UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K/A
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
---------
Criticare Systems, Inc.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1501563
- ------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
- -------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 414-798-8282
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
---------------------- --------------------------
NA NA
------------- -------------
[COVER PAGE 1 OF 2 PAGES.]
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.04 Par Value
(together with associated Preferred Stock Purchase Rights)
--------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the voting common stock held by nonaffiliates
of the registrant as of August 31, 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
None.
[COVER PAGE 2 OF 2 PAGES.]
2
<PAGE>
Criticare Systems, Inc. (the "Company") did not receive the
independent auditors' report reflected in Item 8, the independent auditors'
report referenced in Item 14 with respect to Schedule VIII and the independent
auditors' consent reflected in Exhibit 21 of the Company's Annual Report on Form
10-K for the year ended June 30, 1999, as filed with the Securities and Exchange
Commission on September 28, 1999 (the "Annual Report"). The Company is also
amending Part III of the Annual Report to include the information required by
the items of Part III. Accordingly, Items 6, 7 and 8 of Part II, Items 10, 11,
12 and 13 of Part III and Item 14 of Part IV of the Annual Report are hereby
amended in their entirety as follows:
------
PART II
-------
Item 6. SELECTED FINANCIAL DATA.
- ------- -------------------------
The following table sets forth selected financial data with respect to the
Company for each of the periods indicated. The selected financial data for the
year ended June 30, 1999 are derived from financial statements of the Company
which have not been audited.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------
1999 1998 1997 1996 1995
---------------------- ------------ ------------ ------------ -----------
<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>
3
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- -------------------------------------------------------------------
RESULTS OF OPERATION.
- ----------------------
The discussion in this item regarding the fiscal year ended June 30, 1999
relates to financial statements of the Company which have not been audited. In
the absence of an audit, there can be no assurance that the financial statements
are fairly presented in accordance with generally accepted accounting
principles. See Item 8 of this report.
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,
-----------------------
1999 1998 1997
------- ------ ------
<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.
4
<PAGE>
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
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
5
<PAGE>
cash balances on hand throughout the year. Equity in the loss of investments
relates to a $120,000 advance provided to Immtech International, Inc.
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.
6
<PAGE>
Because the Year 1900 could also be translated as two zeroes, systems which use
two digits could read the date incorrectly for a number of date-sensitive
applications resulting in potential calculation errors or the shutdown of major
systems. The Company is in the process of updating its internal computer
software, other information technology and other operating systems for the
purposes of Year 2000 compliance. The Company will also address the Year 2000
compliance of the Company's new and existing products. The Company 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
7
<PAGE>
products, government regulation, health care cost containment programs, and
competition in the Company's markets.
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.
- ------- -----------------------------------------------
Statement Regarding Financial Statements:
The following financial statements have not been audited. In the absence
of an audit, there can be no assurance that the financial statements are fairly
presented in accordance with generally accepted accounting principles. Deloitte
& Touche LLP, the Company's former accountants, resigned on October 5, 1999
without issuing an audit report for this Annual Report. The Company will engage
new auditors as promptly as practicable. The Company currently anticipates that
it will file an amendment to this Annual Report as soon as practicable after a
new accounting firm issues an audit report for the periods covered.
8
<PAGE>
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.
9
<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.
10
<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.
11
<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.
12
<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. . . . . . . . . . . . . . . . . 256,413 - -
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.
13
<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
14
<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.
15
<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.
16
<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.
17
<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>
18
<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>
19
<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>
20
<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 morgtage 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
21
<PAGE>
the Company's common stock for the five days preceding the conversion date.
Debentures aggregating $550,000 were converted under the 20% discount conversion
feature. The remaining debentures and accrued interest were converted to common
stock of the Company at a conversion price equal to a 25% discount from the
average closing bid price of the Company's common stock for the five days
preceding the conversion date. For the years ended June 30, 1998 and 1997,
$1,650,000 and $850,000 of debentures were converted to 407,761 and 216,173
shares of common stock with a fair market value of $2,298,357 and $1,117,594 as
of the conversion dates.
Proceeds from the issuance of the debentures were recorded as a liability
at the issuance date. The conversion discount was amortized and reported as
additional interest expense over the life of the debentures. Additional
interest expense 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
22
<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>
23
<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 warrants to purchase the
remaining 112,500 shares were to become exercisable
24
<PAGE>
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.
25
<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
26
<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.
27
<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. The quarterly
results for the quarters ended September 30, 1998, December 31, 1998, March 31,
1999 and June 30, 1999 are derived from financial statements of the Company
which have not been audited.
<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.
28
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ------------- --------------------------------------
<S> <C> <C>
Emil H. Soika. . . . . . . . 61 President, Chief Executive Officer and
Director
Joseph M. Siekierski . . . . 34 Vice President - Finance and Secretary
Stephen D. Okland. . . . . . 57 Vice President - Domestic Sales
Drew M Diaz. . . . . . . . . 36 Vice President - International Sales
Michael T. Larsen. . . . . . 40 Vice President - Quality
Control/Quality Assurance
Gloria Najera. . . . . . . . 50 Vice President - Operations
Karsten Houm . . . . . . . . 53 Chairman and Director
Gerhard J. Von der Ruhr. . . 58 Director
N.C. Joseph Lai. . . . . . . 57 Director
Milton Datsopoulos . . . . . 59 Director
</TABLE>
Emil H. Soika has served as President, Chief Executive Officer and a
Director of the Company since November 1998. From November 1995 to September
1998, Mr. Soika served as Vice President and General Manager of Spacelabs
Medical, a medical monitoring and clinical information systems company. From
March 1991 to July 1998, Mr. Soika served as President and Chief Executive
Officer of Block Medical, a manufacturer of intravenous dispensers. Mr. Soika
is a director of Immtech International, Inc., a company engaged in the research
and development of products in the fields of biochemistry and immunology.
Joseph M. Siekierski joined the Company as Vice President-Finance and
Assistant Secretary in October 1997. Mr. Siekierski was appointed as Secretary
of the Company in November 1998. Prior to joining the Company, Mr. Siekierski
was Controller for Modern Building Materials, Inc., a manufacturer of precast
concrete products, from 1996 to 1997. From 1993 to 1996, Mr. Siekierski was
Controller for the Company.
Stephen D. Okland has served as a Vice President of the Company since May
1988.
Drew M. Diaz served the Company as Regional Sales Manager for the Middle
East and Western Europe from 1993 until he was appointed Director of
International Sales in 1995. Mr. Diaz was most recently promoted to Vice
President-International Sales in 1997. From October 1996 until August 1997, Mr.
Diaz also served as Geschaeftsfuehrer of Criticare International GmbH Marketing
Services, a wholly-owned
29
<PAGE>
subsidiary of the Company which was dissolved in 1998 following bankruptcy
proceedings under German law.
Michael T. Larsen has served as Vice President-Quality Control/Quality
Assurance since September 1990.
Gloria Najera joined the Company as Vice President-Operations in March
1997. Prior to rejoining the Company, Ms. Najera was Director of Consumer
Services and Distribution from July 1994 to March 1997 for the Milwaukee
Journal-Sentinel, a newspaper publisher. From 1988 to 1994, Ms. Najera was
Consumer Services Director of the Company.
Karsten Houm has served as Chairman of the Board of the Company since
November 1998 and as a Director of the Company since 1985. Mr. Houm also
currently works as a management consultant. From September 1985 to 1997, Mr.
Houm served as President of Unitor, a Norwegian shipping company.
Gerhard J. Von der Ruhr has served as a Director of the Company since 1984.
Mr. Von der Ruhr is Chairman of O.B. Scientific, Inc., a medical technology
company. Mr. Von der Ruhr is a co-founder of the Company and served as Chairman
of the Company's Board, President (CEO) and Treasurer from the Company's
inception in October 1984 until November 1998.
N.C. Joseph Lai, Ph.D., has served as a Director of the Company since 1984.
Dr. Lai is a management consultant. Dr. Lai is a co-founder of the Company and
served as Vice Chairman of its Board and as an officer from the Company's
inception in October 1984 until November 1998.
Milton Datsopoulos has served as a Director of the Company since 1986. Mr.
Datsopoulos has been a partner in the law firm of Datsopoulos, MacDonald & Lind
in Missoula, Montana since 1974. Mr. Datsopoulos is a director of Montana
Naturals Int'l, Inc., a manufacturer of natural food products and nutritional
supplements, Kafus Environmental Industries Ltd., a producer of consumer and
industrial waste recycling technology, and Leigh Resource Corporation, a company
engaged in mineral exploration and development.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") on Form 3, 4, and
5. Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during fiscal 1999 all section 16(a) filing requirements
applicable to its officers, directors and
30
<PAGE>
greater than 10% beneficial owners were complied with, except that Emil H.
Soika, Joseph M. Siekierski, Stephen D. Okland, Drew M. Diaz, Michael T. Larsen,
Gloria Najera, Karsten Houm and Milton Datsopoulos each did not file a Form 4 or
Form 5 to report option grants during fiscal 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth information with respect to all
compensation, including stock options granted and all cash bonuses and accrued
deferred compensation, incurred by the Company during the three fiscal years
ended June 30, 1999 to or on behalf of the two persons who served as Chief
Executive Officer during fiscal 1999 and the two other executive officers of the
Company whose salary exceeded $100,000 for fiscal 1999. The persons listed
below are sometimes referred to herein as the "named executive officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- -------------
AWARDS:
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($) (1) OPTIONS/SARS (#) COMPENSATION($)
- --------------------------- ----- ------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Emil H. Soika, 1999 78,125 -- 200,000 --
President and Chief
Executive Officer (2)
Gerhard J. Von d 1999 60,000 1,915 -- 593,646 (4)
Chairman of the Board, 1998 144,000 958 -- 56,838 (4)
President (CEO) and 1997 144,000 957 -- 56,620 (4)
Treasurer (3)
Stephen D. Okland, 1999 277,576 (5) 6,000 43,500 (6) 3,701 (7)
Vice President-Domestic 1998 302,628 (5) 6,000 -- 3,690 (7)
Sales 1997 253,706 (5) 6,000 10,000 3,441 (7)
Drew M. Diaz, 1999 165,609 1,915 100,000 (8) 1,822 (9)
Vice President- 1998 188,292 638 -- 86 (9)
International Sales 1997 180,717 8,223 50,000 3,226 (9)
_____________________
<FN>
(1) The amounts represent automobile allowance payments.
31
<PAGE>
(2) Mr. Soika commenced employment with the Company in November 1998.
(3) Mr. Von der Ruhr resigned as Chairman of the Board, President (CEO) and
Treasurer of the Company in November 1998.
(4) For fiscal 1999, represents $50,396 of premiums paid by the Company on
two life insurance policies, the proceeds of which are payable to the
beneficiary of Mr. Von der Ruhr, $2,760 of Company contributions to the 401(k)
plan on behalf of Mr. Von der Ruhr and $540,490 paid or accrued for severance.
For fiscal 1998, represents $53,638 of premiums paid by the Company on two life
insurance policies, the proceeds of which are payable to the beneficiary of Mr.
Von der Ruhr, and $3,200 of Company contributions to the 401(k) plan on behalf
of Mr. Von der Ruhr. For fiscal 1997, represents $53,620 of premiums paid by
the Company on two life insurance policies, the proceeds of which are payable to
the beneficiary of Mr. Von der Ruhr, and $3,000 of Company contributions to the
401(k) plan on behalf of Mr. Von der Ruhr.
(5) Represents commissions paid by the Company to Mr. Okland based on a
percentage of certain domestic sales by the Company. Mr. Okland receives no
fixed salary.
(6) Represents 30,000 stock options granted in fiscal 1999 and 13,500 stock
options regranted due to repricing of options on December 11, 1998.
(7) For fiscal 1999, represents $501 of premiums paid by the Company on a
life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Okland, and $3,200 of Company contributions to the 401(k) plan on behalf of
Mr. Okland. For fiscal 1998, represents $490 of premiums paid by the Company on
a life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Okland, and $3,200 of Company contributions to the 401(k) plan on behalf of
Mr. Okland. For fiscal 1997, represents $441 of premiums paid by the Company on
a life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Okland, and $3,000 of Company contributions to the 401(k) plan on behalf of
Mr. Okland.
(8) Represents 34,000 stock options granted in fiscal 1999 and 66,000 stock
options regranted due to repricing of options on December 11, 1998.
(9) For fiscal 1999, represents $101 of premiums paid by the Company on a
life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Diaz, and $1,781 of Company contributions to the 401(k) plan on behalf of
Mr. Diaz. For fiscal 1998, represents $86 of premiums paid by the Company on a
life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Diaz. For fiscal 1997, represents $3,226 of premiums paid by the Company on
a health insurance policy while Mr. Diaz was a resident of Europe, the proceeds
of which are payable to the beneficiary of Mr. Diaz.
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for out-of-pocket expenses incurred
in attending meetings of the Board of Directors. Directors receive no cash
directors' fees. In addition to the stock options granted to Mr. Soika, listed
above, during fiscal 1999, the Company granted 22,500 stock options to each of
Mr. Houm and Mr. Datsopoulos, and regranted 77,500 stock options to each of Mr.
Houm and Mr. Datsopoulos through the repricing of options on December 11, 1998.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
On June 1, 1999, the Company entered into employment agreements with Emil
H. Soika, President and Chief Executive Officer, Stephen D. Okland, Vice
President-Domestic Sales, and Drew M. Diaz, Vice President-International Sales.
Mr. Soika's employment agreement provides for a base salary of $125,000 per
year. The employment agreements for Mr. Okland and Mr. Diaz provide for the
continuation of their respective current compensation, with an annual review of
the compensation within 30 days prior to the end
32
<PAGE>
of each fiscal year. Mr. Soika's employment agreement provides that Mr. Soika
is eligible to participate in a cash bonus program and is entitled to receive
health and life insurance coverage and disability insurance. Mr. Okland's and
Mr. Diaz's employment agreements provide that each is entitled to receive health
and life insurance coverage and disability insurance. The Company may terminate
Mr. Soika's, Mr. Okland's or Mr. Diaz's respective employment at any time and
any of Mr. Soika, Mr. Okland or Mr. Diaz may resign at any time. If the Company
terminates employment without cause at any time either prior to or after a
change in control of the Company, Mr. Soika is entitled to receive payment of
his base salary and to continue to receive other employee benefits for 12 months
from the date of termination; Mr. Okland is entitled to receive payment of
$18,750 per month and to continue to receive other employee benefits for 24
months from the date of termination; and Mr. Diaz is entitled to receive payment
of his then current compensation and to continue to receive other employee
benefits for 12 months from the date of termination. If Mr. Soika's, Mr.
Okland's or Mr. Diaz's employment is terminated for any other reason before a
change in control of the Company, the terminated employee will not be entitled
to receive any base salary or other benefits for periods after the termination
date. If the Company experiences a change in control, and Mr. Soika voluntarily
terminates his employment for any reason after completing three months of
employment after the date of the change in control, Mr. Soika will be entitled
to receive payment of his base salary and to continue to receive other employee
benefits for 12 months after the date of termination, or until Mr. Soika secures
alternative employment, whichever period is shorter. If the Company experiences
a change in control, and Mr. Okland or Mr. Diaz voluntarily terminates
employment for any reason after completing three months of employment after the
date of the change in control, Mr. Okland will be entitled to receive payment of
$1,8750 per month and to continue to receive other employee benefits for 24
months after the date of termination, or until Mr. Okland secures alternative
employment, whichever period is shorter, and Mr. Diaz will be entitled to
receive payment of his then current compensation and to continue to receive
other employee benefits for 12 months after the date of termination, or until
Mr. Diaz secures alternative employment, whichever period is shorter. Mr.
Soika, Mr. Okland and Mr. Diaz have each agreed not to compete with the Company
during employment and for Mr. Soika, for a period of three months after any
voluntary termination of employment by Mr. Soika or for a period of 12 months
after any termination by the Company without cause; for Mr. Okland, for a period
of 24 months after any voluntary termination of employment by Mr. Okland or for
a period of 24 months after any termination by the Company without cause; and
for Mr. Diaz, for a period of 12 months after any voluntary termination of
employment by Mr. Diaz or for a period of 12 months after any termination by the
Company without cause. Mr. Soika, Mr. Okland and Mr. Diaz have each agreed to
maintain the confidentiality of the Company's financial statements and other
financial information.
On November 16, 1998, the Company entered into a severance agreement with
Gerhard J. Von der Ruhr, the Company's former Chairman of the Board, President
(CEO) and Treasurer. Pursuant to this severance agreement, the Company is
required to make payments to Mr. Von der Ruhr of $6,000 per month over the 36
months from December 1998 through November 2001. The Company also agreed to (i)
issue options to purchase up to 21,000 shares of Common Stock to Mr. Von der
Ruhr with an exercise price of $2.0625 per share, (ii) allow Mr. Von der Ruhr to
continue to use office space
33
<PAGE>
and secretarial services for a period of up to 12 months, (iii) continue to
provide fringe benefits to Mr. Von der Ruhr through September 30, 2001, and (iv)
continue to provide health benefits to Mr. Von der Ruhr and his spouse until the
earlier of the date Mr. Von der Ruhr reaches age 65 or he obtains comparable
insurance coverage from a subsequent employer. Pursuant to this severance
agreement, the Company also transferred patent and technology rights that the
Company had received from Immtech International, Inc. ("Immtech") relating to
treatment for sepsis and prophylaxis and 172,414 shares of Immtech common stock
to a new company ("Newco") formed by Mr. Von der Ruhr in exchange for the
payment by Newco of $150,000 in ten semi-annual installments of $15,000 each
starting on June 1, 1999. The Company received 10% of the outstanding shares of
Newco and the right to elect one member of the board of directors of Newco. The
Company and Mr. Von der Ruhr also agreed to certain provisions regarding the
distribution of products related to the technology transferred by the Company to
Newco.
On November 16, 1998, the Company also entered into a severance agreement
with N.C. Joseph Lai, Ph.D., the Company's former Senior Vice President, Vice
Chairman of the Board and Secretary. Pursuant to this severance agreement, the
Company is required to make payments to Dr. Lai of $5,000 per month over the 36
months from December 1998 through November 2001. The Company also agreed to (i)
issue options to purchase up to 21,000 shares of Common Stock to Dr. Lai with an
exercise price of $2.0625 per share, (ii) allow Dr. Lai to continue to use
office space and secretarial services for a period of up to 12 months, (iii)
continue to provide fringe benefits to Dr. Lai through September 30, 2001, and
(iv) continue to provide health benefits to Dr. Lai and his spouse until the
earlier of the date Dr. Lai reaches age 65 or he obtains comparable insurance
coverage from a subsequent employer.
34
<PAGE>
STOCK OPTIONS
The following table provides certain information regarding stock options
granted to the named executive officers of the Company during the fiscal year
ended June 30, 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS/SARS AT ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM ($)
NAME GRANTED (#) FISCAL YEAR ($/ SH) DATE 5% 10%
- ----------------------- ------------- ------------ --------------------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Emil H. Soika . . . . . 100,000 9.0 1.6875 2/23/04 46,623 103,024
100,000 9.0 1.5000 3/10/04 41,442 91,577
Gerhard J. Von der Ruhr -- -- -- -- -- --
Stephen D. Okland . . . 30,000 2.7 1.8750 12/11/03 15,541 34,341
10,000 0.9 1.8750 10/08/00 5,180 11,447
3,500 0.3 1.8750 12/31/01 2,672 6,226
Drew M. Diaz. . . . . . 34,000 3.1 1.5000 3/10/04 14,090 31,136
2,000 0.2 1.8750 1/25/00 1,527 3,558
4,000 0.4 1.8750 12/31/01 3,053 7,115
10,000 0.9 1.8750 10/08/00 5,180 11,447
50,000 4.5 1.8750 1/23/02 25,901 57,235
</TABLE>
The following table shows the fiscal year-end value of unexercised options
held by the named executive officers. None of the named executive officers
exercised options in fiscal 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END(#) OPTIONS AT FISCAL YEAR END($) (1)
-------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Emil H. Soika -- 200,000 -- 93,750
Gerhard J. Von der Ruhr -- -- -- --
Stephen D. Okland 13,500 30,000 2,531 5,625
Drew M. Diaz 22,000 78,000 4,125 27,375
<FN>
(1) Based on the reported closing bid price of $2.0625 per share of common stock on June 30, 1999.
</TABLE>
35
<PAGE>
RETIREMENT PLAN
Effective April 1, 1991, the Company adopted a 401(k) plan, which covers
substantially all employees who have completed one year of employment. Under
the plan, eligible employees can contribute up to 15% of pre-tax compensation
for investment in a trust under the plan. Company contributions to the plan are
discretionary and determined annually by the Board of Directors. Employee
contributions, within certain limitations, are considered tax deferred under the
provisions of section 401(k) of the Internal Revenue Code. Withdrawals of tax
deferred amounts may be made upon termination of employment or earlier in the
event of certain defined hardship situations. Contributions made or accrued for
named executive officers are included under the "All Other Compensation" column
in the Summary Compensation Table.
Other than the 401(k) plan, the Company does not maintain any pension,
profit sharing, retirement or similar plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of August 31, 1999 by (a) each person known to
the Company to own beneficially more than 5% of the Common Stock, (b) each
director of the Company, (c) each named executive officer, and (d) all directors
and executive officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF
BENEFICIAL OWNER (1) SHARES OWNED PERCENT
- ------------------------------------------------------------ ------------- --------
<S> <C> <C>
Emil H. Soika -- --
Gerhard J. Von der Ruhr 560,275 (2) 6.4%
N.C. Joseph Lai 713,894 (3) 8.2
Karsten Houm 103,365 (4) 1.2
Milton Datsopoulos 77,500 (5) *
Stephen D. Okland 17,000 (6) *
Drew M. Diaz 35,500 (7) *
All directors and executive officers as a group (10 persons) 1,639,634 (8) 18.8
_____________________
<FN>
* Less than 1%
(1) Unless otherwise indicated, the address of the beneficial owner is 20925
Crossroads Circle, Waukesha, WI 53186; the address of Mr. Houm is Kristinelundvn. 21,
0268 Oslo, Norway; and the address of Mr. Datsopoulos is Central Square Building, 201
West Main, Missoula, Montana 59802.
36
<PAGE>
(2) Includes 410,000 shares owned of record by Ursula Von der Ruhr, Mr. Von der
Ruhr's wife, and 1,175 shares owned of record by Mark Von der Ruhr, Mr. Von der
Ruhr's son.
(3) Includes 116,000 shares owned of record by Helen Lai, Dr. Lai's wife;
137,000 shares owned jointly by Dr. Lai and his wife; 184,000 shares in the aggregate
owned of record by Dr. Lai's sons, Christopher Lai and Thomas Lai; and 134,000 shares
owned of record by the Lai Family Foundation.
(4) Includes 87,500 shares which Mr. Houm has the right to acquire under
currently exercisable options.
(5) Includes 77,500 shares which Mr. Datsopoulos has the right to acquire under
currently exercisable options.
(6) Includes 13,500 shares which Mr. Okland has the right to acquire under
currently exercisable options.
(7) Includes 34,000 shares which Mr. Diaz has the right to acquire under
currently exercisable options.
(8) Includes 287,500 shares of Common Stock the members of the group have a
right to acquire under currently exercisable options.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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.
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.
37
<PAGE>
2. Financial Statement Schedules:
-------------------------------
The financial statement schedule referenced below has not been
audited.
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).
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
38
<PAGE>
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).
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).
39
<PAGE>
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.
24+ Power of Attorney.
27+ Financial Data Schedule.
__________________
+ Previously filed.
* 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.
(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.
40
<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 Form 10-K/A 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: November 3, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K/A 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 November 3, 1999
- -------------------------
Emil H. Soika and Director (Principal Executive
Officer)
/s/ Joseph M. Siekierski Vice President-Finance and Secretary November 3, 1999
- -------------------------
Joseph M. Siekierski (Principal Financial and Accounting
Officer)
* Chairman of the Board and Director November 3, 1999
- -------------------------
Karsten Houm
* Director November 3, 1999
- -------------------------
Milton Datsopoulos
* Director November 3, 1999
- -------------------------
Gerhard J. Von der Ruhr
* Director November 3, 1999
- -------------------------
N.C. Joseph Lai
*By: /s/ Emil H. Soika November 3, 1999
--------------------
Emil H. Soika
Attorney-in-Fact
Pursuant to Power of Attorney
</TABLE>
41
<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
Reserve for sales returns and . $ 295,000 $ 366,505 $ 194,505 $ 467,000
allowances
$ 504,000 $ 1,283,931 $ 1,647,931 $ 140,000
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts
Reserve for sales returns and . $ 467,000 $ 99,000 $ 266,000 $ 300,000
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>
42
