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, cardiac output parameters and respiratory mechanics. 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 CO(2) Monitors - devices which utilize the integration of CO(2) and airway flow to provide significant new parameters such as airway deadspace and CO(2) elimination.
- Non-Invasive Cardiac Output Monitor -- a monitor which measures cardiac output through the breath.
- 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.
Levels of oxygen and carbon dioxide ("CO(2)") 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 CO(2) levels in their blood, lungs and other tissue. Previously, the only methods of determining the body's oxygen and CO(2) 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 CO(2). The Company's blood gas monitoring products utilize three different technologies, each of which is suitable for different applications.
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.
CAPNOGRAPH MONITORS. The Company's capnographs (or end-tidal CO(2) monitors) provide a continuous, non-invasive measurement and display of the amount of CO(2) in each breath exhaled by the patient. Clinically, end-tidal CO(2) levels have been correlated to a patient's arterial blood CO(2) levels. Measurement of these levels provides a simple, non-invasive method of estimating the CO(2) levels of the patient. Applications for capnographs include (i) intubation verification - the verification of the introduction of an airway tube into the trachea (air tube) rather than the esophagus (food tube) and the verification of an open and unobstructed airway; (ii) extubation detection - the disclosure of the accidental dislodging from the trachea of an airway tube; (iii) ventilation management through the disclosure of ventilator malfunctions and the proper adjustment of mechanical ventilation to match a patient's condition and needs; and (iv) verification of the effectiveness of 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 CO(2) throughout the patient's respiratory cycle. These monitors provide both a graphical and digital display of CO(2) levels and respiratory rate. The reliability and accuracy of capnography have made its use a rapid indicator of proper and continuous intubation, obstructions in the airway and pulmonary efficiency in eliminating CO(2). In addition, end-tidal CO(2) and respiratory rate measurements facilitate proper and cost-efficient ventilator use. In recognition of its accurate measurement of clinically significant facts, as well as the added degree of safety that it affords patients, capnography has been recommended for use in the operating room by the American Society of Anesthesiologists and in the intensive care unit by the Society of Critical Care Medicine.
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 CO(2) 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. During fiscal 1999, the Company introduced the TIDAL WAVE Sp, a hand-held monitor which offers the customer both capnography and pulse oximetry. The Company also has two bedside capnographs: the CAPNOGARD(R), and the CO(2)SMO(R), a combined capnograph and pulse oximeter. These "mainstream" (on the airway) capnographs are designed to take measurements at the patient's airway through infrared measurements as compared to "sidestream" measurements of exhaled breath which involve the drawing of samples through tubes connected to bedside monitors and which are susceptible to moisture and other secretion contaminants. All models utilize a durable and solid-state sensor developed by the Company. The TIDAL
WAVE and TIDAL WAVE Sp have a list sales price of approximately $2,800 and $3,800, respectively, depending on configuration, the CAPNOGARD has a list sales price of approximately $6,000 and the CO(2)SMO has a list sales price of approximately $8,000.
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 new battery operated hand-held pulse oximeters, the Models 512 and 513. The monitors measure approximately 4" high, 2" wide and 1" deep and weigh less than 1 pound. The lightweight design and portability of these monitors permit wide applications throughout the hospital, as well as in non-hospital locations including doctors' offices, clinics and homecare.
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 Models 515B, 515C, 512 and 513 have list sales prices of approximately $2,000, $2,200, $1,000 and $1,000, respectively.
VOLUMETRIC CO(2) MONITORS. The Company's CO(2)SMO 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 CO(2)SMO Plus! provides continuous, non-invasive measurements of flow, pressure and volume in a patient's airway, as well as measurements of other pulmonary mechanics including CO(2) 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 CO(2) adapter/flow sensor provides continuous measurements of pulmonary deadspace (the portion of the patient's lungs that does not participate in gas exchange) and CO(2) elimination (the volume of CO(2) exhaled by the patient), two parameters never before available continuously at the bedside. The use of these parameters, and the impact of each parameter on patient ventilation, provides the clinician with important feedback to optimize the patient's care. Thus the use of the CO(2)SMO Plus! enhances patient care by minimizing the trauma, length of stay and costs associated with mechanical ventilation. The CO(2)SMO Plus! has a list price of approximately $11,000.
NON-INVASIVE CARDIAC OUTPUT (NICO(TM)) MONITOR. The Company's newest monitor, NICO, is the first device to non-invasively measure cardiac output (the work performed by the heart) using the indirect Fick partial rebreathing technique. NICO offers several advances including "hands off" automatic continuous operation, completely non-invasive techniques and easy to use functionality. Although cardiac output is the best indicator of heart function, it has not been routinely monitored in patients undergoing general surgery because available techniques were too invasive (risky), costly or technically difficult.
The original Fick method, which requires invasive measurements and labor-intensive manual tasks, is a well-accepted standard reference technique used to evaluate all other means of determining cardiac output. Until now, the Fick method has been too difficult to use in most clinical practice circumstances such as surgical operating rooms and intensive care units. NICO uses the Fick principle applied to CO(2) produced by the body and eliminated through gas exchange in the lungs.
NICO provides a continuous display of cardiovascular monitoring variables including cardiac output, stroke volume, cardiac index and heart rate. In addition, NICO provides real time displays of other physiologic variables including CO(2) elimination, end
tidal CO(2), respiration, oxygen saturation, heart rate and respiratory mechanics parameters based on measurements of capnography, airway flow and pulse oximetry.
Clinical applications of this new device include monitoring patients during surgery (in the operating room), in the emergency room and in the intensive care unit. It provides a needed alternative to the conventional invasive procedure for monitoring cardiac output, (thermodilution), which requires insertion of a catheter through the heart and into the pulmonary artery (PA). Patient safety can be enhanced by eliminating the documented hazards of PA catheters which include infection, embolism and heart or lung tissue damage. By eliminating the costs, risks and complications associated with the use of PA catheters, NICO is dramatically simpler and less costly to utilize. Further, since NICO is non-invasive and easy to operate, the use of this technology may be expanded to other applications where it was previously deemed too risky or costly.
The NICO system and rebreathing sensor are covered by numerous patents and patents pending. The NICO monitor has a list price of approximately $12,000.
TRANSCUTANEOUS BLOOD GAS MONITORS. The Company's transcutaneous (through the skin) blood gas monitor provides continuous and non-invasive measurements of oxygen and CO(2) levels in the skin tissue of patients. This monitor utilizes dual parameter sensors attached to the patient's skin surface to measure the amount of oxygen and CO(2) diffusing through the skin. Based upon the magnitude of the diffusion of the blood gas molecules, the monitor converts the sensor readings into a value corresponding to the oxygen or CO(2) at the patient's skin surface and displays the information on the monitor. Premature and other critically ill newborn infants are the primary 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 TCO(2)M(R) Model 860 is a lightweight, portable unit with a simple menu system which guides the user through set-up and operation. The TCO(2)M is the first monitor of its kind to provide on-screen graphical trending information allowing patient data to be reviewed directly at the bedside. TCO(2)M accepts combination or single oxygen and CO(2) sensors for optimum versatility and has a list sales price of approximately $6,500 to $8,500 depending on configuration.
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.
Vent[check](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[check].
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[check] 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 CO(2)/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, other healthcare facilities and the homecare market 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.
The Company employs a 26-person direct United States sales force and also utilizes two outside distributors throughout 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 four 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 37%, 41% and 41% of total net sales during fiscal 1999, 1998 and 1997, 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 currency devaluations against the U.S. dollar in the Pacific Rim region during the latter part of fiscal 1998 and into fiscal 1999 negatively 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 1999, 1998 or 1997.
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 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 1999, 1998 and 1997, the Company incurred research and development costs aggregating approximately $10,784,000, of which approximately $3,958,000 was attributable to fiscal 1999, $3,522,000 was attributable to fiscal 1998 and $3,304,000 was attributable to fiscal 1997. 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 generally warrants its products against defects in material and workmanship, including parts and labor, for up to one year. The costs related thereto are recognized as incurred and are not material to the Company's financial statements. The Company also enters into multi-year sales agreements under which the estimated repair costs are provided for at the time of sale. The Company also offers extended warranty programs that may be purchased by its customers.
BACKLOG
Except for orders pursuant to long-term OEM agreements, the Company ships its products on a current basis and substantially all of the product backlog at May 2, 1999 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 29 U.S. patents and has pending applications for 22 additional U.S. patents. The Company's patents primarily cover its capnography and respiratory flow technologies which the Company believes provide it with a competitive advantage in the marketplace. Although the Company holds patents and has patents pending related to certain of the Company's products, the Company does not believe that its business as a whole is or will be materially dependent upon patent protection of these products. However, the Company will continue to seek patents as it deems advisable to protect its research and development and the market for its products.
Due to extensive patent coverage in the medical electronics instruments industry and the rapid rate of issuance of new patents, certain components of the Company's products may involve infringement of existing patents. The Company believes that any risks presently being assumed with respect to any possible patent infringement are reasonable business risks similar to those being assumed by other companies in the industry.
The Company is the owner of approximately 28 trademarks in the United States including, but not limited to, Novametrix(R), CAPNOGARD(R), CAPNOSTAT(R), CO(2)SMO(R), CO(2)SMO Plus!(TM), NICO(TM), Y-Sensor(TM), SPO(2)T[check], OXYPLETH(R), SuperBright(TM), VenTrak(R), PNEUMOGARD(R), TIDAL WAVE(TM), TCO(2)M(R) and Vent[check](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 the Company's line of monitoring products is generally available from several of its competitors, the Company believes that its monitors provide advantages over currently available competing products in terms of accuracy, reliability and versatility. Additionally, the Company feels that what it believes to be the technological superiority in size, performance and durability of its products provides it with a competitive advantage.
The electronic medical instrumentation industry is characterized by rapid technological changes and advances. Although the Company believes that its products are technologically current, the development of new technologies or refinements of existing ones by the Company's competitors could at any time make the Company's existing products technologically or economically obsolete. Although the Company is not aware of any pending technological developments that would be likely to materially and adversely affect its business or financial position, there can be no assurance that such developments will not occur at any time.
Although all of the Company's competitors do not market all of the products which the Company markets, the Company estimates that it competes with at least ten competitors. Such competitors vary in size from those which are smaller than the Company to divisions or subsidiaries of multinational corporations. There can be no assurance that the Company will be able to compete successfully with its competitors, some of which also have extensive production facilities, well-established marketing and service organizations, recognized reputations in the electronic medical instrumentation industry and/or far greater financial resources than the Company has or will have in the foreseeable future.
PRODUCT LIABILITY AND INSURANCE COVERAGE
From time to time, the Company is subject to product liability claims, suits and complaints incidental to its business. These claims, suits and complaints are covered by insurance policies maintained by the Company, subject to certain policy limits. In addition, certain of the Company's OEM agreements require the Company to maintain certain levels of product liability insurance. The Company currently maintains product liability insurance in the amount of $5,000,000 with a $50,000 per occurrence deductible up to an aggregate annual deductible of $250,000. The Company is not aware of any pending claims, suits or complaints, the disposition of which, in the opinion of management, would have a material adverse effect upon the Company's financial position, results of operations or liquidity. The Company, however, could be materially adversely affected by successful product liability claims, and there can be no assurance that the Company will have sufficient resources to satisfy any liability resulting from claims not covered by existing insurance policies.
REGULATION
The Company's products are subject to regulation in the United States and in many of the foreign countries where the Company markets or seeks to market its products.
Certain of the Company's products are "devices" within the meaning of the Federal Food, Drug and Cosmetics Act. Under that Act, a manufacturer must obtain approval by the United States Food and Drug Administration ("FDA") of certain 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.
Changes within the United States healthcare market continue at a rapid pace. The move toward managed care, and the growing influence of managed care networks, hospital group purchasing organizations ("GPOs"), integrated delivery networks ("IDNs") and hospital cooperatives, have had a major impact on the healthcare industry by accelerating trends toward shorter hospital stays, the use of outpatient facilities rather than hospitalization and by lowering annual cost increases for healthcare spending. Today, hospitals in general have expanded their efforts toward reducing operating costs and improving cost controls as well as managing the purchase price of goods and services. Additional cost saving changes, consolidation and restructuring could further influence decision-making by hospitals, clinics and other healthcare providers, which form the Company's customer base. These possible changes could potentially reduce or delay capital expenditures by these providers, and could change the users and markets for the Company's products. However, the acute care portion of a hospital (including the operating room and intensive care unit) which is a significant market for the Company's products should not be greatly affected by the trend toward the use of outpatient facilities as such outpatient facilities generally care for patients who are not critically ill. In addition, the trend toward managed competition may improve sales of certain of the Company's non-disposable products which provide substantial cost savings compared to similar disposable products sold by its competitors, and may also improve sales of other Company products that improve patient throughput and thereby result in shorter hospital stays.
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 2, 1999, the Company had a total of 214 full-time employees, consisting of 94 production personnel, 40 research and development personnel, 63 sales, marketing and service personnel and 17 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.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's main plant and executive offices are located at 5 Technology Drive, Wallingford, Connecticut where it occupies approximately 53,000 square feet of office and manufacturing space under a twelve year lease expiring in August 2008. The lease provides for minimum annual lease payments of $408,425, and contains one five-year renewal option and a purchase option upon the 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.01 par value (the "Common Stock"), trades on The Nasdaq Stock Market(R) under the symbol "NMTX". The following table sets forth the range of high and low sales prices per share for the Common Stock for each of fiscal 1999 and 1998.
On July 23, 1999, the last sale price of the Common Stock as reported on The Nasdaq Stock Market(R) was $5.00.
As of July 1, 1999, there were approximately 765 record holders of the Common Stock. No dividends have been declared on the Common Stock since the Company was organized. In addition, loan agreements to which the Company is a party contain, among other provisions, various covenants restricting the Company's ability to pay cash dividends to holders of the Common Stock.
In addition, the Company has Class B Warrants that trade on The Nasdaq Stock Market(R) under the symbol "NMTXZ". The Warrants are each exercisable 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.
ITEM 6.
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 2, 1999.
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(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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED MAY 2, 1999 COMPARED TO YEAR ENDED MAY 3, 1998
The Company reported net income of $2.1 million or $0.24 per diluted share for the fiscal year ended May 2, 1999 compared to net income of approximately $2.9 million or $0.31 per diluted share for the fiscal year ended May 3, 1998. Sales shortfalls to international and OEM (original equipment manufacturer) customers, combined with increased investment in research and development ("R&D") and sales and marketing to support the Company's new products and the growing domestic effort, were the primary cause for the reduction in earnings.
Net sales increased approximately $1.3 million or 4% to approximately $32.9 million for the fiscal year ended May 2, 1999 compared to approximately $31.6 million for the fiscal year ended May 3, 1998. The increase in sales, led by significant growth in domestic sales which resulted primarily from an increase in pulse oximetry sales, was partially offset by reductions in international sales and sales to OEM customers primarily due to the impact of global economic conditions.
Cost of sales as a percentage of net sales was 41.3% for fiscal 1999 compared to 42.4% for fiscal 1998 led by the improvement in domestic sales. The improvement in the cost of sales percentage resulted primarily from favorable product and market mix in fiscal 1999 compared to the prior year. Management is continuing to focus on product cost reductions through increased automation, improved product design and process efficiencies.
R&D expenses increased by approximately $435,000 or 12% to approximately $3,958,000 for fiscal 1999 compared to approximately $3,523,000 for fiscal 1998. The increase is primarily attributable to higher expenditures for salaries and related fringe benefits associated with increased R&D personnel which was partially offset by lower levels of expenditures for engineering materials. R&D spending, which approximated 12% of net sales for fiscal 1999, is expected to approximate 10% to 11% of net sales in fiscal 2000 on about the same level of spending as fiscal 1999 but on the higher level of expected sales.
Selling, General & Administrative ("S,G&A") expenses increased by approximately $1,723,000 or 16% to approximately $12,321,000 for fiscal 1999 compared to approximately $10,598,000 for fiscal 1998. The vast majority of the increase was related to increased expenditures associated with the expansion of domestic sales including salaries and related fringe benefits, employee and dealer commissions, outside consulting and travel and entertainment expenses. Marketing expenses, including salaries and related fringe benefits, outside professional services and travel and entertainment
expenses also accounted for a portion of the increase in S,G&A expense. Decreased international sales and marketing expenses,including commissions on reduced sales volume and marketing promotional costs, partially offset the increase in overall S,G&A expense.
Interest expense increased approximately $99,000 to approximately $212,000 for fiscal 1999 compared to approximately $113,000 for fiscal 1998. During fiscal 1999, the Company entered into new debt agreements with its bank primarily to finance the Company's purchase of its treasury stock and for general working capital requirements.
Income tax expense was approximately $804,000 during fiscal 1999 compared to approximately $1,048,000 for fiscal 1998 which reflected the lower earnings. The Company's effective tax rate of 28% for fiscal 1999 was below the statutory rate as a result of benefits derived from R&D tax credits, the Company's Foreign Sales Corporation and a further reduction in the deferred tax valuation allowance. Management believes that current levels of pre-tax earnings will be sufficient to generate approximately $11,000,000 of future taxable income required to utilize the deferred tax benefit recorded as of May 2, 1999. Management expects the effective tax rate to approximate 31% to 33% for fiscal 2000.
On July 1, 1999, the Company announced that it had restated its quarterly results for the first three quarters of fiscal 1999 to adjust revenue and related costs and expenses in those periods. The restatements, which were completed on July 14, 1999, reflected adjustments as a result of modifications to the accounting treatment for sales financing arrangements which the Company entered into with customers, and the reversal of certain dealer sales where products were ultimately returned to the Company due to cancellation of dealer orders by end users.
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 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 planned to continue to focus on product cost reductions through increased utilization of automated equipment, improved product design and reductions in purchase price for materials.
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 was expected to continue to approximate 11% of sales for fiscal 1999.
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 was 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 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 was 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 deferred tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at May 2, 1999 was approximately $15.2 million compared to approximately $18.6 million at May 3, 1998. The reduction in working capital of approximately $3.4 million was primarily attributable to certain long-term sales financing arrangements entered into during fiscal 1999, the purchase of treasury stock, and increased expenditures for the purchase of technology and capital equipment.
Cash used in operations was approximately $228,000 for fiscal 1999 compared to cash provided of approximately $1,697,000 for fiscal 1998. A reduction in income before income taxes, depreciation and amortization and increases in inventory and
accounts and notes receivable, partially offset by increases in accounts payable and accrued expenses, were primarily responsible for the decrease.
$6,200,000 of funds were provided from the proceeds of a term loan and revolving credit agreement consummated during fiscal 1999 with the Company's lender. The proceeds were primarily used to purchase 960,903 shares of the Company's Common Stock at a cost of $4,655,072 and to support general working capital requirements. As of May 2, 1999, there were 231,895 shares authorized for purchase under the stock repurchase plan which expires August 24, 1999.
Cash provided from operations is expected to be the Company's principal source of working capital for fiscal 2000. Additional funds are available under the Company's revolving credit agreement which expires in August 2001. In addition, approximately $3,300,000 may potentially be realized from the exercise of the Company's Class B Warrants which are callable under specified conditions, exercisable at $5.85 per share and expire on December 8, 1999. Further, management believes that additional funds will continue to be available on commercially acceptable terms.
MARKET RISK
The Company's revolving credit facility and term loan agreements are based upon the London Interbank Offered Rate ("LIBOR") and, as such, are sensitive to changes in interest rates. To mitigate the impact of interest rate fluctuations on a portion of this debt, the Company entered into an interest rate swap agreement to hedge a notional amount equal to the remaining principal balance on the term loan. The Company believes that the interest rate swap agreement limits interest rate risk if interest rates should fluctuate. If interest rates should change by 2% in fiscal 2000 from those rates in effect at May 2, 1999, assuming no change in the outstanding debt balance and considering the effects of the Company's interest rate swap agreement, the effect on interest expense would be immaterial. These amounts are determined by considering the hypothetical interest rates on the Company's borrowing cost and interest rate swap agreement. This analysis does not consider the effects of actions management would take if interest rates were to fluctuate by such a significant degree. The sensitivity analysis also assumes no changes in the Company's financial structure. The agreement had no material effect on interest expense during fiscal 1999.
SUBSEQUENT EVENT
On June 30, 1999, the Company acquired Children's Medical Ventures, Inc., a privately owned developer and marketer of neonatal and pediatric products and services for the amount of $8,700,000 in cash and a five-year warrant to purchase 25,000 shares of the Company's common stock at an exercise price of $4.6325 per share. The acquisition including transaction costs was financed with the proceeds of a $4,800,000 five-year term loan agreement with the Company's primary bank which bears interest at LIBOR plus 1.8% and a $4,800,000 five-year term loan with another bank which bears interest at LIBOR plus 1.6%. In addition, the Company expanded its revolving credit agreement
with its primary lender to $6,000,000 for general working capital purposes and extended the expiration date to August 2001.
RECENT ACCOUNTING PRONOUNCEMENT
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities". The SOP, which is effective for the Company beginning May 3, 1999, requires that certain costs capitalized prior thereto be written-off and any future start-up costs be expensed as incurred. As of May 2, 1999, there were approximately $329,000 of unamortized start-up costs which will be written-off as a cumulative effect of an accounting change during the Company's first quarter of fiscal year 2000. The Company estimates the impact of adopting this SOP will result in a reduction of fiscal 2000 earnings of approximately $224,000.
YEAR 2000 COMPLIANCE
Year 2000 compliance is a potentially significant issue for most, if not all companies, the impact of which cannot be predicted with any degree of certainty. The risk to the Company resulting from the failure of its own systems or those of third parties with which it does business to attain Year 2000 readiness is similar to that of other manufacturing firms or business enterprises. The risks include, but are not limited to, disruptions in transacting or processing information, disruptions in the supply of materials from major vendors and delays in shipment to customers due to their Year 2000 non-compliance. The Company has established a Year 2000 program dedicated to assessing the potential impact on its business, results of operations and financial condition. The Company has conducted a thorough review of its installed base of monitoring equipment and has determined that its current products are Year 2000 compliant. The results of the Company's examination have been posted on its web site for its customers to review. During fiscal 1999, the Company completed the installation of a new fully-integrated operating system and has recently completed an upgrade of its communication systems to achieve Year 2000 compliance. To date the Company has capitalized approximately $375,000 to upgrade its operating and information systems and does not expect to incur additional capital or non-capital expenditures of a material amount for Year 2000 compliance purposes. As a result of these expenditures, management believes that the Year 2000 issue will not pose significant operational problems for its internal operating systems. The Company has also contacted its major suppliers to assess their Year 2000 readiness and is continuing to address this issue with other suppliers and third parties with which the Company conducts business. While the Company has not identified any Year 2000 issues as a result of this effort, the Company cannot be certain that its suppliers will obtain Year 2000 readiness and is developing contingency plans to mitigate exposure resulting from non-compliance including considering the substitution of those suppliers that provide an unacceptable response. However, it would be impractical for the Company to attempt to address all potential Year 2000 problems of its suppliers and other third parties. The Company will continue to refine its contingency plans as conditions warrant.
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 2000.
***************
This Annual Report on Form 10-K contains certain forward-looking statements about the Company's products and projected operating results. Shareholders and potential investors are cautioned that such statements are predictions and that actual events or results may vary significantly. The Company's ability to achieve its projected results is dependent upon a variety of factors, many of which are outside of management's control, 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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Market Risk."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For information concerning this Item, see "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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:
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 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 February 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 Northeast Bankshare Association (later became Norstar and subsequently Fleet) (1975-1989). He also served on the advisory boards of Norstar and Fleet banks (1990-1992).
Vartan Ghugasian has been a director of the Company since November 1996. Dr. Ghugasian has been a practicing dentist in Massachusetts since 1972 specializing in prosthodontics. Dr. Ghugasian has enjoyed a number of academic appointments, including as an associate in prosthetic dentistry, Harvard University School of Dental Medicine from 1980 until 1993 and Director of Pre-Clinical Studies at Tufts University School of Dental Medicine from 1974 to 1980. Dr. Ghugasian has also served as a director of the Karagheusian Commemorative Corporation, New York, New York.
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, accessories and products, Westerbeke Corporation, a manufacturer of marine engine products, and Ramsay Youth Services, Inc., a provider of youth and educational services.
John P. Mahoney has been a director of the Company since October 1997. Dr. Mahoney has served as a staff pathologist with Pathology Associates, Inc. (pathology group providing 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 bioMerieux Alliance, 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 Advisor-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 was a founder and director of Value Health, Inc., a provider of specialty managed care programs, from 1987 to 1997. During that time he served as President of the Pharmacy and Disease Management Group as well as Executive Vice President. Prior to 1989, Mr. Shulman was President of the East Central Division at CIGNA Healthplan, Inc., a provider of group life and health insurance, including managed care products. Mr. Shulman is also a director of Ramsay 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.
ITEM 11.
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.
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.
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.
PART IV
ITEM 14.
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 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 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:
The Company did not file any Current Reports on Form 8-K during the quarter ended May 2, 1999. Subsequent to May 2, 1999, the Company did file on July 15, 1999 a Current Report on Form 8-K related to the acquisition of Children's Medical Ventures, Inc.
(c) Exhibits:
Information with respect to this Item regarding Exhibits required to be filed pursuant to Item 601 of Regulation S-K is contained in the attached Index to Exhibits, which Exhibits are incorporated herein by reference. Exhibits 10(a), 10(b), 10(s), 10(t), 10(u), 10(y), 10(gg), 10(ii), 10(kk) and 10(ll) are the management contracts and compensatory plans or arrangements required to be filed as part of this Annual Report on Form 10-K.
(d) Consolidated Financial Statement Schedule:
Information with respect to this Item regarding the consolidated financial statement schedule required by Regulation S-X which is excluded from the annual report to shareholders by Rule 14a-3(b) is contained on page S-1 in this Annual Report on Form 10-K.
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 30, 1999
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 30, 1999
By/s/William J. Lacourciere --------------------------------------- William J. Lacourciere Chairman of the Board, President, Chief Executive Officer and Director
Dated: July 30, 1999
By/s/Jeffery A. Baird --------------------------------------- Jeffery A. Baird Chief Financial Officer and Principal Accounting Officer
Dated: July 30, 1999
By/s/Paul A. Cote --------------------------------------- Paul A. Cote Director
Dated: July 30, 1999
By/s/Vartan Ghugasian --------------------------------------- Vartan Ghugasian Director
Dated: July 30, 1999
By/s/Thomas M. Haythe --------------------------------------- Thomas M. Haythe Director
Dated: July 30, 1999
By/s/John P. Mahoney --------------------------------------- John P. Mahoney Director
Dated: July 30, 1999
By/s/Photios T. Paulson --------------------------------------- Photios T. Paulson Director
Dated: July 30, 1999
By/s/Steven J. Shulman --------------------------------------- Steven J. Shulman Director
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 2, 1999
Novametrix Medical Systems Inc.
Wallingford, Connecticut
Novametrix Medical Systems Inc.
Index to Financial Statements and Financial Statement Schedule
The report of Ernst & Young LLP, independent auditors, dated July 1, 1999, and the following consolidated financial statements of Novametrix Medical Systems Inc. are included in Item 8:
Consolidated Balance Sheets--May 2, 1999 and May 3, 1998
Consolidated Statements of Income--Years ended May 2, 1999, May 3, 1998 and April 27, 1997
Consolidated Statements of Shareholders' Equity--Years ended May 2, 1999, May 3, 1998 and April 27, 1997
Consolidated Statements of Cash Flows--Years ended May 2, 1999, May 3, 1998 and April 27, 1997
Notes to Consolidated Financial Statements--May 2, 1999
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.
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 2, 1999 and May 3, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended May 2, 1999, May 3, 1998 and April 27, 1997. 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 2, 1999 and May 3, 1998, and the consolidated results of its operations and its cash flows for the years ended May 2, 1999, May 3, 1998 and April 27, 1997, 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.
/S/ERNST & YOUNG LLP
Hartford, Connecticut July 1, 1999
Novametrix Medical Systems Inc.
Consolidated Balance Sheets
See accompanying notes.
Novametrix Medical Systems Inc.
Consolidated Statements of Income
See accompanying notes.
Novametrix Medical Systems Inc.
Consolidated Statements of Shareholders' Equity
See accompanying notes.
Novametrix Medical Systems Inc.
Consolidated Statements of Cash Flows
See accompanying notes.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements
May 2, 1999
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 generally recognized when products are shipped. The Company generally warrants its products against defects for up to one year; costs related thereto are recognized as incurred and are not material to the Company's financial statements. The Company provides for the estimated costs to repair products under multi-year agreements at the time of sale.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents. These investments are valued at cost, which approximates fair value.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. These agreements involve the exchange of amounts based on the London Interbank Offered Rate ("LIBOR") for amounts based on a fixed interest rate over the life of the agreement, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment to interest expense. The related amount payable or receivable from counter parties is included in accrued expenses. The fair value of these agreements is not recognized in the financial statements.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, notes receivable and trade receivables. The Company places its cash equivalents with high credit-quality financial institutions and has established guidelines that seek to maintain safety and liquidity. The Company's customer base consists of a large number of diverse customers. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company provides for potential credit losses; such losses have not been significant and have been within management's expectations.
LONG-LIVED ASSETS
Equipment, including assets purchased under a capital lease obligation of $175,480 at May 2, 1999 and May 3, 1998, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed over the estimated useful lives of the assets using the straight-line method. Capital lease amortization is included in depreciation expense.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If such impairment indicators are present, the Company recognizes a loss on the basis of whether these amounts are fully recoverable from projected discounted cash flows of the related asset or product.
ADVERTISING COSTS
Advertising costs are generally expensed as incurred and are included in selling, general and administrative expenses. Advertising costs were $603,670 in 1999, $494,330 in 1998 and $385,749 in 1997.
DEFERRED INCOME TAXES
Deferred income taxes are provided on temporary differences between the tax and financial reporting bases of assets and liabilities based on enacted tax rates applicable to the periods in which the differences are expected to reverse.
EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) savings plan 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 1999, 1998 and 1997.
The Company maintains an Employee Stock Ownership Plan ("ESOP") under which all shares have previously been allocated to participants. The 116,954 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 1999, 1998 and 1997.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
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 SFAS No. 123, "Accounting for Stock-Based Compensation," pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting had been applied, are presented in Note 5.
NON-RECURRING EXPENSES
During 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. NOTES RECEIVABLE
During fiscal 1999, the Company sold products in exchange for long-term non-interest bearing notes receivable, generally payable over a period of eight years. The Company has imputed interest on these notes based upon its estimated incremental borrowing rate. In addition, the Company has notes receivable from various officers and directors. These notes bear interest at the Applicable Federal Rate, as defined (4.84% at May 2, 1999), and provide for quarterly interest payments until the third anniversary of the note at which time the principal is due. Notes receivable at May 2, 1999 consist of:
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
3. DEBT AND CAPITAL LEASE OBLIGATION
Debt and capital lease obligation consist of:
The Company's revolving credit agreement, as amended December 11, 1998, limits borrowing to a maximum of $5,000,000. The agreement expires August 31, 2000 and bears interest at LIBOR plus 0.98% (5.88% at May 2, 1999). The Company pays an availability fee, as defined, equal to 0.125% of the unused available principal under the revolving credit agreement.
The Company's term loan payable to bank is due in monthly installments of $50,000, plus interest at LIBOR plus 1.4% (6.30% at May 2, 1999) through November 30, 2003.
During fiscal 1999 and pursuant to the term loan agreement, the Company entered into an interest rate swap transaction agreement to hedge a notional amount equal to the remaining principal balance on the term loan. The rate is fixed at 6.77% and the agreement expires November 2003. The Company believes the interest rate swap transaction agreement limits the substantial risk should interest rates rise. The interest rate swap agreement had no material effect on interest expense in fiscal 1999.
Under the terms of the term loan and revolving credit agreement (the "Facilities"), the Company is required to maintain certain financial ratios and minimum levels of working capital and net worth. Borrowings under the Facilities are secured by the Company's business assets.
The capital lease obligation is at a fixed interest rate of 8.87% and is collateralized by the leased property.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
3. DEBT AND CAPITAL LEASE OBLIGATION (CONTINUED)
Aggregate annual maturities of debt and the capital lease obligation as of May 2, 1999 follow:
The Company paid interest under its bank debt agreements and capital lease obligation of $172,768 in 1999, $135,921 in 1998 and $248,734 in 1997.
The carrying amounts of the financing arrangements approximate their fair values.
4. CAPITAL STOCK
The Company has authorized 1,000,000 shares of $1.00 par value Preferred Stock of which 50,000 shares are designated as Series A (none issued) and 120,000 shares are designated as Series B. The Series B shares have been fully issued and converted to Common Stock. 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.
At May 2, 1999 there are 7,933,304 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 2, 1999, no takeover events had occurred and no rights were exercisable.
During fiscal 1999, the Company purchased 960,903 shares of its Common Stock for $4,655,072 under its stock repurchase programs. At May 2, 1999, there are 231,895 remaining shares authorized for repurchase.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. 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.
Activity relating to the Company's stock option plans follows:
Options outstanding as of May 2, 1999 had exercise prices as follows: 362,953 options ranging from $1.00 to $5.00 and 395,500 options ranging from $5.50 to $6.31. The weighted average remaining contractual life of these options is 6.8 years.
During fiscal 1999, the Company repriced 250,000 options with an exercise price of $9.125 and 50,000 options with an exercise price of $7.625 to $6.3125, the fair value of the Company's Common Stock on the date of repricing.
At May 2, 1999, options for 194,501 shares have been authorized but not yet granted under the Company's stock option plans.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS, STOCK PURCHASE PLAN AND WARRANTS (CONTINUED)
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 2, 1999, 97,569 shares of Common Stock had been issued under this plan.
The Company has redeemable Class B Warrants outstanding covering an aggregate of 566,785 shares. The warrants, each exercisable into one share of Common Stock at an exercise price of $5.85, are scheduled to expire on December 8, 1999. They are callable by the Company under certain circumstances and traded on The NASDAQ Stock Market(R) under the symbol NMTXZ. The Company's outstanding warrants also include warrants previously granted to directors, its general counsel and consultants to purchase shares of the Company's Common Stock. Data relating to warrants outstanding at May 2, 1999 follows:
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 December 1999 through June 2004, and are all currently exercisable. During fiscal 1999, an aggregate of 32,763 warrants were exercised at prices ranging from $.89 to $4.60 per share and 47,000 warrants were cancelled.
At May 2, 1999, there were 1,819,939 shares of Common Stock reserved for the issuance and exercise of options and warrants, and purchases through the Company's employee stock purchase plan.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
5. 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 1999, 1998 and 1997 consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per common share would have been adjusted to the pro forma amounts indicated below:
During the initial phase-in period, as required by SFAS 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 1999, 1998 and 1997: dividend yield of 0%; expected volatility of .892% in 1999, .524% in 1998 and .294% for 1997; risk free interest rate of 6% in 1999 and 5% in 1998 and 1997; and expected life of ten years. The weighted average fair value of stock options granted in fiscal 1999, 1998 and 1997 was $4.45, $5.84 and $2.84, respectively.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
6. EARNINGS PER SHARE
Certain options and warrants to purchase 919,285, 250,000 and 680,000 shares of the Company's Common Stock outstanding in 1999, 1998 and 1997, 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.
7. 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.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
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:
Total rental expense under operating leases was $687,219 in 1999, $702,438 in 1998 and $554,272 in 1997.
9. INCOME TAXES
The components of the Company's deferred income tax accounts follow:
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
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:
At May 2, 1999, the Company had net operating loss carryovers for federal income tax reporting purposes of approximately $5,813,000 of which $1,243,000 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 $1,080,000 at May 2, 1999 which expire in varying amounts between 2000 and 2014.
During 1999, 1998 and 1997, the Company reduced its valuation allowance due to the increased likelihood that the Company will generate sufficient taxable income to fully utilize the net deferred tax asset recorded at the end of each reporting period.
Income taxes paid in 1999, 1998 and 1997 were not significant.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENT
On June 30, 1999, the Company acquired 100% of the capital stock of Children's Medical Ventures, Inc. (ChMV), a privately owned developer and marketer of neonatal and pediatric care products and services. The purchase price was comprised of cash of $8.7 million and a warrant to purchase 25,000 shares of the Company's common stock at an exercise price of $4.3625 per share. The purchase price was financed with two term loans aggregating $9.6 million. The acquisition will be accounted for as a purchase; accordingly, the purchase price will be allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of acquisition.
Concurrent with the acquisition, the Company amended and restated its bank Facilities (See Note 3). Under the amended and restated agreement with its primary lender, the Company borrowed an additional $4.8 million in the form of a term loan, increased the amount of credit available under the revolving credit agreement from $5 million to $6 million and extended the maturity date to August 2001. In addition, the Company entered into a new term loan agreement with another bank for $4.8 million which expires July 1, 2004. Pursuant to the terms of the amended and restated bank Facilities and the new term loan agreement, the Company is required, among other things, to maintain certain financial ratios and maintain minimum levels of working capital and net worth, and is restricted from the payment of dividends.
11. RECENT ACCOUNTING PRONOUNCEMENT
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." The SOP, which is effective for the Company beginning May 3, 1999, requires start-up costs capitalized prior thereto to be written-off and any future start-up costs to be expensed as incurred. The unamortized balance of start-up costs (approximately $329,000 as of May 2, 1999) will be written-off as a cumulative effect of an accounting change as of May 3, 1999. The Company estimates the impact of adopting this SOP will result in a reduction of fiscal 2000 earnings of approximately $224,000.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires recognition of all derivatives as either assets or liabilities measured at their fair value. Depending on the intended use of the derivative, changes in fair value will be reported in the period of change as either a component of earnings or a component of other comprehensive income. The Company has not quantified the impact of adoption on its financial statements. The Statement is effective for the Company's 2002 fiscal year.
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS
The Company is domiciled in the United States and operates in one industry segment--the design, manufacture and marketing of non-invasive monitors, sensors and accessories. The Company's products are marketed domestically and internationally with no one customer accounting for more than 10% of net sales. The Company has earned revenue from sales to customers in the following geographic locations:
Novametrix Medical Systems Inc.
Notes to Consolidated Financial Statements (continued)
13. QUARTERLY DATA (UNAUDITED)
On July 1, 1999, the Company announced that it had restated its condensed consolidated financial statements for each of the unaudited first three quarterly periods ended January 31, 1999. The restatements reflected adjustments as a result of modifications to the accounting treatment for sales financing arrangements which the Company entered into with customers during the first three quarters of fiscal 1999, and the reversal of certain dealer sales where products were ultimately returned to the Company due to cancellation of dealer orders by end users.
Novametrix Medical Systems Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
May 2, 1999
(1) Uncollectible accounts written off, net of recoveries.
S-1
Index to Exhibits*
- -------- * 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 Index to Exhibits (Continued)
E-2 Index to Exhibits (Continued)
E-3 Index to Exhibits (Continued)
E-4 Index to Exhibits (Continued)
E-5 Index to Exhibits (Continued)
E-6