UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 000-16061
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Criticare Systems, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1501563
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 414-798-8282
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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NA NA
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[COVER PAGE 1 OF 2 PAGES.]
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Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.04 Par Value
(together with associated Preferred Stock Purchase Rights)
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the voting common stock held by nonaffiliates
of the registrant as of August 31, 1999 was $17,445,738. Shares of voting
common stock held by any executive officer or director of the Registrant and any
person who beneficially owns 10% or more of the outstanding voting common stock
have been excluded from this computation because such persons may be deemed to
be affiliates. This determination of affiliate status is not a conclusive
determination for other purposes.
On August 31, 1999, there were outstanding 8,706,151 shares of the
registrant's $.04 par value voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of the Stockholders
of the Registrant to be held November 5, 1999 are incorporated by reference into
Part III of this report.
[COVER PAGE 2 OF 2 PAGES.]
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PART I
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Item 1. BUSINESS.
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Criticare Systems, Inc. (the "Company" or "Criticare") designs,
manufactures and markets vital signs and gas monitoring instruments and related
noninvasive sensors used to monitor patients in many healthcare environments.
Since a patient's oxygen, anesthetic gas and carbon dioxide levels can change
dramatically within minutes, causing severe side effects or death, continuous
monitoring of these parameters is increasing. The Company's monitoring
equipment improves patient safety by delivering accurate, comprehensive and
instantaneous patient information to the clinician. The Company's products also
allow hospitals to contain costs primarily by substituting cost-effective
reusable pulse oximetry sensors for disposable sensors, controlling the use of
costly anesthetics and increasing personnel productivity.
To meet the needs of end-users in a wide variety of patient environments,
the Company has developed a broad line of patient monitors which combine one or
more of its patented or other proprietary technologies, for monitoring oxygen
saturation, carbon dioxide and anesthetic agents, with standard monitoring
technologies that provide electrocardiogram ("ECG"), invasive and noninvasive
blood pressures, temperature, heart rate and respiration rate. In addition, the
Company's VitalView telemetry system allows one nurse to monitor up to eight
patients simultaneously from a convenient central location. This allows
hospitals to move out of the intensive care unit those patients that require
continuous monitoring, but do not need all of an intensive care unit's extensive
and costly personnel and equipment resources.
The Company was incorporated under the laws of the State of Delaware in
October 1984.
Products
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Criticare markets a broad range of vital signs and gas monitoring products
designed to address the needs of a variety of end-users in different patient
environments. Criticare's monitors display information graphically and
numerically. All Criticare monitors incorporate adjustable visual and audible
alarms to provide reliable patient-specific warnings of critical conditions, and
most of the Company's monitors record up to 60 hours of trend data. Criticare
monitors are available with printer capability to provide permanent records of
patient data.
Model 503, 503DX, 504 and 504DX. Criticare's complete line of pulse
oximeters meets the needs of virtually all clinical environments: adult,
pediatric
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and neonatal intensive care units, operating rooms, emergency rooms,
nursing homes, physicians' offices and ambulances. The line is designed to
provide accuracy and convenience at a competitive cost to the end-user.
Model 506DX and 507E Patient Monitors. The 507E series is comprised of
small, compact, portable, full-featured vital signs monitors configured to meet
specific clinical needs. The 507E series is well-suited for dental and
physician offices. The 506DX is ideal for patient ward monitoring of
noninvasive blood pressure. The 507E series combines ECG, oxygen saturation and
noninvasive blood pressure for a complete vital signs monitor for physician
office and hospital applications. The 507E series 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). 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
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
anesthetic gases. The Model 1100 uses the Company's proprietary disposable
respiratory secretion filter system.
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.
Model 4400 Series Blood Pressure, Pulse Oximetry and Temperature
Combination Monitor. The 4400 series 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 the
rights to market the Model 4400 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.
Model 602-14 POET(TM) LT Monitor. The hand-held POET LT provides small
hospitals and alternate care environments with compact, portable carbon
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dioxide monitoring. The POET LT series is an effective, low-cost functioning
solution for these environments.
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. In today's healthcare environment, hospitals benefit by moving
patients from expensive critical care departments as quickly as possible to less
expensive general nursing floors. MPT, because of its complete monitoring
capability and its lower cost, allows the patient to be ambulatory while still
being monitored for all vital signs.
Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive
sensors that can be used on any patient, from a premature infant to a full-grown
adult. Criticare's line of reusable pulse oximetry sensors offers users
significant cost savings compared to disposables. Criticare's reusable sensors
generally last longer than the one-year warranty period and are easily and
inexpensively cleaned between uses. Criticare's reusable sensors include a
finger sensor for routine applications and a multisite sensor for increased
placement flexibility. The multisite sensor is fully immersible, allowing for
sterilization between patients. The Company also sells a range of disposable
sensors designed for single use in cases where the facility would prefer to use
a patient charge disposable product.
Water Chek/Chek-Mate Filter System. The Company's patented, disposable
Water Chek system separates a patient's respiratory secretions from a breath
sample before it enters the gas monitor(s) for analysis. The Company's
proprietary, disposable Chek-Mate filter enhances the removal of moisture from
the sample, while preventing cross-contamination. This system allows the
monitor to operate effectively regardless of humidity or patient condition. The
self-sealing feature also protects the healthcare provider from potential
contamination.
Marketing and Sales
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Domestic Sales. At August 31, 1999, the Company's domestic sales force
consisted of 18 employees and 75 independent dealers. The Company's sales force
and independent dealers market the Company's products to many different types of
medical facilities such as hospitals, surgery centers, nursing homes and
physician offices. The Company sells its higher-end monitors (MPT, Vital View
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Central Station and anesthetic agent monitors) principally to hospitals whereas
the vital signs and pulse oximeters are sold primarily for nonhospital settings.
International Sales. One of the Company's principal marketing strategies
has been to target international markets, particularly Europe, Latin America and
the Pacific Rim countries. During fiscal 1999, Criticare sold its products,
principally to hospitals, in over 75 countries through over 140 independent
dealers. Most of the Company's international order processing, invoicing,
collection and customer service functions are handled directly from the
Company's headquarters in Waukesha, Wisconsin. Criticare believes demand for
the Company's products in international markets is primarily driven by cost
containment concerns, and increased interest in using quality patient monitoring
products for improved patient management.
In fiscal 1999, 37% of Criticare's net sales, or $10.5 million, was
attributable to international sales, of which approximately 44% was from sales
in Europe and the Middle East, 21% was from sales to Pacific Rim countries and
35% was from sales to Canada and Central and South America. In fiscal 1998, 46%
of Criticare's net sales was attributable to international sales. In fiscal
1997, 51% 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. In addition, significant devaluation
of certain foreign currencies could adversely affect the collectibility of
accounts receivable from international customers. The Company analyzes this
risk before making shipments to countries it views as unstable.
Clinical Support. At August 31, 1999, 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 are warranted 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, 1999, the Company had a customer service
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staff of 16 people at its Waukesha, Wisconsin facility. The Company offers
extended warranties and service contracts on all of its monitors.
Manufacturing
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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."
Research, Development and Engineering
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Criticare has focused its research, development and engineering
expenditures on products designed to meet identified market demands. The
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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, 1999, the Company had an in-house research, development and
engineering staff of 23 people. The Company's research, development and
engineering expenditures were $3.0 million in fiscal 1999, $3.3 million in
fiscal 1998 and $2.3 million in fiscal 1997.
Competition
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The markets for the Company's products are highly competitive. Many of
Criticare's competitors, including its principal competitors described below,
have greater financial resources, more established brand identities and
reputations, longer histories in the medical equipment industry and larger and
more experienced sales forces than Criticare. In these respects, such
competitors have a competitive advantage over the Company. The Company competes
primarily on the basis of product features, the quality and value of its
products (i.e., their relative price compared to performance features provided)
and the effectiveness of its sales and marketing efforts. The Company believes
that its principal competitive advantages are provided by its focus on cost
containment and its patented and other proprietary technology and software for
noninvasive, continuous monitoring of oxygen, anesthetic gases, carbon dioxide
and noninvasive 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 Datex/Ohmeda, a United States
subsidiary of Instrumentarium OY, a Finnish company. The Company estimates that
Nellcor has captured a majority of the worldwide pulse oximeter market, and that
Datex/Ohmeda and the Company have each captured significant portions of the
worldwide pulse oximeter market. In addition, there are approximately four
other companies which compete in the market for pulse oximeters. The Company
also indirectly competes with manufacturers of numerous other medical equipment
products for limited customer funds.
The Company believes that the worldwide anesthetic agent and carbon dioxide
monitor markets are comparatively fragmented, with Datex/Ohmeda as the principal
competitor. The Company's principal competitors in the domestic gas monitor
market include Datex/Ohmeda and Hewlett-Packard Company. The market for vital
signs monitors includes competitors such as Hewlett-Packard Company, Siemens
A.G., Datex/Ohmeda and SpaceLabs, Inc., a subsidiary of Westmark International
Incorporated.
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The Company believes that its principal competitors in Western Europe
include Datex/Ohmeda and that the Company has a significant share of this
market. In the Pacific Rim countries, the Company believes that Datex/Ohmeda is
the leading competitor.
Regulation
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As a manufacturer of medical diagnostic equipment, the Company is regulated
by the FDA and similar foreign governmental agencies. In producing its
products, the Company must comply with a variety of regulations, including the
good manufacturing practices regulations of the FDA. In addition, it is subject
to periodic inspections by this agency. If the FDA believes that its legal
requirements have not been fulfilled, it has extensive enforcement powers,
including the ability to ban or recall products from the market and to prohibit
the operation of manufacturing facilities. The Company believes its products
comply with applicable FDA regulations in all material respects. In addition,
the Company received ISO 9002 certification on April 29, 1993 and ISO 9001
certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical
devices are classified as Class I, Class II or Class III, depending upon the
level of regulatory control to which they will be subject. Class III devices,
which are the most highly controlled devices, are subject to premarket approval
by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's
comprehensive premarket approval requirements, but are generally subject to
premarket notification requirements. If a new device is substantially
equivalent to a device that did not require premarket approval, premarket review
is satisfied through a procedure known as a "510(k) submission," under which the
applicant provides product information supporting its claim of substantial
equivalence. The FDA may also require that it be provided with clinical trial
results showing the device's safety and efficacy.
The Company believes that the products it is currently developing generally
will be eligible for the 510(k) submission procedure and, therefore, will not be
subject to lengthy premarket approval procedures. However, these products are
still being developed and there can be no assurance that the FDA will determine
that the products may be marketed without premarket approval.
Criticare seeks, where appropriate, to comply with the safety standards of
Underwriters' Laboratories and the Canadian Standards Association and the
standards of the European Community. To date, the Company has not experienced
significant regulatory expense or delay in the foreign markets in
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which it sells its products. Industry and professional groups such as the
American Society of Anesthesiologists, to the extent they have the power to
mandate certain practices or procedures as part of their profession's standard
of care, are also a source of indirect regulation of the Company's business.
Patents and Trademarks
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The Company believes one of its principal competitive advantages is
provided by its patented and other proprietary technology including its sensor
technology, infrared specific anesthetic gas monitoring technology, UltraSync
signal processing software and disposable respiratory secretion filter system.
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 a 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
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At August 31, 1999 Criticare had 105 employees; including 41 in
manufacturing and operations, six in quality control, 22 in sales and marketing,
13 in administration and 23 in research, development and engineering.
Many of the Company's technical employees are highly skilled. The Company
believes that its continued success depends in part on its ability to continue
to attract qualified management, marketing and technical personnel. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Backlog
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Criticare's backlog on June 30, 1999 and 1998 was approximately $1,836,000
and $1,542,000, 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
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customer. The Company does not believe that its backlog at any date is
indicative of its future sales.
Item 2. PROPERTIES.
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In November 1992, the Company purchased a new 60,000 square foot facility
for approximately $4.5 million. The Company's mortgage calls for monthly
installments of principal and interest of approximately $28,000 and a final
"balloon" payment of approximately $3.0 million in April 2004. The Company
believes this facility will be adequate for the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
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In July, 1999, Criticare and Dynamic Options Corporation, Inc. ("D.O.C.")
amicably settled certain pending legal proceedings. Criticare agreed to make a
cash payment to D.O.C., transfer to D.O.C. a portion of the shares Criticare
holds in Immtech International, Inc. ("Immtech"), issue to D.O.C. 150,000 shares
of Criticare's common stock and transfer certain inventory related to telemetry
products no longer sold by the Company. The settlement agreement requires a
broker chosen by the Company to sell the Immtech shares and the Criticare shares
on behalf of D.O.C.
In the normal course of business Criticare also may be involved in various
legal proceedings from time to time. Criticare does not believe it is currently
involved in any claim or action the ultimate disposition of which would have a
material adverse effect on Criticare.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
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PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS.
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Criticare Systems, Inc. common stock is traded on the Nasdaq National Market
(Symbol CXIM). As of June 30, 1999, there were approximately 320 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.
YEAR ENDED JUNE 30,
1999 1998
Quarter Ended: High Low High Low
September 30 $2-15/16 $1-1/4 $8 $4-3/8
December 31 $2-3/4 $1-5/8 $6-5/8 $2-13/16
March 31 $2-1/16 $1-3/8 $4-3/8 $2-5/8
June 30 $3-3/8 $1-11/16 $3-3/4 $2-11/16
Item 6. SELECTED FINANCIAL DATA.
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The following table sets forth selected financial data with respect to the
Company for each of the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
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1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net Sales $28,512,507 $27,908,364 $26,235,355 $31,528,266 $28,660,275
Income (Loss) Before Income
Taxes and Extraordinary Gain (4,388,171) (499,276) (2,749,435) (4,280,989) 175,643
Net Income (Loss) (4,388,171) (499,276) (2,179,489) (4,330,989) 105,643
Net Income (Loss) Per
Common Share-Basic and
Diluted ($0.51) ($0.06) ($0.30) ($0.63) $0.02
Average Shares
Outstanding 8,581,863 8,309,240 7,267,184 6,913,557 6,764,236
Stockholders' Equity $12,711,709 $17,282,997 $14,227,135 $13,917,549 $17,130,449
Long-term Obligations $4,014,356 3,165,258 5,110,934 4,669,975 3,646,867
Working Capital 10,340,014 13,716,891 12,053,165 10,282,033 13,401,741
Total Assets 24,041,987 24,726,819 25,145,066 27,075,922 25,468,428
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATION.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Consolidated Statements of Operations expressed as percentages
of net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
YEARS ENDED JUNE 30,
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1999 1998 1997
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<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . 54.5 53.3 53.6
Gross profit . . . . . . . . . . . . . . . . 45.5 46.7 46.4
Operating expenses:
Marketing. . . . . . . . . . . . . . . . . . 31.4 26.7 33.4
Research, development and engineering. . . . 10.4 11.7 8.8
Administrative . . . . . . . . . . . . . . . 14.6 7.2 9.6
Severance pay. . . . . . . . . . . . . . . . 2.8 - -
Total. . . . . . . . . . . . . . . . . . . . 59.2 45.6 51.8
Income (loss) from operations. . . . . . . . (13.7) 1.1 (5.4)
Interest expense . . . . . . . . . . . . . . (1.5) (2.9) (4.0)
Interest income. . . . . . . . . . . . . . . .3 .4 .1
Equity in loss of investments. . . . . . . . (.5) (.4) (1.2)
Loss before income taxes and
extraordinary gain . . . . . . . . . . . (15.4) (1.8) (10.5)
Income tax provision . . . . . . . . . . . . - - -
Extraordinary gain on extinguishment of debt - - 2.2
Net loss . . . . . . . . . . . . . . . . . . (15.4)% (1.8)% (8.3)%
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
Net sales for the twelve months ended June 30, 1999 increased 2.2% to
$28,512,507 from $27,908,364. The sales increase is attributable to an increase
in OEM sales partially offset by a decrease in international sales.
The gross profit percentage decreased from 46.7% in 1998 to 45.5% in 1999. The
primary reason for the decrease in gross profit is the increase in OEM sales.
OEM sales typically have a lower gross profit than sales to non-OEM
customers.
Operating expenses of $16,871,981 represents a 32.5% increase from fiscal 1998
levels. Marketing expenses increased approximately $1,486,000 when compared to
1998 levels. This increase is due primarily to increased promotional activities
throughout the world. Engineering expenses decreased approximately $316,000
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when compared to 1998 levels; however, excluding the one-time $900,000 charge
in 1998 (discussed in footnote 8 of the financial statements) engineering
expenses increased approximately $584,000. This increase is due to expanded
research and development efforts related to new product introductions.
Administrative expenses increased approximately $2,159,000. This increase is
attributable to the settlement and related legal costs related to litigation
with a former dealer that represented the Company's products. The Company also
recorded approximately $810,000 of severance costs related primarily to costs
associated with the resignation of the two co-founders of the Company.
Interest expense decreased due to the conversion of convertible debentures to
common stock in 1998.
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.
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LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, the Company generated $465,577 from operating activities,
$256,413 from the mortgage refinancing discussed below, and $10,313 from the
exercise of stock options. The Company used $92,776 for the retirement of
long-term debt, $515,017 for capital expenditures, $150,000 for the purchase of
stock and intangible assets from Immtech International, Inc., and $193,430 for
the repurchase of Company stock. These sources and uses of cash resulted in net
negative cash flow of $218,920 for the 1999 fiscal year.
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 March 1999, the Company refinanced its mortgage note on the Company's office
and manufacturing facility. The new mortgage note requires monthly debt service
payments of approximately $28,000 with a final payment of approximately
$3,000,000 due in April 2004.
The Company expects its continued programs to increase accounts receivable
collections, decrease inventory levels, reduce product development tooling
requirements and stabilize sales demonstration equipment levels 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 1999, the
Company also had access to a commercial bank line of credit of up to $4,000,000.
At June 30, 1999, there were no borrowings outstanding on the line of credit.
The Company violated a convenant related to maintaining a certain tangible net
worth amount and achieving certain income levels. The bank waived compliance
with this covenant subsequent to year end. This line expires in November 2001.
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
15
<PAGE>
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 has incurred
costs of approximately $300,000 as of June 30, 1999 related to Year 2000
preparations. The Company expects to spend an additional $50,000 to complete its
Year 2000 plan. The Company currently expects to complete its Year 2000
compliance plan during October 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 has circulated 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 anticipated product introductions, 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, costs of operations, the
development of new products, government regulation, health care cost containment
programs, and competition in the Company's markets.
16
<PAGE>
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.
- ------- -----------------------------------------------
FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS (Note 5):
Cash and cash equivalents (Note 1) . . . . . . . . . . . . $ 2,511,078 $ 2,729,998
Accounts receivable, less allowance for doubtful accounts
of $375,000 and $300,000, respectively. . . . . . . . . 6,358,487 6,921,713
Other receivables. . . . . . . . . . . . . . . . . . . . . 83,106 322,976
Inventories (Notes 1 and 2). . . . . . . . . . . . . . . . 8,510,975 7,682,471
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 192,290 338,297
Total current assets . . . . . . . . . . . . . . . . . . 17,655,936 17,995,455
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,000 925,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,600,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 2,051,442 1,796,120
Furniture and fixtures . . . . . . . . . . . . . . . . . . 819,579 712,428
Demonstration and loaner monitors. . . . . . . . . . . . . 1,416,893 1,783,611
Production tooling . . . . . . . . . . . . . . . . . . . . 2,158,378 2,005,834
Property, plant and equipment - cost . . . . . . . . . . . 10,971,292 10,822,993
Less accumulated depreciation. . . . . . . . . . . . . . . 4,697,232 4,210,622
Property, plant and equipment - net . . . . . . . . . . 6,274,060 6,612,371
INVESTMENTS (Notes 1, 3 and 5) . . . . . . . . . . . . . . - -
OTHER ASSETS (Notes 1 and 5):
License rights and patents - net . . . . . . . . . . . . . 111,991 118,993
Total other assets . . . . . . . . . . . . . . . . . . . 111,991 118,993
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $24,041,987 $24,726,819
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,078,020 $ 2,305,721
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . . 1,446,614 819,886
Product warranties (Note 1). . . . . . . . . . . . . . . . . . . . . 325,000 328,000
Lawsuit settlement (Note 7). . . . . . . . . . . . . . . . . . . . . 1,600,000 -
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . 380,000 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,395 715,603
Current maturities of long-term debt (Note 5). . . . . . . . . . . . . . 73,893 109,354
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 7,315,922 4,278,564
------------ ------------
LONG-TERM DEBT, less current maturities (Note 5) . . . . . . . . . . . . 3,364,356 3,165,258
------------ ------------
OTHER LONG-TERM OBLIGATIONS (Note 11). . . . . . . . . . . . . . . . . . 650,000 -
------------ ------------
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, 15,000,000 shares authorized,
8,706,151 and 8,351,151 shares issued and outstanding, respectively. 348,246 334,046
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 17,960,363 17,964,250
Common stock held in treasury 103,840 shares - at cost . . . . . . . . . (193,430) -
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . . (5,403,470) (1,015,299)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 12,711,709 17,282,997
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,041,987 $24,726,819
============ ============
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET SALES (NOTE 10). . . . . . . . . . . . . . $28,512,507 $27,908,364 $26,235,355
COST OF GOODS SOLD . . . . . . . . . . . . . . 15,528,314 14,870,453 14,059,508
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . 12,984,193 13,037,911 12,175,847
------------ ------------ ------------
OPERATING EXPENSES:
Marketing. . . . . . . . . . . . . . . . . . . 8,941,036 7,454,619 8,761,731
Research, development and engineering (Note 8) 2,963,134 3,278,714 2,320,655
Administrative (Note 7). . . . . . . . . . . . 4,157,811 1,998,362 2,509,506
Severance pay (Note 11). . . . . . . . . . . . 810,000 - -
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 16,871,981 12,731,695 13,591,892
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . (3,887,788) 306,216 (1,416,045)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (Note 5 and 6). . . . . . . . (432,477) (797,376) (1,048,391)
Interest income. . . . . . . . . . . . . . . . 82,094 111,884 39,001
Equity in loss of investments (Notes 1 and 3). (150,000) (120,000) (324,000)
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . (500,383) (805,492) (1,333,390)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN . . . . . . . . . . (4,388,171) (499,276) (2,749,435)
INCOME TAX PROVISION (NOTES 1 AND 4) . . . . . - - -
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN . . . . . . . . (4,388,171) (499,276) (2,749,435)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (NOTE 5) . . . . . . . . . . . . . - - 569,946
NET LOSS . . . . . . . . . . . . . . . . . . . $(4,388,171) $ (499,276) $(2,179,489)
============ ============ ============
LOSS PER COMMON SHARE-
BASIC AND DILUTED: (NOTE 1)
Before extraordinary gain. . . . . . . . . . . $ (.51) $ (.06) $ (.38)
Extraordinary gain . . . . . . . . . . . . . . - - .08
------------ ------------ ------------
NET LOSS PER COMMON SHARE. . . . . . . . . . . $ (.51) $ (.06) $ (.30)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 8):
Basic. . . . . . . . . . . . . . . . . . . . . 8,581,863 8,309,240 7,267,184
Diluted. . . . . . . . . . . . . . . . . . . . 8,581,863 8,309,240 7,267,184
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Common Stock
Common Stock Paid-In Treasury
Shares Amount Capital No. of Shares Cost
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996. . . . . . . . 7,128,272 $ 285,131 $11,995,118
Net loss. . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Common stock issued in connection
with extinguishment of debt . . . 200,000 8,000 772,000
Exercise of options and warrants. . . 252,020 10,081 570,838
Convertible debentures converted
to common stock, net of $61,872
of unamortized issuance costs . . 216,173 8,647 1,047,075
Issuance of warrants for services . . 84,375
BALANCE, JUNE 30, 1997. . . . . . . . 7,796,465 311,859 14,469,406
Net loss. . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Issuance of common stock. . . . . . . 20,425 817 119,183
Exercise of options and warrants. . . 126,500 5,060 271,371
Convertible debentures converted
to common stock, net of $100,822
of unamortized issuance costs . . 407,761 16,310 2,181,225
Commitment to issue common
stock for patented technology . . 900,000
Issuance of warrants for services . . 23,065
BALANCE, JUNE 30, 1998. . . . . . . . 8,351,151 334,046 17,964,250
Net loss. . . . . . . . . . . . . . .
Comprehensive income/(loss) . . . . .
Issuance of common stock for
patented technology . . . . . . . 350,000 14,000 (14,000)
Exercise of options and warrants. . . 5,000 200 10,113
Common stock repurchased. . . . . . . 103,840 $ (193,430)
BALANCE, JUNE 30, 1999. . . . . . . . 8,706,151 $ 348,246 $17,960,363 103,840 $ (193,430)
Retained Accumulated
Earnings Other Total
(Accumulated Comprehensive Stockholders'
Deficit) Income/Loss Equity
<S> <C> <C> <C>
BALANCE, JUNE 30, 1996. . . . . . . . $ 1,663,466 $ (26,166) $13,917,549
Net loss. . . . . . . . . . . . . . . (2,179,489) (2,179,489)
Foreign currency translation
adjustments . . . . . . . . . . . (11,941) (11,941)
Comprehensive income/(loss) . . . . . (2,191,430)
Common stock issued in connection
with extinguishment of debt . . . 780,000
Exercise of options and warrants. . . 580,919
Convertible debentures converted
to common stock, net of $61,872
of unamortized issuance costs . . 1,055,722
Issuance of warrants for services . . 84,375
BALANCE, JUNE 30, 1997. . . . . . . . (516,023) (38,107) 14,227,135
Net loss. . . . . . . . . . . . . . . (499,276) (499,276)
Foreign currency translation
adjustments . . . . . . . . . . . 38,107 38,107
Comprehensive income/(loss) . . . . . (461,169)
Issuance of common stock. . . . . . . 120,000
Exercise of options and warrants. . . 276,431
Convertible debentures converted
to common stock, net of $100,822
of unamortized issuance costs . . 2,197,535
Commitment to issue common
stock for patented technology . . 900,000
Issuance of warrants for services . . 23,065
BALANCE, JUNE 30, 1998. . . . . . . . (1,015,299) 17,282,997
Net loss. . . . . . . . . . . . . . . (4,388,171) (4,388,171)
Comprehensive income/(loss) . . . . . (4,388,171)
Issuance of common stock for
patented technology . . . . . . . -
Exercise of options and warrants. . . 10,313
Common stock repurchased. . . . . . . (193,430)
BALANCE, JUNE 30, 1999. . . . . . . . $ (5,403,470) $ 12,711,709
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,388,171) $ (499,276) $(2,179,489)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 486,610 721,476 709,618
Amortization . . . . . . . . . . . . . . . . . . . . . . . 7,002 21,440 74,749
Interest and discount accrued on convertible debentures. . - 462,034 451,438
Provision for doubtful accounts. . . . . . . . . . . . . . 380,004 99,000 366,505
Expense related to equity in loss of investments . . . . . 150,000 120,000 324,000
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 . . . . . . . . . . . . . . . . . 183,222 161,524 2,321,416
Other receivables . . . . . . . . . . . . . . . . . . 239,870 (86,121) 117,783
Inventories . . . . . . . . . . . . . . . . . . . . . (461,786) 46,207 93,351
Prepaid expenses. . . . . . . . . . . . . . . . . . . 146,007 (68,677) (81,488)
Accounts payable. . . . . . . . . . . . . . . . . . . 772,299 (768,284) (509,017)
Accrued liabilities . . . . . . . . . . . . . . . . . 2,950,520 (683,954) 287,876
Net cash provided by operating activities. . . . . . . . . . . . . 465,577 448,434 1,491,171
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net . . . . . . . . . . (515,017) (287,205) (134,785)
Purchase of license rights. . . . . . . . . . . . . . . . . . . . . - (1,080) (40,815)
Advances to Immtech International, Inc. . . . . . . . . . . . . . . (150,000) (120,000) (24,000)
Net cash used in investing activities . . . . . . . . . . . . . . . (665,017) (408,285) (199,600)
FINANCING ACTIVITIES:
Proceeds from mortgage refinancing. . . . . . . . . . . . . . . . . 3,450,000 - -
Repayment of mortgage . . . . . . . . . . . . . . . . . . . . . . . (3,193,587) - -
Repurchase of company stock . . . . . . . . . . . . . . . . . . . . (193,430) - -
Borrowings (payments) under line of credit facility . . . . . . . . - - (2,300,000)
Proceeds from the issuance of convertible debentures. . . . . . . . - - 2,500,000
Principal payments on long-term debt. . . . . . . . . . . . . . . . (92,776) (147,441) (217,619)
Convertible debenture issuance costs. . . . . . . . . . . . . . . . - - (220,657)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . 10,313 396,431 580,919
Net cash (used in) provided by financing activities . . . . . . . . (19,480) 248,990 342,643
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . (218,920) 289,139 1,634,214
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. . . . . . . . . . . . 2,729,998 2,440,859 806,645
CASH AND CASH EQUIVALENTS, END OF YEAR. . . . . . . . . . . . . . . $ 2,511,078 $2,729,998 $ 2,440,859
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes (refunded) paid-net . . . . . . . . . . . . . . . $ 8,010 $ 8,525 $ (87,626)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,401 335,342 456,880
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 -
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
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, $7,000, and $9,000 of
22
<PAGE>
amortization was charged to operations in 1999, 1998 and 1997, respectively.
Accumulated amortization approximated $85,000 and $78,000 at June 30, 1999 and
1998, 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 of amortization was
charged to operations in 1997. 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 $2,798,000,
$3,156,000, and $2,175,000 in 1999, 1998 and 1997, 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.
23
<PAGE>
NET INCOME (LOSS) PER COMMON SHARE - Basic income (loss) per share is
computed using the weighted average number of common shares outstanding during
the periods. Diluted income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
periods.
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 and long-term debt.
The Company believes that the carrying amounts of these accounts are a
reasonable estimate of their fair value because of the short-term nature of such
instruments or, in the case of long-term debt because of interest rates
available to the Company for similar obligations.
COMPREHENSIVE INCOME - In 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the Consolidated Statement of Stockholders' Equity. The adoption
of SFAS 130 had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements.
APPROVED ACCOUNTING STANDARDS - 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 2001. 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.
24
<PAGE>
2. INVENTORIES
Inventories consist of the following as of June 30:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Component parts . $3,790,728 $2,647,231
Work in process . 1,261,709 1,409,187
Finished units. . 3,458,538 3,626,053
Total inventories $8,510,975 $7,682,471
</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. No royalty income was recognized during
1999, 1998 and 1997 and no royalty income is expected in future years. 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. - The Company owns comon stock of Immtech
International, Inc. ("Immtech"). Immtech is a biopharmaceutical company focusing
on the discovery and commercialization of therapeutics for treatment of patients
afflicted with opportunistic infectious diseases, cancer, or comprised immune
systems. Immtech has two independent programs for developing drugs: one based on
a technology for the design of a class of pharmaceutical compounds referred to
as dications. The second is based on developing a series of biological proteins
that work in conjunction with the immune system. Immtech has no products
currently for sale, and none are expected to be commercially available for
several years. Immtech has a March 31 fiscal year end.
25
<PAGE>
The following is a summary of the Company's investment in and advances to
Immtech as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Investment in Immtech . . . . . . $ 2,736,000 $ 2,586,000
Advances to Immtech . . . . . . . 863,940 863,940
Total . . . . . . . . . . . . . . 3,599,940 3,449,940
Less investment losses recognized (3,599,940) (3,449,940)
Net investment. . . . . . . . . . $ 0 $ 0
</TABLE>
During July 1998, the Company purchased certain intangible assets and an
additional 172,414 shares of Immtech stock for $150,000. These intangibles and
shares of stock were subsequently sold to a related party as part of a severance
agreement for $150,000 (see note 11).
The Company has recognized investment losses related to the investment in
Immtech of $150,000, $120,000 and $24,000 in 1999, 1998 and 1997, respectively.
As of June 30, 1999, the Company owned approximately 20% of Immtech's issued and
outstanding common stock.
During April 1999, Immtech completed an Initial Public Offering ("IPO") of
its stock. As part of this IPO, the Company was required to sign a lock-up
agreement by which it was agreed that no shares owned by the Company could be
sold in the public market until the Immtech stock traded at $20 (200% of its
initial IPO) price ($10) for 20 consecutive trading days and one year has passed
from the date of the IPO. The lock-up agreement expires in April 2004. At June
30, 1999, the lock-up provisions were still in force. Unrestricted Immtech
shares were trading at $17.50 on June 30, 1999.
Subsequent to June 30, 1999, the Company sold a portion of its Immtech
stock in a Private Placement. The proceeds from this sale were $1,760,000.
The following is summarized financial information for Immtech at June 30,
1999 and 1998 and for the twelve months then ended.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current assets. . . . . . . . . . . . . . . . $ 8,541,000 $ 84,000
Noncurrent assets . . . . . . . . . . . . . . 68,000 111,000
Current liabilities . . . . . . . . . . . . . 253,000 4,097,000
Noncurrent liabilities. . . . . . . . . . . . - -
Redeemable preferred stock. . . . . . . . . . - 5,548,000
Common stockholders' equity (deficit) . . . . 8,356,000 (9,450,000)
Revenues. . . . . . . . . . . . . . . . . . . 136,000 156,000
Net loss. . . . . . . . . . . . . . . . . . . (8,341,000) (1,152,000)
Net loss attributable to common stockholders. (4,657,000) (1,666,000)
</TABLE>
26
<PAGE>
BLATZ PARTNERSHIP - The Company was 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) were allocated 40% to the general partners
and 60% to the Company. This investment was sold during 1999, resulting in no
material gain or loss.
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,
1999 1998 1997
<S> <C> <C> <C>
Deferred income tax assets:
Accounts receivable and sales allowances $ 170,000 $ 156,000 $ 237,000
Inventory allowances . . . . . . . . . . 254,000 110,000 207,000
Product warranties . . . . . . . . . . . 127,000 128,000 144,000
Other accrued liabilities. . . . . . . . 243,000 86,000 98,000
Severance pay accrual. . . . . . . . . . 279,000 - -
Lawsuit settlement . . . . . . . . . . . 626,000 - -
Federal net operating loss carryforwards 2,244,000 1,870,000 1,717,000
State net operating loss carryforwards . 325,000 270,000 255,000
Federal tax credit carryforwards . . . . 152,000 152,000 198,000
Investment losses not deducted . . . . . 1,481,000 1,481,000 1,434,000
Total deferred income tax assets . . . . 5,901,000 4,253,000 4,290,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1,
1999 1998 1997
<S> <C> <C> <C>
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization. . (619,000) (596,000) (1,007,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (7,000) (3,000) (6,000)
Total deferred income tax liabilities. . . . . . . . . . (626,000) (599,000) (1,013,000)
Valuation allowance. . . . . . . . . . . . . . . . . . . (5,275,000) (3,654,000) (3,277,000)
Net deferred income taxes recognized in the consolidated
balance sheets. . . . . . . . . . . . . . . . . . . $ 0 $ 0 $ 0
</TABLE>
27
<PAGE>
At June 30, 1999, the Company had Federal net operating loss carryforwards
of approximately $6,600,000 which expire in 2008 through 2019. At June 30,
1999, 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 $6,500,000 of
state net operating loss carryforwards, which expire in 2002 through 2019,
available to offset certain future state taxable income.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current
Federal. . . . . . . . . . $ 0 $ 0 $ 0
State. . . . . . . . . . . 0 0 0
Total income tax provision $ 0 $ 0 $ 0
</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>
1999 1998 1997
<S> <C> <C> <C>
Federal statutory income tax rate. . . . (34.0)% (34.0)% (34.0)%
Losses for which no benefit was provided 29.3 30.9 29.1
Non-deductible losses of subsidiaries. . 3.2 - 4.0
Other-net. . . . . . . . . . . . . . . . 1.5 3.1 .9
Effective income tax rate. . . . . . . . 0% 0% 0%
</TABLE>
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Long-term debt consists of the following:
Mortgage note, 7.5% due in monthly installments of $27,793
with a final payment of $3,048,253 due in April 1, 2004,
collateralized by real estate with a carrying value of approximately
$3,934,000 at June 30, 1999. . . . . . . . . . . . . . . . . . . . . $3,438,249 -
Mortage 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 (refinanced in 1999). . . . . . . . . . $3,274,612
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,438,249 $3,274,612
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . 73,893 109,354
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,364,356 $3,165,258
</TABLE>
28
<PAGE>
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>
2000. . . . . . . . . $ 73,893
2001. . . . . . . . . 79,430
2002. . . . . . . . . 86,764
2003. . . . . . . . . 93,596
2004. . . . . . . . . 3,104,566
Total . . . . . . . . $ 3,438,249
</TABLE>
In March 1999, the Company refinanced its mortgage note on the Company's
office and manufacturing facility. The Company incurred a prepayment penalty of
approximately $120,000 which was recorded as interest expense.
At June 30, 1999, 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 are payable on demand with interest payable monthly
at the bank's reference rate, plus .25% (8.0% as of June 30, 1999). As of June
30, 1999, there were no borrowings against the line. Borrowings under the line
of credit facility are collateralized by substantially all assets of the
Company. The credit facility has covenants which require minimum levels of
tangible net worth and income levels. The Company was not in compliance with
these covenants at June 30, 1999. This non-compliance was waived by the lending
institution, and the line of credit facility was extended until November 2001.
In March 1997, the Company satisfied a $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.
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
29
<PAGE>
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 wasrecognized 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
From time to time, various lawsuits arise out of the normal course of
business. These proceedings are handled by outside counsel. Currently
management is not aware of any claim or action pending against the Company that
would have a material adverse effect on the Company's financial position or
results of operations.
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. Repayments approximated
$182,000 and $14,000 in 1999 and 1997, respectively. One grant was repaid in
full during 1999. The repayments are charged to expense as the related products
are sold. Since the second grant did not result in the successful completion
and marketing of a product, the Company does not have to repay the grant. 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, 1999.
As of June 30, 1999, the Company accrued a liability of $1,600,000 related
to certain legal proceedings with a former dealer. In July 1999, the Company
agreed to a $1,600,000 settlement with the dealer. The Company agreed to
30
<PAGE>
make a cash payment to the dealer, transfer a portion of the shares the Company
holds in Immtech, issue the dealer 150,000 shares of the Company's common stock,
and transfer certain inventory related to telemetry products no longer sold by
the Company. The settlement agreement requires that a broker chosen by the
Company sell the Immtech and Company common stock on behalf of the dealer.
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 1,720,000 reserved shares of common stock of which 220,750 reserved
shares of common stock remain available for future issuance under the stock
option plans at June 30, 1999. The Board of Directors increased the number of
reserved shares for issuance under the Plans from 1,220,000 to 1,720,000
during 1999. The activity during 1997, 1998 and 1999 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, 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
Granted . . . . . . . . 993,700 1.50-1.88 1.74
Cancelled . . . . . . . (636,800) 1.69-3.00 2.06
Exercised . . . . . . . (5,000) 2.06 2.06
Outstanding at June 30, 1999 1,191,600 1.50-3.00 1.83
Exercisable at June 30, 1999 560,600 1.50-3.00 2.02
</TABLE>
The following table summarizes information about stock options outstanding
as of June 30, 1999:
<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, 1999 Life-Years Price at June 30, 1999 Exercise Price
<S> <C> <C> <C> <C> <C>
1.50-1.875 980,700 3.52 $ 1.74 210,400 1.90
2.00-3.00 210,900 1.15 2.28 350,200 2.21
1.50-3.00 1,191,600 3.10 1.90 560,600 2.02
</TABLE>
31
<PAGE>
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, 1999, 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,
1999 1998 1997
<S> <C> <C> <C>
Net loss-as reported . . . . . . . . . $ (4,388,171) $(499,276) $(2,179,489)
Net loss-pro forma . . . . . . . . . . $ (4,538,172) $(779,276) $(2,325,795)
Net loss per common share-as reported. $ (.51) $ (.06) $ (.30)
Net loss per common share-pro forma. . $ (.53) $ (.09) $ (.32)
Assumptions used:
Expected volatility . . . . . . . 15% 14% 58%
Risk-free interest rate . . . . . 5% 5% 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.
In March 1999, the Company granted 120,000 stock options to a non-employee
at a price of $2.50 per share. The options vest if certain performance
parameters are achieved by May 2000. No such parameters were achieved by June
30, 1999.
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
32
<PAGE>
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 and 90,000 shares of common stock at $2.00 per share during the years
ended June 30, 1998 and 1997. Warrants to purchase 15,000 shares of common
stock at $2.00 per share were exercisable as of June 30, 1999. 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. 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, 1999, 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. During 1999, the Company
renegotiated the agreement and issued the third party 350,000 shares instead of
the 400,000 shares payable over four years and the 112,000 contingent shares.
The 400,000 shares to have been issued were considered to be outstanding shares
for purposes of computing basic and diluted income (loss) per common share from
April 1998 until the 350,000 shares were issued in November 1998.
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.
33
<PAGE>
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
$84,000, $77,000, and $81,000 in 1999, 1998 and 1997, respectively.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in one business segment-the manufacturing of medical
monitoring and telemetry equipment. The Company's customers include hospitals
and alternative health care sites throughout the world. Although the Company's
products are sold primarily to health care providers, concentrations of credit
risk with respect to trade accounts receivable are limited due to the Company's
large number of customers and their geographic dispersion. During 1999, a
customer, who has entered into an OEM agreement with the Company, purchased
approximately $4,360,000 of the Company's products. This represents
approximately 15% of the Company's total sales. 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
34
<PAGE>
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>
1999 1998 1997
<S> <C> <C> <C>
Europe and Middle East . . . . . . . $ 4,635,000 $ 5,464,000 $ 5,606,000
Pacific Rim. . . . . . . . . . . . . 2,243,000 3,895,000 3,784,000
Canada and Central and South America 3,634,000 3,414,000 3,867,000
Net export sales . . . . . . . . . . $10,512,000 $12,773,000 $13,257,000
</TABLE>
11. SEVERANCE PAY
During November 1999, the two co-founders of the Company resigned from
their positions. The Company has provided each of these individuals with a
severance agreement which includes a portion of their salary and fringe benefits
for a period which approximates three years and recorded a charge of $810,000
for their severance in the year ended June 30, 1999.
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. 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, 1999 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
July 28, 1999
35
<PAGE>
QUARTERLY RESULTS
The following table contains quarterly information, which includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation. The Company recorded a charge of
approximately $1,800,000 for settlement costs related to a lawsuit that was
substantially resolved in the quarter ended June 30, 1999 and a charge of
$900,000 for the purchase of patented technology in the quarter ended June 30,
1998. 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,
1997 1997 1998 1998 1998 1998 1999 1999
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . $ 7,544 $ 7,138 $ 6,279 $ 6,947 $ 6,724 $ 7,290 $ 7,276 $ 7,223
Gross profit. . . . . 3,506 3,273 2,919 3,340 3,259 3,562 3,379 2,784
Income (loss) from
operations. . . . . 586 422 70 (772) (214) (880) (486) (2,308)
Net income (loss) . . 172 132 19 (822) (420) (947) (681) (2,340)
Net income (loss)
per common
share-Basic. . . . .02 .02 .00 (.10) (.05) (.11) (.08) (.27)
-Diluted. .02 .02 .00 (.10) (.05) (.11) (.08) (.27)
</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.
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, 1999. During that period, there were no disagreements with the accountants
regarding accounting and financial disclosure.
36
<PAGE>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- --------------------------------------------------------
Information regarding the executive officers and directors of the Company
is incorporated herein by reference to the discussions under "Nominees for
Election as Director," "Other Directors," " Section 16(a) Beneficial Ownership
Reporting Compliance" and "Executive Officers" in the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders (the "Criticare Proxy Statement")
which will be filed on or before October 28, 1999.
Item 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Criticare Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- -----------------------------------------------------------------
Incorporated herein by reference to the discussion under "Security
Ownership" in the Criticare Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- --------------------------------------------------
Incorporated herein by reference to the discussion under "Certain
Transactions" in the Criticare Proxy Statement.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial
---------------------
statements of the Company are included in Item 8 of this report.
Consolidated Balance Sheets - as of June 30, 1999 and 1998.
Consolidated Statements of Operations - for the years ended June 30,
1999, 1998 and 1997.
37
<PAGE>
Consolidated Statements of Stockholders' Equity - for the years ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - for the years ended June 30,
1999, 1998 and 1997.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
-------------------------------
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 1999, 1998
and 1997:
Schedule
Number Description Page
------ ----------- ----
VIII Valuation and Qualifying 21
Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or the required
information is shown in the financial statements or notes thereto, and therefore
have been omitted.
3. Exhibits:
--------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Registration Statement on Form S-1,
Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference
to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.1 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).
38
<PAGE>
10.2 Rights Agreement (incorporated by reference to the Company's
Current Report on Form 8-K filed on April 18, 1997).
10.3 Assignment of Rights to Patent Applications, Patents and/or
Inventions, effective November 3, 1998, between the Company and TeleMed
Technologies International, Inc. (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
10.4 Registration Agreement, dated as of November 3, 1998, between
the Company and TeleMed Technologies International, Inc. (incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999).
10.5* 1999 Employee Stock Purchase Plan.
10.6* 1992 Employee Stock Option Plan (incorporated by reference
to the Company's Registration Statement on Form S-8, Registration No. 33-60644).
10.7* 1992 Nonemployee Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8, Registration No.
33-60214).
10.8* 1987 Employee Stock Option Plan (incorporated by reference
to the Company's Registration Statement on Form S-8, Registration No. 33-33497).
10.9* 1987 Nonemployee Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8, Registration No.
33-40038).
10.10* 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).
10.11* Employment Agreement of Gerhard J. Von der Ruhr
(incorporated by reference to the Registration Statement filed on Form S-1,
Registration No. 33-13050).
10.12* Employment Agreement of N.C. Joseph Lai (incorporated by
reference to the Registration Statement filed on Form S-1, Registration No.
33-13050).
39
<PAGE>
10.13* 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).
10.14* 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).
10.15* Severance Agreement, dated as of November 16, 1998, of
Gerhard J. Von der Ruhr (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999).
10.16* Severance Agreement, dated as of November 16, 1998, of N.C.
Joseph Lai (incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999).
10.17* Employment Agreement of Emil H. Soika.
10.18* Employment Agreement of Joseph M. Siekierski.
10.19* Employment Agreement of Stephen D. Okland.
10.20* Employment Agreement of Drew M. Diaz.
10.21* Employment Agreement of Gloria Najera.
10.22* Amendment to Employment Agreement of Gloria Najera.
21 Subsidiaries.
23 Independent Auditors' Consent.
24 Power of Attorney (incorporated by reference to the signature
page hereof).
27 Financial Data Schedule.
__________________
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30,
1999.
40
<PAGE>
(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.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CRITICARE SYSTEMS, INC.
By /s/ Emil H. Soika
--------------------
Emil H. Soika, President
and Chief Executive Officer
Date: September 28, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Emil H. Soika 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/ Emil H. Soika President, Chief Executive Officer September 28, 1999
- ---------------------------- and Director (Principal Executive
Emil H. Soika Officer)
/s/ Joseph M. Siekierski Vice President-Finance and Secretary September 28, 1999
- ---------------------------- (Principal Financial and Accounting
Joseph M. Siekierski Officer)
42
<PAGE>
/s/ Karsten Houm Chairman of the Board and Director September 28, 1999
- ----------------------------
Karsten Houm
/s/ Milton Datsopoulos Director September 28, 1999
- ----------------------------
Milton Datsopoulos
/s/ Gerhard J. Von der Ruhr Director September 28, 1999
- ----------------------------
Gerhard J. Von der Ruhr
/s/ N.C. Joseph Lai Director September 28, 1999
- ----------------------------
N.C. Joseph Lai
</TABLE>
43
<PAGE>
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, 1999 and 1998, and for each of the three years
in the period ended June 30, 1999, and have issued our report thereon dated July
28, 1999; such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of Criticare Systems,
Inc. listed in Item 14. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
July 28, 1999
44
<PAGE>
SCHEDULE VIII
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Column A
- ------------------------------- Column B Column C Column D Column E
----------- ----------- ----------- ---------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts $ 295,000 $ 366,505 $ 194,505 $ 467,000
Reserve for sales returns and
allowances . . . . . . . . . $ 504,000 $ 1,283,931 $ 1,647,931 $ 140,000
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts $ 467,000 $ 99,000 $ 266,000 $ 300,000
Reserve for sales returns and
allowances . . . . . . . . . $ 140,000 $ 1,357,917 $ 1,397,917 $ 100,000
YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts $ 300,000 $ 380,004 $ 305,004 $ 375,000
Reserve for sales returns and
allowances. . . . . . . . . $ 100,000 $ 760,194 $ 800,194 $ 60,000
</TABLE>
45
CRITICARE SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
CRITICARE SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
TABLE OF CONTENTS
I. INTRODUCTION 1
II. DEFINITIONS 1
III. PARTICIPATION 4
IV. OPTIONS TO PURCHASE; MAXIMUM SHARES AVAILABLE 5
V. PURCHASE OF STOCK PURSUANT TO OPTIONS 6
VI. ADMINISTRATION OF PLAN 10
VII. ADJUSTMENT UPON CHANGES IN COMMON STOCK 11
VIII. AMENDMENT; TERMINATION OF PLAN 12
IX. MISCELLANEOUS 12
<PAGE>
CRITICARE SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
I. INTRODUCTION
The purpose of the Criticare Systems, Inc. Employee Stock Purchase Plan is
to make available to eligible employees of Criticare Systems, Inc. (the
"Company"), and certain related companies a means of purchasing shares of the
Company's Common Stock through voluntary, regular payroll deductions. The Plan
is not subject to the provisions of the Employee Retirement Income Security Act
of 1974, but is intended to qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Plan shall be administered, interpreted and construed so as to extend and limit
participation in a manner consistent with Section 423 of the Code.
Participation in the Plan is entirely voluntary, and the Company makes no
recommendations to employees as to whether they should or should not participate
in the Plan.
The Plan has been adopted by the Board and is effective July 1, 1999, but
no Options to purchase shares may be exercised or deemed exercised unless this
Plan is approved by the Company's shareholders on or before December 31, 1999 in
the manner required by section 423(b)(2) of the Code and Treasury Regulation
section 1.423-2(c).
II. DEFINITIONS
2.1. DEFINITIONS. The following words and phrases shall have the
following meanings:
"Administrator" means the entity or person designated to act as
Administrator of the Plan pursuant to Section 6.1.
"Base Compensation" means gross compensation for the relevant pay period,
including overtime pay, but excluding all bonuses, severance pay, extraordinary
pay, expense allowances or reimbursements, moving expenses and income from the
exercise of nonqualified stock options, the disposition of incentive stock
options or from restricted stock or stock option awards. For these purposes,
gross compensation includes any amount that would be included in taxable income
but for the fact that it was contributed to a qualified plan pursuant
<PAGE>
to an elective deferral under Section 401(k) of the Code or contributed under a
salary reduction agreement pursuant to Section 125 of the Code.
"Board" means the Board of Directors of the Company.
"Broker" means a duly licensed securities dealer, broker or agent
designated to act as Broker of the Plan pursuant to Section 6.2.
"Committee" means the Compensation Committee of the Board, which, to the
extent required by Rule 16b-3, shall consist entirely of Non-Employee Directors
(as defined in Rule 16b-3).
"Company" means Criticare Systems, Inc
"Common Stock" means the Company's Common Stock, par value $.04 per share.
"Code" has the meaning set forth in Article I.
"Eligible Employee" means any employee of any Employer, excluding any
employee (a) who has been employed by the Employer for less than six months, (b)
whose customary employment with the employee's Employer is 20 hours or less per
week, (c) whose customary employment with the employee's Employer is not for
more than five months in any calendar year, or (d) who immediately after the
grant of an option under this Plan to the employee would (in accordance with the
provisions of Sections 423 and 424(d) of the Code) own stock possessing 5% or
more of the total combined voting power or value of all classes of stock of the
"employer corporation" or of its "Parent Corporations" or "Subsidiary
Corporations," as defined in Section 424 of the Code.
"Employer" means, with respect to any Participant, the Company or Related
Corporation of which the Participant is an Eligible Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
"Fair Market Value" means, with respect to a share of Common Stock, the
last sales price (or average of the quoted closing bid and asked prices if there
is no closing sales price reported) of a share of Common Stock as reported by
the Nasdaq National Market (or by the principal national stock exchange on which
the Nasdaq Common Stock is then listed) on the date of valuation, if such date
is a
2
<PAGE>
business day, or the immediately preceding business day, if such date is not a
business day. In the absence of an established market for Common Stock, the
Fair Market Value of a share of Common Stock shall be determined in good faith
by the Board.
"Indemnified Person" has the meaning set forth in Section 9.2.
"Initial Option Period" means the Option Period commencing on the Plan
Start Date and ending on December 31, 1999.
"Option" means an option granted pursuant to this Plan at the beginning of
each Option Period to acquire Common Stock.
"Option Exercise Date" means the last day of each Option Period.
"Option Period" means each calendar month during the period beginning on
the Plan Start Date and ending on June 30, 2009, unless the Plan is terminated
earlier; provided, however, the first Option Period under the Plan shall start
on July 1, 1999 and terminate December 31, 1999.
"Payroll Deduction Account" means, with respect to each Participant, the
amounts credited to the Participant's account from the payroll deductions made
by the Participant under this Plan, less any amounts withdrawn from such account
(for payment of Common Stock, payment to the Participant, payment of withholding
and other taxes or amounts or payment of other obligations or amounts).
"Participant" has the meaning set forth in Section 3.2.
"Plan" means the Criticare Systems, Inc. Employee Stock Purchase Plan.
"Plan Start Date" means July 1, 1999.
"Related Corporation" means any present or future corporation which (i)
would be a "subsidiary corporation" or "parent corporation" of the Company or
any other Related Corporation as such terms are defined in Section 424 of the
Code, and (ii) is designated as a participating employer in this Plan by the
Board.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act.
"Stock Account" means, with respect to each Participant, the number of
whole shares of Common Stock credited under this Plan to the Participant's
3
<PAGE>
account. Dividends with respect to shares of Common Stock credited to a
Participant's Stock Account shall be paid to the Participant and shall not be
held in either the Participant's Stock Account or Payroll Deduction Account.
III. PARTICIPATION
3.1. ELIGIBLE EMPLOYEES. Subject to Article VIII, all Eligible
Employees as of the beginning of each Option Period may participate in the Plan
for such Option Period at their election.
3.2. PARTICIPATION PROCEDURES. If an Eligible Employee does not
otherwise have an election to become a Participant in effect, each Eligible
Employee choosing to participate in the Plan (herein called a "Participant")
during an Option Period shall enroll as a Participant in the Plan by filing with
the Participant's Employer a completed enrollment form (authorized by the
Administrator) prior to the beginning of any Option Period (including the
Initial Option Period).
3.3. EMPLOYEE CONTRIBUTIONS. Subject to other limitations provided in
this Plan, a Participant may contribute under the Plan any portion of
Participant's Base Compensation which is a whole dollar amount, with a minimum
of 1% of Participant's Base Compensation and a maximum of 10% of the
Participant's Base Compensation. Contributions may be made only through regular
payroll deductions, net of any tax or other withholdings.
An enrollment form and payroll deduction authorization will remain
effective for each successive Option Period until terminated in writing by a
Participant or until the Participant is no longer eligible to participate in the
Plan. The payroll deduction authorization may be reduced or terminated at any
time by the Participant's written request submitted to the Participant's
Employer; provided, however, that a Participant may not recommence or increase
payroll deductions until the beginning of the next Option Period, nor may a
Participant make more than one revision of the Participant's payroll deduction
authorization in any Option Period. Termination of deductions shall constitute
withdrawal from the Plan as set forth in Section 3.5 and cancellation of any
outstanding Options of the Participant. Reduction or termination of deductions
will become effective as soon as practicable after a Participant's written
request is received by the Participant's Employer.
3.4. PARTICIPANT RESTRICTION. Notwithstanding any provisions of this
Plan to the contrary, no Participant will be granted an Option under this
4
<PAGE>
Plan which would permit the Participant's rights to purchase shares of stock
pursuant to all employee stock purchase plans under section 423 of the Code
sponsored by the Company and "parent corporations" and "subsidiary corporations"
(within the meaning of Section 424 of the Code) to accrue at a rate which
exceeds $25,000 of the Fair Market Value of such stock determined at the time
each Option is "granted" (within the meaning of Code Section 423(b)(8)) for each
calendar year during which any Option granted to such Participant is outstanding
at any time, as provided in Sections 423 and 424(d) of the Code.
3.5. WITHDRAWAL FROM PLAN. A Participant may withdraw from the Plan
(thereby canceling all Options then in existence) at any time by giving written
notice to the Participant's Employer and to the Administrator. The
Administrator shall, as soon as practicable after receiving written notice of a
Participant's withdrawal from the Plan, cause to be delivered to the Participant
(i) a certificate issued in the name of the Participant representing the number
of full shares of Common Stock held in the Participant's Stock Account and (ii)
a check representing any funds held to the credit of the Participant's Payroll
Deduction Account. A Participant who has withdrawn from the Plan may thereafter
reenter the Plan by following the procedure described under Section 3.2.
3.6. TERMINATION OF PARTICIPANT'S EMPLOYMENT. Upon termination of a
Participant's employment from the Employers for any reason, including death or
disability, the Participant's Stock Account and Payroll Deduction Account in the
Plan shall be closed, and all existing Options held by the Participant shall be
canceled. The Administrator shall, as soon as practicable after termination of
a Participant's employment, cause to be delivered to the Participant or the
Participant's estate or the Participant's designated beneficiary as provided
below, as applicable, (i) a certificate issued in the name of the Participant
representing the number of full shares of Common Stock in the Participant's
Stock Account, and (ii) a check representing any funds held to the credit of the
Participant's Payroll Deduction Account. In the event of a Participant's death,
the Participant's Common Stock and Payroll Deduction Account shall be delivered
and paid to the estate of such Participant or to a beneficiary designated by the
Participant in writing on a form approved by the Administrator.
IV. OPTIONS TO PURCHASE STOCK; MAXIMUM SHARES AVAILABLE
4.1. MAXIMUM SHARES. The maximum number of shares which shall be
issued under the Plan, subject to adjustment upon changes in Common Stock under
Article VII, shall be 500,000 shares. If, on a given Option Exercise Date, the
number of shares with respect to which Options are to be exercised
5
<PAGE>
exceeds the number of shares available under the Plan, the Company shall make a
pro rata allocation of the shares remaining available for purchase in as uniform
a manner as shall be practicable and it shall determine to be equitable, and the
balance of the Payroll Deduction Account of each Participant shall be returned
to the Participant as promptly as possible.
4.2. OFFERINGS. Subject to Article VIII, the Company shall make
consecutive offerings on the beginning of each Option Period to Participants to
purchase Common Stock as long as shares authorized remain available for
issuance. Each offering as of the beginning of each Option Period shall be the
total number of shares authorized under Section 4.1, less the number of shares
issued by purchases of Common Stock under Section 5.5 in prior Option Periods.
V. PURCHASE OF STOCK PURSUANT TO OPTIONS
5.1. PAYROLL DEDUCTION ACCOUNTS. Each Employer will deduct from its
Participants' paychecks such amounts as have been authorized by the Participants
and, promptly after the end of each month, remit to the Administrator all
amounts so deducted during the month, together with a report showing each
Participant and the amounts allocable to the Payroll Deduction Account of each
Participant. The Administrator shall credit each Participant's Payroll
Deduction Account with the amount of such deposits, and shall reduce the
Participant's Payroll Deduction Account by the purchase price of all Common
Stock purchased by the Participant under this Plan and by any other withdrawals
from the Participant's Payroll Deduction Account. The Plan, through its
Administrator, shall purchase for the Stock Accounts of the Participants shares
of Common Stock with funds received under the Plan.
5.2. STOCK ACCOUNTS. The Administrator will open and maintain a Stock
Account in the name of each Participant to which will be credited all shares of
Common Stock purchased for the Participant's benefit. All shares held under the
Plan will be registered in the name of the Plan, the Administrator or the
Administrator's nominee, and will remain so registered until the shares are
delivered to the Participant. The Participant shall have the right to sell all
or any part of the shares held in the Participant's Stock Account, pursuant to
procedures established by the Administrator.
5.3. GRANT OF OPTIONS AND PURCHASE. Subject to Article VIII, each
person who is a Participant on the first day of an Option Period will as of the
first day of such Option Period be deemed to have been granted an Option for
such period. Such Option will be for the number of whole shares of Common Stock
to
6
<PAGE>
be determined by dividing (a) the balance in the Participant's Payroll
Deduction Account on the Option Exercise Date, by (b) the purchase price per
share of Common Stock determined under Section 5.4 below; provided, however,
that the quotient in this Section 5.3 shall be rounded down to a whole number.
The number of shares of Common Stock receivable by each Participant upon
exercise of an Option for an Option Period shall be reduced, on a substantially
proportionate basis, in the event that the number of shares then available under
the Plan is otherwise insufficient.
5.4. PURCHASE PRICE. The purchase price of each share of Common Stock
sold pursuant to the exercise of an Option shall be 0.85 multiplied by the Fair
Market Value of the Common Stock on the first day or last day of the Option
Period, whichever is lower.
5.5. EXERCISE OF OPTIONS. Each person who is a Participant in the Plan
on the Option Exercise Date will be deemed to have exercised on the Option
Exercise Date the Option granted to the Participant for that Option Period.
Upon such exercise, the balance of the Participant's Payroll Deduction Account
shall be applied to the purchase of the number of whole shares of Common Stock
determined under Section 5.3, and the amount of shares of Common Stock purchased
shall be credited to the Participant's Stock Account. In the event that the
balance of the Participant's Payroll Deduction Account following an Option
Period is in excess of the total purchase price of the shares of Common Stock so
sold, the balance of the Payroll Deduction Account shall be returned to the
Participant; provided, however, that if the balance in the Payroll Deduction
Account consists solely of an amount equal to the value of a fractional share it
will be retained in the Payroll Deduction Account and carried over to the next
Option Period. No fractional shares shall be issued hereunder.
Notwithstanding anything herein to the contrary, the Company's obligation
to sell and deliver shares of Common Stock under the Plan is subject to the
approval required of any governmental authority in connection with the
authorization, issuance, sale or transfer of such shares, to any requirements of
Nasdaq or any national securities exchange applicable thereto, and to compliance
by the Company with other applicable legal requirements in effect from time to
time, including without limitation any applicable tax withholding requirements.
5.6. NO ASSIGNMENT OF PARTICIPANT'S INTEREST IN PLAN. A Participant
may not assign, sell, transfer, pledge, hypothecate or alienate any Options or
other interests (including Participant's Payroll Deduction Account) in or rights
under the Plan. Options under the Plan are exercisable by a Participant
7
<PAGE>
during the Participant's lifetime only by the Participant. All employees shall
have the same rights and privileges under the Plan. Participants shall have no
interest or voting rights in shares of Common Stock covered by his or her Option
until such Option has been exercised.
5.7. VESTING. Each Participant will immediately acquire full ownership
of all shares of Common Stock at the time such shares are credited to the
Participant's Stock Account.
5.8. DELIVERY OF STOCK. A Participant may instruct the Administrator,
in writing, at any time to deliver to the Participant a certificate, issued in
the name of the Participant, representing any or all of the full shares of
Common Stock held in the Participant's Stock Account. As soon as practicable
after receiving such instructions, the Administrator shall cause the certificate
to be mailed to the Participant. Such instruction to the Administrator,
requesting delivery of a certificate, will not affect the Participant's status
under the Plan unless the Participant also terminates the payroll deduction
authorization.
5.9. DIVIDENDS, SPLITS AND DISTRIBUTIONS. Any stock dividends or stock
splits in respect of shares held in the Participant's Stock Account will be
credited to the Participant's account without charge. Any distributions to
holders of Common Stock or other securities or rights to subscribe for
additional shares of Common Stock will be sold and the proceeds will be handled
in the same manner as a cash dividend, unless the Participant instructs the
Administrator to the contrary.
5.10. VOTING RIGHTS. The Administrator will deliver to each
Participant as promptly as practicable, by mail or otherwise, all notices of
meetings, proxy statements and other material distributed by the Company to its
stockholders. The full shares of Common Stock in each Participant's Stock
Account will be voted in accordance with the Participant's signed proxy
instructions duly delivered to the Administrator or pursuant to any other method
of voting available to holders of Common Stock. There will be no charge to the
Participant for the Administrator's retention or delivery of stock certificates,
or in connection with notices, proxies or other such material.
5.11. NO INTEREST TO BE PAID. No interest will be paid to or credited
to the Payroll Deduction Accounts or Stock Accounts of the Participants.
5.12 DESIGNATION OF BENEFICIARY. A Participant may file a written
designation of a beneficiary who is to receive any shares and cash, if any,
8
<PAGE>
from the Participant's accounts under the Plan in the event of such
Participant's death. If a Participant is married and the designated beneficiary
is not the spouse, spousal consent shall be required for such designation to be
effective. Such designation of beneficiary may be changed by Participant at any
time by written notice. In the event of death of the Participant and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such Participant's death, the Company shall deliver such shares and/or
cash in Participant's accounts to the personal representative, executor or
administrator of the estate of the Participant, or if no personal
representative, executor or administrator has been appointed (to the knowledge
of the Company), the Company, in its discretion, may deliver such shares and/or
cash in the Participant's accounts to the spouse or to any one or more
dependents or relatives of such Participant or if no spouse, dependent or
relative is known by the Company, then to such other person as the Company may
designate.
5.13 CONDITIONS UPON ISSUANCE OF COMMON STOCK. Shares of Common Stock
shall not be issued with respect to an Option unless the exercise of such Option
and the issuance and delivery of such shares pursuant thereto shall comply with
all applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the rules and regulations promulgated
thereunder and the requirements of any stock exchange upon which shares may be
listed and shall be further subject to the approval of counsel for the Company
with respect to such compliance. As a condition to the exercise of an Option,
the Company may require the person exercising the Option to represent and
warrant at the time of such exercise that the shares are being purchased only
for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel of the Company, such representation is
required by any of the afore-mentioned applicable provisions of law. The terms
and conditions of Options granted under the Plan, and the repurchase of shares
by, persons subject to section 16 of the Exchange Act shall comply with all
applicable provisions of Rule 16b-3 under the Exchange Act. The Plan and each
Option shall be deemed to contain, and the shares issued upon exercise thereof
shall be subject to, such additional conditions and restrictions as may be
required by Rule 16b-3 under the Exchange Act to qualify for the maximum
exemption from section 16 of the Exchange Act with respect to Plan
transactions.
In addition to the restrictions described in the first paragraph of this
section 5.13, the shares of Common Stock received by any person upon exercise of
Option may not be sold, assigned, transferred, pledged, or otherwise disposed of
for a period of six months from the date of such exchange. The shares of the
9
<PAGE>
Common Stock received upon the exercise of such Option may bear a legend to such
effect and the Company may require the person receiving such shares to execute
an agreement to such effect.
5.14 TAX WITHHOLDING. At the time an Option is exercised, in whole or
in part, or at the time some or all of Common Stock issued the Plan is disposed
of, the Participant must make adequate provision for the Company's federal,
state or other tax withholding obligations, if any, that may arise upon exercise
of the Option or the disposition of the shares of Common Stock. At any time,
the Company may, but shall not be obligated to withhold from a Participant's
Compensation the amount necessary for the Company to meet applicable withholding
obligations, including, any withholding required to make available to the
Company any tax deductions attributed to the sale or early disposition of Common
Stock by the Participant.
VI. ADMINISTRATION OF PLAN
6.1. THE ADMINISTRATOR AND THE COMMITTEE. To carry out the purposes of
the Plan, the Committee shall appoint an Administrator. The Administrator may
be any company or individual that the Committee deems qualified, including the
Company. The Administrator shall be responsible for the implementation of the
Plan, including allocation of funds and stock to the Payroll Deduction Accounts
and Stock Accounts and keeping adequate and accurate records for the
Participants.
The Committee shall be entitled to adopt and apply guidelines and
procedures consistent with the purposes of the Plan. In order to effectuate the
purposes of the Plan, the Committee shall have the discretionary authority to
construe and interpret the Plan, to supply any omissions therein, to reconcile
and correct any errors or inconsistencies, to decide any questions in the
administration and application of the Plan, and to make equitable adjustments
for any mistakes or errors made in the administration of the Plan, and all such
actions or determinations made by the Committee, and the application of rules
and regulations to a particular case or issue by the Committee, in good faith,
shall not be subject to review by anyone, but shall be final, binding and
conclusive on all persons ever interested hereunder.
6.2. BROKER. The Administrator may, in its discretion, with the
consent and approval of the Committee, appoint a Broker. The Broker may be any
company or individual that the Committee deems qualified; provided, however,
10
<PAGE>
that the Broker shall be a licensed security dealer, broker, or agent authorized
to make purchases and sales of Common Stock.
6.3. REPORTING TO PARTICIPANTS. The Administrator will send to each
Participant a statement at the end of each calendar quarter (or such other
period as determined by the Committee in its sole discretion). Each such
statement shall contain information concerning transactions in the Participant's
Payroll Deduction Account and Stock Account during the relevant period and
reflect the balance in the Participant's Payroll Deduction Account and Stock
Account at the end of such period.
6.4 USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan in all Payroll Deduction Accounts may be used by the
Company for any corporate purpose. The Company shall not be obligated to
segregate such payroll deductions.
VII. ADJUSTMENT UPON CHANGES IN COMMON STOCK
7.1. CHANGES IN COMMON STOCK. If any change is made in the Common
Stock (through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, revise stock split,
liquidating dividend, combination of shares, exchange of shares, change in
corporate structure or otherwise), the Administrator may make appropriate
adjustments in (a) the number of shares and price per share of Common Stock
subject to the Plan or to any Option granted under the Plan, (b) the number of
shares of Common Stock that have been authorized under the Plan but not yet
placed under Option, and (c) the maximum number of shares each Participant may
purchase.
7.2. DISSOLUTION; MERGER; CAPITAL REORGANIZATION; ETC. In the event of
(i) a dissolution or liquidation of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation, or a reverse merger in
which the Company is the surviving corporation but the shares of Common Stock by
virtue of the merger are converted into other property, whether in the form of
securities, cash or otherwise; or (iii) any other capital reorganization in
which more than 50 percent of the shares of Common Stock entitled to vote are
exchanged, the Plan shall terminate, unless another corporation assumes the
responsibility of continuing the operation of the Plan or the Committee
determines in its discretion that the Plan shall nevertheless continue in full
force and effect. If the Committee elects to terminate the Plan, the
Administrator shall send to each Participant a stock certificate representing
the
11
<PAGE>
number of whole shares to which the Participant is entitled. In addition,
the Administrator shall send checks drawn on the Plan's account to each
Participant in an amount equal to the funds held to the credit of such
Participant's Payroll Deduction Account.
7.3. COMPANY'S RIGHT TO RESTRUCTURE, ETC. The grant of any right to a
Participant pursuant to the Plan shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business or
assets.
VIII. AMENDMENT; TERMINATION OF PLAN
8.1. AMENDMENT AND TERMINATION. The Company, acting through the
Committee, reserves the right to amend or terminate the Plan at any time or
times; provided, however, any amendment that would require the consent of
stockholders under applicable law, rule or regulation (including, without
limitation, the Code, the Exchange Act or any self regulatory organization such
as a national securities exchange), will not be made unless such stockholders'
consent is obtained.
In addition, the Plan shall terminate automatically on the tenth
anniversary of the Plan Start Date, or on any Option Exercise Date when
Participants become entitled to purchase a number of shares greater than the
number of reserved shares remaining available for purchase, subject to the
allocation of remaining shares pursuant to the last sentence of Section 5.3.
Upon termination of the Plan, all amounts held in the Payroll Deduction Accounts
shall, to the extent not used to purchase shares of Common Stock, be refunded to
the Participants entitled thereto.
IX. MISCELLANEOUS
9.1. EXPENSES OF PLAN. The Broker's brokerage commissions, if any,
incurred in connection with transactions in Common Stock under the Plan, and the
Administrator's administrative charges for maintaining Participants' accounts
relating to purchases of securities and all other expenses of administering or
maintaining the Plan will be paid by the Company. If the Company is acting as
Administrator, no expenses will be charged to the Participants.
9.2. INDEMNIFICATION. In the event and to the extent not insured
against under any contract of insurance with an insurance company, the Company
shall indemnify and hold harmless each "Indemnified Person," as defined below,
12
<PAGE>
against any and all claims, demands, suits, proceedings, losses, damages,
interest, penalties, expenses (specifically including, but not limited to,
counsel fees to the extent approved by the Board or otherwise provided by law,
court costs and other reasonable expenses of litigation), and liability of every
kind, including amounts paid in settlement, with the approval of the Board,
arising from any action or cause of action related to the Indemnified Person's
act or acts or failure to act. Such indemnity shall apply regardless of whether
such claims, demands, suits, proceedings, losses, damages, interest, penalties,
expenses and liability arise in whole or in part from (a) the negligence or
other fault of the Indemnified Person, or (b) from the imposition on such
Indemnified Person of any civil penalties or excise taxes pursuant to the Code
or any other applicable laws; except when the same is judicially determined to
be due to gross negligence, fraud, recklessness, or willful or intentional
misconduct of such Indemnified Person. "Indemnified Person" shall mean each
member of the Board, the Administrator, each member of the Committee and each
other employee of any Employer who is allocated fiduciary responsibility
hereunder.
9.3. NO CONTRACT OF EMPLOYMENT INTENDED. The granting of any rights to
an Eligible Employee under this Plan shall not constitute an agreement or
understanding, express or implied, on the part of any Employer, to employ such
Eligible Employee for any specified period.
9.4 GOVERNING LAW. The construction, validity and operation o shall be
governed by the laws of the State of Wisconsin.
9.5. SEVERABILITY OF PROVISIONS. If any provision of this Plan is
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of this Plan, but
such invalid, illegal or unenforceable provisions shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
9.6. NO LIABILITY. Neither the Company, its directors, officers or
employees, the Committee, the Administrator nor any Related Corporation which is
in existence or hereafter comes into existence, shall be liable to any
Participant or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that the Plan does not qualify
under Section 423 of the Code.
13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1999, by
and between CRITICARE SYSTEMS, INC., a Delaware corporation (the "Company"), and
EMIL H. SOIKA ("Employee").
RECITALS
A. Employee is currently employed by the Company as its President and
CEO.
B. The Company desires to make certain agreements with Employee in
order to induce Employee to remain in such employ and in exchange for Employee's
covenants herein.
C. The parties desire to evidence their agreement as to the terms of
the Company's employment of Employee.
AGREEMENT
In consideration of the foregoing recitals and mutual covenants contained
herein, the parties hereby agree as follows:
1. Employment. The Company hereby continues its employment of Employee
----------
as the Company's President and CEO, and Employee hereby accepts such employment,
subject to the provisions of this Agreement.
2. Duties and Authority. Employee shall be employed as the Company's
----------------------
President and CEO. Employee shall have such duties and authority as are
customary for the President and CEO of a publicly-held corporation with similar
authority as the Company's Board of Directors may from time to time reasonably
assign Employee consistent with the foregoing and the other provisions of this
Agreement. Employee agrees to devote his entire business time, energy and
skills to such employment. At all times, Employee shall be subject to the
direction of the Company's Board of Directors and its President.
3. Compensation and Benefits. Employee shall be entitled to the
---------------------------
following compensation and benefits for services rendered to the Company:
(a) Compensation. Employee shall receive an annual base salary of
------------
$125,000 payable in equal installments not less frequently than monthly.
Employee's base salary shall be reviewed annually within 30 days prior to the
end of each fiscal year (but such annual base salary shall not be reduced to
less than the prior year's annual base salary without Employee's written
consent).
(b) Bonus Plan. Employee shall be eligible to receive a bonus
-----------
annually, based on Employee's and the Company's financial performance, in the
discretion of the Board of Directors.
<PAGE>
(c) Expense Reimbursements. The Company shall reimburse Employee
-----------------------
for actual out-of-pocket costs incurred for reasonable business expenses, other
than automobile expenses (which are covered in Section 3(d)) in accordance with
the policies and procedures of the Company in effect from time to time).
(d) Automobile Allowance. Employee shall receive a Company car or
--------------------
car allowance subject to Company policies in effect from time to time with
respect to reimbursement for personal use.
(e) Vacations. Employee shall be entitled to paid vacations of
---------
not more than four weeks each calendar year, which may be taken in Employee's
discretion; provided, however, that such vacation shall not unreasonably
interfere with the Company's needs at such time. Unused vacation time for a
calendar year shall not be carried over from one year to the next.
(f) Health Insurance. Employee shall be entitled to family health
----------------
insurance coverage under the Company's group plan on a premium-sharing basis
then in effect.
(g) Disability Insurance. Employee shall be entitled to
---------------------
participate in the Company's group life insurance and disability insurance in
effect from time to time.
(h) Severance Pay.
--------------
(i) This Agreement may be terminated by the Company at any
time for Cause (hereinafter defined), and in such event Employee shall not be
entitled to receive any further compensation. For purposes of this Agreement,
the term "Cause" shall mean acts of fraud, repeated material misconduct, or
intentional dishonesty by Employee in the course of Employee's employment with
the Company, or the commission of a felony.
(ii) In the event that Employee voluntarily terminates
Employee's employment by the Company, Employee shall not be entitled to receive
any further compensation; provided, however, that if such voluntary termination
occurs at any time after Employee has completed three (3) months of employment
by the Company after the occurrence of a Change in Control (as hereinafter
defined), Employee shall be entitled to receive severance benefits for a period
of 12 months after the date of termination or until Employee secures new
employment, whichever is shorter, consisting of the following:
A. Employee's base salary,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family and the
continuation of Employee's Company provided life insurance or equivalent
coverage,
C. Continuation of use of the company car or an
equivalent car allowance,
2
<PAGE>
D. The payment of Employee's real estate broker's
commissions (not to exceed 6% of the sales price) arising from the sale of
Employee's Wisconsin residence and of Employee's professional packing and moving
van expenses associated with Employee's moving from his Wisconsin residence to
any location within the continental United States of America.
(iii) Notwithstanding anything to the contrary herein,
Employee's employment hereunder may be terminated by the Company without Cause
at any time either prior to or after a "Change in Control" (as hereinafter
defined), however, in such event, Company shall pay Employee for a period of 12
months after the date of termination as severance benefits consisting of the
following:
A. Employee's base salary,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family the continuation
of Employee's Company life insurance or equivalent coverage,
C. Continuation of use of the company car or an
equivalent car allowance,
D. The payment of Employee's real estate broker's
commissions (not to exceed 6% of the sales price) arising from the sale of
Employee's Wisconsin residence and of Employee's professional packing and moving
van expenses associated with Employee's moving from his Wisconsin residence to
any location within the continental United States of America.
A termination without cause shall be deemed to have occurred if Company, without
Employee's consent, materially reduces Employee's responsibilities, reduces
Employee's salary or requires Employee to relocate or transfer to a site further
than 30 miles from Employee's current place of employment.
The term "Change in Control" shall mean a sale, assignment or exchange
of more than 51% of the voting stock outstanding immediately after such sale or
the sale, assignment or exchange of substantially all of the assets of the
Company. The date of the Change in Control shall mean the date upon which a
sale is closed, or in a series of transactions, the date upon which beneficial
ownership of the voting stock or assets is transferred.
All amounts payable to Employee under this Section 3 shall be paid in
normal payroll installments on normal payroll dates less all applicable
withholding. Except as otherwise provided in this Section 3, as of the
effective date of termination, all obligations of the Company to pay
3
<PAGE>
Employee compensation shall terminate and the Company shall have no further
obligation to Employee after the date of termination.
Upon termination of employment for any reason, Employee will deliver
to the Company all data, records and information, including without limitation,
all documents, correspondence, files, notebooks, reports, computer programs,
software, manuals, customer information, samples and all other materials and
copies thereof relating to the Company's business which Employee may possess or
which are under his control.
4. Options.
-------
(i) Employee shall be entitled to receive stock options
exercisable for up to 200,000 shares of common stock of the Company according to
a vesting schedule based upon the achievement of certain benchmarks to be agreed
upon between Employee and the Company's Board of Directors.
(ii) In the event Employee is terminated without Cause or in the
event of a Change in Control of the Company as those terms are defined in the
Agreement, stock options held by Employee shall become immediately exercisable
without regard to vesting and/or applicable benchmarks unless the agreement
governing the exercise of such options contains provisions expressly to the
contrary. In the event of a sale or exchange of assets or stock anticipated to
constitute a Change in Control, the Company agrees that it shall make provisions
for the conversion or exchange of shares to be received upon the exercise of
such options for the consideration to be received by stockholders of the Company
generally; provided, however, that Employee may be required to provide to the
Company an irrevocable notice of exercise a reasonable period of time prior to
the actual closing date to facilitate such exchange.
5. Confidentiality. Employee covenants that he shall at all times keep
---------------
confidential the Company's financial statements and other financial information,
except to the extent (a) disclosure of financial information (but not financial
statements) is incidental to the performance of his duties for the Company, (b)
disclosure is required by applicable law, or (c) the Company's Board of
Directors authorizes disclosure.
6. Restrictive Covenant.
---------------------
(a) As used in this Section 6, the following definitions apply:
"Products" mean vital signs medical monitoring equipment
primarily marketed for use in hospital and alternate care medical facilities.
"Protected Territory" means the United States of America.
(i) Important and essential assets of the Company's business
are the identity of the Company's customers for its Products in the Protected
Territory and the identity of relationships in its distribution network for its
Products in the Protected Territory and their goodwill
4
<PAGE>
toward the Company relating to the marketing and distribution of the Company's
Products in the Protected Territory, and
(ii) The Company through Employee has expended substantial
time, money and effort in acquiring its customers and distribution network for
its Products in the Protected Territory, and the business and goodwill which the
Company enjoys are dependent to a high degree upon their personal relationships
with Employee;
(iii) Selling and servicing the Company's Products in the
Protected Territory requires special skills and knowledge which are valuable
assets of the Company.
(b) Employee expressly agrees that during the term of this
Agreement and for the period of 3 months after Employee's voluntary termination
of employment or for the period of 12 months after the Company's termination of
Employee's employment without Cause (the running of said 3 or 12 month periods
being tolled during any breach of the provisions of this section):
(i) The Employee will not, either directly or indirectly, for
himself or on behalf of or in conjunction with any other person, firm,
partnership, corporation, association or other entity, contact in the Protected
Territory any customer of the Company to whom the Company sold any of its
Products within the 18 months immediately preceding his termination for the
primary purpose of soliciting such customer with respect to purchasing or
leasing Products in competition with Products manufactured and sold by Company,
and
(ii) Employee will not directly or indirectly solicit or
communicate with persons who are Employees of the Company who were so employed
at the time Employee's employment is terminated or who were employed within 12
months immediately preceding such termination date (y) for the purpose of
encouraging such persons to leave or terminate their relationship with the
Company, or (z) for the primary purpose of encouraging such persons to represent
any other person, firm, partnership, corporation, association or other entity to
the sale, lease or servicing of Products in competition with Products
manufactured and sold by the Company, and
(iii) Employee will not enter into the employment of,
represent in any manner, or be in any manner connected with any person, firm,
corporation, entity, association or other entity primarily engaged in a business
relating to the development, servicing, sale, marketing and/or distribution of
Products and which, directly or indirectly, transacts or solicits any business
primarily related to the Company's Products in the Protected Territory.
(c) Employee further expressly agrees that at no time during the
term of this Agreement will he engage in or have a financial interest in any
business which is offering, selling, supplying, manufacturing, or servicing
Products which are competitive with any Products offered, sold or supplied by
the Company to any person, firm, partnership, corporation, or other entity.
(d) Employee further agrees that the remedy at law for any breach
for any of the provisions of this section will be inadequate and that the
Company, its successors or assigns
5
<PAGE>
shall be entitled to injunctive relief in addition to any other rights or
remedies which the Company may have for any such breach.
7. Arbitration. Any controversy or claims arising out of or relating
-----------
to this Agreement shall be submitted to binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
Waukesha County, Wisconsin, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. If the
parties cannot agree on the choice of a single arbitrator within 15 days after
receipt of a notice of arbitration, then the parties shall contact the
chairperson of the Alternative Dispute Resolution section of the Wisconsin Bar,
who shall select an independent arbitrator, and the arbitration shall be decided
by such independent arbitrator. Each of the parties reserves the right to file
with a court of competent jurisdiction an application for temporary or
preliminary injunctive relief or a temporary protective order on the grounds
that the arbitration award to which the applicant may be entitled may be
rendered effective in the absence of such relief. The arbitration award shall
be in writing, and shall specify the factual and legal bases for the award. The
losing party shall pay all costs and expenses of the arbitrator.
8. Notices. Any notice, request, approval, consent, demand, permission
-------
or other communication required or permitted by this Agreement shall be
effective only if it is in a writing signed by the party giving same and shall
be deemed to have been sent, given and received only either (a) when personally
received by the intended recipient, or (b) three days after depositing in the
United States Mail, registered or certified mail, return receipt requested, with
first-class postage prepaid, addressed as follows:
If the Employee:
Emil H. Soika
2040 Limerick Lane
Brookfield, WI 53405
If to the Company:
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, WI 53186
Attn: President
or to such other address as the intended recipient may have theretofore
specified by notice given to the sender as provided in this section.
9. Assignability. This Agreement requires the personal services of
-------------
Employee, and Employee's rights or obligations hereunder may not be assigned or
delegated except as set forth in this Agreement. In the event of a sale of the
stock of the Company, or consolidation or merger of the Company with or into
another company or entity, or the sale of all or any substantial part of the
assets of the Company to another corporation, entity or individual, the Company
may assign this
6
<PAGE>
Agreement to any successor in interest and upon such assignment, Company shall
have no further liability hereunder and the successor in interest shall be
subject to all obligations and be entitled to enforce all rights of the Company
under this Agreement. Subject to the foregoing, this Agreement shall bind and
inure to the benefit of the parties and their respective successors and assigns.
10. Other Agreements. This Agreement contains the entire agreement
-----------------
between the Company and Employee with respect to the subject matter hereof, and
merges and supersedes all prior agreements, understandings or negotiations
whatsoever with respect to the subject matter hereof.
11. Amendments and Waivers. No amendment to this Agreement or any
------------------------
waiver of any of its provisions shall be effective unless expressly stated in a
writing signed by both parties. No delay or omission in the exercise of any
right, power or remedy under or for this Agreement shall impair such right,
power or remedy or be construed as a waiver of any breach. Any waiver of a
breach of any provision of this Agreement shall not be treated as a waiver of
any other provision of this Agreement or of any subsequent breach of the same or
any other provision of this Agreement.
12. Severability. If any provision of this Agreement shall be held
------------
illegal, invalid or otherwise unenforceable under controlling law, the remaining
provisions of this Agreement shall not be affected thereby but shall continue in
effect.
13. Governing Law. This Agreement shall be governed by and construed
--------------
and enforced in accordance with the laws of the State of Wisconsin.
CRITICARE SYSTEMS, INC.
BY /s/ Karsten Houm
------------------
Its
EMPLOYEE:
/s/ Emil H. Soika
--------------------
Emil H. Soika
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1999, by
and between CRITICARE SYSTEMS, INC., a Delaware corporation (the "Company"), and
JOSEPH M. SIEKIERSKI ("Employee").
RECITALS
A. Employee is currently employed by the Company as its Vice
President-Finance.
B. The Company desires to make certain agreements with Employee in
order to induce Employee to remain in such employ and in exchange for Employee's
covenants herein.
C. The parties desire to evidence their agreement as to the terms of
the Company's employment of Employee.
AGREEMENT
In consideration of the foregoing recitals and mutual covenants contained
herein, the parties hereby agree as follows:
1. Employment. The Company hereby continues its employment of
----------
Employee as the Company's Vice President-Finance, and Employee hereby accepts
such employment, subject to the provisions of this Agreement.
2. Duties and Authority. Employee shall be employed as the Company's
---------------------
Vice President-Finance. Employee shall have such duties and authority as are
customary for the Vice President-Finance of a publicly-held corporation with
similar authority as the Company's Board of Directors may from time to time
reasonably assign Employee consistent with the foregoing and the other
provisions of this Agreement. Employee agrees to devote his entire business
time, energy and skills to such employment. However, it is understood that
Employee shall not be required to devote more than an average of 50 hours per
calendar week to such employment. At all times, Employee shall be subject to
the direction of the Company's Board of Directors and its President.
3. Compensation and Benefits. Employee shall be entitled to the
---------------------------
following compensation and benefits for services rendered to the Company:
(a) Compensation. Employee shall receive an annual base salary
------------
payable in equal installments not less frequently than monthly. Employee's
base salary shall be reviewed annually within 30 days prior to the end of each
fiscal year (but such annual base salary shall not be reduced to less than the
prior year's annual base salary without Employee's written consent).
(b) Bonus Plan. Employee shall be eligible to receive a bonus
-----------
annually, based on Employee's and the Company's financial performance, in the
discretion of the Board of Directors.
<PAGE>
(c) Expense Reimbursements. The Company shall reimburse Employee
----------------------
for actual out-of-pocket costs incurred for reasonable business expenses, other
than automobile expenses (which are covered in Section 3(d)) in accordance with
the policies and procedures of the Company in effect from time to time).
(d) Automobile Allowance. Employee shall receive a Company car
---------------------
or car allowance subject to Company policies in effect from time to time with
respect to reimbursement for personal use.
(e) Vacations. Employee shall be entitled to paid vacations of
---------
not more than four weeks each calendar year, which may be taken in Employee's
discretion; provided, however, that such vacation shall not unreasonably
interfere with the Company's needs at such time. Unused vacation time for a
calendar year shall not be carried over from one year to the next.
(f) Health Insurance. Employee shall be entitled to family
-----------------
health insurance coverage under the Company's group plan on a premium-sharing
basis then in effect.
(g) Life Insurance. Subject to Employee's insurability Employee
---------------
shall be entitled to Company-paid split dollar life insurance with a death
benefit of not less than $250,000 less the Company's premium costs.
(h) Disability Insurance. Employee shall be entitled to
---------------------
participate in the Company's group life insurance and disability insurance in
effect from time to time.
(i) Club Membership. Company shall provide a health club
----------------
membership to Employee or equivalent value toward membership in an alternative
club.
(j) Severance Pay.
--------------
(i) This Agreement may be terminated by the Company at any
time for Cause (hereinafter defined), and in such event Employee shall not be
entitled to receive any further compensation. For purposes of this Agreement,
the term "Cause" shall mean acts of fraud, repeated material misconduct, or
intentional dishonesty by Employee in the course of Employee's employment with
the Company, or the commission of a felony.
(ii) In the event that Employee voluntarily terminates
Employee's employment by the Company, Employee shall not be entitled to receive
any further compensation; provided, however, that if such voluntary termination
occurs at any time after Employee has completed three (3) months of employment
by the Company after the occurrence of a Change in Control (as hereinafter
defined), Employee shall be entitled to receive severance benefits for a period
of 12 months after the date of termination or until Employee secures new
employment, whichever is shorter, consisting of the following:
2
<PAGE>
A. Employee's base salary,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family, and
C. Continuation of use of the company car or an
equivalent car allowance and the continuation of Employee's Company provided
group term life insurance or equivalent coverage, and
D. Option to take ownership of any Company provided
split-dollar life insurance coverage on Employee's life subject to Employee's
reimbursement to Company of all past premiums paid for such coverage on
Employee's life; this option shall be exercised within 30 days following
Employee's termination of employment.
(iii) Notwithstanding anything to the contrary herein,
Employee's employment hereunder may be terminated by the Company without Cause
at any time either prior to or after a "Change in Control" (as hereinafter
defined), however, in such event, Company shall pay Employee for a period of 12
months after the date of termination as severance benefits consisting of the
following:
A. Employee's base salary,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family, and
C. Continuation of use of the company car or an
equivalent car allowance and the continuation of Employee's Company provided
group term life insurance or equivalent coverage, and
D. Option to take ownership of any Company provided
split-dollar life insurance coverage on Employee's life subject to Employee's
reimbursement to Company of all past premiums paid for such coverage on
Employee's life; this option shall be exercised within 30 days following
Employee's termination of employment.
3
<PAGE>
A termination without cause shall be deemed to have occurred if Company, without
Employee's consent, materially reduces Employee's responsibilities, reduces
Employee's salary or requires Employee to relocate or transfer to a site further
than 30 miles from Employee's current place of employment.
The term "Change in Control" shall mean a sale, assignment or exchange
of more than 51% of the voting stock outstanding immediately after such sale or
the sale, assignment or exchange of substantially all of the assets of the
Company. The date of the Change in Control shall mean the date upon which a
sale is closed, or in a series of transactions, the date upon which beneficial
ownership of the voting stock or assets is transferred.
All amounts payable to Employee under this Section 3 shall be paid in
normal payroll installments on normal payroll dates less all applicable
withholding. Except as otherwise provided in this Section 3, as of the
effective date of termination, all obligations of the Company to pay Employee
compensation shall terminate and the Company shall have no further obligation to
Employee after the date of termination.
Upon termination of employment for any reason, Employee will deliver
to the Company all data, records and information, including without limitation,
all documents, correspondence, files, notebooks, reports, computer programs,
software, manuals, customer information, samples and all other materials and
copies thereof relating to the Company's business which Employee may possess or
which are under his control.
4. Options. In the event Employee is terminated without Cause or in
-------
the event of a Change in Control of the Company as those terms are defined in
the Agreement, stock options held by Employee shall become immediately
exercisable without regard to vesting and/or applicable benchmarks unless the
agreement governing the exercise of such options contains provisions expressly
to the contrary. In the event of a sale or exchange of assets or stock
anticipated to constitute a Change in Control, the Company agrees that it shall
make provisions for the conversion or exchange of shares to be received upon the
exercise of such options for the consideration to be received by stockholders of
the Company generally; provided, however, that Employee may be required to
provide to the Company an irrevocable notice of exercise a reasonable period of
time prior to the actual closing date to facilitate such exchange.
5. Confidentiality. Employee covenants that he shall at all times
---------------
keep confidential the Company's financial statements and other financial
information, except to the extent (a) disclosure of financial information (but
not financial statements) is incidental to the performance of his duties for the
Company, (b) disclosure is required by applicable law, or (c) the Company's
Board of Directors authorizes disclosure.
6. Other Company Employees. For a period of one year form the date
-------------------------
Employee's employment by the Company terminates, Employee shall not (a) solicit
another Company employee to leave the Company's employ and work for the Employee
or another person or entity, or (b) participate in the hiring of another Company
employee by another person or entity away from the Company.
7. Arbitration. Any controversy or claims arising out of or relating
-----------
to this Agreement shall be submitted to binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
Waukesha County, Wisconsin, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. If the
parties
4
<PAGE>
cannot agree on the choice of a single arbitrator within 15 days after receipt
of a notice of arbitration, then the parties shall contact the chairperson of
the Alternative Dispute Resolution section of the Wisconsin Bar, who shall
select an independent arbitrator, and the arbitration shall be decided by such
independent arbitrator. Each of the parties reserves the right to file with a
court of competent jurisdiction an application for temporary or preliminary
injunctive relief or a temporary protective order on the grounds that the
arbitration award to which the applicant may be entitled may be rendered
effective in the absence of such relief. The arbitration award shall be in
writing, and shall specify the factual and legal bases for the award. The
losing party shall pay all costs and expenses of the arbitrator.
8. Notices. Any notice, request, approval, consent, demand,
-------
permission or other communication required or permitted by this Agreement shall
be effective only if it is in a writing signed by the party giving same and
shall be deemed to have been sent, given and received only either (a) when
personally received by the intended recipient, or (b) three days after
depositing in the United States Mail, registered or certified mail, return
receipt requested, with first-class postage prepaid, addressed as follows:
If the Employee:
Joseph M. Siekierski
W327 S7343 Cabriolet Court
Mukwonago, WI 53149
If to the Company:
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, WI 53186
Attn: President
or to such other address as the intended recipient may have theretofore
specified by notice given to the sender as provided in this section.
9. Assignability. This Agreement requires the personal services of
-------------
Employee, and Employee's rights or obligations hereunder may not be assigned or
delegated except as set forth in this Agreement. In the event of a sale of the
stock of the Company, or consolidation or merger of the Company with or into
another company or entity, or the sale of all or any substantial part of the
assets of the Company to another corporation, entity or individual, the Company
may assign this Agreement to any successor in interest and upon such assignment,
Company shall have no further liability hereunder and the successor in interest
shall be subject to all obligations and be entitled to enforce all rights of the
Company under this Agreement. Subject to the foregoing, this Agreement shall
bind and inure to the benefit of the parties and their respective successors and
assigns.
10. Other Agreements. This Agreement contains the entire agreement
-----------------
between the Company and Employee with respect to the subject matter hereof, and
merges and supersedes all
5
<PAGE>
prior agreements, understandings or negotiations whatsoever with respect to the
subject matter hereof.
11. Amendments and Waivers. No amendment to this Agreement or any
------------------------
waiver of any of its provisions shall be effective unless expressly stated in a
writing signed by both parties. No delay or omission in the exercise of any
right, power or remedy under or for this Agreement shall impair such right,
power or remedy or be construed as a waiver of any breach. Any waiver of a
breach of any provision of this Agreement shall not be treated as a waiver of
any other provision of this Agreement or of any subsequent breach of the same or
any other provision of this Agreement.
12. Severability. If any provision of this Agreement shall be held
------------
illegal, invalid or otherwise unenforceable under controlling law, the remaining
provisions of this Agreement shall not be affected thereby but shall continue in
effect.
13. Governing Law. This Agreement shall be governed by and construed
--------------
and enforced in accordance with the laws of the State of Wisconsin.
CRITICARE SYSTEMS, INC.
BY /s/ Karsten Houm
------------------
Its
------------------
EMPLOYEE:
/s/ Joseph M. Siekierski
---------------------------
Joseph M. Siekierski
6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1999, by
and between CRITICARE SYSTEMS, INC., a Delaware corporation (the "Company"), and
STEPHEN OKLAND ("Employee").
RECITALS
A. Employee is currently employed by the Company as its Vice President
of Domestic Sales, with primary emphasis on developing and supervising a
distribution network consisting of dealers and independent representatives for
the sale of the Company's products in markets located inside the United States.
B. The Company desires to make certain agreements with Employee in
order to induce Employee to remain in such employ and in exchange for Employee's
covenants herein.
C. The parties desire to evidence their agreement as to the terms of
the Company's employment of Employee.
AGREEMENT
In consideration of the foregoing recitals and mutual covenants contained
herein, the parties hereby agree as follows:
1. Employment. The Company hereby continues its employment of Employee
----------
as the Company's Vice President of Domestic Sales, and Employee hereby accepts
such employment subject to the provisions of this Agreement.
2. Duties and Authority. Employee shall have such duties and authority
--------------------
as are customary for the Vice President of Domestic Sales of a publicly-held
corporation but focusing on the development, management and supervision of a
distribution network for the markets inside the United States but including
without limitation, such specific additional management duties and authority as
the Company's Board of Directors may from time to time reasonably assign
Employee consistent with the foregoing and the other provisions of this
Agreement. Employee agrees to devote his entire business time, energy and
skills to such employment. However, it is understood that Employee shall not be
required to devote more than the usual and customary hours per calendar week to
such employment as are generally expected of similarly situated officers of
publicly-held companies. At all times, Employee shall be subject to the
direction of the Company's Board of Directors and its President.
<PAGE>
3. Compensation and Benefits. Employee shall be entitled to the
---------------------------
following compensation and benefits for services rendered to the Company:
(a) Compensation. Employee shall continue to receive his current
------------
compensation (i.e., commissions) payable in installments not less frequently
than monthly. Employee's compensation shall be reviewed annually within 30 days
prior to the end of each fiscal year (but such compensation shall not be reduced
to less than the prior year's commission rate without Employee's written
consent).
(b) Expense Reimbursements. The Company shall reimburse Employee
-----------------------
for actual out-of-pocket costs incurred for reasonable business expenses, other
than automobile expenses (which are covered in Section 3(c)) in accordance with
the policies and procedures of the Company in effect from time to time).
(c) Automobile Allowance. Employee shall receive a Company car or
--------------------
car allowance subject to Company policies in effect from time to time with
respect to reimbursement for personal use.
(d) Vacations. Employee shall be entitled to paid vacations of
---------
not more than four weeks each calendar year, which may be taken in Employee's
discretion; provided, however, that such vacation shall not unreasonably
interfere with the Company's needs at such time. Unused vacation time for a
calendar year shall not be carried over from one year to the next.
(e) Health Insurance. Employee shall be entitled to family health
----------------
insurance coverage under the Company's group plan on a premium-sharing basis
then in effect.
(f) Life Insurance. Subject to Employee's insurability Employee
---------------
shall be entitled to Company-paid split dollar life insurance with a death
benefit of not less than $250,000 less the Company's premium costs.
(g) Disability Insurance. Employee shall be entitled to
---------------------
participate in the Company's group life insurance and disability insurance in
effect from time to time.
(h) Severance Pay.
--------------
(i) This Agreement may be terminated by the Company at any
time for Cause (hereinafter defined), and in such event Employee shall not be
entitled to receive any further compensation. For purposes of this Agreement,
the term "Cause" shall mean acts of fraud, repeated material misconduct, or
intentional dishonesty by Employee in the course of Employee's employment with
the Company, or the commission of a felony.
(ii) In the event that Employee voluntarily terminates
Employee's employment by the Company, Employee shall not be entitled to receive
any further compensation; provided, however, that if such voluntary termination
occurs at any time after Employee has completed three (3) months of employment
by the Company after the occurrence of a Change in
2
<PAGE>
Control ( as hereinafter defined), Employee shall be entitled to receive
severance benefits for a period of 24 months after the date of termination or
until Employee secures new employment, whichever is shorter, consisting of the
following:
A. $18,750.00 per month,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family and the
continuation of Employee's Company provided life insurance or equivalent
coverage,
C. Continuation of use of the company car or an
equivalent car allowance, and
D. Option to take ownership of any Company provided
split-dollar life insurance coverage on Employee's life subject to Employee's
reimbursement to Company of all past premiums paid for such coverage on
Employee's life; this option shall be exercised within 30 days following
Employee's termination of employment.
(iii) Notwithstanding anything to the contrary herein,
Employee's employment hereunder may be terminated by the Company without Cause
at any time either prior to or after a "Change in Control" (as hereinafter
defined), however, in such event, Company shall pay Employee for a period of 24
months after the date of termination as severance benefits consisting of the
following:
A. $18,750.00 per month,
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family and the
continuation of Employee's Company provided life insurance or equivalent
coverage,
C. Continuation of use of the company car or an
equivalent car allowance, and
D. Option to take ownership of any Company provided
split-dollar life insurance coverage on Employee's life subject to Employee's
reimbursement to Company of all past premiums paid for such coverage on
Employee's life; this option shall be exercised within 30 days following
Employee's termination of employment.
3
<PAGE>
A termination without cause shall be deemed to have occurred if Company, without
Employee's consent, materially reduces Employee's responsibilities, reduces
Employee's salary or requires Employee to relocate or transfer to a site further
than 30 miles from Employee's current place of employment.
The term "Change in Control" shall mean a sale, assignment or exchange
of more than 51% of the voting stock outstanding immediately after such sale or
the sale, assignment or exchange of substantially all of the assets of the
Company. The date of the Change in Control shall mean the date upon which a
sale is closed, or in a series of transactions, the date upon which beneficial
ownership of the voting stock or assets is transferred.
All amounts payable to Employee under this Section 3 shall be paid in
normal payroll installments on normal payroll dates less all applicable
withholding. Except as otherwise provided in this Section 3, as of the
effective date of termination, all obligations of the Company to pay Employee
compensation shall terminate and the Company shall have no further obligation to
Employee after the date of termination.
Upon termination of employment for any reason, Employee will deliver
to the Company all data, records and information, including without limitation,
all documents, correspondence, files, notebooks, reports, computer programs,
software, manuals, customer information, samples and all other materials and
copies thereof relating to the Company's business which Employee may possess or
which are under his control.
4. Options. In the event Employee is terminated without Cause or in
-------
the event of a Change in Control of the Company as those terms are defined in
the Agreement, stock options held by Employee shall become immediately
exercisable without regard to vesting and/or applicable benchmarks unless the
agreement governing the exercise of such options contains provisions expressly
to the contrary. In the event of a sale or exchange of assets or stock
anticipated to constitute a Change in Control, the Company agrees that it shall
make provisions for the conversion or exchange of shares to be received upon the
exercise of such options for the consideration to be received by stockholders of
the Company generally; provided, however, that Employee may be required to
provide to the Company an irrevocable notice of exercise a reasonable period of
time prior to the actual closing date to facilitate such exchange.
5. Confidentiality. Employee covenants that he shall at all times keep
---------------
confidential the Company's financial statements and other financial information,
except to the extent (a) disclosure of financial information (but not financial
statements) is incidental to the performance of his duties for the Company, (b)
disclosure is required by applicable law, or (c) the Company's Board of
Directors authorizes disclosure.
6. Other Company Employees. For a period of one year from the date
-------------------------
Employee's employment by the Company terminates, Employee shall not (a) solicit
another Company employee to leave the Company's employ and work for the Employee
or another person or entity, or (b) participate in the hiring of another Company
employee by another person or entity away from the Company.
4
<PAGE>
7. Restrictive Covenant.
---------------------
(a) As used in this Section 7, the following definitions apply:
"Products" mean vital signs medical monitoring equipment
primarily marketed for use in hospital and alternate care medical facilities.
"Protected Territory" means the United States of America.
(b) The Employee expressly acknowledges that:
(i) Important and essential assets of the Company's business
are the identity of the Company's customers for its Products in the Protected
Territory and the identity of relationships in its distribution network for its
Products in the Protected Territory and their goodwill toward the Company
relating to the marketing and distribution of the Company's Products in the
Protected Territory, and
(ii) The Company through Employee has expended substantial
time, money and effort in acquiring its customers and distribution network for
its Products in the Protected Territory, and the business and goodwill which the
Company enjoys are dependent to a high degree upon their personal relationships
with Employee;
(iii) Selling and servicing the Company's Products in the
Protected Territory requires special skills and knowledge which are valuable
assets of the Company.
(c) Employee expressly agrees that during the term of this
Agreement and for the period of 24 months after Employee's voluntary termination
of employment or for the period of 24 months after the Company's termination of
Employee's employment without Cause (the running of said 24 month periods being
tolled during any breach of the provisions of this section):
(i) The Employee will not, either directly or indirectly, for
himself or on behalf of or in conjunction with any other person, firm,
partnership, corporation, association or other entity, contact in the Protected
Territory any customer of the Company to whom the Company has sold any of its
Products within the 18 months immediately preceding his termination or to whom
the Company or any member of its distribution network has made a proposal in the
Protected Territory for the sale of the Company's Products within the six (6)
months preceding his termination or to whom Employee or Company's distribution
network called upon in the Protected Territory during the periods described
above for the primary purpose of soliciting such customer in the Protected
Territory with respect to purchasing or obtaining services with respect to
Products for use in the Protected Territory which compete with Products
manufactured and sold by the Company, and
(ii) Employee will not directly or indirectly solicit or
communicate with members of the Company's distribution network in the Protected
Territory at the time Employee's employment is terminated (or who were members
of such distribution network in the
5
<PAGE>
Protected Territory within twelve (12) months immediately preceding such
termination date (y) for the purpose of encouraging such persons to leave or
terminate their relationship with the Company, or (z) for the primary purpose of
encouraging such members to represent any other person, firm, partnership,
corporation, association or other entity with respect to the sale, lease or
servicing of Products in the Protected Territory which compete with Products
manufactured and sold by the Company.
(d) Employee further expressly agrees that at no time during the
term of this Agreement will he engage in or have a financial interest in any
business which is offering, selling, supplying, manufacturing, or servicing
Products which are competitive with any Products offered, sold or supplied by
the Company to any person, firm, partnership, corporation, or other entity.
(e) Employee further agrees that the remedy at law for any breach
for any of the provisions of this section will be inadequate and that the
Company, its successors or assigns shall be entitled to injunctive relief in
addition to any other rights or remedies which the Company may have for any such
breach.
8. Arbitration. Any controversy or claims arising out of or relating
-----------
to this Agreement shall be submitted to binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
Waukesha County, Wisconsin, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. If the
parties cannot agree on the choice of a single arbitrator within 15 days after
receipt of a notice of arbitration, then the parties shall contact the
chairperson of the Alternative Dispute Resolution section of the Wisconsin Bar,
who shall select an independent arbitrator, and the arbitration shall be decided
by such independent arbitrator. Each of the parties reserves the right to file
with a court of competent jurisdiction an application for temporary or
preliminary injunctive relief or a temporary protective order on the grounds
that the arbitration award to which the applicant may be entitled may be
rendered ineffective in the absence of such relief. The arbitration award shall
be in writing, and shall specify the factual and legal bases for the award. The
losing party shall pay all costs and expenses of the arbitrator.
9. Notices. Any notice, request, approval, consent, demand, permission
-------
or other communication required or permitted by this Agreement shall be
effective only if it is in a writing signed by the party giving same and shall
be deemed to have been sent, given and received only either (a) when personally
received by the intended recipient, or (b) three days after depositing in the
United States Mail, registered or certified mail, return receipt requested, with
first-class postage prepaid, addressed as follows:
If the Employee:
Stephen Okland
517 Stonebury Drive
Southlake, TX 76092
6
<PAGE>
If to the Company:
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, WI 53186
Attn: President
or to such other address as the intended recipient may have theretofore
specified by notice given to the sender as provided in this section.
10. Assignability. This Agreement requires the personal services of
-------------
Employee, and Employee's rights or obligations hereunder may not be assigned or
delegated except as set forth in this Agreement. In the event of a sale of the
stock of the Company, or consolidation or merger of the Company with or into
another company or entity, or the sale of all or any substantial part of the
assets of the Company to another corporation, entity or individual, the Company
may assign this Agreement to any successor in interest and upon such assignment,
Company shall have no further liability hereunder and the successor in interest
shall be subject to all obligations and be entitled to enforce all rights of the
Company under this Agreement. Subject to the foregoing, this Agreement shall
bind and inure to the benefit of the parties and their respective successors and
assigns.
11. Other Agreements. This Agreement contains the entire agreement
-----------------
between the Company and Employee with respect to the subject matter hereof, and
merges and supersedes all prior agreements, understandings or negotiations
whatsoever with respect to the subject matter hereof.
12. Amendments and Waivers. No amendment to this Agreement or any
------------------------
waiver of any of its provisions shall be effective unless expressly stated in a
writing signed by both parties. No delay or omission in the exercise of any
right, power or remedy under or for this Agreement shall impair such right,
power or remedy or be construed as a waiver of any breach. Any waiver of a
breach of any provision of this Agreement shall not be treated as a waiver of
any other provision of this Agreement or of any subsequent breach of the same or
any other provision of this Agreement.
13. Severability. If any provision of this Agreement shall be held
------------
illegal, invalid or otherwise unenforceable under controlling law, the remaining
provisions of this Agreement shall not be affected thereby but shall continue in
effect.
[The remainder of this page was intentionally left blank.]
7
<PAGE>
14. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of Wisconsin.
CRITICARE SYSTEMS, INC.
BY /s/ Karsten Houm
------------------
Its
EMPLOYEE:
/s/ Stephen Okland
--------------------
Stephen Okland
8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of June 1, 1999, by
and between CRITICARE SYSTEMS, INC., a Delaware corporation (the "Company"), and
DREW DIAZ ("Employee").
RECITALS
A. Employee is currently employed by the Company as its Vice President
of International Sales, with primary emphasis on developing and supervising a
distribution network consisting of dealers and independent representatives for
the sale of the Company's products in markets located outside the United States.
B. The Company desires to make certain agreements with Employee in
order to induce Employee to remain in such employ and in exchange for Employee's
covenants herein.
C. The parties desire to evidence their agreement as to the terms of
the Company's employment of Employee.
AGREEMENT
In consideration of the foregoing recitals and mutual covenants contained
herein, the parties hereby agree as follows:
1. Employment. The Company hereby continues its employment of Employee
----------
as the Company's Vice President of International Sales, and Employee hereby
accepts such employment subject to the provisions of this Agreement.
2. Duties and Authority. Employee shall have such duties and authority
--------------------
as are customary for the Vice President of International Sales of a
publicly-held corporation but focusing on the development, management and
supervision of a distribution network for the markets outside the United States
but including without limitation, such specific additional management duties and
authority as the Company's Board of Directors may from time to time reasonably
assign Employee consistent with the foregoing and the other provisions of this
Agreement. Employee agrees to devote his entire business time, energy and
skills to such employment. However, it is understood that Employee shall not be
required to devote more than the usual and customary hours per calendar week to
such employment as are generally expected of similarly situated officers of
publicly-held companies. At all times, Employee shall be subject to the
direction of the Company's Board of Directors and its President.
<PAGE>
3. Compensation and Benefits. Employee shall be entitled to the
---------------------------
following compensation and benefits for services rendered to the Company:
(a) Compensation. Employee shall continue to receive his current
------------
compensation (i.e., base salary plus commissions) payable in installments not
less frequently than monthly. Employee's compensation shall be reviewed
annually within 30 days prior to the end of each fiscal year (but such
compensation shall not be reduced to less than the prior year's salary and
commission rate without Employee's written consent).
(b) Expense Reimbursements. The Company shall reimburse Employee
-----------------------
for actual out-of-pocket costs incurred for reasonable business expenses, other
than automobile expenses (which are covered in Section 3(c)) in accordance with
the policies and procedures of the Company in effect from time to time).
(c) Automobile Allowance. Employee shall receive a Company car or
--------------------
car allowance subject to Company policies in effect from time to time with
respect to reimbursement for personal use.
(d) Vacations. Employee shall be entitled to paid vacations of
---------
not more than four weeks each calendar year, which may be taken in Employee's
discretion; provided, however, that such vacation shall not unreasonably
interfere with the Company's needs at such time. Unused vacation time for a
calendar year shall not be carried over from one year to the next.
(e) Health Insurance. Employee shall be entitled to family health
----------------
insurance coverage under the Company's group plan on a premium-sharing basis
then in effect.
(f) Disability Insurance. Employee shall be entitled to
---------------------
participate in the Company's group life insurance and disability insurance in
effect from time to time.
(g) Severance Pay.
--------------
(i) This Agreement may be terminated by the Company at any
time for Cause (hereinafter defined), and in such event Employee shall not be
entitled to receive any further compensation. For purposes of this Agreement,
the term "Cause" shall mean acts of fraud, repeated material misconduct, or
intentional dishonesty by Employee in the course of Employee's employment with
the Company, or the commission of a felony.
(ii) In the event that Employee voluntarily terminates
Employee's employment by the Company, Employee shall not be entitled to receive
any further compensation; provided, however, that if such voluntary termination
occurs at any time after Employee has completed three (3) months of employment
by the Company after the occurrence of a Change in Control (as hereinafter
defined), Employee shall be entitled to receive severance benefits for a period
of 12 months after the date of termination or until Employee secures new
employment, whichever is shorter, consisting of the following:
2
<PAGE>
A. Employee's then current compensation (i.e., base
salary plus commission),
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family and the
continuation of Employee's Company provided life insurance or equivalent
coverage,
C. Continuation of use of the company car or an
equivalent car allowance.
(iii) Notwithstanding anything to the contrary herein,
Employee's employment hereunder may be terminated by the Company without Cause
at any time either prior to or after a "Change in Control" (as hereinafter
defined), however, in such event, Company shall pay Employee for a period of 12
months after the date of termination as severance benefits consisting of the
following:
A. Employee's then current compensation (i.e., base
salary plus commission),
B. The amount which the Company pays for group health
insurance benefits with respect to such Employee and his family and the
continuation of Employee's Company life insurance or equivalent coverage,
C. Continuation of use of the company car or an
equivalent car allowance.
A termination without cause shall be deemed to have occurred if Company, without
Employee's consent, materially reduces Employee's responsibilities, reduces
Employee's salary or requires Employee to relocate or transfer to a site further
than 30 miles from Employee's current place of employment.
The term "Change in Control" shall mean a sale, assignment or exchange
of more than 51% of the voting stock outstanding immediately after such sale or
the sale, assignment or exchange of substantially all of the assets of the
Company. The date of the Change in Control shall mean the date upon which a
sale is closed, or in a series of transactions, the date upon which beneficial
ownership of the voting stock or assets is transferred.
All amounts payable to Employee under this Section 3 shall be paid in
normal payroll installments on normal payroll dates less all applicable
withholding. Except as otherwise provided in this Section 3, as of the
effective date of termination, all obligations of the Company to pay Employee
compensation shall terminate and the Company shall have no further obligation to
Employee after the date of termination.
3
<PAGE>
Upon termination of employment for any reason, Employee will deliver
to the Company all data, records and information, including without limitation,
all documents, correspondence, files, notebooks, reports, computer programs,
software, manuals, customer information, samples and all other materials and
copies thereof relating to the Company's business which Employee may possess or
which are under his control.
4. Options. In the event Employee is terminated without Cause or in
-------
the event of a Change in Control of the Company as those terms are defined in
the Agreement, stock options held by Employee shall become immediately
exercisable without regard to vesting and/or applicable benchmarks unless the
agreement governing the exercise of such options contains provisions expressly
to the contrary. In the event of a sale or exchange of assets or stock
anticipated to constitute a Change in Control, the Company agrees that it shall
make provisions for the conversion or exchange of shares to be received upon the
exercise of such options for the consideration to be received by stockholders of
the Company generally; provided, however, that Employee may be required to
provide to the Company an irrevocable notice of exercise a reasonable period of
time prior to the actual closing date to facilitate such exchange.
5. Confidentiality. Employee covenants that he shall at all times keep
---------------
confidential the Company's financial statements and other financial information,
except to the extent (a) disclosure of financial information (but not financial
statements) is incidental to the performance of his duties for the Company, (b)
disclosure is required by applicable law, or (c) the Company's Board of
Directors authorizes disclosure.
6. Other Company Employees. For a period of one year form the date
-------------------------
Employee's employment by the Company terminates, Employee shall not (a) solicit
another Company employee to leave the Company's employ and work for the Employee
or another person or entity, or (b) participate in the hiring of another Company
employee by another person or entity away from the Company.
7. Restrictive Covenant.
---------------------
(a) As used in this Section 7, the following definitions apply:
"Products" mean vital signs medical monitoring equipment
primarily marketed for use in hospital and alternate care medical facilities.
"Protected Territory" means all countries outside of the United
States of America.
(b) The Employee expressly acknowledges that:
(i) Important and essential assets of the Company's business
are the identity of the Company's customers for its Products in the Protected
Territory and the identity of relationships in its distribution network for its
Products in the Protected Territory and their goodwill
4
<PAGE>
toward the Company relating to the marketing and distribution of the Company's
Products in the Protected Territory, and
(ii) The Company through Employee has expended substantial
time, money and effort in acquiring its customers and distribution network for
its Products in the Protected Territory, and the business and goodwill which the
Company enjoys are dependent to a high degree upon their personal relationships
with Employee;
(iii) Selling and servicing the Company's Products in the
Protected Territory requires special skills and knowledge which are valuable
assets of the Company.
(c) Employee expressly agrees that during the term of this
Agreement and for the period of 12 months after Employee's voluntary termination
of employment or for the period of 12 months after the Company's termination of
Employee's employment without Cause (the running of said 12 month periods being
tolled during any breach of the provisions of this section):
(i) The Employee will not, either directly or indirectly, for
himself or on behalf of or in conjunction with any other person, firm,
partnership, corporation, association or other entity, contact in the Protected
Territory any customer of the Company to whom the Company has sold any of its
Products within the 18 months immediately preceding his termination or to whom
the Company or any member of its distribution network has made a proposal in the
Protected Territory for the sale of the Company's Products within the six (6)
months preceding his termination or to whom Employee or Company's distribution
network called upon in the Protected Territory during the periods described
above for the primary purpose of soliciting such customer in the Protected
Territory with respect to purchasing or obtaining services with respect to
Products for use in the Protected Territory which compete with Products
manufactured and sold by the Company, and
(ii) Employee will not directly or indirectly solicit or
communicate with members of the Company's distribution network in the Protected
Territory at the time Employee's employment is terminated (or who were members
of such distribution network in the Protected Territory within twelve (12)
months immediately preceding such termination date (y) for the purpose of
encouraging such persons to leave or terminate their relationship with the
Company, or (z) for the primary purpose of encouraging such members to represent
any other person, firm, partnership, corporation, association or other entity
with respect to the sale, lease or servicing of Products in the Protected
Territory which compete with Products manufactured and sold by the Company; and
(d) Employee further expressly agrees that at no time during the
term of this Agreement will he engage in or have a financial interest in any
business which is offering, selling, supplying, manufacturing, or servicing
Products which are competitive with any Products offered, sold or supplied by
the Company to any person, firm, partnership, corporation, or other entity.
(e) Employee further agrees that the remedy at law for any breach
for any of the provisions of this section will be inadequate and that the
Company, its successors or assigns
5
<PAGE>
shall be entitled to injunctive relief in addition to any other rights or
remedies which the Company may have for any such breach.
8. Arbitration. Any controversy or claims arising out of or relating
-----------
to this Agreement shall be submitted to binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
Waukesha County, Wisconsin, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. If the
parties cannot agree on the choice of a single arbitrator within 15 days after
receipt of a notice of arbitration, then the parties shall contact the
chairperson of the Alternative Dispute Resolution section of the Wisconsin Bar,
who shall select an independent arbitrator, and the arbitration shall be decided
by such independent arbitrator. Each of the parties reserves the right to file
with a court of competent jurisdiction an application for temporary or
preliminary injunctive relief or a temporary protective order on the grounds
that the arbitration award to which the applicant may be entitled may be
rendered effective in the absence of such relief. The arbitration award shall
be in writing, and shall specify the factual and legal bases for the award. The
losing party shall pay all costs and expenses of the arbitrator.
9. Notices. Any notice, request, approval, consent, demand, permission
-------
or other communication required or permitted by this Agreement shall be
effective only if it is in a writing signed by the party giving same and shall
be deemed to have been sent, given and received only either (a) when personally
received by the intended recipient, or (b) three days after depositing in the
United States Mail, registered or certified mail, return receipt requested, with
first-class postage prepaid, addressed as follows:
If the Employee:
Drew Diaz
2560 Buckingham Place
Brookfield, WI 53045
If to the Company:
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, WI 53186
Attn: President
or to such other address as the intended recipient may have theretofore
specified by notice given to the sender as provided in this section.
10. Assignability. This Agreement requires the personal services of
-------------
Employee, and Employee's rights or obligations hereunder may not be assigned or
delegated except as set forth in this Agreement. In the event of a sale of the
stock of the Company, or consolidation or merger of the Company with or into
another company or entity, or the sale of all or any substantial part of the
assets of the Company to another corporation, entity or individual, the Company
may assign this
6
<PAGE>
Agreement to any successor in interest and upon such assignment, Company shall
have no further liability hereunder and the successor in interest shall be
subject to all obligations and be entitled to enforce all rights of the Company
under this Agreement. Subject to the foregoing, this Agreement shall bind and
inure to the benefit of the parties and their respective successors and assigns.
11. Other Agreements. This Agreement contains the entire agreement
-----------------
between the Company and Employee with respect to the subject matter hereof, and
merges and supersedes all prior agreements, understandings or negotiations
whatsoever with respect to the subject matter hereof.
12. Amendments and Waivers. No amendment to this Agreement or any
------------------------
waiver of any of its provisions shall be effective unless expressly stated in a
writing signed by both parties. No delay or omission in the exercise of any
right, power or remedy under or for this Agreement shall impair such right,
power or remedy or be construed as a waiver of any breach. Any waiver of a
breach of any provision of this Agreement shall not be treated as a waiver of
any other provision of this Agreement or of any subsequent breach of the same or
any other provision of this Agreement.
13. Severability. If any provision of this Agreement shall be held
------------
illegal, invalid or otherwise unenforceable under controlling law, the remaining
provisions of this Agreement shall not be affected thereby but shall continue in
effect.
14. Governing Law. This Agreement shall be governed by and construed
--------------
and enforced in accordance with the laws of the State of Wisconsin.
CRITICARE SYSTEMS, INC.
BY /s/ Karsten Houm
------------------
Its
EMPLOYEE:
/s/ Drew Diaz
---------------
Drew Diaz
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 1st day of
October, 1998, by and between CRITICARE SYSTEMS, INC., a Delaware corporation
(the "Company"), and GLORIA NAJERA ("Employee").
RECITALS
A. Employee is currently employed by the Company as its Vice
President-Operations.
B. The Company desires to make certain agreements with Employee in
order to induce Employee to remain in such employ and in exchange for Employee's
covenants herein.
C. The parties desire to evidence their agreement as to the terms of
the Company's employment of Employee.
AGREEMENT
In consideration of the mutual covenants contained herein, the parties
hereby agree as follows:
1. Employment. The Company hereby continues its employment of Employee
----------
as the Company's Vice President-Operations, and Employee hereby accepts such
employment, subject to the provisions of this Agreement.
2. Duties and Authority. Employee shall be employed as the Company's
----------------------
Vice President-Operations. Employee shall have such duties and authority as are
customary for the Vice President-Operations of a publicly-held corporation with
similar operations, including without limitation, such specific management
duties and authority as the Company's Board of Directors may from time to time
reasonably assign Employee consistent with the foregoing and the other
provisions of this Agreement. Employee agrees to devote his entire business
time, energy and skills to such employment. However, it is understood that
Employee shall not be required to devote more than an average of 50 hours per
calendar week to such employment. At all times, Employee shall be subject to
the direction of the Company's Board of Directors and its President.
<PAGE>
3. Compensation and Benefits. Employee shall be entitled to the
---------------------------
following compensation and benefits for services rendered to the Company:
(a) Base Salary. Employee shall receive an annual base salary
------------
payable in equal installments not less frequently than monthly, which shall be
established annually (but which shall not be reduced to less than the prior
year's annual salary without Employee's written consent) ("Base Salary").
(b) Bonus Plan. Employee shall be eligible to receive a bonus
-----------
annually, based on Employee's and the Company's financial performance, in the
discretion of the Board of Directors.
(c) Expense Reimbursements. The Company shall reimburse Employee
-----------------------
for actual out-of-pocket costs incurred for reasonable business expenses, other
than automobile expenses (which are covered in Section 3(d) ) in accordance with
the policies and procedures of the Company in effect from time to time.
(d) Automobile Allowance. Employee shall receive a Company car or
--------------------
car allowance subject to Company policies in effect from time to time with
respect to reimbursement for personal use.
(e) Vacations. Employee shall be entitled to paid vacations of
---------
not more than four weeks each calendar year, which may be taken in Employee's
discretion; provided, however, that such vacation shall not unreasonably
interfere with the Company's needs at such time. Unused vacation time for a
calendar year shall not be carried over from one year to the next.
(f) Health Insurance. Employee shall be entitled to family health
----------------
insurance coverage under the Company's group plan on a premium-sharing basis
then in effect.
(g) Disability Insurance. Employee shall be entitled to
---------------------
participate in the Company's group disability insurance in effect from time to
time.
(h) Severance Pay.
--------------
(i) This Agreement may be terminated by the Company at any
time for "Cause," and in such event Employee shall not be entitled to receive
any further compensation. For purposes of this Agreement, the term "Cause"
shall mean acts of fraud, repeated material misconduct, or intentional
2
<PAGE>
dishonesty by Employee in the course of Employee's employment with the Company,
or the commission of a felony.
(ii) In the event that Employee voluntarily terminates
Employee's employment by the Company, Employee shall not be entitled to receive
any further compensation; provided, however, that if such voluntary termination
occurs at any time after Employee has completed three (3) months of employment
by the Company after the occurrence of a Change in Control (as hereinafter
defined), Employee shall be entitled to receive severance benefits consisting of
Employee's Base Salary plus the amount which the Company pays for group health
insurance benefits with respect to such Employee for a period of six (6) months
after the date of such termination.
(iii) Notwithstanding anything to the contrary herein,
Employee's employment hereunder may be terminated by the Company without "Cause"
at any time prior to a "Change in Control" (has hereinafter defined), however,
in such event, Company shall pay Employee as severance benefits Employee's Base
Salary (has hereinafter defined) plus the amount that the Company pays for group
health and disability insurance with respect to such employee for a period equal
to the period following the date upon which Employee's employment is terminated
until Employee secures alternative employment, up to a maximum of six (6) months
after the date of such termination. Employee agrees to utilize her best efforts
to obtain such replacement employment.
(iv) In the event that Employee's employment is terminated by
the Company at any time after a Change in Control by the Company without Cause,
Company shall pay Employee as severance benefits Employee's Base Salary plus the
amount that the Company pays for group health insurance with respect to such
employee for a period equal to the portion of the "Severance Period" (as
hereinafter defined) remaining after the date of termination of Employee's
employment but not less than six (6) months. The term "Severance Period" shall
mean 12 months after a Change in Control.
The term "Change in Control" shall mean a sale, assignment or
exchange of more than 51% of the voting stock outstanding immediately after such
sale or the sale, assignment or exchange of substantially all of the assets of
the Company. The date of a Change in Control shall mean the date upon which a
sale is closed, or in a series of transactions, the date upon which beneficial
ownership of the voting stock or assets is transferred. A termination without
Cause shall be deemed to have occurred if within the Severance Period, Company,
without Employee's consent, materially reduces Employee's
3
<PAGE>
responsibilities, reduces Employee's salary or requires Employee to relocate or
transfer to a site further than 30 miles from Employee's current place of
employment.
All amounts payable to Employee under this paragraph 3 shall be
paid in normal payroll installments on normal payroll dates less all applicable
withholding. Except as otherwise provided in this paragraph 3, as of the
effective date of termination, all obligations of the Company to pay Employee
compensation shall terminate and the Company shall have no further obligation to
Employee after the date of termination.
(i) Upon termination of employment for any reason, Employee will
deliver to the Company all data, records and information, including without
limitation, all documents, correspondence, files, notebooks, reports, computer
programs, software, manuals, customer lists, customer information, samples and
all other materials and copies thereof relating to the Company's business
(collectively, "Confidential Information") which Employee may possess or which
are under his control.
4. Confidentiality. Employee covenants that he shall at all times keep
---------------
confidential the Company's financial statements and other financial information,
except to the extent (a) disclosure of financial information (but not financial
statements) is incidental to the performance of his duties for the Company, (b)
disclosure is required by applicable law, or (c) the Company's Board of
Directors authorizes disclosure.
5. Other Company Employees. For a period of one year from the date
-------------------------
Employee's employment by the Company terminates, Employee shall not (a) solicit
another Company employee to leave the Company's employ and work for Employee or
another person or entity, or (b) participate in the hiring of another Company
employee by another person or entity away from the Company.
6. Notices. Any notice, request, approval, consent, demand, permission
-------
or other communication required or permitted by this Agreement shall be
effective only if it is in a writing signed by the party giving same and shall
be deemed to have been sent, given and received only either (a) when personally
received by the intended recipient, or (b) three days after depositing in the
United
4
<PAGE>
States Mail, registered or certified mail, return receipt requested, with first-
class postage prepaid, addressed as follows:
If to Employee:
Gloria Najera
1307 S. 93rd Street
West Allis, WI 53214
If to the Company:
Criticare Systems, Inc.
20925 Crossroads Circle
Waukesha, WI 53186
Attn: President
or to such other address as the intended recipient may have theretofore
specified by notice given to the sender as provided in this section.
7. Assignability. This Agreement requires the personal services of
-------------
Employee, and Employee's rights or obligations hereunder may not be assigned or
delegated except as set forth in this Agreement. In the event of a sale of the
stock of the Company, or consolidation or merger of the Company with or into
another company or entity, or the sale of all or any substantial part of the
assets of the Company to another corporation, entity or individual, the Company
may assign this Agreement to any successor in interest and upon such assignment,
Company shall have no further liability hereunder and the successor in interest
shall be subject to all obligations and be entitled to enforce all rights of the
Company under this Agreement. Subject to the foregoing, this Agreement shall
bind and inure to the benefit of the parties and their respective successors and
assigns.
8. Other Agreements. This Agreement contains the entire agreement
-----------------
between the Company and Employee with respect to the subject matter hereof, and
merges and supersedes all prior agreements, understandings or negotiations
whatsoever with respect to the subject matter hereof.
9. Amendments and Waivers. No amendment of this Agreement or any
------------------------
waiver of any of its provisions shall be effective unless expressly stated in a
writing signed by both parties. No delay or omission in the exercise of any
right, power or remedy under or for this Agreement shall impair such right,
power or remedy or be construed as a waiver of any breach. Any waiver of a
breach of any provision of this Agreement shall not be treated as a waiver of
any other provision
5
<PAGE>
of this Agreement or of any subsequent breach of the same or any other provision
of this Agreement.
10. Severability. If any provision of this Agreement shall be held
------------
illegal, invalid or otherwise unenforceable under controlling law, the remaining
provisions of this Agreement shall not be affected thereby but shall continue in
effect.
11. Governing Law. This Agreement shall be governed by and construed
--------------
and enforced in accordance with the laws of the State of Wisconsin.
CRITICARE SYSTEMS, INC.
BY /s/ Gerhard J. Von der Ruhr
--------------------------------
Its President
---------
EMPLOYEE:
/s/ Gloria Najera
-------------------
Gloria Najera
6
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS IS AN AMENDMENT, dated November 16, 1998, to an Employment Agreement
dated October 1, 1998 (the "Agreement") by and between CRITICARE SYSTEMS, INC.,
a Delaware corporation ("Criticare"), and GLORIA NAJERA ("Employee").
AGREEMENT
1. The Agreement is hereby amended by adding the following provisions:
Arbitration. Any controversy or claims arising out of or relating to this
------------
Agreement in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in Waukesha County, Wisconsin, and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. If the parties cannot agree on the choice of a single arbitrator
within 15 days after receipt of a notice of arbitration, then the parties shall
contact the chairperson of the Alternative Dispute Resolution section of the
Wisconsin Bar, who shall select an independent arbitrator, and the arbitration
shall be decided by such independent arbitrator. Each of the parties reserves
the right to file with a court of competent jurisdiction an application for
temporary or preliminary injunctive relief or a temporary protective order on
the grounds that the arbitration award to which the applicant may be entitled
may be rendered effective in the absence of such relief. The arbitration award
shall be in writing, and shall specify the factual and legal bases for the
award. The losing party shall pay all costs and expenses associated with the
arbitration proceeding.
2. The Agreement is further amended by adding the following provision:
"In the event Employee is terminated without Cause or in the event of a Change
in Control of the Company as those terms are defined in the Agreement, stock
options held by Employee shall become immediately exercisable without regard to
vesting and/or applicable benchmarks. In the event of a sale or exchange of
assets or stock anticipated to constitute a Change in Control, the Company
agrees that it shall make provisions for the conversion or exchange of shares to
be received upon the exercise of such options for the consideration to be
received by stockholders of the Company generally; provided, however, that
Employee may be required to provide to the Company an irrevocable notice of
exercise a reasonable period of time prior to the actual closing date to
facilitate such exchange.
<PAGE>
3. The Agreement in all other respects is not amended but remains
unchanged and the parties thereto continue to be legally bound by the provisions
thereof as amended hereby.
CRITICARE SYSTEMS, INC.
BY /s/ Joseph M. Siekierski
---------------------------
Its Vice President - Finance
---------------------------
/s/ Gloria Najera
-------------------
Gloria Najera
2
EXHIBIT 21
SUBSIDIARIES
All of the Company's subsidiaries are wholly-owned:
<TABLE>
<CAPTION>
Company Jurisdiction of Organization
- ------------------------------- ----------------------------
<S> <C>
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
</TABLE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
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) and in Registration
Statements on Form S-3 (File Nos. 333-72631 and 333-84283) of our reports dated
July 28, 1999 appearing in this Annual Report on Form 10-K of Criticare Systems,
Inc. for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,511,078
<SECURITIES> 0
<RECEIVABLES> 6,733,487
<ALLOWANCES> (375,000)
<INVENTORY> 8,510,975
<CURRENT-ASSETS> 17,655,936
<PP&E> 10,971,292
<DEPRECIATION> (4,697,232)
<TOTAL-ASSETS> 24,041,987
<CURRENT-LIABILITIES> (7,315,922)
<BONDS> 0
0
0
<COMMON> (348,246)
<OTHER-SE> (12,363,463)
<TOTAL-LIABILITY-AND-EQUITY> 24,041,987
<SALES> 28,512,507
<TOTAL-REVENUES> 28,512,507
<CGS> (15,528,314)
<TOTAL-COSTS> (32,400,295)
<OTHER-EXPENSES> (500,383)
<LOSS-PROVISION> (380,004)
<INTEREST-EXPENSE> (432,477)
<INCOME-PRETAX> (4,388,171)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,388,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,388,171)
<EPS-BASIC> (.51)
<EPS-DILUTED> (.51)
</TABLE>
