UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 2002
[ ] 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
-------
Criticare Systems, Inc.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1501563
---------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20925 Crossroads Circle, Suite 100, Waukesha, Wisconsin 53186
------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 262-798-8282
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
---------------------- ----------------------------
NA NA
------ ------
[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)
--------------------------------------------------------------------
(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, 2002 was approximately $31,820,000. 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, 2002, there were outstanding 11,199,524 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 December 6, 2002 are incorporated by reference into
Part III of this report.
[COVER PAGE 2 OF 2 PAGES.]
PART I
------
Item 1. BUSINESS.
------- --------
Criticare Systems, Inc. (the "Company" or "Criticare") designs,
manufactures and markets vital signs and gas monitoring instruments and related
noninvasive sensors used to monitor patients in many healthcare environments.
Since a patient's oxygen, anesthetic gas and carbon dioxide levels can change
dramatically within minutes, causing severe side effects or death, continuous
monitoring of these parameters is increasing. The Company's monitoring
equipment improves patient safety by delivering accurate, comprehensive and
instantaneous patient information to the clinician. The Company's products also
allow hospitals to contain costs primarily by substituting cost-effective
reusable pulse oximetry sensors for disposable sensors, controlling the use of
costly anesthetics and increasing personnel productivity.
To meet the needs of end-users in a wide variety of patient environments,
the Company has developed a broad line of patient monitors which combine one or
more of its patented or other proprietary technologies, for monitoring oxygen
saturation, carbon dioxide and anesthetic agents, with standard monitoring
technologies that provide electrocardiogram ("ECG"), invasive and noninvasive
blood pressures, temperature, heart rate and respiration rate. In addition, the
Company's VitalView telemetry system allows one nurse to monitor up to eight
patients simultaneously from a convenient central location. This allows
hospitals to move out of the intensive care unit those patients that require
continuous monitoring, but do not need all of an intensive care unit's extensive
and costly personnel and equipment resources.
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
--------
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. Many of the
Company's new products, as well as those in development, focus on anesthesia
related monitoring, as management believes this is a high growth area with
relatively few competitors. All Criticare monitors incorporate adjustable
visual and audible alarms to provide reliable patient-specific warnings of
critical conditions, and most of the Company's monitors record up to 60 hours of
trend data. Criticare monitors are available with printer capability to provide
permanent records of patient data.
Model 8100 Vital Signs 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 rate, and nurse call interface. Optional features include CO2 and
CO2/O2 monitoring and an integrated printer. The 8100 is well suited for busy
departments that require basic vital signs monitoring to conscious sedation.
Model 8500 Poet IQ(TM) Anesthesia Gas Monitor. The 8500 series of monitors
----------------------------------------------
is used in conjunction with the 8100 series and provides automatic
identification and quantification of all five approved anesthetic agents. The
operating system consists of an integrated, solid state module based upon a
proprietary infrared technology developed by Criticare. It automatically
monitors up to five anesthetic agents plus nitrous oxide, oxygen, and carbon
dioxide. The system also utilizes a unique, disposable water trap component that
is also proprietary to the Company. This product is expected to be released in
October 2002 and will be marketed as a configurable system for applications by
original equipment manufacturers ("OEMs") and as a Criticare branded product.
Model 503DX, 504+, and 504DX Pulse Oximeters. Criticare's complete line of
--------------------------------------------
pulse oximeters meets the needs of virtually all clinical environments,
including: 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 507EL Patient Monitors. The 506DX and 507EL series of
-------------------------------------------
monitors are comprised of small, compact, portable, full-featured vital signs
monitors configured to meet specific clinical needs. The 506DX combines oxygen
saturation, noninvasive blood pressure and temperature and is ideal for spot
checking patients' vital signs. The 507EL series combines ECG, oxygen
saturation, noninvasive blood pressure and temperature for a complete vital
signs monitor for physician offices and hospital applications. The 507EL is
available with a color monitor display or a low cost black and white display and
is an effective monitoring system for the emergency room or the recovery room.
2
Model 602-14 POET(TM) LT Monitor. The hand-held POET LT provides small
------------------------------------
hospitals and alternate care environments with compact, portable carbon dioxide
monitoring. The POET LT series is an effective, low-cost solution for these
environments.
VitalView(TM) Central Monitoring Station. The VitalView central station
-------------------------------------------
makes it possible for one nurse or technician to monitor numerous patients
simultaneously. The VitalView can receive, display and store data from a wide
variety of Criticare monitors, including the 8100 and MPT.
MPT(TM) (Multiple Parameter Telemetry) Monitor. The MPT monitor allows the
----------------------------------------------
transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood
pressure) on a real time basis to a VitalView central station while the patient
is ambulatory. In today's healthcare environment, hospitals benefit by moving
patients from expensive critical care departments as quickly as possible to less
expensive general nursing floors. MPT, because of its complete monitoring
capability and its lower cost, allows the patient to be ambulatory while still
being monitored for all vital signs.
Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive
------------------------
sensors that can be used on any patient, from a premature infant to a full-grown
adult. Criticare's line of reusable pulse oximetry sensors offers users
significant cost savings compared to disposables. Criticare's reusable sensors
generally last longer than the one-year warranty period and are easily and
inexpensively cleaned between uses. Criticare's reusable sensors include a
finger sensor for routine applications and a multisite sensor for increased
placement flexibility. The multisite sensor is fully immersible, allowing for
sterilization between patients. The Company also sells a range of disposable
sensors designed for single use in cases where the facility would prefer to use
a patient charge disposable product.
WaterChek(TM)/Chek-Mate Filter System. The Company's patented, disposable
--------------------------------------
Water Chek system separates a patient's respiratory secretions from a breath
sample before it enters the gas monitor(s) for analysis. The Company's
proprietary, disposable Chek-Mate filter enhances the removal of moisture from
the sample, while preventing cross-contamination. This system allows the
monitor to operate effectively regardless of humidity or patient condition. The
self-sealing feature also protects the healthcare provider from potential
contamination.
Automatic External Defibrillator. In the fourth quarter of fiscal 2002 the
--------------------------------
Company entered into a distribution agreement with a manufacturer of automatic
external defibrillators that will allow Criticare to sell their defibrillators
in the markets in which Criticare has an established presence. This newly
developed system is believed to be the smallest and lightest package available
while still providing clinically advanced defibrillation capabilities. The
system resides in a rugged waterproof case, features Biphasic Wavecontrol(TM),
integrated electrodes and intuitive operating parameters. The agreement for
the Company to distribute this new defibrillator replaces a distributor
agreement previously set up with another manufacturer of defibrillators.
3
Marketing and Sales
---------------------
Domestic Sales. At August 31, 2002, the Company's domestic sales force
---------------
consisted of seven employees and 104 independent dealers. The Company's sales
force and independent dealers market the Company's products to many different
types of medical facilities such as hospitals, surgery centers, nursing homes
and physician offices. The Company sells its higher-end monitors (MPT, Vital
View Central Station and anesthetic agent monitors) principally to hospitals
whereas the vital signs and pulse oximeters are sold primarily in non-hospital
settings.
In June 1999 the Company began to focus on selling to OEMs with the hiring
of a senior manager to lead this effort. Modules and stand-alone monitors were
developed and marketed for blood pressure, pulse oximetry, respiration rate, and
anesthetic gases for specific OEM customers. 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
--------------------
has been to target international markets, particularly Europe, Latin America and
the Pacific Rim countries. During fiscal 2002, Criticare sold its products,
principally to hospitals, in over 75 countries through over 75 independent
dealers.
In order to expand its business in China and Taiwan, in fiscal 2002 the
Company changed its distributor in these countries. This distributor will now
manufacture, sell, and service Criticare labeled product in China and Taiwan.
Also in fiscal 2002, the Company entered into a manufacturing and distribution
agreement with a Romanian company that will assemble and distribute Criticare
labeled product in the Black Sea Economic Zone, including Romania, Bulgaria,
Ukraine, Belarus, Greece, Turkey, Serbia, Croatia, Slovenia, Slovakia, and
Hungary. The Company expects to increase its international sales by entering
these high growth, developing markets.
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 2002, 39% of Criticare's net sales, or $10.3 million, was
attributable to international sales, of which approximately 66% was from sales
in Europe and the Middle East, 13% was from sales to Pacific Rim countries and
21% was from sales to Canada and Central and South America. In fiscal 2001 and
2000, 41% of Criticare's net sales were attributable to international sales.
Other than inventory and accounts receivable for the Company's branch office in
India totaling approximately $1.0 million, there are no material identifiable
assets of the Company located in foreign markets. The Company sells its products
in United States dollars and is therefore not subject to
4
currency risks other than currency fluctuations from its office in India;
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.
Service, Support and Warranty. Criticare believes that customer service is
-----------------------------
a key element of its marketing program. At August 31, 2002, the Company had a
customer service staff of 19 people at its Waukesha, Wisconsin facility.
Customer service support is available 24 hours a day, seven days a week, with
the majority of customers' technical problems being resolved over the telephone.
The customer service staff also provide periodic training and education of the
direct sales force who in turn provide training to the end-users.
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. The Company offers extended warranties and service
contracts on all of its monitors.
Manufacturing
-------------
Historically, Criticare has manufactured and assembled its products
internally, principally at the Company's facility in Waukesha, Wisconsin. Due
mainly to pricing pressures on monitoring systems worldwide, 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 contract manufacturing firm in
Taiwan also has manufacturing capabilities in China and a portion of Criticare's
production is being transitioned to China to continue to receive favorable
pricing. The Company works closely with these two firms to maintain product
quality and reliability. These two firms perform the same rigorous quality
control testing at their facilities that Criticare had done in the past at its
own facility. With the majority of the Company's manufacturing outsourced as of
the end of calendar 2001, Criticare concentrates 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 effectively transitioned
to offshore manufacturers.
Any inability of these offshore manufacturers to deliver products on a
timely basis could have a material adverse effect on the Company. However, each
of these manufacturers has the ability to produce the majority of the Company's
products, in addition to the dual manufacturing capabilities that the Taiwanese
company has to produce product in both Taiwan and China. Therefore, the Company
is not totally reliant
5
on a single plant or single source to supply product. This factor, combined
with the Company's ability to continue to manufacture at its headquarters in
Waukesha, Wisconsin, reduces the Company's risk of supply interruption.
The Company has achieved certification under the International Organization
for Standardization's (ISO) 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
----------------------------------------
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, 2002, the Company had an in-house research, development and
engineering staff of 22 people. The Company's research, development and
engineering expenditures were $2.3 million in fiscal 2002, $2.4 million in
fiscal 2001 and $2.9 million in fiscal 2000.
The Company made significant investments in engineering in fiscal 2000 to
update the entire Criticare product line and develop the 8100 vital signs
monitor. In fiscal 2001 and fiscal 2002, 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.
Competition
-----------
The markets for the Company's products are highly competitive. Many of
Criticare's competitors, including its principal competitors described below,
have greater financial resources, more established brand identities and
reputations, longer histories in the medical equipment industry and larger and
more experienced sales forces than Criticare. In these respects, such companies
have a competitive advantage over Criticare. 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.
6
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 Agilent (formerly Hewlett-Packard Company),
which has been acquired by Philips. The market for vital signs monitors
includes competitors such as Agilent, Siemens A.G., Datex/Ohmeda and Spacelabs
Medical, Inc., which has been acquired by Datex/Ohmeda.
The Company believes that its principal competitor in Western Europe and
the Pacific Rim countries is Datex/Ohmeda.
Regulation
----------
As a manufacturer of medical diagnostic equipment, the Company is regulated
by the FDA and similar foreign governmental agencies. In producing its
products, the Company must comply with a variety of regulations, including the
good manufacturing practices regulations of the FDA. In addition, it is subject
to periodic inspections by this agency. If the FDA believes that its legal
requirements have not been fulfilled, it has extensive enforcement powers,
including the ability to ban or recall products from the market and to prohibit
the operation of manufacturing facilities. The Company believes its products
comply with applicable FDA regulations in all material respects. In addition,
the Company received ISO 9002 certification on April 29, 1993 and ISO 9001
certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical
devices are classified as Class I, Class II or Class III, depending upon the
level of regulatory control to which they will be subject. Class III devices,
which are the most highly controlled devices, are subject to premarket approval
by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's
comprehensive premarket approval requirements, but are generally subject to
premarket notification requirements. If a new device is substantially
equivalent to a device that did not require premarket approval, premarket review
is satisfied through a procedure known as a "510(k) submission," under which the
applicant provides product information supporting its claim of substantial
equivalence. The FDA may also require that it be provided with clinical trial
results showing the device's safety and efficacy.
The Company believes that the products it is currently developing generally
will be eligible for the 510(k) submission procedure and, therefore, will not be
subject to lengthy premarket approval procedures. However, these products are
still being developed and there can be no assurance that the FDA will determine
that the products may be marketed without premarket approval.
7
Criticare seeks, where appropriate, to comply with the safety standards of
Underwriters' Laboratories and the Canadian Standards Association and the
standards of the European Community. To date, the Company has not experienced
significant regulatory expense or delay in the foreign markets in which it sells
its products. Industry and professional groups such as the American Society of
Anesthesiologists, to the extent they have the power to mandate certain
practices or procedures as part of their profession's standard of care, are also
a source of indirect regulation of the Company's business.
Patents and Trademarks
------------------------
The Company believes one of its principal competitive advantages is
provided by its patented and other proprietary technology including its sensor
technology, infrared specific anesthetic gas monitoring technology, UltraSync
signal processing software and disposable respiratory secretion filter system.
The Company has 15 issued U.S. patents and four patent applications pending.
The Company's U.S. patents expire between 2004 and 2019. 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 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", "MICROVIEW", and "WATERCHEK".
The Company also relies upon trade secret protection for certain of its
proprietary technology. Although the Company requires all employees to sign
confidentiality agreements, no assurance can be given that such agreements can
be effectively enforced or that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to or disclose the Company's trade secrets.
Employees
---------
At August 31, 2002 Criticare had 84 employees, including 22 in research,
development and engineering, 19 in customer service, 15 in manufacturing and
operations, 13 in administration, 11 in sales and marketing, and four in quality
control.
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.
8
Backlog
-------
Criticare's backlog on June 30, 2002 and 2001 was $1,000,450 and $813,438,
respectively. 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.
------- ----------
In August 2002, the Company sold its 60,000 square foot building in
Waukesha, Wisconsin for $4,000,000 and leased back approximately 37,000 square
feet of this building to serve as the Company's headquarters, warehouse,
manufacturing, research and development and service facility. The proceeds from
the sale were used to retire the mortgage note on the facility and resulted in a
debt free balance sheet for the Company. The lease expires on August 30, 2007,
with an option for the Company to extend for an additional three years, and with
rent totaling $22,423 per month for the first year of the lease and annual
increases approximating 3% in years two, three and five of the lease.
Item 3. LEGAL PROCEEDINGS.
------- ------------------
In the normal course of business Criticare may be involved in various legal
proceedings from time to time. Criticare does not believe it is currently
involved in any claim or action the ultimate disposition of which would have a
material adverse effect on Criticare.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2002.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
------- -------------------------------------------------------------------
MATTERS.
-------
The Company's common stock is traded on the Nasdaq National Market (Symbol
CXIM). As of June 30, 2002, there were approximately 233 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.
9
Year Ended June 30,
2002 2001
---------- ----------
Quarter Ended: High Low High Low
September 30 . . . . . . . . $4.68 $3.30 $3.38 $2.31
December 31. . . . . . . . . $5.23 $4.00 $3.00 $1.63
March 31 . . . . . . . . . . $4.70 $3.50 $3.44 $1.94
June 30. . . . . . . . . . . $5.81 $4.00 $4.49 $2.55
The following table summarizes share information for the Company's equity
compensation plans as of June 30, 2002, including the 1992 Employee Stock Option
Plan, the 1992 Non-employee Stock Option Plan, the 1987 Employee Stock Option
Plan, the 1987 Non-employee Stock Option Plan and the Employee Stock Purchase
Plan. All of these equity compensation plans have been approved by the Company's
shareholders. The Company has also issued warrants to a consultant which have
not been approved by the Company's shareholders. See Note 7 of the Notes to the
Consolidated Financial Statements in Item 8 of this report for additional
information regarding these warrants.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to be Weighted average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights in first column)
------------- ------------------------- -------------------- ---------------------------
Equity compensation
plans approved by
security holders. . . 1,209,620 shares $2.26 per share 616,300 shares
Equity compensation
plans not approved by
security holders. . . 100,000 shares $2.21 per share 0 shares
---------------- --------------- --------------
Total . . . . . . . 1,309,620 shares $2.25 per share 616,300 shares
10
Item 6. SELECTED FINANCIAL DATA.
------- -------------------------
The following table sets forth selected financial data with respect to the
Company for each of the periods indicated.
Years Ended June 30,
--------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Net sales . . . . . . . . . . $26,219,618 $27,736,304 $27,154,236 $28,512,507 $27,908,364
(Loss) income from operations. (1,212,478) (86,055) (2,517,548) (3,887,788) 306,216
Loss before income
taxes and extraordinary gain (1,425,181) (178,232) (2,686,388) (4,388,171) (499,276)
Net loss . . . . . . . . . . . (1,425,181) (178,232) (186,388) (4,388,171) (499,276)
Net loss per common share--
basic and diluted . . . . . $ (0.13) $ (0.02) $ (0.02) $ (0.51) $ (0.06)
Average shares outstanding . . 10,876,818 10,171,394 8,694,918 8,581,863 8,309,240
Stockholders' equity . . . . . $18,387,067 $21,005,816 $18,798,952 $12,711,709 $17,282,997
Long-term obligations. . . . . 3,151,879 3,270,131 3,552,474 4,014,356 3,165,258
Working capital. . . . . . . . 15,464,899 17,995,488 16,257,780 10,340,014 13,716,891
Total assets . . . . . . . . . 25,474,256 29,871,854 27,210,867 24,041,987 24,726,819
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- -------------------------------------------------------------------
RESULTS OF OPERATION.
----------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Operations expressed as
percentages of net sales.
PERCENTAGE OF NET SALES
YEARS ENDED JUNE 30,
--------------------------
2002 2001 2000
------ ------ -------
Net sales . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . . . 62.8 59.4 60.6
Gross profit. . . . . . . . . . . . . . 37.2 40.6 39.4
Operating expenses:
Marketing . . . . . . . . . . . . . . . 21.5 23.0 29.5
Research, development and engineering . 8.9 8.8 10.5
Administrative. . . . . . . . . . . . . 11.4 9.1 8.6
Total . . . . . . . . . . . . . . . . . 41.8 40.9 48.6
Loss from operations. . . . . . . . . . (4.6) (0.3) (9.2)
Interest expense. . . . . . . . . . . . (0.9) (0.9) (1.0)
Interest income . . . . . . . . . . . . 0.3 0.5 0.3
Foreign currency exchange loss. . . . . (0.5) -- --
Gain on sale of stock . -- -- 9.2
Other income . . . . 0.3 -- --
Loss before income taxes. . . . . . . . (5.4) (0.7) (0.7)
Income tax provision. . . . . . . . . . -- -- --
Net loss. . . . . . . . . . . . . . . . (5.4)% (0.7)% (0.7)%
11
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO JUNE 30, 2001
Net sales of $26.2 million for the fiscal year ended June 30, 2002 were
down 5.5% from $27.7 million in fiscal 2001. A 5.0% reduction in the number of
units shipped and a 3.9% decrease in the average selling price per unit were the
main contributors to the sales decline between years. A 2.0% increase in
accessory sales in the current year partially offset the reduced sales volume
and lower average selling prices on the Company's monitors and related
equipment.
International sales in fiscal 2002 to Criticare's distributors in the
United Kingdom (U.K.) and China decreased 36.3% from the prior year and
contributed over $1.1 million to the Company's sales decrease between years.
Significant cutbacks in health care spending in the U.K., where only critically
important capital expenditures are being made, have negatively impacted the
Company's sales to its distributor in the U.K. in fiscal 2002. The transition
to a new distributor in China in fiscal 2002 is expected to provide long-term
sales growth opportunities for the Company, but in the short-term has resulted
in reduced sales in fiscal 2002 as this change was implemented. See "Forward
Looking Statements".
Domestic sales in fiscal 2002 were down $499,552 from the prior year, but
this was partially offset by higher sales to domestic OEM customers that were up
$182,186 in fiscal 2002. The decrease in domestic sales can be attributed to
the poor U.S. economy in fiscal 2002 and the events of September 11th, which
basically eliminated sales from one of the Company's largest domestic trade
shows that was held that week. OEM sales in fiscal 2002 increased for the third
consecutive year and represented 19.5% of total company sales in fiscal 2002,
consistent with the Company's strategy to increase this segment of its business.
The gross profit percentage of 37.2% realized in fiscal 2002 was down from 40.6%
in fiscal 2001. Higher manufacturing costs in the first six months of the
current fiscal year to support the Company's efforts to transition its
manufacturing offshore by the end of calendar year 2001 and the lower sales
volume between years resulted in an under-utilization of fixed manufacturing
costs which contributed to reduced margins in fiscal 2002. Due to the
outsourcing of the majority of the Company's products, approximately $509,000 of
fixed costs that had previously been classified as manufacturing expenses were
included in administrative expenses in the current year. The favorable impact
of this change on margins was offset by a $621,000 increase in the reserve for
obsolete inventory that was deemed necessary due to continued high levels of
component parts being maintained by the Company after outsourcing the majority
of its manufacturing.
12
Total operating expenses in fiscal 2002 were $385,796 lower than the prior
year, despite a $457,611 increase in administrative expenses, due mainly to a
$736,196 reduction in marketing expenses in fiscal 2002. As noted above, the
higher administrative expenses were mainly driven by a change in the
classification of expenses due to a change in the operations of the business.
Certain fixed costs that had been expensed as manufacturing costs in prior years
were more appropriately classified as administrative expenses in fiscal 2002.
The decrease in marketing expenses was due mostly to a reduction in sales
commissions and bonuses earned from lower sales in fiscal 2002. In addition,
the elimination of a sales vice president position in the fourth quarter of the
prior year resulted in a reduction in marketing salaries and fringe benefits in
fiscal 2002.
In addition to the lower sales and reduction in gross profit in fiscal
2002, a $120,526 increase in other expenses in fiscal 2002, due mostly to the
recognition of a $119,188 foreign currency exchange loss related to the
Company's operation in India, contributed to the $1,425,181 loss in fiscal 2002.
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. 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 fiscal 2001 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.
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
13
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.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts, sales
returns, inventories and warranty obligations. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates. The Company believes the following accounting policies require its
more significant judgments and estimates used in the preparation of its
financial statements.
14
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.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Management analyzes specific accounts receivable as well as historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends, foreign currency movements and changes in its customer payment terms
when evaluating the allowance for doubtful accounts. If the financial condition
of one of the Company's customers were to deteriorate, resulting in impairment
of its ability to make payments to the Company, additional allowances may be
required.
The Company also maintains a sales returns reserve in order to estimate
potential future product returns related to current period revenue. Management
analyzes historical returns, current economic trends, changes in customer demand
and acceptances of the Company's products when evaluating the adequacy of the
sales returns reserve. Significant management judgments and estimates must be
made and used in connection with establishing the sales returns reserve in any
accounting period. Material differences between actual sales returns experience
and management's estimates may affect the Company's revenue in subsequent
periods.
VALUATION OF INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. The Company maintains a reserve for obsolete
inventory that it utilizes to write down inventories for estimated obsolescence
or unmarketable inventory equal to the difference between the carrying value of
the inventory and the estimated market value based upon assumptions about future
product demand and market conditions. If future product demand is lower than
expected or if market conditions are less favorable than those projected by the
Company, additional charges to the obsolescence reserve may be required.
During fiscal 2002, the reserve for obsolete inventory was increased by
$621,000 to $946,000 at June 30, 2002 due to continued high levels of component
parts being maintained by the Company after outsourcing the majority of its
manufacturing.
15
PRODUCT WARRANTY
The Company reserves for the estimated cost of product warranties at the
time products are shipped based upon its historical experience providing
warranty coverage. The Company's warranty obligations are affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. If actual product failure rates, material usage or service
delivery costs differ from current projections, revisions to the estimated
warranty reserve would be required.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses the recognition and measurement of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of. The
Company is required to adopt the provision of SFAS No. 144 beginning with its
fiscal year that starts July 1, 2002. The Company does not believe that adoption
of SFAS 144 will have a material effect on its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Given that SFAS No. 146 was issued in June 2002 and is not
yet effective, the impact on the Company's financial position or results of
operations from adopting SFAS No. 146 has not been determined.
See the Summary of Significant Accounting Policies in Note 1 of the Notes
to the Consolidated Financial Statements for further explanation of these
Statements of Financial Accounting Standards.
SUBSEQUENT EVENT
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 actions 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.
This internal audit is ongoing and, at this time, management is unable to
determine with certainty the extent of any violations or the potential for the
imposition of penalties. 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. 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 Bureau of Industry and Security ("BIS") and the Treasury's
Office of Foreign Asset Control ("OFAC"). Although there is no assurance, based
upon a review of the internal audit to date and precedents, the Company believes
a negotiated settlement of any violations will not have a material adverse
effect on the operations of the Company. At this time, the Company cannot
determine whether any monetary fines would have a material adverse effect on its
financial condition. The Company does not believe that the evidence 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 to the BIS, OFAC and, possibly, other agencies will serve
to mitigate any potential adverse consequences that otherwise might accrue.
16
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had no short-term borrowings and a cash
balance of $3,523,070 that was up $160,966 from the $3,362,104 cash balance at
the end of fiscal 2001. The Company generated $283,269 of cash from operations
as significant reductions in accounts receivables and additional decreases in
inventory more than offset the $1,425,181 loss in fiscal 2002. The Company used
$513,307 of cash to invest in property, plant and equipment and $86,767 to pay
down long-term debt. In addition, $197,727 of cash was used to repurchase 41,123
shares of the Company's common stock in accordance with the stock buyback that
was approved by the Criticare Board of Directors in the third quarter of fiscal
2002. The majority of these uses of cash were funded by $654,843 in proceeds
received from the issuance of common stock related to the exercise and payment
of 303,300 stock options in the last three quarters of fiscal 2002.
As of June 30, 2001, the Company had a cash balance of $3,362,104 and no
short-term borrowings. In October 2000, the Company received $4,019,114 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 by $3,247,274 from the prior year. In fiscal 2001, the Company used
$688,322 of these proceeds for capital expenditures, $80,432 to retire long-term
debt, and $103,289 to fund operations.
In August 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 approximately $41,000 was realized on the sale
after the payment of commissions and fees and the funding of $105,000 in
capitalized build out costs needed to split the building into two leasable
spaces. The proceeds from the sale were used to retire the $3,197,125 of debt on
the Company's balance sheet at June 30, 2002 and increased the Company's cash
position by approximately $500,000. In addition, the reduction in square footage
is expected to reduce annual operating expenses by approximately $150,000 (see
"Forward Looking Statements").
As noted above, the Company's Board of Directors authorized the repurchase
of up to 500,000 shares of the Company's common stock in the third quarter of
fiscal 2002. In accordance with this buyback, the Company purchased 41,123
shares in the fourth quarter of fiscal 2002. These share repurchases are
expected to continue in fiscal 2003, depending upon market conditions, and will
be funded by cash generated from operations and current cash balances.
The Company believes all future capital and liquidity requirements will be
satisfied by cash generated from operations, proceeds received from the issuance
of common stock related to the exercise of stock options, and its current cash
balances. The Company also has a $4,000,000 line of credit currently in place
that expires in November 2002 that could be utilized, if necessary. At June 30,
2002 there were no borrowings outstanding under this line of credit. The Company
violated a loan covenant under this line of credit related to achieving certain
income levels. The bank waived compliance with this covenant subsequent to year
end. This line expires in November 2002, but is expected to be extended with
terms consistent with the current agreement.
17
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,
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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-------- ----------------------------------------------------------------
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, 2002, 2001, and 2000. Due historically to the lack of need to borrow
from this credit facility and due to the Company's current strong cash position,
the Company is not subject to financial risk on this obligation if interest
rates in the market change significantly.
18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------- -----------------------------------------------
FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
ASSETS 2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) . . . . . . . . . . . . $ 3,523,070 $ 3,362,104
Accounts receivable, less allowance for doubtful accounts
of $300,000 and $1,000,000, respectively . . . . . . . . 5,481,952 7,122,464
Investments (Notes 1 and 3). . . . . . . . . . . . . . . . 2,304,689 3,970,454
Other receivables (Note 1) . . . . . . . . . . . . . . . . 502,348 33,788
Inventories (Notes 1 and 2). . . . . . . . . . . . . . . . 7,134,803 8,600,413
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 453,347 502,172
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 19,400,209 23,591,395
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,000 925,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,600,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 2,007,322 2,055,518
Furniture and fixtures . . . . . . . . . . . . . . . . . . 809,277 837,238
Construction in progress . . . . . . . . . . . . . . . . . 116,798 --
Demonstration and loaner monitors. . . . . . . . . . . . . 1,616,766 1,463,909
Production tooling . . . . . . . . . . . . . . . . . . . . 3,425,117 3,122,938
----------- -----------
Property, plant and equipment - cost . . . . . . . . . . . 12,500,280 12,004,603
Less accumulated depreciation. . . . . . . . . . . . . . . 6,517,220 5,822,133
----------- -----------
Property, plant and equipment - net. . . . . . . . . . . . 5,983,060 6,182,470
OTHER ASSETS (Note 1):
License rights and patents - net . . . . . . . . . . . . . 90,987 97,989
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . 90,987 97,989
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $25,474,256 $29,871,854
=========== ===========
See notes to consolidated financial statements.
19
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,331,496 $ 3,421,776
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . . . 770,578 1,187,493
Product warranties (Note 1). . . . . . . . . . . . . . . . . . . . . . 248,725 220,000
Accrued taxes other than income. . . . . . . . . . . . . . . . . . . . 131,412 96,947
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,510 582,925
Current maturities of long-term debt (Note 5). . . . . . . . . . . . . . 93,589 86,766
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 3,935,310 5,595,907
LONG-TERM DEBT, less current maturities (Note 5) . . . . . . . . . . . . 3,103,536 3,197,126
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . 48,344 73,005
CONTINGENCIES (Notes 6 and 12)
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,
11,199,524 and 10,796,224 shares issued and outstanding, respectively. 447,981 431,849
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 23,350,124 22,494,548
Common stock held in treasury (100,890 and 64,134 shares, respectively). (309,059) (119,467)
Subscriptions receivable . . . . . . . . . . . . . . . . . . . . . . . . (225,000) --
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . . (7,187,501) (5,771,568)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . 5,832 --
Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . 2,304,689 3,970,454
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 18,387,066 21,005,816
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,474,256 $29,871,854
============ ============
See notes to consolidated financial statements.
20
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
NET SALES (NOTE 9) . . . . . . . . . . . . . . $26,219,618 $27,736,304 $27,154,236
COST OF GOODS SOLD . . . . . . . . . . . . . . 16,464,652 16,469,119 16,462,477
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . 9,754,966 11,267,185 10,691,759
OPERATING EXPENSES:
Marketing (Note 1) . . . . . . . . . . . . . . 5,631,199 6,367,395 8,014,129
Research, development and engineering (Note 1) 2,339,696 2,446,907 2,861,733
Administrative (Note 6). . . . . . . . . . . . 2,996,549 2,538,938 2,333,445
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 10,967,444 11,353,240 13,209,307
LOSS FROM OPERATIONS . . . . . . . . . . . . . (1,212,478) (86,055) (2,517,548)
OTHER INCOME (EXPENSE):
Interest expense (Note 5). . . . . . . . . . . (246,207) (253,150) (259,280)
Interest income. . . . . . . . . . . . . . . . 76,771 157,782 90,440
Foreign currency exchange loss . . . . . . . . (119,188) -- --
Gain on sale of stock (Note 3) . . . . . . . . -- -- 2,500,000
Other income . . . . . . . . . . . . . . . . . 75,921 3,191 --
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . (212,703) (92,177) 2,331,160
LOSS BEFORE INCOME TAXES . . . . . . . . . . . (1,425,181) (178,232) (186,388)
INCOME TAX PROVISION (NOTES 1 AND 4) . . . . . -- -- --
------------ ------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . $(1,425,181) $ (178,232) $ (186,388)
============ ============ ============
NET LOSS PER COMMON SHARE (NOTE 1):
Basic. . . . . . . . . . . . . . . . . . . . . $ (0.13) $ (0.02) $ (0.02)
Diluted. . . . . . . . . . . . . . . . . . . . $ (0.13) $ (0.02) $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 1):
Basic. . . . . . . . . . . . . . . . . . . . . 10,876,818 10,171,394 8,694,918
Diluted. . . . . . . . . . . . . . . . . . . . 10,876,818 10,171,394 8,694,918
See notes to consolidated financial statements.
21
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Additional Common Stock
Common Stock Paid-In Treasury Subscriptions
Shares Amount Capital Shares Cost Receivable
BALANCE, JUNE 30, 1999 . . . . . . 8,706,151 $ 348,246 $17,960,363 103,840 $(193,430) $ 0
Net loss . . . . . . . . . . . . .
Unrealized gain on investment. . .
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
BALANCE, JUNE 30, 2000 . . . . . . 8,976,251 359,050 18,478,040 81,122 (151,111) 0
Net loss . . . . . . . . . . . . .
Unrealized (loss) on investment. .
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
BALANCE, JUNE 30, 2001 . . . . . . 10,796,224 431,849 22,494,548 64,134 (119,467) 0
Net loss . . . . . . . . . . . . .
Unrealized (loss) on investment. .
Cumulative translation adjustment.
Comprehensive income/(loss). . . .
Exercise of options. . . . . . . . 403,300 16,132 848,121 (225,000)
Employee common stock
purchased from treasury. . . . . 7,455 (4,367) 8,135
Repurchase of Company stock. . . . 41,123 (197,727)
BALANCE, JUNE 30, 2002 . . . . . . 11,199,524 $ 447,981 $23,350,124 100,890 $(309,059) $(225,000)
Retained
Earnings Cumulative Unrealized Total
(Accumulated Translation Gain on Stockholders'
Deficit) Adjustment Investment Equity
BALANCE, JUNE 30, 1999 . . . . . . $(5,403,470) $ 0 $ 0 $12,711,709
Net loss . . . . . . . . . . . . . (186,388) (186,388)
Unrealized gain on investment. . . 5,704,675 5,704,675
Comprehensive income/(loss). . . . 5,518,287
Common stock issued in settlement
of lawsuit . . . . . . . . . . . 69,375
Exercise of options. . . . . . . . 458,350
Employee common stock. . . . . . .
purchased from treasury. . . . . (1,844) 41,231
BALANCE, JUNE 30, 2000 . . . . . . (5,591,702) 0 5,704,675 18,798,952
Net loss . . . . . . . . . . . . . (178,232) (178,232)
Unrealized (loss) on investment. . (1,734,221) (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. . . . . (1,634) 67,182
BALANCE, JUNE 30, 2001 . . . . . . (5,771,568) 0 3,970,454 21,005,816
Net loss . . . . . . . . . . . . . (1,425,181) (1,425,181)
Unrealized (loss) on investment. . (1,665,765) (1,665,765)
Cumulative translation adjustment. 9,248 5,832 15,080
Comprehensive income/(loss). . . . (3,075,866)
Exercise of options. . . . . . . . 639,253
Employee common stock. . . . . . .
purchased from treasury. . . . . 15,590
Repurchase of Company stock. . . . (197,727)
BALANCE, JUNE 30, 2002 . . . . . . $(7,187,501) $ 5,832 $2,304,689 $18,387,066
See notes to consolidated financial statements.
22
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . $(1,425,181) $ (178,232) $ (186,388)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 865,291 742,931 871,510
Amortization . . . . . . . . . . . . . . . . . . 7,002 7,001 7,001
Gain on sale of fixed assets . . . . . . . . . . (5,292) -- --
Provision for doubtful accounts. . . . . . . . . (700,000) (300,000) 925,000
Provision for obsolete inventory . . . . . . . . 621,000 -- --
Gain on sale of Immtech stock. . . . . . . . . . -- -- (2,500,000)
Litigation settled with common stock . . . . . . -- -- 69,375
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . 2,340,512 (39,699) (1,349,278)
Other receivables. . . . . . . . . . . . . . . (468,560) 82,985 (33,667)
Inventories. . . . . . . . . . . . . . . . . . 691,753 (670,510) 341,955
Prepaid expenses . . . . . . . . . . . . . . . 48,825 (282,320) (27,562)
Accounts payable . . . . . . . . . . . . . . . (1,090,280) 786,432 (442,676)
Accrued liabilities. . . . . . . . . . . . . . (601,801) (251,877) (2,401,762)
------------ ------------ ------------
Net cash provided by (used in) operating activities. 283,269 (103,289) (4,726,492)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . (513,307) (688,322) (595,412)
Proceeds from sale of fixed assets . . . . . . . . . 5,575 -- --
Proceeds from sale of Immtech stock. . . . . . . . . -- -- 2,500,000
------------ ------------ ------------
Net cash (used in) provided by investing activities. (507,732) (688,322) 1,904,588
FINANCING ACTIVITIES:
Repurchase of Company common stock . . . . . . . . . (197,727) -- --
Principal payments on long-term debt . . . . . . . . (86,767) (80,432) (73,925)
Proceeds from issuance of common stock . . . . . . . 654,843 4,119,317 499,581
------------ ------------ ------------
Net cash provided by financing activities. . . . . . 370,349 4,038,885 425,656
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . 15,080 -- --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 160,966 3,247,274 (2,396,248)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . 3,362,104 114,830 2,511,078
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . $ 3,523,070 $ 3,362,104 $ 114,830
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes paid-net. . . . . . . . . . . . . . . $ 12,309 $ 16,639 $ 7,535
Interest . . . . . . . . . . . . . . . . . . . . . 246,749 253,653 259,590
Noncash investing and financing activities:
Litigation settled with common stock . . . . . . . -- -- 69,375
Cost of fixed asset disposals. . . . . . . . . . . 168,320 -- 201,072
Unrealized (loss)/gain on investment in Immtech. . (1,665,765) (1,734,221) 5,704,675
See notes to consolidated financial statements.
23
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
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. In addition, the Company sells modules and stand-alone monitors
worldwide to original equipment manufacturers ("OEMs").
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"), and Sleep Care, Inc.
("Sleep Care"). 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 accordance with Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholders' equity. The Company's
investments were in marketable equity securities and were classified as
available-for-sale securities. There were no held-to-maturity or trading
securities as of June 30, 2002 (see Note 3).
24
OTHER RECEIVABLES -- Other receivables in fiscal 2002 include a trade receivable
that was assumed by a new distributor in China. In accordance with the
agreement executed with this distributor, this receivable balance is to be paid
over a twelve month period beginning in May 2002 and ending in April 2003.
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, which was sold in August 2002, was being
depreciated over 40 years prior to the sale. The remaining assets are being
depreciated over three to seven years, using primarily the straight-line method.
Construction in progress represents building improvements made related to the
sale of the building. The estimated costs to complete the construction totals
approximately $145,000.
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, in accordance with the
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"), when indications of potential impairment exist. The amount of
any impairment is calculated by comparing the estimated fair market value with
the carrying value of the related asset. Management considers such factors as
current operating results, trends, and future prospects, in addition to other
economic factors in performing this analysis. No such impairments exist at June
30, 2002 and 2001.
LICENSE RIGHTS AND PATENTS -- License rights and patents are amortized over the
estimated useful lives of the related agreements using primarily the
straight-line method. Approximately $7,000 of amortization was charged to
operations in each of the fiscal years ended June 30, 2002, 2001 and 2000.
Accumulated amortization approximated $106,000 and $99,000 at June 30, 2002 and
2001, 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.
SHIPPING COSTS -- Shipping costs are included in cost of goods sold in the
accompanying consolidated statements of operations.
PRODUCT WARRANTIES -- Estimated costs for product warranties are accrued for and
charged to operations as the related products are shipped.
25
MARKETING EXPENSES -- Marketing expenses include all of the Company's sales
related costs. In fiscal 2002 and 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 $(183,046) and $(25,757),
respectively. Marketing expenses in fiscal 2000 include a $900,000 charge to
bad debt expense related to the accounts receivable balances of certain
international customers. Including this $900,000 charge, bad debt expense
totaled $1,160,614 for fiscal year 2000.
RESEARCH AND DEVELOPMENT EXPENSES -- Research and development costs are charged
to operations as incurred. Such expenses approximated $2,147,000, $2,325,000
and $2,696,000 in 2002, 2001 and 2000, 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 statements 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 597,129
shares in 2002 and 370,260 shares in 2001 without this anti-dilutive impact.
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.
26
APPROVED ACCOUNTING STANDARDS -- In June 2001, the Financial Accounting
Standards Board (FASB) finalized SFAS 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, 2002
and has only a small investment in intangible assets at June 30, 2002.
Therefore, the adoption of SFAS 141 and 142 has not had a material effect on
the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", in that it removes goodwill from its impairment scope and
allows for different approaches in cash flow estimation. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supercedes the business
segment concept in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued
27
operation. However, SFAS No. 144 retains the requirement of APB Opinion No. 30
to report discontinued operations separately from continuing operations. The
Company is required to adopt the provision of SFAS No. 144 beginning with its
fiscal year that starts July 1, 2002. The Company does not believe that
adoption of SFAS 144 will have a material effect on its consolidated financial
statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees, and
termination benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Given that SFAS No. 146 was issued in June 2002 and is not yet effective,
the impact on the Company's financial position or results of operations from
adopting SFAS No. 146 has not been determined.
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 2001 financial statements
have been reclassified to conform to the fiscal 2002 presentation.
2. INVENTORIES
Inventories consist of the following as of June 30:
2002 2001
Component parts . . . . . . . . $3,549,397 $3,784,491
Work in process . . . . . . . . 499,950 1,372,587
Finished units. . . . . . . . . 4,031,456 3,768,335
---------- ----------
Total inventories . . . . . . . 8,080,803 8,925,413
Less: reserve for obsolescence 946,000 325,000
---------- ----------
Net inventory . . . . . . . . . $7,134,803 $8,600,413
28
3. INVESTMENTS
IMMTECH INTERNATIONAL, INC. - Investments classified as available-for-sale
securities consist of 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 owned 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
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 $5.05
and $8.70 per share, on June 30, 2002 and 2001, respectively. The market value
of these shares could change substantially due to overall market risk.
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 none of the restricted 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 had been satisfied, but the restricted legends had not been removed
from the shares.
In order to have the restricted legends removed from the Immtech stock
certificates, the Company entered into an agreement with Immtech dated November
2, 2001. Under the agreement, portions of the Company's Immtech stock were
subject to restrictions on transfer for relatively short-term periods of up to
six months, after which time all such stock would be free of restrictions. As of
June 30, 2002, all of the Company's Immtech shares were freely tradable.
29
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 upon 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,
2002 2001 2000
Deferred income tax assets:
Accounts receivable and sales allowances. . . . . . . $ 146,000 $ 415,000 $ 533,000
Inventory allowances. . . . . . . . . . . . . . . . . 400,000 164,000 191,000
Product warranties. . . . . . . . . . . . . . . . . . 98,000 86,000 128,000
Other accrued liabilities . . . . . . . . . . . . . . 136,000 210,000 246,000
Severance pay accrual . . . . . . . . . . . . . . . . 24,000 52,000 145,000
Federal net operating loss carryforwards. . . . . . . 4,282,000 3,665,000 3,320,000
State net operating loss carryforwards. . . . . . . . 536,000 467,000 483,000
Federal tax credit carryforwards. . . . . . . . . . . 152,000 152,000 152,000
Investment losses not deducted. . . . . . . . . . . . 709,000 709,000 709,000
------------ ------------ ------------
Total deferred income tax assets. . . . . . . . . . . 6,483,000 5,920,000 5,907,000
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization (585,000) (625,000) (616,000)
Prepaid expenses. . . . . . . . . . . . . . . . . . . (41,000) (28,000) (13,000)
Unrealized gain on investments. . . . . . . . . . . . (904,000) (1,557,000) (2,237,000)
------------ ------------ ------------
Total deferred income tax liabilities . . . . . . . . (1,530,000) (2,210,000) (2,866,000)
Valuation allowance . . . . . . . . . . . . . . . . . (4,953,000) (3,710,000) (3,041,000)
Net deferred income taxes recognized in the
consolidated balance sheets . . . . . . . . . . . . $ 0 $ 0 $ 0
At June 30, 2002, the Company had federal net operating loss carryforwards of
approximately $12,594,000 which expire in 2008 through 2022. At June 30, 2002,
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 $10,713,000 of state net
operating loss carryforwards, which expire in 2003 through 2017, available to
offset certain future state taxable income.
30
The income tax provision consists of the following:
2002 2001 2000
Current
Federal. . . . . . . . . . $ 0 $ 0 $ 0
State. . . . . . . . . . . 0 0 0
Total income tax provision $ 0 $ 0 $ 0
A reconciliation of the provision for income taxes (benefit) at the federal
statutory income tax rate to the effective income tax rate follows:
2002 2001 2000
Federal statutory income tax rate . . . . . . . . . . . (34.0)% (34.0)% (34.0)%
Losses for which no benefit was provided. . . . . . . . 51.9 17.5 35.3
Non-deductible losses of subsidiaries . . . . . . . . . 0.0 15.6 27.6
Other--net (principally stock options in 2002 and 2000) (17.9) 0.9 (28.9)
------- ------- -------
Effective income tax rate . . . . . . . . . . . . . . . 0% 0% 0%
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
2002 2001
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 $3,664,000 at June 30, 2002. . . . . . . . $3,197,125 $3,283,892
Less current maturities. . . . . . . . . . . . . . . . . . 93,589 86,766
---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . $3,103,536 $3,197,126
Aggregate annual principal payments required under terms of the long-term
debt agreements are as follows:
YEARS ENDING JUNE 30, PRINCIPAL PAYMENTS
2003. . . . . . . . . 93,589
2004. . . . . . . . . 3,103,536
2005. . . . . . . . . 0
2006. . . . . . . . . 0
2007. . . . . . . . . 0
-------------------
Total . . . . . . . . $ 3,197,125
31
In August 2002, the Company sold its facility headquartered in Waukesha,
Wisconsin and leased back approximately 62% of the building's square footage.
The proceeds from the sale of the building were used to retire the mortgage note
on the facility.
At June 30, 2002, 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% (5.0% as of June 30, 2002). As of June 30,
2002, 2001 and 2000 there were no borrowings against the line. Borrowings under
the line of credit facility are collateralized by substantially all assets of
the Company. The credit facility has covenants which require minimum levels of
tangible net worth and income levels. The Company was not in compliance with the
income level covenant at June 30, 2002. This non-compliance was waived by the
lending institution.
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.
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 160,630 reserved
shares of common stock remain available for future issuance under the stock
option plans at June 30, 2002. 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 2000, 2001 and 2002 for the above plans is summarized
as follows:
32
NUMBER OF STOCK OPTIONS WEIGHTED AVG.
SHARES PRICE RANGE EXERCISE PRICE
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
Granted. . . . . . . . . . 35,000 3.60-4.40 4.21
Cancelled. . . . . . . . . (57,700) 1.63-2.97 2.43
Exercised. . . . . . . . . (403,300) 1.63-2.97 2.14
----------
Outstanding at June 30, 2002 1,209,620 $1.50-4.40 $ 2.26
The following table summarizes information about stock options outstanding
as of June 30, 2002:
OPTIONS OUTSTANDING
Weighted Average OPTIONS EXERCISABLE
Shares Remaining Weighted Shares
Range of Outstanding Contractual Average Exercise Exercisable Weighted Average
Exercise Prices at June 30, 2002 Life-Years Price at June 30, 2002 Exercise Price
$1.50-2.00 . . . . . 621,250 2.49 $ 1.73 378,750 $ 1.64
2.25-4.40. . . . . . 588,370 3.11 2.82 275,870 2.80
1.50-4.40. . . . . . 1,209,620 2.79 2.26 654,620 2.13
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, 2002, 2001 and 2000, 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:
33
YEARS ENDED JUNE 30,
2002 2001 2000
Net (loss)--as reported . . . . . . . . . . . . $(1,425,181) $(178,232) $(186,388)
Net (loss)--pro forma . . . . . . . . . . . . . $(1,556,352) $(507,678) $(365,626)
Net (loss) per common share--as reported. . . . $ (0.13) $ (0.02) $ (0.02)
Net (loss) per common share--pro forma. . . . . $ (0.14) $ (0.05) $ (0.04)
Assumptions used:
Expected volatility . . . . . . . . . . . . . 70.0% 37.5% 23.0%
Risk-free interest rate . . . . . . . . . . . 3.59% 4.92% 6.00%
Expected option life (in years) . . . . . . . 3.30 4.57 4.00
Weighted average fair market value of options
granted during the fiscal year ended June 30. $ 1.57 $ 0.61 $ 0.38
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 February 1998, 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 common stock at a price of $3.00 per share.
The warrant was exercisable as to 30,000 shares upon execution of the agreement
and the warrants to purchase the remaining 120,000 shares were to be exercisable
if certain performance parameters were achieved by February 1999. No such
parameters were achieved. Therefore, as of June 30, 2002, only 30,000 of these
warrants were exercisable. These 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, 2002, 17,500 of these warrants were
exercisable. Such warrants expire in December 2005.
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
34
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.
COMMON STOCK HELD IN TREASURY - At June 30, 2002 and 2001 the Company held in
Treasury 100,890 and 64,134 shares of common stock, respectively. In the third
quarter of fiscal 2002, the Criticare Board of Directors approved the purchase
in the open market of up to 500,000 shares of Criticare common stock. In the
fourth quarter of fiscal 2002, the Company purchased and held in Treasury at
June 30, 2002 41,123 shares of common stock in accordance with this stock
buyback program.
SUBSCRIPTIONS RECEIVABLE - Subscriptions receivable represents common stock
issued in May 2002 to two directors of the Company related to expiring stock
options. The shares have been issued and promissory notes payable in the
principal amount of $112,500 executed by each of the directors for the exercise
price of the stock options. These notes are non-interest bearing and are due
and payable within one year from the date of execution of the notes.
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 in 2002 and 2001, respectively, and $77,000 in 2000.
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.
35
Other than inventory and accounts receivable for the Company's branch office in
India totaling approximately $1.0 million, 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:
2002 2001 2000
Europe and Middle East . . . . . . . $ 6,861,000 $ 6,833,000 $ 5,437,000
Pacific Rim. . . . . . . . . . . . . 1,292,000 2,313,000 2,662,000
Canada and Central and South America 2,193,000 2,217,000 3,035,000
----------- ----------- -----------
Export net sales . . . . . . . . . . $10,346,000 $11,363,000 $11,134,000
U.S. net sales . . . . . . . . . . . 15,874,000 16,373,000 16,020,000
----------- ----------- -----------
Total net sales. . . . . . . . . . . $26,220,000 $27,736,000 27,154,000
Note: Sales in Europe and the Middle East have been combined above 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 $3,507,000, $3,383,000 and $2,031,000 in fiscal 2002,
2001 and 2000, respectively. These sales represented approximately 13%, 12% and
8% of the Company's total sales, respectively. This customer had a receivable
balance of $370,346, $630,716 and $935,520 on June 30, 2002, 2001 and 2000,
respectively, which represented 6%, 9% and 14% of the Company's total
receivables as of these dates.
In fiscal 2001, the Company entered into agreements with two offshore contract
manufacturing firms to supply finished products. In addition, prior to the
Company outsourcing the majority of its production, the Company also had a
supplier that it made significant purchases from. A summary of the purchases
and outstanding payables to these three companies for the years ended June 30,
2002, 2001, and 2000 follows below:
2002 2001 2000
Supplier I - Purchases . $4,258,014 $ 192,930 $ 0
% of total purchases 19.0% 0.8% 0.0%
Accounts payable balance $ 796,557 $ 0 $ 0
% of total payables. 34.2% 0.0% 0.0%
Supplier II - Purchases. $2,104,640 $ 336,764 $ 0
% of total purchases 9.4% 1.4% 0.0%
Accounts payable balance $ 242,694 $ 126,661 0
% of total payables. 10.4% 3.7% 0.0%
Supplier III - Purchases $1,680,600 $4,460,897 $3,358,214
% of total purchases 7.5% 19.1% 16.3%
Accounts payable balance $ 33,103 $ 144,131 $ 220,999
% of total payables. 1.4% 4.2% 8.4%
36
11. COMMITMENTS
In fiscal 2002 and prior years, the Company leased certain operating equipment
under various operating leases for varying periods through fiscal 2005. Rent
expense was $104,311 in 2002 and $165,361 in 2001 for these lease commitments.
In August 2002, the Company sold its facility headquartered in Waukesha,
Wisconsin and leased back approximately 62% of the building's square footage.
The future minimum rental commitments under this five year building lease and
all other lease commitments are as follows:
YEAR ENDED JUNE 30,
2003 . . . $ 262,397
2004 . . . 307,792
2005 . . . 310,212
2006 . . . 300,945
Thereafter 340,894
--------------------
Total. . . $ 1,522,240
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 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. At June 30, 2002 and
2001, a one month supply of product maintained at these two firms would total
approximately $596,000 and $475,000, respectively. 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. SUBSEQUENT EVENTS
In August 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 approximately $41,000 was realized on the sale
after the payment of commissions and fees and the funding of $105,000 in
capitalized build out costs needed to split the building into two leasable
spaces. The proceeds from the sale were used to retire the $3,197,125 of debt on
the Company's balance sheet at June 30, 2002 and increased the Company's cash
position by approximately $500,000.
In July and August of 2002, the Company sold a total of 50,000 shares of its
Immtech common stock and realized a gain on the sale of $241,746.
37
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 actions 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. This internal audit is ongoing and, at this time, management is unable
to determine with certainty the extent of any violations or the potential for
the imposition of penalties. 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. 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 Bureau of Industry and Security ("BIS") and the Treasury's
Office of Foreign Asset Control ("OFAC"). Although there is no assurance, based
upon a review of the internal audit to date and precedents, the Company believes
a negotiated settlement of any violations will not have a material adverse
effect on the operations of the Company. At this time, the Company cannot
determine whether any monetary fines would have a material adverse effect on its
financial condition. The Company does not believe that the evidence 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 to the BIS, OFAC and, possibly, other agencies will serve
to mitigate any potential adverse consequences that otherwise might accrue.
38
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
Criticare Systems, Inc.
We have audited the accompanying consolidated balance sheets of Criticare
Systems, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Criticare Systems,
Inc. at June 30, 2002 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 19, 2002
39
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. Certain amounts have been
reclassified from the first and second quarters of fiscal 2002 to conform to the
annual presentation of fiscal 2002.
QUARTERS ENDED (UNAUDITED)
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
2002 2002 2001 2001 2001 2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales . . . . . . . . . . . . . . $ 6,982 $ 6,403 $ 7,346 $ 5,489 $ 7,678 $ 7,264 $ 6,564
Gross profit. . . . . . . . . . . . . 2,712 2,368 2,864 1,811 3,252 2,923 2,581
(Loss) income from
operations. . . . . . . . . . . . . (171) (202) 198 (1,037) (149) 37 134
Net (loss) income . . . . . . . . . . (314) (235) 186 (1,062) (161) 44 106
Net (loss) income
per common
share--Basic. . . . . . . . . . . . (0.03) (0.02) 0.02 (0.10) (0.01) 0.00 0.01
--Diluted. . . . . . . . . . . (0.03) (0.02) 0.02 (0.10) (0.01) 0.00 0.01
SEPT. 30,
2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales . . . . . . . . . . . . . . $ 6,230
Gross profit. . . . . . . . . . . . . 2,511
(Loss) income from
operations. . . . . . . . . . . . . (108)
Net (loss) income . . . . . . . . . . (166)
Net (loss) income
per common
share--Basic. . . . . . . . . . . . (0.02)
--Diluted. . . . . . . . . . . (0.02)
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.
---------------------
Not applicable.
40
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 Directors," "Other Directors," "Section 16(a) Beneficial Ownership
Reporting Compliance" and "Executive Officers" in the Company's Proxy Statement
for the 2002 Annual Meeting of Stockholders (the "Criticare Proxy Statement")
which will be filed on or before October 28, 2002.
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 "Certain Relationships and Related Transactions" in the
Criticare Proxy Statement.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
-------- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial
---------------------
statements of the Company are included in Item 8 of this report.
Consolidated Balance Sheets - as of June 30, 2002 and 2001.
Consolidated Statements of Operations - for the years ended June 30,
2002, 2001 and 2000.
41
Consolidated Statements of Stockholders' Equity - for the years ended
June 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows - for the years ended June 30,
2002, 2001 and 2000.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
-------------------------------
Independent Auditor's Report.
Financial Statement Schedule for the years ending June 30, 2002, 2001
and 2000:
Schedule
Number Description Page
----------------------- ------------------------ ----
II. . . . . . . . . . . Valuation and Qualifying 49
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).
42
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).
10.7* Employment Agreement of Emil H. Soika, dated as of June 26, 2001,
(incorporated by reference to the Company's Annual Report on Form 10-K/A
for the year ended June 30, 2001).
10.8* Employment Agreement of Stephen D. Okland, dated as of June 1, 1999,
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1999).
10.9* Employment Agreement of Drew M. Diaz, dated as of June 1, 1999,
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1999).
10.10 Supply Partnership Agreement, dated as of August 1, 2000, between the
Company and BioCare Corporation (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001).
10.11 Supply Agreement, dated as of October 26, 2000, between the Company and
TriVirix International Limited (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001).
43
10.12 Settlement Agreement, dated as of November 2, 2001, between the Company
and Immtech International, Inc. (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001).
21 Subsidiaries.
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,
2002.
(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.
44
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: October 15, 2002
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 October 15, 2002
---------------------------- and Director (Principal Executive
Emil H. Soika Officer)
/s/ Michael J. Sallmann Vice President-Finance and Secretary October 15, 2002
---------------------------- (Principal Financial and Accounting
Michael J. Sallmann Officer)
/s/ Karsten Houm Chairman of the Board and Director September 27, 2002
----------------------------
Karsten Houm
/s/ Milton Datsopoulos Director September 27, 2002
----------------------------
Milton Datsopoulos
/s/ N.C. Joseph Lai Director September 27, 2002
----------------------------
N.C. Joseph Lai
/s/ Higgins Bailey Director September 27, 2002
----------------------------
Dr. Higgins Bailey
/s/ Jeffrey T. Barnes Director September 27, 2002
----------------------------
Jeffrey T. Barnes
/s/ Stephen K. Tannenbaum Director September 27, 2002
----------------------------
Stephen K. Tannenbaum
45
CERTIFICATIONS
--------------
I, Emil H. Soika, President and Chief Executive Officer of Criticare Systems,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Criticare
Systems, Inc.;
2. Based on my knowledge, this annual 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
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: October 15, 2002
/s/ Emil H. Soika
-------------------------------
Emil H. Soika
President and
Chief Executive Officer
46
CERTIFICATIONS
--------------
I, Michael J. Sallmann, Vice President - Finance and Secretary of Criticare
Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Criticare
Systems, Inc.;
2. Based on my knowledge, this annual 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
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: October 15, 2002
/s/ Michael J. Sallmann
-------------------------------
Michael J. Sallmann
Vice President - Finance
and Secretary
47
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Criticare Systems, Inc.:
The audits referred to in our report dated August 19, 2002 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
schedule listed in Item 14. This financial statement Schedule II is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 19, 2002
48
SCHEDULE II
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
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, 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
YEAR ENDED JUNE 30, 2002:
Allowance for doubtful accounts . . . . . $ 1,000,000 $ (183,046) $ 516,954 $ 300,000
Reserve for sales returns and allowances $ 60,000 $ 12,945 $ - $ 72,945
Reserve for obsolete inventory. . . . . . $ 325,000 $ 676,284 $ 55,284 $ 946,000
49