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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 May 3, 1998
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 _____________
Commission file number 20-8969
NOVAMETRIX MEDICAL SYSTEMS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-0977422
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Technology Drive
Wallingford, Connecticut 06492
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (203) 265-7701
Securities registered under Section 12(b) of the Exchange Act:
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Name of each exchange
Title of each class on which registered
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None None
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Securities registered under Section 12(g) of the Exchange Act:
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Common Stock,
$.01 par value Class B Warrants
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<S> <C>
(Title of class) (Title of class)
</TABLE>
Page 1 of 65 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 July 1, 1998 ................. $57,131,791
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 July 1, 1998 ..... 8,857,786 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 July 29, 1998 -- Part III
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ITEM 1. BUSINESS.
GENERAL
Organized in 1978, Novametrix Medical Systems Inc. (the "Company") is
engaged in the business of designing, developing, manufacturing and marketing
monitors and sensors which provide continuous and non-invasive measurements of a
patient's blood gas levels (oxygen and carbon dioxide) and respiratory mechanics
(lung pressure, flow and volume). The Company's current product line consists of
the following:
- Capnographs -- monitors which measure the level of exhaled carbon
dioxide.
- Pulse Oximeters -- monitors which measure arterial blood oxygen
saturation levels and pulse rates.
- Volumetric CO2 Monitors - devices which utilize the integration of
CO2 and airway flow to provide significant new parameters such as
airway deadspace and CO2 elimination.
- Transcutaneous Blood Gas Monitors -- monitors which measure oxygen
and carbon dioxide levels through the skin.
- Respiratory Mechanics Monitors -- monitors which measure pressure,
flow and volume in a patient's airway and lungs.
- Reusable and disposable sensors and adapters, related accessories
and replacement parts.
The Company also produces several monitors which combine two or more of
the above parameters in a single device.
BLOOD GAS MONITORS
Levels of oxygen and carbon dioxide ("CO2") 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
during anesthesia in the operating room, the assessment of a patient in the
emergency room, the monitoring of a patient in the intensive care unit and
recovery room and throughout respiratory care applications. Healthy people have
a normal range of oxygen and CO2 levels in their blood, lungs and other tissue.
Also, depending on a person's size and age, there is a range of normal airway
and lung pressure, flow and volume levels. By continuously monitoring these
ranges, a change in a patient's status can be detected at an early stage and
modified before serious deterioration in a patient's condition occurs. In
addition, if a patient's blood gas levels or respiratory mechanics are outside
their normal ranges, continuous monitoring provides healthcare professionals
with important information concerning the progress of the medical treatment
undertaken to restore them to within normal ranges.
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Previously, the only methods of determining the body's oxygen and CO2
levels involved invasive techniques of withdrawing blood samples from a
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 CO2. The Company's blood gas
monitoring products utilize three different technologies, each of which is
suitable for different applications.
CAPNOGRAPH MONITORS. The Company's capnographs (or end-tidal CO2
monitors) provide a continuous, non-invasive measurement and display of the
amount of CO2 in each breath exhaled by the patient. Clinically, end-tidal CO2
levels have been correlated to a patient's arterial blood CO2 levels.
Measurement of these levels provides a simple, non-invasive method of estimating
the CO2 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
cardio-pulmonary 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 CO2 throughout
the patient's respiratory cycle. These monitors provide both a graphical and
digital display of CO2 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
CO2. In addition, end-tidal CO2 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.
The Company's TIDAL WAVE(TM) monitor (measuring 8" high, 3" wide and
1 1/2" deep and battery operated) is the first hand-held mainstream CO2 monitor
with a graphical waveform on the market. 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 has two bedside
capnographs: the CAPNOGARD(R), and the CO2SMO(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 and solid-state sensor developed by the Company. The TIDAL WAVE has a
list sales price of approximately $2,800 depending on configuration, the
CAPNOGARD has a list sales price of approximately $6,500 and the CO2SMO has a
list sales price of approximately $8,000.
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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. 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. Each oximeter utilizes
the Company's reusable Superbright(TM) sensors, which provide safe and accurate
results on all types of patients, including neonates (an infant less than 28
days old) and poorly perfused patients (patients with insufficient blood flow).
The Company's full-featured oximeter, the OXYPLETH(R), provides high visibility
of the plethysmographic waveform (a graphic display of arterial pulse, also
known as a plethysmogram) through the use of digital technology combined with
advanced software developed by the Company. The Model 515B and Model 515C (with
plethysmogram) pulse oximeters utilize the same basic technology and software as
our more expensive model to provide the same oxygen saturation and pulse rate
information but with fewer available added features.
This family of pulse oximeters also includes a battery operated
hand-held pulse oximeter, the SPO2T[checkmark]. Measuring approximately 6" high,
4" wide and 1-1/2" deep and weighing less than 1 pound, this monitor's
lightweight design and portability permits wide applications such as use in
emergency transport situations, doctors' offices, clinics during outpatient
procedures and performance of spot checks on patients in all areas of the
hospital.
The Company also offers a unique Sensor Management Program designed to
reduce hospital operating costs. Under the 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.
The OXYPLETH has a list sales price of approximately $3,000. The Model
515B, Model 515C and SPO2T[checkmark] have list sales prices of approximately
$2,000, $2,200 and $1,000, respectively.
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TRANSCUTANEOUS BLOOD GAS MONITORS. The Company's transcutaneous
(through the skin) blood gas monitor provides continuous and non-invasive
measurements of oxygen and CO2 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 CO2 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 CO2 at the
patient's skin surface and displays the information on the monitor. Premature
and other critically ill newborn infants are the primary patients who benefit
from the use of transcutaneous monitoring. In view of their limited blood
supply, frequent invasive blood sampling has been recognized as traumatic and
unsatisfactory for these patients.
The TCO2M(R) Model 860, a new transcutaneous monitor, is a lightweight,
portable unit with a simple menu system which guides the user through set-up and
operation. The TCO2M is the first monitor of its kind to provide on-screen
graphical trending information allowing patient data to be reviewed directly at
the bedside. TCO2M accepts combination or single oxygen and CO2 sensors for
optimum versatility and has a list sales price of approximately $6,500 to $8,500
depending on configuration.
VOLUMETRIC CO2 MONITORS
The Company's newest monitor, the CO2SMO Plus!(TM), is the first
monitor to integrate airway flow measurements with capnography (and pulse
oximetry) in one small package for continuous bedside monitoring of mechanically
ventilated patients. The CO2SMO- Plus! provides continuous, non-invasive
measurements of flow, pressure and volume in a patient's airway, as well as
measurements of other pulmonary mechanics- CO2 elimination and arterial
oxygenation. Applications for this monitor include the clinical management of
proper pressure and flow of airway gases being delivered to a mechanically
ventilated patient's lungs, allowing therapists to wean a patient from costly
mechanical ventilation to spontaneous breathing at the clinically appropriate
time. The addition of the first combined mainstream CO2 adapter/flow sensor
provides continuous measurements of pulmonary deadspace, the portion of the
patient's lungs that does not participate in gas exchange, and CO2 elimination,
the volume of CO2 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. Thus the use of the CO2SMO Plus! enhances
patient care by minimizing the trauma, length of stay and costs associated with
mechanical ventilation. The CO2SMO Plus! has a list price of approximately
$11,000.
RESPIRATORY MECHANICS MONITORS
Respiratory mechanics monitors provide continuous information on a
patient's ventilatory status to help prevent Barotrauma (lung rupture) and other
complications associated with mechanical ventilation.
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Vent[checkmark]TM, (Ventcheck) a hand-held respiratory mechanics monitor,
measures flow, pressure and volume at the airway and graphically displays flow
and pressure waveforms and loops, breath by breath. Measuring 8" high, 3" wide
and 1-1/2" deep and battery operated, this monitor is designed for spot checking
mechanically ventilated patients and, when used during transport, provides an
additional level of safety for the patient. Respiratory therapy and critical
care departments with patients requiring mechanical ventilation represent the
primary users of the Vent[checkmark].
The Company's VenTrak(R) Model 1550 respiratory mechanics monitor also
provides pressure, flow and volume in a patient's airway, both continuously and
non-invasively. In addition, the VenTrak can be combined with the Company's
capnography technology for enhanced monitoring of mechanical ventilation
effectiveness and patient respiratory capabilities.
The Vent[checkmark] has a list sales price of approximately $2,000 and the
VenTrak has a list sales price of approximately $9,000 to $13,000 depending upon
its configuration.
The Company also maintains the exclusive rights to patented technology for
the commercial manufacture and marketing of a family of disposable airway
sensors and a combined CO2/flow adapter.
SALES, MARKETING AND CUSTOMERS
The Company markets its products domestically and internationally
through salespersons and outside distributors to its customers, most of which
are hospitals. All of the Company's blood gas and respiratory mechanics products
are marketed primarily to hospitals for use in operating rooms, emergency rooms,
intensive care units, respiratory therapy departments, transport situations and
in other departments where critically ill or injured patients require
monitoring. The Company is expanding its marketing efforts to physician groups,
nursing homes, surgical centers, outpatient clinics and other healthcare
facilities through the use of private label agreements and specialty
distributors experienced in these marketplaces.
The Company also markets its products to original equipment
manufacturers (OEMs) 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 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.
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The Company employs a 21-person direct United States sales force and
also utilizes four outside distributors in the United States to sell its
products. Typically, these distributors sell other medical instruments and
products, but do not sell products which compete directly with those offered by
the Company. In addition, the Company utilizes manufacturer's representatives to
support sales of its products in the non-hospital markets.
Internationally, the Company currently employs six sales and marketing
managers 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 41%, 41% and 45% of total net
sales during Fiscal 1998, 1997 and 1996, 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 the Company's 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.
The Company's international sales are denominated in U.S. dollars,
which may be affected by exchange rate fluctuations. The Company believes that
fluctuations in the strength of the U.S. dollar have had a minimal impact on its
international sales during prior fiscal years. However, economic uncertainties
and current devaluations against the U.S. dollar in the Pacific Rim region
during the latter part of Fiscal 1998, modestly affected the Company's sales.
The Company is continuing its efforts to maximize business opportunities in that
region as it monitors economic events.
No customer accounted for more than 10% of the Company's net sales in
Fiscal 1998, 1997 or 1996.
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 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 activities are devoted to the
design and development of new monitor and sensor technologies and to the
development and enhancement of its existing 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. With the advent
of managed care and continuing healthcare cost containment efforts, these
research and development activities are focused
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on providing technology and related products which measure and record medically
necessary information in a safe and cost-effective manner.
The Company's research and development activities presently are, and
during the foreseeable future are expected to be, devoted primarily to the
development and enhancement of the Company's existing products and technologies
and to the design and development of new products. For Fiscal 1998, 1997 and
1996, the Company incurred research and development costs aggregating
approximately $9,541,000, of which approximately $3,523,000 was attributable to
Fiscal 1998, $3,304,000 was attributable to Fiscal 1997 and $2,714,000 to Fiscal
1996. All of the Company's research and development activities are sponsored by
the Company.
The Company's Cascadia Technology Division, located in Redmond,
Washington, is principally engaged in research and development. 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 the needed components and supplies are available
from alternate sources. The Company has not experienced any interruption of
production or deliveries of components, supplies or equipment. However, there
can be no assurance that the Company will continue to receive timely service or
that the Company would be able to find readily a substitute manufacturer if one
were needed on short notice. 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
warrants its products against defects in material and workmanship, including
parts and labor, for one year or more, except for certain non-capital items
which the Company warrants for shorter periods. The Company also offers extended
warranty programs that may be purchased by its customers. Historically, the
Company's annual warranty expenses have been immaterial.
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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 May 3, 1998 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 27 U.S. patents and has pending applications for 11
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 22 trademarks in the United
States including, but not limited to, Novametrix(R), CAPNOGARD(R), CAPNOSTAT(R),
CO2SMO(R), CO2SMO Plus!(TM), Y-Sensor(TM), SPO2T[checkmark], OXYPLETH(R),
SuperBright(TM), VenTrak(R), PNEUMOGARD(R), TIDAL WAVE(TM), TCO2M(R) and
Vent[checkmark](TM).
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 continuous, non-invasive blood gas monitors are presently
available from several of the Company's competitors, the Company believes that
its continuous, non-
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invasive blood gas monitors provide advantages over currently available
competing products in terms of accuracy, reliability and versatility. The
Company believes its respiratory mechanics monitors also compare favorably with
competitive models in terms of accuracy of measurement and reliability of
service. Additionally, the Company feels that what it believes to be the
technological superiority in size, performance, reliability 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.
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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 new 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 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. All of
the products currently marketed domestically by the Company requiring
pre-marketing approval from the FDA have been so approved.
In the future, certain other classes of medical devices may be required
to comply with industry-wide performance standards with respect to safety and
efficacy when these standards are promulgated by the FDA and internationally
recognized standards organizations (such as ISO and IEC). The FDA has not yet
developed industry-wide performance standards with respect to the safety and
effectiveness of those products manufactured by the Company which would be
subject to such standards. When and if these standards are adopted, the Company
will be required to submit data demonstrating compliance with the standards
(during which period the Company may be permitted to continue to market products
which have previously been approved by the FDA).
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) and EN46001
(Quality System specific to medical device manufacturing) certification. By
obtaining certification to these standards, the Company is permitted to place a
"CE" mark on its products which indicates product compliance as specifically
required by the European marketplace. 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.
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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 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.
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
As of May 3, 1998, the Company had a total of 200 full-time employees,
consisting of 84 production personnel, 45 research and development personnel, 56
sales, marketing and service personnel and 15 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.
<PAGE> 14
14
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 newly constructed 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 commencement of the sixth year of the lease. The lease
requires the Company to pay for property taxes, insurance and repairs related to
the facility.
The Company also leases a building in Redmond, Washington under a
three-year lease expiring in March 2000, renewable for an additional three
years, and comprising approximately 7,000 square feet of space utilized for
research and development and manufacturing support. The lease provides for
minimum annual lease payments of $61,700 plus taxes, insurance and other
expenses.
The Company believes that its facilities are well maintained, in good
operating condition and are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
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.
<PAGE> 15
15
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(SM) 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 1998 and 1997.
<TABLE>
<CAPTION>
High Sale Low Sale
--------- --------
<S> <C> <C>
FISCAL 1998
First Quarter....................... $9 1/2 $5 1/8
Second Quarter...................... 11 1/16 7 1/8
Third Quarter....................... 8 1/4 6
Fourth Quarter...................... 9 5 3/4
FISCAL 1997
First Quarter....................... $7 $4 7/8
Second Quarter...................... 6 7/8 5
Third Quarter....................... 6 1/4 5
Fourth Quarter...................... 6 1/8 4 1/2
</TABLE>
On July 17, 1998, the last sale price of the Common Stock as reported
on the Nasdaq Stock Market(SM) was $ 7.00.
As of July 17, 1998, there were approximately 820 record holders of the
Common Stock. No dividends have been declared on the Common Stock since the
Company was organized. In addition, a loan agreement to which the Company is a
party contains, 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(SM) under the symbol "NMTXZ". The Warrants are each exercisable
into one share of Common Stock at an exercise price of $5.85 and are scheduled
to expire on December 8, 1999. The Warrants are callable by the Company under
specified circumstances.
<PAGE> 16
16
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 May 3, 1998.
<TABLE>
<CAPTION>
May 3 April 27, April 28, April 30, May 1,
FOR YEAR ENDED 1998(1) 1997(1) 1996(1) 1995 1994
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $31,561,144 $28,253,750 $25,260,180 $24,032,101 $20,788,496
Income Before Income Taxes
and Non-recurring Expenses 3,951,598 3,073,469 2,136,795 1,644,367 754,720
Net Income(2)(3) 2,903,598 4,923,559 3,116,795 1,604,367 754,720
Net Income Per
Share(2)(3)(4)
Basic 0.35 0.70 0.50 0.27 0.15
Diluted 0.31 0.59 0.38 0.21 0.11
Cash Dividends on Common
Stock - - - - -
AT YEAR END
Total Assets 31,001,896 27,224,432 18,823,362 16,605,981 15,270,682
Working Capital 18,602,648 10,831,127 8,363,914 6,411,756 2,142,809
Long-Term Debt 90,881 782,275 1,333,333 2,308,333 3,560,007
Redeemable Preferred Stock - 1,000,000 1,000,000 1,000,000 1,000,000
Stockholders' Equity 27,032,439 18,109,926 12,528,549 9,151,900 3,283,276
</TABLE>
- ----------------------
(1) The above data should be read in conjunction with the consolidated
financial statements, related notes and other financial information set
forth elsewhere herein.
(2) Includes income tax benefits of $4,030,000 ($0.58 per basic share and
$0.49 per diluted share) and $1,020,000 ($0.17 per basic share and
$0.12 per diluted share), respectively, for Fiscal 1997 and Fiscal 1996
as a result of a reduction in the Company's net deferred tax asset
valuation allowance.
(3) Fiscal 1997 net income includes non-recurring expenses of $2,149,910
($0.31 per basic share and $0.26 per diluted share) pertaining to an
attempted merger and related proxy context.
(4) Reflects the Company's adoption of Financial Accounting Statement No.
128, "Earnings Per Share", during Fiscal 1998. Prior years have been
restated accordingly.
<PAGE> 17
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED MAY 3, 1998 COMPARED TO YEAR ENDED APRIL 27, 1997
Fiscal 1998 operating results compared favorably to the prior year. Net
income for the year ended May 3, 1998 was $2.9 million or $0.31 per diluted
share compared to reported net income for the prior year ended April 27, 1997 of
$4.9 million or $0.59 per diluted share. The prior year, however, contained a
benefit of $4.0 million from a reduction in the Company's net deferred tax asset
valuation allowance and approximately $2.1 million of non-recurring expenses. On
a comparable, fully- taxed basis excluding the non-recurring expenses, earnings
would have been approximately $2.1 million or $0.25 per diluted share for the
year ended April 27, 1997.
Net sales increased by approximately $3.3 million or 12% to approximately
$31.6 million for the fiscal year ended May 3, 1998 compared to approximately
$28.3 million for the fiscal year ended April 27, 1997. The growth in sales was
primarily led by an increase in domestic sales and sales to OEM (original
equipment manufacturer) customers. Sales to international customers reflected a
modest improvement for Fiscal 1998 compared to Fiscal 1997 as growth was slowed
primarily by economic uncertainties in the Pacific Rim region.
Cost of sales as a percentage of net sales was 42.4% for Fiscal 1998
compared to 43.6% for Fiscal 1997. The improvement in the cost of sales
percentage resulted primarily from favorable sales mix and higher gross margins
associated with the Company's newer products. Management continues to focus on
product cost reductions through increased utilization of automated equipment,
improved product design and reductions in purchase price for materials.
Research and Product Development ("R&D") expenses increased by
approximately $219,000 or 7% to $3,523,000 for Fiscal 1998 compared to R&D
expenses of approximately $3,304,000 during Fiscal 1997. Increased expenditures
for salaries and related fringe benefits were partially offset by reduced
expenses for outside professional services. In accordance with the Company's
product development plans, R&D spending is expected to continue to approximate
11% of sales for Fiscal 1999.
Selling, General & Administrative ("S,G&A") expenses increased by
approximately $1,291,000 or 14% to $10,598,000 for Fiscal 1998 compared to
$9,307,000 for Fiscal 1997. Approximately 63% of the increase is related to
higher sales and marketing expenses and pertains to increased sales and
marketing salaries, commissions and related fringe benefits, marketing
promotional costs, and travel and entertainment expenses. The balance of the
S,G&A increase was related to increased administrative expenses
<PAGE> 18
18
including salaries and related fringe benefits, outside professional services
and general insurance.
Interest expense decreased by approximately $137,000 or 55% to $113,000 for
Fiscal 1998 compared to approximately $250,000 for Fiscal 1997. During Fiscal
1998, the Company repaid its term loan, revolving line-of-credit facility and a
capital lease obligation resulting in lower interest expense.
Income tax expense increased to $1,048,000 during Fiscal 1998 from a net
benefit of $4,000,000 recorded during Fiscal 1997. The prior year benefit
resulted from a reduction in the net deferred tax asset valuation allowance. The
Company's effective tax rate for Fiscal 1998 was 26.5% which is less than the
statutory rate as a result of benefits received from the Company's Foreign Sales
Corporation, R&D tax credits, and a further reduction in the Company's valuation
allowance. Management believes that current levels of pre-tax earnings will be
sufficient to generate approximately $12,500,000 of future taxable income that
is required to utilize the deferred tax benefit recorded as of May 3, 1998.
Management expects the effective tax rate to approximate 28% to 30% during
Fiscal 1999.
YEAR ENDED APRIL 27, 1997 COMPARED TO YEAR ENDED APRIL 28, 1996
Net sales increased by approximately $3.0 million or 12% to approximately
$28.3 million for the fiscal year ended April 27, 1997 as compared to net sales
of approximately $25.3 million for the fiscal year ended April 28, 1996. Sales
to domestic, international and OEM customers all exhibited growth during Fiscal
1997 compared to the prior year. OEM sales reflected substantially higher
shipment levels to the Company's expanding OEM customer base while product
shipments to domestic and international markets reflected more modest
improvements over the previous year. In addition, international orders received
in Fiscal 1997 exceeded shipments by approximately $550,000 creating a higher
opening backlog for Fiscal 1998 than was available at the start of Fiscal 1997.
Cost of sales as a percentage of net sales was 43.6% for Fiscal 1997
compared to 43.3% for Fiscal 1996. The favorable impact of product cost
improvements was essentially offset by sales mix and manufacturing start-up
costs associated with the new products introduced during the second half of the
fiscal year. The Company continued to target gross margin improvements through
added production efficiencies and product cost reductions.
R&D expenses increased by 22% or approximately $590,000 to $3,304,000 or
11.7% of net sales during the fiscal year ended April 27, 1997 compared to R&D
expenses of approximately $2,714,000 or 10.7% of sales during Fiscal 1996.
Higher levels of salaries and related fringe benefits, outside professional
services and engineering project materials were primarily responsible for the
increase in R&D expenditures. R&D expenses were expected to approximate 11.0% of
net sales for Fiscal 1998 in conjunction with the Company's product development
objectives.
<PAGE> 19
19
S,G&A expenses increased by approximately $170,000 or 2% to $9,307,000 for
Fiscal 1997 as compared to $9,137,000 for Fiscal 1996. S,G&A expenses as a
percentage of net sales improved to 32.9% in Fiscal 1997 compared to 36.2% in
the prior fiscal year. Decreased selling expenses related primarily to changes
in international distribution and decreased field service expenses were offset
by increases in marketing related salaries and fringe benefits and travel and
entertainment expenses. General and Administrative expenses increased 6%
primarily as a result of higher legal costs and salary and related fringe
benefits.
Interest expense decreased by 13% or $37,000 to approximately $250,000 for
Fiscal 1997 as compared to approximately $287,000 for Fiscal 1996. Interest
expense associated with bank debt decreased by $54,000 as a result of lower
average debt levels during Fiscal 1997. Interest on capital lease obligations of
approximately $17,000 partially offset the decreased interest expense related to
bank debt.
During the third quarter of Fiscal 1997, the Company incurred approximately
$2,150,000 of non-recurring expenses associated with the attempted acquisition
of Andros Holding Inc. and a related proxy contest.
Income tax benefits increased to $4,000,000 for Fiscal 1997 compared to
$980,000 for Fiscal 1996. The increase resulted from a further reduction in the
net deferred tax asset valuation allowance of $3,864,000 due to the continued
improvement of the performance of the Company during Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $7.8 million to $18.6 million at May 3, 1998
compared to $10.8 million at April 27, 1997. The current ratio was 5.8 to 1 at
May 3, 1998 compared to 2.5 to 1 at April 27, 1997. The increase in working
capital was primarily attributable to increases in accounts receivable and
inventory, reductions in accounts payable and accrued expenses, and cash
realized from the exercise of warrants, the majority of which was used to payoff
the Company's bank debt.
Cash provided from operations was approximately $1,697,000 for Fiscal 1998
compared to cash utilized of approximately $205,000 for Fiscal 1997. Income
before income taxes, depreciation and amortization of approximately $5,111,000,
partially offset by increases in accounts receivable and inventory and decreases
in accounts payable and accrued expenses, was primarily responsible for the
improvement in cash flow from operations.
While cash flow from operations is expected to be the principal source of
the Company's working capital during Fiscal 1999, additional funds are
available, if needed, from various other sources. As of May 3, 1998, the Company
had $3,500,000 of borrowing available under its revolving credit agreement which
expires during August 1998 and which the Company expects to renew to August
2000, and approximately
<PAGE> 20
20
$3,300,000 of additional funds which may be available from the exercise of the
Company's Class B Warrants which are callable under specified conditions.
Further, management believes that additional funds are obtainable on
commercially acceptable terms.
YEAR 2000 COMPLIANCE
The Company addressed the Year 2000 compliance issue with a focus on two
specific potential areas of exposure: our installed base of monitoring
equipment, some of which utilize two-digit date and time keeping for
documentation purposes, and our business operating systems. With regard to the
potential impact on our installed base of medical monitors in the marketplace,
the Company performed a thorough examination of current and past products which
have software utilizing two-digit dates, and have posted the detailed results of
our compliance on our website for our customers to view. With regard to the
potential impact on the Company's business operations, we have recently
installed a new fully-integrated operating system that is Year 2000 compliant,
replacing fourteen-year-old software. In both instances, products and
operations, we have determined that there will be no material costs or problems
associated with the transition to the Year 2000.
IMPACT OF INFLATION
The rate of inflation continues to have a marginal impact on the operations
of the Company. While management routinely assesses the possible effects of
inflation with respect to the Company's future business plans, the rate of
inflation is not expected to have a material impact upon the growth of the
Company during Fiscal 1999.
***************
This Annual Report on Form 10-K contains certain forward-looking
statements about the Company's 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, including without limitation: an
unanticipated slowdown in the healthcare industry; unanticipated technological
developments which affect the competitiveness of the Company's products; or an
unanticipated delay or loss of business.
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."
<PAGE> 21
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
<PAGE> 22
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information with respect to the executive officers and
directors of the Registrant is set forth below:
<TABLE>
<CAPTION>
Positions
Name with the Company Age
- ---- ---------------- ---
<S> <C> <C>
William J. Lacourciere Chairman of the Board, 58
President, Chief Executive Officer
and Director (Class C)
Joseph A. Vincent Executive Vice President, Chief 46
Operating Officer, Treasurer and
Secretary
Leslie E. Mace Vice President - Engineering 52
Philip F. Nuzzo Vice President - Marketing and 45
Product Development
Jeffery A. Baird Corporate Controller, Chief Financial 44
Officer
Paul A. Cote Director (Class A) 68
Vartan Ghugasian Director (Class A) 53
Thomas M. Haythe Director (Class C) 58
John P. Mahoney Director (Class C) 50
Photios T. Paulson Director (Class B) 59
Steven J. Shulman Director (Class B) 47
</TABLE>
William J. Lacourciere has been Chairman of the Board of the Company
since September 1991, Chief Executive Officer since February 1991, President
since August 1986 and a director since October 1982. 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, Mr. Lacourciere served as Vice President - Domestic Sales.
Joseph A. Vincent, CMA was appointed Executive Vice President and Chief
Operating Officer of the Company in February 1997. Mr. Vincent served as Vice
<PAGE> 23
23
President - Finance from August 1991 to February 1997 and as Chief Financial
Officer from April 1990 to February 1997. He has been Secretary since April 1990
and Treasurer since February 1991 and served as Controller from September 1984
to April 1990. Mr. Vincent held various positions with Picker International,
Inc. (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.
Leslie E. Mace has been Vice President - Engineering of the Company and
General Manager of the Company's Cascadia Division in Redmond, Washington since
March 1991. He served as Vice President of the Company's Cascadia Division from
May 1989 to March 1991. Mr. Mace served as Vice President, Chief Operating
Officer and Engineering Manager of Cascadia Technology Corporation, a Washington
corporation (research and development company), from prior to 1988 to April
1989.
Philip F. Nuzzo was appointed Vice President - Marketing and Product
Development of the Company in August 1996. He 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 Angeles,
California.
Jeffery A. Baird was appointed Chief Financial Officer in March 1997.
He has served as Controller since February 1993 and has held various positions
since joining the Company in 1988. Prior to his employment at Novametrix, 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. Mr. Cote was a member of
the Board of Directors of Secor Federal Savings & Loan, Birmingham, Alabama
(1992 -1993) and the Advisory Boards of Fleet Bank (1990-1992) and Northeast
Bankshares Association (later became Norstar and subsequently Fleet)
(1975-1989).
Vartan Ghugasian has been a director of the Company since November
1996. Dr. Ghugasian has been a practicing dentist in Massachusetts since 1972.
Dr. Ghugasian has enjoyed a number of academic appointments, including as an
Associate in Prosthetic Dentistry, Harvard School of Dental Medicine, from 1980
until 1993. Dr. Ghugasian is a director of the Karagheusian Commemorative
Corporation, New York, New York.
Thomas M. Haythe has been a director of the Company since March 1978.
He has been a partner at the law firm of Haythe & Curley since prior to 1991.
Mr. Haythe also serves as a director of Guest Supply, Inc., a provider of hotel
guest room amenities and accessories, Westerbeke Corporation, a manufacturer of
marine engine products, and Ramsay Health Care, Inc., a provider of psychiatric
healthcare services.
<PAGE> 24
24
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 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. Dr. Mahoney is a member of the Manning 13D Stockholders Group.
See "Security Ownership of Certain Beneficial Owners" under "Item 12, Security
Ownership of Certain Benefit Owners and Management."
Photios T. Paulson has been a director of the Company since July 1992.
Mr. Paulson has served as Vice President of bioAlliance, SA, a privately-held
French holding company, since January 1995, Chairman of bioMerieux Vitek Inc., a
manufacturer of clinical diagnostic systems, since July 1991 and as Senior
Adviser-Health Care Industry and International Investment Banking for Prudential
Securities Inc. since prior to 1991.
Steven J. Shulman has been a director of the Company since November
1993. Mr. Shulman serves as President and Chief Executive Officer of Prudential
HealthCare, one of the nation's ten largest healthcare providers. Mr. Shulman
previously served as President, Pharmacy & Disease Management Group of Value
Health, Inc., a provider of specialty managed care programs, from November 1995
to March 1997. Mr. Shulman served as Executive Vice President from April 1991
until September 1993, and Senior Vice President from prior to 1989 until
September 1993 of Value Health. From October 1990 through April 1991 he served
as the acting President and Chief Executive Officer of American PsychManagement,
Inc. a wholly-owned subsidiary of Value Health. Mr. Shulman has been a director
of Value Health since April 1991. Prior to 1989, Mr. Shulman held various
managerial positions at CIGNA Healthplan, Inc., a provider of group life and
health insurance, including managed care products. Mr. Shulman is also a
director of Ramsay Health Care, Inc., a provider of psychiatric healthcare
services.
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.
<PAGE> 25
25
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.
<PAGE> 26
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 Schedules
Information with respect to this Item regarding the
consolidated financial statement schedules 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) and 10(kk) 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:
None.
(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) and 10(kk) 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 Schedules:
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 S-1 in this Annual Report on Form 10-K.
<PAGE> 27
27
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby
appoint each of William J. Lacourciere and Jeffery A. Baird 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 24, 1998
NOVAMETRIX MEDICAL SYSTEMS INC.
By/s/William J. Lacourciere
--------------------------------------
William J. Lacourciere
Chairman of the Board,
President, 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 24, 1998
By/s/William J. Lacourciere
--------------------------------------
William J. Lacourciere
Chairman of the Board,
President, Chief Executive
Officer and Director
<PAGE> 28
28
Dated: July 24, 1998
By/s/Jeffery A. Baird
--------------------------------------
Jeffery A. Baird
Chief Financial Officer and
Principal Accounting Officer
Dated: July 24, 1998
By/s/Paul A. Cote
--------------------------------------
Paul A. Cote
Director
Dated: July 24, 1998
By/s/Vartan Ghugasian
--------------------------------------
Vartan Ghugasian
Director
Dated: July 24, 1998
By/s/Thomas M. Haythe
--------------------------------------
Thomas M. Haythe
Director
Dated: July 24, 1998
By/s/John P. Mahoney
--------------------------------------
John P. Mahoney
Director
Dated: July 24, 1998
By/s/Photios T. Paulson
--------------------------------------
Photios T. Paulson
Director
Dated: July 24, 1998
By/s/Steven J. Shulman
--------------------------------------
Steven J. Shulman
Director
<PAGE> 29
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 May 3, 1998
Novametrix Medical Systems Inc.
Wallingford, Connecticut
<PAGE> 30
Novametrix Medical Systems Inc.
Index to Financial Statements and Financial Statement Schedule
The report of Ernst & Young LLP, independent auditors, dated June 24, 1998, and
the following consolidated financial statements of Novametrix Medical Systems
Inc. are included in Item 8:
Consolidated Balance Sheets--May 3, 1998 and April 27, 1997
Consolidated Statements of Income--Years ended May 3, 1998, April 27,
1997 and April 28, 1996
Consolidated Statements of Shareholders' Equity--Years ended May 3,
1998, April 27, 1997 and April 28, 1996
Consolidated Statements of Cash Flows--Years ended May 3, 1998, April
27, 1997 and April 28, 1996
Notes to Consolidated Financial Statements--May 3, 1998
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
<PAGE> 31
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 May 3, 1998 and April 27, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended May 3, 1998, April 27, 1997 and April 28, 1996. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Novametrix Medical Systems Inc. at May 3, 1998 and April 27, 1997, and the
consolidated results of its operations and its cash flows for the years ended
May 3, 1998, April 27, 1997 and April 28, 1996, in conformity with generally
accepted accounting principles. 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.
Hartford, Connecticut
June 24, 1998
F-2
<PAGE> 32
Novametrix Medical Systems Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,783,596 $ 236,808
Accounts receivable, less allowance for losses of
$250,000 9,712,814 8,328,515
Inventories:
Finished products 3,624,385 1,741,426
Work in process 1,777,028 1,851,736
Materials 2,471,521 3,241,653
----------- -----------
7,872,934 6,834,815
Deferred income taxes, net 2,414,000 2,450,000
Prepaid expenses and other current assets 697,880 313,220
----------- -----------
Total current assets 22,481,224 18,163,358
Equipment, less accumulated depreciation and
amortization of $6,031,517 in 1998 and $5,396,091 in
1997 2,596,209 2,286,915
License, technology, patent and other costs, less
accumulated amortization of $3,566,574 in 1998 and
$3,675,242 in 1997 3,954,797 4,174,159
Deferred income taxes, net 1,969,666 2,600,000
----------- -----------
$31,001,896 $27,224,432
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
------------ --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 33,901 $ 2,974,380
Accounts payable 1,883,234 2,058,142
Accrued expenses 1,961,441 2,299,709
------------ ------------
Total current liabilities 3,878,576 7,332,231
Long-term debt and capital lease obligations, less current
portion 90,881 782,275
Redeemable Preferred Stock, at redemption and
liquidation value 1,000,000
Shareholders' equity:
Common Stock, $.01 par value, authorized
20,000,000 shares; issued 9,174,355 shares in 1998
and 7,525,539 shares in 1997 91,744 75,255
Additional paid-in capital 34,754,643 28,737,217
Retained-earnings (deficit) (5,326,910) (8,215,508)
Treasury stock; 338,452 shares (2,487,038) (2,487,038)
------------ ------------
27,032,439 18,109,926
------------ ------------
$ 31,001,896 $ 27,224,432
============ ============
</TABLE>
F-4
<PAGE> 34
Novametrix Medical Systems Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996
------------ -------------- --------------
<S> <C> <C> <C>
Revenues:
Net sales $ 31,561,144 $ 28,253,750 $ 25,260,180
Interest 45,761 7,912 13,988
------------ ------------ ------------
31,606,905 28,261,662 25,274,168
Costs and expenses:
Cost of products sold 13,377,206 12,307,178 10,929,686
Research and product development 3,522,687 3,303,822 2,714,485
Selling, general and administrative 10,597,621 9,306,728 9,136,806
Interest 113,246 249,805 286,775
Non-recurring expenses 2,149,910
Other expense, net 44,547 20,660 69,621
------------ ------------ ------------
27,655,307 27,338,103 23,137,373
------------ ------------ ------------
Income before income taxes 3,951,598 923,559 2,136,795
Income tax provision (benefit) 1,048,000 (4,000,000) (980,000)
------------ ------------ ------------
Net income $ 2,903,598 $ 4,923,559 $ 3,116,795
============ ============ ============
Earnings per common share:
Basic $ .35 $ .70 $ .50
Diluted $ .31 $ .59 $ .38
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
Novametrix Medical Systems Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- ------- ---------------
<S> <C> <C> <C> <C>
Year ended April 28, 1996:
Balance at April 30, 1995 6,136,533 $ 61,365 60,000 $ 1,500,000
Issuance of stock 182,765 1,828
Stock issuance costs
Conversion of Preferred Stock 666,666 6,667 (60,000) (1,500,000)
Dividends on Preferred Stock ($.75 a share)
Net income
--------- --------- ------- ---------------
Balance at April 28, 1996 6,985,964 69,860 -- --
Year ended April 27, 1997:
Issuance of stock 539,575 5,395
Dividends on Preferred Stock ($.75 a share)
Net income
--------- --------- ------- ---------------
Balance at April 27, 1997 7,525,539 75,255 -- --
Year ended May 3, 1998:
Issuance of stock 1,204,372 12,045
Tax benefit related to stock option exercises
Conversion of Redeemable Preferred Stock 444,444 4,444
Dividends on Preferred Stock ($.75 a share)
Net income
--------- --------- ------- ---------------
Balance at May 3, 1998 9,174,355 $ 91,744 -- $ --
========= ========= ======= ===============
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
<TABLE>
<CAPTION>
ADDITIONAL RETAINED- TREASURY STOCK
PAID-IN EARNINGS ------------------------------------------
CAPITAL DEFICIT SHARES AMOUNT TOTAL
- --------------------- -------------------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
$ 26,239,685 $ (16,162,112) (338,452) $ (2,487,038) $ 9,151,900
343,926 345,754
(22,150) (22,150)
1,493,333 --
(63,750) (63,750)
3,116,795 3,116,795
- --------------------- -------------------- ------------------ ------------------ ------------
28,054,794 (13,109,067) (338,452) (2,487,038) 12,528,549
682,423 687,818
(30,000) (30,000)
4,923,559 4,923,559
- --------------------- -------------------- ------------------ ------------------ ------------
28,737,217 (8,215,508) (338,452) (2,487,038) 18,109,926
4,734,204 4,746,249
287,666 287,666
995,556 1,000,000
(15,000) (15,000)
2,903,598 2,903,598
- --------------------- -------------------- ------------------ ------------------ ------------
$ 34,754,643 $ (5,326,910) (338,452) $ (2,487,038) $ 27,032,439
===================== ==================== ================== ================== ============
</TABLE>
F-7
<PAGE> 37
Novametrix Medical Systems Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
MAY 3, 1998 APRIL 27, 1997 APRIL 28, 1996
----------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,903,598 $ 4,923,559 $ 3,116,795
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Deferred income tax expense (benefit) 954,000 (4,030,000) (1,020,000)
Depreciation 635,426 487,952 428,186
Amortization 524,092 526,594 512,414
Changes in operating assets and liabilities:
Accounts receivable (1,384,299) (2,393,987) (687,357)
Inventories (1,038,119) (1,159,335) (743,620)
Prepaid expenses and other current assets (384,660) (181,377) (25,403)
Accounts payable (174,908) 814,652 (419,460)
Accrued expenses (338,268) 806,719 (139,808)
----------- ----------- -----------
Net cash provided (used) by operating activities 1,696,862 (205,223) 1,021,747
INVESTING ACTIVITIES
Purchases of equipment (944,720) (1,225,492) (518,761)
Purchases of licenses, technology, patents and other (304,730) (146,233) (151,870)
----------- ----------- -----------
Net cash used by investing activities (1,249,450) (1,371,725) (670,631)
FINANCING ACTIVITIES
Proceeds from borrowings 1,420,000
Principal payments on borrowings (3,631,873) (547,065) (600,000)
Proceeds from sales of Common Stock, less issuance costs 4,746,249 687,818 323,604
Dividends on Preferred Stock (15,000) (30,000) (63,750)
----------- ----------- -----------
Net cash provided (used) by financing activities 1,099,376 1,530,753 (340,146)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,546,788 (46,195) 10,970
Cash and cash equivalents at beginning of year 236,808 283,003 272,033
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,783,596 $ 236,808 $ 283,003
=========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 38
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements
May 3, 1998
1. ACCOUNTING POLICIES
NATURE OF BUSINESS
Novametrix Medical Systems Inc. develops, manufactures and markets non-invasive
critical care monitors, sensors and accessories which are distributed worldwide
and provide continuous patient monitoring capabilities. The Company's current
product offering and future development plans utilize leading-edge technologies.
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
The consolidated financial statements include the accounts of Novametrix Medical
Systems Inc. and its wholly-owned subsidiaries (collectively, the "Company").
All significant intercompany accounts and transactions are eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 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.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents.
F-9
<PAGE> 39
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
EQUIPMENT
Equipment, including assets under capital lease obligation(s) of $175,480 at May
3, 1998 and $325,387 at April 27, 1997, is 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.
FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and long-term debt approximates their fair value based on anticipated
cash flows and current market conditions.
LICENSE, TECHNOLOGY, PATENT AND OTHER COSTS
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 17 years. The Company reviews license, technology, patent and
other costs 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 product.
ADVERTISING COSTS
Advertising costs are generally expensed as incurred and are included in
selling, general and administrative expenses. Advertising costs were $494,330 in
1998, $385,749 in 1997 and $364,148 in 1996.
F-10
<PAGE> 40
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are provided for temporary differences between the tax and
financial reporting bases of the Company's 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 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.
The expense related thereto was not material for fiscal years 1998, 1997 and
1996.
The Company maintains an Employee Stock Ownership Plan ("ESOP") under which all
shares have previously been allocated to participants. The 121,655 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 1998, 1997 and 1996.
EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share." This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods presented have been restated to conform to the
Statement No. 128 requirements.
F-11
<PAGE> 41
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 Financial Accounting
Statement 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 4.
NON-RECURRING EXPENSES
During the third quarter of fiscal 1997, the Company's stockholders voted
against a proposed merger with Andros Holdings Inc. As a result, $2,149,910 of
merger and proxy related contest costs were expensed.
2. DEBT AND CAPITAL LEASE OBLIGATION(S)
Long-term debt and capital lease obligation(s) consist of:
<TABLE>
<CAPTION>
MAY 3, 1998 APRIL 27, 1997
----------- --------------
<S> <C> <C>
Term loan to bank $ -- $1,083,333
Note payable to bank under revolving credit
agreement -- 2,395,000
Capital lease obligation(s) 124,782 278,322
---------- ----------
124,782 3,756,655
Less current portion 33,901 2,974,380
---------- ----------
$ 90,881 $ 782,275
========== ==========
</TABLE>
The Company's term loan to bank was repaid in full during September 1997.
F-12
<PAGE> 42
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
2. DEBT (CONTINUED)
The Company's revolving credit agreement limits borrowing to a maximum of
$3,500,000 until maturity or 75% of the Company's eligible accounts receivable,
as defined. The agreement expires on August 31, 1998 and bears interest at the
London Interbank Offered Rate ("LIBOR") plus 1.75% (7.41% at May 3, 1998). Under
the terms of the revolving credit agreement, the Company is required to maintain
certain financial ratios and minimum levels of working capital and net worth,
and is restricted, among other things, from the payment of dividends on Common
Stock, new borrowings, capital expenditures and mergers. Management is currently
negotiating a renewal of this agreement with the Company's bank and expects to
extend the expiration date to August 31, 2000.
The capital lease obligation carries a fixed interest rate of 8.87% and is
collateralized by the leased property.
Aggregate annual maturities of the capital lease obligation as of May 3, 1998
follow:
<TABLE>
<CAPTION>
CAPITAL LEASE
-------------
<S> <C>
1999 $ 42,994
2000 42,994
2001 42,993
2002 14,331
--------
Total 143,312
Less: amount representing interest on capital lease 18,530
--------
$124,782
========
</TABLE>
Substantially all cash and cash equivalents are on deposit with the Company's
principal bank.
The Company paid interest under its capital lease obligation(s) and bank debt
agreements of $135,921 in 1998, $248,734 in 1997 and $292,328 in 1996.
F-13
<PAGE> 43
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
3. CAPITAL STOCK
The Preferred Stock is issuable in one or more series. 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.
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 (fully issued and converted to Common Stock).
At May 3, 1998 there are 8,835,903 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 May 3, 1998, no takeover events had
occurred and no rights were exercisable.
4. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS
On October 14, 1997, the Company's shareholders approved the Novametrix Medical
Systems Inc. 1997 Long Term Incentive Plan (the "Incentive Plan") which provides
for the granting of nonqualified or incentive stock options, restricted stock
awards, stock appreciation rights and performance awards to any employee,
director or consultant. The Company reserved 500,000 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.
F-14
<PAGE> 44
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
4. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
Activity relating to the Company's stock option plans follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 457,618 $ 4.23 413,734 $ 3.59 413,367 $ 3.21
Granted 278,000 8.50 115,000 5.72 55,000 5.00
Exercised (20,665) 2.93 (57,782) 2.43 (43,799) 2.05
Cancelled (5,000) 4.38 (13,334) 5.00 (10,834) 2.73
------- -------- ------- -------- ------- --------
Outstanding at end
of year 709,953 $ 5.94 457,618 $ 4.23 413,734 $ 3.59
======= ======== ======= ======== ======= ========
Options exercisable
at end of year 343,619 $ 3.95 245,951 $ 3.44 212,067 $ 2.72
======= ======== ======= ======== ======= ========
</TABLE>
Options outstanding as of May 3, 1998 had exercise prices as follows: 336,953
options ranging from $1.00 to $5.00 and 373,000 options ranging from $5.50 to
$9.13. The weighted average remaining contractual life of these options is 7.6
years.
At May 3, 1998, options for 252,001 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, 2002
for which 150,000 shares of Common Stock have been reserved. As of May 3, 1998,
81,028 shares of Common Stock had been issued under this plan.
F-15
<PAGE> 45
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
4. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
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, 1999. They
are callable by the Company under certain circumstances and traded on the Nasdaq
Stock Market(SM) under the symbol NMTXZ. The Company's outstanding warrants also
include warrants previously granted to officers and directors, its general
counsel and consultants to purchase shares of the Company's Common Stock. Data
relating to warrants outstanding at May 3, 1998 follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
FISCAL YEAR WARRANTS RANGE OF COVERED BY OUTSTANDING
GRANTED EXERCISE PRICES WARRANTS
-------------------- ---------------- -------------------------
<S> <C> <C>
1989 $ 3.49 10,744
1990 $ .89 to $1.81 181,833
1992 $ .93 1,776
1993 $ 2.625 10,000
1994 $ 4.60 50,000
1995 $ 4.125 to $5.85 639,964
-------
894,317
=======
</TABLE>
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 from March 1999 through June 2004, and are all currently
exercisable. During Fiscal 1998, an aggregate of 1,166,346 warrants, including
659,070 Class A Warrants and 271,738 warrants held by the Company's principal
bank, were exercised at prices ranging from $.89 to $5.85 per share and 24,717
warrants were cancelled or expired.
At May 3, 1998, there were 1,925,243 shares of Common Stock reserved for the
issuance and exercise of options and warrants, and purchases through the
Company's employee stock purchase plan.
F-16
<PAGE> 46
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
4. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
If compensation costs for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for 1998, 1997 and 1996
consistent with the method prescribed by Financial Accounting Statement ("FAS")
No. 123, the Company's net income and earnings per common share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net income:
Basic $ 2,546,338 $ 4,798,364 $ 3,033,069
Diluted 2,561,338 4,828,364 3,096,819
Pro forma earnings per share:
Basic $ .31 $ .69 $ .49
Diluted .27 .58 .38
</TABLE>
During the initial phase-in period, as required by FAS No. 123, the pro forma
amounts were determined based on the stock option grants and employee stock
purchases subsequent to April 30, 1995. Therefore, the pro forma amounts may not
be indicative of the effects of compensation cost on net income and earnings per
share in future years. Pro forma compensation cost relating to the stock options
is recognized over the 36 month vesting period. The fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for grants in
fiscal 1998, 1997 and 1996: dividend yield of 0%; expected volatility of .524%
in 1998 and .294% for 1997 and 1996; risk free interest rate of 5%; and expected
lives of ten years. The weighted average fair value of stock options granted in
fiscal 1998, 1997 and 1996 was $5.84, $2.84 and $2.59, respectively.
F-17
<PAGE> 47
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR
Net income $ 2,903,598 $ 4,923,559 $ 3,116,795
Preferred Stock dividends (15,000) (30,000) (63,750)
----------- ----------- -----------
Numerator for basic earnings per share 2,888,598 4,893,559 3,053,045
Effect of dilutive securities:
Preferred Stock dividends 15,000 30,000 63,750
----------- ----------- -----------
Numerator for diluted earnings per share $ 2,903,598 $ 4,923,559 $ 3,116,795
=========== =========== ===========
DENOMINATOR
Denominator for basic earnings per share:
Weighted average shares outstanding 8,147,451 6,993,161 6,157,192
Effect of dilutive securities:
Employee stock options and warrants 1,045,661 852,589 1,166,227
Convertible Preferred Stock 180,892 444,444 849,206
----------- ----------- -----------
Dilutive potential common shares 1,226,553 1,297,033 2,015,433
----------- ----------- -----------
Denominator for diluted earnings per share 9,374,004 8,290,194 8,172,625
=========== =========== ============
Basic earnings per share $ .35 $ .70 $ .50
=========== =========== ===========
----------- ----------- -----------
Diluted earnings per share $ .31 $ .59 $ .38
=========== =========== ===========
</TABLE>
Certain options and warrants to purchase 250,000, 680,000 and 605,000 shares of
the Company's Common Stock outstanding in 1998, 1997 and 1996, 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.
6. CONTINGENCIES
The Company is a party to various legal proceedings incidental to its business.
Management 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.
F-18
<PAGE> 48
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
7. BUSINESS AND SIGNIFICANT CUSTOMERS
The Company considers that its products comprise a single business segment
within the medical instruments industry. The Company had export sales as
follows:
<TABLE>
<CAPTION>
WESTERN
HEMISPHERE
(OTHER THAN
EUROPE THE U.S.) ASIA OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998 $ 5,869,172 $ 3,496,434 $ 2,892,071 $ 738,341 $12,996,018
1997 3,633,733 3,386,274 3,682,431 741,442 11,443,880
1996 4,498,005 2,949,055 3,076,383 814,325 11,337,768
</TABLE>
As a result of a modification in the operations of a significant OEM customer,
fiscal 1998 European sales include approximately $1.0 million of sales which
would not have been classified as export sales in 1997 and 1996.
No one customer accounted for more than 10% of net sales in 1998, 1997 or 1996.
8. 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 commencement of the sixth year of the lease and
stipulates a general inflation escalation clause. In addition, the Company
leases 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:
<TABLE>
<S> <C>
1999 $ 631,794
2000 560,302
2001 474,074
2002 465,181
2003 442,028
Thereafter 2,144,231
----------
$4,717,610
==========
</TABLE>
Total rental expense under operating leases was $702,438 in 1998, $554,272 in
1997 and $398,076 in 1996.
F-19
<PAGE> 49
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The components of the Company's deferred income tax accounts follow:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Tax credits $ 971,545 $ 656,900 $ 639,756
Net operating loss carryforwards 3,033,564 3,907,427 4,413,335
Inventories - valuation allowance and
other 646,692 812,122 687,064
Other 163,096 267,621 166,528
----------- ----------- -----------
Total deferred tax assets 4,814,897 5,644,070 5,906,683
Valuation allowance for deferred tax assets (328,428) (506,141) (4,872,987)
----------- ----------- -----------
4,486,469 5,137,929 1,033,696
Deferred tax liabilities 102,803 87,929 13,696
----------- ----------- -----------
Net deferred tax asset $ 4,383,666 $ 5,050,000 $ 1,020,000
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense:
Federal $ 89,000 $ 22,000 $ 37,000
State 5,000 8,000 3,000
----------- ----------- -----------
94,000 30,000 40,000
Deferred tax expense (benefit):
Federal 930,000 (4,036,000) (1,020,000)
State 24,000 6,000
----------- ----------- -----------
954,000 (4,030,000) (1,020,000)
----------- ----------- -----------
Income tax provision (benefit) $ 1,048,000 $(4,000,000) $ (980,000)
=========== =========== ===========
</TABLE>
F-20
<PAGE> 50
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The provision for income taxes at the Company's tax rate differed from the
provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed tax expense at expected statutory
rate $ 1,343,543 $ 314,000 $ 727,000
Benefit of foreign sales corporation (113,000)
State taxes, net of federal effect 19,000 (4,000) 3,000
Alternative minimum tax 37,000
Permanent items--net effect 63,392 30,000 2,000
Utilization of net operating loss
carryforwards (476,000) (729,000)
Tax credits (87,222)
Reduction in valuation allowance (177,713) (3,864,000) (1,020,000)
----------- ----------- -----------
$ 1,048,000 $(4,000,000) $ (980,000)
=========== =========== ===========
</TABLE>
At May 3, 1998, the Company had net operating loss carryovers for federal income
tax reporting purposes of approximately $8,900,000 of which $4,330,000 expires
in 2005, $4,195,000 expires in 2006 and $375,000 expires in 2007. The Company
has unused research and other tax credits of approximately $972,000 at May 3,
1998 which expire in varying amounts between 1999 and 2013.
During 1998, the Company reduced its valuation allowance due to the Company's
continued improvement in earnings and increased probability of future taxable
income. Based on the weight of available evidence, in management's opinion, the
Company will more likely than not generate sufficient taxable income to fully
utilize the net deferred tax asset recorded on the balance sheet at May 3, 1998.
Income taxes paid in 1998, 1997 and 1996 were not significant.
F-21
<PAGE> 51
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
10. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER TOTAL
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998
Net sales $ 7,365,211 $ 7,502,865 $ 7,362,273 $ 9,330,795 $ 31,561,144
Gross profit 4,250,759 4,224,435 4,054,872 5,653,872 18,183,938
Research and development
expenses 860,157 851,156 884,429 926,945 3,522,687
Selling, general and
administrative expenses 2,538,974 2,495,182 2,433,411 3,130,054 10,597,621
Income tax provision 236,000 211,000 208,000 393,000 1,048,000
Net income 523,858 626,788 534,995 1,217,957 2,903,598
Diluted earnings per share $ .06 $ .07 $ .06 $ .13 $ .31
FISCAL 1997
Net sales $ 6,419,995 $ 6,588,800 $ 7,253,321 $ 7,991,634 $ 28,253,750
Gross profit 3,681,624 3,748,327 4,040,805 4,475,816 15,946,572
Research and development
expenses 799,294 842,662 814,182 847,684 3,303,822
Selling, general and
administrative expenses 2,277,154 2,264,158 2,342,447 2,422,969 9,306,728
Non-recurring expenses 2,149,910 2,149,910
Income tax benefit (100,000) (100,000) (50,000) (3,750,000) (4,000,000)
Net income (loss) 647,874 696,158 (1,279,860) 4,859,387 4,923,559
Diluted earnings (loss)
per share $ .08 $ .08 $ (.18) $ .59 $ .59
</TABLE>
F-22
<PAGE> 52
Novametrix Medical Systems Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
May 3, 1998
<TABLE>
<CAPTION>
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 END OF PERIOD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended May 3, 1998:
Allowance for doubtful accounts deducted from
accounts receivable $250,000 $ 29,000 $ 29,000 $250,000
====================== ========================
Year ended April 27, 1997:
Allowance for doubtful accounts deducted from
accounts receivable $250,000 $ 29,000 $ 29,000 $250,000
====================== ========================
Year ended April 28, 1996:
Allowance for doubtful accounts deducted from
accounts receivable $250,000 $ 6,000 $ 6,000 $250,000
====================== ========================
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 53
Index to Exhibits*
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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(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(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).
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).
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).
</TABLE>
- ---------------------------
* 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
<PAGE> 54
Index to Exhibits
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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).
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).
</TABLE>
E-2
<PAGE> 55
Index to Exhibits
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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).
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).
</TABLE>
E-3
<PAGE> 56
Index to Exhibits
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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).
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).
</TABLE>
E-4
<PAGE> 57
Index to Exhibits
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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-Q 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-QSB for the quarter
ended February 1, 1998).
10(jj) Amendment No. 4 to Fourth Amended and Restated Loan and Security Agreement E-6
dated as of January 1, 1998 among the Company, NTC and First Union Bank of
Connecticut.
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).
21 Subsidiaries of the Company. E-11
23.1 Consent of Ernst & Young LLP, Independent Auditors. E-12
24 Power of Attorney (See "Power of Attorney" in Form 10-K). --
27 Financial Data Schedule. E-13
</TABLE>
E-5
<PAGE> 1
EXHIBIT 10(jj)
AMENDMENT NO. 4 TO FOURTH
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of January,
1998 among NOVAMETRIX MEDICAL SYSTEMS INC., a Delaware corporation having its
principal office at 5 Technology Drive, Wallingford, Connecticut 06492
("Novametrix"); NTC TECHNOLOGY INC., a Delaware corporation having its principal
office in Wilmington, Delaware with a mailing address in care of 5 Technology
Drive, Wallingford, Connecticut 06492 ("NTC"), and FIRST UNION NATIONAL BANK, a
national banking association having an office at 205 Church Street, New Haven,
Connecticut 06510 (the "Lender"), as AMENDMENT NO. 4 TO THE FOURTH AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT dated as of June 16, 1994 by and among
Novametrix, NTC and Union Trust Company (the "Fourth Loan Agreement").
WITNESSETH:
WHEREAS, Novametrix, NTC and Union Trust Company executed the Fourth
Loan Agreement on June 16, 1994; and
WHEREAS, subsequent thereto, Union Trust Company changed its name to
First Fidelity Bank; and
WHEREAS, Novametrix, NTC and First Fidelity Bank executed Amendment No.
1 to the Fourth Amended and Restated Loan and Security Agreement on July 26,
1995; and
WHEREAS, subsequent thereto, First Fidelity Bank changed its name to
First Union Bank of Connecticut; and
WHEREAS, Novametrix, NTC and the Lender executed Amendment No. 2 to the
Fourth Amended and Restated Loan and Security Agreement as of October 25, 1996;
and
WHEREAS, Novametrix, NTC and First Union Bank of Connecticut executed
Amendment No. 3 to this Fourth Amended and Restated Loan and Security Agreement
as of April 25, 1997; and
E-6
<PAGE> 2
WHEREAS, subsequent thereto, First Union Bank of Connecticut was merged
into First Union National Bank; and
WHEREAS, the parties now wish to amend and modify the Fourth Loan
Agreement and the Substituted Revolving Note (as defined therein) issued
thereunder: (i) to change the interest rate payable on the 1997 Substituted
Revolving Note, and (ii) to reduce the fees payable on account thereof:
NOW, THEREFORE, the parties agree as follows:
1. Amendments to the Definitions of Certain Terms: (i) The definitions
of each of the following terms, as set forth in the Fourth Loan Agreement, as
heretofore amended, are hereby amended and restated to read as follows:
1.78 "RELATED DOCUMENTS" means the Allonge No 1 to 1997 Substituted
Revolving Note and every other document executed by Borrower or NTC in
connection with the Loans or otherwise in connection with the Fourth
Loan Agreement as amended by Amendment No. 1 and as amended by
Amendment No. 2, and as amended by Amendment No. 3, and as amended by
Amendment 4.
1.82 "REVOLVING CREDIT INTEREST RATE" has the meaning set forth in
Section 3.7 of the Fourth Loan Agreement, as amended by Amendment No.
4.
1.93 "SUBSTITUTED REVOLVING NOTE" shall, unless the context otherwise
requires, mean and refer to the 1997 Substituted Revolving Note as
amended by the Allonge No. 1 to 1997 Substituted Revolving Note.
(ii) The term "1997 SUBSTITUTED REVOLVING NOTE" shall have the
meaning accorded to it in Section 3.6 of the Fourth Loan Agreement as amended by
Amendment No. 4.
(iii) All other capitalized terms used herein which are not
defined herein shall have the meaning accorded to them in the Fourth Loan
Agreement as heretofore amended.
2. Amended Terms Pertaining to Revolving Credit: The following
subsections of Section 3 of the Fourth Loan Agreement, as heretofore amended
entitled "Revolving Credit", are hereby amended and restated to read as follows:
3.6 REVOLVING CREDIT NOTE. The obligation of Borrower and NTC to repay
the Revolving Credit and all Advances thereunder shall be evidenced by
an amended and restated promissory note (the "1997 Substituted
Revolving Note") substantially in the form of Exhibit 3.6 (1997)
attached to Amendment No. 3 and dated as of April 25, 1997, as modified
by the Allonge No. 1 to 1997 Substituted Revolving Note, substantially
in the form of Exhibit 3.6-a (1998) attached to Amendment No. 4 to Loan
Agreement and
E-7
<PAGE> 3
executed by the Borrower, NTC and the Lender concurrently with
Amendment No. 4 to Loan Agreement.
The 1997 Substituted Revolving Note shall for all purposes be treated
as having been issued in substitution for, and not in repayment or as a
refunding of, the 1996 Substituted Revolving Note executed by the
Borrower and NTC in favor of Lender in the face principal amount of
$3,500,000 dated October 25, 1996.
3.7 INTEREST RATE. Interest shall accrue on the aggregate principal
amount of all Advances outstanding under the Revolving Credit from time
to time at the rate set forth in the 1997 Substituted Revolving Note as
modified by Allonge No. 1 to 1997 Substituted Revolving Note (the
"Revolving Credit Interest Rate"); provided that following an Event of
Default the applicable interest rate shall be the Default Interest
Rate. Interest shall be calculated on the basis of a 360 day year for
the actual number of days elapsed. Each adjustment to the Revolving
Credit Interest Rate shall result immediately, without notice or demand
of any kind, in a new rate of interest effective with respect to the
interest period on and after the date of such adjustment.
3.12 FACILITY FEE. The amount by which the Maximum Principal Amount
exceeds the average daily aggregate principal balance outstanding under
the Revolving Credit is hereinafter referred to as the "Unused Amount."
Borrower and NTC shall pay to Lender a fee in the amount of one-eighth
of one percent (1/8%) per annum on the Unused Amount for each calendar
year quarter (or partial quarter in the event that this Agreement
commences on any day other than the first day of a calendar year
quarter or terminates on any day other than the last day of a calendar
year quarter), such fee to be payable in arrears on the first day of
each calendar year quarter commencing on April 1, 1998. Such fee shall
be deemed fully earned by Lender as of the last day of each calendar
year quarter or partial quarter, as the case may be, with respect to
which the payment of such fee accrues.
3. Reaffirmation of Representations and Warranties: Novametrix and NTC
hereby restate and reaffirm, as of the date hereof, the representations and
warranties set forth in Section 7 of the Fourth Loan Agreement, except that the
representations and warranties set forth in Section 7.9 shall be deemed to apply
to the most current set of financial information provided to the Lender, and
except as otherwise set forth on Schedule I hereto.
Novametrix and NTC each hereby represent and warrant to the Lender that
there exists no Event of Default or Incipient Default as of the date hereof.
4. Waiver of Claims, Defenses, Etc.: As of the date hereof, Novametrix
and NTC represent that there exist no defenses, offsets, counterclaims,
reductions, set-offs or diminutions of any kind or nature whatsoever of or to
any of the obligations of the Borrower or NTC under the Fourth Loan
E-8
<PAGE> 4
Agreement, as heretofore amended, or under any of the Related Documents, or
otherwise, or to any of the rights of Lender in and to any such obligations, or
to, under or by reason of the Fourth Loan Agreement, as heretofore amended, this
Amendment No. 4, or any other Related Document, or otherwise, and there exists
no claims, rights, or other assertions of liability against Lender or any
Affiliate, Subsidiary, officer, director, employee, agent or attorney of Lender
on account of any of the actions taken by Lender or any such Person to date
under or in connection with the Fourth Loan Agreement, as heretofore amended,
the Notes, the Related Documents, or in connection with the transactions
contemplated by the Fourth Loan Agreement, as heretofore amended, the Notes, the
Related Documents or otherwise.
By execution of this Amendment No. 4, each of Novametrix and NTC hereby
waives all claims, actions and causes of action which have arisen or may arise
against Lender or any of its Affiliates, Subsidiaries, successors or assigns,
under or in connection with any of the transactions contemplated by the Fourth
Loan Agreement, as heretofore amended, or the Related Documents or any other
loan document or agreement between the Lender and Novametrix and/or NTC, or
otherwise, in respect of any matter, cause or thing arising or occurring prior
to the date hereof.
5. Reaffirmation of Existing Agreements: The Fourth Loan Agreement, as
heretofore amended, and the Related Documents, except to the extent expressly
herein modified, are hereby ratified and affirmed and shall be and remain in
full force and effect.
6. Counterparts: This Amendment No. 4 to the Fourth Loan Agreement may
be executed in counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same instrument.
E-9
<PAGE> 5
Dated as of the date and year first above written.
Signed, sealed and delivered
in the presence of: NOVAMETRIX MEDICAL SYSTEMS INC.
/s/_______________________
/s/_______________________ By/s/____________________________________
Name: William J. Lacourciere
Title:
NTC TECHNOLOGY INC.
/s/_______________________
/s/_______________________ By/s/____________________________________
Name: Thomas M. Haythe
Title: President
FIRST UNION NATIONAL BANK
/s/______________________
/s/______________________ By/s/____________________________________
Name: John H. Frost
Title: Vice President
E-10
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1. NTC Technology Inc.
2. NTC Management Inc.
3. Emertech, Sarl.
4. Novametrix International, Ltd.
5. Novametrix Acquisition Corporation
6. Novametrix Foreign Sales Corporation
E-11
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement
Number 33-58789 on Form S-3 dated April 25, 1995, Registration Statement Number
33-82336 on Form S-8 dated August 3, 1994, Post Effective Amendment No. 1 on
Form S-3 dated August 12, 1994 to Registration Statement Number 33-67478 on Form
S-1 dated August 17, 1993, the Registration Statement Number 33-44786 on Form
S-8 dated December 30, 1991 pertaining to the Novametrix Medical Systems Inc.
1990 Stock Option Plan, and Registration Statement on Form S-8 dated July 24,
1998 pertaining to the Novametrix Medical Systems Inc. 1997 Long Term Incentive
Plan and the Novametrix Medical Systems Inc. Employee Warrants Plan of our
report dated June 24, 1998, with respect to the consolidated financial
statements and schedule of Novametrix Medical Systems Inc. included in this
annual report (Form 10-K) for the year ended May 3, 1998.
/s/ Ernst & Young, LLP
Hartford, Connecticut
July 21, 1998
E-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
Novametrix Medical Systems Inc. Consolidated Statements of Income for the year
ended May 3, 1998 and the Consolidated Balance Sheets at May 3, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-03-1998
<PERIOD-START> APR-28-1997
<PERIOD-END> MAY-03-1998
<CASH> 1,783,596
<SECURITIES> 0
<RECEIVABLES> 9,962,814
<ALLOWANCES> (250,000)
<INVENTORY> 7,872,934
<CURRENT-ASSETS> 22,481,224
<PP&E> 8,627,726
<DEPRECIATION> 6,031,517
<TOTAL-ASSETS> 31,001,896
<CURRENT-LIABILITIES> 3,878,576
<BONDS> 90,881
0
0
<COMMON> 91,744
<OTHER-SE> 26,940,695
<TOTAL-LIABILITY-AND-EQUITY> 31,001,896
<SALES> 31,561,144
<TOTAL-REVENUES> 31,606,905
<CGS> 13,377,206
<TOTAL-COSTS> 13,377,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,246
<INCOME-PRETAX> 3,951,598
<INCOME-TAX> 1,048,000
<INCOME-CONTINUING> 2,903,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,903,598
<EPS-PRIMARY> 0.35<F1>
<EPS-DILUTED> 0.31
<FN>
<F1>THE AMOUNT IS REPORTED AS EPS BASIC AND NOT FOR EPS PRIMARY.
</FN>
</TABLE>
