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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 000-16061
Criticare Systems, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1501563
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 414-798-8282
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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NA NA
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[COVER PAGE 1 OF 2 PAGES.]
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Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.04 Par Value
(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, 1998 was $9,220,204.
On August 31, 1998, there were outstanding 8,351,151 shares of the
registrant's $.04 par value voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended June 30, 1998 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 12, 1998 are incorporated by
reference into Part III of this report.
[COVER PAGE 2 OF 2 PAGES.]
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PART I
Item 1. BUSINESS.
Criticare Systems, Inc. (the "Company" or "Criticare") designs,
manufactures and markets vital signs and gas monitoring instruments and related
noninvasive sensors used to monitor patients in many healthcare 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
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 meets the needs of
virtually all clinical environments: adult, pediatric and neonatal intensive
care
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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(R). The Scholar monitor series specifically addresses the needs
of small hospitals with broad clinical needs (the monitoring of ECG, blood
oxygen saturation, noninvasive blood pressure, temperature and invasive blood
pressure) 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 VitalView Central Stations.
Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient
monitoring for a wide variety of cardio-pulmonary parameters in an integrated
system. The Model 1100 is able to monitor two ECG waveforms, noninvasive blood
pressure, three types of invasive blood pressure, respiration rate, heart rate,
temperature, oxygen saturation, inspired/expired oxygen, carbon dioxide and 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 506DX Combination Monitor. The 506DX combination monitor was
developed in conjunction with Alaris Medical ("Alaris") and incorporates
Criticare's oximetry and noninvasive blood pressure technology with Alaris's
temperature technology. Alaris has rights to market the 506DX combination
monitor to hospitals in the United States and Canada. Criticare has rights to
market the product to the alternate care market and to international markets.
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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. 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.
VitalView(TM). The VitalView central station makes it possible for one
nurse or technician to monitor numerous patients simultaneously. The VitalView
can receive, display and store data from a wide variety of Criticare monitors
including the Scholar, 507E and MPT.
MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the
transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood
pressure) on a real time basis to a VitalView central station while the patient
is ambulatory. The Company believes the MPT is the first device of its kind. In
today's healthcare environment, hospitals benefit by moving patients from
expensive critical care departments as quickly as possible to less expensive
general nursing floors. MPT, because of its complete monitoring capability and
its lower cost, allows the patient to be ambulatory while still being monitored
for all vital signs. MPT was approved by the FDA on December 10, 1996.
Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive
sensors that can be used on any patient, from a premature infant to a full-grown
adult. Criticare's line of reusable pulse oximetry sensors offers users
significant cost savings compared to disposables. Criticare's reusable sensors
generally last longer than the one-year warranty period and are easily and
inexpensively cleaned between uses. Criticare's reusable sensors include a
finger sensor for routine applications and a multisite sensor for increased
placement flexibility. The multisite sensor is fully immersible, allowing for
sterilization between patients. 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
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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 two improved oxygen saturation monitors that incorporate 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 Company is also in the later stages of developing
the hand-held Vital Signs monitor, which 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 by 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 VitalView
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.
Marketing and Sales
Domestic Sales. The Company's Systems Division focuses its efforts on
the MPT/VitalView Systems and related monitors such as Scholar I and Scholar II
that can interface with the VitalView Central Station. The flexibility of the
MPT Systems affords hospitals the opportunity to place monitoring where it is
used rather than being tied to fixed monitoring units. At August 31, 1998, the
Systems Division consisted of four sales specialists, five independent dealers,
three clinical specialists and one manager.
The Company's Monitoring Division focuses its efforts on stand-alone
monitoring needs of hospitals, surgery centers, nursing homes and physician
offices. Monitoring Division products include pulse oximeters, CO2 monitors,
anesthetic agent monitors and vital signs monitors. At August 31, 1998, the
Monitoring Division consisted of four regional managers, approximately 60
independent dealers with approximately 600 sales people and one sales manager.
International Sales. One of the Company's principal marketing
strategies has been to target international markets, particularly Europe, Latin
America and
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the Pacific Rim countries. During fiscal 1998, Criticare sold its
products, principally to hospitals, in over 75 countries through over 140
independent dealers. During fiscal 1997, the Company's international sales
efforts were coordinated by the Company's wholly-owned subsidiary, Criticare
International GmbH Marketing Services, a corporation organized under the laws of
Germany ("Criticare International"). During fiscal 1998, Criticare International
was liquidated following bankruptcy proceedings under German law. Most of the
Company's international order processing, invoicing, collection and customer
service functions are handled directly from the Company's headquarters in
Waukesha, Wisconsin. However, the Company formed CSI Trading, Inc. during fiscal
1997 and Criticare Service GmbH during fiscal 1998 to perform certain marketing
and service functions in Europe. Criticare believes demand for the Company's
products in international markets is primarily driven by cost containment
concerns, and increased interest in using quality patient monitoring products
for improved patient management.
In fiscal 1998, 46% of Criticare's net sales, or $12.8 million, was
attributable to international sales, of which approximately 43% was from sales
in Europe and the Middle East, 30% was from sales to Pacific Rim countries and
27% was from sales to Canada and Central and South America. In fiscal 1997, 51%
of Criticare's net sales was attributable to international sales. In fiscal
1996, 46% 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, 1998, Criticare employed three clinical
support specialists to provide customer training and education, primarily to
domestic hospitals. The clinical support staff also assists in the periodic
training and education of the direct sales force. In addition, the direct sales
force maintains contact with end-users and provides additional training and
updates. Clinical support in foreign markets is provided by the Company's
clinical support staff and direct sales force.
Warranty and Service. Criticare believes that customer service is a key
element of its marketing program. Criticare's monitors are warranted against
defects for one year and its reusable sensors 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, 1998, the Company had a customer service staff of 15
people at its Waukesha, Wisconsin facility. The Company also maintains a product
repair
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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
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."
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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,
1998, the Company had an in-house research, development and engineering staff of
25 people. The Company's research, development and engineering expenditures were
$3.3 million in fiscal 1998, $2.3 million in fiscal 1997 and $2.6 million in
fiscal 1996. Expenditures for fiscal 1998 include $900,000 which relates to the
commitment to issue shares of the Company's common stock for certain patented
technology.
Competition
The markets for the Company's products are highly competitive. Many of
Criticare's competitors, including its principal competitors described below,
have greater financial resources, more established brand identities and
reputations, longer histories in the medical equipment industry and larger and
more experienced sales forces than Criticare. In these respects, such
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, a unit of Mallinckrodt Inc., 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
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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,
including the ability to ban or recall products from the market and to prohibit
the operation of manufacturing facilities. The Company believes its products
comply with applicable FDA regulations in all material respects. In addition,
the Company received ISO 9002 certification on April 29, 1993 and ISO 9001
certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical
devices are classified as Class I, Class II or Class III, depending upon the
level of regulatory control to which they will be subject. Class III devices,
which are the most highly controlled devices, are subject to premarket approval
by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's
comprehensive premarket approval requirements, but are generally subject to
premarket notification requirements. If a new device is substantially equivalent
to a device that did not require premarket approval, premarket review is
satisfied through a procedure known as a "510(k) submission," under which the
applicant provides product information supporting its claim of substantial
equivalence. The FDA may also require that it be provided with clinical trial
results showing the device's safety and efficacy.
The Company believes that the products it is currently developing
generally will be eligible for the 510(k) submission procedure and, therefore,
will not be subject to lengthy premarket approval procedures. However, these
products are still being developed and there can be no assurance that the FDA
will determine that the products may be marketed without premarket approval.
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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 three
foreign patent applications pending. There is no assurance that any patents held
or secured by the Company will provide any protection or commercial or
competitive benefit to the Company. There is also no assurance that the
Company's products will not infringe upon patents held by others. The Company is
the owner of United States trademark registrations for "POET" and "Scholar."
The Company also relies upon trade secret protection for certain of its
proprietary technology. Although the Company requires its employees having
access to its proprietary information to sign confidentiality agreements, no
assurance can be given that such agreements can be effectively enforced or that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to or disclose the Company's
trade secrets.
Employees
At August 31, 1998, Criticare had 117 employees; including 33 in
manufacturing and operations, five in quality control, 40 in sales and
marketing, 14 in administration and 25 in research, development and engineering.
Many of the Company's technical employees are highly skilled. The
Company believes that its continued success depends in part on its ability to
continue to attract qualified management, marketing and technical personnel.
None of the Company's employees are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
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Backlog
Criticare's backlog on June 30, 1998 and 1997 was approximately
$1,542,000 and $1,184,000, 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 "balloon" payment of approximately $2.7 million in December 2002. The
Company believes this facility will be adequate for the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
During fiscal 1998, the Company amicably settled separate pending legal
proceedings involving (i) Alan Brack, (ii) Messrs. Buckley and Joubert and Maria
Letica, and (iii) John Bombulie and Michael Cox. None of these settlements were
material to the Company's financial condition or results of operations.
Prior to August, 1997, Criticare and a distributor of its products,
Dynamic Options Corporation ("D.O.C."), had a dispute over whether Criticare
could terminate the exclusive marketing agreement between the parties. On August
8, 1997, Criticare filed a Complaint against D.O.C. in the Waukesha County
Circuit Court. Criticare did not seek specific damages from D.O.C., but rather a
declaratory judgment that Criticare could terminate the exclusive marketing
agreement. On August 14, 1997, D.O.C. filed a Complaint in the Circuit Court for
Madison County, Alabama against Criticare and one of its employees, Fred Arbona.
The Complaint alleged that Criticare breached the terms of the exclusive
marketing agreement between the parties and that Criticare had committed fraud
and intentional interference with the business relationships between D.O.C. and
its customers. D.O.C. also alleged in its Complaint that Criticare violated the
Alabama Sales Representative Commission Contract Act by failing to pay
commissions due under the exclusive marketing agreement between the parties.
D.O.C. is seeking $5 million for each of the counts in its Complaint. On
September 12, 1997, Criticare filed a Notice of Removal of that case to the
Federal District Court in Alabama. However, the District Court remanded the case
to the Madison County Court. Criticare then filed a motion with the Madison
County Court to stay or dismiss the action in Alabama because of the prior
existing case in Waukesha County. The Madison County Court granted Criticare's
motion to
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dismiss, but D.O.C. won a reversal on appeal. Criticare has appealed
the reversal to the Alabama Supreme Court and that appeal is pending. Likewise,
D.O.C. filed a motion with the Waukesha County Circuit Court to stay or dismiss
the action in Waukesha County due to the pending litigation in Alabama. D.O.C.
has also filed a counterclaim in the Waukesha County case alleging virtually the
same causes of action that it did in its Complaint against Criticare in Alabama.
Criticare believes that D.O.C.'s claims lack merit and remains committed to
litigate vigorously the disputed claims with D.O.C. At this time, it is not
possible to assess with any degree of accuracy Criticare's likelihood of
prevailing on its claims against D.O.C., nor the likelihood of prevailing with
regard to D.O.C.'s claims against Criticare.
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.
From time to time the Company receives notices from competitors of
potential patent infringement. 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, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Incorporated herein by reference to the Company's 1998 Annual Report to
Stockholders, page 23.
Item 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the Company's 1998 Annual Report to
Stockholders, page 2.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
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Incorporated herein by reference to the Company's 1998 Annual Report to
Stockholders, pages 7 through 9.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company did not hold any market risk sensitive instruments during
the period covered by this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, together with the report thereon of Deloitte
& Touche LLP dated August 20, 1998, are incorporated herein by reference to the
Company's 1998 Annual Report to Stockholders, pages 10 through 22.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not changed accountants during the 24 months prior to
June 30, 1998. 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," " Section 16(a) Beneficial
Ownership Reporting Compliance" and "Executive Officers" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders (the "Criticare Proxy
Statement").
Item 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Criticare Proxy Statement.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the discussion under "Security
Ownership" in the Criticare Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the discussion under "Certain
Transactions" in the Criticare Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of the Company, included in the annual report of the Company to its
Stockholders for the fiscal year ended June 30, 1998, are incorporated by
reference in Item 8.
Consolidated Balance Sheets - as of June 30, 1998 and 1997.
Consolidated Statements of Operations - for the years ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity - for the
years ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows - for the years ended
June 30, 1998, 1997 and 1996.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30,
1998, 1997 and 1996:
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Schedule
Number Description Page
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VIII Valuation and Qualifying Accounts 22
and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or the required
information is shown in the financial statements or notes thereto, and therefore
have been omitted.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Registration Statement filed on Form S-1,
Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by
reference to the Registration Statement filed on Form S-1, Registration No.
33-13050).
4.2 Specimen Convertible Debenture (incorporated by reference
to the Registration Statement filed on Form S-3, Registration No. 333-25153).
10.1 Employment Agreement of Gerhard J. Von der Ruhr
(incorporated by reference to the Registration Statement filed on Form S-1,
Registration No. 33-13050).
10.2 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).
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).
16
<PAGE> 17
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 Officer and Director Indemnity
Agreement (incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-13050).
10.10 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).
10.11 Amendment to Employment Agreement of Gerhard J. Von der
Ruhr (incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1997).
10.12 Amendment to Employment Agreement of N.C. Joseph Lai
(incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended June 30, 1997).
10.13 Amended Consultant Warrant Agreement (incorporated by
reference to the Company's Post-effective Amendment number 1 to its Registration
Statement on Form S-3, Registration No. 333-00861).
10.14 Amendment to Amended Consultant Warrant Agreement
(incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended June 30, 1997).
10.15 Rights Agreement (incorporated by reference to the
Company's Current Report on Form 8-K filed on April 18, 1997).
17
<PAGE> 18
10.16 Convertible Debenture Purchase Agreement
(incorporated by reference to the Company's Registration Statement on Form S-3,
Registration No. 333-25153).
10.17 Agreement, effective as of May 8, 1997, between the
Company and Telemed Technologies Inc.
10.18 Consulting Agreement dated as of February 13, 1998
between the Company and C.C.R.I. Corporation.
13 Annual Report to Stockholders for the Year Ended
June 30, 1998.
21 Subsidiaries.
23 Independent Auditors' Consent.
24 Power of Attorney (incorporated by reference to the
signature page hereof).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June
30, 1998.
(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.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CRITICARE SYSTEMS, INC.
By /s/ Gerhard J. Von der Ruhr
------------------------------
Gerhard J. Von der Ruhr,
President
Date: October 13, 1998
19
<PAGE> 20
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 Joseph M. Siekierski, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - ---------- ------ ----
<S> <C> <C>
/s/ Gerhard J. Von der Ruhr Chairman of the Board, President and October 13, 1998
- - --------------------------- Director
Gerhard J. Von der Ruhr
/s/ N.C. Joseph Lai Vice Chairman of the Board, October 13, 1998
- - --------------------------- Senior Vice President and Director
N.C. Joseph Lai
/s/ Joseph M. Siekierski Vice President-Finance October 13, 1998
- - --------------------------- (Principal Financial and Accounting
Joseph M. Siekierski Officer)
/s/ Karsten Houm Director October 13, 1998
- - ----------------
Karsten Houm
/s/ Milton Datsopoulos Director October 13, 1998
- - ----------------------
Milton Datsopoulos
</TABLE>
20
<PAGE> 21
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, 1998 and 1997, and for each of the three years
in the period ended June 30, 1998, and have issued our report thereon dated
August 20, 1998; such financial statements and report are included in your 1998
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(a). This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 20, 1998
21
<PAGE> 22
<TABLE>
<CAPTION>
SCHEDULE VIII
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
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, 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
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts $ 295,000 $ 366,505 $ 194,505 $ 467,000
Reserve for sales returns and $ 504,000 $1,283,931 $1,647,931 $ 140,000
allowances
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts $ 467,000 $ 99,000 $ 266,000 $ 300,000
Reserve for sales returns and $ 140,000 $1,357,917 $1,397,917 $ 100,000
allowances
</TABLE>
22
<PAGE> 1
EXHIBIT 10.17
AGREEMENT
This agreement, effective the date of last signature below, is between
CRITICARE SYSTEMS, INC. ("Criticare") and TELEMED TECHNOLOGIES INTERNATIONAL
INC. ("TTI").
RECITALS
A. TTI owns pending United States patent application No. 07/881,604
("the Patent Application") and certain know-how and technical information
relating to a homeview or similar monitoring system and complete, unencumbered
rights to manufacture, use and/or sell any invention disclosed and/or claimed
therein, including any equivalent inventions (the "Patent Rights"), and
Criticare desires an assignment of the Patent Rights, together with such
know-how and technical information from TTI.
B. By this Agreement, TTI represents that the Patent Rights are pending
on appeal before the U.S. Patent Office. However, TTI acknowledges that the
compensation terms set forth herein account for the uncertain maturity and scope
of the Patent Rights, and Criticare desires to enter into this Agreement in
order to secure priority access to and/or ownership of the Patent Rights.
C. It is the understanding of TTI and Criticare that by this Agreement,
Criticare has the unfettered right to the art of the Patent Application. Any
rights that TTI may have in other patents and copyrights will not preclude
Criticare from using the art described in the Patent Rights and not require
additional royalties to TTI beyond those stated in this Agreement.
In consideration of the foregoing and the mutual covenants contained
herein, Criticare and TTI agree as follows:
1. Compensation.
(a) Subject to prior receipt from TTI of the consent and waiver
described in paragraph 7, Criticare agrees to pay TTI a maximum of $50,000,
according to the following schedule: an initial $25,000 within ten (10) business
days of the effective date of this Agreement, and a maximum of $25,000
thereafter, as needed, for continued legal services for the appeal and/or the
prosecution of the Patent Application, provided the scope, nature, cost and
conduct of such legal services are acceptable to Criticare. TTI shall oversee
the continued appeal and/or prosecution of the Patent Application in Criticare's
name and in conformance with Criticare's instructions to positively pursue
patent allowance after the date of the assignment provided for in paragraph 2,
and shall provide Criticare with any and all know-how, technical information and
ongoing technical support as reasonably required to obtain the Patent
Application. To the extent any such know-how, technical information or support
include a TTI trade secret such trade secret shall be provided to Criticare only
upon the issue of a patent on the Patent Application, and with Criticare's
agreement to accept such a patent.
(b) Upon allowance of the Patent Application in a form containing no
amendments that, in the reasonable opinion of the parties' respective patent
counsel, undermine the original intent and scope of the Patent Application, TTI
will be entitled to additional compensation according to the following schedule:
(i.) during the four years after allowance of the Patent Application, 100,000
shares of Criticare common stock at no cost to TTI at the end of each such year,
and (ii) an additional 112 shares of Criticare common stock at no cost to TTI
for every subsequent homeview system sold by Criticare after the 1,500th system,
such subsequent sales limited to an additional 1,000 systems and such additional
shares limited to 112,000 shares. Criticare shall not be obliged to make any
extraordinary efforts to promote and sell homeview systems. Criticare will use
its best efforts to register such shares at such time TTI is eligible for such
shares. If, after the allowance of the Patent Application, it is the reasonable
opinion of the patent counsel of Criticare that the original intent and scope of
the Patent Application is not preserved or if TTI otherwise becomes ineligible
for the aforementioned stock, Criticare agrees to assign complete ownership of
the Patent Rights back to TTI. Such opinion regarding intent and scope shall be
presented in writing to TTI within thirty (30) business days of the date
Criticare receives notice of allowance and information regarding the final claim
language of the Patent Application. Upon such reassignment Criticare has the
right of first refusal to license the Patent Rights from TTI paying a royalty
not to exceed seven percent (7%) of net sales of homeview systems.
2. Assignment and License Back. Upon initial payment by Criticare as provided
in paragraph 1(a), TTI will execute and return to Criticare the Assignment
attached hereto as Exhibit A, the entirety of which is incorporated herein,
thereby assigning the Patent Rights and specified know-how and/or technical
information to Criticare. Upon such assignment, Criticare shall enter into a
mutually-acceptable agreement granting a limited, royalty-free license
<PAGE> 2
to TTI for the term of the Patent issued from the Patent Application to use the
Patent Rights for ECG purposes only. Such license is attached as Exhibit B and
incorporated by reference.
3. Patent Prosecution and Appeal. TTI agrees to inform Criticare in a diligent
manner as to the course and substance of the appeal and/or prosecution of the
Patent Application. Accordingly, Criticare shall have the right to comment and
advise TTI. TTI acknowledges that the availability of shares of Criticare common
stock, as provided in paragraph 1(b), are contingent upon allowance of the
Patent Application in a form containing no amendments that, in the reasonable
opinion of the parties' respective patent counsel, undermine the original intent
and scope of the Patent Application. If such common stock is not issued to TTI,
Criticare will reassign the Patent Rights to TTI, as more fully provided in
paragraph 1(b), above.
4. Governing Law. This Agreement shall be interpreted, applied and performed
according to the laws of the State of Wisconsin without regard to conflict of
law principles.
5. Waiver. The failure of either party to insist, in any one or more instances,
upon performance of any of the terms, promises and conditions of this Agreement,
shall not be construed as a waiver or relinquishment of any right granted
hereunder or of the future performance of any such term, promise or condition.
6. Entire Agreement. This Agreement, together with Exhibits A and B which are
incorporated herein, constitutes and contains the entire agreement of the
parties with respect to the Patent Application and the Patent Rights. This
Agreement supersedes any and all prior understandings and agreements between the
parties. Any modification of this Agreement shall be in writing and executed in
the same manner as this Agreement.
7. Representations and Warranties. Both parties represent and warrant that they
have been duly authorized by their respective boards of directors to enter into
this agreement. TTI represents and warrants that its assets are greater than its
liabilities, such representation and warranty based on the value of the Patent
Rights being equal to the present value of the consideration set forth in
paragraph 1. TTI further represents and warrants that it owns all right, title
and interest in and to the Patent Rights free and clear of any and all liens or
encumbrances or, to its knowledge, the claims of others but for the security
interest in favor of National City Bank of Pennsylvania, whose consent to this
assignment and the waiver of its security interest TTI shall obtain within ten
days of the effective date of this Agreement. TTI further represents and
warrants that, to the best of its knowledge and based upon a reasonable
investigation, use of the Patent Rights do not infringe any rights of any third
party or any other rights of TTI.
8. Survival. This agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, and shall survive any mergers, acquisitions or other changes of
ownership of either party.
Criticare Systems, Inc. Telemed Technologies International Inc.
BY: /s/ Gerhard J. Von der Ruhr BY: /s/ Lee B. Ehrlichman
--------------------------- ---------------------
Date: May 8, 1997 Date: April 22, 1997
2
<PAGE> 1
EXHIBIT 10.18
CRITICARE SYSTEMS, INC.
CONSULTING AGREEMENT
This Consulting Agreement is made and entered into this 13th day of
February 1998, by and between C.C.R.I. CORPORATION, a Colorado corporation
("Consultant") and CRITICARE SYSTEMS, INC. (the "Company").
It is agreed as follows:
1. Consultant Services. Consultant hereby agrees to perform and provide
investor relations and development services for the Company. Consultant will
perform the Services with the assistance and full participation of Mr. Malcolm
McGuire and his associates. The services will include, but not be limited to,
the following:
(a) Preparation of a Corporate Profile, suitable for use with brokers
and investors (research, write, design, print and distribute). All content is
subject to the Company's approval.
(b) Design and implement a Plan for both the short and long term
promotion of investor interest in the Company.
(c) Interface with the investment community on behalf of the Company,
and publicly promote investor interest in the Company in this setting.
(d) Assist the Company in preparing press releases, upon request, and
introduce the Company to appropriate financial writers and media persons.
(e) Prepare and distribute FAX pieces designed specifically to promote
interest in the Company (utilizing C.C.R.I.'s broker and investor FAX file).
(f) Enlist additional quality market makers for the Company's stock.
(g) Introduce Company personnel to key persons in the investment
community and to C.C.R.I.'s network of brokers, financial planners,
<PAGE> 2
money managers, analysts, and investors. This will include promotional meetings
in select cities.
(h) Include information about the Company in a mailing that will
target 10,000 selected appropriate institutions, brokers, investment firms and
individual investors.
(i) Develop a list of key brokers that can be cultivated on behalf of
the Company and its stock, and seek to enhance the interest of these brokers in
the Company.
(j) Assist, when requested, in the preparation of presentations to
broker and investor groups.
(k) Work with Company's officers to develop an ongoing in-house
program for investor relations.
2. Payment. Subject to the provisions of this Agreement, the Company shall
pay Consultant the following as full compensation for the Services for the term
hereof:
(a) Retainer. The Company shall pay Consultant an initial retainer of
$10,000 payable as of the date hereof.
(b) Expenses. The Company will reimburse Consultants administrative
expenses in performing the Services payable in arrears on the 15th day of each
month upon Consultant's delivery to the Company of an itemized statement of such
expenses for the previous month, payable up to a maximum of $2,500 per month,
unless otherwise negotiated between Company and Consultant.
(c) Stock Warrant. Subject to the provisions of this Agreement and the
Company's receipt from Consultant of appropriate investment letter and the
filing of such documents as may be necessary to establish all necessary
exemptions from the registration requirements of federal or state securities
laws the Company hereby grants Consultant warrants to purchase 150,000 shares of
the common stock of the Company exercisable at a price of $3.00 per share. The
Warrant shall vest in accordance with and be governed by the terms of the
Warrant Agreement attached hereto as Appendix A. The Company will cause the
shares of Common Stock issuable upon exercise of the Warrants to be registered
under the Securities Act of 1933 pursuant to a registration statement. The
Company will provide a legal opinion from its legal counsel, that the Company
may lawfully issue the warrants. In the event that said warrants have not been
registered by May 15, 1998, C.C.R.I. shall be entitled to interim cash
compensation equal to the
2
<PAGE> 3
spread between the stock price and the warrant option price on all or part of
the warrants to which it is legally entitled on that May 15, 1998 date. This
right shall continue to be in effect until warrant registration is accomplished.
Warrants for which C.C.R.I receives alternate cash compensation shall be
returned to CRITICARE SYSTEMS, INC.
3. Project Expenses. The company shall pay Consultant project expenses for
the out of pocket costs of promotional events and materials, such expenses to be
approved in advance by the Company and to be payable upon submission by
Consultant to the Company of itemized statements accounting for such expenses or
at the discretion of the Company upon the Company's receipt of written estimates
of such expenses. In certain circumstances the Company will prepay the
consultants, airfare or hotel costs directly as agreed to in advance by the
parties. Such projects will include but not be limited to the following:
(a) Corporate Profile. Consultant agrees to produce a full-color
four-page promotional brochure (cost covered in initial retainer).
(b) Promotional Events. The Company agrees to reimburse consultant for
reasonable travel meal and lodging expenses incurred in co-hosting with the
Company promotional meeting for prospective investors, such meetings to be
approved in advance and at the discretion of the Company. The Company also
agrees to pay all room rental and catering expense incurred in hosting any such
meetings.
(c) Mailing. Within forty-five (45) days of the date of this Agreement
the Consultant shall cause to be mailed certain pre-printed materials (corporate
profile) which shall include an attached card returnable to the Consultant,
encouraging the recipient to request appropriate materials, created by the
Consultant in accordance with Section 3.(a) hereof.
4. Prior Approval of Published Materials. Consultant shall provide the
Company for its review and comment copies of any tangible communications,
whether written or recorded on audio video or film media, which Consultant may
give to any person in providing the Services. Consultant shall provide such
copies to the Company a minimum of two (2) business days prior to Consultant's
first proposed use of such materials or more than five (5) business days prior
if necessary, to provide the Company the opportunity to make any revisions it
deems appropriate and necessary to such materials. Consultant shall not use
material in performing the Services which contain any statement which is false
or misleading; provided that consultant shall not be responsible for the
accuracy or completeness of information furnished to it in writing by the
Company.
3
<PAGE> 4
5. Nondisclosure of Confidential or Insider Information.
(a) In the course of performance of Consultant's duties Consultant may
receive information which is considered material inside information within the
meaning and intent of the United States federal securities laws rules and
regulations. Consultant will not disclose this information to others, except as
expressly authorized by the Company and will not use this information directly
or indirectly for the benefit of Consultant or as a basis for advice to any
other party concerning any decision to buy, sell, or otherwise deal in the
Company's securities or those of any of its affiliated companies.
(b) The provisions of this Section 5 shall survive the termination or
expiration of this Agreement.
6. Scope of Engagement. Consultant shall retain the legal status of an
independent contractor. In no event shall Consultant be or be deemed to be an
employee or agent of the Company, or to qualify for benefits afforded such
persons as Company employees. Consultant has no power or authority to act for,
represent, or bind the Company.
7. Term. This Agreement shall commence on the date first written above and
shall terminate on the one-year anniversary of such date, unless earlier
terminated by either party pursuant to the terms hereof. The Agreement may be
renewed for an additional one-year term upon mutual written agreement of the
parties hereto.
8. Termination. Either party may terminate this Agreement at any time upon
thirty (30) business days' notice. In the event that this Agreement is
terminated by either party prior to the end of the one-year term the Consultant
shall be entitled to reimbursement of expenses as provided in paragraphs 2 and 3
through the date of termination. Termination of this Agreement shall not affect
the rights of the Consultant under the Warrant.
9. Assignment. This Agreement shall be binding upon the parties'
respective successors and permitted assigns. Neither party may assign this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party.
10. Notices. All notices and other official communications under this
Agreement shall be in writing and deemed sufficiently given if delivered
personally or mailed by first class mail postage prepaid to (if to the Company):
CRITICARE SYSTEMS, INC., 20925 Crossroads Circle, Waukesha WI, 53186, Attention:
Gerhard J. Von der Ruhr, Chairman of the Board or to such other address as the
Company may from time to time designate in writing; and (if to Consultant):
C.C.R.I. Corporation, 3104 East Camelback Road, #539, Phoenix, AZ 85016,
Attention: Malcolm McGuire, or to such other
4
<PAGE> 5
address as Consultant may from time to time designate in writing. Notices shall
be effective upon delivery if delivered personally, and on the third business
day after mailing if mailed.
11. Severability. In the event any one or more of the provisions of this
Agreement is determined to be invalid illegal or unenforceable the remaining
provisions of the Agreement shall remain in full force and effect unless the
removal the provisions of the Agreement so nullified would render meaningless
either party's performance hereunder.
12. Headings. The heading used in this Agreement are for the convenience of
the parties only and shall not in any way limit or affect the meaning or
interpretation of any of the terms.
13. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter embraced hereunder
including the Warrant Agreement and except as expressly incorporated herein,
supersedes all prior agreements promises, proposal representations
understandings and negotiations whether written or oral between the parties. No
modifications amendment supplements to or waivers of this Agreement or any of
the terms or conditions hereof shall be binding upon the parties or of any
effect unless made in writing and duly signed by both parties. In the event of
an conflict between this Agreement and any Warrant Agreement entered into by and
between the parties, this Agreement shall control.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin without regard to the
principles of Laws.
5
<PAGE> 6
Accepted by:
C.C.R.I. Corporation CRITICARE SYSTEMS, INC.
By: /s/ Malcolm McGuire By: /s/ Gerhard J. Von der Ruhr
----------------------------- -----------------------------
Malcolm McGuire President Gerhard J. Von der Ruhr
Chairman of the Board
Date: February 13, 1998 Date: February 13, 1998
6
<PAGE> 7
Appendix A
150,000 Warrants
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
(II) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III)
UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
CRITICARE SYSTEMS, INC.
CONSULTANT WARRANT AGREEMENT
THIS AGREEMENT is made and entered into as of this 13th day of February
1998 by and between CRITICARE SYSTEMS, INC. (the "Company") and C.C.R.I.
CORPORATION ( the "Consultant") (together, the "Parties").
RECITALS
A. As of February 13, 1998, the Company and the Consultant entered into a
Consulting Agreement under which the Consultant received warrants to purchase
common stock of the Company ( Common Stock ).
B. The Consulting Agreement provides for the issuance to Consultant of
warrants to purchase 150,000 shares of the common stock of the Company
exercisable at a price of $3.00 per share.
C. The Company has agreed to issue and the Consultant is desirous of
obtaining the warrants on the terms and conditions herein contained.
IT IS THEREFORE agreed by and between the parties for and in consideration
of the premises and the mutual covenants herein contained and for other good and
valuable consideration, as follows:
<PAGE> 8
1. The Company hereby confirms and acknowledges that it has granted to the
Consultant on February 13, 1998, warrants to purchase 150,000 shares of Common
Stock (the "Warrant") upon the terms and conditions herein set forth subject to
the terms and conditions of the Consulting Agreement. The Warrant shall have a 5
year life and is granted as compensation for services.
2. The purchase price of the shares of Common Stock which may be purchased
pursuant to the Warrant is $3.00 per share. The bid price at the time our
discussions were initiated.
3. The Warrant shall continue for five years after the date of grant set
forth in paragraph I, unless sooner terminated or modified under the provisions
of this Agreement or the Consulting Agreement and shall automatically expire at
midnight on the fifth anniversary of such date.
4. The Warrant shall vest in four separate increments exercisable at $3.00
per share upon the occurrence of certain conditions set forth below:
a. The Warrant shall become exercisable as to 30,000 shares upon
execution and delivery of this Warrant Agreement.
b. The second increment of 40,000 shares shall vest and become
exercisable on June 13, 1998 if on or before said date the closing price of the
stock has been $5.00 or above for 7 out of 10 trading days.
c. The third increment of 40,000 shares shall vest and become
exercisable on October 13, 1998 if on or before said date the closing price of
the Common Stock has been $7.00 per share or higher for 7 out of 10 trading
days.
d. The fourth and final 40,000 shares shall vest and become
exercisable on February 13 1999, if on or before such date, the closing price of
the Common Stock has been $9.00 per share or higher for 7 out of 10 trading
days.
e. In the event the company should be acquired by another entity prior
to the conclusion of this contract all price targets reached by virtue of that
acquisition would be automatically vested.
In the event that any of the three stock performance parameters set
forth above for a specific period is not met for such period, but in a
subsequent period the stock performance parameters such subsequent period is
met, then, in addition to the shares which would otherwise be exercisable for
such subsequent period pursuant to the terms hereof with respect to that
performance parameter, any shares which have not vested for a prior period of
periods shall also become exercisable on such
2
<PAGE> 9
subsequent period vesting date. Warrant shares which have not vested as of
February 13, 1999 in accordance with these terms shall not be exercisable and
this Warrant shall terminate as to such unvested shares after February 13, 1999.
5. The shares of Common Stock issuable upon exercise of the Warrant shall
be included in a Registration Statement which shall be filed with the Securities
and Exchange Commission to permit Consultant's public resale of any shares
obtained upon exercise of the Warrant. The Company agrees to cause such
Registration Statement to be filed within 10 days of the date of signing and
delivery of this Warrant Agreement and to use reasonable efforts to cause such
registration statement to become effective as soon as reasonably possible
thereafter. The Company agrees to bear the reasonable costs and expenses of such
registration and the costs and expenses of obtaining the registration or
qualification of the shares issuable upon exercise of the Warrant in one state
of Consultant's choice.
6. Subject to the terms of paragraph 8 hereof, this Warrant shall be
transferable upon surrender of this Warrant Agreement with the form of
assignment attached hereto duly executed by Consultant to the Company at its
office in the State of Wisconsin. Upon such surrender, the Company shall cause a
Warrant Certificate containing terms identical to those of this Warrant
Agreement, to be issued in the name of the transferee or transferees. If this
Warrant Agreement is assigned in respect of less than all the shares covered
hereby Consultant shall be entitled to receive a new Warrant Agreement covering
the number of shares not so assigned.
7. Subject to the vesting requirements of paragraph 4 above the Warrant
may be exercised in whole or in part by delivering to the Company written notice
of exercise on the Purchase Form included herein together with payment in full
for the shares being purchased upon such exercise. The Company will upon receipt
of said notice and payment issue or cause to be issued to the Consultant a stock
certificate for the number of shares purchased hereby.
8. The consultant represents and agrees that: (i) the Warrant shall not be
exercisable unless the purchase of Warrant shares upon the exercise of the
Warrant is pursuant to an applicable effective registration statement under the
Securities Act of 1933 (the "Act"), or unless in the opinion of counsel for the
Company the proposed purchase of such Warrant shares would be exempt from the
registration requirements of the Act and from the qualification requirements of
any state securities law; (ii) upon exercise of the Warrant it will acquire the
Warrant
3
<PAGE> 10
shares for its own account for investment and not with any intent or view to any
distribution, resale or other disposition of the Warrant shares except as
permitted hereby; (iii) it will not sell or transfer the Warrant shares unless
they are registered under the Act. The Company may require as a condition of the
exercise of the Warrant that the consultant sign such further representations
and agreements as it reasonably determines to be necessary or appropriate to
assure and to evidence compliance with the requirements of the Act.
9. In case the Company shall at any time subdivide (by way of a stock
split or stock dividend) or combine the outstanding shares of Common Sock the
exercise price shall be forthwith proportionately decreased (in the case of
subdivision) or increased (in the case of combination) and the number of shares
of Common Stock deliverable upon the exercise of this Warrant shall be
proportionately adjusted.
10. The Consultant shall have no rights as a stockholder with respect to
the shares of Common Stock which may be purchased pursuant to the Warrant until
such shares are issued to the Consultant.
11. THIS AGREEMENT IS ENTERED INTO AND SHALL BE GOVERNED BY, CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF Wisconsin.
12. The terms and conditions contained in Consulting Agreement, and as it
may be amended from time to time hereafter, are incorporated into and made a
part of this Agreement by reference as if the same were set forth herein in full
and all provisions of the Warrant are made subject to any and all terms of the
Consulting Agreement.
13. Any notice to be given under the terms of this Agreement shall given in
accordance with Section 10 of the Consulting Agreement.
IN WITNESS WHEREOF the parties have executed and delivered this Consultant
Warrant Agreement as of the date first above mentioned.
4
<PAGE> 11
CRITICARE SYSTEMS, INC.
By: /s/ Gerhard J. Von der Ruhr
---------------------------------
Gerhard J. Von der Ruhr,
Chairman of the Board
C.C.R.I. CORPORATION
By: /s/ Malcolm McGuire
---------------------------------
Malcolm McGuire, President
Address:
3104 East Camelback Road, Suite 539
Phoenix, Arizona 85016
5
<PAGE> 1
MISSION STATEMENT
[CSI LOGO]
FOUNDED IN 1984, CRITICARE SYSTEMS, INC. (CSI) IS
DEDICATED TO ADDRESSING THE NEEDS OF A RAPIDLY CHANGING
HEALTH CARE SYSTEM BY DESIGNING, MANUFACTURING,
AND MARKETING COST-EFFECTIVE PATIENT MONITORING
SYSTEMS AND NONINVASIVE SENSORS--USING PROPRIETARY
TECHNOLOGY-THAT REDUCE HEALTH CARE COSTS AND
IMPROVE PATIENT MANAGEMENT.
================================================================================
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended June 30,
- - ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $27,908,364 $26,235,355 $31,528,266 $28,660,275 $30,114,679
Income (Loss) Before Income
Taxes and Extraordinary Gain $(499,276) (2,749,435) (4,280,989) 175,643 114,141
Net Income (Loss) $(499,276) (2,179,489) (4,330,989) 105,643 64,141
Net Income (Loss) Per
Common Share-Basic and
Diluted ($0.06) (0.30) (0.63) 0.02 0.01
Average Shares
Outstanding 8,309,240 7,267,184 6,913,557 6,764,236 6,719,979
Stockholders' Equity $17,282,997 14,227,135 13,917,549 17,130,449 17,022,753
Long-term Obligations $3,165,258 5,110,934 4,669,975 3,646,867 3,835,751
Working Capital $13,716,891 12,053,165 10,282,033 13,401,741 13,258,880
Total Assets $24,726,819 25,145,066 27,075,922 25,468,428 25,171,231
</TABLE>
2
<PAGE> 2
LETTER TO STOCKHOLDERS
Dear Fellow Stockholders:
During this past fiscal year, your Company continued its strategy to capitalize
on the opportunities that "managed care" represents. In contrast to the previous
"fee for service" system, managed care and its "cousin" capitation, limit
reimbursement levels on a per patient basis. In order to reduce the cost of care
under these conditions, health care providers strive to reduce the average
length of a hospital stay, decrease the number of elective procedures performed,
and more rigorously evaluate whether a patient qualifies for hospitalization.
The effect of all of this is that fewer patients are ultimately hospitalized,
but their acuity levels are higher, meaning that they are more seriously ill.
While a hospital's census may be lower than before, the arrival of managed care
has created a greater need for monitoring. Criticare's answer to this dilemma
was the introduction of MPT(TM) Multiple Parameter Telemetry, the world's first
patient-borne monitor that permits a physician to continually assess a patient's
cardiovascular and pulmonary status (i.e., ECG, blood pressure, pulse rate, and
oxygen saturation) anywhere in the hospital. This continuous surveillance of
vital signs permits more rapid assessment and timely treatment of adverse
conditions to improve clinical outcomes.
During our first year of marketing the MPT, we have focused on penetrating key
institutions that are reputed to be technology leaders in the health care
industry. The first article describing the benefits of MPT was published this
past summer. We expect more to follow in the coming months.
Our product development efforts have turned toward a new line of portable,
handheld products which we expect to be ready for shipment in the second fiscal
quarter of 1999. A natural spin-off of these products will include OEM modules
for several of our proprietary technologies as we anticipate expanding our share
of OEM markets.
Regarding Criticare's investment in Immtech, the Board of Directors approved a
spin-off of 750,000 Immtech common shares to Company shareholders in the form
of a stock dividend. The spin-off is expected to be consummated immediately
prior to the effectiveness of a public offering of Immtech common shares and
warrants. It is subject to a number of conditions, including a filing with the
Securities and Exchange Commission. However, no assurance can be given at this
time that the spin-off will be consummated.
While our past year's sales and earnings do not yet fully reflect the potential
impact that telemetry systems will ultimately contribute to revenues, we are
confident that the Company is well positioned to capitalize further on the
changing healthcare environment during this coming year. We are happy to report,
however, that efforts to streamline operations have been successful. Operating
expenses were significantly reduced due to various cost cutting measures
and our current ratio improved to a level of 4.2 as compared to 3.1 one year
ago.
On behalf of the management and the Board of Directors, we would like to thank
our devoted associates, our loyal customers, our quality-conscious vendors, and
our dedicated stockholders for their continued support.
Sincerely,
Gerhard J. Von der Ruhr N.C. Joseph Lai, Ph.D.
President and Chief Executive Officer Senior Vice President
3
<PAGE> 3
[PICTURES OF COMPANY PRODUCTS]
4
<PAGE> 4
[PICTURES OF COMPANY PRODUCTS]
5
<PAGE> 5
[PICTURES OF COMPANY PRODUCTS]
6
<PAGE> 6
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 Operations expressed as percentages of
net sales.
<TABLE>
<CAPTION>
PERCENTAGES OF NET SALES
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 53.3 53.6 52.5
--------------------------------------------------------------------------------------------
Gross profit 46.7 46.4 47.5
--------------------------------------------------------------------------------------------
Operating expenses:
Marketing 26.7 33.4 37.1
Research, development and engineering 11.7 8.8 8.1
Administrative 7.2 9.6 6.0
--------------------------------------------------------------------------------------------
Total 45.6 51.8 51.2
--------------------------------------------------------------------------------------------
Income (loss) from operations 1.1 (5.4) (3.7)
Interest expense (2.9) (4.0) (1.4)
Interest income .4 .1 .1
Equity in loss of investments (.4) (1.2) (8.6)
--------------------------------------------------------------------------------------------
Loss before income taxes and
extraordinary gain (1.8) (10.5) (13.6)
--------------------------------------------------------------------------------------------
Income tax provision -- -- .1
Extraordinary gain on extinguishment of debt -- 2.2 --
--------------------------------------------------------------------------------------------
Net loss (1.8)% (8.3)% (13.7)%
--------------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
Net sales for the twelve months ended June 30, 1998 increased 6.3% to
$27,908,364 from $26,235,355 for the twelve months ended June 30, 1997. The
sales increase is attributable to the alternate care sales and new OEM sales.
The gross profit percentage remained relatively consistent at 46.7% versus 46.4%
in fiscal 1997. Margins in domestic hospital, alternate care, and international
all remained relatively consistent with those of the prior year.
Operating expenses of $12,731,695 decreased 6.3% from fiscal 1997 levels. In
addition, operating expenses as a percentage of sales decreased to 45.6% from
51.8% in fiscal 1997. The largest savings occurred in the marketing expenses
where spending levels were reduced by approximately $1,300,000. The reduction in
marketing expenses was primarily related to international spending. The Company
consolidated several international functions at the home office in the United
States. This resulted in a savings of over $850,000. Administrative expenses for
fiscal 1998 decreased by 20.4% from fiscal 1997 levels, due to liquidation
expenses incurred in fiscal 1997 related to Criticare International. The reduced
expenses in marketing and administration were partially offset by an increase of
41.3% in research, development, and engineering expenses, which resulted from a
$900,000 charge associated with the acquisition of in-process technology related
to the transmission of clinical data.
Interest expense decreased during fiscal 1998 due to no borrowings on the line
of credit during the year. Interest income increased during fiscal 1998 due to
higher cash balances on hand throughout the year. Equity in the loss of
investments relates to a $120,000 advance provided to Immtech International,
Inc.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
Net sales for the twelve months ended June 30, 1997 decreased 17% to $26,235,355
from $31,528,266 for the twelve months ended June 30, 1996. Domestic hospital
sales decreased 40%, due to lower unit sales in all products and continued
competitive pricing conditions. In addition, marketing and sales efforts in this
division were concentrated on the market introduction of the
MPT(TM)/VitalView(TM) telemetry product. Alternate care sales decreased 12% and
international sales decreased 8%, due primarily to lower oximeter and gas
monitor sales due to a combination of competitive pricing and market demand
conditions in these two market areas.
7
<PAGE> 7
MD&A (CONT'D)
The gross profit percentage decreased to 46.4% in fiscal 1997 from 47.5% in
fiscal 1996. This decrease was due primarily to increased manufacturing expenses
related to new product introductions, the effect of lower sales volume on fixed
manufacturing expenses and continued price competition in the oximetry product
line affecting both the alternate care and international sales markets. Although
the Company has developed and released lower cost vital signs and telemetry
monitors and continues to develop lower cost oximeter and gas products, the
effect of pricing competition may continue to negatively affect gross profit
margins.
Operating expenses of $13,591,892 for fiscal 1997 decreased 16% from $16,155,513
for fiscal 1996. As a percentage of net sales, operating expenses increased to
51.8% in fiscal 1997 from 51.2% in fiscal 1996. Marketing expenses for fiscal
1997 decreased 25% to $8,761,731 from $11,686,368 for fiscal 1996 due primarily
to decreased sales commissions related to the lower sales volume and lower
advertising and sales promotion expenses. Research, development and engineering
expenses for fiscal 1997 decreased 10%, or $248,057 from fiscal 1996 expense
levels due to slightly lower staffing and project expenses. Administrative
expenses increased 32% or $609,073 when compared to fiscal 1996 due to an
increased provision for doubtful accounts receivable of $236,382 and costs
associated with a judgment against and the liquidation of Criticare
International GmbH Marketing Services ("Criticare International") of $417,553
offset in part by lower insurance costs.
Interest expense increased during fiscal 1997 due to increased short-term line
of credit borrowings and the interest and purchase discount associated with the
$2,500,000 convertible debentures issued during February 1997. Interest income
declined slightly due to lower cash balances invested during fiscal 1997. Equity
in loss of investments for fiscal 1997 included cash advances of $24,000 to
Immtech International, Inc. and a $300,000 charge related to the write-off of an
investment in a sleep apnea company compared to the fiscal 1996 charge of
$2,716,163 related to cash advances to and the purchase of 2,200,000 shares of
Immtech International, Inc. preferred stock.
Extraordinary gain on extinguishment of debt in the amount of $569,946 resulted
from the exchange of 200,000 shares of newly issued restricted Criticare common
stock in full payment of the $1,240,000 promissory note plus accrued interest of
approximately $110,000 associated with the fiscal 1996 purchase of Immtech
International, Inc. preferred stock.
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. The Company recorded a charge of
$900,000 for the purchase of patented technology in the quarter ended June 30,
1998 and charges of $418,000 for a judgment against and the liquidation of
Criticare International and $300,000 for the write-off of the Intercare
Technologies, Inc. investment in the quarter ended June 30, 1997. These items
were unusual, nonrecurring adjustments.
<TABLE>
<CAPTION>
QUARTERS ENDED
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1996 1996 1997 1997 1997 1997 1998 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 6,478 $ 6,581 $ 5,481 $ 7,695 $ 7,544 $ 7,138 $ 6,279 $ 6,947
Gross profit 3,124 3,061 2,444 3,547 3,506 3,273 2,919 3,340
Income (loss) from
operations 230 (151) (618) (877) 586 422 70 (772)
Extraordinary gain
on extinguishment
of debt -- -- 570 -- -- -- -- --
Net income (loss) 51 (297) (284) (1,649) 172 132 19 (822)
Net income (loss)
per common
share--Basic .01 (.04) (.04) (.23) .02 .02 .00 (.10)
--Diluted .01 (.04) (.04) (.23) .02 .02 .00 (.10)
</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.
8
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1998, the Company generated $448,434 from operating activities,
$194,431 from the exercise of stock options, $120,000 from the issuance of
common stock, and $82,000 from the exercise of warrants. The Company used
$147,441 for retirement of long-term debt, $288,285 for capital expenditures and
$120,000 for advances to Immtech International, Inc. These sources and uses of
cash resulted in a net positive cash flow of $289,139 for the 1998 fiscal year.
In fiscal 1997, the Company generated $1,491,171 from operating activities,
$2,500,000 from the issuance of convertible debentures, $400,919 from the
exercise of stock options and $180,000 from the exercise of warrants. The
Company used $2,300,000 for the retirement of borrowings under the bank line of
credit facility, $220,657 for costs associated with the issuance of the
convertible debentures, $217,619 for retirement of long-term debt, $175,600 for
capital expenditures and $24,000 for advances to Immtech International, Inc.
These sources and uses of cash resulted in a net positive cash flow of
$1,634,214 for the 1997 fiscal year.
The mortgage note requires monthly debt service payments of approximately
$35,000 with a final payment of approximately $2,702,000 due in December 2002.
The Company expects its continued programs to increase accounts receivable
collections, decrease inventory levels, reduce product development tooling
requirements, stabilize sales demonstration equipment levels and eliminate
advances to Immtech International, Inc. will have a positive affect on cash flow
activities in the next fiscal year. Consequently, the Company believes its
research and development activities and other capital and liquidity requirements
for the next one to two years will be satisfied by cash generated from
operations and other borrowings. During fiscal 1998, the Company also had access
to a commercial bank line of credit of up to $4,000,000. At June 30, 1998, there
were no borrowings outstanding on the line of credit. The Company violated a
convenant related to achieving certain income levels. The bank waived compliance
with this covenant subsequent to year end. This line expires in November 1998.
The Company currently expects that this line will be renewed.
The Company's Board of Directors has approved a spin-off of 750,000 Immtech
common shares to Company shareholders in the form of a stock dividend. The
spin-off is expected to be consummated immediately prior to the effectiveness of
a public offering of Immtech common shares and warrants. The spin-off is subject
to a number of conditions, including a filing with the Securities and Exchange
Commission, and no assurances can be given that the spin-off will be
consummated.
YEAR 2000 PREPARATIONS
The Company has developed a plan to address company-wide Year 2000 readiness.
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because the
Year 1900 could also be translated as two zeroes, systems which use two digits
could read the date incorrectly for a number of date-sensitive applications
resulting in potential calculation errors or the shutdown of major systems. The
Company is in the process of updating its internal computer software, other
information technology and other operating systems for the purposes of Year 2000
compliance. The Company will also address the Year 2000 compliance of the
Company's new and existing products. The Company currently expects to complete
its Year 2000 compliance plan during fiscal 1999 and does not expect that its
costs to become Year 2000 compliant will be material to its financial condition
or results of operations.
The Company's operations may also be adversely affected to the extent that
suppliers and other third parties are not Year 2000 compliant. The Company
intends to circulate surveys to its key third party vendors during fiscal 1999
to assess the Year 2000 compliance status of the operating systems of such
vendors and the potential impact on the Company of non-compliance. However, a
number of risks relating to the Year 2000 issue may be out of the Company's
control, including reliance on outside links for essential services such as
communications and power. There can be no assurance that a failure of systems of
third parties on which the Company's systems and operations will rely to be Year
2000 compliant will not have a material adverse effect on the Company's
business, financial condition or operating results.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Annual Report that
are not historical or current facts deal with potential future circumstances and
developments. These include expected future financial results, liquidity needs,
financing ability, Year 2000 compliance, management's or the Company's
expectations and beliefs and similar matters discussed in Management's
Discussion and Analysis or elsewhere in this Annual Report. The discussions of
such matters and subject areas are qualified by the inherent risk and
uncertainties surrounding future expectations generally, and also may materially
differ from the Company's actual future experience.
The Company's business, operations and financial performance are subject to
certain risks and uncertainties which could result in material differences in
actual results from management's or the Company's current expectations. These
risks and uncertainties include, but are not limited to, general economic
conditions, demand for the Company's products and costs of operations.
9
<PAGE> 9
BALANCE SHEETS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- - -------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS (NOTE 5):
Cash and cash equivalents (Note 1) $ 2,729,998 $ 2,440,859
Accounts receivable, less allowance for doubtful accounts
of $300,000 and $467,000, respectively 6,921,713 7,182,237
Other receivables 322,976 236,855
Inventories (Notes 1 and 2) 7,682,471 7,730,591
Prepaid expenses 338,297 269,620
- - -------------------------------------------------------------------------------------
Total current assets 17,995,455 17,860,162
- - -------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NOTES 1 AND 5):
Land 925,000 925,000
Building 3,600,000 3,600,000
Machinery and equipment 1,796,120 1,674,488
Furniture and fixtures 712,428 617,451
Demonstration and loaner monitors 1,783,611 1,781,698
Production tooling 2,005,834 2,137,986
- - -------------------------------------------------------------------------------------
Property, plant and equipment - cost 10,822,993 10,736,623
Less accumulated depreciation 4,210,622 3,691,894
- - -------------------------------------------------------------------------------------
Property, plant and equipment - net 6,612,371 7,044,729
- - -------------------------------------------------------------------------------------
INVESTMENTS (NOTES 1, 3 AND 5) -- --
- - -------------------------------------------------------------------------------------
OTHER ASSETS (NOTES 1 AND 5):
License rights and patents - net 118,993 124,882
Convertible debenture issuance costs - net -- 115,293
- - -------------------------------------------------------------------------------------
Total other assets 118,993 240,175
- - -------------------------------------------------------------------------------------
TOTAL $24,726,819 $25,145,066
=====================================================================================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 10
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- - ---------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 2,305,721 $ 3,112,112
Accrued liabilities:
Compensation and commissions 819,886 1,000,552
Product warranties (Note 1) 328,000 370,000
Other (Note 7) 715,603 1,176,891
Current maturities of long-term debt (Note 5) 109,354 147,442
- - ---------------------------------------------------------------------------------------------------------------
Total current liabilities 4,278,564 5,806,997
- - ---------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 3,165,258 3,274,611
- - ---------------------------------------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES (NOTE 6) -- 1,836,323
- - ---------------------------------------------------------------------------------------------------------------
CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTES 5, 6 AND 8):
Preferred stock - $.04 par value, 500,000 shares authorized,
no shares issued or outstanding -- --
Common stock - $.04 par value, 10,000,000 shares authorized,
8,351,151 and 7,796,465 shares issued and outstanding, respectively 334,046 311,859
Additional paid-in capital 17,964,250 14,469,406
Retained earnings (accumulated deficit) (1,015,299) (516,023)
Cumulative translation adjustments -- (38,107)
- - ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,282,997 14,227,135
- - ---------------------------------------------------------------------------------------------------------------
TOTAL $24,726,819 $25,145,066
===============================================================================================================
</TABLE>
11
<PAGE> 11
OPERATIONS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES (NOTE 10) $ 27,908,364 $ 26,235,355 $ 31,528,266
COST OF GOODS SOLD 14,870,453 14,059,508 16,531,970
- - ---------------------------------------------------------------------------------------------------
GROSS PROFIT 13,037,911 12,175,847 14,996,296
- - ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 7,454,619 8,761,731 11,686,368
Research, development and engineering (Note 8) 3,278,714 2,320,655 2,568,712
Administrative 1,998,362 2,509,506 1,900,433
- - ---------------------------------------------------------------------------------------------------
Total 12,731,695 13,591,892 16,155,513
- - ---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 306,216 (1,416,045) (1,159,217)
- - ---------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (797,376) (1,048,391) (447,348)
Interest income 111,884 39,001 41,739
Equity in loss of investments (Notes 1 and 3) (120,000) (324,000) (2,716,163)
- - ---------------------------------------------------------------------------------------------------
Total (805,492) (1,333,390) (3,121,772)
- - ---------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN (499,276) (2,749,435) (4,280,989)
INCOME TAX PROVISION (NOTES 1 AND 4) -- -- 50,000
- - ---------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY GAIN (499,276) (2,749,435) (4,330,989)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (NOTE 5) -- 569,946 --
- - ---------------------------------------------------------------------------------------------------
NET LOSS $ (499,276) $ (2,179,489) $ (4,330,989)
===================================================================================================
LOSS PER COMMON SHARE--
BASIC AND DILUTED: (NOTE 1)
Before extraordinary gain $ (.06) $ (.38) $ (.63)
Extraordinary gain -- .08 --
- - ---------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $ (.06) $ (.30) $ (.63)
===================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 8):
Basic 8,309,240 7,267,184 6,913,557
Diluted 8,309,240 7,267,184 6,913,557
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 12
STOCKHOLDERS' EQUITY
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Retained Earnings Cumulative Total
Common Stock Paid-In (Accumulated Translation Stockholders'
Shares Amount Capital Deficit) Adjustments Equity
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Common stock issued in connection
with extinguishment of debt 200,000 8,000 772,000 780,000
Exercise of options and warrants 252,020 10,081 570,838 580,919
Convertible debentures converted
to common stock, net of $61,872
of unamortized issuance costs 216,173 8,647 1,047,075 1,055,722
Issuance of warrants for services 84,375 84,375
Foreign currency translation
adjustments (11,941) (11,941)
Net loss (2,179,489) (2,179,489)
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 7,796,465 $311,859 $14,469,406 $(516,023) $(38,107) $14,227,135
Issuance of common stock 20,425 817 119,183 120,000
Exercise of options and warrants 126,500 5,060 271,371 276,431
Convertible debentures converted
to common stock, net of $100,822
of unamortized issuance costs 407,761 16,310 2,181,225 2,197,535
Commitment to issue common
stock for patented technology 900,000 900,000
Issuance of warrants for services 23,065 23,065
Foreign currency translation
adjustments 38,107 38,107
Net loss (499,276) (499,276)
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 8,351,151 $334,046 $17,964,250 $(1,015,299) -- $17,282,997
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 13
CASH FLOWS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (499,276) $(2,179,489) $(4,330,989)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 721,476 709,618 601,682
Amortization 21,440 74,749 44,706
Interest and discount accrued on convertible debentures 462,034 451,438 --
Provision for doubtful accounts 99,000 366,505 130,123
Expense related to equity in loss of investments 120,000 324,000 2,716,163
Expense related to issuance of warrants for services 23,065 84,375 --
Expense related to commitment to issue common stock
for patented technology 900,000 -- --
Extraordinary gain on extinguishment of debt -- (569,946) --
Changes in assets and liabilities:
Accounts receivable 161,524 2,321,416 (1,391,941)
Other receivables (86,121) 117,783 (75,180)
Inventories 46,207 93,351 (911,053)
Prepaid expenses (68,677) (81,488) (21,160)
Accounts payable (768,284) (509,017) 938,269
Accrued liabilities (683,954) 287,876 531,777
- - ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 448,434 1,491,171 (1,767,603)
- - -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (287,205) (134,785) (1,576,304)
Purchase of license rights (1,080) (40,815) --
Advances to Immtech International, Inc. (120,000) (24,000) (580,163)
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (408,285) (199,600) (2,156,467)
- - -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings (payments) under line of credit facility -- (2,300,000) 2,300,000
Proceeds from the issuance of convertible debentures -- 2,500,000 --
Principal payments on long-term debt (147,441) (217,619) (199,013)
Convertible debenture issuance costs -- (220,657) --
Proceeds from issuance of common stock 396,431 580,919 231,450
- - ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 248,990 342,643 2,332,437
- - ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 289,139 1,634,214 (1,591,633)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,440,859 806,645 2,398,278
- - ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,729,998 $ 2,440,859 $ 806,645
==================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes (refunded) paid--net $ 8,525 $ (87,626) $ 133,783
Interest 335,342 456,880 414,784
Noncash investing and financing activities:
Common stock issued in connection with extinguishment of debt -- 780,000 --
Common stock issued upon conversion of convertible debentures,
net of $100,822 and $61,872 of unamortized issuance costs 2,197,535 1,055,722 --
Issuance of warrants for services 23,065 84,375 --
Commitment to issue common stock for patented technology 900,000 -- --
Purchase of preferred stock of Immtech International, Inc. and a
note receivable in exchange for common stock and a note payable
Common stock -- -- 896,000
Note payable -- -- 1,240,000
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Criticare Systems, Inc. (the "Company") and its
wholly owned subsidiaries: Criticare International GmbH Marketing Services
("Criticare International"), CSI Trading, Inc. ("CSI Trading"), Criticare
Service GmbH, Criticare Biomedical, Inc. ("Criticare Biomedical"), Sleep
Care, Inc. ("Sleep Care"), Criticare (FSC), Inc. and CSI International
Corp. (DISC). Criticare International was liquidated during fiscal 1998.
CSI Trading was incorporated in November 1996 to assist with European
marketing activities. All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS -- The Company considers all investments with purchased
maturities of less than three months to be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out method.
INVESTMENTS -- The Company accounts for its investment in Intercare
Technologies, Inc. ("Intercare") on the cost method and accounts for its
investment in Immtech International, Inc. ("Immtech") and Blatz House
Offices Limited Partnership (the "Blatz Partnership") on the equity method
(see Note 3).
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is recorded
at cost. Each member of the Company's sales force is provided with
demonstration monitors to assist them in their sales efforts. Also, the
Company has loaner monitors which are used to temporarily replace a
customer's unit when it is being repaired or upgraded. Depreciation is
provided over the estimated useful lives of the assets. The building is
being depreciated over 40 years, and the remaining assets are being
depreciated over three to seven years, using primarily the straight-line
method.
LICENSE RIGHTS AND PATENTS -- License rights and patents are amortized over
the estimated useful lives of the related agreements using primarily the
straight-line method. Approximately $7,000, $9,000, and $42,000 of
amortization was charged to operations in 1998, 1997 and 1996,
respectively. Accumulated amortization approximated $78,000 and $71,000 at
June 30, 1998 and 1997, respectively.
CONVERTIBLE DEBENTURE ISSUANCE COSTS -- Convertible debenture issuance
costs were amortized over the two-year term of the debentures.
Approximately $15,000 and $46,000 of amortization was charged to operations
in 1998 and 1997. The prorata amount of unamortized debenture issuance
costs were charged to additional paid-in-capital upon conversion of the
debentures to common stock. Unamortized debenture issuance costs charged to
additional paid-in capital amounted to $100,822 and $61,872 during 1998 and
1997. (See Note 6.)
GOODWILL -- Goodwill relating to the excess of the cost over the fair value
of the net assets of an acquired subsidiary was amortized on the
straight-line method over approximately five years. Approximately $20,000
and $29,000 of amortization was charged to operations in 1997 and 1996,
respectively. The goodwill was fully amortized as of June 30, 1997.
REVENUE RECOGNITION -- Revenues and the costs of products sold are
recognized as the related products are shipped or installed, if there are
significant installation costs.
PRODUCT WARRANTIES -- Estimated costs for product warranties are accrued
for and charged to operations as the related products are shipped.
RESEARCH AND DEVELOPMENT EXPENSES -- Research and development costs are
charged to operations as incurred. Such expenses approximated $3,156,000,
$2,175,000 and $2,400,000 in 1998, 1997 and 1996, respectively. The 1998
amount includes $900,000 related to certain acquired patented technology
which was charged to operations as in-process research and development
costs at the time of the acquisition. (See Note 8.)
INCOME TAXES -- The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
FOREIGN CURRENCY TRANSLATION -- The effects of unrealized exchange rate
fluctuations from translating foreign currency assets and liabilities into
United States dollars are accumulated as cumulative translation adjustments
in stockholders' equity. Realized gains and losses from foreign currency
transactions are included in operating results for the period.
15
<PAGE> 15
NOTES (CONT'D)
NET INCOME (LOSS) PER COMMON SHARE -- On July 1, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, the Company changed
the method used to compute earnings per share and restated all prior
periods. The Company now reports basic and diluted earnings per share in
place of primary and fully diluted earnings per share.
FAIR VALUE OF FINANCIAL STATEMENTS -- The Company's financial instruments
under Statement of Financial Account Standards ("SFAS") No. 107 "Disclosure
About Fair Value of Financial Instruments," includes cash, accounts
receivable, accounts payable, borrowings under line of credit facility,
long-term debt and convertible debentures. The Company believes that the
carrying amounts of these accounts are a reasonable estimate of their fair
value because of the short-term nature of such instruments or, in the case
of long-term debt and convertible debentures, because of interest rates
available to the Company for similar obligations.
APPROVED ACCOUNTING STANDARDS -- In 1997, the Financial Accounting Standard
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" which will be effective for the Company in fiscal 1999. The
Company is currently evaluating the impact of adopting SFAS Nos. 130 and
131. In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement is required to
be adopted in fiscal 1999. SFAS No. 132 will have no impact on the
Company's financial statements as the Company does not have a pension plan
and it does not provide postretirement benefits. In 1998, the FASB also
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is required to be adopted in fiscal 2000. The
Company is currently in the process of evaluating the impact of adopting
SFAS No. 133.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Component parts $2,647,231 $2,867,884
Work in process 1,409,187 1,843,018
Finished units 3,626,053 3,019,689
-----------------------------------------------------------------
Total inventories $7,682,471 $7,730,591
-----------------------------------------------------------------
</TABLE>
3. INVESTMENTS
INTERCARE TECHNOLOGIES, INC. -- During 1992, the Company's subsidiary,
Sleep Care, transferred certain assets to Intercare Technologies, Inc.
("Intercare") in exchange for 75,000 shares of convertible preferred stock
of Intercare with an estimated fair value of $300,000, at that time. In
connection with the transfer, Sleep Care licensed to Intercare the rights
to certain intellectual property and technology, primarily license rights
and patents, related to products previously marketed by Sleep Care. In
exchange for the license rights, the Company is to receive royalties of 5%
of the gross revenues from sales of products licensed under the agreement.
Royalty income approximated $33,000 in 1996. No income was recognized
during 1998 and 1997. The assets retained by Sleep Care were fully
amortized as of June 30, 1996. Amortization of the intellectual property
approximated $8,000 in 1996. During the year ended June 30, 1997,
management of the Company concluded the investment in Intercare was
impaired and the carrying value of the investment was reduced from $300,000
to zero.
IMMTECH INTERNATIONAL, INC. -- During 1989, the Company acquired an initial
investment interest in the common stock of Immtech International, Inc.
("Immtech") for $500,000. Immtech is a biopharmaceutical company focusing
on the discovery and development of therapeutic products for the treatment
of opportunistic diseases and cancer in patients with compromised immune
responses. Immtech has two separate platform technologies for developing
drugs, one based on developing a new class of molecules as pharmaceuticals
and a second for developing a series of biological proteins that work in
conjunction with the immune system.
On December 21, 1995, 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. Subsequent to
June 30, 1998, the Series A and B preferred stock was exchanged for
1,569,364 shares of Immtech's common stock. The Series A and Series B
preferred stock were originally convertible by the holders to an equivalent
number of shares of Immtech common stock and were redeemable at the option
of the holders in December 1997.
16
<PAGE> 16
The Series A and Series B preferred stock had cumulative dividend
preferences at a rate of 8% per annum. The Series A and Series B preferred
stock contained voting rights equivalent to the number of shares of common
stock issuable upon conversion.
The acquisition price was 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, 1998 and 1997:
Investment in Immtech:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Common Stock $ 500,000 $ 500,000
Series A and B preferred stock 2,086,000 2,086,000
--------------------------------------------------------------------------------------------------
Total 2,586,000 2,586,000
Advances to Immtech 863,940 743,940
--------------------------------------------------------------------------------------------------
Total 3,449,940 3,329,940
Less investment losses recognized (3,449,940) (3,329,940)
--------------------------------------------------------------------------------------------------
Net investment $ 0 $ 0
--------------------------------------------------------------------------------------------------
</TABLE>
The Series A and Series B preferred stock owned by the Company had a stated
redemption value of approximately $3,398,000 and $3,150,000 as of June 30,
1997 and 1996, respectively. The Company has recognized investment losses
related to the investment in Immtech of $120,000, $24,000 and $2,716,163 in
1998, 1997 and 1996, respectively. As of June 30, 1998, the Company owned
approximately 5.3% and 65% of Immtech's issued and outstanding common and
preferred stock respectively, or approximately 30% of the common stock on a
fully diluted and as converted basis.
Immtech was incorporated in 1984. Thus far, Immtech 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
$13,262,000 through March 31, 1998. Immtech is expected to continue to
incur significant losses during the next several years. In addition, as of
March 31, 1998, Immtech's current liabilities exceeded its current assets
by approximately $3,639,000 and Immtech had a common stockholders'
deficiency of approximately $9,022,000. In addition, Immtech was not in
compliance with certain of its 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 continuing efforts to obtain
additional equity financing.
The following is summarized financial information for Immtech at March 31,
1998 and 1997 and for the years then ended.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current assets $ 14,000 $ 93,000
Noncurrent assets 57,000 96,000
Current liabilities 3,653,000 3,139,000
Noncurrent liabilities -- --
Redeemable preferred stock 5,440,000 5,108,000
Common stockholders' equity (deficit) (9,022,000) (8,058,000)
Revenues 20,000 15,000
Net loss (1,146,000) (1,351,000)
Net loss attributable to common stockholders (1,477,000) (1,619,000)
</TABLE>
Subsequent to June 30, 1998, the Company purchased certain intangible
assets and an additional 172,414 shares of Immtech common stock for
$150,000. On July 24, 1998 (the "Effective Date"), Immtech completed a
recapitalization (the "Recapitalization") pursuant to which: (i) Immtech
effected a 0.645260-for-1 reverse stock split of all of the shares of
common stock issued and outstanding immediately prior to the Effective
Date, resulting in the reduction in the number of issued and outstanding
shares of common stock from 2,305,166 to 1,487,431 (the "Reverse Stock
Split"); (ii) Immtech's debtholders converted approximately $2,780,000 in
stockholder advances (including the Company's advances), notes payable and
related accrued interest outstanding immediately prior to the Effective
Date into 1,209,962 shares of Immtech common stock (after giving effect to
the Reverse Stock Split); (iii) Immtech's Series A Preferred stockholders
converted 1,794,550 shares of Series A Preferred Stock issued and
outstanding immediately prior to the Effective Date into 1,157,951 shares
of common stock (after giving effect to the Reverse Stock Split); (iv)
Immtech's Series B Preferres stockholders converted 1,600,000 shares of
Series B Preferred Stock issued and outstanding immediately prior to the
Effective Date into 1,232,138 shares of common stock (after giving effect
to the Reverse Stock Split).
17
<PAGE> 17
NOTES (CONT'D)
Contemporaneously with the completion of the Recapitalization, Immtech
issued and sold 1,150,000 shares of common stock for $0.87 per share, or
aggregate consideration to Immtech of $1,000,000 to certain accredited
investors. After the Recapitalization and issuance of 1,150,000 shares of
common stock, the Company owned 2,187,684 shares of Immtech's issued and
outstanding common stock, or approximately 28% on a fully-diluted basis.
BLATZ PARTNERSHIP -- The Company is the sole limited partner in a real
estate limited partnership which owns the Blatz Phase II Commercial Office
Buildings located in Milwaukee, Wisconsin. Under terms of the Partnership
Agreement (the "Agreement"), profits and losses (other than those resulting
from a sale or refinancing of the Project) are to be allocated 40% to the
general partners and 60% to the Company.
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, 1998 and 1997 and for the years then ended:
<TABLE>
1998 1997
<S> <C> <C>
Current assets $504,000 $ 360,000
Noncurrent assets 3,644,000 3,975,000
Current liabilities 1,911,000 1,689,000
Noncurrent liabilities 4,679,000 4,679,000
Net deficit (2,442,000) (2,033,000)
Revenues 742,000 799,000
Net loss (453,000) (349,000)
</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 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,
1998 1997 1996
<S> <C> <C> <C>
Deferred income tax assets:
Accounts receivable and sales allowances $ 156,000 $ 237,000 $ 312,000
Inventory allowances 110,000 207,000 43,000
Product warranties 128,000 144,000 117,000
Other accrued liabilities 86,000 98,000 80,000
Federal net operating loss carryforwards 1,870,000 1,717,000 736,000
State net operating loss carryforwards 270,000 255,000 188,000
Federal tax credit carryforwards 152,000 198,000 198,000
Investment losses not deducted 1,481,000 1,434,000 1,307,000
- - -----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 4,253,000 4,290,000 2,981,000
- - -----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization (596,000) (1,007,000) (928,000)
- - -----------------------------------------------------------------------------------------------------------------
Prepaid expenses (3,000) (6,000) (5,000)
- - -----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities: (599,000) (1,013,000) (933,000)
- - -----------------------------------------------------------------------------------------------------------------
Valuation allowance (3,654,000) (3,277,000) (2,048,000)
- - -----------------------------------------------------------------------------------------------------------------
Net deferred income taxes recognized in the
consolidated balance sheets $ 0 $ 0 $ 0
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 18
At June 30, 1998, the Company had Federal net operating loss carryforwards
of approximately $5,500,000 which expire in 2008 through 2013. At June 30,
1998, the Company had available for federal income tax purposes
approximately $41,000 of alternative minimum tax credit carryforwards which
carry forward indefinitely and approximately $111,000 tax credit
carryforwards which expire in the years 2007 through 2009. The Company also
has approximately $5,400,000 of state net operating loss carryforwards,
which expire in 2002 through 2013, available to offset certain future state
taxable income.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current
Federal $ 0 $ 0 $35,000
State 0 0 15,000
- - -----------------------------------------------------------------------------------------------------------------
Total income tax provision $ 0 $ 0 $50,000
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
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>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
Losses for which no benefit was provided 30.9 29.1 13.4
Non-deductible losses of subsidiaries 4.0 21.6
Other--net 3.1 .9 .1
- - ------------------------------------------------------------------------------------------------------------------
Effective income tax rate 0% 0% 1.1%
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1998 1997
<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 2002, collateralized by
real estate with a carrying value of
approximately $4,024,000 at June 30, 1997 $3,274,612 $3,366,046
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 $52,000
at June 30, 1997 -- 56,007
- - ------------------------------------------------------------------------------------------------------------------
Total 3,274,612 3,422,053
Less current maturities 109,354 147,442
- - ------------------------------------------------------------------------------------------------------------------
Long-term debt $3,165,258 $3,274,611
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregate annual principal payments required under terms of the long-term
debt agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30, PRINCIPAL PAYMENTS
<S> <C>
1999 $ 109,354
2000 120,356
2001 132,465
2002 145,793
2003 2,766,644
-----------------------------------------------------
Total $3,274,612
</TABLE>
At June 30, 1998, the Company had a $4,000,000 demand line of credit
facility with a commercial bank to meet its short-term borrowing needs.
Borrowings against the line were payable on demand with interest payable
monthly at the bank's reference rate (8.75% as of June 30, 1998). As of
June 30, 1998, there were no borrowings against the line. The line expires
on November 15, 1998. Borrowings under the line of credit facility are
collateralized by substantially all assets of the Company.
In March 1997, the Company satisfied the $1,240,000 promissory note plus
interest accrued on the note of approximately $110,000 in exchange for
200,000 shares of newly issued common stock. Under the provisions of the
agreement, the shares must be held for one full year prior to resale. In
conjunction with this transaction, the Company recorded an extraordinary
gain on the extinguishment of debt of $569,946 for the outstanding
indebtedness under the promissory note in excess of the estimated fair
market value of the restricted stock.
19
<PAGE> 19
NOTES (CONT'D)
6. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures.
The debentures had a two year term to maturity with a stated annual
interest rate of 8%, payable in shares of common stock at the conversion
date or maturity date. The holders of the debentures had the option to
convert up to $1,250,000 of the debentures and accrued interest to common
stock of the Company sixty-one (61) days after the February 1997 closing
date at a conversion price equal to a 20% discount from the average closing
bid price of the Company's common stock for the five days preceding the
conversion date. Debentures aggregating $550,000 were converted under the
20% discount conversion feature. The remaining debentures and accrued
interest were converted to common stock of the Company at a conversion
price equal to a 25% discount from the average closing bid price of the
Company's common stock for the five days preceding the conversion date. For
the years ended June 30, 1998 and 1997, $1,650,000 and $850,000 of
debentures were converted to 407,761 and 216,173 shares of common stock
with a fair market value of $2,298,357 and $1,117,594 as of the conversion
dates.
Proceeds from the issuance of the debentures were recorded as a liability
at the issuance date. The conversion discount was amortized and reported as
additional interest expense over the life of the debentures. Additional
interest expense was recognized for any unamortized discount as of the
conversion date. The debentures were included in the accompanying June 30,
1997 consolidated balance sheet at the issuance price, plus any accrued
interest and amortized discount.
7. CONTINGENCIES
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
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 $14,000 and $30,000 in 1997
and 1996, respectively, and in the aggregate, approximated $246,000 as of
June 30, 1998. 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%, plus payment of a royalty in the
amount of 1% of net sales of the related product for a five-year period, as
defined. No funds have been received under this grant at June 30, 1998.
8. STOCKHOLDERS' EQUITY
STOCK OPTIONS -- In December 1992, the Board of Directors approved a new
Employee Stock Option Plan and Non-Employee Stock Option Plan. No new stock
options can be granted under the Employee Stock Option Plan and
Non-Employee Stock Option Plan which existed prior to the approval of the
new plans. The Board of Directors has authorized in connection with these
new plans the issuance of 1,220,000 reserved shares of common stock of
which 198,650 reserved shares of common stock remain available for future
issuance under the stock option plans at June 30, 1998. The activity during
1996, 1997 and 1998 for the above plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF STOCK OPTIONS WEIGHTED AVG.
SHARES PRICE RANGE EXERCISE PRICE
<S> <C> <C> <C>
Outstanding at July 1, 1995 1,040,900 $1.88-8.50 $2.30
Granted 246,000 2.13-3.75 2.82
Cancelled (123,580) 2.00-5.75 2.25
Exercised (93,900) 2.00-2.63 2.38
----------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 1,069,420 1.88-8.50 2.45
Granted 250,500 2.50-5.25 2.64
Cancelled (113,500) 2.00-8.50 3.38
Exercised (162,020) 2.00-2.63 2.47
----------------------------------------------------------------------------------------------
Outstanding at June 30, 1997 1,044,400 1.88-5.25 2.40
Granted 60,000 3.00-3.25 3.13
Cancelled (179,200) 2.00-5.25 2.38
Exercised (85,500) 2.00-2.75 2.27
----------------------------------------------------------------------------------------------
Outstanding at June 30, 1998 839,700 1.88-3.63 2.50
----------------------------------------------------------------------------------------------
Exercisable at June 30, 1998 645,700 1.88-3.63 2.38
----------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding as of
June 30, 1998:
20
<PAGE> 20
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - -----------------------------------------------------------------------------------------------------------------
Weighted Average
Shares Remaining Weighted Shares
Range of Outstanding Contractual Average Exercise Exercisable Weighted Average
Exercise Prices at June 30, 1998 Life-Years Price at June 30, 1998 Exercise Price
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.88-2.50 551,400 2.07 $2.21 443,900 $2.16
2.51-3.63 288,300 2.79 2.91 201,800 2.87
- - -----------------------------------------------------------------------------------------------------------------
1.88-3.63 839,700 2.31 2.50 645,700 2.38
- - -----------------------------------------------------------------------------------------------------------------
</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.
At June 30, 1998, 1,038,350 shares of common stock were reserved under the above
plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. If the Company had elected to
recognize compensation cost for the options granted during the years ended June
30, 1998, 1997, and 1996, consistent with the method prescribed by SFAS No. 123,
net loss and net loss per share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
<S> <C> <C> <C>
Net loss--as reported $(499,276) $(2,179,489) $(4,330,989)
Net loss--pro forma $(779,276) $(2,325,795) $(4,390,340)
Net loss per common share--as reported $(.06) $(.30) $(.63)
Net loss per common share--pro forma $(.09) $(.32) $(.64)
Assumptions used:
Expected volatility 14% 58% 58%
Risk-free interest rate 5% 6% 6%
Expected option life (in years) 3 3 3
</TABLE>
The fair value of stock options used to compute pro forma net loss and net loss
per common share is the estimated present value at the grant date using the
Black-Scholes option-pricing model. The pro forma effect on net loss for 1998,
1997, and 1996 is not representative of the pro forma effect in future years
because it does not take into consideration pro forma compensation cost related
to grants made prior to 1996.
STOCK WARRANTS -- In September 1995, the Company executed a warrant agreement
with a consultant. The warrant agreement provided for the issuance of warrants
to purchase up to 150,000 shares of the common stock of the Company, exercisable
at a price of $2.00 per share. The warrant was exercisable as to 37,500 shares
upon execution of the agreement and the warrants to purchase the remaining
112,500 shares were to become exercisable if certain performance parameters were
achieved by September 1996. Such parameters were not met as of such date. In
January 1997, the agreement was extended and the parameters were changed. During
the year ended June 30, 1997, the Company recognized $84,375 of expense related
to the value of the services performed by the consultant under the extended
agreement. By June 30, 1997, warrants to purchase the remaining 112,500 shares
of common stock at a price of $2.00 per share became exercisable. The warrant
holder exercised rights and purchased 41,000, 90,000, and 4,000 shares of common
stock at $2.00 per share during the years ended June 30, 1998, 1997, and 1996,
respectively. Warrants to purchase 15,000 shares of common stock at $2.00 per
share were exercisable as of June 30, 1998. Such warrants expire in September
2000.
In February 1998, the Company executed a similar warrant agreement with the
consultant. The warrant agreement provides for the issuance of warrants to
purchase up to 150,000 shares of common stock at a price of $3.00 per share. The
warrant is exercisable as to 30,000 shares upon execution of the agreement and
the warrants to purchase the remaining 120,000 shares will be exercisable if
certain performance parameters are achieved by February 1999. No such parameters
were achieved by June 30, 1998. During the year ended June 30, 1998, the Company
recognized $23,065 of expense related to the value of the services performed
under the agreement. As of June 30, 1998, 30,000 warrants were exercisable. Such
warrants expire in February 2003.
COMMITMENT TO ISSUE SHARES OF COMMON STOCK -- In April 1998, the Company agreed
to and accepted the patent rights assigned to them by a third party with respect
to certain technology related to the transmission of clinical data. In
consideration for the patent, the Company has agreed to provide the third party
with 400,000 shares of common stock payable over a four-year time period with
additional consideration of up to 112,000 shares contingent upon the achievement
of certain sales levels. The Company recorded a charge to operations of $900,000
in fiscal 1998 with respect to the value of the in-process technology which was
expensed as research and development costs. The 400,000 shares to be issued have
been considered to be outstanding shares for purposes of computing basic and
diluted income (loss) per common share.
21
<PAGE> 21
NOTES (CONT'D)
PREFERRED STOCK -- The Company's Board of Directors has the authority to
determine the relative rights and preferences of any series it may
establish with respect to the 500,000 shares of $.04 par value authorized
preferred shares. No preferred stock is issued or outstanding.
On March 27, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company. The dividend was made on
April 24, 1997 to the stockholders of record on that date to purchase
Preferred Stock ("Preferred") upon the occurrence of certain events. The
Rights will be exercisable the tenth business day after a person or group
acquires 20% of the Company's common stock, or makes an offer to acquire
30% or more of the Company's common stock. When exercisable, each right
entitles the holder to purchase for $25, subject to adjustment,
one-hundredth of a share of Preferred for each share of common stock owned.
Each share of Preferred will be entitled to a minimum preferential
quarterly dividend of $25 per share, but not less than an aggregate
dividend of 100 times the common stock dividend. Each share will have 100
votes, voting together with the common stock. In the event of any merger,
each share of Preferred will be entitled to receive 100 times the amount
received per share of common stock. The Rights expire on April 1, 2007.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan which covers substantially all employees.
Company contributions to the plan are discretionary and determined annually
by the Company's Board of Directors. The Company's contributions were
approximately $77,000, $81,000, and $61,000 in 1998, 1997 and 1996,
respectively.
10. 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.
The Company currently coordinates substantially all international sales and
distribution activities. Such activities were previously provided by the
Company with the assistance of Criticare International. Identifiable assets
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>
1998 1997 1996
<S> <C> <C> <C>
Europe and Middle East $ 5,464,000 $ 5,606,000 $ 6,417,000
Pacific Rim 3,895,000 3,784,000 4,147,000
Canada and Central and South America 3,414,000 3,867,000 4,012,000
------------------------------------------------------------------------------------------------
Net Export Sales $12,773,000 $13,257,000 $14,576,000
------------------------------------------------------------------------------------------------
</TABLE>
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997 and the results of operations and their
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
August 20, 1998
22
<PAGE> 22
FACT SHEET / DIRECTORS AND OFFICERS
FACT SHEET AS OF JULY 1, 1998
COMMON STOCK MARKET PRICE RANGE
AND DIVIDEND POLICY
Criticare Systems, Inc. common stock is traded on the Nasdaq
National Market (Symbol CXIM). As of June 30, 1998, there were
approximately 316 holders of record of Criticare's common stock. The
Company has never paid dividends on its common stock and has no
plans to pay cash dividends in the foreseeable future.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997
<S> <C> <C> <C> <C>
Quarter Ended: High Low High Low
September 30 $8 $4-3/8 $3-1/4 $2-3/8
December 31 $6-5/8 $2-13/16 $3-1/16 $2-3/8
March 31 $4-3/8 $2-5/8 $7-7/16 $2-1/2
June 30 $3-3/4 $2-11/16 $6-1/16 $4-3/4
</TABLE>
NASDAQ SYMBOL: CXIM
CORPORATE GENERAL COUNSEL TRANSFER AGENT AND REGISTRAR
Reinhart, Boerner, Van Deuren, Firstar Trust Company
Norris & Rieselbach, s.c. Milwaukee, Wisconsin
Milwaukee, Wisconsin
AUDITORS
Deloitte & Touche LLP
PATENT, TRADEMARK AND Milwaukee, Wisconsin
COPYRIGHT COUNSEL
Reinhart, Boerner, Van Deuren, CORPORATE HEADQUARTERS
Norris & Rieselbach, s.c. 20925 Crossroads Circle
Milwaukee, Wisconsin Waukesha, WI 53186 U.S.A.
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held on Thursday,
November 12, 1998 at 9:00 a.m. at the Milwaukee Athletic Club,
758 North Broadway, Milwaukee, Wisconsin.
FORMS 1O-K AND 1O-Q
The Company has filed an annual report with the Securities
and Exchange Commission on Form 1O-K. The Company also
files quarterly reports on Form 1O-Q. Stockholders may obtain
copies of these reports, without charge, by writing:
Secretary
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, Wisconsin 53186
U.S.A.
DIRECTORS
Milton Datsopoulos
Attorney and Partner
Datsopoulos, Macdonald & Lind
Karsten Houm
Management Consultant
N.C. Joseph Lai, Ph.D.
Vice Chairman of the Board,
Secretary,
Senior Vice President
Criticare Systems, Inc.
Gerhard J. Von Der Ruhr
Chairman of the Board, Treasurer,
President
Criticare Systems, Inc.
Officers and Senior Staff
Andrew Diaz
Vice President
International Sales
N.C.Joseph Lai, Ph.D.
Vice Chairman of the Board
Senior Vice President
Michael T. Larsen
Vice President
Quality Control/Quality Assurance
Gloria Najera
Vice President
Operations
Stephen D. Okland
Vice President
Domestic Sales
Joseph M. Siekierski
Vice President-Finance
Assistant Secretary
Gerhard J. Von Der Ruhr
Chairman of the Board
President
23
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
All of the Company's subsidiaries are wholly-owned:
Company Jurisdiction of Organization
------- ----------------------------
Criticare Service GmbH Germany
Sleep Care, Inc. Delaware
Criticare (FSC), Inc. Wisconsin
CSI International, Corp. (DISC) Wisconsin
Criticare Biomedical, Inc. Wisconsin
CSI Trading, Inc. Wisconsin
<PAGE> 1
EXHIBIT 23
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 20, 1998 appearing in and incorporated by reference in the Annual Report
on Form 10-K of Criticare Systems, Inc. for the year ended June 30, 1998.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,729,998
<SECURITIES> 0
<RECEIVABLES> 7,221,713
<ALLOWANCES> (300,000)
<INVENTORY> 7,682,471
<CURRENT-ASSETS> 17,995,455
<PP&E> 10,822,993
<DEPRECIATION> (4,210,622)
<TOTAL-ASSETS> 24,726,819
<CURRENT-LIABILITIES> (4,278,564)
<BONDS> 0
0
0
<COMMON> (334,046)
<OTHER-SE> (16,948,951)
<TOTAL-LIABILITY-AND-EQUITY> 24,726,819
<SALES> 27,908,364
<TOTAL-REVENUES> 27,908,364
<CGS> (14,870,453)
<TOTAL-COSTS> (27,602,148)
<OTHER-EXPENSES> (805,492)
<LOSS-PROVISION> (99,000)
<INTEREST-EXPENSE> (797,376)
<INCOME-PRETAX> (499,276)
<INCOME-TAX> 0
<INCOME-CONTINUING> (499,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (499,276)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
