit 10B to the Company's Quarterly Report on
Form 10-QSB for the three month period ended July 31, 1994).
10(y) 1994 Stock Option Plan (incorporated by reference to Exhibit 4(i) to the --
Company's Registration Statement on Form S-8, dated August 3, 1994).
10(z) Form of Representative Warrant Agreement, certificate included (incorporated by --
reference to Exhibit 4(a) to the Company's Registration Statement on Form SB-2
dated June 8, 1994).
10(aa) Form of Warrant Agreement, certificate included (incorporated by reference to --
Exhibit 4(b) to the Company's Registration Statement on Form SB-2 dated June 8,
1994).
10(bb) Amendment No. 1 to Fourth Amended and Restated Loan and Security Agreement dated --
as of July 26, 1995 among the Company, NTC and First Fidelity Bank, formerly
Union Trust Company (incorporated by reference to Exhibit 10(ff) to the Company's
Annual Report on Form 10-KSB for the year ended April 30, 1995).
10(cc) Amendment No. 3 to Rights Agreement dated as of November 28, 1995 between the --
Company and Mellon Bank, N.A. (incorporated by reference to Exhibit 10(cc) to the
Company's Form 10-KSB for the year ended April 28, 1996).
10(dd) Lease dated January 4, 1996 between Nova Associates, L.L.C. and the Company --
(incorporated by reference to Exhibit 10(dd) to the Company's Form 10-KSB for the
year ended April 28, 1996).
E-4
63
Page
10(ee) Amendment No. 2 to Fourth Amended and Restated Loan and Security Agreement dated --
as of October 25, 1996 among the Company, NTC and First Union Bank of
Connecticut, formerly First Fidelity Bank (incorporated by reference to Exhibit
10(ee) to the Company's Form 10-KSB for the year ended April 27, 1997).
10(ff) Amendment No. 3 to Fourth Amended and Restated Loan and Security Agreement dated --
as of April 25, 1997 among the Company, NTC and First Union Bank of Connecticut
(incorporated by reference to Exhibit 10(ff) to the Company's Form 10-KSB for the
year ended April 27, 1997).
10(gg) Restricted Stock Agreement between the Company and Joseph A. Vincent --
(incorporated by reference to Exhibit 10(gg) to the Company's Form 10-KSB for the
year ended April 27, 1997).
10(hh) Stockholders Agreement between the Company and the Charles F. Manning, Jr., M.D., --
Group dated as of September 30, 1997 (incorporated by reference to Exhibit 10(hh)
of the Company's Form 10-QSB for the quarter ended November 2, 1997).
10(ii) Amendment dated as of November 24, 1997 to Employment Agreement dated as of June --
1, 1988 between the Company and William J. Lacourciere (incorporated by reference
to Exhibit 10(ii) of the Company's Form 10-Q for the quarter ended February 1,
1998).
10(jj) Amendment No. 4 to Fourth Amended and Restated Loan and Security Agreement dated --
as of January 1, 1998 among the Company, NTC and First Union Bank of Connecticut
(incorporated by reference to Exhibit 10(jj) of the Company's Form 10-K for the
year ended May 3, 1998).
10(kk) 1997 Long Term Incentive Plan (incorporated by reference to Exhibit A of the --
Company's Proxy Statement for the Annual Meeting held October 14, 1997).
10(ll) Form of Promissory Note under the Novametrix Medical Systems Inc. Director and --
Senior Officer Stock Retention Program (incorporated by reference to Exhibit
10(ll) of the Company's Form 10-Q/A for the quarter ended January 2, 1999).
10(mm) Stock Purchase Agreement dated as of June 30, 1999 by and among the Company, --
Children's Medical Ventures, Inc. ("ChMV") and the Stockholders of ChMV
(incorporated by reference to Exhibit 10(mm) of the Company's Current Report of
Form 8-K dated July 15, 1999).
E-5
64
Page
10(nn) 1998 Loan Agreement dated as of August 1, 1998 among the Company, NTC and First --
Union National Bank (incorporated by reference to Exhibit 10(nn) of the Company's
Form 10-K for the year ended May 2, 1999).
10(oo) Amended and Restated 1998 Loan Agreement dated as of October 9, 1998 among the --
Company, NTC and First Union National Bank (incorporated by reference to Exhibit
10(oo) of the Company's Form 10-K for the year ended May 2, 1999).
10(pp) Second Amended and Restated 1998 Loan Agreement dated as of December 11, 1998 --
among the Company, NTC and First Union National Bank (incorporated by reference
to Exhibit 10(pp) of the Company's Form 10-K for the year ended May 2, 1999).
10(qq) 1999 Amended and Restated Loan Agreement dated as of June 30, 1999 among the --
Company, NTC, ChMV and First Union National Bank (incorporated by reference to
Exhibit 10(qq) of the Company's Form 10-K for the year ended May 2, 1999).
10(rr) Loan Agreement dated as of June 30, 1999 among the Company, NTC, ChMV and Webster --
Bank (incorporated by reference to Exhibit 10(rr) of the Company's Form 10-K for
the year ended May 2, 1999).
10(ss) Rights Agreement dated as of December 29, 1999 between the Company and --
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes the
form of Certificate of Designation setting forth the terms of the Series A
Preferred Stock, $1.00 par value, as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C
(incorporated by reference to Exhibit 10(ss) of the Company's Current Report of
Form 8-K dated January 13, 2000).
10(tt) Amendment No. 1 to 1999 Amended and Restated Loan Agreement dated as of April 28, --
2000 among the Company, NTC, ChMV and First Union National Bank (incorporated by
reference to Exhibit 10(tt) of the Company's Form 10-K for the year ended April 30,
2000).
10(uu) Amendment No. 1 to Loan Agreement dated as of April 28, 2000 among the Company, --
NTC, ChMV and Webster Bank (incorporated by reference to Exhibit 10(uu) of the
Company's Form 10-K for the year ended April 30, 2000).
10(vv) Unit Purchase and Master Agreement dated as of March 16, 2000 by and between the --
Company and GE Marquette Medical Systems, Inc. (incorporated by reference to
Exhibit 10(vv} of the Company's Form 10-K for the year ended April 30, 2000).
10(ww) Employment Agreement dated as of May 22, 2000 by and between the Company and --
Thomas Patton (incorporated by reference to Exhibit 10(ww) of the Company's
Form 10-K for the year ended April 30, 2000).
10(xx) Stock Option Agreement dated as of May 22, 2000 by and between the Company and --
Thomas Patton (incorporated by reference to Exhibit 10(xx) of the Company's Form
10-K for the year ended April 30, 2000).
10(yy) Employment Agreement dated as of September 30, 2000 by and between the Company E-8
and Joseph A. Vicent
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65
Page
10(zz) Employment Agreement dated as of September 30, 2000 by and between the Company E-23
and Philip F. Nuzzo
10(aaa) Second Amendment to 1999 Amended and Restated Loan Agreement dated as of March E-38
30, 2001 among the Company, NTC, ChMV and First Union National Bank.
10(bbb) Third Amendment to 1999 Amended and Restated Loan Agreement dated as of March 30, E-44
2001 among the Company, NTC, ChMV and First Union National Bank.
21 Subsidiaries of the Company. E-50
23.1 Consent of Ernst & Young LLP, Independent Auditors. E-51
24 Power of Attorney (See "Power of Attorney" in Form 10-K). --
E-7