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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 000-16061
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Criticare Systems, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1501563
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 414-798-8282
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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NA NA
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[COVER PAGE 1 OF 2 PAGES.]
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.04 Par Value
(together with associated Preferred Stock Purchase Rights)
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the voting common stock held by nonaffiliates
of the registrant as of August 31, 1999 was $17,445,738. Shares of voting
common stock held by any executive officer or director of the Registrant and any
person who beneficially owns 10% or more of the outstanding voting common stock
have been excluded from this computation because such persons may be deemed to
be affiliates. This determination of affiliate status is not a conclusive
determination for other purposes.
On August 31, 1999, there were outstanding 8,706,151 shares of the
registrant's $.04 par value voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of the Stockholders
of the Registrant to be held November 5, 1999 are incorporated by reference into
Part III of this report.
[COVER PAGE 2 OF 2 PAGES.]
2
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PART I
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Item 1. BUSINESS.
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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
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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 503, 503DX, 504 and 504DX. Criticare's complete line of pulse
oximeters meets the needs of virtually all clinical environments: adult,
pediatric
3
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
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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
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Domestic Sales. At August 31, 1999, the Company's domestic sales force
consisted of 18 employees and 75 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
5
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 1999, Criticare sold its products,
principally to hospitals, in over 75 countries through over 140 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 1999, 37% of Criticare's net sales, or $10.5 million, was
attributable to international sales, of which approximately 44% was from sales
in Europe and the Middle East, 21% was from sales to Pacific Rim countries and
35% was from sales to Canada and Central and South America. In fiscal 1998, 46%
of Criticare's net sales was attributable to international sales. In fiscal
1997, 51% 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, 1999, Criticare employed three clinical
support specialists to provide customer training and education, primarily to
domestic hospitals. The clinical support staff 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, 1999, the Company had a customer service
6
staff of 16 people at its Waukesha, Wisconsin facility. The Company offers
extended warranties and service contracts on all of its monitors.
Manufacturing
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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
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Criticare has focused its research, development and engineering
expenditures on products designed to meet identified market demands. The
7
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, 1999, the Company had an in-house research, development and
engineering staff of 23 people. The Company's research, development and
engineering expenditures were $3.0 million in fiscal 1999, $3.3 million in
fiscal 1998 and $2.3 million in fiscal 1997.
Competition
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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.
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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
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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
9
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
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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 three
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 a United States trademark registrations for "POET" and
"Scholar."
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
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At August 31, 1999 Criticare had 105 employees; including 41 in
manufacturing and operations, six in quality control, 22 in sales and marketing,
13 in administration and 23 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
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Criticare's backlog on June 30, 1999 and 1998 was approximately $1,836,000
and $1,542,000, 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
10
customer. The Company does not believe that its backlog at any date is
indicative of its future sales.
Item 2. PROPERTIES.
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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. LEGAL PROCEEDINGS.
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In July, 1999, Criticare and Dynamic Options Corporation, Inc. ("D.O.C.")
amicably settled certain pending legal proceedings. Criticare agreed to make a
cash payment to D.O.C., transfer to D.O.C. a portion of the shares Criticare
holds in Immtech International, Inc. ("Immtech"), issue to D.O.C. 150,000 shares
of Criticare's common stock and transfer certain inventory related to telemetry
products no longer sold by the Company. The settlement agreement requires a
broker chosen by the Company to sell the Immtech shares and the Criticare shares
on behalf of D.O.C.
In the normal course of business Criticare also 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
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PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS.
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Criticare Systems, Inc. common stock is traded on the Nasdaq National Market
(Symbol CXIM). As of June 30, 1999, there were approximately 320 holders of
record of Criticare's common stock. The Company has never paid dividends on its
common stock and has no plans to pay cash dividends in the foreseeable future.
YEAR ENDED JUNE 30,
1999 1998
Quarter Ended: High Low High Low
September 30 $2-15/16 $1-1/4 $8 $4-3/8
December 31 $2-3/4 $1-5/8 $6-5/8 $2-13/16
March 31 $2-1/16 $1-3/8 $4-3/8 $2-5/8
June 30 $3-3/8 $1-11/16 $3-3/4 $2-11/16
Item 6. SELECTED FINANCIAL DATA.
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The following table sets forth selected financial data with respect to the
Company for each of the periods indicated.
Years Ended June 30,
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1999 1998 1997 1996 1995
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Net Sales $28,512,507 $27,908,364 $26,235,355 $31,528,266 $28,660,275
Income (Loss) Before Income
Taxes and Extraordinary Gain (4,388,171) (499,276) (2,749,435) (4,280,989) 175,643
Net Income (Loss) (4,388,171) (499,276) (2,179,489) (4,330,989) 105,643
Net Income (Loss) Per
Common Share-Basic and
Diluted ($0.51) ($0.06) ($0.30) ($0.63) $0.02
Average Shares
Outstanding 8,581,863 8,309,240 7,267,184 6,913,557 6,764,236
Stockholders' Equity $12,711,709 $17,282,997 $14,227,135 $13,917,549 $17,130,449
Long-term Obligations $4,014,356 3,165,258 5,110,934 4,669,975 3,646,867
Working Capital 10,340,014 13,716,891 12,053,165 10,282,033 13,401,741
Total Assets 24,041,987 24,726,819 25,145,066 27,075,922 25,468,428
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATION.
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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.
PERCENTAGE OF NET SALES
YEARS ENDED JUNE 30,
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1999 1998 1997
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Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . 54.5 53.3 53.6
Gross profit . . . . . . . . . . . . . . . . 45.5 46.7 46.4
Operating expenses:
Marketing. . . . . . . . . . . . . . . . . . 31.4 26.7 33.4
Research, development and engineering. . . . 10.4 11.7 8.8
Administrative . . . . . . . . . . . . . . . 14.6 7.2 9.6
Severance pay. . . . . . . . . . . . . . . . 2.8 - -
Total. . . . . . . . . . . . . . . . . . . . 59.2 45.6 51.8
Income (loss) from operations. . . . . . . . (13.7) 1.1 (5.4)
Interest expense . . . . . . . . . . . . . . (1.5) (2.9) (4.0)
Interest income. . . . . . . . . . . . . . . .3 .4 .1
Equity in loss of investments. . . . . . . . (.5) (.4) (1.2)
Loss before income taxes and
extraordinary gain . . . . . . . . . . . (15.4) (1.8) (10.5)
Income tax provision . . . . . . . . . . . . - - -
Extraordinary gain on extinguishment of debt - - 2.2
Net loss . . . . . . . . . . . . . . . . . . (15.4)% (1.8)% (8.3)%
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 represents 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
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when compared to 1998 levels; however, excluding 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 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 due to the conversion of convertible debentures to
common stock in 1998.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
Net sales for the twelve months ended June 30, 1998 increased 6.3% to
$27,908,364 from $26,235,355 for the twelve months ended June 30, 1997. The
sales increase is attributable to the alternate care sales and new OEM sales.
The gross profit percentage remained relatively consistent at 46.7% versus 46.4%
in fiscal 1997. Margins in domestic hospital, alternate care, and international
all remained relatively consistent with those of the prior year.
Operating expenses of $12,731,695 decreased 6.3% from fiscal 1997 levels. In
addition, operating expenses as a percentage of sales decreased to 45.6% from
51.8% in fiscal 1997. The largest savings occurred in the marketing expenses
where spending levels were reduced by approximately $1,300,000. The reduction
in marketing expenses was primarily related to international spending. The
Company consolidated several international functions at the home office in the
United States. This resulted in a savings of over $850,000. Administrative
expenses for fiscal 1998 decreased by 20.4% from fiscal 1997 levels, due to
liquidation expenses incurred in fiscal 1997 related to Criticare International.
The reduced expenses in marketing and administration were partially offset by an
increase of 41.3% in research, development, and engineering expenses, which
resulted from a $900,000 charge associated with the acquisition of in-process
technology related to the transmission of clinical data.
Interest expense decreased during fiscal 1998 due to no borrowings on the line
of credit during the year. Interest income increased during fiscal 1998 due to
higher cash balances on hand throughout the year. Equity in the loss of
investments relates to a $120,000 advance provided to Immtech International,
Inc.
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LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, the Company generated $465,577 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, $150,000 for the purchase of
stock and intangible assets from Immtech International, Inc., 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 fiscal 1998, the Company generated $448,434 from operating activities,
$194,431 from the exercise of stock options, $120,000 from the issuance of
common stock, and $82,000 from the exercise of warrants. The Company used
$147,441 for retirement of long-term debt, $288,285 for capital expenditures and
$120,000 for advances to Immtech International, Inc. These sources and uses of
cash resulted in a net positive cash flow of $289,139 for the 1998 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 April 2004.
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 affect 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 the next one to two years will be satisfied by
cash generated from operations and other borrowings. During fiscal 1999, the
Company also had access to a commercial bank line of credit of up to $4,000,000.
At June 30, 1999, there were no borrowings outstanding on the line of credit.
The Company violated a convenant 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.
YEAR 2000 PREPARATIONS
The Company has developed a plan to address company-wide Year 2000 readiness.
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because
the Year 1900 could also be translated as two zeroes, systems which use two
digits could read the date incorrectly for a number of date-sensitive
applications resulting in potential calculation errors or the shutdown of major
15
systems. The Company is in the process of updating its internal computer
software, other information technology and other operating systems for the
purposes of Year 2000 compliance. The Company will also address the Year 2000
compliance of the Company's new and existing products. The Company has incurred
costs of approximately $300,000 as of June 30, 1999 related to Year 2000
preparations. The Company expects to spend an additional $50,000 to complete its
Year 2000 plan. The Company currently expects to complete its Year 2000
compliance plan during October 1999 and does not expect that its costs to become
Year 2000 compliant will be material to its financial condition or results of
operations.
The Company's operations may also be adversely affected to the extent that
suppliers and other third parties are not Year 2000
compliant. The Company has circulated surveys to its key third party vendors
during fiscal 1999 to assess the Year 2000 compliance status of the operating
systems of such vendors and the potential impact on the Company of
non-compliance. However, a number of risks relating to the Year 2000 issue may
be out of the Company's control, including reliance on outside links for
essential services such as communications and power. There can be no assurance
that a failure of systems of third parties on which the Company's systems and
operations will rely to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or operating results.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Annual Report 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, Year 2000 compliance,
management's or the Company's expectations and beliefs and similar matters
discussed in Management's Discussion and Analysis or elsewhere in this Annual
Report. 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, government regulation, health care cost containment
programs, and competition in the Company's markets.
16
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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- -----------------------------------------------
FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS 1999 1998
CURRENT ASSETS (Note 5):
Cash and cash equivalents (Note 1) . . . . . . . . . . . . $ 2,511,078 $ 2,729,998
Accounts receivable, less allowance for doubtful accounts
of $375,000 and $300,000, respectively. . . . . . . . . 6,358,487 6,921,713
Other receivables. . . . . . . . . . . . . . . . . . . . . 83,106 322,976
Inventories (Notes 1 and 2). . . . . . . . . . . . . . . . 8,510,975 7,682,471
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 192,290 338,297
Total current assets . . . . . . . . . . . . . . . . . . 17,655,936 17,995,455
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,000 925,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,600,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 2,051,442 1,796,120
Furniture and fixtures . . . . . . . . . . . . . . . . . . 819,579 712,428
Demonstration and loaner monitors. . . . . . . . . . . . . 1,416,893 1,783,611
Production tooling . . . . . . . . . . . . . . . . . . . . 2,158,378 2,005,834
Property, plant and equipment - cost . . . . . . . . . . . 10,971,292 10,822,993
Less accumulated depreciation. . . . . . . . . . . . . . . 4,697,232 4,210,622
Property, plant and equipment - net . . . . . . . . . . 6,274,060 6,612,371
INVESTMENTS (Notes 1, 3 and 5) . . . . . . . . . . . . . . - -
OTHER ASSETS (Notes 1 and 5):
License rights and patents - net . . . . . . . . . . . . . 111,991 118,993
Total other assets . . . . . . . . . . . . . . . . . . . 111,991 118,993
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $24,041,987 $24,726,819
See notes to consolidated financial statements.
17
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,078,020 $ 2,305,721
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . . 1,446,614 819,886
Product warranties (Note 1). . . . . . . . . . . . . . . . . . . . . 325,000 328,000
Lawsuit settlement (Note 7). . . . . . . . . . . . . . . . . . . . . 1,600,000 -
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . 380,000 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,395 715,603
Current maturities of long-term debt (Note 5). . . . . . . . . . . . . . 73,893 109,354
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 7,315,922 4,278,564
------------ ------------
LONG-TERM DEBT, less current maturities (Note 5) . . . . . . . . . . . . 3,364,356 3,165,258
------------ ------------
OTHER LONG-TERM OBLIGATIONS (Note 11). . . . . . . . . . . . . . . . . . 650,000 -
------------ ------------
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 5, 6 and 8):
Preferred stock - $.04 par value, 500,000 shares authorized,
no shares issued or outstanding. . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
8,706,151 and 8,351,151 shares issued and outstanding, respectively. 348,246 334,046
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 17,960,363 17,964,250
Common stock held in treasury 103,840 shares - at cost . . . . . . . . . (193,430) -
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . . (5,403,470) (1,015,299)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 12,711,709 17,282,997
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,041,987 $24,726,819
============ ============
See notes to consolidated financial statements.
18
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
NET SALES (NOTE 10). . . . . . . . . . . . . . $28,512,507 $27,908,364 $26,235,355
COST OF GOODS SOLD . . . . . . . . . . . . . . 15,528,314 14,870,453 14,059,508
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . 12,984,193 13,037,911 12,175,847
------------ ------------ ------------
OPERATING EXPENSES:
Marketing. . . . . . . . . . . . . . . . . . . 8,941,036 7,454,619 8,761,731
Research, development and engineering (Note 8) 2,963,134 3,278,714 2,320,655
Administrative (Note 7). . . . . . . . . . . . 4,157,811 1,998,362 2,509,506
Severance pay (Note 11). . . . . . . . . . . . 810,000 - -
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 16,871,981 12,731,695 13,591,892
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . (3,887,788) 306,216 (1,416,045)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (Note 5 and 6). . . . . . . . (432,477) (797,376) (1,048,391)
Interest income. . . . . . . . . . . . . . . . 82,094 111,884 39,001
Equity in loss of investments (Notes 1 and 3). (150,000) (120,000) (324,000)
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . (500,383) (805,492) (1,333,390)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN . . . . . . . . . . (4,388,171) (499,276) (2,749,435)
INCOME TAX PROVISION (NOTES 1 AND 4) . . . . . - - -
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN . . . . . . . . (4,388,171) (499,276) (2,749,435)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (NOTE 5) . . . . . . . . . . . . . - - 569,946
NET LOSS . . . . . . . . . . . . . . . . . . . $(4,388,171) $ (499,276) $(2,179,489)
============ ============ ============
LOSS PER COMMON SHARE-
BASIC AND DILUTED: (NOTE 1)
Before extraordinary gain. . . . . . . . . . . $ (.51) $ (.06) $ (.38)
Extraordinary gain . . . . . . . . . . . . . . - - .08
------------ ------------ ------------
NET LOSS PER COMMON SHARE. . . . . . . . . . . $ (.51) $ (.06) $ (.30)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 8):
Basic. . . . . . . . . . . . . . . . . . . . . 8,581,863 8,309,240 7,267,184
Diluted. . . . . . . . . . . . . . . . . . . . 8,581,863 8,309,240 7,267,184
============ ============ ============
See notes to consolidated financial statements.
19
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Additional Common Stock
Common Stock Paid-In Treasury
Shares Amount Capital No. of Shares Cost
BALANCE, JUNE 30, 1996. . . . . . . . 7,128,272 $ 285,131 $11,995,118
Net loss. . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Common stock issued in connection
with extinguishment of debt . . . 200,000 8,000 772,000
Exercise of options and warrants. . . 252,020 10,081 570,838
Convertible debentures converted
to common stock, net of $61,872
of unamortized issuance costs . . 216,173 8,647 1,047,075
Issuance of warrants for services . . 84,375
BALANCE, JUNE 30, 1997. . . . . . . . 7,796,465 311,859 14,469,406
Net loss. . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Issuance of common stock. . . . . . . 20,425 817 119,183
Exercise of options and warrants. . . 126,500 5,060 271,371
Convertible debentures converted
to common stock, net of $100,822
of unamortized issuance costs . . 407,761 16,310 2,181,225
Commitment to issue common
stock for patented technology . . 900,000
Issuance of warrants for services . . 23,065
BALANCE, JUNE 30, 1998. . . . . . . . 8,351,151 334,046 17,964,250
Net loss. . . . . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Issuance of common stock for
patented technology . . . . . . . 350,000 14,000 (14,000)
Exercise of options and warrants. . . 5,000 200 10,113
Common stock repurchased. . . . . . . 103,840 $ (193,430)
BALANCE, JUNE 30, 1999. . . . . . . . 8,706,151 $ 348,246 $17,960,363 103,840 $ (193,430)
Retained Accumulated
Earnings Other Total
(Accumulated Comprehensive Stockholders'
Deficit) Income/Loss Equity
BALANCE, JUNE 30, 1996. . . . . . . . $ 1,663,466 $ (26,166) $13,917,549
Net loss. . . . . . . . . . . . . . . (2,179,489) (2,179,489)
Foreign currency translation
adjustments . . . . . . . . . . . (11,941) (11,941)
Comprehensive income/(loss) . . . . . (2,191,430)
Common stock issued in connection
with extinguishment of debt . . . 780,000
Exercise of options and warrants. . . 580,919
Convertible debentures converted
to common stock, net of $61,872
of unamortized issuance costs . . 1,055,722
Issuance of warrants for services . . 84,375
BALANCE, JUNE 30, 1997. . . . . . . . (516,023) (38,107) 14,227,135
Net loss. . . . . . . . . . . . . . . (499,276) (499,276)
Foreign currency translation
adjustments . . . . . . . . . . . 38,107 38,107
Comprehensive income/(loss) . . . . . (461,169)
Issuance of common stock. . . . . . . 120,000
Exercise of options and warrants. . . 276,431
Convertible debentures converted
to common stock, net of $100,822
of unamortized issuance costs . . 2,197,535
Commitment to issue common
stock for patented technology . . 900,000
Issuance of warrants for services . . 23,065
BALANCE, JUNE 30, 1998. . . . . . . . (1,015,299) 17,282,997
Net loss. . . . . . . . . . . . . . . (4,388,171) (4,388,171)
Comprehensive income/(loss) . . . . . (4,388,171)
Issuance of common stock for
patented technology . . . . . . . -
Exercise of options and warrants. . . 10,313
Common stock repurchased. . . . . . . (193,430)
BALANCE, JUNE 30, 1999. . . . . . . . $ (5,403,470) $ 12,711,709
See notes to consolidated financial statements.
20
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,388,171) $ (499,276) $(2,179,489)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 486,610 721,476 709,618
Amortization . . . . . . . . . . . . . . . . . . . . . . . 7,002 21,440 74,749
Interest and discount accrued on convertible debentures. . - 462,034 451,438
Provision for doubtful accounts. . . . . . . . . . . . . . 380,004 99,000 366,505
Expense related to equity in loss of investments . . . . . 150,000 120,000 324,000
Expense related to issuance of warrants for services . . . - 23,065 84,375
Expense related to commitment to issue common stock
for patented technology. . . . . . . . . . . . . . . . - 900,000 -
Extraordinary gain on extinguishment of debt . . . . . . . - - (569,946)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . 183,222 161,524 2,321,416
Other receivables . . . . . . . . . . . . . . . . . . 239,870 (86,121) 117,783
Inventories . . . . . . . . . . . . . . . . . . . . . (461,786) 46,207 93,351
Prepaid expenses. . . . . . . . . . . . . . . . . . . 146,007 (68,677) (81,488)
Accounts payable. . . . . . . . . . . . . . . . . . . 772,299 (768,284) (509,017)
Accrued liabilities . . . . . . . . . . . . . . . . . 2,950,520 (683,954) 287,876
Net cash provided by operating activities. . . . . . . . . . . . . 465,577 448,434 1,491,171
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net . . . . . . . . . . (515,017) (287,205) (134,785)
Purchase of license rights. . . . . . . . . . . . . . . . . . . . . - (1,080) (40,815)
Advances to Immtech International, Inc. . . . . . . . . . . . . . . (150,000) (120,000) (24,000)
Net cash used in investing activities . . . . . . . . . . . . . . . (665,017) (408,285) (199,600)
FINANCING ACTIVITIES:
Proceeds from mortgage refinancing. . . . . . . . . . . . . . . . . 3,450,000 - -
Repayment of mortgage . . . . . . . . . . . . . . . . . . . . . . . (3,193,587) - -
Repurchase of company stock . . . . . . . . . . . . . . . . . . . . (193,430) - -
Borrowings (payments) under line of credit facility . . . . . . . . - - (2,300,000)
Proceeds from the issuance of convertible debentures. . . . . . . . - - 2,500,000
Principal payments on long-term debt. . . . . . . . . . . . . . . . (92,776) (147,441) (217,619)
Convertible debenture issuance costs. . . . . . . . . . . . . . . . - - (220,657)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . 10,313 396,431 580,919
Net cash (used in) provided by financing activities . . . . . . . . (19,480) 248,990 342,643
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . (218,920) 289,139 1,634,214
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. . . . . . . . . . . . 2,729,998 2,440,859 806,645
CASH AND CASH EQUIVALENTS, END OF YEAR. . . . . . . . . . . . . . . $ 2,511,078 $2,729,998 $ 2,440,859
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes (refunded) paid-net . . . . . . . . . . . . . . . $ 8,010 $ 8,525 $ (87,626)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,401 335,342 456,880
Noncash investing and financing activities:
Common stock issued in connection with extinguishment of debt. - - 780,000
Common stock issued upon conversion of convertible debentures,
net of $100,822 and $61,872 of unamortized issuance costs . - 2,197,535 1,055,722
Issuance of warrants for services. . . . . . . . . . . . . . . - 23,065 84,375
Commitment to issue common stock for patented technology . . . - 900,000 -
See notes to consolidated financial statements.
21
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
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 Immtech International, Inc. ("Immtech") and Blatz House Offices
Limited Partnership (the "Blatz Partnership") on the equity method (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, $7,000, and $9,000 of
22
amortization was charged to operations in 1999, 1998 and 1997, respectively.
Accumulated amortization approximated $85,000 and $78,000 at June 30, 1999 and
1998, respectively.
CONVERTIBLE DEBENTURE ISSUANCE COSTS - Convertible debenture issuance costs
were amortized over the two-year term of the debentures. Approximately $15,000
and $46,000 of amortization was charged to operations in 1998 and 1997. The
prorata 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 and $61,872 during 1998 and 1997. (See Note 6.)
GOODWILL - Goodwill relating to the excess of the cost over the fair value
of the net assets of an acquired subsidiary was amortized on the straight-line
method over approximately five years. Approximately $20,000 of amortization was
charged to operations in 1997. The goodwill was fully amortized as of June 30,
1997.
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.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
charged to operations as incurred. Such expenses approximated $2,798,000,
$3,156,000, and $2,175,000 in 1999, 1998 and 1997, 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.
23
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 Account 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 and foreign currency translation adjustments 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 - In 1998, the FASB also issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is required to be adopted in fiscal 2001. The Company is currently in the
process of evaluating the impact of adopting SFAS No. 133.
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.
24
2. INVENTORIES
Inventories consist of the following as of June 30:
1999 1998
Component parts . $3,790,728 $2,647,231
Work in process . 1,261,709 1,409,187
Finished units. . 3,458,538 3,626,053
Total inventories $8,510,975 $7,682,471
3. INVESTMENTS
INTERCARE TECHNOLOGIES, INC. - During 1992, the Company's subsidiary, Sleep
Care, transferred certain assets to Intercare Technologies, Inc. ("Intercare")
in exchange for 75,000 shares of convertible preferred stock of Intercare with
an estimated fair value of $300,000, at that time. In connection with the
transfer, Sleep Care licensed to Intercare the rights to certain intellectual
property and technology, primarily license rights and patents, related to
products previously marketed by Sleep Care. In exchange for the license rights,
the Company is to receive royalties of 5% of the gross revenues from sales of
products licensed under the agreement. No royalty income was recognized during
1999, 1998 and 1997 and no royalty income is expected in future years. The
assets retained by Sleep Care were fully amortized as of June 30, 1996.
Amortization of the intellectual property approximated $8,000 in 1996. During
the year ended June 30, 1997, management of the Company concluded the investment
in Intercare was impaired and the carrying value of the investment was reduced
from $300,000 to zero.
IMMTECH INTERNATIONAL, INC. - The Company owns comon 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.
25
The following is a summary of the Company's investment in and advances to
Immtech as of June 30, 1999 and 1998:
1999 1998
Investment in Immtech . . . . . . $ 2,736,000 $ 2,586,000
Advances to Immtech . . . . . . . 863,940 863,940
Total . . . . . . . . . . . . . . 3,599,940 3,449,940
Less investment losses recognized (3,599,940) (3,449,940)
Net investment. . . . . . . . . . $ 0 $ 0
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 11).
The Company has recognized investment losses related to the investment in
Immtech of $150,000, $120,000 and $24,000 in 1999, 1998 and 1997, respectively.
As of June 30, 1999, the Company owned approximately 20% of Immtech's issued and
outstanding common stock.
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. The lock-up agreement expires in April 2004. At June
30, 1999, the lock-up provisions were still in force. Unrestricted Immtech
shares were trading at $17.50 on June 30, 1999.
Subsequent to June 30, 1999, the Company sold a portion of its Immtech
stock in a Private Placement. The proceeds from this sale were $1,760,000.
The following is summarized financial information for Immtech at June 30,
1999 and 1998 and for the twelve months then ended.
1999 1998
Current assets. . . . . . . . . . . . . . . . $ 8,541,000 $ 84,000
Noncurrent assets . . . . . . . . . . . . . . 68,000 111,000
Current liabilities . . . . . . . . . . . . . 253,000 4,097,000
Noncurrent liabilities. . . . . . . . . . . . - -
Redeemable preferred stock. . . . . . . . . . - 5,548,000
Common stockholders' equity (deficit) . . . . 8,356,000 (9,450,000)
Revenues. . . . . . . . . . . . . . . . . . . 136,000 156,000
Net loss. . . . . . . . . . . . . . . . . . . (8,341,000) (1,152,000)
Net loss attributable to common stockholders. (4,657,000) (1,666,000)
26
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, resulting in no
material gain or loss.
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:
JUNE 30, JUNE 30, JULY 1,
1999 1998 1997
Deferred income tax assets:
Accounts receivable and sales allowances $ 170,000 $ 156,000 $ 237,000
Inventory allowances . . . . . . . . . . 254,000 110,000 207,000
Product warranties . . . . . . . . . . . 127,000 128,000 144,000
Other accrued liabilities. . . . . . . . 243,000 86,000 98,000
Severance pay accrual. . . . . . . . . . 279,000 - -
Lawsuit settlement . . . . . . . . . . . 626,000 - -
Federal net operating loss carryforwards 2,244,000 1,870,000 1,717,000
State net operating loss carryforwards . 325,000 270,000 255,000
Federal tax credit carryforwards . . . . 152,000 152,000 198,000
Investment losses not deducted . . . . . 1,481,000 1,481,000 1,434,000
Total deferred income tax assets . . . . 5,901,000 4,253,000 4,290,000
JUNE 30, JUNE 30, JULY 1,
1999 1998 1997
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization. . (619,000) (596,000) (1,007,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (7,000) (3,000) (6,000)
Total deferred income tax liabilities. . . . . . . . . . (626,000) (599,000) (1,013,000)
Valuation allowance. . . . . . . . . . . . . . . . . . . (5,275,000) (3,654,000) (3,277,000)
Net deferred income taxes recognized in the consolidated
balance sheets. . . . . . . . . . . . . . . . . . . $ 0 $ 0 $ 0
27
At June 30, 1999, the Company had Federal net operating loss carryforwards
of approximately $6,600,000 which expire in 2008 through 2019. At June 30,
1999, 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 $6,500,000 of
state net operating loss carryforwards, which expire in 2002 through 2019,
available to offset certain future state taxable income.
The income tax provision consists of the following:
1999 1998 1997
Current
Federal. . . . . . . . . . $ 0 $ 0 $ 0
State. . . . . . . . . . . 0 0 0
Total income tax provision $ 0 $ 0 $ 0
A reconciliation of the provision for income taxes (benefit) at the federal
statutory income tax rate to the effective income tax rate follows:
1999 1998 1997
Federal statutory income tax rate. . . . (34.0)% (34.0)% (34.0)%
Losses for which no benefit was provided 29.3 30.9 29.1
Non-deductible losses of subsidiaries. . 3.2 - 4.0
Other-net. . . . . . . . . . . . . . . . 1.5 3.1 .9
Effective income tax rate. . . . . . . . 0% 0% 0%
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
1999 1998
Long-term debt consists of the following:
Mortgage note, 7.5% due in monthly installments of $27,793
with a final payment of $3,048,253 due in April 1, 2004,
collateralized by real estate with a carrying value of approximately
$3,934,000 at June 30, 1999. . . . . . . . . . . . . . . . . . . . . $3,438,249 -
Mortage note, 9.625% due in monthly installments of $34,983
with a final payment of $2,688,336 due in December 2002,
collateralized by real estate (refinanced in 1999). . . . . . . . . . $3,274,612
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,438,249 $3,274,612
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . 73,893 109,354
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,364,356 $3,165,258
28
Aggregate annual principal payments required under terms of the long-term
debt agreements are as follows:
Years Ending June 30, Principal Payments
2000. . . . . . . . . $ 73,893
2001. . . . . . . . . 79,430
2002. . . . . . . . . 86,764
2003. . . . . . . . . 93,596
2004. . . . . . . . . 3,104,566
Total . . . . . . . . $ 3,438,249
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.
At June 30, 1999, 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 are payable on demand with interest payable monthly
at the bank's reference rate, plus .25% (8.0% as of June 30, 1999). As of June
30, 1999, 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, 1999. This non-compliance was waived by the lending
institution, and the line of credit facility was extended until November 2001.
In March 1997, the Company satisfied a $1,240,000 promissory note plus
interest accrued on the note of approximately $110,000 in exchange for 200,000
shares of newly issued common stock. Under the provisions of the agreement, the
shares must be held for one full year prior to resale. In conjunction with this
transaction, the Company recorded an extraordinary gain on the extinguishment of
debt of $569,946 for the outstanding indebtedness under the promissory note in
excess of the estimated fair market value of the restricted stock.
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
29
the Company's common stock for the five days preceding the conversion date. For
the years ended June 30, 1998 and 1997, $1,650,000 and $850,000 of debentures
were converted to 407,761 and 216,173 shares of common stock with a fair market
value of $2,298,357 and $1,117,594 as of the conversion dates.
Proceeds from the issuance of the debentures were recorded as a liability
at the issuance date. The conversion discount was amortized and reported as
additional interest expense over the life of the debentures. Additional interest
expense wasrecognized for any unamortized discount as of the conversion date.
The debentures were included in the accompanying June 30, 1997 consolidated
balance sheet at the issuance price, plus any accrued interest and amortized
discount.
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's financial position or
results of operations.
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 and $14,000 in 1999 and 1997, respectively. One grant was repaid in
full during 1999. 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, 1999.
As of June 30, 1999, the Company accrued a liability of $1,600,000 related
to certain legal proceedings with a former dealer. In July 1999, the Company
agreed to a $1,600,000 settlement with the dealer. The Company agreed to
30
make a cash payment to the dealer, transfer a portion of the shares the Company
holds in Immtech, issue the dealer 150,000 shares of the Company's common stock,
and transfer certain inventory related to telemetry products no longer sold by
the Company. The settlement agreement requires that a broker chosen by the
Company sell the Immtech and Company common stock on behalf of the dealer.
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 220,750 reserved
shares of common stock remain available for future issuance under the stock
option plans at June 30, 1999. 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 1997, 1998 and 1999 for the above plans are
summarized as follows:
Number of Stock Options Weighted Avg.
Shares Price Range Exercise Price
Outstanding at July 1, 1996. 1,069,420 1.88-8.50 2.45
Granted . . . . . . . . 250,500 2.50-5.25 2.64
Cancelled . . . . . . . (113,500) 2.00-8.50 3.38
Exercised . . . . . . . (162,020) 2.00-2.63 2.47
Outstanding at June 30, 1997 1,044,400 1.88-5.25 2.40
Granted . . . . . . . . 60,000 3.00-3.25 3.13
Cancelled . . . . . . . (179,200) 2.00-5.25 2.38
Exercised . . . . . . . (85,500) 2.00-2.75 2.27
Outstanding at June 30, 1998 839,700 1.88-3.63 2.50
Granted . . . . . . . . 993,700 1.50-1.88 1.74
Cancelled . . . . . . . (636,800) 1.69-3.00 2.06
Exercised . . . . . . . (5,000) 2.06 2.06
Outstanding at June 30, 1999 1,191,600 1.50-3.00 1.83
Exercisable at June 30, 1999 560,600 1.50-3.00 2.02
The following table summarizes information about stock options outstanding
as of June 30, 1999:
OPTIONS OUTSTANDING Options Exercisable
Weighted Average
Shares Remaining Weighted Shares
Range of Outstanding Contractual Average Exercise Exercisable Weighted Average
Exercise Prices at June 30, 1999 Life-Years Price at June 30, 1999 Exercise Price
1.50-1.875 980,700 3.52 $ 1.74 210,400 1.90
2.00-3.00 210,900 1.15 2.28 350,200 2.21
1.50-3.00 1,191,600 3.10 1.90 560,600 2.02
31
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. A substantial
portion of the options issued are contingent on future services or future
events.
At June 30, 1999, 1,038,350 shares of common stock were reserved under the
above plans.
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, 1998,1997, and 1996, 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:
YEARS ENDED JUNE 30,
1999 1998 1997
Net loss-as reported . . . . . . . . . $ (4,388,171) $(499,276) $(2,179,489)
Net loss-pro forma . . . . . . . . . . $ (4,538,172) $(779,276) $(2,325,795)
Net loss per common share-as reported. $ (.51) $ (.06) $ (.30)
Net loss per common share-pro forma. . $ (.53) $ (.09) $ (.32)
Assumptions used:
Expected volatility . . . . . . . 15% 14% 58%
Risk-free interest rate . . . . . 5% 5% 6%
Expected option life (in years) . 3 3 3
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.
In March 1999, the Company granted 120,000 stock options to a non-employee
at a price of $2.50 per share. The options vest if certain performance
parameters are achieved by May 2000. No such parameters were achieved by June
30, 1999.
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
32
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. During the year ended June 30, 1997, the Company
recognized $84,375 of expense related to the value of the services performed by
the consultant under the extended agreement. 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 and 90,000 shares of common stock at $2.00 per share during the years
ended June 30, 1998 and 1997. Warrants to purchase 15,000 shares of common
stock at $2.00 per share were exercisable as of June 30, 1999. 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, 1999, 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. 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.
The 400,000 shares to have been issued were considered to be outstanding shares
for purposes of computing basic and diluted income (loss) per common share from
April 1998 until the 350,000 shares were issued in November 1998.
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.
33
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
$84,000, $77,000, and $81,000 in 1999, 1998 and 1997, respectively.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in one business segment-the manufacturing of medical
monitoring and telemetry equipment. The Company's 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. During 1999, a
customer, who has entered into an OEM agreement with the Company, purchased
approximately $4,360,000 of the Company's products. This represents
approximately 15% of the Company's total sales. 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
34
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:
1999 1998 1997
Europe and Middle East . . . . . . . $ 4,635,000 $ 5,464,000 $ 5,606,000
Pacific Rim. . . . . . . . . . . . . 2,243,000 3,895,000 3,784,000
Canada and Central and South America 3,634,000 3,414,000 3,867,000
Net export sales . . . . . . . . . . $10,512,000 $12,773,000 $13,257,000
11. SEVERANCE PAY
During November 1999, 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 and recorded a charge of $810,000
for their severance in the year ended June 30, 1999.
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. 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 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Criticare Systems, Inc. and
subsidiaries at June 30, 1999 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
July 28, 1999
35
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 charge of
approximately $1,800,000 for settlement costs related to a lawsuit that was
substantially resolved in the quarter ended June 30, 1999 and a charge of
$900,000 for the purchase of patented technology in the quarter ended June 30,
1998. These items were unusual, nonrecurring adjustments.
Quarters Ended
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1997 1997 1998 1998 1998 1998 1999 1999
(in thousands, except per share data)
Net sales . . . . . . $ 7,544 $ 7,138 $ 6,279 $ 6,947 $ 6,724 $ 7,290 $ 7,276 $ 7,223
Gross profit. . . . . 3,506 3,273 2,919 3,340 3,259 3,562 3,379 2,784
Income (loss) from
operations. . . . . 586 422 70 (772) (214) (880) (486) (2,308)
Net income (loss) . . 172 132 19 (822) (420) (947) (681) (2,340)
Net income (loss)
per common
share-Basic. . . . .02 .02 .00 (.10) (.05) (.11) (.08) (.27)
-Diluted. .02 .02 .00 (.10) (.05) (.11) (.08) (.27)
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- -------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
The Company has not changed accountants during the 24 months prior to June
30, 1999. During that period, there were no disagreements with the accountants
regarding accounting and financial disclosure.
36
PART III
--------
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 1999 Annual Meeting of Stockholders (the "Criticare Proxy Statement")
which will be filed on or before October 28, 1999.
Item 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Criticare Proxy Statement.
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- --------------------------------------------------
Incorporated herein by reference to the discussion under "Certain
Transactions" in the Criticare Proxy Statement.
PART IV
-------
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, 1999 and 1998.
Consolidated Statements of Operations - for the years ended June 30,
1999, 1998 and 1997.
37
Consolidated Statements of Stockholders' Equity - for the years ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - for the years ended June 30,
1999, 1998 and 1997.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
-------------------------------
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 1999, 1998
and 1997:
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).
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).
38
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.
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).
39
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.
10.18* Employment Agreement of Joseph M. Siekierski.
10.19* Employment Agreement of Stephen D. Okland.
10.20* Employment Agreement of Drew M. Diaz.
10.21* Employment Agreement of Gloria Najera.
10.22* Amendment to Employment Agreement of Gloria Najera.
21 Subsidiaries.
23 Independent Auditors' Consent.
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,
1999.
40
(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.
41
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, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Emil H. Soika and Joseph M. Siekierski, 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.
Signature Title Date
- ---------------------------- ------------------------------------ ------------------
/s/ Emil H. Soika President, Chief Executive Officer September 28, 1999
- ---------------------------- and Director (Principal Executive
Emil H. Soika Officer)
/s/ Joseph M. Siekierski Vice President-Finance and Secretary September 28, 1999
- ---------------------------- (Principal Financial and Accounting
Joseph M. Siekierski Officer)
42
/s/ Karsten Houm Chairman of the Board and Director September 28, 1999
- ----------------------------
Karsten Houm
/s/ Milton Datsopoulos Director September 28, 1999
- ----------------------------
Milton Datsopoulos
/s/ Gerhard J. Von der Ruhr Director September 28, 1999
- ----------------------------
Gerhard J. Von der Ruhr
/s/ N.C. Joseph Lai Director September 28, 1999
- ----------------------------
N.C. Joseph Lai
43
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 as of June 30, 1999 and 1998, and for each of the three years
in the period ended June 30, 1999, and have issued our report thereon dated July
28, 1999; such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of Criticare Systems,
Inc. listed in Item 14. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. 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
July 28, 1999
44
SCHEDULE VIII
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Column A
- ------------------------------- Column B Column C Column D Column E
----------- ----------- ----------- ---------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ------------------------------- ----------- ----------- ----------- ---------
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts $ 295,000 $ 366,505 $ 194,505 $ 467,000
Reserve for sales returns and
allowances . . . . . . . . . $ 504,000 $ 1,283,931 $ 1,647,931 $ 140,000
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts $ 467,000 $ 99,000 $ 266,000 $ 300,000
Reserve for sales returns and
allowances . . . . . . . . . $ 140,000 $ 1,357,917 $ 1,397,917 $ 100,000
YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts $ 300,000 $ 380,004 $ 305,004 $ 375,000
Reserve for sales returns and
allowances. . . . . . . . . $ 100,000 $ 760,194 $ 800,194 $ 60,000
45