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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [fee required] for the fiscal year ended June 30, 1996.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 414-798-8282
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
NA NA
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Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.04 Par Value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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. [ X ]
The aggregate market value of the voting common stock held by
nonaffiliates of the Registrant as of August 31, 1996 was $19,602,748.
On August 31, 1996, there were outstanding 7,128,272 shares of the
Registrant's $.04 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended June 30, 1996 are incorporated by reference into Part II of this
report.
Portions of the Proxy Statement for the Annual Meeting of the Stockholders
of the Registrant to be held November 1, 1996 are incorporated by reference
into Part III of this report.
PART I
Item 1. BUSINESS.
Criticare designs, manufactures and markets vital signs and gas monitoring
instruments and related noninvasive sensors used to monitor patients in many
healthcare settings. 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 settings, 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
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patients simultaneously from a convenient central location. This allows
hospitals to move out of the intensive care unit ("ICU") those patients that
require continuous monitoring, but do not need all of an ICU's extensive and
costly personnel and equipment resources.
The Company was incorporated under the laws of the State of Delaware in
October 1984.
Products
Criticare markets a broad range of vital signs and gas monitoring products
designed to address the needs of a variety of end-users in different patient
settings. Criticare's monitors display information graphically and
numerically. All Criticare monitors incorporate adjustable visual and audible
alarms to provide reliable patient-specific warnings of critical conditions,
and most of the Company's monitors record up to 60 hours of trend data.
Criticare monitors are available with printer capability to provide permanent
records of patient data.
Model 503, 503S, 504, 504P, 504US, 504USP and 504O (PONI) Pulse Oximeters.
Criticare's complete line of pulse oximeters meet the needs of virtually all
clinical environments: adult, pediatric and neonatal intensive care units,
operating rooms, emergency rooms, nursing homes, physicians' offices and
ambulances. The line is designed to provide accuracy and convenience at a
competitive cost to the end-user.
Model 507S, 507SD, 507N, 507O and 507E Patient Monitors. The 507 series
is comprised of small, compact, portable, full-featured vital signs monitors
configured to meet specific clinical needs. The 507S and 507SD are well-suited
to dental and physician offices. The 507N and 507O are ideal for patient floor
monitoring of noninvasive blood pressure and pulse oximetry. The 507E combines
ECG, oxygen saturation and noninvasive blood pressure for a complete vital
signs monitor for physician office and hospital applications. Combined with
the VitalView central station, the 507E is an effective low-cost monitoring
system for the emergency room or the recovery room.
Scholar(TM). The Scholar monitor series specifically addresses the needs
of small hospitals with broad clinical needs (the monitoring of ECG, blood
oxygen saturation, noninvasive blood pressure, temperature and invasive blood
pressure) but whose budgets are small. Scholar offers all the primary features
a hospital needs with the capability of adding more features if desired.
Scholar monitors are available with printer and recorder capability and can
transmit data to Criticare's Maestro and Vital View Central Stations.
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Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient
monitoring for a wide variety of cardio-pulmonary parameters in an integrated
system. The Model 1100 is able to monitor two ECG waveforms, noninvasive blood
pressure, three types of invasive blood pressure, respiration rate, heart rate,
temperature, oxygen saturation, inspired/expired oxygen, carbon dioxide and the
range of anesthetic gases, including recently developed anesthetic agents such
as desflurane and sevoflurane. The Model 1100 uses the Company's proprietary
disposable respiratory secretion filter system and is designed to accommodate
low-flow anesthesia situations.
Model 602-3B, 602-6B, 602-11 and 602-13 Gas Monitors. The 602 series
provides monitoring of carbon dioxide, pulse oximetry and anesthetic agents
using Criticare's proprietary infrared technology. The 602 IQ series of
operating room monitors provides automatic identification and quantification of
all five approved anesthetic agents simultaneously.
Model 820 Maestro(TM) I Telemetry Monitors. The Maestro I Telemetry
system addresses the rapidly expanding telemetry market with a reliable,
inexpensive ECG telemetry system. The Maestro I system provides a waterproof
ECG transmitter capable of five ECG lead configurations at a price
approximately 30% lower than Criticare's material competitors. The ability to
link Criticare's 507E and Scholar monitors to this versatile central station is
expected to expand the market into numerous hospital departments.
Vital View(TM). The Vital View central station makes it possible for one
nurse or technician to monitor numerous patients simultaneously. The Vital
View can receive, display and store data from a wide variety of Criticare
monitors including the Scholar, 507E and MPT.
MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the
transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood
pressure) on a real time basis to a Vital View central station while the
patient is ambulatory. The Company believes the MPT is the first device of its
kind. In today's healthcare environment, hospitals need to move 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. MPT has not yet been approved by the FDA, although the
Company has submitted the 510(k) application and expects approval this calendar
year.
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
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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. Last year the Company introduced the "Shell"
sensor, the first reusable sensor with a removable hard cover. The cover can
be inexpensively replaced if it becomes damaged, saving hundreds of dollars
over buying a new sensor. The Shell sensor is also the first reusable sensor
on the market that can be fully dismantled and immersed for improved cleaning
and sterilization between patients if required. The Company also sells a range
of disposable sensors designed for single use in cases where the facility would
prefer to use a patient charge disposable product.
Water Chek/Chek-Mate Filter System. The Company's patented, disposable
Water Chek system separates a patient's respiratory secretions from a breath
sample before it enters the gas monitor(s) for analysis. The Company's
proprietary, disposable Chek-Mate filter enhances the removal of moisture from
the sample, while preventing cross-contamination. This system allows the
monitor to operate effectively regardless of humidity or patient condition.
The self-sealing feature also protects the healthcare provider from potential
contamination.
Products Under Development
Digital Oximetry DOT(TM). The Company is in the later stages of
developing an improved oxygen saturation monitor incorporating a digital
electronic signal which allows more accurate saturation readings in conditions
influenced by light, motion or temperature artifact than the analog electronic
signal used in current oxygen saturation monitors.
Vital Signs(TM). The hand-held Vital Signs monitor measures heart rate,
oxygen saturation, noninvasive blood pressure and temperature using a hand-held
monitor weighing less than two pounds. These features make the Vital Signs
monitor well-suited for use on nursing floors and in physicians' offices,
ambulances and home healthcare organizations.
Home View. The Company is in the active stage of developing a home care
application of the MPT (Multiple Parameter Telemetry) monitor and the Vital
View central station. When completed, the Home View system will allow patients
to be monitored, on a real time basis, using telephone modems to transmit data
to the care giver at a remote (hospital or home care) facility thereby further
reducing the cost of monitoring certain patients in the high cost hospital
environment.
Fetal Oxygen Monitor. The Company is in the active stage of developing a
fetal oxygen monitor designed to monitor the blood oxygen saturation of a fetus
during labor and delivery. The Company's potential introduction of this
product
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will depend to a large extent on the need for clinical testing, engineering
requirements and, in particular, the FDA approval process. Although there were
over 4 million births in the United States in 1990, it is likely that a fetal
oxygen monitor would, at least initially, be used only during deliveries where
some unusual circumstances or danger were perceived by the physician. No
assurance can be given that such product will be successfully developed and
marketed by the Company or, if developed and marketed, will be clinically or
commercially accepted.
Marketing and Sales
Domestic Sales. The Company's hospital division markets the Company's
products through a combination of direct sales employees and select regional
specialty dealers. The Company believes this form of distribution allows it to
concentrate its efforts on its more sophisticated products, the Model 602 POET
IQ, Model 1100 and Scholar Vital Signs monitors, the Vital View central station
and MPT (Multiple Parameter Telemetry), products which afford hospitals the
opportunity to address cost containment issues. The Company is focusing its
distribution efforts on hospitals with over 100 beds; such hospitals comprise
over one-half of the United States' 7,500 hospitals.
As of August 31, 1996, the Company's direct sales force included seven
sales people, two regional managers and one executive manager. The Company has
augmented its direct sales effort by the appointment of ten key regional
specialty dealers employing approximately 35 sales people to improve specific
market penetration while adhering to prudent cost of sale guidelines. This
strategy will be continued until specific market share targets are achieved and
demand increases for the new products.
The Company's alternate care division markets the Company's products,
primarily the Model 503, Model 504, Model 507 and POET TE monitors, to domestic
alternate care providers such as free-standing surgery centers, oral and
plastic surgery suites, other out-patient clinics, home care services, extended
care facilities and medical transport vehicles. As of August 31, 1996, the
Company served this market through 60 independent dealers and distributors
employing approximately 650 sales people. The Company also sells monitors to
third party rental and leasing companies. The Company does not lease products
directly.
International Sales. One of the Company's principal marketing strategies
has been to target international markets, particularly Western Europe, Latin
America and the Pacific Rim countries. During fiscal 1996, Criticare sold its
products principally to hospitals in over 79 countries through over 96
independent dealers. The Company's wholly owned subsidiary, Criticare
International GmbH Marketing Services ("Criticare International"), coordinates
international sales and
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distribution. 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 for improved patient
management.
In fiscal 1996, 46.2% of Criticare's net sales, or $14.6 million, was
attributable to international sales, of which approximately 44% was from sales
in Western Europe, 28% was from sales to Pacific Rim countries and 28% was from
sales to Canada and South America. In fiscal 1995, 49.1% of Criticare's net
sales, or $14.1 million, was attributable to international sales. In fiscal
1994, 46.5% or $14.0 million, of Criticare's net sales was attributable to
exports. There are no material identifiable assets of the Company located in
foreign markets. The Company sells its products in United States dollars and
is not subject to significant currency risks; however, an increase in the value
of the United States dollar relative to foreign currencies could make the
Company's products less price competitive in those markets.
Clinical Support. At August 31, 1996, Criticare employed two clinical
support specialists to provide customer training and education, primarily to
domestic hospitals. The clinical support staff also assists in the periodic
training and education of the direct sales force. In addition, the direct
sales force maintains contact with end-users and provides additional training
and updates. Clinical support in foreign markets is provided by Criticare
International sales coordinators.
Warranty and Service. Criticare believes that customer service is a key
element of its marketing program. Criticare's monitors are warranted against
defects for one year and its reusable sensors for six months. If a problem
develops with a Criticare product while under warranty, the Company typically
provides a replacement unit until the product can be repaired at the Company's
facility. At August 31, 1996, the Company had a customer service staff of 17
people at its Waukesha, Wisconsin facility. The Company also maintains a
product repair facility in Bad Homburg, Germany for its international
customers. The Company offers extended warranties and service contracts on all
of its monitors.
Manufacturing
The Company continually strives to implement manufacturing efficiencies
while maintaining product quality and reliability. The Company's oximeters and
sensors are assembled from off-the-shelf components and other parts produced to
the Company's specifications, such as printed circuit board assemblies, custom
transformers and sensor cable/connector subassemblies. However, Criticare
produces certain important components in-house. All electronic components are
subjected to a 24-hour high-temperature burn-in to eliminate early component
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failure. Some subassembly is performed by subcontractors, but final assembly
and quality control are performed at Criticare's facility. Criticare maintains
test and inspection procedures to minimize errors and enhance the operating
reliability of its products. Final test procedures on fully assembled units
include an operational test and a continuous 72-hour burn-in procedure.
Certain of Criticare's products incorporate components currently purchased
from single sources. While the Company believes these components are available
from alternate sources on reasonable terms, an interruption in the delivery of
these or other components could have an adverse effect on the Company. In
order to reduce the risk of supply interruption, the Company maintains
inventories of certain components.
The ISO 9000 series of quality management and assurance standards was
developed by the International Organization for Standardization (ISO) and
published in 1987. In 1993 the EC (European Community) was formed with the
signing of the Maastricht Treaty by 12 European countries. One of the many
standards adopted by this group is the ISO 9000 international quality assurance
and quality management series under the designation EN2 9000. Based on this
action by the EC and specific requirements from European customers, the Company
believes ISO 9000 registration will be required to compete in EC and other
international markets as an indication of compliance with international quality
management and assurance standards. In July 1994 the Food and Drug
Administration (FDA) announced its intention of harmonizing the ISO 9000
standards with its Medical Device Good Manufacturing Practices (GMP). The
Company has achieved certification under ISO's standards 9001 and 9002. See
"Regulation."
Research, Development and Engineering
Criticare has focused its research, development and engineering
expenditures on products designed to meet identified market demands. The
Company seeks to apply its expertise in gas monitoring and related sensor
technology to develop new products and adapt existing products for new markets.
At August 31, 1996, the Company had an in-house research, development and
engineering staff of 24 people. The Company's research, development and
engineering expenditures were $2.6 million in fiscal 1996, $1.9 million in
fiscal 1995 and $2.4 million in fiscal 1994.
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,
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longer histories in the medical equipment industry and larger and more
experienced sales forces than Criticare. In these respects, such competitors
have a competitive advantage over the Company. The Company competes primarily
on the basis of product features, the quality and value of its products (i.e.,
their relative price compared to performance features provided) and the
effectiveness of its sales and marketing efforts. The Company believes that
its principal competitive advantages are provided by its focus on cost
containment and its patented and other proprietary technology and software for
noninvasive, continuous monitoring of oxygen, specific anesthetic gases, carbon
dioxide and blood pressure, its cost-efficient manufacturing, the efficiency
and speed of its research and development efforts and its established
international presence.
The principal competing manufacturers of pulse oximeters are Nellcor
Puritan Bennett and Ohmeda, a division of The BOC Group, Inc.. The Company
estimates that Nellcor has captured a majority, and that Ohmeda and the Company
have each captured significant portions of the worldwide pulse oximeter market.
In addition, there are approximately 30 other companies which compete in the
market for pulse oximeters. The Company also indirectly competes with
manufacturers of numerous other medical equipment products for limited customer
funds.
The Company believes that the worldwide anesthetic agent and carbon
dioxide monitor markets are comparatively fragmented, with no dominant
competitor. The Company's principal competitors in the domestic gas monitor
market include Datex Medical Instrumentation, Inc., a United States subsidiary
of Instrumentarium OY, a Finnish company, Ohmeda and Datascope Corp. The
market for vital signs monitors includes competitors such as Hewlett-Packard
Company, Siemens A.G., Datex and SpaceLabs, Inc., a subsidiary of Westmark
International Incorporated.
The Company believes that its principal competitors in Western Europe
include Datex and Ohmeda and that the Company has a significant share of this
market. In the Pacific Rim countries, the Company believes that Ohmeda is the
leading competitor and that Datex and the Company also have significant market
shares.
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,
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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, with the possible exception of the fetal oxygen
monitor, the products it is currently developing generally will be eligible for
the 510(k) submission procedure and, therefore, will not be subject to lengthy
premarket approval procedures. However, these products are still being
developed and there can be no assurance that the FDA will determine that the
products may be marketed without premarket approval.
Criticare seeks, where appropriate, to comply with the safety standards of
Underwriters' Laboratories and the Canadian Standards Association and the
standards of the European Community. To date, the Company has not experienced
significant regulatory expense or delay in the foreign markets in which it
sells its products. Industry and professional groups such as the American
Society of Anesthesiologists, to the extent they have the power to mandate
certain practices or procedures as part of their profession's standard of care,
are also a source of indirect regulation of the Company's business.
Patents and Trademarks
The Company believes one of its principal competitive advantages is
provided by its patented and other proprietary technology including its sensor
technology, infrared specific anesthetic gas monitoring technology, UltraSync
signal processing software and disposable respiratory secretion filter system.
None of the Company's U.S. patents expire before 2004. Criticare also has been
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granted three foreign patents and has three foreign patent applications pending
on its respiratory secretion filter system. There is no assurance that any
patents held or secured by the Company will provide any protection or
commercial or competitive benefit to the Company. There is also no assurance
that the Company's products will not infringe upon patents held by others. The
Company is the owner of a United States trademark registrations for "POET,"
"Scholar," "Vital View" and "MPT."
The Company also relies upon trade secret protection for certain of its
proprietary technology. Although the Company requires its employees having
access to its proprietary information to sign confidentiality agreements, no
assurance can be given that such agreements can be effectively enforced or that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to or disclose the
Company's trade secrets.
Employees
At August 31, 1996, Criticare had 120 employees in the United States,
including 29 in manufacturing and operations, 12 in quality control, 43 in
marketing and sales, 12 in administration and 24 in research, development and
engineering. At August 31, 1996, Criticare International had 19 employees.
Many of the Company's technical employees are highly skilled. The Company
believes that its continued success depends in part on its ability to continue
to attract qualified management, marketing and technical personnel. None of
the Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Backlog
Criticare's backlog on June 30, 1996 and 1995 was approximately $841,000
and $899,000, respectively. The backlog at these dates consisted primarily of
products for which the sales order specified a delayed delivery date.
Criticare generally delivers its products out of inventory when specified by
the customer. The Company does not believe that its backlog at any date is
indicative of its future sales.
Item 2. PROPERTIES.
In November 1992, the Company purchased a new 60,000 square foot facility
for approximately $4.5 million. The Company's mortgage calls for monthly
installments of principal and interest of approximately $35,000 and a final
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"balloon" payment of approximately $2.7 million in December 2003. The Company
believes this facility will be adequate for the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
On December 15, 1995, Criticare sued a number of its former employees for
improperly diverting corporate resources to pursue their personal business
interests through a Bahamian corporation called Pro Med. Criticare asserted
both breach of fiduciary duty and conspiracy claims again these former
employees, breach of employment agreement against Allan Brack (its former Vice
President-International), and sought a declaratory ruling that Mr. Brack be
barred from exercising any outstanding stock options by virtue of his improper
acts. In April of 1996, Criticare amended its complaint to drop Pro Med and
one other individual defendant, Richard Buckley, who Criticare was unable to
serve. One of the remaining defendants, Jean-Claude Joubert, moved to dismiss
for lack of personal jurisdiction. The court granted his motion and entered
judgment dismissing him from the case on June 11, 1996. Criticare does not
intend at this time to appeal that ruling. The only remaining defendant, Allan
Brack, moved for summary judgment on Criticare's breach of fiduciary duty and
conspiracy claims. The court recently entered an order refusing to dismiss
these claims, but limiting the scope of damages Criticare can seek. Criticare
is currently examining settlement possibilities, but remains committed to
litigate this action vigorously if it is unable to achieve an overall
settlement of its disputed claims with all the former employees who were
originally named in the lawsuit. At this time, it is not possible to assess
with any degree of accuracy Criticare's likelihood of prevailing on its claims
against Mr. Brack, or the potential recovery, if any.
From time to time the Company receives notices from competitors of
potential patent infringement. Based on the advice of its patent counsel and
other considerations, the Company does not currently believe that any of such
claims which it has received, either individually or in the aggregate, will
have a material adverse effect on the Company's results of operations or
financial condition. However, there can be no assurance that the Company will
not be sued for patent infringement or that if sued, the outcome of such suits
will not have an adverse effect on the Company.
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, 1996.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated herein by reference to the Company's 1996 Annual Report to
Stockholders, page 23.
Item 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the Company's 1996 Annual Report to
Stockholders, page 2.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Incorporated herein by reference to the Company's 1996 Annual Report to
Stockholders, pages 8 through 10.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets for the Company at June 30, 1996 and 1995
and Consolidated Statements of Operations, Stockholders' Equity and Cash Flows
for the years ended June 30, 1996, 1995 and 1994, and notes thereto, are
incorporated herein by reference to the Company's 1996 Annual Report to
Stockholders, pages 11 through 22.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed accountants during the 24 months prior to June
30, 1996. During that period, there were no disagreements with the accountants
regarding accounting and financial disclosure.
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 "Nominee
for Election as Director," "Other Directors," "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" and "Executive Officers" in the Company's
Proxy Statement for the 1996 Annual Meeting of Stockholders (the "Criticare
Proxy Statement").
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Item 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Criticare Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the discussion under "Security
Ownership" in the Criticare Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the discussion under "Certain
Transactions" in the Criticare Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS 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, included in the annual report of the Company to its
Stockholders for the fiscal year ended June 30, 1996, are incorporated by
reference in Item 8.
Consolidated Balance Sheets - as of June 30, 1996 and 1995.
Consolidated Statements of Operations - for the years ended June 30,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - for the years ended
June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - for the years ended June 30,
1996, 1995 and 1994.
Notes to consolidated financial statements.
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2. Financial Statement Schedules:
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 1996, 1995
and 1994:
<TABLE>
<CAPTION>
Schedule
Number Description Page
-------- ----------- ----
<S> <C> <C>
VIII Valuation and Qualifying Accounts 21
and Reserves
</TABLE>
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 filed on Form S-1, Registration No.
33-13050).
3.2 By-Laws of the Company (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
10.1 Employment Agreement of Gerhard J. Von der Ruhr (incorporated by
reference to the Registration Statement filed on Form S-1 by the Company,
Registration No. 33-13050).
10.2 Employment Agreement of N.C. Joseph Lai (incorporated by reference
to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.3 Blatz House Offices Limited Partnership Agreement (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1987).
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<PAGE> 16
10.4 Option Agreement dated March 12, 1991 between the Company and
American Healthcare Systems (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1991).
10.5 1992 Employee Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8, Registration No. 33-60644).
10.6 1992 Nonemployee Stock Option Plan (incorporated by reference to
the Company's Registration Statement on Form S-8, Registration No. 33-60214).
10.7 1987 Employee Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8, Registration No. 33-33497).
10.8 1987 Nonemployee Stock Option Plan (incorporated by reference to
the Company's Registration Statement on Form S-8, Registration No. 33-40038).
10.9 Form of Executive Office and Director Indemnity Agreement
(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 33-13050).
10.10 Employment Agreement of Richard J. Osowski (incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended June
30, 1994).
10.11 Revised Option Agreement between the Company and AmHS Purchasing
Partners, L.P. dated as of July 1, 1993 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994).
11.1 Statement regarding computation of per share earnings.
13.1 Annual Report to Stockholders for the Year Ended June 30, 1996.
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
27 Financial Data Schedule
16
<PAGE> 17
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months
ended June 30, 1996.
(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.
17
<PAGE> 18
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.e
CRITICARE SYSTEMS, INC.
By /s/ Richard J. Osowski
------------------------
Richard J. Osowski,
Senior Vice President-Finance
Date: September 25, 1996
18
<PAGE> 19
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Gerhard J. Von der Ruhr and Richard J. Osowski, 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 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gerhard J. Von der Ruhr Chairman of the Board, President and September 23, 1996
- ---------------------------
Gerhard J. Von der Ruhr
/s/ N.C. Joseph Lai Vice Chairman of the Board, September 19, 1996
- --------------------------- Vice President and Director
N.C. Joseph Lai
/s/ Richard J. Osowski Senior Vice President-Finance September 23, 1996
- --------------------------- (Principal Financial and Accounting
Richard J. Osowski Officer)
Director September __, 1996
- ---------------------------
Karsten Houm
/s/ Milton Datsopoulos Director September 20, 1996
- ---------------------------
Milton Datsopoulos
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Criticare Systems, Inc.:
We have audited the consolidated financial statements of Criticare Systems,
Inc. and subsidiaries as of June 30, 1996 and 1995, and for each of the three
years in the period ended June 30, 1996, and have issued our report thereon
dated August 2, 1996; such financial statements and report are included in your
1996 Annual Report to Stockholders and are incorporated herein by reference.
Our audits also included the consolidated financial statement schedule of
Criticare Systems, Inc. listed in Item 14. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 2, 1996
20
<PAGE> 21
SCHEDULE VIII
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
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
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1994:
Allowance for doubtful accounts $231,000 $ 45,706 $ 1,706 $275,000
Reserve for sales returns and $108,000 $ 724,687 $ 628,687 $204,000
allowances
YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts $275,000 $ 36,878 $ 41,878 $270,000
Reserve for sales returns and $204,000 $1,172,464 $1,007,464 $369,000
allowances
YEAR ENDED JUNE 30, 1996
Allowance for doubtful accounts $270,000 $ 130,123 $ 105,123 $295,000
Reserve for sales returns and $369,000 $1,062,793 $ 927,793 $504,000
allowances
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Number
------- ----------
<S> <C> <C>
3.1 Restated Certificate of (1)
Incorporation of the Company
3.2 By-Laws of the Company (1)
4.1 Specimen Common Stock (1)
certificate
10.1 Employment Agreement of (1)
Gerhard J. Von der Ruhr
10.2 Employment Agreement of (1)
N.C. Joseph Lai
10.3 Blatz House Offices Limited (1)
Partnership
10.4 Option Agreement dated March 12, (1)
1991 between the Company and
American Healthcare Systems
10.5 1992 Employee Stock Option Plan (1)
10.6 1992 Nonemployee Stock Option Plan (1)
10.7 1987 Employee Stock Option Plan (1)
10.8 1987 Nonemployee Stock Option Plan (1)
10.9 Form of Executive Officer and (1)
Director Indemnity Agreement
10.10 Employment Agreement of Richard J. Osowski (1)
10.11 Revised Option Agreement between the (1)
Company and AmHS Purchasing Partners,
L.P. dated as of July 1, 1993(1)
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
11.1 Statement regarding computation
of per share earnings 24
13.1 Annual Report to Stockholders
for the year ended June 30, 1996 25
21.1 Subsidiaries 41
23.1 Independent Auditors' Consent 42
27 Financial Data Schedule 43
</TABLE>
(1) Exhibit incorporated by reference as indicated in Part IV.
23
<PAGE> 1
EXHIBIT 11.1
CRITICARE SYSTEMS, INC.
INFORMATION REGARDING COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE YEARS ENDED JUNE 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
June 30, June 30, June 30,
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss) $(4,330,989) $ 105,643 $ 64,141
=========== =========== ===========
Shares applicable:
Weighted average number of shares
outstanding during the period 6,913,557 6,697,218 6,697,218
Outstanding stock options -
net issuable under treasury
stock method 12,267 22,761
----------- ----------- -----------
TOTAL SHARES APPLICABLE 6,913,557 6,709,485 6,719,979
=========== =========== ===========
Primary earnings (loss) per common share $ (.63) $ .02 $ .01
=========== =========== ===========
FULLY DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Net earnings $(4,330,989) $ 105,643 $ 64,141
=========== =========== ===========
Shares applicable:
Weighted average number of shares
outstanding during the period 6,913,557 6,697,218 6,697,218
Outstanding stock options -
net issuable under treasury stock method 67,018 22,761
----------- ----------- -----------
TOTAL SHARES APPLICABLE 6,913,557 6,764,236 6,719,979
=========== =========== ===========
Fully diluted earnings (loss) per share $ (.63) $ .02 $ .01
=========== =========== ===========
</TABLE>
24
<PAGE> 1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended June 30,
- ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 31,528,266 $28,660,275 $30,114,679 $29,195,578 $26,229,673
Income (Loss) Before
Income Taxes (4,280,989) 175,643 114,141 167,753 (284,152)
Net Income (Loss) (4,330,989) 105,643 64,141 114,753 (223,152)
Earnings (Loss) Per
Share--Fully Diluted (0.63) 0.02 0.01 0.02 (0.03)
Average Shares
Outstanding 6,913,557 6,764,236 6,719,979 6,798,155 6,564,326
Stockholders' Equity 13,917,549 17,130,449 17,022,753 16,958,709 16,763,225
Long-term Obligations 4,669,975 3,646,867 3,835,751 4,021,226 --
Working Capital 10,282,033 13,401,741 13,258,880 12,725,583 13,248,113
Total Assets 27,075,922 25,468,428 25,171,231 24,418,857 20,469,645
- ----------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Consolidated Statements of Income expressed as percentages of net
sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
YEARS ENDED JUNE 30,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 52.5 50.3 49.5
- ------------------------------------------------------------------------------
Gross Profit 47.5 49.7 50.5
- ------------------------------------------------------------------------------
Operating expenses:
Marketing 37.1 34.9 32.6
Research, development and engineering 8.1 6.7 7.9
Administrative 6.0 6.3 6.5
- ------------------------------------------------------------------------------
Total 51.2 47.9 48.8
- ------------------------------------------------------------------------------
Income (loss) from operations (3.7) 1.8 1.7
Interest expense (1.4) (1.3) (1.3)
Interest income .1 0.6 0.2
Equity in loss of investments (8.6) (0.5) (0.2)
- ------------------------------------------------------------------------------
Income (loss) before income taxes (13.6) 0.6 0.4
Income tax provision .1 0.2 0.2
- ------------------------------------------------------------------------------
Net (loss) income (13.7)% 0.4% 0.2%
- ------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995
Net sales for the twelve months ended June 30, 1996 increased 10% to
$31,528,266 from $28,660,275 for the twelve months ended June 30, 1995.
Domestic hospital sales increased 25% due primarily to the introduction of new
Scholar(TM) Vital Signs monitors and ECG telemetry. Alternate care and foreign
sales both increased modestly, 1% and 3%, respectively, related to increased
vital signs monitor sales.
The gross profit percentage decreased to 47.5% in fiscal 1996 from 49.7% in
fiscal 1995. This decrease was due primarily to continued price competition in
the oximetry and gas product lines affecting both the alternate care and
foreign sales markets. Although the company has developed and released lower
cost vital sign monitors and continues to develop lower cost oximeters and gas
products, the effect of pricing competition may continue to negatively affect
gross profit margins.
Operating expenses of $16,155,513 for fiscal 1996 increased 17.7% from the
$13,723,594 for fiscal 1995. As a percentage of net sales, operating expenses
increased to 51.2% from 47.9% in fiscal 1996 and 1995, respectively. Marketing
expenses for fiscal 1996 increased 17% to $11,686,368 from $10,014,656 for
fiscal 1995 due primarily to increased domestic hospital sales staffing,
advertising and promotion. Research, development and engineering expenses for
fiscal 1996 increased 35%, or $670,308 from fiscal 1995 expense levels due to
increased staffing and project costs related to vital signs, digital oximetry,
and MPT(TM) (Multiple Parameter Telemetry) product development. Administrative
expenses increased 5% or $89,899 when compared to fiscal 1995 due to increased
legal and professional consulting expenses.
Interest expense increased during fiscal 1996 due to increased short term line
of credit borrowing and the $1,240,000 note related to the Immtech
International, Inc. stock purchase. Interest income declined due to lower cash
balances invested during fiscal 1996. Equity in loss of investments increased
to $2,716,163 during fiscal 1996 due to the purchase of 2,200,000 shares of
Immtech International, Inc. preferred stock and a note receivable of $50,000 at
a cost of $2,136,000 and cash advances to the research and development start-up
company of $580,163.
8
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO JUNE 30, 1994
Net sales for the twelve months ended June 30, 1995 decreased 5% to $28,660,275
from $30,114,679 for the twelve months ended June 30, 1994. Alternate care
sales increased while foreign sales held constant and domestic hospital sales
decreased. The alternate care sales increase can be attributed to an increased
demand for patient monitors in non-hospital settings. Domestic hospital sales
were impacted by "managed care" pressures and consolidation trends within the
domestic hospital industry. The Company has accelerated new product
development and implemented new domestic hospital sales and marketing
strategies to meet the changes in this industry.
The gross profit percentage decreased to 49.7% in fiscal 1995 from 50.5% in
fiscal 1994. This decrease is due primarily to a change in the product mix and
continued price competition. Although efforts continue to reduce manufacturing
costs and develop lower cost products, the effect of pricing competition could
continue to negatively impact gross margins.
Operating expenses of $13,723,594 for fiscal 1995 decreased 7% from the
$14,701,878 for fiscal 1994. As a percentage of net sales, operating expenses
decreased to 47.9% from 48.8% in fiscal 1995 and 1994, respectively. Marketing
expenses for fiscal 1995 increased 2% to $10,014,656 from $9,818,625 for fiscal
1994 due primarily to an increase in sales promotional activities. Research,
development and engineering expenses for fiscal 1995 decreased 20% or $482,543
from fiscal 1994 expense levels. This decrease relates to reduced payroll
costs and project expenses which are a result of the restructuring which
occurred during fiscal 1994. Administrative
expenses decreased 7% or $131,772 when compared to fiscal 1994 due to a
decrease in consulting expenses. Operating expenses for fiscal 1995 were also
$550,000 less than fiscal 1994 due to the restructuring expenses recorded in
fiscal 1994.
Interest expense decreased during fiscal 1995 due to a reduction in the
outstanding principal balance on the building mortgage and bank note. Interest
income increased due to the higher cash balances invested during a portion of
the year and an increase in the interest rate earned on invested cash balances.
QUARTERLY RESULTS
The following table contains unaudited quarterly information, which includes
all adjustments, consisting only of normal recurring adjustments, that the
Company considers necessary for a fair presentation.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1994 1994 1995 1995 1995 1995 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $6,534 $7,463 $7,227 $7,436 $6,958 $8,736 $7,711 $8,123
Gross profit 3,317 3,629 3,717 3,578 3,312 4,360 3,715 3,609
Income (loss) from
operations 264 304 148 (198) 182 287 (239) (1,389)
Net income (loss) 116 153 53 (216) 64 (2,375) (218) (1,802)
Fully diluted net income
(loss) per share .02 .02 .01 (.03) .01 (.35) (.03) (.26)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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. In
addition, the Company has historically shipped a relatively greater volume of
products in the second half of its fiscal year. The Company believes this
trend is generally explained by domestic and foreign hospital spending
patterns.
9
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The Company used $1,767,603 of cash for operating activities in fiscal 1996,
$1,576,304 for capital expenditures and sales demonstration equipment, $199,013
for retirement of long term debt, and $580,163 for advances to Immtech
International, Inc.
The Company used $334,275 of cash for operating activities in fiscal 1995,
$537,275 for capital expenditures, and $182,541 for retirement of long-term
debt.
The mortgage note requires annual debt service payments of approximately
$420,000 with a final payment of approximately $2,688,000 due in December 2003.
The bank note requires annual debt service payments of approximately $137,000
through November 1997. The promissory note issued in connection with the
Immtech acquisition requires quarterly interest payments with the $1,240,000
principal due in December 2002.
The Company expects its programs to increase accounts receivable collections,
lower inventory levels, reduce product development tooling requirements,
stabilize sales demonstration equipment levels and eliminate advances to Immtech
International, Inc. to have a positive affect on cash flow activities in the
next fiscal year. Consequently, the Company believes its research and
development activities and other capital and liquidity requirements for the next
one to two years will be satisfied by cash generated from operations, and if
necessary, periodic utilization of a commercial bank line of credit of up to
$4,000,000 currently in place. The Company is in the process of negotiating
with the bank to renew the Company's annual line of credit which expires on
October 31, 1996. The Company does not anticipate any difficulties will be
encountered in renewing the credit agreement.
10
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (NOTE 9) $31,528,266 $28,660,275 $30,114,679
COST OF GOODS SOLD 16,531,970 14,419,179 14,908,372
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 14,996,296 14,241,096 15,206,307
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 11,686,368 10,014,656 9,818,625
Research, development and engineering 2,568,712 1,898,404 2,380,947
Administrative 1,900,433 1,810,534 1,952,306
Restructuring costs (Note 10) 50,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total 16,155,513 13,723,594 14,701,878
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (1,159,217) 517,502 504,429
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (447,348) (374,264) (386,896)
Interest income 41,739 167,092 56,608
Equity in loss of investments (Notes 1 and 3) (2,716,163) (134,687) (60,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total (3,121,772) (341,859) (390,288)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (4,280,989) 175,643 114,141
INCOME TAX PROVISION (NOTES 1 AND 4) 50,000 70,000 50,000
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(4,330,989) $105,643 $64,141
====================================================================================================================================
EARNINGS (LOSS) PER COMMON SHARE (NOTE 1):
Primary $(.63) $0.02 $0.01
Fully diluted $(.63) $0.02 $0.01
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 6,913,557 6,709,485 6,719,979
Fully diluted 6,913,557 6,764,236 6,719,979
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 806,645 $ 2,398,278
Accounts receivable, less allowance for doubtful accounts
of $295,000 and $270,000, respectively 9,870,158 8,608,340
Other receivables 354,638 279,458
Inventories (Notes 1 and 2) 7,550,858 6,639,805
Prepaid expenses 188,132 166,972
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 18,770,431 18,092,853
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NOTES 1 AND 5):
Land 925,000 925,000
Building 3,600,000 3,600,000
Machinery and equipment 1,671,309 1,586,177
Furniture and fixtures 882,682 859,182
Demonstration and loaner monitors 2,054,783 1,402,841
Production tooling 2,049,632 1,208,032
- ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - cost 11,183,406 9,581,232
Less accumulated depreciation 3,290,760 2,663,208
- ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 7,892,646 6,918,024
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENTS (NOTES 1, 3 AND 5) 300,000 300,000
- ---------------------------------------------------------------------------------------------------------------------
OTHER ASSETS (NOTE 1):
License rights and patents - net 92,467 108,373
Goodwill - net 20,378 49,178
- ---------------------------------------------------------------------------------------------------------------------
Total other assets 112,845 157,551
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $27,075,922 $25,468,428
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 7
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings under line of credit facility (Note 5) $ 2,300,000
Accounts payable 3,609,188 $ 2,661,558
Accrued liabilities:
Compensation and commissions 1,040,441 714,171
Income taxes (Note 4) 21,800
Product warranties (Note 1) 300,000 375,000
Other (Note 6) 1,029,072 726,765
Current maturities of long-term debt (Note 5) 209,697 191,818
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,488,398 4,691,112
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 4,669,975 3,646,867
- ---------------------------------------------------------------------------------------------------------------------
CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock - $.04 par value, 500,000 shares
authorized, no shares issued or outstanding
Common stock - $.04 par value, 10,000,000 shares authorized,
7,128,272 and 6,697,218 shares issued and outstanding,
respectively 285,131 267,889
Additional paid-in capital 11,995,118 10,884,910
Retained earnings 1,663,466 5,994,455
Cumulative translation adjustments (26,166) (16,805)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,917,549 17,130,449
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $27,075,922 $25,468,428
=====================================================================================================================
</TABLE>
13
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Stock Paid-In Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustments Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1993 6,697,218 $267,889 $10,884,910 $5,824,671 $(18,761) $16,958,709
Foreign currency translation
adjustments (97) (97)
Net income 64,141 64,141
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 6,697,218 267,889 10,884,910 5,888,812 (18,858) 17,022,753
Foreign currency translation
adjustments 2,053 2,053
Net income 105,643 105,643
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 6,697,218 267,889 10,884,910 5,994,455 (16,805) 17,130,449
Common stock issued in connection
with an acquisition 333,154 13,326 882,674 896,000
Exercise of options and warrants 97,900 3,916 227,534 231,450
Foreign currency translation
adjustments (9,361) (9,361)
Net loss (4,330,989) (4,330,989)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 7,128,272 $285,131 $11,995,118 $1,663,466 $(26,166) $13,917,549
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(4,330,989) $105,643 $64,141
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 601,682 528,260 576,917
Amortization 44,706 101,321 386,434
Equity in loss of investments 2,716,163 134,687 60,000
Changes in assets and liabilities:
Accounts receivable (1,261,818) 735,953 (1,201,080)
Other receivables (75,180) (41,982) 67,296
Inventories (911,053) (2,268,256) 933,929
Prepaid expenses (21,160) (3,996) 161,883
Accounts payable 938,269 794,920 159,987
Accrued liabilities 531,777 (420,825) 697,857
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,767,603) (334,275) 1,907,364
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,576,304) (537,275) (350,782)
Advances to Immtech International, Inc. (580,163)
Cost of securing patents and license rights (12,801)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,156,467) (537,275) (363,583)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings under line of credit facility 2,300,000
Principal payments on long-term debt (199,013) (182,541) (169,611)
Proceeds from issuance of common stock 231,450
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,332,437 (182,541) (169,611)
- ---------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,591,633) (1,054,091) 1,374,170
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,398,278 3,452,369 2,078,199
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 806,645 $2,398,278 $3,452,369
===========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes--net of refunds $ 133,783 $ 103,920 $ 16,549
Interest 414,784 375,343 387,467
Noncash investing and financing activities:
The Company purchased Series A and B preferred stock
of Immtech International, Inc. and note receivable in
exchange for common stock and a note payable. The
amounts were as follows:
Common stock 896,000
Note payable 1,240,000
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of Criticare Systems, Inc. (the "Company") and its
wholly owned subsidiaries: Criticare International GmbH Marketing Services
("Criticare International"), Criticare Biomedical, Inc. ("Criticare
Biomedical"), Sleep Care, Inc. ("Sleep Care"), Criticare (FSC), Inc. and CSI
International (DISC). All significant intercompany accounts and transactions
have been eliminated.
CASH EQUIVALENTS--The Company considers all investments with purchased
maturities of less than three months to be cash equivalents.
INVENTORIES--Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out method.
INVESTMENTS--The Company accounts for its investment in Intercare
Technologies, Inc. ("Intercare") on the cost method and accounts for its
investment in Immtech International, Inc. ("Immtech") and Blatz House Offices
Limited Partnership (the "Blatz Partnership") on the equity method (see Note
3).
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is recorded
at cost. Each member of the Company's sales force is provided with
demonstration monitors to assist them in their sales efforts. Also, the
Company has loaner monitors which are used to temporarily replace a
customer's unit when it is being repaired or upgraded. Depreciation is
provided over the estimated useful lives of the assets. The building is
being depreciated over 40 years, and the remaining assets are being
depreciated over three to seven years, using primarily the straight-line
method.
CAPITALIZED SOFTWARE COSTS-- Certain costs incurred to develop software were
capitalized and amortized over the expected sales life of the related
product, generally three to seven years. Software development and design
costs incurred prior to the establishment of a product's technological
feasibility are expensed as incurred. Approximately $277,000 of amortization
was charged to operations during 1994.
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 $42,000, $73,000 and $80,000 of
amortization was charged to operations in 1996, 1995 and 1994, respectively.
Accumulated amortization approximated $344,000 and $302,000 at June 30,
1996 and 1995, respectively.
GOODWILL--Goodwill is the excess of the cost over the fair value of the
net assets of an acquired subsidiary and is being amortized on the
straight-line method over approximately five years. Approximately $29,000 of
amortization was charged to operations in 1996, 1995 and 1994. Accumulated
amortization approximated $243,000 and $214,000 at June 30, 1996 and 1995,
respectively.
REVENUE RECOGNITION--Revenues and the costs of products sold are
recognized as the related products are shipped.
PRODUCT WARRANTIES--Estimated costs for product warranties are accrued
for and charged to operations as the related products are shipped.
RESEARCH AND DEVELOPMENT EXPENSES--Research and development costs are
charged to operations as incurred. Such expense approximated $2,400,000,
$1,800,000 and $2,100,000 in 1996, 1995 and 1994, respectively.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
FOREIGN CURRENCY TRANSLATION--The effects of unrealized exchange rate
fluctuations from translating foreign currency assets and liabilities into
United States dollars are accumulated as cumulative translation adjustments
in stockholders' equity. Realized gains and losses from foreign currency
transactions are included in operating results for the period.
EARNINGS (LOSS) PER COMMON SHARE--Earnings (loss) per common share amounts
are computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Fully diluted earnings per
common share assumes the additional potential dilution from the exercise of
outstanding stock options.
APPROVED ACCOUNTING STANDARDS--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." This statement must be adopted by
the Company in the fiscal year ending June 30, 1997. The Company has not
analyzed the impact of adopting the new statement.
16
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS--Certain amounts previously reported have been
reclassified to conform to the current presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
1996 1995
<S> <C> <C>
Component parts $2,879,286 $2,996,313
Work in process 1,561,481 1,138,060
Finished units 3,110,091 2,505,432
---------------------------------------------------------
Total inventories $7,550,858 $6,639,805
---------------------------------------------------------
</TABLE>
3. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Intercare Technologies, Inc. $300,000 $300,000
Immtech International, Inc. -- --
Blatz Partnership -- --
---------------------------------------------------------
Total Investments $300,000 $300,000
---------------------------------------------------------
</TABLE>
INTERCARE TECHNOLOGIES, INC.--During 1992, the Company's subsidiary, Sleep
Care, transferred certain assets to Intercare in exchange for 75,000 shares
of convertible preferred stock with a market value of $300,000. The
preferred stock is convertible at any time at the Company's option into an
equivalent number of shares of Intercare common stock. At any time within
four years after the date of conversion, the converted shares are redeemable
at the Company's option for an amount equal to $4.00 per share. In
connection with the transfer, Sleep Care licensed to Intercare the rights to
certain intellectual property and technology, primarily license rights and
patents, related to products previously marketed by Sleep Care. In exchange
for the license rights, the Company is to receive royalties of 5% of the
gross revenues from sales of products licensed under the agreement after
February 1993. Royalties earned were approximately $33,000, $68,000 and
$62,500 in 1996, 1995 and 1994, respectively. The license agreement is in
effect through February 1997 or until approximately $430,000 in royalties
have been received, whichever is earlier. Upon conclusion of the term of the
license agreement, Sleep Care will sell the intellectual property and
technology to Intercare. The assets retained by Sleep Care, which are fully
amortized as of June 30, 1996, were amortized over the greater of the
straight line method over the term of the license agreement or by the amount
of royalties received. Amortization of the intellectual property
approximated $8,000, $68,000 and $73,000 in 1996, 1995 and 1994,
respectively.
IMMTECH INTERNATIONAL, INC.--During 1989, the Company acquired an initial
investment interest in the common stock of Immtech International, Inc.
("Immtech") for $500,000. Immtech is a development stage biopharmaceutical
focused on the development of therapeutic products based on a modified
form of protein occurring naturally in the body known as C-Reactive Protein
("CRP") and a form of that protein, identified as modified CRP ("mCRP") and
diagnostic products which monitor long-term diabetes control and detect
chronic alcoholism. Certain officers and directors of the Company serve in
similar capacities at Immtech.
On December 21, 1996, the Company's subsidiary, Criticare Biomedical,
purchased from Marquette Venture Partners II, L.P. and MVP Affiliates Fund,
L.P. (collectively, the "Sellers") 1,000,000 shares of the $.01 par value
Series A Preferred Stock ("Series A"), 1,200,000 shares of the $.01 par value
Series B Preferred Stock ("Series B") of Immtech and a promissory note
payable by Immtech to the Sellers in the principal amount of $50,000 for
approximately $2,136,000, payable in the form of 333,154 shares of the
Company's common stock and a note payable for $1,240,000. The Series A and
Series B preferred stock are convertible by the holders to an equivalent
number of shares of Immtech common stock and are redeemable at the option of
the holders in December 1997.
The Series A and Series B preferred stock have cumulative dividend
preferences at a rate of 8% per annum. The Series A and Series B preferred
stock contain voting rights equivalent to the number of shares of common
stock issuable upon conversion.
17
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition price has been assigned a value of approximately $2,136,000
based upon an estimate by Company management of the fair value of the
consideration given by the Company. The investment in Immtech is accounted
for using the equity method. The purchase price was allocated to in-process
research and development and charged to expense as an investment loss upon
the consummation of the agreement. There was no significant tax benefit
available on this charge.
The following is a summary of the Company's investment in and advances
to Immtech as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Investment in Immtech:
Common Stock $ 500,000 $ 500,000
Series A and B preferred stock 2,086,000
-----------------------------------------------------------------
Total 2,586,000 500,000
Advances to Immtech 719,940 89,777
-----------------------------------------------------------------
Total 3,305,940 589,777
Less investment losses recognized (3,305,940) (589,777)
-----------------------------------------------------------------
Net investment $ 0 $ 0
-----------------------------------------------------------------
</TABLE>
The Series A and Series B preferred stock owned by the Company had a stated
redemption value of approximately $3,150,000 as of June 30, 1996. The
Company has recognized investment losses related to the investment in
Immtech of $2,716,163, $134,687 and $60,000 in 1996, 1995 and 1994,
respectively. As of June 30, 1996, the Company owned approximately 5.4% and
68.9% of Immtech's issued and outstanding common and preferred stock
respectively, or approximately 34% of the common stock on a fully diluted
and as converted basis.
Immtech was incorporated in 1984. Immtech is in the development stage and
has directed its efforts toward research and development, hiring scientific
and management personnel, arranging for facilities, and conducting clinical
trials. Immtech has no products currently available for sale, and none are
expected to be commercially available for several years. Immtech has a
March 31 fiscal year end.
Since inception, Immtech has incurred accumulated losses of approximately
$10,166,000 through March 31, 1996. Immtech is expected to continue to
incur significant losses during the next several years. In addition, as of
March 31, 1996, Immtech's current liabilities exceeded its current assets by
approximately $1,764,000 and Immtech had a common stockholders' deficiency
of approximately $6,634,000. In addition, Immtech was not in compliance
with certain of its note agreements. Immtech is currently negotiating with
the note holders to restructure the note agreements. These factors, among
others, indicate that Immtech may be unable to continue as a going concern.
Immtech's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become
due and ultimately, to obtain profitable operations. Immtech's financial
plans for the forthcoming year include the refinancing of existing debt, and
continuing its efforts to obtain additional debt and/or equity financing.
The following is summarized financial information for Immtech at March
31, 1996 and 1995 and for the years then ended.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets $ 14,000 $ 8,000
Noncurrent assets 104,000 146,000
Current liabilities 1,778,000 1,062,000
Noncurrent liabilities 384,000 383,000
Redeemable preferred stock 4,590,000 4,344,000
Common stockholders' equity (deficit) (6,634,000) (5,635,000)
Revenues 335,000 261,000
Net loss (760,000) (1,432,000)
Net loss attributable to common stockholders (1,006,000) (1,662,000)
</TABLE>
BLATZ PARTNERSHIP--The Blatz Partnership is a limited partnership which
rehabilitated the Blatz Phase II Commercial Office Buildings (the "Project")
in Milwaukee, Wisconsin. During 1988 and 1989, the Company contributed
$1,500,000 to the Blatz Partnership. The Company received tax benefits and
acquired an equity interest in the Project. The Blatz Partnership buildings
are certified historic structures for which a rehabilitation income tax
credit was passed through to the Company in its proportionate share. The
Company received total tax credits of approximately $915,000 on the Project.
The Partnership Agreement (the "Agreement") provided that profits and losses
(other than those resulting from a sale or refinancing of the Project) be
allocated 10% to the general partners and 90% to the Company. Effective
July 1, 1990, the Agreement was amended whereby profits and losses (other
than those resulting from a sale or refinancing of the Project) are to be
allocated 40% to the general partners and 60% to the Company. The Company
has the option to revert to the original allocation of profits and losses
(10% to the general partners and 90% to the Company) for a three year period
any time during the term of the limited partnership.
18
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of the investment is zero. Recognition of any
income by the Company for its interest in the Blatz Partnership will occur
only after the Blatz Partnership has earnings in excess of previously
unrecorded losses.
The following is summarized financial information for the Blatz Partnership
at June 30, 1996 and 1995 and for the years then ended:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets $ 140,000 $ 51,000
Noncurrent assets 4,332,000 4,407,000
Current liabilities 1,477,000 116,000
Noncurrent liabilities 4,679,000 5,564,000
Net deficit (1,684,000) (1,222,000)
Revenues 717,000 580,000
Net loss (462,000) (615,000)
</TABLE>
4. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is to be 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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1,
1996 1995 1994
<S> <C> <C> <C>
Deferred income tax assets:
Accounts receivable and sales allowances $ 312,000 $ 249,000 $ 187,000
Inventory allowances 43,000 32,000 41,000
Product warranties 117,000 127,000 110,000
Other accrued liabilities 80,000 97,000 76,000
Federal net operating loss carryforwards 736,000 35,000 93,000
State net operating loss carryforwards 188,000 132,000 91,000
Federal tax credit carryforwards 198,000 152,000 188,000
Investment losses not deducted 1,307,000 233,000 180,000
------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 2,981,000 1,057,000 966,000
------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Excess of tax overbook depreciation and amortization (928,000) (765,000) (642,000)
Prepaid expenses (5,000) (7,000) (6,000)
Reversal of DISC income (66,000)
------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities (933,000) (772,000) (714,000)
------------------------------------------------------------------------------------------------------------
Valuation allowance (2,048,000) (285,000) (252,000)
------------------------------------------------------------------------------------------------------------
Net deferred income taxes recognized in the
consolidated balance sheets $ 0 $ 0 $ 0
------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, the Company had available for federal income tax purposes
approximately $87,000 of alternative minimum tax credit carryforwards which
carry forward indefinitely and approximately $111,000 tax credit
carryforwards which expire in the years 2007 through 2009. The Company also
has approximately $3,500,000 of state net operating loss carryforwards,
which expire in 2003 through 2009, available to offset certain future state
taxable income.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current
Federal $35,000 $57,000 $40,000
State 15,000 13,000 10,000
Total income tax provision $50,000 $70,000 $50,000
</TABLE>
19
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision for income taxes (benefit) at the
federal statutory income tax rate to the effective income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit 4.9 5.8
Non-deductible life insurance premiums 1.4 18.6
Non-deductible losses of subsidiaries 21.6 8.7 22.4
Non-deductible meals and entertainment expenses 9.1 6.1
Goodwill amortization 5.6 8.6
Benefit of foreign sales corporation (14.4) (20.3)
Benefit of federal and state net operating loss carryforward recognized (11.4) (32.4)
Losses for which no benefit was provided 13.4
Other-net .1 2.0 1.0
----------------------------------------------------------------------------------------------------
Effective income tax rate 1.1% 39.9% 43.8%
----------------------------------------------------------------------------------------------------
</TABLE>
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note, 9.625%, due in monthly installments
of $34,983 with a final payment of $2,688,336
due in December 2003, collateralized by real estate
with a carrying value of approximately $4,204,000
at June 30, 1996 $3,457,048 $3,539,727
Bank note 8.5%, due in monthly installments of
$11,440 through November 1997, collateralized
by certain machinery and equipment with a
carrying value of approximately $155,000 at
June 30, 1996 182,624 298,958
Promissory note, 7%, interest payable quarterly,
principal due in December 2002, collateralized by
the Company's investment in Immtech preferred stock 1,240,000
----------------------------------------------------------------------------------------------------------------------
Total 4,879,672 3,838,685
Less current maturities 209,697 191,818
----------------------------------------------------------------------------------------------------------------------
Long-term debt $4,669,975 $3,646,867
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregate annual principal payments required under terms of the
long-term debt agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, PRINCIPAL PAYMENTS
<S> <C>
1997 $ 209,697
1998 155,363
1999 109,354
2000 120,356
2001 132,465
Thereafter 4,152,437
--------------------------------------------------------------------------------------------------
Total $4,879,672
--------------------------------------------------------------------------------------------------
</TABLE>
The Company has a $4,000,000 line of credit facility with a commercial bank
to meet its short-term borrowing needs. Borrowings against the line are
payable on demand with interest payable monthly at the bank's reference rate
(8.25% as of June 30, 1996). As of June 30, 1996, there were $2,300,000 of
borrowings against the line. There were no borrowings against the line as
of June 30, 1995. The line expires on
October 31, 1996.
The fair value of the Company's long-term debt and line of credit facility
approximates its carrying value as of June 30, 1996.
6. CONTINGENCIES
The Company is involved in various lawsuits that have arisen from the normal
conduct of business. These proceedings are handled by outside counsel.
In the opinion of management, the ultimate resolution of these matters will
not have a material effect on the consolidated financial
20
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements.
The Company has received two grants from the State of Wisconsin for research
and development of certain products. The grants are to be repaid only upon
successful completion and marketing of the related product. Repayment of
these grants is to be made on a sales by unit basis, up to an aggregate of
$600,000. Repayments approximated $30,000, $32,000 and $58,000 in 1996,
1995 and 1994, respectively, and in aggregate, approximated $232,000 as of
June 30, 1996. The repayments are charged to expense as the related
products are sold. The Company has been awarded a third grant from the
State of Wisconsin for an amount up to $100,000 which requires repayment of
the grant amount plus interest at 8%, and the Company is also required to
pay a royalty in the amount of 1% of net sales of the related product for a
five year period, as defined. No funds have been received under this grant
at June 30, 1996.
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 1,220,000 reserved shares of common stock of which 250,150
reserved shares of common stock remain available for future issuance under
the stock option plans at June 30, 1996. The activity during 1994, 1995 and
1996 for the above plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF STOCK OPTIONS
SHARES PRICE RANGE
<S> <C> <C>
Outstanding at July 1, 1993 709,466 $2.00-8.50
Granted 451,000 1.88-2.25
Cancelled (287,716) 2.00-6.13
-----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1994 872,750 1.88-8.50
Granted 421,500 2.00-2.19
Cancelled (253,350) 1.88-2.75
-----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1995 1,040,900 1.88-8.50
Granted 246,000 2.13-3.75
Cancelled (123,580) 2.00-5.75
Exercised (93,900) 2.00-2.63
-----------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 1,069,420 1.88-8.50
-----------------------------------------------------------------------------------------------------------------------
Exercisable at June 30, 1996 513,420 1.88-8.50
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Outstanding options have fixed terms and are exercisable over a period
determined by the Compensation Committee of the Company's Board of Directors
but no longer than five years after the date of grant. A substantial portion
of the options issued are contingent on future services or future events.
The Company has a Purchase and Supply Agreement and Option Agreement with a
hospital purchasing alliance (the "Alliance"). During 1994, the Company
granted the Alliance options to purchase 100,000 shares at $2.00 per share,
the market price on the date of the grant. The Company also agreed to grant
the Alliance up to 50,000 additional options per year, beginning in 1995 and
for each of the subsequent two years, as defined in the agreement, if
certain annual aggregate dollar volumes of purchases are made. The Alliance
did not earn the additional options in 1996 and 1995. The exercise price of
the additional options is the last sale price reported on the day prior to
the grant date each year. These options are not included in the preceding
stock option table.
At June 30, 1996, 1,469,570 shares of common stock were reserved under the
above plans and arrangements.
STOCK WARRANTS--In September 1995, the Company executed a warrant agreement
with a consultant. The warrant agreement provides for the issuance to the
consultant of warrants to purchase up to 150,000 shares of the common stock
of the Company, exercisable at a price of $2.00 per share. The warrant was
exercisable as to 37,500 shares upon execution of the agreement and the
warrants to purchase the remaining 112,500 shares become exercisable if
certain performance parameters are achieved by September 1996. No such
parameters were achieved during the year ended June 30, 1996.
The warrant holder exercised rights to purchase 4,000 shares during the year
ended June 30, 1996. Warrants to purchase 33,500 shares are exercisable as
of June 30, 1996. Such warrants expire in September 2000.
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 $61,000, $40,000 and $42,000 in 1996, 1995 and 1994,
respectively.
21
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers include domestic hospitals, domestic alternative
health care sites, and foreign health care markets. 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.
Criticare International coordinates substantially all international sales
and distribution. 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:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Europe $ 6,417,000 $ 5,910,000 $ 5,416,000
Pacific Rim 4,147,000 4,013,000 4,430,000
Canada and South America 4,012,000 4,146,000 4,119,000
-----------------------------------------------------------------
Net export sales $14,576,000 $14,069,000 $14,010,000
-----------------------------------------------------------------
</TABLE>
10. RESTRUCTURING COSTS
In December 1993, the Company incurred $550,000 of restructuring costs.
The restructuring costs included severance expenses associated with the
elimination of certain middle management and technical positions and the
costs associated with the discontinuance of certain products.
INDEPENDENT AUDITORS REPORT
To the Stockholders and Directors of Criticare Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Criticare
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Criticare Systems, Inc. and
subsidiaries at June 30, 1996 and 1995 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
August 2, 1996
22
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
All of the Company's subsidiaries are wholly owned:
Criticare International GmbH Marketing Services
Sleep Care, Inc.
Criticare (FSC), Inc.
CSI International, Inc. (DISC)
Criticare Biomedical, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Criticare Systems, Inc.:
We consent to the incorporation by reference in Registration Statements on Form
S-8 (File Nos. 33-33497, 33-40038, 33-60214 and 33-60644) of our reports dated
August 2, 1996 included and incorporated by reference in the Annual Report on
Form 10-K of Criticare Systems, Inc. for the year ended June 30, 1996.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
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0
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</TABLE>
