SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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OR
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 0-16061
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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 (IRS Employer Identification No.)
of incorporation or organization)
20925 Crossroads Circle, Suite 100, 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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N/A
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Former name, former address and former fiscal year,
if changed since last report.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Number of shares outstanding of each class of the registrant's classes of common
stock as of December 31, 2002: Voting Common Stock 11,204,024 shares.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND JUNE 30, 2002
(UNAUDITED)
ASSETS December 31, 2002 June 30, 2002
----------------- --------------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,203,567 $ 3,523,070
Accounts receivable, less allowance for doubtful accounts
of $300,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,357,182 5,481,952
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,460 2,304,689
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404,562 502,348
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,570,524 7,134,803
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,267 453,347
------------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,792,562 19,400,209
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . . . 2,220,188 5,983,060
License rights and patents - net . . . . . . . . . . . . . . . . . . . . . 87,487 90,987
------------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,100,237 $25,474,256
=================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,606,819 $ 2,331,496
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . . . 934,998 770,578
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 325,000 248,725
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403,549 490,922
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . - 93,589
------------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 5,270,366 3,935,310
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . - 3,103,536
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . 41,241 48,344
STOCKHOLDERS' EQUITY:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
11,204,024 and 11,199,524 shares issued and outstanding, respectively. 448,161 447,981
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 23,358,742 23,350,124
Common stock held in treasury (133,539 and 100,890 shares, respectively) . (425,852) (309,059)
Subscriptions receivable . . . . . . . . . . . . . . . . . . . . . . . . . (225,000) (225,000)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . . . (7,298,981) (7,187,501)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . 6,100 5,832
Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . 925,460 2,304,689
------------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 16,788,630 18,387,066
------------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,100,237 $25,474,256
=================== ============
See notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
NET SALES . . . . . . . . . . . . . . . . . . . $15,353,953 $12,835,733
COST OF GOODS SOLD. . . . . . . . . . . . . . . 9,018,466 8,160,154
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 6,335,487 4,675,579
OPERATING EXPENSES:
Sales and marketing . . . . . . . . . . . . . . 3,341,298 3,103,433
Research, development and engineering . . . . . 1,385,655 1,167,701
Administrative. . . . . . . . . . . . . . . . . 2,088,761 1,243,596
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . 6,815,714 5,514,730
LOSS FROM OPERATIONS. . . . . . . . . . . . . . (480,227) (839,151)
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . (91,533) (124,947)
Interest income . . . . . . . . . . . . . . . . 28,528 47,999
Other . . . . . . . . . . . . . . . . . . . . . 431,752 39,777
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Total . . . . . . . . . . . . . . . . . . . . . 368,747 (37,171)
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . (111,480) (876,322)
INCOME TAX PROVISION. . . . . . . . . . . . . . - -
------------ ------------
NET LOSS. . . . . . . . . . . . . . . . . . . . $ (111,480) $ (876,322)
============ ============
NET LOSS PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.08)
Diluted . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.08)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . 11,071,264 10,761,035
Diluted . . . . . . . . . . . . . . . . . . . . 11,071,264 10,761,035
See notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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NET SALES . . . . . . . . . . . . . . . . . . . $ 9,049,606 $ 7,346,596
COST OF GOODS SOLD. . . . . . . . . . . . . . . 5,111,466 4,482,453
----------- ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 3,938,140 2,864,143
OPERATING EXPENSES:
Sales and marketing . . . . . . . . . . . . . . 2,014,338 1,503,078
Research, development and engineering . . . . . 756,715 580,618
Administrative. . . . . . . . . . . . . . . . . 1,131,531 582,818
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . 3,902,584 2,666,514
INCOME FROM OPERATIONS. . . . . . . . . . . . . 35,556 197,629
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . - (62,271)
Interest income . . . . . . . . . . . . . . . . 12,662 14,954
Other . . . . . . . . . . . . . . . . . . . . . 131,953 35,201
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Total . . . . . . . . . . . . . . . . . . . . . 144,615 (12,116)
INCOME BEFORE INCOME TAXES. . . . . . . . . . . 180,171 185,513
INCOME TAX PROVISION. . . . . . . . . . . . . . - -
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NET INCOME. . . . . . . . . . . . . . . . . . . $ 180,171 $ 185,513
=========== ============
NET INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.02
Diluted . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.02
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . 11,069,846 10,789,041
Diluted . . . . . . . . . . . . . . . . . . . . 11,382,915 11,499,734
See notes to consolidated financial statements.
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (111,480) $ (876,322)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . 453,725 389,675
Amortization . . . . . . . . . . . . . . . 3,500 3,501
Provision for doubtful accounts. . . . . . - -
Provision for obsolete inventory . . . . . (177,813) -
Gain on sale of Immtech stock. . . . . . . (255,843) -
Gain on sale of building . . . . . . . . . (41,208) -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . (875,230) 1,616,061
Other receivables . . . . . . . . . . 97,786 15,341
Inventories . . . . . . . . . . . . . (145,120) 323,847
Prepaid expenses. . . . . . . . . . . 122,080 129,867
Accounts payable. . . . . . . . . . . 1,275,323 (1,361,629)
Accrued liabilities . . . . . . . . . 146,219 (310,776)
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Net cash provided by (used in) operating activities 491,939 (70,435)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net . . (557,597) (147,820)
Proceeds from sale of Immtech stock . . . . . . . . 255,843 -
Proceeds from sale of building. . . . . . . . . . . 3,795,164 -
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Net cash provided by (used in) investing activities 3,493,410 (147,820)
FINANCING ACTIVITIES:
Retirement of long-term debt. . . . . . . . . . . . (3,197,125) (42,223)
Repurchase of Company common stock (121,359) -
Proceeds from issuance of common stock. . . . . . . 13,364 355,532
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Net cash (used in) provided by financing activities (3,305,120) 313,309
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . 268 -
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . 680,497 95,054
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. . . . 3,523,070 3,362,104
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CASH AND CASH EQUIVALENTS, END OF YEAR. . . . . . . $ 4,203,567 $ 3,457,158
============ ============
See notes to consolidated financial statements.
5
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Criticare
Systems, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments necessary for a fair statement of results for each
period shown. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
prevent the financial information given from being misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report and
previously filed Form 10-K. Certain amounts from the fiscal 2002 financial
statements have been reclassified to conform to the fiscal 2003 presentation.
2. INVENTORY VALUATION
Inventory is stated at the lower of cost or market, with cost determined on the
first-in, first-out method. Components of inventory consisted of the following
at December 31 and June 30, 2002, respectively:
December 31, 2002 June 30, 2002
------------------ --------------
Component parts . . . . . . . . $ 3,205,548 $ 3,549,397
Work in process . . . . . . . . 772,661 499,950
Finished units. . . . . . . . . 4,360,502 4,031,456
-------------- ------------
Total inventories . . . . . . . 8,338,711 8,080,803
Less: reserve for obsolescence 768,187 946,000
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Net inventory . . . . . . . . . $ 7,570,524 $ 7,134,803
3. INVESTMENTS
In October of 2002 the Company sold 4,000 shares of its Immtech International,
Inc. ("Immtech") common stock and realized a gain of $14,097 and in July and
August of 2002 the Company sold 50,000 shares of Immtech common stock and
realized a gain of $241,746. The Company held 402,374 shares of Immtech stock,
which was trading at $2.30 per share, on December 31, 2002. The market value of
these shares could change substantially due to overall market risk.
6
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, 2002 June 30, 2002
----------------- -------------
Land and building.. . . . . . . . . $ - $ 4,525,000
Machinery and equipment. . . . . . . 2,194,290 2,007,322
Furniture and fixtures . . . . . . . 908,896 809,277
Construction in progress . . . . . . - 116,798
Leasehold improvements . . . . . . . 207,969 -
Demonstration and loaner monitors. . 1,282,040 1,616,766
Production tooling . . . . . . . . . 3,499,560 3,425,117
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Property, plant and equipment - cost 8,092,755 12,500,280
Less: accumulated depreciation. . . 5,872,567 6,517,220
------------- ------------
Property, plant and equipment - net. $ 2,220,188 $ 5,983,060
On August 30, 2002, the Company sold its building in Waukesha, Wisconsin and
leased back approximately 62% of the building's square footage. The building
was sold for $4,000,000 and a gain of $41,208 was realized on the sale after the
payment of commissions and fees and the funding of $105,396 in capitalized build
out costs needed to split the building into two leasable spaces. The proceeds
from the sale were used to retire the $3,182,160 of debt on the Company's
balance sheet at August 30, 2002 and increased the Company's cash position by
approximately $500,000.
5. CONTINGENCIES
The import and export rules applicable to all United States companies engaged in
international business transactions contain compliance guidelines. Violations
may result in civil or criminal penalties, or both, as well as the potential
loss of export privileges.
On August 6, 2002, in part due to the new regulations imposed under the
Sarbanes-Oxley Act, the Company initiated an internal review of its import and
export procedures. On August 28, 2002, senior management of the Company became
aware of previous events that may have violated United States import/export laws
and regulations. Senior management of the Company immediately authorized an
internal audit of these possible violations, focusing on the sale of medical
equipment directly or indirectly into an embargoed country and possible marking
issues.
The factual investigation pursuant to the internal audit is complete, no
additional compliance issues arose, and no material marking issues were
identified as a result of the investigation.
Subsequently, the Company has taken action to adopt and implement a written
compliance program with respect to applicable import/export rules. The Company
has also undertaken a voluntary disclosure with the relevant government agencies
and has filed its completed internal audit report and all requested documents.
Although there is no assurance, based upon the results of the completed internal
audit and precedents, the Company believes a negotiated settlement of any
violations will not have a material adverse effect on the Company. In
addition, the Company does not believe that the audit result supports the denial
of export privileges; however, any such penalty would have a material adverse
effect on the Company's business. The Company further believes that the
voluntary disclosure, along with other internal actions taken, will serve to
mitigate any potential adverse consequences that otherwise might accrue.
7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 2002 and 2001
RESULTS OF OPERATIONS
-----------------------
Record net sales in the fiscal second quarter ended December 31, 2002 increased
year-to-date sales for the six months ended December 31, 2002 over $2.5 million,
or 19.6%, above the prior year period. The Company's domestic, international,
OEM, and governmental sales all were higher than the prior year period, with OEM
and domestic sales contributing most significantly to the sales increase. A
21.4% increase in the number of units shipped and a 7.5% increase in the average
selling price per unit drove the higher year-to-date sales.
The gross profit percentage for the first six months of the current year of
41.3% improved almost five points from the 36.4% generated for the first six
months of the prior year. The significantly higher sales in the current year
resulted in a better utilization of fixed manufacturing costs and was the main
contributor to the improved margins. In addition, due to the outsourcing of the
majority of the Company's products, approximately $310,000 of fixed costs that
had previously been classified as manufacturing expenses were more appropriately
included in administrative expenses in the current year and improved margins.
Operating expenses for the six months ended December 31, 2002 were higher than
the same period in the prior year by $1.3 million, with over $1.2 million of the
increased spending occurring in the Company's second fiscal quarter ending
December 31, 2002. The higher operating expenses in the quarter were mainly
driven by one time type costs incurred, including $103,000 to launch the
Company's new line of proprietary anesthesia monitoring products, significant
legal and consulting fees related to the internal review conducted by the
Company of its import and export procedures totaling approximately $285,000, and
a final payment of $150,000 made to the Company's former CEO and founder to
satisfy past severance obligation issues. Also contributing to the increase in
operating expenses was the $310,000 reclassification of fixed manufacturing
costs discussed above to administrative expense, higher trade show and related
sales travel expenses to attend three large medical trade shows held during the
quarter that increased spending $211,000 from the prior year, and a $188,000
increase in employee and dealer commissions driven by the strong fiscal second
quarter sales. Operating expenses are expected to return closer to historical
levels in future quarters as the internal review winds down and the costs to
support the newly released anesthesia products are reduced. See
"Forward-Looking Statements."
Other income improved $405,918 for the six months ended December 31, 2002 from
the same period in the prior year due mainly to the recognition of a $255,843
gain on the sale of 54,000 shares of the Company's Immtech International, Inc.
stock, $100,000 in profits recognized on the successful completion of the
Company's first medical equipment integration project in Romania, and a $41,208
gain on the sale of the Company's building.
The significantly higher sales, improved margins, and increase in other income
for the six months ended December 31, 2002 more than offset the higher operating
expenses, resulting in a net loss of $111,480 that was $764,842 better than the
$876,322 net loss in the prior year period.
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 2002 and 2001
RESULTS OF OPERATIONS
-----------------------
Record quarterly net sales for the three months ended December 31, 2002 of
$9,049,606 increased 23.2% from the same period in the prior year, driven by a
26.3% increase in the number of units shipped and a 7.9% increase in the average
selling price per unit. Net sales of the Company's core 506DX and 8100 vital
signs monitors were $1,203,577 higher in the current quarter. These higher
sales, combined with a $357,800 increase in defibrillator sales and $162,226 of
new sales from the Company's recently released anesthesia monitors drove the
increase in sales to a quarterly record level for the three months ended
December 31, 2002.
The gross profit percentage of 43.5% for the three months ended December 31,
2002 improved significantly from the 39.0% produced in the same period in the
prior year and represented the strongest quarterly margin performance in three
years. The record sales volume in the current period resulted in a better
utilization of fixed manufacturing costs and was the main driver of the higher
margins. In addition, due to the outsourcing of the majority of the Company's
products, approximately $170,000 of fixed costs that had previously been
classified as manufacturing expenses were more appropriately included in
administrative expenses in the current period ended December 31, 2002 and
improved margins when compared to the same period in the prior year.
Operating expenses for the three months ended December 31, 2002 increased
$1,236,070 from the same period in the prior year and more than offset the
favorable impact of higher sales and improved margins. The higher operating
expenses were mainly driven by the one time type costs incurred and discussed
above to launch the Company's new line of proprietary anesthesia monitoring
products, significant legal and consulting fees related to the internal review
conducted by the Company of its import and export procedures, and a final
payment made to the Company's former CEO and founder to satisfy past severance
obligation issues. Also contributing to the increase in operating expenses was
the reclassification of fixed manufacturing costs discussed above to
administrative expense, higher trade show and related sales travel expenses to
attend three large medical trade shows held during the quarter, and an increase
in employee and dealer commissions driven by the strong fiscal second quarter
sales. Operating expenses are expected to return closer to historical levels in
future quarters as the internal review winds down and the costs to support the
newly released anesthesia products are reduced. See "Forward-Looking
Statements."
Other income improved $156,731 for the three months ended December 31, 2002 from
the same period in the prior year due mainly to the successful completion of the
Company's first medical equipment integration project in Romania in which the
Company realized a $100,000 share of the profits from the transaction. In
addition, the Company eliminated its interest expense in the current quarter due
to the retirement of the Company's mortgage in its fiscal first quarter ending
September 30, 2002, saving $62,271 in interest expense that was incurred in the
prior year period.
The record sales, improved margins, and higher other income for the three months
ended December 31, 2002 offset the majority of the increase in operating
expenses incurred in the current period, resulting in net income of $180,171
that was basically level to the $185,513 of net income in the prior year period.
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources
----------------------------------
As of December 31, 2002, the Company had a cash balance of $4,203,567, an
increase of $680,497 from its balance at June 30, 2002, and a long-term debt
free balance sheet due to the sale of the Company's building in the current
fiscal year. The Company sold its building in Waukesha, Wisconsin in August of
2002, leased back approximately 62% of its square footage, and used the proceeds
from the sale to retire the long-term debt on the balance sheet. The sale of
the building increased the Company's cash position by approximately $500,000 and
was the main contributor to the increase in cash from its balance of $3,362,104
at June 30, 2002.
Other significant events impacting cash flows for the six months ended December
31, 2002 included the sale of 54,000 shares of the Company's Immtech
International, Inc. stock that resulted in the recognition of a realized gain of
$255,843. The Company held 402,374 shares of Immtech stock after the sale of
these shares that was trading at $2.30 per share on December 31, 2002. Also, in
accordance with the authorized buyback of up to 500,000 shares of the Company's
common stock by the Board of Directors in the third quarter of fiscal 2002, the
Company purchased 35,100 shares of common stock at a cost of $121,359 in the
first quarter of fiscal 2003. No shares were purchased in the second fiscal
quarter ended December 31, 2002. The Company has acquired a total of 76,223
shares of its common stock under this approved stock buyback.
The Company believes all capital and liquidity requirements for the remainder of
fiscal 2003 will be satisfied by cash generated from operations and its current
cash balances. No major capital equipment expenditures are expected in the last
six months of the fiscal year ending June 30, 2003. The Company also has a
$4,000,000 line of credit currently in place that expires in November 2003 that
could be utilized, if necessary. At December 31, 2002, there were no borrowings
outstanding under this line of credit.
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.
10
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,
compliance with product safety regulations and product liability and product
recall risks, risks relating to international sales and compliance with U.S.
export regulations, 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.
CONTROLS AND PROCEDURES
-------------------------
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic filings with the Securities and Exchange Commission. It
should be noted that in designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The annual meeting of stockholders of the Company was held on December 6,
2002. The matters voted upon, including the number of votes cast for, against,
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
Proposal 1: Election of directors for a term ending at the 2005 annual meeting
of stockholders.
For Withheld
--------- --------
Jeffrey T. Barnes. . . 9,440,751 628,937
N.C. Joseph Lai, Ph.D. 9,404,061 665,627
The Company's other directors consist of Karsten Houm, Emil H. Soika and
Stephen K. Tannenbaum (whose terms end at the 2003 annual meeting of
stockholders) and Milton Datsopoulos and Higgins D. Bailey, Ed.D (whose terms
end at the 2004 annual meeting of stockholders).
Proposal 2: Approve and adopt proposed amendment to the Criticare Systems,
Inc. 1992 Employee Stock Option Plan.
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
8,737,022 1,224,516 108,150 0
Proposal 3: Ratification of appointment of BDO Seidman, LLP as auditors of the
Company.
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
9,997,871 28,900 42,917 0
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------------
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to the Registration Statement filed 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).
10.1 Criticare Systems, Inc. 1992 Employee Stock Option Plan, as amended
(incorporated by reference to the Proxy Statement for the 2002 Annual
Meeting of Stockholders filed on October 28, 2002).
(b) Reports on Form 8-K: None in the quarter ended December 31, 2002.
12
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: February 11, 2003 BY /s/ Michael J. Sallmann
-------------------------------------
Michael J. Sallmann
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
13
CERTIFICATIONS
--------------
I, Emil H. Soika, President and Chief Executive Officer of Criticare Systems,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Criticare
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
14
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 6, 2003
/s/ Emil H. Soika
--------------------------------------
Emil H. Soika
President and Chief Executive Officer
15
CERTIFICATIONS
--------------
I, Michael J. Sallmann, Vice President - Finance and Secretary of Criticare
Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Criticare
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
16
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Michael J. Sallmann
--------------------------------------
Michael J. Sallmann
Vice President - Finance and Secretary
17