Item 1. BUSINESS. - ------- --------
Criticare Systems, Inc. (the "Company" or "Criticare") designs, manufactures and markets vital signs and gas monitoring instruments and related noninvasive sensors used to monitor patients in many healthcare environments. Since a patient's oxygen, anesthetic gas and carbon dioxide levels can change dramatically within minutes, causing severe side effects or death, continuous monitoring of these parameters is increasing. The Company's monitoring equipment improves patient safety by delivering accurate, comprehensive and instantaneous patient information to the clinician. The Company's products also allow hospitals to contain costs primarily by substituting cost-effective reusable pulse oximetry sensors for disposable sensors, controlling the use of costly anesthetics and increasing personnel productivity.
To meet the needs of end-users in a wide variety of patient environments, the Company has developed a broad line of patient monitors which combine one or more of its patented or other proprietary technologies, for monitoring oxygen saturation, carbon dioxide and anesthetic agents, with standard monitoring technologies that provide electrocardiogram ("ECG"), invasive and noninvasive blood pressures, temperature, heart rate and respiration rate. In addition, the Company's VitalView telemetry system allows one nurse to monitor up to eight patients simultaneously from a convenient central location. This allows hospitals to move out of the intensive care unit those patients that require continuous monitoring, but do not need all of an intensive care unit's extensive and costly personnel and equipment resources.
The Company was incorporated under the laws of the State of Delaware in October 1984.
Products - --------
Criticare markets a broad range of vital signs and gas monitoring products designed to address the needs of a variety of end-users in different patient environments. Criticare's monitors display information graphically and numerically. All Criticare monitors incorporate adjustable visual and audible alarms to provide reliable patient-specific warnings of critical conditions, and most of the Company's monitors record up to 60 hours of trend data. Criticare monitors are available with printer capability to provide permanent records of patient data.
Model 8100 Vital Signs Monitor. The full-featured CSI 8100 Vital Signs ---------------------------------- Monitor provides maximum flexibility for hospital, transport and outpatient care settings. The unit's custom configurations include ECG, ComfortCuff(TM) noninvasive blood pressure, DOX(TM) digital oximetry, heart rate, temperature, respiration and nurse call interface. Optional features include CO2 and CO2/O2 monitoring and an integrated
printer. The 8100 is well suited for busy departments that require basic vital signs monitoring to conscious sedation.
Model 503, 503DX, 504 and 504DX. Criticare's complete line of pulse ------------------------------------ oximeters meets the needs of virtually all clinical environments: adult, pediatric and neonatal intensive care units, operating rooms, emergency rooms, nursing homes, physicians' offices and ambulances. The line is designed to provide accuracy and convenience at a competitive cost to the end-user.
Model 506DX and 507E Patient Monitors. The 507E series is comprised of ----------------------------------------- small, compact, portable, full-featured vital signs monitors configured to meet specific clinical needs. The 507E series is well-suited for dental and physician offices. The 506DX is ideal for patient ward monitoring of noninvasive blood pressure. The 507E series combines ECG, oxygen saturation and noninvasive blood pressure for a complete vital signs monitor for physician office and hospital applications. The 507E series is an effective low-cost monitoring system for the emergency room or the recovery room.
Scholar(R). The Scholar monitor series specifically addresses the needs of ---------- small hospitals with broad clinical needs (the monitoring of ECG, blood oxygen saturation, noninvasive blood pressure, temperature and invasive blood pressure). Scholar offers all the primary features a hospital needs with the capability of adding more features if desired. Scholar monitors are available with printer and recorder capability and can transmit data to Criticare's VitalView Central Stations.
Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient -------------------------------- monitoring for a wide variety of cardio-pulmonary parameters in an integrated system. The Model 1100 is able to monitor two ECG waveforms, noninvasive blood pressure, three types of invasive blood pressure, respiration rate, heart rate, temperature, oxygen saturation, inspired/expired oxygen, carbon dioxide and anesthetic gases. The Model 1100 uses the Company's proprietary disposable respiratory secretion filter system.
Model 602-3B, 602-6B, 602-11 and 602-13 Gas Monitors. The 602 series ---------------------------------------------------------- provides monitoring of carbon dioxide, pulse oximetry and anesthetic agents using Criticare's proprietary infrared technology. The 602 IQ series of operating room monitors provides automatic identification and quantification of all five approved anesthetic agents.
Model 4400 Series Blood Pressure, Pulse Oximetry and Temperature ------------------------------------------------------------------------ Combination Monitor. The 4400 series monitor was developed in conjunction with - -------------------- Alaris Medical ("Alaris") and incorporates Criticare's oximetry and noninvasive blood pressure technology with Alaris's temperature technology. Alaris has the rights to market the Model 4400 monitor to hospitals in the United States and Canada. Criticare has rights to market the product to the alternate care market and to international markets.
Model 602-14 POET(TM) LT Monitor. The hand-held POET LT provides small ------------------------------------ hospitals and alternate care environments with compact, portable carbon dioxide monitoring. The POET LT series is an effective, low-cost functioning solution for these environments.
VitalView(TM). The VitalView central station makes it possible for one ------------- nurse or technician to monitor numerous patients simultaneously. The VitalView can receive, display and store data from a wide variety of Criticare monitors including the Scholar, 507E and MPT.
MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the ------- transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood pressure) on a real time basis to a VitalView central station while the patient is ambulatory. In today's healthcare environment, hospitals benefit by moving patients from expensive critical care departments as quickly as possible to less expensive general nursing floors. MPT, because of its complete monitoring capability and its lower cost, allows the patient to be ambulatory while still being monitored for all vital signs.
Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive ------------------------ sensors that can be used on any patient, from a premature infant to a full-grown adult. Criticare's line of reusable pulse oximetry sensors offers users significant cost savings compared to disposables. Criticare's reusable sensors generally last longer than the one-year warranty period and are easily and inexpensively cleaned between uses. Criticare's reusable sensors include a finger sensor for routine applications and a multisite sensor for increased placement flexibility. The multisite sensor is fully immersible, allowing for sterilization between patients. The Company also sells a range of disposable sensors designed for single use in cases where the facility would prefer to use a patient charge disposable product.
Water Chek/Chek-Mate Filter System. The Company's patented, disposable ------------------------------------- Water Chek system separates a patient's respiratory secretions from a breath sample before it enters the gas monitor(s) for analysis. The Company's proprietary, disposable Chek-Mate filter enhances the removal of moisture from the sample, while preventing cross-contamination. This system allows the monitor to operate effectively regardless of humidity or patient condition. The self-sealing feature also protects the healthcare provider from potential contamination.
Marketing and Sales - ---------------------
Domestic Sales. At August 31, 2000, the Company's domestic sales force --------------- consisted of eight employees and 104 independent dealers. The Company's sales force and independent dealers market the Company's products to many different types of medical facilities such as hospitals, surgery centers, nursing homes and physician offices. The Company sells its higher-end monitors (MPT, Vital View Central Station and
anesthetic agent monitors) principally to hospitals whereas the vital signs and pulse oximeters are sold primarily for nonhospital settings.
International Sales. One of the Company's principal marketing strategies -------------------- has been to target international markets, particularly Europe, Latin America and the Pacific Rim countries. During fiscal 2000, Criticare sold its products, principally to hospitals, in over 70 countries through over 70 independent dealers. Most of the Company's international order processing, invoicing, collection and customer service functions are handled directly from the Company's headquarters in Waukesha, Wisconsin. Criticare believes demand for the Company's products in international markets is primarily driven by cost containment concerns, and increased interest in using quality patient monitoring products for improved patient management.
In fiscal 2000, 41% of Criticare's net sales, or $11.0 million, was attributable to international sales, of which approximately 49% was from sales in Europe and the Middle East, 24% was from sales to Pacific Rim countries and 27% was from sales to Canada and Central and South America. In fiscal 1999, 37% of Criticare's net sales was attributable to international sales. In fiscal 1998, 46% of Criticare's net sales was attributable to exports. There are no material identifiable assets of the Company located in foreign markets. The Company sells its products in United States dollars and is not subject to significant currency risks; however, an increase in the value of the United States dollar relative to foreign currencies could make the Company's products less price competitive in those markets. In addition, significant devaluation of certain foreign currencies could adversely affect the collectibility of accounts receivable from international customers. The Company analyzes this risk before making shipments to countries it views as unstable.
Clinical Support. At August 31, 2000, Criticare employed one clinical ----------------- support specialist to provide customer training and education, primarily to domestic hospitals. The clinical support specialist also assists in the periodic training and education of the direct sales force. In addition, the direct sales force maintains contact with end-users and provides additional training and updates. Clinical support in foreign markets is provided by the Company's clinical support staff and direct sales force.
Warranty and Service. Criticare believes that customer service is a key ---------------------- element of its marketing program. Criticare's monitors are warranted against defects for one year and its reusable sensors are warranted for six months. If a problem develops with a Criticare product while under warranty, the Company typically provides a replacement unit until the product can be repaired at the Company's facility. At August 31, 2000, the Company had a customer service staff of 16 people at its Waukesha, Wisconsin facility. The Company offers extended warranties and service contracts on all of its monitors.
Manufacturing - -------------
The Company continually strives to implement manufacturing efficiencies while maintaining product quality and reliability. The Company's oximeters and sensors are assembled from off-the-shelf components and other parts produced to the Company's specifications, such as printed circuit board assemblies, custom transformers and sensor cable/connector subassemblies. However, Criticare produces certain important components in-house. All electronic components are subjected to a 24-hour high-temperature burn-in to eliminate early component failure. Some subassembly is performed by subcontractors, but final assembly and quality control are performed at Criticare's facility. Criticare maintains test and inspection procedures to minimize errors and enhance the operating reliability of its products. Final test procedures on fully assembled units include an operational test and a continuous 72-hour burn-in procedure.
Certain of Criticare's products incorporate components currently purchased from single sources. While the Company believes these components are available from alternate sources on reasonable terms, an interruption in the delivery of these or other components could have an adverse effect on the Company. In order to reduce the risk of supply interruption, the Company maintains inventories of certain components.
The ISO 9000 series of quality management and assurance standards was developed by the International Organization for Standardization (ISO) and published in 1987. In 1993 the EC (European Community) was formed with the signing of the Maastricht Treaty by 12 European countries. One of the many standards adopted by this group is the ISO 9000 international quality assurance and quality management series under the designation EN2 9000. Based on this action by the EC and specific requirements from European customers, the Company believes ISO 9000 registration will be required to compete in EC and other international markets as an indication of compliance with international quality management and assurance standards. In July 1994 the Food and Drug Administration (FDA) announced its intention of harmonizing the ISO 9000 standards with its Medical Device Good Manufacturing Practices (GMP). The Company has achieved certification under ISO's standards 9001 and 9002. See "Regulation."
Research, Development and Engineering - ----------------------------------------
Criticare has focused its research, development and engineering expenditures on products designed to meet identified market demands. The Company seeks to apply its expertise in gas monitoring and related sensor technology to develop new products and adapt existing products for new markets. At August 31, 2000, the Company had an in-house research, development and engineering staff of 20 people. The Company's research, development and engineering expenditures were $2.9 million in fiscal 2000, $3.0 million in fiscal 1999 and $3.3 million in fiscal 1998.
Competition - -----------
The markets for the Company's products are highly competitive. Many of Criticare's competitors, including its principal competitors described below, have greater financial resources, more established brand identities and reputations, longer histories in the medical equipment industry and larger and more experienced sales forces than Criticare. In these respects, such competitors have a competitive advantage over the Company. The Company competes primarily on the basis of product features, the quality and value of its products (i.e., their relative price compared to performance features provided) and the effectiveness of its sales and marketing efforts. The Company believes that its principal competitive advantages are provided by its focus on cost containment and its patented and other proprietary technology and software for noninvasive, continuous monitoring of oxygen, anesthetic gases, carbon dioxide and noninvasive blood pressure, its cost-efficient manufacturing, the efficiency and speed of its research and development efforts and its established international presence.
The principal competing manufacturers of pulse oximeters are Nellcor Puritan Bennett, a unit of Mallinckrodt Inc., and Datex/Ohmeda, a United States subsidiary of Instrumentarium OY, a Finnish company. The Company estimates that Nellcor has captured a majority of the worldwide pulse oximeter market, and that Datex/Ohmeda and the Company have each captured significant portions of the worldwide pulse oximeter market. In addition, there are approximately four other companies which compete in the market for pulse oximeters. The Company also indirectly competes with manufacturers of numerous other medical equipment products for limited customer funds.
The Company believes that the worldwide anesthetic agent and carbon dioxide monitor markets are comparatively fragmented, with Datex/Ohmeda as the principal competitor. The Company's principal competitors in the domestic gas monitor market include Datex/Ohmeda and Hewlett-Packard Company. The market for vital signs monitors includes competitors such as Hewlett-Packard Company, Siemens A.G., Datex/Ohmeda and SpaceLabs, Inc., a subsidiary of Westmark International Incorporated.
The Company believes that its principal competitors in Western Europe include Datex/Ohmeda and that the Company has a significant share of this market. In the Pacific Rim countries, the Company believes that Datex/Ohmeda is the leading competitor.
Regulation - ----------
As a manufacturer of medical diagnostic equipment, the Company is regulated by the FDA and similar foreign governmental agencies. In producing its products, the Company must comply with a variety of regulations, including the good manufacturing practices regulations of the FDA. In addition, it is subject to periodic inspections by this
agency. If the FDA believes that its legal requirements have not been fulfilled, it has extensive enforcement powers, including the ability to ban or recall products from the market and to prohibit the operation of manufacturing facilities. The Company believes its products comply with applicable FDA regulations in all material respects. In addition, the Company received ISO 9002 certification on April 29, 1993 and ISO 9001 certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical devices are classified as Class I, Class II or Class III, depending upon the level of regulatory control to which they will be subject. Class III devices, which are the most highly controlled devices, are subject to premarket approval by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's comprehensive premarket approval requirements, but are generally subject to premarket notification requirements. If a new device is substantially equivalent to a device that did not require premarket approval, premarket review is satisfied through a procedure known as a "510(k) submission," under which the applicant provides product information supporting its claim of substantial equivalence. The FDA may also require that it be provided with clinical trial results showing the device's safety and efficacy.
The Company believes that the products it is currently developing generally will be eligible for the 510(k) submission procedure and, therefore, will not be subject to lengthy premarket approval procedures. However, these products are still being developed and there can be no assurance that the FDA will determine that the products may be marketed without premarket approval.
Criticare seeks, where appropriate, to comply with the safety standards of Underwriters' Laboratories and the Canadian Standards Association and the standards of the European Community. To date, the Company has not experienced significant regulatory expense or delay in the foreign markets in which it sells its products. Industry and professional groups such as the American Society of Anesthesiologists, to the extent they have the power to mandate certain practices or procedures as part of their profession's standard of care, are also a source of indirect regulation of the Company's business.
Patents and Trademarks - ------------------------
The Company believes one of its principal competitive advantages is provided by its patented and other proprietary technology including its sensor technology, infrared specific anesthetic gas monitoring technology, UltraSync signal processing software and disposable respiratory secretion filter system. None of the Company's U.S. patents expire before 2004. Criticare also has 13 foreign patent applications pending. There is no assurance that any patents held or secured by the Company will provide any protection or
commercial or competitive benefit to the Company. There is also no assurance that the Company's products will not infringe upon patents held by others. The Company is the owner of United States trademark registrations for "POET," "Scholar," "MPT," "REMOTEVIEW" and "MICROVIEW."
The Company also relies upon trade secret protection for certain of its proprietary technology. Although the Company requires its employees having access to its proprietary information to sign confidentiality agreements, no assurance can be given that such agreements can be effectively enforced or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose the Company's trade secrets.
Employees - ---------
At August 31, 2000 Criticare had 104 employees; including 44 in manufacturing and operations, six in quality control, 21 in sales and marketing, 13 in administration and 20 in research, development and engineering.
Many of the Company's technical employees are highly skilled. The Company believes that its continued success depends in part on its ability to continue to attract qualified management, marketing and technical personnel. None of the Company's employees are subject to a collective bargaining agreement. The Company believes that its relations with its employees are good.
Backlog - -------
Criticare's backlog on June 30, 2000 and 1999 was approximately $1,833,000 and $1,836,000, respectively. The backlog at these dates consisted primarily of products for which the sales order specified a delayed delivery date. Criticare generally delivers its products out of inventory when specified by the customer. The Company does not believe that its backlog at any date is indicative of its future sales.
Item 2.
Item 2. PROPERTIES. - ------- ----------
In November 1992, the Company purchased a new 60,000 square foot facility for approximately $4.5 million. The Company's mortgage calls for monthly installments of principal and interest of approximately $28,000 and a final "balloon" payment of approximately $3.0 million in April 2004. The Company believes this facility will be adequate for the foreseeable future.
Item 3.
Item 3. LEGAL PROCEEDINGS. - ------- ------------------
In the normal course of business Criticare may be involved in various legal proceedings from time to time. Criticare does not believe it is currently involved in any
claim or action the ultimate disposition of which would have a material adverse effect on Criticare.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2000.
PART II -------
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------- ------------------------------------------------------------------- MATTERS. - -------
The Company's common stock is traded on the Nasdaq National Market (Symbol CXIM). As of June 30, 2000, there were approximately 286 holders of record of the common stock. The Company has never paid dividends on its common stock and has no plans to pay cash dividends in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA. - ------- -------------------------
The following table sets forth selected financial data with respect to the Company for each of the periods indicated.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- ------------------------------------------------------------------- RESULTS OF OPERATION. - ----------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Operations expressed as percentages of net sales.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999
For the twelve months ended June 30, 2000, international sales rose approximately $600,000, but were offset by a decrease in total domestic sales of approximately $2,000,000. The net result was a decline in net sales of 4.8%, from $28,512,507 to $27,154,236, which resulted primarily from decreasing product prices.
The gross profit percentage declined from 45.5% in 1999 to 39.4% in 2000. This decrease is due primarily to continued price erosion on products in a portion of the Company's older product line.
Total operating expenses were reduced by $3,700,000, which represents a 21.7% cost reduction during fiscal 2000. Marketing expenses were lowered by approximately $900,000 due to a variety of factors. These include a reduction in service labor and materials, a decrease in payroll and related travel expenses due to a reduction in direct sales people as more dealers were added, and a decrease in commissions associated with the lower sales. Offsetting the $1,800,000 of reductions was a $900,000 increase in the reserve for doubtful accounts related to the receivable balances of certain international
customers. Research and development expenses decreased approximately $100,000, as the design phase of the 8100 product was completed and production commenced. Administration expenses decreased approximately $2,000,000. The majority of this reduction is due to the non-reoccurring litigation and settlement costs associated with a lawsuit in the prior year. In addition, $810,000 of severance costs were recorded in 1999.
Interest expense was reduced $170,000 from 1999 levels due to the mortgage that was refinanced in March 1999. However, the more significant change is the $2,500,000 gain recorded on the private placement sale of 500,000 Immtech shares in fiscal 2000.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
Net sales for the twelve months ended June 30, 1999 increased 2.2% to $28,512,507 from $27,908,364. The sales increase is attributable to an increase in OEM sales partially offset by a decrease in international sales.
The gross profit percentage decreased from 46.7% in 1998 to 45.5% in 1999. The primary reason for the decrease in gross profit is the increase in OEM sales. OEM sales typically have a lower gross profit than sales to non-OEM customers.
Operating expenses of $16,871,981 represent a 32.5% increase from fiscal 1998 levels. Marketing expenses increased approximately $1,486,000 when compared to 1998 levels. This increase is due primarily to increased promotional activities throughout the world. Engineering expenses decreased approximately $316,000 when compared to 1998 levels; however, when considering the one-time $900,000 charge in 1998 (discussed in footnote 8 of the financial statements) engineering expenses increased approximately $584,000. This increase is due to expanded research and development efforts related to new product introductions. Administrative expenses increased approximately $2,159,000. This entire increase is attributable to the settlement and related legal costs related to litigation with a former dealer that represented the Company's products. The Company also recorded approximately $810,000 of severance costs related primarily to costs associated with the resignation of the two co-founders of the Company.
Interest expense decreased as no purchase discount related to convertible debentures was recorded in 1999. All debentures were converted to common stock during 1998.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000, the Company generated $2,500,000 through the private placement sale of Immtech stock and $499,581 from the exercise of stock options and employee stock purchases from the treasury. The Company used $73,925 to retire long-term debt, $595,412 for capital expenditures, and $4,726,492 to fund operations. These sources and uses of cash resulted in net negative cash flow of $2,396,248 for the 2000 fiscal year.
In fiscal 1999, the Company generated $315,577 from operating activities, $256,413 from the mortgage refinancing discussed below, and $10,313 from the exercise of stock options. The Company used $92,776 for the retirement of long-term debt, $515,017 for capital expenditures, and $193,430 for the repurchase of Company stock. These sources and uses of cash resulted in net negative cash flow of $218,920 for the 1999 fiscal year.
In March 1999, the Company refinanced its mortgage note on the Company's office and manufacturing facility. The new mortgage note requires monthly debt service payments of approximately $28,000 with a final payment of approximately $3,000,000 due in December 2002.
The Company expects its continued programs to increase accounts receivable collections, decrease inventory levels, reduce product development tooling requirements and stabilize sales demonstration equipment levels will have a positive effect on cash flow activities in the next fiscal year. Consequently, the Company believes its research and development activities and other capital and liquidity requirements for at least the next twelve months will be satisfied by cash generated from operations and other borrowings. There are currently no significant capital expenditures planned for fiscal 2001. During fiscal 2000, the Company also had access to a commercial bank line of credit of up to $4,000,000. At June 30, 2000, there were no borrowings outstanding on the line of credit. The Company violated a covenant related to maintaining a certain tangible net worth amount and achieving certain income levels. The bank waived compliance with this covenant subsequent to year end. This line expires in November 2001.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed herein that are not historical or current facts deal with potential future circumstances and developments. These include anticipated product introductions, expected future financial results, liquidity needs, financing ability, management's or the Company's expectations and beliefs and similar matters discussed in Management's Discussion and Analysis or elsewhere herein. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience.
The Company's business, operations and financial performance are subject to certain risks and uncertainties which could result in material differences in actual results from management's or the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, demand for the Company's products, costs of operations, the development of new products, the reliance on single sources of supply for certain components in the Company's products, government regulation, health care cost containment programs, the effectiveness of the Company's programs to manage working capital and reduce costs, and competition in the Company's markets.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------- ----------------------------------------------------------------
The Company did not hold any market risk sensitive instruments during the period covered by this report.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- -----------------------------------------------
FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999
See notes to consolidated financial statements.
See notes to consolidated financial statements.
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2000, 1999 AND 1998
See notes to consolidated financial statements.
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2000, 1999 AND 1998
See notes to consolidated financial statements.
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000, 1999 AND 1998
See notes to consolidated financial statements.
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Criticare Systems, Inc. (the "Company") and its wholly owned subsidiaries: Criticare International GmbH Marketing Services ("Criticare International"), CSI Trading, Inc. ("CSI Trading"), Criticare Service GmbH, Criticare Biomedical, Inc. ("Criticare Biomedical"), Sleep Care, Inc. ("Sleep Care"), Criticare (FSC), Inc. and CSI International Corp. (DISC). Criticare International was liquidated during fiscal 1998. CSI Trading was incorporated in November 1996 to assist with European marketing activities. All significant intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS - The Company considers all investments with purchased maturities of less than three months to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out method.
INVESTMENTS - The Company accounts for its investment in Intercare Technologies, Inc. ("Intercare") on the cost method and accounts for its investment in the Blatz House Offices Limited Partnership (the "Blatz Partnership") on the equity method. In fiscal 2000, the Company ceased accounting for its investment in Immtech International, Inc ("Immtech") under the equity method and recorded the asset on the balance sheet at its fair market value in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (see Note 3).
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is recorded at cost. Each member of the Company's sales force is provided with demonstration monitors to assist them in their sales efforts. Also, the Company has loaner monitors which are used to temporarily replace a customer's unit when it is being repaired or upgraded. Depreciation is provided over the estimated useful lives of the assets. The building is being depreciated over 40 years, and the remaining assets are being depreciated over three to seven years, using primarily the straight-line method.
LICENSE RIGHTS AND PATENTS - License rights and patents are amortized over the estimated useful lives of the related agreements using primarily the straight-line method. Approximately $7,000 of amortization was charged to operations in each of
the fiscal years ended June 30, 2000, 1999 and 1998. Accumulated amortization approximated $92,000 and $85,000 at June 30, 2000 and 1999, respectively.
CONVERTIBLE DEBENTURE ISSUANCE COSTS - Convertible debenture issuance costs were amortized over the two-year term of the debentures. Approximately $15,000 of amortization was charged to operations in 1998. The pro rata amount of unamortized debenture issuance costs were charged to additional paid-in-capital upon conversion of the debentures to common stock. Unamortized debenture issuance costs charged to additional paid-in capital amounted to $100,822 during 1998. (See Note 6.)
REVENUE RECOGNITION - Revenues and the costs of products sold are recognized as the related products are shipped or installed, if there are significant installation costs.
PRODUCT WARRANTIES - Estimated costs for product warranties are accrued for and charged to operations as the related products are shipped.
MARKETING EXPENSES - Marketing expenses include all of the Company's sales related costs. The amount incurred in fiscal 2000 includes a $900,000 charge to bad debt expense related to the accounts receivable balance of certain international customers. Total bad debt expense was $1,160,614, $380,004, and $99,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are charged to operations as incurred. Such expenses approximated $2,696,000, $2,798,000 and $3,156,000 in 2000, 1999 and 1998, respectively. The 1998 amount includes $900,000 related to certain acquired patented technology which was charged to operations as in-process research and development costs at the time of the acquisition. (See Note 8.)
INCOME TAXES - The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FOREIGN CURRENCY TRANSLATION - The effects of unrealized exchange rate fluctuations from translating foreign currency assets and liabilities into United States dollars are accumulated as cumulative translation adjustments in stockholders' equity.
NET INCOME (LOSS) PER COMMON SHARE - Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the periods. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods.
FAIR VALUE OF FINANCIAL STATEMENTS - The Company's financial instruments under Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosure About Fair Value of Financial Instruments," includes cash, accounts receivable, accounts payable, borrowings under line of credit facility and long-term debt. The Company believes that the carrying amounts of these accounts are a reasonable estimate of their fair value because of the short-term nature of such instruments or, in the case of long-term debt because of interest rates available to the Company for similar obligations.
COMPREHENSIVE INCOME - In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, foreign currency translation adjustments and unrealized gains on investments, and is presented in the Consolidated Statement of Stockholders' Equity. The adoption of SFAS 130 had no impact on total stockholders' equity. Prior year financial statements have been reclassified to conform to the SFAS 130 requirements.
APPROVED ACCOUNTING STANDARDS - Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is effective for financial statements with fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to affect its financial statements.
In 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB No. 101) dealing with revenue recognition which is effective in the fourth quarter of fiscal 2000. The Company does not expect its adoption of SAB No. 101 to have a material effect on the Company's financial statements.
In March 2000, the FASB issued FASB interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation ("FIN 44") which is effective July 1, 2000. This interpretation clarifies the application of APB Opinion 25 for certain issues related to stock issued to employees. The Company believes its existing stock based compensation policies and procedures are in compliance with FIN 44 and, therefore, that the adoption of FIN 44 will not have a material effect on the Company's financial statements.
USE OF ESTIMATES - 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following as of June 30:
3. INVESTMENTS
IMMTECH INTERNATIONAL, INC. - The Company owns common stock of Immtech International, Inc. ("Immtech"). Immtech is a biopharmaceutical company focusing on the discovery and commercialization of therapeutics for treatment of patients afflicted with opportunistic infectious diseases, cancer or comprised immune systems. Immtech has two independent programs for developing drugs: one based on a technology for the design of a class of pharmaceutical compounds referred to as dications. The second is based on developing a series of biological proteins that work in conjunction with the immune system. Immtech has no products currently for sale, and none are expected to be commercially available for several years. Immtech has a March 31 fiscal year end.
During the first and second quarters of fiscal 2000, the Company sold a portion of its Immtech stock in a Private Placement. The proceeds from this sale were $2,500,000.
As a result, the Company owns less than 20% of Immtech's issued and outstanding common stock as of June 30, 2000. Therefore, in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company ceased accounting for the Immtech investment under the equity method and recorded the asset on the balance sheet at the fair market value of $5,704,675. An unrealized gain was also recorded as a component of stockholder's equity. The Company held 456,374 shares of Immtech common stock, which was trading at $12.50 per share, on June 30, 2000.
The following is a summary of the Company's investment in and advances to Immtech as of June 30, 1999:
During July 1998, the Company purchased certain intangible assets and an additional 172,414 shares of Immtech stock for $150,000. These intangibles and shares of stock were subsequently sold to a related party as part of a severance agreement for $150,000 (see Note 12).
The Company has recognized investment losses related to the investment in Immtech of $150,000 and $120,000 in 1999 and 1998, respectively.
During April 1999, Immtech completed an Initial Public Offering ("IPO") of its stock. As part of this IPO, the Company was required to sign a lock-up agreement by which it was agreed that no shares owned by the Company could be sold in the public market until the Immtech stock traded at $20 (200% of its initial IPO price ($10)) for 20 consecutive trading days and one year has passed from the date of the IPO. As of June 30, 2000, these lock up provisions have been satisfied.
The following is summarized financial information for Immtech at June 30, 1999 and for the twelve months then ended.
BLATZ PARTNERSHIP - The Company was the sole limited partner in a real estate limited partnership which owns the Blatz Phase II Commercial Office Buildings located in Milwaukee, Wisconsin. Under terms of the Partnership Agreement (the "Agreement"), profits and losses (other than those resulting from a sale or refinancing of the Project) were allocated 40% to the general partners and 60% to the Company. This investment was sold during 1999.
4. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company's financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax asset will not be realized. A valuation allowance is used to offset the related net deferred income tax assets due to uncertainties of realizing the benefits of certain net operating loss and tax credit carryforwards.
Significant components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
At June 30, 2000, the Company had federal net operating loss carryforwards of approximately $9,765,000 which expire in 2008 through 2020. At June 30, 2000, the Company had available for federal income tax purposes approximately $41,000 of alternative minimum tax credit carryforwards which carry forward indefinitely and approximately $111,000 tax credit carryforwards which expire in the years 2007 through 2009. The Company also has approximately $9,667,000 of state net operating loss carryforwards, which expire in 2002 through 2015, available to offset certain future state taxable income.
The income tax provision consists of the following:
A reconciliation of the provision for income taxes (benefit) at the federal statutory income tax rate to the effective income tax rate follows:
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
Aggregate annual principal payments required under terms of the long-term debt agreements are as follows:
At June 30, 2000, the Company had a $4,000,000 demand line of credit facility with a commercial bank to meet its short-term borrowing needs. Borrowings against the line were payable on demand with interest payable monthly at the bank's reference rate, plus .25% (9.75% as of June 30, 2000). As of June 30, 2000, there were no borrowings against the line. Borrowings under the line of credit facility are collateralized by substantially all assets of the Company. The credit facility has covenants which require minimum levels of tangible net worth and income levels. The Company was not in compliance with these covenants at June 30, 2000. This non-compliance was waived by the lending institution.
In March 1999, the Company refinanced its mortgage note on the Company's office and manufacturing facility. The Company incurred a prepayment penalty of approximately $120,000, which was recorded as interest expense.
6. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures. The debentures had a two year term to maturity with a stated annual interest rate of 8%, payable in shares of common stock at the conversion date or maturity date. The holders of the debentures had the option to convert up to $1,250,000 of the debentures and accrued interest to common stock of the Company sixty-one (61) days after the February 1997 closing date at a conversion price equal to a 20% discount from the average closing bid price of the Company's common stock for the five days preceding the conversion date. Debentures aggregating $550,000 were converted under the 20% discount conversion feature. The remaining debentures and accrued interest were converted to common stock of the Company at a conversion price equal to a 25% discount from the average closing bid price of the Company's common stock for the five days preceding the conversion date. For the year ended June 30, 1998, $1,650,000 of debentures were converted to 407,761 shares of common stock with a fair market value of $2,298,357 as of the conversion date.
7. CONTINGENCIES
From time to time, various lawsuits arise out of the normal course of business. These proceedings are handled by outside counsel. Currently management is not aware of any claim or action pending against the Company that would have a material adverse effect on the Company.
The Company has received two grants from the State of Wisconsin for research and development of certain products. The grants are to be repaid only upon successful completion and marketing of the related product. Repayment of these grants is to be made on a sales by unit basis. Repayments approximated $182,000 in 1999 and constituted full repayment of one of these grants. The repayments are charged to expense as the related products are sold. Since the second grant did not result in the successful completion and marketing of a product, the Company does not have to repay the grant. The Company has been awarded a third grant from the State of Wisconsin for an amount up to $100,000 which requires repayment of the grant amount plus interest at 8%, plus payment of a royalty in the amount of 1% of net sales of the related product for a five-year period, as defined. No funds have been received under this grant at June 30, 2000.
8. STOCKHOLDERS' EQUITY
STOCK OPTIONS - In December 1992, the Board of Directors approved a new Employee Stock Option Plan and Non-Employee Stock Option Plan. No new stock options can be granted under the Employee Stock Option Plan and Non-Employee Stock Option Plan which existed prior to the approval of the new plans. The Board of Directors has authorized in connection with these new plans the issuance of 1,720,000 reserved shares of common stock of which 139,350 reserved shares of common stock remain available for future issuance under the stock option plans at June 30, 2000. The Board of Directors increased the number of reserved shares for issuance under the Plans from 1,220,000 to 1,720,000 during 1999. The activity during 1998, 1999 and 2000 for the above plans are summarized as follows:
The following table summarizes information about stock options outstanding as of June 30, 2000:
Outstanding options have fixed terms and are exercisable over a period determined by the Compensation Committee of the Company's Board of Directors but no longer than five years after the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. If the Company had elected to recognize compensation cost for the options granted during the years ended June 30, 2000, 1999 and 1998, consistent with the method prescribed by SFAS No. 123, net loss and net loss per share would have been changed to the pro forma amounts indicated below:
The fair value of stock options used to compute pro forma net loss and net loss per common share is the estimated present value at the grant date using the Black-Scholes option-pricing model.
STOCK WARRANTS - In September 1995, the Company executed a warrant agreement with a consultant. The warrant agreement provided for the issuance of warrants to purchase up to 150,000 shares of the common stock of the Company, exercisable at a price of $2.00 per share. The warrant was exercisable as to 37,500 shares upon execution of the agreement and the warrants to purchase the remaining 112,500 shares were to become exercisable if certain performance parameters were achieved by September 1996. Such parameters were not met as of such date. In January 1997, the agreement was extended and the parameters were changed. By June 30, 1997, warrants to purchase the remaining 112,500 shares of common stock at a price of $2.00 per share became exercisable. The warrant holder exercised rights and purchased 41,000 shares of common stock at $2.00 per share during the year ended June 30, 1998. Warrants to purchase 15,000 shares of common stock at $2.00 per share were exercisable as of June 30, 2000. Such warrants expire in September 2000.
In February 1998, the Company executed a similar warrant agreement with the consultant. The warrant agreement provides for the issuance of warrants to purchase up to 150,000 shares of common stock at a price of $3.00 per share. The warrant is exercisable as to 30,000 shares upon execution of the agreement and the warrants to
purchase the remaining 120,000 shares will be exercisable if certain performance parameters are achieved by February 1999. No such parameters were achieved. During the year ended June 30, 1998, the Company recognized $23,065 of expense related to the value of the services performed under the agreement. As of June 30, 2000, 30,000 warrants were exercisable. Such warrants expire in February 2003.
COMMITMENT TO ISSUE SHARES OF COMMON STOCK - In April 1998, the Company agreed to and accepted the patent rights assigned to them by a third party with respect to certain technology related to the transmission of clinical data. In consideration for the patent, the Company has agreed to provide the third party with 400,000 shares of common stock payable over a four-year time period with additional consideration of up to 112,000 shares contingent upon the achievement of certain sales levels. The Company recorded a charge to operations of $900,000 in fiscal 1998 with respect to the value of the in-process technology which was expensed as research and development costs. The 400,000 shares to be issued have been considered to be outstanding shares for purposes of computing basic and diluted income (loss) per common share in 1998. During 1999, the Company renegotiated the agreement and issued the third party 350,000 shares instead of the 400,000 shares payable over four years and the 112,000 contingent shares.
PREFERRED STOCK - The Company's Board of Directors has the authority to determine the relative rights and preferences of any series it may establish with respect to the 500,000 shares of $.04 par value authorized preferred shares. No preferred stock is issued or outstanding.
On March 27, 1997, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock of the Company. The dividend was made on April 24, 1997 to the stockholders of record on that date to purchase Preferred Stock ("Preferred") upon the occurrence of certain events. The Rights will be exercisable the tenth business day after a person or group acquires 20% of the Company's common stock, or makes an offer to acquire 30% or more of the Company's common stock. When exercisable, each right entitles the holder to purchase for $25, subject to adjustment, one-hundredth of a share of Preferred for each share of common stock owned. Each share of Preferred will be entitled to a minimum preferential quarterly dividend of $25 per share, but not less than an aggregate dividend of 100 times the common stock dividend. Each share will have 100 votes, voting together with the common stock. In the event of any merger, each share of Preferred will be entitled to receive 100 times the amount received per share of common stock. The Rights expire on April 1, 2007.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan which covers substantially all employees. Company contributions to the plan are discretionary and determined annually by the Company's
Board of Directors. The Company's contributions were approximately $77,000, $84,000, and $77,000 in 2000, 1999 and 1998, respectively.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company is a manufacturer of medical monitors and telemetry products whose customers include hospitals and alternative health care sites throughout the world. Although the Company's products are sold primarily to health care providers, concentrations of credit risk with respect to trade accounts receivable are limited due to the Company's large number of customers and their geographic dispersion. The Company currently coordinates substantially all international sales and distribution activities. Such activities were previously provided by the Company with the assistance of Criticare International. Identifiable assets located outside of the United States are insignificant in relation to the Company's total assets. Net export sales by geographic area are as follows:
11. SIGNIFICANT CUSTOMER
During 1999, a customer entered into an OEM agreement with the Company and purchased approximately $4,360,000 of the Company's products. This represents approximately 15% of the Company's total sales. This customer had a receivable balance of $448,546 on June 30, 1999, which represents 7% of the Company's total receivables as of this date. During 2000, purchases approximated $1,988,000 and a receivable balance of $944,326, which represented 14% of accounts receivable on June 30, 2000.
12. SEVERANCE PAY
During November 1998, the two co-founders of the Company resigned from their positions. The Company has provided each of these individuals with a severance agreement, which includes a portion of their salary and fringe benefits for a period which approximates three years.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Criticare Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Criticare Systems, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial position of Criticare Systems, Inc. at June 30, 2000 and 1999 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP Milwaukee, Wisconsin August 15, 2000
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Criticare Systems, Inc.:
We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Criticare Systems, Inc. and subsidiaries for the year ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Criticare Systems, Inc. and subsidiaries present fairly, in all material respects, the results of their operations and their cash flows for the year ended June 30, 1998 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Milwaukee, Wisconsin August 20, 1998
QUARTERLY RESULTS
The following table contains quarterly information, which includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation. The Company recorded a gain of $2,500,000 in the quarter ended September 30, 1999 related to the sale of Immtech stock and a charge of approximately $1,800,000 for settlement costs related to a lawsuit that was resolved in the quarter ended June 30, 1999. These items were unusual, nonrecurring adjustments.
The Company typically receives a substantial volume of its quarterly sales orders at or near the end of each quarter. In anticipation of meeting this expected demand, the Company usually builds a significant inventory of finished products throughout each quarter. If the expected volume of sales orders is not received during the quarter, or is received too late to allow the Company to ship the products ordered during the quarter, the Company's quarterly results and stock of finished inventory can be significantly affected.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- ------------------------------------------------------------------- FINANCIAL DISCLOSURE. - ---------------------
The Company's change in accountants for the 1999 fiscal year was previously reported in the Company's Current Report on Form 8-K filed on October 13, 1999, as amended on October 25, 1999, and the Company's Current Report on Form 8-K filed on November 5, 1999.
PART III - ---------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------------
Information regarding the executive officers and directors of the Company is incorporated herein by reference to the discussions under "Nominees for Election as Director," "Other Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Executive Officers" in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders (the "Criticare Proxy Statement") which will be filed on or before October 28, 2000.
Item 11.
Item 11. EXECUTIVE COMPENSATION. - -------- -----------------------
Incorporated herein by reference to the discussion under "Executive Compensation" in the Criticare Proxy Statement.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- -----------------------------------------------------------------
Incorporated herein by reference to the discussion under "Security Ownership" in the Criticare Proxy Statement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- --------------------------------------------------
Incorporated herein by reference to the discussion under "Employment Agreements and Severance Arrangements" in the Criticare Proxy Statement.
PART IV -------
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - -------- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial --------------------- statements of the Company are included in Item 8 of this report.
Consolidated Balance Sheets - as of June 30, 2000 and 1999.
Consolidated Statements of Operations - for the years ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity - for the years ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows - for the years ended June 30, 2000, 1999 and 1998.
Notes to consolidated financial statements.
2. Financial Statement Schedules: -------------------------------
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 2000, 1999 and 1998:
Schedule Number Description Page - ------ ----------- ----
VIII Valuation and Qualifying 21 Accounts and Reserves
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or the required information is shown in the financial statements or notes thereto, and therefore have been omitted.
3. Exhibits: --------
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement on Form S-1, Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
4.2 Specimen Convertible Debenture (incorporated by reference to the Registration Statement filed on Form S-3, Registration No. 33-25153).
10.1 Blatz House Offices Limited Partnership Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1987).
10.2 Rights Agreement (incorporated by reference to the Company's Current Report on Form 8-K filed on April 18, 1997).
10.3 Assignment of Rights to Patent Applications, Patents and/or Inventions, effective November 3, 1998, between the Company and TeleMed Technologies International, Inc. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
10.4 Registration Agreement, dated as of November 3, 1998, between the Company and TeleMed Technologies International, Inc. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
10.5* 1999 Employee Stock Purchase Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
10.6* 1992 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60644).
10.7* 1992 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60214).
10.8* 1987 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-33497).
10.9* 1987 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-40038).
10.10* Form of Executive Officer and Director Indemnity Agreement (incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-13050).
10.11* Employment Agreement of Gerhard J. Von der Ruhr (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.12* Employment Agreement of N.C. Joseph Lai (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.13* Amendment to Employment Agreement of Gerhard J. Von der Ruhr (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1997).
10.14* Amendment to Employment Agreement of N.C. Joseph Lai (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1997).
10.15* Severance Agreement, dated as of November 16, 1998, of Gerhard J. Von der Ruhr (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
10.16* Severance Agreement, dated as of November 16, 1998, of N.C. Joseph Lai (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
10.17* Employment Agreement of Emil H. Soika, (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
10.18* Employment Agreement of Stephen D. Okland, (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
10.19* Employment Agreement of Drew M. Diaz, (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
21 Subsidiaries (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney (incorporated by reference to the signature page hereof).
27 Financial Data Schedule.
__________________ * Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30, 2000.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate section of this report.
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.
CRITICARE SYSTEMS, INC.
By /s/ Emil H. Soika ---------------------------------- Emil H. Soika, President and Chief Executive Officer
Date: September 28, 2000
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Emil H. Soika and Mark S. Ruehle, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Criticare Systems, Inc.:
The audits referred to in our report dated August 15, 2000 relating to the consolidated financial statements of Criticare Systems, Inc., which is contained in Item 8 of this Form 10-K (incorporated in Item 8 of the Form 10-K by reference to the annual report to stockholders for the year ended June 30, 2000) included the audit of the financial statement schedules listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits.
In our opinion such financial statement schedules present fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP Milwaukee, Wisconsin August 15, 2000
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Criticare Systems, Inc.:
We have audited the consolidated financial statements of Criticare Systems, Inc. and subsidiaries for the year ended June 30, 1998, and have issued our report thereon dated August 20, 1998; such report is included elsewhere in this Form 10-K. Our audit also included the consolidated financial statement schedule information for the year ended June 30, 1998, of Criticare Systems, Inc. listed in Item 14. This consolidated financial statement schedule information is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Milwaukee, Wisconsin August 20, 1998
SCHEDULE II
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998