UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 2001
[ ] 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: 262-798-8282
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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, 2001 was approximately $34,866,000. 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, 2001, there were outstanding 10,796,224 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 30, 2001 are incorporated by reference
into Part III of this report.
[COVER PAGE 2 OF 2 PAGES.]
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.
According to the guidance set by Statement of Financial Accounting
Standards No. 131, the Company operates in one business segment in the
healthcare environment. The chief operating decision maker does not utilize
segmented financial statements in making decisions about resource allocation
because the business activities that generate revenue do not have expenses
specifically associated with them. Therefore, no segment data is disclosed in
the notes to the financial statements in Item 8. However, the Company's customer
base is differentiated by region (see note 9 in the notes to the financial
statements in Item 8 for an analysis of sales by geographic area).
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 8100 and 8500 Vital Signs Monitors. The full-featured CSI 8100 Vital
----------------------------------------
Signs Monitor provides maximum flexibility for hospital, transport and
outpatient care settings. The unit's custom configurations include ECG,
ComfortCuff (TM) noninvasive blood pressure, DOX (TM) digital oximetry, heart
rate, temperature, respiration and nurse call interface. Optional features
include CO2 and CO2/O2 monitoring and an integrated
printer. The 8100 is well suited for busy departments that require basic vital
signs monitoring to conscious sedation. The 8500 series of operating room
monitors is used in conjunction with the 8100 series and provides automatic
identification and quantification of all five approved anesthetic agents.
Model 503DX, 504, 504+, and 504DX Pulse Oximeters. Criticare's complete
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line of pulse oximeters meets the needs of virtually all clinical environments:
adult, pediatric and neonatal intensive care units, operating rooms, emergency
rooms, nursing homes, physicians' offices and ambulances. The line is designed
to provide accuracy and convenience at a competitive cost to the end-user.
Model 506DX and 507E Patient Monitors. The 507E series is comprised of
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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 507E series combines ECG, oxygen saturation and noninvasive blood
pressure for a complete vital signs monitor for physician offices and hospital
applications. The 507E series is an effective low-cost monitoring system for the
emergency room or the recovery room. The 506DX is ideal for patient ward
monitoring of noninvasive blood pressure.
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 4400 and 4500 Series Blood Pressure, Pulse Oximetry and Temperature
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Combination Monitors. The 4400 series monitor was developed in conjunction with
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Alaris Medical ("Alaris") and incorporates Criticare's oximetry and noninvasive
blood pressure technology with Alaris's temperature technology. The 4500 series
monitor incorporates Criticare's noninvasive blood pressure technology with
Alaris's temperature technology. Alaris has the rights to market these products
to hospitals in the United States and Canada. Criticare has rights to market
these products to the alternate care market and to international markets.
2
Model 602-14 POET(TM) LT Monitor. The hand-held POET LT provides small
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hospitals and alternate care environments with compact, portable carbon dioxide
monitoring. The POET LT series is an effective, low-cost functioning solution
for these environments.
VitalView(TM) Central Monitoring Station. The VitalView central station
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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 507E and MPT.
MPT(TM) Monitor. The MPT (Multiple Parameter Telemetry) monitor allows the
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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
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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
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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. Criticare has entered into three contracts to supply Water Chek
systems to be utilized on OEM supplied equipment to the final customer.
Marketing and Sales
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Domestic Sales. At August 31, 2001, the Company's domestic sales force
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consisted of eight employees and 100 independent dealers. The Company's sales
force and independent dealers market the Company's products to many different
types of medical facilities such as hospitals, surgery centers, nursing homes
and physician offices. The Company sells its higher-end monitors (MPT, Vital
View Central Station and
3
anesthetic agent monitors) principally to hospitals whereas the vital signs and
pulse oximeters are sold primarily for nonhospital settings.
The Company has begun to focus on selling to original equipment
manufacturers ("OEMs"). OEM business has become a significant sales channel for
the Company and is expected to be the primary driver of growth in future
periods.
International Sales. One of the Company's principal marketing strategies
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has been to target international markets, particularly Europe, Latin America and
the Pacific Rim countries. During fiscal 2001, Criticare sold its products,
principally to hospitals, in over 75 countries through over 75 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 2001, 41% of Criticare's net sales, or $11.4 million, was
attributable to international sales, of which approximately 60% was from sales
in Europe and the Middle East, 20% was from sales to Pacific Rim countries and
20% was from sales to Canada and Central and South America. In fiscal 2000, 41%
of Criticare's net sales were attributable to international sales. In fiscal
1999, 37% of Criticare's net sales were 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, 2001, Criticare employed one clinical
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support specialist to provide customer training and education, primarily to
domestic hospitals. The clinical support specialist also assists in the
periodic training and education of the direct sales force. In addition, the
direct sales force maintains contact with end-users and provides additional
training and updates. Clinical support in foreign markets is provided by the
Company's clinical support staff and direct sales force.
Warranty and Service. Criticare believes that customer service is a key
----------------------
element of its marketing program. Criticare's monitors and sensors are warranted
against defects for one year. 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, 2001, the
Company had a customer service staff of 16 people at its Waukesha, Wisconsin
facility. The Company offers extended warranties and service contracts on all of
its monitors.
4
Manufacturing
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Historically, Criticare has manufactured and assembled its products
internally, principally at the Company's facility in Waukesha, Wisconsin.
Recently, prices for monitoring systems have eroded worldwide. In response to
this pricing pressure, in fiscal 2001 the Company entered into agreements with
two offshore contract manufacturing firms located in Ireland and Taiwan,
respectively, that exclusively manufacture medical devices in a regulated
environment. The Company has worked closely with these two firms to maintain
product quality and reliability. These two firms will perform the same rigorous
quality control testing at their facilities that Criticare has done in the past.
The Company expects to be out of the manufacturing of substantially all of its
established product lines by the end of calendar year 2001 and will then
concentrate on product enhancements and new product development, customer
service, and increased involvement with its OEM customers. The Company
anticipates that it will continue limited production of new products internally
during the development phase and for a short period after commercial
introduction until production can be transitioned to the offshore manufacturers.
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. 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. Each of
the offshore contract manufacturing firms has achieved certification under ISO's
standard 9001. 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 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,
2001, the Company had an in-house research, development and engineering staff of
21 people. The Company's research, development and engineering expenditures were
$2.4 million in fiscal 2001, $2.9 million in fiscal 2000 and $3.0 million in
fiscal 1999.
The Company made significant investments in engineering in 1999 and 2000 to
update the entire Criticare product line and develop the 8100 vital signs
monitor. In 2001, research and development efforts were more focused on
refinements to the 8100 product line and the development of the 8500 series
monitor which features automatic identification and quantification of all five
approved anesthetic agents.
5
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, provided in part by its outsourcing a large portion of its
manufacturing, its patented and other proprietary technology and software for
noninvasive, continuous monitoring of oxygen, anesthetic gases, carbon dioxide
and noninvasive blood pressure, 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 a subsidiary of Tyco International Ltd., and
Datex/Ohmeda, a United States subsidiary of Instrumentarium OY, a Finnish
company. The Company estimates that Nellcor Puritan Bennett 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 Koninklijke Philips Electronics N.V. The market
for vital signs monitors includes competitors such as Koninklijke Philips
Electronics N.V., Siemens A.G., Datex/Ohmeda and Spacelabs Medical, Inc.
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
6
agency. If the FDA believes that its legal requirements have not been
fulfilled, it has extensive enforcement powers, including the ability to ban or
recall products from the market and to prohibit the operation of manufacturing
facilities. The Company believes its products comply with applicable FDA
regulations in all material respects. In addition, the Company received ISO
9002 certification on April 29, 1993 and ISO 9001 certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical
devices are classified as Class I, Class II or Class III, depending upon the
level of regulatory control to which they will be subject. Class III devices,
which are the most highly controlled devices, are subject to premarket approval
by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's
comprehensive premarket approval requirements, but are generally subject to
premarket notification requirements. If a new device is substantially
equivalent to a device that did not require premarket approval, premarket review
is satisfied through a procedure known as a "510(k) submission," under which the
applicant provides product information supporting its claim of substantial
equivalence. The FDA may also require that it be provided with clinical trial
results showing the device's safety and efficacy.
The Company believes that the products it is currently developing generally
will be eligible for the 510(k) submission procedure and, therefore, will not be
subject to lengthy premarket approval procedures. However, these products are
still being developed and there can be no assurance that the FDA will determine
that the products may be marketed without premarket approval.
Criticare seeks, where appropriate, to comply with the safety standards of
Underwriters' Laboratories and the Canadian Standards Association and the
standards of the European Community. To date, the Company has not experienced
significant regulatory expense or delay in the foreign markets in which it sells
its products. Industry and professional groups such as the American Society of
Anesthesiologists, to the extent they have the power to mandate certain
practices or procedures as part of their profession's standard of care, are also
a source of indirect regulation of the Company's business.
Patents and Trademarks
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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.
The Company has 13 issued U.S. patents and three patent applications pending.
The Company's U.S. patents expire between 2004 and 2015. Criticare also has two
issued foreign patents and 11 foreign patent applications pending. There is no
assurance that any patents held or secured by the Company will provide any
protection or
7
commercial or competitive benefit to the Company. There is also no assurance
that the Company's products will not infringe upon patents held by others. The
Company is the owner of United States trademark registrations for "POET,"
"MPT," "REMOTEVIEW" and "MICROVIEW."
The Company also relies upon trade secret protection for certain of its
proprietary technology. Although the Company requires its employees having
access to its proprietary information to sign confidentiality agreements, no
assurance can be given that such agreements can be effectively enforced or that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to or disclose the Company's
trade secrets.
Employees
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At August 31, 2001 Criticare had 86 employees; including 31 in
manufacturing and operations, five in quality control, 16 in sales and
marketing, 13 in administration and 21 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, 2001 and 2000 was approximately $813,000
and $1,833,000, respectively. The backlog at June 30, 2000 was significantly
higher than the current year due to problems experienced in obtaining components
from suppliers in fiscal 2000. This prevented the Company from shipping products
where orders had been received, and increased the backlog in fiscal 2000.
Criticare generally delivers its products out of inventory when specified
by the customer. The Company does not believe that its backlog at any date is
indicative of its future sales.
Item 2. 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. Due mainly to the
Company's outsourcing initiatives, there is currently excess capacity available
at this facility. The Company is evaluating alternatives in order to eliminate
this excess capacity and reduce costs, including the potential sale of the
facility or the leasing of a portion of the facility.
Item 3. LEGAL PROCEEDINGS.
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In the normal course of business Criticare may be involved in various legal
proceedings from time to time. Criticare does not believe it is currently
involved in any
8
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, 2001.
9
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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The Company's common stock is traded on the Nasdaq National Market (Symbol
CXIM). As of June 30, 2001, there were approximately 257 holders of record of
the common stock. The Company has never paid dividends on its common stock and
has no plans to pay cash dividends in the foreseeable future.
Year Ended June 30,
2001 2000
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Quarter Ended:. High Low High Low
September 30. . $ 3.38 $ 2.31 $ 2.88 $ 1.88
December 31 (1). $ 3.00 $ 1.63 $ 2.75 $ 2.00
March 31. . . . $ 3.44 $ 1.94 $ 5.06 $ 2.25
June 30 . . . . $ 4.49 $ 2.55 $ 3.44 $ 1.97
(1) Trading of the Company's common stock on the Nasdaq National Market was
suspended from October 6, 1999 until December 13, 1999 due to the delayed filing
of the Company's 1999 Annual Report on Form 10-K with the SEC.
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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2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Net sales. . . . . . . . . . . $27,736,304 $27,154,236 $28,512,507 $27,908,364 $26,235,355
Loss before income
taxes and extraordinary gain (178,232) (186,388) (4,388,171) (499,276) (2,749,435)
Net loss . . . . . . . . . . . (178,232) (186,388) (4,388,171) (499,276) (2,179,489)
Net loss per common share-
basic and diluted. . . . . . $ (0.02) $ (0.02) $ (0.51) $ (0.06) $ (0.30)
Average shares outstanding . . 10,171,394 8,694,918 8,581,863 8,309,240 7,267,184
Stockholders' equity . . . . . $21,005,816 $18,798,952 $12,711,709 $17,282,997 $14,227,135
Long-term obligations. . . . . 3,270,140 3,552,474 4,014,356 3,165,258 5,110,934
Working capital. . . . . . . . 17,995,497 16,257,780 10,340,014 13,716,891 12,053,165
Total assets . . . . . . . . . 29,871,854 27,210,867 24,041,987 24,726,819 25,145,066
10
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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2001 2000 1999
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Net sales . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . . 59.4 60.6 54.5
Gross profit. . . . . . . . . . . . . 40.6 39.4 45.5
Operating expenses:
Marketing . . . . . . . . . . . . . . 23.0 29.5 31.4
Research, development and engineering 8.8 10.5 10.4
Administrative. . . . . . . . . . . . 9.1 8.6 14.6
Severance pay . . . . . . . . . . . . -- -- 2.8
Total . . . . . . . . . . . . . . . . 40.9 48.6 59.2
(Loss) from operations. . . . . . . . (0.3) (9.2) (13.7)
Interest expense. . . . . . . . . . . (0.9) (1.0) (1.5)
Interest income . . . . . . . . . . . 0.5 0.3 0.3
Equity in loss of investments . . . . -- -- (0.5)
Gain on sale of stock . . . . . . . . -- 9.2 --
Loss before income taxes. . . . . . . (0.7) (0.7) (15.4)
Income tax provision. . . . . . . . . -- -- --
Net loss. . . . . . . . . . . . . . . (0.7)% (0.7)% (15.4)%
11
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO JUNE 30, 2000
Net sales for the fiscal year ended June 30, 2001 increased 2% from the prior
year. However, two significant and isolated sales in the prior year, combined
with the partial return of product from one of these sales in the current year,
had the effect of increasing prior year revenue and reducing current year
revenue. Adjusting for these items, the net sales in fiscal 2001 increased over
$2.6 million, or 10.3%, above the prior year. Approximately $2.1 million of this
increase can be attributed to higher OEM sales, which grew 73% from the prior
year on a 77% increase in the number of units shipped. OEM business has become a
significant distribution channel in fiscal 2001, and this trend towards OEM
contributing more to overall Company sales is expected to continue in fiscal
2002 and future years. Higher replacement part shipments contributed another
$300,000 to the sales increase between years.
The gross profit percentage of 40.6% realized in fiscal 2001 improved from the
39.4% generated in fiscal 2000. Margins in the current year were favorably
impacted by the recognition of $105,000 in deferred income from the settlement
of a contract that was agreed to in January 2000 and fully satisfied in the
third quarter of fiscal 2001. In addition, a warranty reserve was reduced by
$105,000 due to favorable warranty experience on extended warranty contracts
sold to customers, and a reserve for obsolete inventory was decreased by
$75,000. These adjustments increased margins approximately 1.0 percentage point
in fiscal 2001. The Company expects to see improvement in its margins in fiscal
2002 due to lower product costs expected from outsourcing the manufacturing of
the majority of its product lines to foreign manufacturers. See "Forward-Looking
Statements."
Total operating expenses were $1,856,000 lower in fiscal 2001 than the prior
year, of which $1.2 million of this reduction was due to a decrease in bad debt
expense between years. Marketing expenses in fiscal 2000 included bad debt
expense of $1.2 million, including a specific charge of $900,000 in the fourth
quarter related to the receivable balances of certain international customers
that were deemed to be uncollectible during the fourth quarter. Marketing
expenses in fiscal 2001 included a $300,000 recovery of a portion of the bad
debt expense recognized in the fourth quarter of the prior year from the
repossession of inventory sold, and more than offset the bad debt provision
provided in fiscal 2001. Excluding the $1.2 million impact on bad debt expense
between years, marketing expenses were still down $447,000 in fiscal 2001, due
mainly to more cost-effective spending on travel and trade shows. In addition to
the reduction in marketing expenses, engineering project expenses were reduced
nearly $500,000 in fiscal 2001, due to significant spending incurred in fiscal
2000 related to the development of the 8100 product that was released in late
fiscal 2000. The reduction in marketing and engineering expenses more than
offset the $200,000 increase in administrative expenses related mostly to the
termination and replacement of a senior manager in fiscal 2001.
The overall $1,856,000 reduction in operating expenses in fiscal 2001, combined
with slightly higher revenue and improved margins compared to the prior year,
resulted in an $86,000 loss from operations, which represented a significant
improvement from the $2,518,000 operating loss generated in fiscal 2000.
Other income and expense in fiscal 2001 is comparable to that of the prior year
with the exception of the $2.5 million gain recorded in fiscal 2000. This gain
related to the private placement sale of a portion of the Company's stock
investment in Immtech International, Inc., in which the Company still has a
position. The large gain allowed the Company to offset the majority of the
operating loss produced in fiscal 2000, resulting in a net loss of $186,000,
that was $8,000 greater than the $178,000 loss generated in fiscal 2001.
12
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999
For the twelve months ended June 30, 2000, international sales rose
approximately $600,000, but were offset by a decrease in total domestic sales of
approximately $2,000,000. The increase in international sales was driven by a
13% increase in the number of units sold and was partially offset by a 4%
decrease in the average sales price per unit. The reduction in domestic sales
was due to both lower volume, as the number of units shipped fell 15%, and a 7%
decrease in the average sales price between years. The net result was a decline
in net sales of 4.8%, from $28,512,507 to $27,154,236.
The gross profit percentage declined from 45.5% in 1999 to 39.4% in 2000. This
decrease is due primarily to continued price erosion on products in a portion of
the Company's older product line.
Total operating expenses were reduced by $3,700,000, which represents a 21.7%
cost reduction during fiscal 2000. Marketing expenses were lowered by
approximately $900,000 due to a variety of factors. These include a reduction in
service labor and materials, a decrease in payroll and related travel expenses
due to a reduction in direct sales people as more dealers were added, and a
decrease in commissions associated with the lower sales. Offsetting the
$1,800,000 of reductions was a $900,000 increase in the reserve for doubtful
accounts related to the receivable balances of certain international customers.
Research and development expenses decreased approximately $100,000, as the
design phase of the 8100 product was completed and production commenced.
Administration expenses decreased approximately $2,000,000. The majority of this
reduction is due to the non-reoccurring litigation and settlement costs
associated with a lawsuit in the prior year. In addition, $810,000 of severance
costs were recorded in 1999.
Interest expense was reduced $170,000 from 1999 levels due to the mortgage that
was refinanced in March 1999. However, the more significant change is the
$2,500,000 gain recorded on the private placement sale of 500,000 Immtech shares
in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had a cash balance of approximately $3.4
million and no short-term borrowings. In October 2000, the Company received $4.0
million in proceeds from a private placement of additional shares of the
Company's common stock. These proceeds allowed the Company to increase its cash
balance in fiscal 2001 almost $3.3 million from the prior year. In fiscal 2001,
the Company used $688,322 of these proceeds for capital expenditures, $80,433 to
retire long-term debt, and $73,807 to fund operations.
In fiscal 2000, the Company generated negative cash flow of $2,396,248 due
mainly to payments made in fiscal 2000 to either partially or fully satisfy
liabilities accrued at the end of fiscal 1999. Accrued liabilities in fiscal
2000 were reduced $2,400,344 due mostly to a $1,600,000 payment to a former
dealer for the settlement of a lawsuit, the recognition of $380,000 of deferred
income as revenue from a large customer deposit received late in fiscal 1999,
and the payment of approximately $350,000 of severance to the two co-founders of
the Company who resigned from their positions in fiscal 1999. These items, all
accrued in fiscal 1999 and partially or fully settled or realized in fiscal
2000, decreased accrued liabilities and cash flow in fiscal 2000 and increased
accrued liabilities and cash flow in fiscal 1999. A $1,349,278 increase in
accounts receivable also reduced cash flow in fiscal 2000. Higher sales of
$1,207,740 in the last two months of fiscal 2000 compared to the prior year, the
majority of which were not yet due and therefore not collected before the end of
June, increased the accounts receivable balance and decreased cash flow between
years.
13
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 has implemented programs to increase accounts receivable
collections, decrease inventory levels, reduce product development tooling
requirements, and lower sales demonstration equipment levels in order to improve
cash flow in the next fiscal year. Therefore, the Company expects that its
research and development activities and other capital and liquidity requirements
for the next twelve months will be satisfied by cash generated from operations
and its current cash balances. There are currently no significant capital
expenditures planned for fiscal 2002. During fiscal 2001, the Company also had
access to a commercial bank demand line of credit of up to $4,000,000. At June
30, 2001, there were no borrowings outstanding on the line of credit. The
Company violated a covenant related to achieving certain income levels. The bank
waived compliance with this covenant subsequent to year end. This line expires
in November 2001, but is expected to be extended with terms consistent with the
current agreement.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed herein that are not
historical or current facts deal with potential future circumstances and
developments. These include anticipated product introductions, expected future
financial results, liquidity needs, financing ability, management's or the
Company's expectations and beliefs and similar matters discussed in Management's
Discussion and Analysis or elsewhere herein. The discussions of such matters and
subject areas are qualified by the inherent risk and uncertainties surrounding
future expectations generally, and also may materially differ from the Company's
actual future experience.
The Company's business, operations and financial performance are subject to
certain risks and uncertainties which could result in material differences in
actual results from management's or the Company's current expectations. These
risks and uncertainties include, but are not limited to, general economic
conditions, demand for the Company's products, costs of operations, the
development of new products, the reliance on single sources of supply for
certain components in the Company's products, government regulation, health care
cost containment programs, the effectiveness of the Company's programs to manage
working capital and reduce costs, competition in the Company's markets,
unanticipated difficulties in outsourcing the manufacturing of the majority of
its products to foreign manufacturers and risks related to foreign
manufacturing, including economic and political instability, trade and foreign
tax laws, production delays and cost overruns and quality control, and the
Company's ability to reduce costs by eliminating excess capacity at its
principal facility.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-------- ----------------------------------------------------------------
The Company has a 7.5% fixed rate mortgage note outstanding on its facility
and land. In addition, the Company has a demand line of credit facility with a
commercial bank with interest payable monthly at 25 basis points above the
bank's reference rate. The Company had no borrowings outstanding under this bank
facility at June 30, 2001, 2000, and 1999. The Company could be subject to
financial risk on these two obligations if interest rates in the market change
significantly.
14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------- -----------------------------------------------
FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
ASSETS 2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) . . . . . . . . . . . . $ 3,362,104 $ 114,830
Accounts receivable, less allowance for doubtful accounts
of $1,000,000 and $1,300,000, respectively . . . . . . . 7,122,464 6,782,765
Investments (Notes 1 and 3). . . . . . . . . . . . . . . . 3,970,454 5,704,675
Other receivables. . . . . . . . . . . . . . . . . . . . . 33,788 116,773
Inventories (Notes 1 and 2). . . . . . . . . . . . . . . . 8,600,413 8,178,326
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 502,172 219,852
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 23,591,395 21,117,221
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,000 925,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,600,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 2,055,518 2,009,312
Furniture and fixtures . . . . . . . . . . . . . . . . . . 837,238 763,282
Demonstration and loaner monitors. . . . . . . . . . . . . 1,463,909 1,407,587
Production tooling . . . . . . . . . . . . . . . . . . . . 3,122,938 2,651,145
----------- -----------
Property, plant and equipment - cost . . . . . . . . . . . 12,004,603 11,356,326
Less accumulated depreciation. . . . . . . . . . . . . . . 5,822,133 5,367,670
----------- -----------
Property, plant and equipment - net. . . . . . . . . . . . 6,182,470 5,988,656
OTHER ASSETS (Note 1):
License rights and patents - net . . . . . . . . . . . . . 97,989 104,990
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . 97,989 104,990
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $29,871,854 $27,210,867
=========== ===========
See notes to consolidated financial statements.
15
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,421,776 $ 2,635,344
Accrued liabilities:
Compensation and commissions. . . . . . . . . . . . . . . . . . . . . 1,187,493 1,243,839
Product warranties (Note 1) . . . . . . . . . . . . . . . . . . . . . 220,000 325,000
Accrued taxes other than income . . . . . . . . . . . . . . . . . . . 96,947 126,769
Accrued audit and legal fees . . . . . . . . . . . . . . . . . . . . . 35,900 20,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,025 428,057
Current maturities of long-term debt (Note 5) . . . . . . . . . . . . . 86,766 80,432
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 5,595,907 4,859,441
LONG-TERM DEBT, less current maturities (Note 5). . . . . . . . . . . . 3,197,126 3,283,892
OTHER LONG-TERM OBLIGATIONS (Note 12) . . . . . . . . . . . . . . . . . 73,005 268,582
CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 5 and 7):
Preferred stock - $.04 par value, 500,000 shares authorized,
no shares issued or outstanding . . . . . . . . . . . . . . . . . . . -- --
Common stock - $.04 par value, 15,000,000 shares authorized,
10,796,224 and 8,976,251 shares issued and outstanding, respectively 431,849 359,050
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 22,494,548 18,478,040
Common stock held in treasury (64,134 and 81,122 shares, respectively). (119,467) (151,111)
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . (5,771,568) (5,591,702)
Accumulated comprehensive income. . . . . . . . . . . . . . . . . . . . 3,970,454 5,704,675
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 21,005,816 18,798,952
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,871,854 $27,210,867
============ ============
See notes to consolidated financial statements.
16
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
NET SALES (NOTE 9) . . . . . . . . . . . . . . $27,736,304 $27,154,236 $28,512,507
COST OF GOODS SOLD . . . . . . . . . . . . . . 16,469,119 16,462,477 15,528,314
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . 11,267,185 10,691,759 12,984,193
OPERATING EXPENSES:
Marketing (Note 1) . . . . . . . . . . . . . . 6,367,395 8,014,129 8,941,036
Research, development and engineering (Note 6) 2,446,907 2,861,733 2,963,134
Administrative (Note 6). . . . . . . . . . . . 2,538,938 2,333,445 4,157,811
Severance pay (Note 12). . . . . . . . . . . . -- -- 810,000
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 11,353,240 13,209,307 16,871,981
LOSS FROM OPERATIONS . . . . . . . . . . . . . (86,055) (2,517,548) (3,887,788)
OTHER INCOME (EXPENSE):
Interest expense (Note 5). . . . . . . . . . . (253,150) (259,280) (427,008)
Interest income. . . . . . . . . . . . . . . . 157,782 90,440 82,094
Equity in loss of investments (Notes 1 and 3). -- -- (150,000)
Gain on sale of stock (Note 3) . . . . . . . . -- 2,500,000 --
Other income/(expense) . . . . . . . . . . . . 3,191 -- (5,469)
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . (92,177) 2,331,160 (500,383)
LOSS BEFORE INCOME TAXES . . . . . . . . . . . (178,232) (186,388) (4,388,171)
INCOME TAX PROVISION (NOTES 1 AND 4) . . . . . -- -- --
------------ ------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . $ (178,232) $ (186,388) $(4,388,171)
============ ============ ============
NET LOSS PER COMMON SHARE:
Basic. . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.02) $ (0.51)
Diluted. . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.02) $ (0.51)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 7):
Basic. . . . . . . . . . . . . . . . . . . . . 10,171,394 8,694,918 8,581,863
Diluted. . . . . . . . . . . . . . . . . . . . 10,171,394 8,694,918 8,581,863
See notes to consolidated financial statements.
17
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Retained
Additional Common Stock Earnings Accumulated
Common Stock Paid-In Treasury (Accumulated Comprehensive
Shares Amount Capital Shares Cost Deficit) Income/Loss
BALANCE, JUNE 30, 1998. . . . . . . 8,351,151 $334,046 $17,964,250 $(1,015,299)
Net loss. . . . . . . . . . . . . . (4,388,171)
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) (5,403,470) 0
Net loss. . . . . . . . . . . . . . (186,388)
Unrealized gain on investment . . . 5,704,675
Comprehensive income/(loss) . . . .
Common stock issued in settlement
of lawsuit. . . . . . . . . . . . 30,000 1,200 68,175
Exercise of options . . . . . . . . 240,100 9,604 448,746
Employee common stock
purchased from treasury . . . . . 756 (22,718) 42,319 (1,844)
BALANCE, JUNE 30, 2000. . . . . . . 8,976,251 359,050 18,478,040 81,122 (151,111) (5,591,702) 5,704,675
Net loss. . . . . . . . . . . . . . (178,232)
Unrealized (loss) on investment . . (1,734,221)
Comprehensive income/(loss) . . . .
Common stock issued . . . . . . . . 1,801,273 72,051 3,977,063
Exercise of options . . . . . . . . 18,700 748 2,273
Employee common stock
purchased from treasury . . . . . 37,172 (16,988) 31,644 (1,634)
BALANCE, JUNE 30, 2001. . . . . . . 10,796,224 $431,849 $22,494,548 64,134 $(119,467) $(5,771,568) $3,970,454
Total
Stockholders'
Equity
BALANCE, JUNE 30, 1998. . . . . . . $17,282,997
Net loss. . . . . . . . . . . . . . (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. . . . . . . 12,711,709
Net loss. . . . . . . . . . . . . . (186,388)
Unrealized gain on investment . . . 5,704,675
Comprehensive income/loss . . . . . 5,518,287
Common stock issued . . . . . . . . 69,375
Exercise of options . . . . . . . . 458,350
Employee common stock
purchased from treasury . . . . . 41,231
BALANCE, JUNE 30, 2000. . . . . . . 18,798,952
Net loss. . . . . . . . . . . . . . (178,232)
Unrealized (loss) on investment . . (1,734,221)
Comprehensive income/loss . . . . . (1,912,453)
Common stock issued . . . . . . . . 4,049,114
Exercise of options . . . . . . . . 3,021
Employee common stock
purchased from treasury . . . . . 67,182
BALANCE, JUNE 30, 2001. . . . . . . $21,005,816
See notes to consolidated financial statements.
18
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ -----------
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (178,232) $ (186,388) $(4,388,171)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 742,931 871,510 486,610
Amortization . . . . . . . . . . . . . . . . . . . . . . . . 7,001 7,001 7,002
Provision for doubtful accounts. . . . . . . . . . . . . . . (300,000) 925,000 380,004
Gain on sale of Immtech stock. . . . . . . . . . . . . . . . -- (2,500,000) --
Litigation settled with common stock . . . . . . . . . . . . -- 69,375 --
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . (39,699) (1,349,278) 183,222
Other receivables. . . . . . . . . . . . . . . . . . . . . 82,985 (33,667) 239,870
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (670,510) 341,955 (461,786)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . (282,320) (27,562) 146,007
Accounts payable . . . . . . . . . . . . . . . . . . . . . 786,432 (442,676) 772,299
Accrued liabilities. . . . . . . . . . . . . . . . . . . . (251,877) (2,401,762) 2,950,520
------------ ------------ -----------
Net cash (used in) provided by operating activities. . . . . . . (103,289) (4,726,492) 315,577
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . . . . . . (688,322) (595,412) (515,017)
Proceeds from sale of Immtech stock. . . . . . . . . . . . . . . -- 2,500,000 --
------------ ------------ -----------
Net cash (used in) provided by investing activities. . . . . . . (688,322) 1,904,588 (515,017)
FINANCING ACTIVITIES:
Net proceeds from mortgage refinancing . . . . . . . . . . . . . -- -- 256,413
Repurchase of Company stock. . . . . . . . . . . . . . . . . . . -- -- (193,430)
Principal payments on long-term debt . . . . . . . . . . . . . . (80,432) (73,925) (92,776)
Proceeds from issuance of common stock . . . . . . . . . . . . . 4,119,317 499,581 10,313
------------ ------------ -----------
Net cash provided by (used in) financing activities. . . . . . . 4,038,885 425,656 (19,480)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . 3,247,274 (2,396,248) (218,920)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . 114,830 2,511,078 2,729,998
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . $ 3,362,104 $ 114,830 $2,511,078
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes paid-net. . . . . . . . . . . . . . . . . . . . . $ 16,639 $ 7,535 $ 8,010
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,653 259,590 437,401
Noncash investing and financing activities:
Litigation settled with common stock . . . . . . . . . . . . . -- 69,375 --
Cost of fixed asset disposals. . . . . . . . . . . . . . . . . -- 201,072 --
Unrealized (loss)/gain on investment in Immtech. . . . . . . . (1,734,221) 5,704,675 --
See notes to consolidated financial statements.
19
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Criticare Systems Inc. designs, manufactures and
markets patient monitoring equipment and related accessories to the health care
community worldwide and is headquartered in Waukesha, Wisconsin. The Company
sells domestically primarily to oral and stand-alone general surgery centers and
hospitals through regional sales managers and a dealer network. Internationally,
the Company sells mainly to hospitals through country managers and a worldwide
dealer network.
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). CSI Trading
was incorporated in November 1996 to assist with European marketing activities
and includes a branch sales office in India. 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 - In fiscal 2000, the Company ceased accounting for its
investment in Immtech International, Inc ("Immtech") under the equity method and
recorded the asset on the balance sheet at its fair market value in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (see Note 3).
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is recorded
at cost. Each member of the Company's sales force is provided with demonstration
monitors to assist them in their sales efforts. Also, the Company has loaner
monitors which are used to temporarily replace a customer's unit when it is
being repaired or upgraded. Depreciation is provided over the estimated useful
lives of the assets. The building is being depreciated over 40 years, and the
remaining assets are being depreciated over three to seven years, using
primarily the straight-line method.
LICENSE RIGHTS AND PATENTS - License rights and patents are amortized over
the estimated useful lives of the related agreements using primarily the
straight-line method. Approximately $7,000 of amortization was charged to
operations in each of
20
the fiscal years ended June 30, 2001, 2000 and 1999. Accumulated amortization
approximated $99,000 and $92,000 at June 30, 2001 and 2000, respectively.
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. This revenue recognition policy is utilized for
shipment of product to customers including both distributors and end-users.
PRODUCT WARRANTIES - Estimated costs for product warranties are accrued for
and charged to operations as the related products are shipped.
MARKETING EXPENSES - Marketing expenses include all of the Company's sales
related costs. In fiscal 2001, recoveries of bad debts expensed in prior years
more than offset additional provisions expensed in the current year, resulting
in a net credit of bad debt expense of $(25,757). The amount incurred in fiscal
2000 includes a $900,000 charge to bad debt expense related to the accounts
receivable balances of certain international customers. Bad debt expense totaled
$1,160,614 and $380,004 for the years ended June 30, 2000 and 1999,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
charged to operations as incurred. Such expenses approximated $2,325,000,
$2,696,000 and $2,798,000 in 2001, 2000 and 1999, respectively.
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.
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. The basic and diluted weighted average number of common shares
outstanding in the financial statements are the same because including a diluted
calculation in a loss position would produce an anti-dilutive per share amount.
The number of diluted weighted average common shares outstanding would be higher
by 370,260 shares in 2001 and 236,024 shares in 2000 without this anti-dilutive
impact.
21
FAIR VALUE OF FINANCIAL STATEMENTS - The Company's financial instruments
under SFAS No. 107 "Disclosure About Fair Value of Financial Instruments,"
includes cash, accounts receivable, accounts payable, borrowings under line of
credit facility and long-term debt. The Company believes that the carrying
amounts of these accounts are a reasonable estimate of their fair value because
of the short-term nature of such instruments or, in the case of long-term debt
because of interest rates available to the Company for similar obligations.
COMPREHENSIVE INCOME - In 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income, foreign currency translation adjustments and unrealized
gains on investments, and is presented in the Consolidated Statement of
Stockholders' Equity.
APPROVED ACCOUNTING STANDARDS - In June 2001, the Financial Accounting
Standards Board finalized FASB Statements No. 141, "Business Combinations" (SFAS
141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business combinations initiated
after June 30, 2001 and for purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company does not have any goodwill recorded as an asset as of June 30,
2001 and has only a small investment in intangible assets at June 30, 2001.
Therefore, the Company does not expect adoption of SFAS 141 and 142 to have a
material effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No.133) issued by the FASB
is effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change.
22
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial statements.
In March 2000, the FASB issued FASB interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44") which is effective
July 1, 2000. This interpretation clarifies the application of APB Opinion 25
for certain issues related to stock issued to employees. The Company believes
its existing stock based compensation policies and procedures are in compliance
with FIN 44 and, therefore, that the adoption of FIN 44 will not have a material
effect on the Company's financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts from the fiscal 2000 financial
statements have been reclassified to conform to the fiscal 2001 presentation.
2. INVENTORIES
Inventories consist of the following as of June 30:
2001 2000
Component parts . . . . . . . . $3,784,491 $3,721,474
Work in process . . . . . . . . 1,372,587 1,169,609
Finished units. . . . . . . . . 3,768,335 3,687,243
---------- ----------
Total inventories . . . . . . . 8,925,413 8,578,326
Less: reserve for obsolescence 325,000 400,000
---------- ----------
Net inventory . . . . . . . . . $8,600,413 $8,178,326
3. INVESTMENTS
IMMTECH INTERNATIONAL, INC. - The Company owns common stock of Immtech
International, Inc. ("Immtech"). Immtech is a biopharmaceutical company
focusing on the discovery and commercialization of therapeutics for treatment of
patients afflicted with opportunistic infectious diseases, cancer or comprised
immune systems. Immtech has two independent programs for developing drugs: one
based on a technology for the design of a class of pharmaceutical compounds
referred to as dications. The second is based on developing a series of
biological proteins that work in conjunction with the immune system. Immtech
has no products currently for sale, and none are expected to be commercially
available for several years. Immtech has a March 31 fiscal year end.
During the first and second quarters of fiscal 2000, the Company sold a
portion of its Immtech stock in a Private Placement. The proceeds from this sale
were $2,500,000. As a result of this sale, the Company owns less than 20% of
Immtech's issued and outstanding common stock as of June 30, 2000. Therefore,
beginning in fiscal 2000, in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company ceased
accounting for the Immtech investment under the equity method and recorded the
23
asset on the balance sheet at the fair market value of $5,704,675. An unrealized
gain was also recorded as a component of stockholders' equity. The Company held
456,374 shares of Immtech common stock, which was trading at $8.70 and $12.50
per share, on June 30, 2001 and 2000, respectively.
The following is a summary of the Company's investment in and advances to
Immtech as of June 30, 1999:
1999
Investment in Immtech . . . . . . $ 2,736,000
Advances to Immtech . . . . . . . 863,940
------------
Total . . . . . . . . . . . . . . 3,599,940
Less investment losses recognized (3,599,940)
------------
Net investment. . . . . . . . . . $ 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 the former President and Chief
Executive Officer of the Company as part of a severance agreement for $150,000
(see Note 12). At the time of this transaction, the shares of Immtech stock were
carried at zero value under the equity method of accounting.
The Company has recognized investment losses related to the investment in
Immtech of $150,000 in 1999.
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 of $10) for 20 consecutive trading days and one year had
passed from the date of the IPO. As of June 30, 2000, these lock up provisions
have been satisfied.
The following is summarized financial information for Immtech at June 30,
1999 and for the twelve months then ended.
1999
Current assets. . . . . . . . . . . . . . . . $ 8,541,000
Noncurrent assets . . . . . . . . . . . . . . 68,000
Current liabilities . . . . . . . . . . . . . 253,000
Noncurrent liabilities. . . . . . . . . . . . --
Redeemable preferred stock. . . . . . . . . . --
Common stockholders' equity (deficit) . . . . 8,356,000
Revenues. . . . . . . . . . . . . . . . . . . 136,000
Net loss. . . . . . . . . . . . . . . . . . . (8,341,000)
Net loss attributable to common stockholders. (4,657,000)
24
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, JUNE 30,
2001 2000 1999
Deferred income tax assets:
Accounts receivable and sales allowances. . . . . . . $ 415,000 $ 533,000 $ 170,000
Inventory allowances. . . . . . . . . . . . . . . . . 164,000 191,000 254,000
Product warranties. . . . . . . . . . . . . . . . . . 86,000 128,000 128,000
Other accrued liabilities . . . . . . . . . . . . . . 210,000 246,000 392,000
Severance pay accrual . . . . . . . . . . . . . . . . 52,000 145,000 279,000
Lawsuit settlement. . . . . . . . . . . . . . . . . . -- -- 626,000
Federal net operating loss carryforwards. . . . . . . 3,665,000 3,320,000 2,014,000
State net operating loss carryforwards. . . . . . . . 467,000 483,000 291,000
Federal tax credit carryforwards. . . . . . . . . . . 152,000 152,000 152,000
Investment losses not deducted. . . . . . . . . . . . 709,000 709,000 1,532,000
------------ ------------ ------------
Total deferred income tax assets. . . . . . . . . . . 5,920,000 5,907,000 5,838,000
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization (625,000) (616,000) (620,000)
Prepaid expenses. . . . . . . . . . . . . . . . . . . (28,000) (13,000) (7,000)
Unrealized gain on investments. . . . . . . . . . . . (1,557,000) (2,237,000) --
------------ ------------ ------------
Total deferred income tax liabilities . . . . . . . . (2,210,000) (2,866,000) (627,000)
Valuation allowance . . . . . . . . . . . . . . . . . (3,710,000) (3,041,000) (5,211,000)
Net deferred income taxes recognized in the
consolidated balance sheets . . . . . . . . . . . . $ 0 $ 0 $ 0
At June 30, 2001, the Company had federal net operating loss carryforwards
of approximately $10,779,000 which expire in 2008 through 2021. At June 30,
2001, 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 of tax credit carryforwards which expire
in the years 2007 through 2009. The Company also has approximately $9,339,000 of
state net operating loss carryforwards, which expire in 2003 through 2016,
available to offset certain future state taxable income.
The income tax provision consists of the following:
2001 2000 1999
Current
Federal. . . . . . . . . . $ 0 $ 0 $ 0
State. . . . . . . . . . . 0 0 0
Total income tax provision $ 0 $ 0 $ 0
25
A reconciliation of the provision for income taxes (benefits) at the
federal statutory income tax rate to the effective income tax rate follows:
2001 2000 1999
Federal statutory income tax rate . . . . . . (34.0)% (34.0)% (34.0)%
Losses for which no benefit was provided. . . 17.5 35.3 29.3
Non-deductible losses of subsidiaries . . . . 15.6 27.6 3.2
Other-net (principally stock options in 2000) 0.9 (28.9) 1.5
------- ------- -------
Effective income tax rate . . . . . . . . . . 0% 0% 0%
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
2001 2000
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 April 1, 2004,
collateralized by real estate with a carrying value of
approximately $3,754,000 at June 30, 2001. . . . . . . . $3,283,892 $3,364,324
Less current maturities. . . . . . . . . . . . . . . . . . 86,766 80,432
---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . $3,197,126 $3,283,892
Aggregate annual principal payments required under terms of the long-term
debt agreement are as follows:
YEARS ENDING JUNE 30, PRINCIPAL PAYMENTS
2002. . . . . . . . . $ 86,766
2003. . . . . . . . . 93,600
2004. . . . . . . . . 3,103,526
2005. . . . . . . . . 0
2006. . . . . . . . . 0
-------------------
Total . . . . . . . . $ 3,283,892
At June 30, 2001, the Company had a $4,000,000 demand line of credit
facility with a commercial bank to meet its short-term borrowing needs.
Borrowings against the line were payable on demand with interest payable monthly
at the bank's reference rate, plus .25% (7.0% as of June 30, 2001). As of June
30, 2001, 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 the
income level covenant at June 30, 2001. This non-compliance was waived by the
lending institution.
26
In March 1999, the Company refinanced its mortgage note on the Company's
office and manufacturing facility. The Company incurred a prepayment penalty of
approximately $120,000, which was recorded as interest expense.
6. CONTINGENCIES
From time to time, various lawsuits arise out of the normal course of
business. These proceedings are handled by outside counsel. Currently management
is not aware of any claim or action pending against the Company that would have
a material adverse effect on the Company.
The Company received two grants from the State of Wisconsin for research
and development of certain products. The grants were to be repaid only upon
successful completion and marketing of the related product. Repayment of these
grants was to be made on a sales by unit basis. Repayments approximated $182,000
in 1999 and constituted full repayment of one of these grants. The repayments
were charged to expense as the related products were sold. Since the second
grant did not result in the successful completion and marketing of a product,
the Company did not have to repay the grant.
7. 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 2,220,000 reserved shares of common stock of which 137,930 reserved
shares of common stock remain available for future issuance under the stock
option plans at June 30, 2001. The Board of Directors increased the number of
reserved shares for issuance under the Plans from 1,720,000 to 2,220,000 during
2001. The activity during 1999, 2000 and 2001 for the above plans is summarized
as follows:
NUMBER OF STOCK OPTIONS WEIGHTED AVG.
SHARES PRICE RANGE EXERCISE PRICE
Outstanding at July 1, 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
Granted . . . . . . . . . . . . . . . . . . 489,100 2.00-2.25 2.24
Cancelled . . . . . . . . . . . . . . . . . (287,700) 1.63-3.63 1.99
Exercised . . . . . . . . . . . . . . . . . (240,100) 1.50-2.75 1.91
-----------
Outstanding at June 30, 2000. . . . . . . . . 1,152,900 1.50-2.75 1.96
Granted . . . . . . . . . . . . . . . . . . 780,520 1.88-3.69 2.47
Cancelled . . . . . . . . . . . . . . . . . (279,100) 1.88-2.75 2.01
Exercised . . . . . . . . . . . . . . . . . (18,700) 1.63-2.97 2.03
-----------
Outstanding at June 30, 2001. . . . . . . . . 1,635,620 1.50-3.69 2.19
Exercisable at June 30, 2001. . . . . . . . . 735,120 1.50-3.69 2.11
27
The following table summarizes information about stock options outstanding
as of June 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted Average
Shares Remaining Weighted Shares
Range of Outstanding Contractual Average Exercise Exercisable Weighted Average
Exercise Prices at June 30, 2001 Life-Years Price at June 30, 2001 Exercise Price
1.50-1.875 . . . . . 794,000 2.99 $ 1.75 344,000 $ 1.69
2.00-3.69. . . . . . 841,620 3.10 2.61 391,120 2.49
1.50-3.69. . . . . . 1,635,620 3.05 2.19 735,120 2.11
Outstanding options have fixed terms and are exercisable over a period
determined by the Compensation Committee of the Company's Board of Directors but
no longer than five years after the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. If the Company had elected to
recognize compensation cost for the options granted during the years ended June
30, 2001, 2000 and 1999, 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,
2001 2000 1999
Net income (loss)-as reported . . . . . . . . . $(178,232) $ (186,388) $(4,388,171)
Net income (loss)-pro forma . . . . . . . . . . $(507,678) $ (365,626) $(4,555,200)
Net income (loss) per common share-as reported. $ (0.02) $ (0.02) $ (0.51)
Net income (loss) per common share-pro forma. . $ (0.05) $ (0.04) $ (0.53)
Assumptions used:
Expected volatility . . . . . . . . . . . . . 37.5% 23% 15%
Risk-free interest rate . . . . . . . . . . . 5% 6% 5%
Expected option life (in years) . . . . . . . 4 4 3
Weighted average fair market value of options
granted during the fiscal year ended June 30 $ 0.61 $ 0.38 $ 0.23
The fair value of stock options used to compute pro forma net loss and net
loss per common share is the estimated present value at the grant date using the
Black-Scholes option-pricing model.
STOCK WARRANTS - In September 1995, the Company executed a warrant
agreement with a consultant. The warrant agreement provided for the issuance of
warrants to purchase up to 150,000 shares of the common stock of the Company,
exercisable at a price of $2.00 per share. The warrant was exercisable as to
37,500 shares upon execution of the agreement and the warrants to purchase the
remaining 112,500 shares were to become exercisable if certain performance
parameters were achieved by September 1996. Such parameters were not met as of
such date. In January 1997, the agreement was extended and the parameters were
changed. By June 30, 1997, warrants to purchase the remaining 112,500 shares of
28
common stock at a price of $2.00 per share became exercisable. The warrant
holder exercised rights and purchased 41,000 shares of common stock at $2.00 per
share during the year ended June 30, 1998. The warrants were exercised to
purchase 15,000 shares of common stock at $2.00 per share during the year ended
June 30, 2001, and the remainder of such warrants expired.
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, 2001, 30,000 warrants were exercisable. Such warrants
expire in February 2003.
In December 2000, the Company executed another warrant agreement with the
consultant. The warrant agreement provides for the issuance of warrants to
purchase up to 70,000 shares of common stock at a price of $1.875 per share. The
warrant vests over a four year period in four equal increments each year on the
anniversary date of the warrant. The warrant terminates as to any shares that
are unvested at the time the consultant ceases to provide consulting services to
the Company. As of June 30, 2001, none of these warrants were exercisable. Such
warrants expire in December 2005.
COMMITMENT TO ISSUE SHARES OF COMMON STOCK - In April 1998, the Company
agreed to and accepted the patent rights assigned to them by a third party with
respect to certain technology related to the transmission of clinical data. In
consideration for the patent, the Company has agreed to provide the third party
with 400,000 shares of common stock payable over a four-year time period with
additional consideration of up to 112,000 shares contingent upon the achievement
of certain sales levels. The Company recorded a charge to operations of
$900,000 in fiscal 1998 with respect to the value of the in-process technology
which was expensed as research and development costs. The 400,000 shares to be
issued have been considered to be outstanding shares for purposes of computing
basic and diluted income (loss) per common share in 1998. During 1999, the
Company renegotiated the agreement and issued the third party 350,000 shares
instead of the 400,000 shares payable over four years and the 112,000 contingent
shares.
PREFERRED STOCK - The Company's Board of Directors has the authority to
determine the relative rights and preferences of any series it may establish
with respect to the 500,000 shares of $.04 par value authorized preferred
shares. No preferred stock is issued or outstanding.
On March 27, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock of the Company. The dividend was made on April 24, 1997
to the stockholders of record on that date to purchase Preferred Stock
("Preferred") upon the occurrence of certain events. The Rights will be
exercisable the tenth business day after a person or group acquires 20% of the
Company's common stock, or makes an offer to acquire 30% or more of the
Company's common stock. When exercisable, each right entitles the holder to
purchase for $25, subject to adjustment, one-hundredth of a share of Preferred
for each share of common stock owned. Each share of Preferred will be entitled
to a minimum preferential quarterly dividend of $25 per share, but not less than
an aggregate dividend of 100 times the common stock dividend. Each share will
have 100 votes, voting together with the common stock. In the event of any
merger, each share of Preferred will be entitled to receive 100 times the amount
received per share of common stock. The Rights expire on April 1, 2007.
29
8. 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
$87,000, $77,000, and $84,000 in 2001, 2000 and 1999, respectively.
9. BUSINESS AND CREDIT CONCENTRATIONS
The Company is a manufacturer of medical monitors and telemetry products
whose customers include hospitals and alternative health care sites throughout
the world. Although the Company's products are sold primarily to health care
providers, concentrations of credit risk with respect to trade accounts
receivable are limited due to the Company's large number of customers and their
geographic dispersion. The Company currently coordinates substantially all
international sales and distribution activities through its headquarters in
Waukesha, Wisconsin. Such activities were previously provided by the Company
with the assistance of Criticare International. Identifiable assets located
outside of the United States are insignificant in relation to the Company's
total assets. Net export sales by geographic area are as follows:
2001 2000 1999
Europe and Middle East . . . . . . . $ 6,833,000 $ 5,437,000 $ 4,635,000
Pacific Rim. . . . . . . . . . . . . 2,313,000 2,662,000 2,243,000
Canada and Central and South America 2,217,000 3,035,000 3,634,000
----------- ----------- -----------
Export net sales . . . . . . . . . . $11,363,000 $11,134,000 $10,512,000
U.S. net sales . . . . . . . . . . . 16,373,000 16,020,000 18,001,000
----------- ----------- -----------
Total net sales. . . . . . . . . . . 27,736,000 27,154,000 28,513,000
Note: Sales in Europe and the Middle East have been combined due to joint sales
responsibility in these areas. No country made up more than 10% of the Company's
total sales.
10. OTHER BUSINESS CONCENTRATIONS
During 1999, the Company entered into an OEM agreement with a customer.
Sales to this customer approximated $3,383,000, $2,031,000, and $4,360,000 in
fiscal 2001, 2000, and 1999, respectively. These sales represented approximately
12%, 8%, and 15% of the Company's total sales, respectively. This customer had a
receivable balance of $630,716, $935,520, and $448,546 on June 30, 2001, 2000,
and 1999, respectively, which represented 9%, 14%, and 7% of the Company's total
receivables as of these dates.
The Company also has a supplier that it made purchases from totaling
approximately $4,461,000, $3,358,000, and $3,087,000 in fiscal 2001, 2000, and
1999, respectively. These purchases represent approximately 19%, 16%, and 16% of
the Company's total purchases, respectively. The Company had a payable balance
owed to this vendor of $144,131, $220,999, and $122,603 on June 30, 2001, 2000,
and 1999, respectively, which represents 4%, 8%, and 4% of the Company's total
payables as of these dates.
30
11. COMMITMENTS
The Company leases certain operating equipment under various operating
leases for varying periods through fiscal 2006. Rent expense was $165,361 in
2001 and $207,553 in 2000.
The future minimum rental commitments under these leases are as follows:
Year ended June 30,
2002 $91,222
2003 35,084
2004 22,008
2005 18,831
Thereafter 15,693
--------
Total $182,838
During fiscal 2001 the Company entered into supply partnership agreements
with two offshore contract manufacturing firms that exclusively manufacture
medical devices in a regulated environment. These two firms will manufacture
specific products designated by the Company in accordance with formal purchase
orders. The initial term of the agreements is for a period of three years and is
automatically extended for additional periods of two years each, unless either
party gives written notice at least sixty days prior to the end of the initial
term or the then current extension term. To ensure an adequate supply of
products manufactured by these companies is maintained, the agreements require
that these firms keep on hand in their finished goods inventories one full month
of supply of all products under current purchase orders, in addition to a one
month supply that will be maintained by the Company. At June 30, 2001, a one
month supply of product maintained at these two firms would total approximately
$475,000. In the event the Company would cancel a purchase order under either of
these agreements, the Company would be required to purchase at cost all raw
materials, work-in-progress and finished goods inventories for that purchase
order. In addition, any property or equipment that these firms purchased
specifically for the production of the Company's products would be purchased at
mutually agreed upon prices. There have not been any purchase order
cancellations under these agreements.
12. SEVERANCE PAY
During November 1998, the two co-founders of the Company resigned from
their positions. The Company has provided each of these individuals with a
severance agreement, which includes a portion of their salary and fringe
benefits for a period which approximates three years. The salary portion of the
severance expires on November 30, 2001 and the fringe benefit portion expires on
September 30, 2001, with the exception of health and dental benefits, which
continue until age 65 or comparable coverage is available through another
employer.
31
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, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2001. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Criticare Systems,
Inc. and subsidiaries at June 30, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 21, 2001
32
QUARTERLY RESULTS
The following table contains quarterly information, which includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation. The Company recorded a gain of
$2,500,000 in the quarter ended September 30, 1999 related to the sale of
Immtech stock. This item was an unusual, nonrecurring adjustment.
QUARTERS ENDED
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
2001 2001 2000 2000 2000 2000 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales . . . . . $ 7,678 $ 7,264 $ 6,564 $ 6,230 $ 7,519 $ 6,131 $ 6,901 $ 6,603
Gross profit. . . . 3,252 2,923 2,581 2,511 2,326 2,235 3,142 2,989
(Loss) income from
operations. . . . (149) 37 134 (108) (1,317) (1,143) (215) 157
Net (loss) income . (161) 44 106 (166) (1,367) (1,197) 489 1,880
Net (loss) income
per common
share-Basic . . . (0.01) 0.00 0.01 (0.02) (0.16) (0.14) 0.06 0.22
-Diluted . . (0.01) 0.00 0.01 (0.02) (0.16) (0.14) 0.06 0.21
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's change in accountants for the 1999 fiscal year was previously
reported in the Company's Current Report on Form 8-K filed on October 13, 1999,
as amended on October 25, 1999, and the Company's Current Report on Form 8-K
filed on November 5, 1999.
33
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 2001 Annual Meeting of Stockholders (the "Criticare Proxy Statement")
which will be filed on or before October 29, 2001.
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 "Employment
Agreements and Severance Arrangements" 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, 2001 and 2000.
Consolidated Statements of Operations - for the years ended June 30,
2001, 2000 and 1999.
Consolidated Statements of Stockholders' Equity - for the years ended
June 30, 2001, 2000 and 1999.
34
Consolidated Statements of Cash Flows - for the years ended June 30,
2001, 2000 and 1999.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
-------------------------------
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 2001, 2000
and 1999:
Schedule
Number Description Page
------ ----------- ----
II Valuation and Qualifying 40
Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or the required
information is shown in the financial statements or notes thereto, and therefore
have been omitted.
3. Exhibits:
--------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Registration Statement on Form S-1,
Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference
to the Registration Statement filed on Form S-1, Registration No. 33-13050).
4.2 Rights Agreement (incorporated by reference to the Company's
Current Report on Form 8-K filed on April 18, 1997).
35
10.1* 1999 Employee Stock Purchase Plan (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended June 30, 1999).
10.2* 1992 Employee Stock Option Plan (incorporated by reference
to the Company's Registration Statement on Form S-8, Registration No. 33-60644).
10.3* 1992 Nonemployee Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8, Registration No.
33-60214).
10.4* 1987 Employee Stock Option Plan (incorporated by reference
to the Company's Registration Statement on Form S-8, Registration No. 33-33497).
10.5* 1987 Nonemployee Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8, Registration No.
33-40038).
10.6* 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).
36
10.7* 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).
10.8* 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).
10.9* Employment Agreement of Emil H. Soika, (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended June
30, 1999).
10.10* Employment Agreement of Stephen D. Okland, (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended June
30, 1999).
10.11* Employment Agreement of Drew M. Diaz, (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended June
30, 1999).
10.12 Supply Partnership Agreement, dated as of August 1, 2000,
between the Company and BioCare Corporation.
10.13 Supply Agreement, dated as of October 26, 2000, between the
Company and TriVirix International Limited.
21 Subsidiaries (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1999).
23.1 Consent of BDO Seidman, LLP
24 Power of Attorney (incorporated by reference to the signature
page hereof).
__________________
* 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,
2001.
(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.
37
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 26, 2001
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Emil H. Soika and Michael J. Sallmann, 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 26, 2001
------------------------- and Director (Principal Executive
Emil H. Soika Officer)
/s/ Michael J. Sallmann Vice President-Finance and Secretary September 26, 2001
------------------------- (Principal Financial and Accounting
Michael J. Sallmann Officer)
/s/ Karsten Houm Chairman of the Board and Director September 26, 2001
-------------------------
Karsten Houm
/s/ Milton Datsopoulos Director September 26, 2001
-------------------------
Milton Datsopoulos
/s/ N.C. Joseph Lai Director September 26, 2001
-------------------------
N.C. Joseph Lai, Ph.D.
/s/ Higgins Bailey Director September 26, 2001
-------------------------
Dr. Higgins Bailey
/s/ Jeffrey T. Barnes Director September 26, 2001
-------------------------
Jeffrey T. Barnes
/s/ Stephen K. Tannenbaum Director September 26, 2001
-------------------------
Stephen K. Tannenbaum
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Criticare Systems, Inc.:
The audits referred to in our report dated August 21, 2001 relating to the
consolidated financial statements of Criticare Systems, Inc., which is contained
in Item 8 of this Form 10-K included the audit of the financial statement
schedules listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based upon our audits.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 21, 2001
39
SCHEDULE II
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
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, 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
Reserve for obsolete inventory $ 37,920 $ 521,684 $ -- $ 559,604
YEAR ENDED JUNE 30, 2000:
Allowance for doubtful accounts $ 375,000 $ 1,160,614 $ 235,614 $ 1,300,000
Reserve for sales returns and
allowances $ 60,000 $ 554,101 $ 554,101 $ 60,000
Reserve for obsolete inventory $ 559,604 $ 94,310 $ 253,914 $ 400,000
YEAR ENDED JUNE 30, 2001:
Allowance for doubtful accounts $ 1,300,000 $ 685,873 $ 985,873 $ 1,000,000
Reserve for sales returns and
allowances $ 60,000 $ -- $ -- $ 60,000
Reserve for obsolete inventory $ 400,000 $ -- $ 75,000 $ 325,000
40