AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 2000
REGISTRATION NO. 333- _____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CRITICARE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
-------------------
DELAWARE 3845 39-150563
------------------------------- ---------------------------- -----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
CRITICARE SYSTEMS, INC.
20925 CROSSROADS CIRCLE
WAUKESHA, WI 53186
(262) 798-8282
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
EMIL H. SOIKA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CRITICARE SYSTEMS, INC.
20925 CROSSROADS CIRCLE
WAUKESHA, WI 53186
(262) 798-8282
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
BENJAMIN G. LOMBARD, ESQ.
REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, S.C.
1000 NORTH WATER STREET, SUITE 2100
MILWAUKEE, WISCONSIN 53202
(414) 298-1000
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement
-------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
----------------------------- ------------ -------------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $0.04 par value 1,786,273 $ 2.43 (1) $ 4,340,643 $ 1,146
============================= ============ ========================== ================= =================
<FN>
(1) Calculated in accordance with Rule 457(c) based on the average of the high and low sales prices of
the Common Stock as reported on the Nasdaq National Market on November 20, 2000, solely for the purposes of
calculating the amount of the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY
DETERMINE.
2
<PAGE>
PROSPECTUS
PRELIMINARY PROSPECTUS DATED NOVEMBER 28, 2000
SUBJECT TO COMPLETION
1,786,273 SHARES
CRITICARE SYSTEMS, INC.
COMMON STOCK
The selling stockholders listed under the section entitled "Selling
Stockholders" are offering for sale up to 1,786,273 shares of our common stock.
Because the shares offered under this prospectus will be sold by the selling
stockholders, we will not receive any proceeds from the sale of these shares.
Shares of our common stock are traded on the Nasdaq National Market.
Trading Symbol on Nasdaq National Market: CXIM
Last Sale Price on November 27, 2000: $2.38 per share
_________________________________________
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_______________, 2000
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in the common stock. You
should read the entire prospectus carefully including "Risk Factors" and the
financial statements before making an investment decision.
OUR BUSINESS
We design, manufacture and market vital signs and gas monitoring
instruments and related noninvasive sensors used to monitor patients in many
healthcare settings.
Since a patient's oxygen, anesthetic gas and carbon dioxide levels can
change dramatically within minutes, causing severe side effects or death,
continuous monitoring of these parameters is increasing. Our monitoring
equipment improves patient safety by delivering accurate, comprehensive and
instantaneous patient information to physicians and other health service
clinicians. Our products also allow hospitals to contain costs primarily by
substituting cost-effective reusable pulse oximetry sensors for disposable
sensors, controlling the use of costly anesthetics and increasing personnel
productivity.
To meet the needs of end-users in a wide variety of patient settings, we
have developed a broad line of patient monitors which combine one or more of our
patented or other proprietary technologies for monitoring:
- oxygen saturation;
- carbon dioxide; and
- anesthetic agents,
with standard monitoring technologies that provide:
- electrocardiogram;
- invasive and noninvasive blood pressures;
- temperature;
- heart rate; and
- respiration rate.
In addition, our VitalView telemetry system allows one nurse to monitor up
to eight patients simultaneously from a convenient central location. This
allows hospitals to move out of the intensive care unit those patients that
require continuous monitoring, but do not need all of an intensive care unit's
extensive and costly personnel and equipment resources.
Our principal address and telephone number are: Criticare Systems, Inc.,
20925 Crossroads Circle, Waukesha, Wisconsin 53186, telephone number (262)
798-8282.
THE OFFERING
Common stock offered by the 1,786,273 shares
selling stockholders
Common stock outstanding as 10,777,524 shares
of October 31, 2000
Proceeds from sale We will not receive any proceeds from the
sale of these shares.
2
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
WE FACE SIGNIFICANT COMPETITION IN OUR MARKETS. AS A RESULT, WE MAY NOT BE ABLE
TO INCREASE OUR MARKET SHARE OR PROFIT MARGINS.
The markets for our products are highly competitive. Many of our
competitors have greater:
- engineering resources;
- research and development resources;
- manufacturing resources;
- financial and marketing resources; and
- market presence and reputation.
We have historically experienced substantial price competition for our
products and price competition is likely to continue.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES. IF WE DO NOT ACHIEVE PROFITABILITY,
OUR FINANCIAL CONDITION AND STOCK PRICE COULD SUFFER.
We had net losses of $4,388,171 in fiscal 1999, $186,388 in fiscal 2000,
and $165,970 in the first quarter of fiscal 2001. Our results in fiscal 1999
included a charge of approximately $1,800,000 for settlement costs related to a
lawsuit and our results for fiscal 2000 included a gain of $2,500,000 from our
private placement sale of 500,000 shares of Immtech International, Inc. We
cannot assure you that we will be able to achieve or sustain profitability in
future periods.
WE RELY ON SINGLE SOURCES OF SUPPLY FOR MANY OF THE KEY COMPONENTS OF OUR
PRODUCTS.
Certain of our products incorporate components currently purchased from
single sources. An interruption in the delivery of these components could harm
our business. For example, we experienced a severe shortage of LC monitors
during the third quarter of fiscal 2000 which delayed international shipments of
a new product line.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
We rely on our patented and other proprietary technology including:
- our sensor technology;
- infrared specific anesthetic gas monitoring technology;
- UltraSync signal processing software; and
- disposable respiratory secretion filter system.
The actions taken by us to protect our proprietary rights may not be
adequate to prevent imitation of our products, processes or technology. We can
not assure you that:
- our proprietary information will not become known to competitors;
- others will not independently develop substantially equivalent or
better products that do not infringe on our intellectual property
rights; or
- others will not challenge or assert rights in, and ownership of, our
patents and other proprietary rights.
Although none of our United States patents expire before 2004, to the
extent competitors develop equivalent or superior non-infringing technology in
these areas, or to the extent that we are unable to enforce our patents, our
ability to market and sell our products could be harmed.
3
<PAGE>
INTERNATIONAL SALES MAKE OUR BUSINESS SUSCEPTIBLE TO NUMEROUS INTERNATIONAL
BUSINESS RISKS AND CHALLENGES THAT COULD AFFECT OUR PROFITABILITY.
International sales accounted for 41% of our total net sales for the 2000
fiscal year. We expect that international sales will continue to constitute a
significant portion of our business. Although we sell our products in United
States dollars and are not subject to significant currency risks, an increase in
the value of the United States dollar relative to foreign currencies in our
international markets could make our products less price competitive in such
markets. Also, our international sales are subject to the risks inherent in
doing business abroad, including:
- delays in shipments;
- increases in import duties and tariffs; and
- changes in foreign regulations and political climate.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY.
Our products are subject to regulation by the United States Food and Drug
Administration and comparable foreign governmental authorities. These
regulations can be burdensome and may:
- substantially delay or prevent the introduction of new products;
- materially increase the costs of any new product introductions;
- interfere with or require cessation of product manufacturing and
marketing; and
- result in product recalls.
Additionally, adoption of new regulations or modifications to applicable
regulations could harm our business.
HEALTH CARE COST CONTAINMENT PROGRAMS COULD ADVERSELY AFFECT OUR DOMESTIC SALES.
The cost of a significant portion of medical care in the United States is
funded by government or other insurance programs. Additional limits imposed by
such programs on health care cost reimbursements may further impair the ability
of hospitals and other health care providers to purchase equipment such as our
products and could reduce our domestic sales.
OUR BUSINESS IS SUBJECT TO POSSIBLE PRODUCT LIABILITY EXPOSURE.
As a manufacturer of medical diagnostic equipment, we could face product
liability claims. We have had no product liability claims to date and maintain
product liability insurance. However, we can make no assurance that our
insurance coverage will be adequate to cover any product liability claims which
arise in the future or that it will continue to be available at reasonable
prices.
OUR STOCK PRICE MAY FLUCTUATE, INCREASING THE RISK TO INVESTORS IN OUR COMMON
STOCK.
Market prices of securities of medical technology companies, including our
common stock, have experienced significant volatility from time to time. There
may be volatility in the market price of the common stock due to factors that
may or may not relate to our performance. Various factors and events may have a
significant impact on the market price of our common stock such as:
- announcements by us or our competitors concerning new product
developments;
- governmental approvals, regulations or actions;
- developments or disputes relating to patent or proprietary rights; and
- public concern over product liability.
In addition, our quarterly results have historically fluctuated.
4
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
We have made forward-looking statements in this document that are subject
to risks and uncertainties. Without limitation, these forward-looking
statements include statements:
- regarding new products we may introduce in the future;
- about our business strategy and plans;
- about the adequacy of our working capital and other financial
resources; and
- that are not of an historical nature.
When we use words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. You should note that
forward-looking statements rely on a number of assumptions concerning future
events, and are subject to a number of uncertainties and other factors, many of
which are outside of our control, that could cause actual results to differ
materially from the statements made. These factors include those discussed
under the caption "Risk Factors" in this prospectus. Please note that we
disclaim any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
MARKET INFORMATION AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
"CXIM." The following table sets forth the high and low closing sale prices for
our common stock as reported by Nasdaq.
<TABLE>
<CAPTION>
Common Stock
------------
Quarter High Low
------------ ------- -------
<S> <C> <C>
FISCAL 1999
First. . . . 2-15/16 1-1/4
Second . . . 2-3/4 1-5/8
Third. . . . 2-1/8 1-7/16
Fourth . . . 3-3/8 1-11/16
FISCAL 2000
First. . . . 2-7/8 1-7/8
Second(1). . 2-3/4 2
Third. . . . 5-1/16 2-1/4
Fourth . . . 3-7/16 1-31/32
FISCAL 2001
First. . . . 3-3/8 2-5/16
<FN>
(1) Trading of our common stock on the Nasdaq National Market was
suspended from October 6, 1999 until December 13, 1999 due to the delayed filing
of our Annual Report on Form 10-K with the SEC.
</TABLE>
As of October 31, 2000, there were approximately 278 holders of record of
our common stock. We have never declared or paid any cash dividends on shares
of our common stock. We intend to retain any earnings for use in the operation
and expansion of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.
5
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
stockholders.
DETERMINATION OF OFFERING PRICE
The common stock offered by this prospectus may be offered for sale by the
selling stockholders from time to time in transactions on the Nasdaq National
Market, in negotiated transactions, or otherwise, or by a combination of these
methods, at fixed prices which may be changed, at market prices at the time of
sale, at prices related to market prices or at negotiated prices. As such, the
offering price is indeterminate as of the date of this prospectus. See "Plan of
Distribution."
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The balance sheet data as of June 30, 2000 and 1999 and the
statements of operations data for the fiscal years ended June 30, 2000 and 1999
are derived from our consolidated financial statements that have been audited by
BDO Seidman, LLP, independent auditors, and are included elsewhere in this
prospectus. The statement of operations data for the fiscal year ended June 30,
1998 is derived from our consolidated financial statements that have been
audited by Deloitte & Touche LLP, independent auditors, and are included
elsewhere in this prospectus. The balance sheet data as of June 30, 1998, 1997
and 1996 and the statement of operations data for the fiscal years end June 30,
1998, 1997 and 1996 are derived from our audited consolidated financial
statements which are not included elsewhere in this prospectus. The balance
sheet data as of September 30, 2000 and 1999 and the statement of operations
data for the three months ended September 30, 2000 and 1999 are derived from our
unaudited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly our consolidated financial position and results of
operations as of September 30, 2000 and 1999 and for the three months then
ended. Actual results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
------------- --------------------
2000 1999 2000 1999 1998 1997 1996
------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . $ 6,229,877 $ 6,603,337 $27,154,236 $28,512,507 $27,908,364 $26,235,355 $31,528,266
(Loss) income before income
taxes and
extraordinary gain. . . . . . (165,970) 1,880,476 (186,388) (4,388,171) (499,276) (2,749,435) (4,280,989)
Net (loss) income . . . . . . . (165,970) 1,880,476 (186,388) (4,388,171) (499,276) (2,179,489) (4,330,989)
Net (loss) income per
common share--Basic . . . . . $ (0.02) $ 0.22 $ (0.02) $ (0.51) $ (0.06) $ (0.30) $ (0.63)
--Diluted . . . . $ (0.02) $ 0.21 $ (0.02) $ (0.51) $ (0.06) $ (0.30) $ (0.63)
------------ ----------- ------------ ------------ ------------ ------------ ------------
Average shares outstanding
--Basic . . . . . . . . . . . 8,898,607 8,706,151 8,694,918 8,581,863 8,309,240 7,267,184 6,913,557
------------ ----------- ------------ ------------ ------------ ------------ ------------
--Diluted . . . . . . . . . . 8,898,607 8,921,806 8,694,918 8,581,863 8,309,240 7,267,184 6,913,557
------------ ----------- ------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Long-term obligations . . . . . $ 3,495,488 $ 3,979,687 $ 3,552,474 $ 4,014,356 $ 3,165,258 $ 5,110,934 $ 4,669,975
Working capital . . . . . . . . 17,984,238 12,188,902 16,257,780 10,340,014 13,716,891 12,053,165 10,282,033
Total assets. . . . . . . . . . 28,664,974 23,362,905 27,210,867 24,041,987 24,726,819 25,145,066 27,075,922
Stockholders' equity. . . . . . 20,526,259 14,592,186 18,798,952 12,711,709 17,282,997 14,227,135 13,917,549
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of our
financial condition and results of operations and should be read in conjunction
with our financial statements and the notes to the financial statements
contained elsewhere in this prospectus. The matters discussed in this section
that are not historical or current facts deal with potential future
circumstances and developments. See "Financial Statements" at page F-1.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
THREE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
-------------- -----------------------
2000 1999 2000 1999 1998
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . . 59.7 54.7 60.6 54.5 53.3
Gross profit. . . . . . . . . . . . . 40.3 45.3 39.4 45.5 46.7
Operating expenses:
Marketing . . . . . . . . . . . . . . 23.7 24.3 29.5 31.4 26.7
Research, development
and engineering . . . . . . . . . . 9.3 10.8 10.5 10.4 11.7
Administrative. . . . . . . . . . . . 9.0 7.8 8.6 14.6 7.2
Severance pay . . . . . . . . . . . . -- -- -- 2.8 --
Total . . . . . . . . . . . . . . . . 42.0 42.9 48.6 59.2 45.6
(Loss) income from operations. . . . (1.7) 2.4 (9.2) (13.7) 1.1
Interest expense. . . . . . . . . . . (1.0) (1.0) (1.0) (1.5) (2.9)
Interest income . . . . . . . . . . . 0.1 0.4 0.3 0.3 0.4
Equity in loss of investments . . . . -- -- -- (0.5) (0.4)
Gain on sale of stock . . . . . . . . -- 26.7 9.2 -- --
(Loss) income before income taxes . . (2.7) 28.5 (0.7) (15.4) (1.8)
Income tax provision. . . . . . . . . -- -- -- -- --
Net (loss) income . . . . . . . . . . (2.7)% 28.5% (0.7)% (15.4)% (1.8)%
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Sales volume (number of units sold) for the three months ended September
30, 2000 rose 15% from the same period in fiscal 1999, however, net sales
revenue fell by approximately $400,000, or approximately 6.1%, from $6,600,000
in the first quarter of fiscal 2000 to $6,200,000 in the first quarter of fiscal
2001. One of the reasons for this result is the large systems sale recorded in
the first quarter of the prior year. Resulting hospital sales in the prior year
were $1,500,000 higher than that of the current year. Another reason for the
overall decrease in revenue is the decline in the selling price of some of our
older product line. Prices have fallen, in part, due to increased competition
and, in part, due to our willingness to accept a lower margin during the phase
out period of some of these products, rather than absorb future inventory
obsolescence costs. However, OEM sales in the current year have rebounded from
a sluggish start in fiscal 1999, posting an $800,000 gain over the same period
last year.
The gross profit percentage of 40% in the first quarter of the current year
represents a decrease of 11% from the same period in fiscal 2000, but shows an
improvement over both of the previous two quarters. A comparison of the current
year cost of sales to that of the prior year (after adjusting for the higher
margin systems sale) shows that the cost per unit has remained relatively
constant. Therefore, the lower margin in fiscal 2000 is attributed to the
profitable systems sale in the prior year, the lower sales prices on established
products as discussed above, and introductory pricing on our newly introduced
products being sold as demonstration units. We expect to see some improvement
in its margins, as most of the demonstration units have been moved through the
backlog, and future sales of the newer products are expected to be subject to
less discounting.
8
<PAGE>
In the prior year, we made great strides in reducing operating expenses
from that of the year before, and that emphasis has continued into fiscal 2001.
Current year operating expenses decreased $200,000 in the first quarter from
that of the prior year. Approximately $100,000 is attributed to the service
area in the form of higher warranty sales and better control of materials and
supplies. Research and development accounts for another $100,000 in reductions,
as there was a significant amount of activity in the first quarter of the prior
year related to the development of the new products released in late fiscal
2000.
Income from operations fell approximately $250,000 for the three months
ended September 30, 2000 when compared to the same period in fiscal 2000 due to
the decrease in revenue and gross profit, which offset the reduction in
operating expense.
Net non-operating expenses were approximately $60,000, the majority of
which relates to interest expense on the building mortgage, and is comparable to
the amount spent on interest in the prior year. However, offsetting last year's
interest expense was a $1,800,000 gain on the sale of Immtech stock, which
accounts for the difference in the non-operating expense totals.
COMPARISON OF YEARS ENDED JUNE 30, 2000 AND 1999
For the twelve months ended June 30, 2000, international sales rose
approximately $600,000, but were offset by a decrease in total domestic sales of
approximately $2,000,000. The net result was a decline in net sales of 4.8%,
from $28,512,507 to $27,154,236, which resulted primarily from decreasing
product prices.
The gross profit percentage declined from 45.5% in 1999 to 39.4% in 2000.
This decrease is due primarily to continued price erosion on products in a
portion of our older product line.
Total operating expenses were reduced by $3,700,000, which represents a
21.7% cost reduction during fiscal 2000. Marketing expenses were lowered by
approximately $900,000 due to a variety of factors. These include a reduction
in service labor and materials, a decrease in payroll and related travel
expenses due to a reduction in direct sales people as more dealers were added,
and a decrease in commissions associated with the lower sales. Offsetting the
$1,800,000 of reductions was a $900,000 increase in the reserve for doubtful
accounts related to the receivable balances of certain international customers.
Research and development expenses decreased approximately $100,000, as the
design phase of the 8100 product was completed and production commenced.
Administration expenses decreased approximately $2,000,000. The majority of
this reduction is due to the non-reoccurring litigation and settlement costs
associated with a lawsuit in the prior year. In addition, $810,000 of severance
costs were recorded in 1999.
Interest expense was reduced $170,000 from 1999 levels due to the mortgage
that was refinanced in March 1999. However, the more significant change is the
$2,500,000 gain recorded on the private placement sale of 500,000 Immtech shares
in fiscal 2000.
COMPARISON OF YEARS ENDED JUNE 30, 1999 AND 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.
9
<PAGE>
Operating expenses of $16,871,981 represent 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 our products.
We also recorded approximately $810,000 of severance costs related primarily to
costs associated with the resignation of our two co-founders.
Interest expense decreased as no purchase discount related to convertible
debentures was recorded in 1999. All debentures were converted to common stock
during 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had a cash balance of approximately $200,000
and no short-term borrowings. In the three months ended September 30, 2000,
approximately $200,000 was provided by operations, of which $100,000 was
reinvested in property, plant and equipment. In the same period of the prior
year, approximately $1,700,000 was used in operations, of which a significant
portion was attributed to the settlement of a long-standing lawsuit. Proceeds
for this settlement were obtained from the sale of shares of Immtech stock in a
private placement sale. Subsequent to September 30, 2000, we received $4,000,000
in proceeds from the private placement of 1,786,273 shares of our common stock
to the selling stockholders. The primary intended use of these funds is for
additional research and development and an expanded marketing program. We
believe all other capital and liquidity requirements will be satisfied by cash
generated from operations and periodic utilization of a $4,000,000 line of
credit currently in place, if necessary. At September 30, 2000, there were no
borrowings outstanding under the line of credit.
In fiscal 2000, we generated $2.5 million through the private placement
sale of Immtech stock and $499,581 from the exercise of stock options and
employee stock purchases from the treasury. We used $73,925 to retire long-term
debt, $595,412 for capital expenditures and $4,726,492 to fund operations.
These sources and uses of cash resulted in net negative cash flow of $2,396,248
for the 2000 fiscal year.
In fiscal 1999, we generated $315,577 from operating activities, $256,413
from the mortgage refinancing discussed below, and $10,313 from the exercise of
stock options. We used $92,776 for the retirement of long-term debt, $515,017
for capital expenditures, and $193,430 for the repurchase of our stock. These
sources and uses of cash resulted in net negative cash flow of $218,920 for the
1999 fiscal year.
In March 1999, we refinanced our mortgage note on our 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 December 2002.
We expect our 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 effect on cash flow activities in the next fiscal year. Consequently,
we believe our research and development activities and other capital and
liquidity requirements for at least the next twelve months will be satisfied by
cash generated from operations and other borrowings. There are currently no
significant capital expenditures planned for fiscal 2001. During fiscal 2000,
we also had access to a commercial bank line of credit of up to $4,000,000. At
June 30, 2000, there were no borrowings outstanding on the line of credit. We
violated a covenant 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.
10
<PAGE>
QUARTERLY RESULTS
The following table contains quarterly information, which includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation. We recorded a gain of $2,500,000 in the
quarter ended September 30, 1999 related to the sale of Immtech stock and a
charge of approximately $1,800,000 for settlement costs related to a lawsuit
that was resolved in the quarter ended June 30, 1999. These items were unusual,
nonrecurring adjustments.
<TABLE>
<CAPTION>
QUARTERS ENDED
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
2000 2000 2000 1999 1999 1999 1999 1998 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales. . . . . $ 6,230 $ 7,519 $ 6,131 $ 6,901 $ 6,603 $ 7,223 $ 7,276 $ 7,290 $ 6,724
Gross profit . . . 2,511 2,326 2,235 3,142 2,989 2,784 3,379 3,562 3,259
(Loss) income from
operations . . . (108) (1,317) (1,143) (215) 157 (2,308) (486) (880) (214)
Net (loss)
income . . . . . (166) (1,367) (1,197) 489 1,880 (2,340) (681) (947) (420)
Net (loss) income
per common
share-Basic. . . (0.02) (0.16) (0.14) 0.06 0.22 (0.27) (0.08) (0.11) (0.05)
-Diluted. . (0.02) (0.16) (0.14) 0.06 0.21 (0.27) (0.08) (0.11) (0.05)
</TABLE>
We typically receive a substantial volume of our quarterly sales orders at
or near the end of each quarter. In anticipation of meeting this expected
demand, we usually build 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 us to ship the products ordered during
the quarter, our quarterly results and stock of finished inventory can be
significantly affected.
11
<PAGE>
BUSINESS
We design, manufacture and market vital signs and gas monitoring
instruments and related noninvasive sensors used to monitor patients in many
healthcare environments.
Since a patient's oxygen, anesthetic gas and carbon dioxide levels can
change dramatically within minutes, causing severe side effects or death,
continuous monitoring of these parameters is increasing. Our monitoring
equipment improves patient safety by delivering accurate, comprehensive and
instantaneous patient information to the clinician. Our products also allow
hospitals to contain costs primarily by substituting cost-effective reusable
pulse oximetry sensors for disposable sensors, controlling the use of costly
anesthetics and increasing personnel productivity.
To meet the needs of end-users in a wide variety of patient environments,
we have developed a broad line of patient monitors which combine one or more of
our patented or other proprietary technologies for monitoring:
- oxygen saturation;
- carbon dioxide; and
- anesthetic agents,
with standard monitoring technologies that provide:
- electrocardiogram;
- invasive and noninvasive blood pressures;
- temperature;
- heart rate; and
- respiration rate.
In addition, our VitalView telemetry system allows one nurse to monitor up
to eight patients simultaneously from a convenient central location. This
allows hospitals to move out of the intensive care unit those patients that
require continuous monitoring, but do not need all of an intensive care unit's
extensive and costly personnel and equipment resources.
PRODUCTS
We market a broad range of vital signs and gas monitoring products designed
to address the needs of a variety of end-users in different patient
environments. Our monitors display information graphically and numerically.
All of our monitors incorporate adjustable visual and audible alarms to provide
reliable patient-specific warnings of critical conditions, and most of our
monitors record up to 60 hours of trend data. Our monitors are available with
printer capability to provide permanent records of patient data.
Model 8100 Vital Signs Monitor. The full-featured CSI 8100 Vital Signs
----------------------------------
Monitor provides maximum flexibility for hospital, transport and outpatient care
settings. The unit's custom configurations include ECG, ComfortCuff
noninvasive blood pressure, DOX digital oximetry, heart rate, temperature,
respiration and nurse call interface. Optional features include CO2 and CO2/O2
monitoring and an integrated printer. The 8100 is well suited for busy
departments that require basic vital signs monitoring to conscious sedation.
12
<PAGE>
Model 503, 503DX, 504 and 504DX. Our complete line of pulse oximeters
------------------------------------
meets the needs of virtually all clinical environments, including:
- adult, pediatric and neonatal intensive care units;
- operating rooms;
- emergency rooms;
- nursing homes;
- physicians' offices; and
- ambulances.
Our pulse oximeter line is designed to provide accuracy and convenience at
a competitive cost to the end-user.
Model 506DX and 507E Patient Monitors. The 507E series is comprised of
-----------------------------------------
small, compact, portable, full-featured vital signs monitors configured to meet
specific clinical needs. The 507E series is well-suited for dental and
physician offices. The 506DX is ideal for patient ward monitoring of
noninvasive blood pressure. The 507E series combines electrocardiogram, oxygen
saturation and noninvasive blood pressure for a complete vital signs monitor for
physician office and hospital applications. The 507E series is an effective
low-cost monitoring system for the emergency room or the recovery room.
Scholar(TM). The Scholar monitor series specifically addresses the needs
-----------
of small hospitals with broad clinical needs, including the monitoring of:
- electrocardiogram;
- blood oxygen saturation;
- noninvasive blood pressure;
- temperature; and
- invasive blood pressure.
Scholar offers all the primary features a hospital needs with the
capability of adding more features if desired. Scholar monitors are available
with printer and recorder capability and can transmit data to our VitalView
Central Stations.
Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient
--------------------------------
monitoring for a wide variety of cardio-pulmonary parameters in an integrated
system. The Model 1100 is able to monitor:
- two electrocardiogram waveforms;
- noninvasive blood pressure;
- three types of invasive blood pressure;
- respiration rate;
- heart rate;
- temperature;
- oxygen saturation;
- inspired/expired oxygen; and
- carbon dioxide and anesthetic gases.
The Model 1100 uses our proprietary disposable respiratory secretion filter
system.
Model 602-3B, 602-6B, 602-11 and 602-13 Gas Monitors. The 602 series
----------------------------------------------------------
provides monitoring of carbon dioxide, pulse oximetry and anesthetic agents
using our proprietary infrared technology. The 602 IQ series of operating room
monitors provides automatic identification and quantification of all five
approved anesthetic agents.
13
<PAGE>
Model 4400 Series Blood Pressure, Pulse Oximetry and Temperature
------------------------------------------------------------------------
Combination Monitor. The 4400 series monitor was developed in conjunction with
--------------------
Alaris Medical and incorporates our oximetry and noninvasive blood pressure
technology with Alaris's temperature technology. Alaris has the rights to
market the Model 4400 monitor to hospitals in the United States and Canada. We
have rights to market the product to the alternate care market and to
international markets.
Model 602-14 POET(TM) LT Monitor. The hand-held POET LT provides small
------------------------------------
hospitals and alternate care environments with compact, portable carbon dioxide
monitoring. The POET LT series is an effective, low-cost functioning solution
for these environments.
VitalView(TM). The VitalView central station makes it possible for one
-------------
nurse or technician to monitor numerous patients simultaneously. The VitalView
can receive, display and store data from a wide variety of our monitors
including the Scholar, 507E and MPT.
MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the
-------
transmission of vital signs (electrocardiogram, blood oxygen saturation and
noninvasive blood pressure) on a real time basis to a VitalView central station
while the patient is ambulatory. In today's healthcare environment, hospitals
benefit by moving patients from expensive critical care departments as quickly
as possible to less expensive general nursing floors. MPT, because of its
complete monitoring capability and its lower cost, allows the patient to be
ambulatory while still being monitored for all vital signs.
Pulse Oximetry Sensors. We have designed proprietary, noninvasive sensors
-----------------------
that can be used on any patient, from a premature infant to a full-grown adult.
Our line of reusable pulse oximetry sensors offers users significant cost
savings compared to disposables. Our reusable sensors generally last longer
than the one-year warranty period and are easily and inexpensively cleaned
between uses. Our reusable sensors include a finger sensor for routine
applications and a multisite sensor for increased placement flexibility. The
multisite sensor is fully immersible, allowing for sterilization between
patients. We also sell a range of disposable sensors designed for single use in
cases where the facility would prefer to use a patient charge disposable
product.
Water Chek/Chek-Mate Filter System. Our patented, disposable Water Chek
-------------------------------------
system separates a patient's respiratory secretions from a breath sample before
it enters the gas monitor(s) for analysis. Our proprietary, disposable
Chek-Mate filter enhances the removal of moisture from the sample, while
preventing cross-contamination. This system allows the monitor to operate
effectively regardless of humidity or patient condition. The self-sealing
feature also protects the healthcare provider from potential contamination.
MARKETING AND SALES
Domestic Sales. At August 31, 2000, our domestic sales force consisted of
---------------
eight employees and 104 independent dealers. Our sales force and independent
dealers market our products to many different types of medical facilities such
as hospitals, surgery centers, nursing homes and physician offices. We sell our
higher-end monitors (MPT, VitalView Central Station and anesthetic agent
monitors), principally to hospitals whereas the vital signs and pulse oximeters
are sold primarily for nonhospital settings.
International Sales. One of our principal marketing strategies has been to
-------------------
target international markets, particularly Europe, Latin America and the Pacific
Rim countries. During fiscal 2000, we sold our products, principally to
hospitals, in over 70 countries through over 70 independent dealers. Most of
our international order processing, invoicing, collection and customer service
functions are handled directly from our headquarters in Waukesha, Wisconsin. We
believe demand for our products in international markets is primarily driven by
cost containment concerns, and increased interest in using quality patient
monitoring products for improved patient management.
14
<PAGE>
In fiscal 2000, 41% of our net sales, or $11.0 million, was attributable to
international sales, of which approximately:
- 49% was from sales in Europe and the Middle East;
- 24% was from sales to Pacific Rim countries; and
- 27% was from sales to Canada and Central and South America.
In fiscal 1999, 37% of our net sales was attributable to international
sales. In fiscal 1998, 46% of our net sales was attributable to exports. We
sell our products in United States dollars and are not subject to significant
currency risks. However, an increase in the value of the United States dollar
relative to foreign currencies could make our products less price competitive in
those markets. In addition, significant devaluation of certain foreign
currencies could adversely affect the collectibility of accounts receivable from
international customers. We analyze this risk before making shipments to
countries we view as unstable.
Clinical Support. At August 31, 2000, we employed one clinical support
-----------------
specialist to provide customer training and education, primarily to domestic
hospitals. The clinical support specialist also assists in the periodic
training and education of the direct sales force. In addition, the direct sales
force maintains contact with end-users and provides additional training and
updates. Clinical support in foreign markets is provided by our clinical
support staff and direct sales force.
Warranty and Service. We believe that customer service is a key element of
--------------------
our marketing program. Our monitors are warranted against defects for one year
and our reusable sensors are warranted for six months. If a problem develops
with one of our products while under warranty, we typically provide a
replacement unit until the product can be repaired at our facility. At August
31, 2000, we had a customer service staff of 16 people at our Waukesha,
Wisconsin facility. We offer extended warranties and service contracts on all
of our monitors.
MANUFACTURING
We continually strive to implement manufacturing efficiencies while
maintaining product quality and reliability. Our oximeters and sensors are
assembled from off-the-shelf components and other parts produced to our
specifications, such as printed circuit board assemblies, custom transformers
and sensor cable/connector subassemblies. However, we produce certain important
components in-house. All electronic components are subjected to a 24-hour
high-temperature burn-in to eliminate early component failure. Some subassembly
is performed by subcontractors, but final assembly and quality control are
performed at our facility. We maintain test and inspection procedures to
minimize errors and enhance the operating reliability of our products. Final
test procedures on fully assembled units include an operational test and a
continuous 72-hour burn-in procedure.
Some of our products incorporate components currently purchased from single
sources. While we believe these components are available from alternate sources
on reasonable terms, an interruption in the delivery of these or other
components could harm us. In order to reduce the risk of supply interruption,
we maintain inventories of certain components.
The ISO 9000 series of quality management and assurance standards was
developed by the International Organization for Standardization and published in
1987. In 1993 the European Community was formed with the signing of the
Maastricht Treaty by 12 European countries. One of the many standards adopted
by this group is the ISO 9000 international quality assurance and quality
management series under the designation EN2 9000. Based on this action by the
European Community and specific requirements from European customers, we believe
ISO 9000 registration will be required to compete in European Community and
other international markets as an indication of compliance with international
quality management and assurance standards. In July 1994 the Food and Drug
Administration announced its intention of harmonizing the ISO 9000 standards
with its Medical Device Good Manufacturing Practices. We have achieved
certification under ISO 9001 and 9002 standards. See "-Regulation."
15
<PAGE>
RESEARCH, DEVELOPMENT AND ENGINEERING
We have focused our research, development and engineering expenditures on
products designed to meet identified market demands. We seek to apply our
expertise in gas monitoring and related sensor technology to develop new
products and adapt existing products for new markets. At August 31, 2000, we
had an in-house research, development and engineering staff of 20 people. Our
research, development and engineering expenditures were $2.9 million in fiscal
2000, $3.0 million in fiscal 1999 and $3.3 million in fiscal 1998.
COMPETITION
The markets for our products are highly competitive. Many of our
competitors, including our principal competitors described below, have:
- greater financial resources;
- more established brand identities and reputations;
- longer histories in the medical equipment industry; and
- larger and more experienced sales forces.
In these respects, our competitors may have a competitive advantage over
us. We compete primarily on the basis of product features, the quality and
value of our products (i.e., their relative price compared to performance
features provided) and the effectiveness of our sales and marketing efforts. We
believe that our principal competitive strengths are provided by:
- our focus on cost containment;
- our patented and other proprietary technology and software for
noninvasive continuous monitoring of oxygen, anesthetic gases, carbon
dioxide and noninvasive blood pressure;
- our cost-efficient manufacturing;
- the efficiency and speed of our research and development efforts; and
- our established international presence.
The principal competing manufacturers of pulse oximeters are Nellcor
Puritan Bennett, a unit of Mallinckrodt Inc., and Datex/Ohmeda, a United States
subsidiary of Instrumentarium OY, a Finnish company. We estimate that Nellcor
has captured a majority of the worldwide pulse oximeter market, and that
Datex/Ohmeda and Criticare have each captured significant portions of the
worldwide pulse oximeter market. In addition, there are approximately four
other companies which compete in the market for pulse oximeters. We also
indirectly compete with manufacturers of numerous other medical equipment
products for limited customer funds.
We believe that the worldwide anesthetic agent and carbon dioxide monitor
markets are comparatively fragmented, with Datex/Ohmeda as the principal
competitor. Our principal competitors in the domestic gas monitor market
include Datex/Ohmeda and Hewlett-Packard Company. The market for vital signs
monitors includes competitors such as Hewlett-Packard Company, Siemens A.G.,
Datex/Ohmeda and SpaceLabs, Inc., a subsidiary of Westmark International
Incorporated.
We believe that our principal competitors in Western Europe include
Datex/Ohmeda and that we have a significant share of this market. In the
Pacific Rim countries, we believe that Datex/Ohmeda is the leading competitor.
16
<PAGE>
REGULATION
As a manufacturer of medical diagnostic equipment, we are regulated by the
Food and Drug Administration and similar foreign governmental agencies. In
producing our products, we must comply with a variety of regulations, including
the good manufacturing practices regulations of the Food and Drug
Administration. In addition, we are subject to periodic inspections by this
agency. If the Food and Drug Administration believes that its legal
requirements have not been fulfilled, it has extensive enforcement powers,
including the ability to ban or recall products from the market and to prohibit
the operation of manufacturing facilities. We believe our products comply with
applicable Food and Drug Administration regulations in all material respects.
In addition, we received ISO 9002 certification on April 29, 1993 and ISO 9001
certification on July 8, 1994.
Under the Food, Drug and Cosmetic Act, all medical devices are classified
as Class I, Class II or Class III, depending upon the level of regulatory
control to which they will be subject. Class III devices, which are the most
highly controlled devices, are subject to premarket approval by the Food and
Drug Administration prior to commercial distribution in the United States.
Our current products have not been subject to the Food and Drug
Administration's comprehensive premarket approval requirements, but are
generally subject to premarket notification requirements. If a new device is
substantially equivalent to a device that did not require premarket approval,
premarket review is satisfied through a procedure known as a "510(k)
submission," under which the applicant provides product information supporting
its claim of substantial equivalence. The Food and Drug Administration may also
require that it be provided with clinical trial results showing the device's
safety and efficacy.
We believe that the products we are currently developing generally will be
eligible for the 510(k) submission procedure and, therefore, will not be subject
to lengthy premarket approval procedures. However, these products are still
being developed and we can make no assurance that the Food and Drug
Administration will determine that the products may be marketed without
premarket approval.
We seek, where appropriate, to comply with the safety standards of
Underwriters' Laboratories and the Canadian Standards Association and the
standards of the European Community. To date, we have not experienced
significant regulatory expense or delay in the foreign markets in which we sell
our products. Industry and professional groups such as the American Society of
Anesthesiologists, to the extent they have the power to mandate practices or
procedures as part of their profession's standard of care, are also a source of
indirect regulation of our business.
PATENTS AND TRADEMARKS
We believe one of our principal competitive advantages is provided by our
patented and other proprietary technology, including our:
- sensor technology;
- infrared specific anesthetic gas monitoring technology;
- UltraSync signal processing software; and
- disposable respiratory secretion filter system.
None of our U.S. patents expire before 2004. We also have thirteen foreign
patent applications pending. There is no assurance that any patents held or
secured by us will provide any protection or commercial or competitive benefit
to us. There is also no assurance that our products will not infringe upon
patents held by others. We are the owner of United States trademark
registrations for "POET," "Scholar," "MPT," "REMOTEVIEW" and "MICROVIEW."
17
<PAGE>
We also rely upon trade secret protection for certain of our proprietary
technology. Although we require our employees having access to our proprietary
information to sign confidentiality agreements, we can make no assurance that
such agreements can be effectively enforced or that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to or disclose our trade secrets.
EMPLOYEES
At August 31, 2000, we had 104 employees, including:
- 44 in manufacturing and operations;
- 6 in quality control;
- 21 in sales and marketing;
- 13 in administration; and
- 20 in research, development and engineering.
Many of our technical employees are highly skilled. We believe that our
continued success depends in part on our ability to continue to attract
qualified management, marketing and technical personnel. None of our employees
are subject to a collective bargaining agreement. We believe that our relations
with our employees are good.
BACKLOG
Our backlog was approximately $1,833,000 on June 30, 2000 and approximately
$1,836,000 on June 30, 1999. The backlog at these dates consisted primarily of
products for which the sales order specified a delayed delivery date. We
generally deliver our products out of inventory when specified by the customer.
We do not believe that our backlog at any date is indicative of our future
sales.
DESCRIPTION OF PROPERTY
In November 1992, we purchased a new 60,000 square foot facility for
approximately $4.5 million. Our mortgage calls for monthly installments of
principal and interest of approximately $28,000 and a final "balloon" payment of
approximately $3.0 million in April 2004. We believe this facility will be
adequate for the foreseeable future.
LEGAL PROCEEDINGS
In the normal course of business we may be involved in various legal
proceedings from time to time. We do not believe we are currently involved in
any claim or action the ultimate disposition of which would have a material
adverse effect on us.
18
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information regarding our directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE TITLE
------------------------- --- ------------------------------------------------
<S> <C> <C>
Karsten Houm (1)(2) 54 Chairman of the Board and Director
Emil H. Soika 62 President, Chief Executive Officer and Director
N.C. Joseph Lai, Ph.D. 58 Director
Milton Datsopoulos (1)(2) 60 Director
Jeffrey T. Barnes 46 Director
Mark S. Ruehle 39 Vice President-Finance and Secretary
Stephen D. Okland 58 Vice President-Domestic Sales
Drew M. Diaz 37 Vice President-International Sales
Michael T. Larsen 41 Vice President-Quality Control/Quality Assurance
Joseph P. Lester 50 Vice President-Operations
Dennis D. Hurlebaus 58 Vice President-U.S. Hospital Sales
______________________
<FN>
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
</TABLE>
KARSTEN HOUM, CHAIRMAN OF THE BOARD AND DIRECTOR. Mr. Houm has served as
our Chairman of the Board since November 1998 and as a Director since 1985. Mr.
Houm also currently works as a management consultant. From September 1985 to
June 1997, Mr. Houm served as President of Unitor, a Norwegian shipping company.
EMIL H. SOIKA, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Soika
has served as our President, Chief Executive Officer and Director 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 1995, 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.
N.C. JOSEPH LAI, PH.D., DIRECTOR. Dr. Lai has served as a Director since
1984. Dr. Lai is a management consultant. Dr. Lai is one of our co-founders
and served as our Vice Chairman of the Board and as an officer from our
inception in October 1984 until November 1998.
19
<PAGE>
MILTON DATSOPOULOS, DIRECTOR. Mr. Datsopoulos has served as a Director
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.
JEFFREY T. BARNES, DIRECTOR. Mr. Barnes has served as a Director since
October 2000. Mr. Barnes has been a partner of Oxford Bioscience, a venture
capital firm, since October 1999. From 1997 to October 1999, Mr. Barnes was a
principal of Robertson Stephens, an investment banking firm. From October 1993
to January 1997, Mr. Barnes was a principal of Needham & Co., an investment
banking firm.
MARK S. RUEHLE, VICE PRESIDENT-FINANCE AND SECRETARY. Mr. Ruehle has
served as our Vice President-Finance and Secretary since February 2000. Prior
to joining us, Mr. Ruehle was Senior Manager of Finance for AmeriServe Food
Distribution, Inc., a food distribution company, from December 1992 to June
1999.
STEPHEN D. OKLAND, VICE PRESIDENT-DOMESTIC SALES. Mr. Okland has served as
one of our Vice Presidents since April 1986.
DREW M. DIAZ, VICE PRESIDENT-INTERNATIONAL SALES. Mr. Diaz served as our
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, our wholly-owned subsidiary which was
dissolved in 1998 following bankruptcy proceedings under German law.
MICHAEL T. LARSEN, VICE PRESIDENT-QUALITY CONTROL/QUALITY ASSURANCE. Mr.
Larsen has served as our Vice President-Quality Control/Quality Assurance since
September 1990.
JOSEPH P. LESTER, VICE PRESIDENT-OPERATIONS. Mr. Lester has served as our
Vice President-Operations since January 2000. Prior to joining us, Mr. Lester
was Vice President-Operations for Siemens Medical Systems, Inc. from April 1997
to January 2000. From 1993 to April 1997, Mr. Lester was Senior
Director-Operations for Spacelabs Medical, a medical monitoring and clinical
information systems company.
DENNIS D. HURLEBAUS, VICE PRESIDENT-U.S. HOSPITAL SALES. Mr. Hurlebaus has
served as our Vice President-U.S. Hospital Sales since May 2000. Prior to
joining us, Mr. Hurlebaus was Vice President-Sales for Team Rehab, a medical
software company, from January 2000 to April 2000. From October 1995 to June
1998, Mr. Hurlebaus was Vice President-Sales of Hill-Rom, a medical equipment
company. From February 1981 to October 1995, Mr. Hurlebaus was Vice
President-Sales for Datascope, a medical equipment company.
BOARD OF DIRECTORS
Our Board of Directors consists of five members. Our By-laws provide that
our Board of Directors will be divided into three classes, as nearly equal as
possible, with each class serving staggered three year terms. Karsten Houm and
Emil H. Soika will stand for re-election at the 2000 annual meeting of
stockholders. Milton Datsopoulos will stand for re-election at the 2001 annual
meeting of stockholders. N.C. Joseph Lai, Ph.D. and Jeffrey T. Barnes will
stand for re-election at the 2002 annual meeting of stockholders.
20
<PAGE>
Mr. Barnes' directorship is connected with the investment of the selling
stockholders in our common stock pursuant to a Purchase Agreement, dated as of
October 17, 2000, among Criticare and the selling stockholders.
COMPENSATION OF DIRECTORS
Our directors are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors. Our directors historically have
not received cash directors' fees, although we have adopted a policy effective
November 1, 2000 to pay a retainer of $1,250 per month to our Chairman of the
Board and $1,000 per month to each of our other non-employee directors. During
fiscal 2000, we granted 50,000 stock options to each of Mr. Houm and Mr.
Datsopoulos.
EXECUTIVE COMPENSATION
Cash and Other Compensation. The following table sets forth compensation
information for the three fiscal years ended June 30, 2000 to or on behalf of
the person who served as our Chief Executive Officer during fiscal 2000 and our
two other executive officers whose salary exceeded $100,000 for fiscal 2000.
The persons listed below are sometimes referred to in this prospectus as the
"named executive officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- --------------
AWARDS:
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) (1) OPTIONS/SARS (#) COMPENSATION ($)
-------------------------- ---- ----------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Emil H. Soika, 2000 125,000 1,280 -- 434 (3)
President, Chief 1999 78,125 -- 200,000 --
Executive Officer and
Director (2)
Stephen D. Okland, 2000 230,282 (4) 6,000 -- 3,517 (6)
Vice President- 1999 277,576 (4) 6,000 43,500 (5) 3,701 (6)
Domestic Sales 1998 302,628 (4) 6,000 -- 3,690 (6)
Drew M. Diaz, 2000 160,100 1,640 42,000 3,295 (8)
Vice President- 1999 165,609 1,915 100,000 (7) 1,882 (8)
International Sales 1998 188,292 638 -- 86 (8)
_____________________
<FN>
(1) The amounts represent automobile allowance payments.
(2) Mr. Soika commenced employment with us in November 1998.
(3) Represents premiums we paid on a life insurance policy, the proceeds of which are payable to
the beneficiary of Mr. Soika.
(4) Represents commissions we paid to Mr. Okland based on a percentage of certain domestic sales by
the Company. Mr. Okland receives no fixed salary.
21
<PAGE>
(5) Represents 30,000 stock options granted in fiscal 1999 and 13,500 stock options regranted due
to repricing of options on December 11, 1998.
(6) For fiscal 2000, represents $317 of premiums we paid on a life insurance policy, the proceeds
of which are payable to the beneficiary of Mr. Okland, and $3,200 of contributions made by us to our
401(k) plan on behalf of Mr. Okland. For fiscal 1999, represents $501 of premiums we paid on a life
insurance policy, the proceeds of which are payable to the beneficiary of Mr. Okland, and $3,200 of
contributions made by us to our 401(k) plan on behalf of Mr. Okland. For fiscal 1998, represents $490
of premiums we paid on a life insurance policy, the proceeds of which are payable to the beneficiary of
Mr. Okland, and $3,200 of contributions made by us to our 401(k) plan on behalf of Mr. Okland.
(7) Represents 34,000 stock options granted in fiscal 1999 and 66,000 stock options regranted due
to repricing of options on December 11, 1998.
(8) For fiscal 2000, represents $95 of premiums we paid on a life insurance policy, the proceeds of
which are payable to the beneficiary of Mr. Diaz, and $3,200 of contributions made by us to our 401(k)
plan on behalf of Mr. Diaz. For fiscal 1999, represents $101 of premiums we paid on a life insurance
policy, the proceeds of which are payable to the beneficiary of Mr. Diaz, and $1,781 of contributions
made by us to our 401(k) plan on behalf of Mr. Diaz. For fiscal 1998, represents $86 of premiums we
paid on a life insurance policy, the proceeds of which are payable to the beneficiary of Mr. Diaz.
</TABLE>
Options Granted During Fiscal 2000. The following table provides
information regarding stock options granted to our named executive officers
during the fiscal year ended June 30, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION
NAME GRANTED (#) FISCAL YEAR ($/ SH) DATE FOR OPTION TERM ($)
----------------- ----------- ------------ --------------- ---------------- ---------------------
5% 10%
---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Emil H. Soika -- -- -- -- -- --
Stephen D. Okland -- -- -- -- -- --
Drew M. Diaz 2,000 0.6 2.25 January 25, 2002 461 945
40,000 12.2 2.25 May 15, 2005 24,865 54,946
</TABLE>
Fiscal Year-End Option Values. The following table shows the fiscal
year-end value of unexercised options held by our named executive officers.
None of our named executive officers exercised options in fiscal 2000.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR END ($) (1)
------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ------------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C>
Emil H. Soika 60,000 140,000 45,941 104,070
Stephen D. Okland 23,500 20,000 11,017 9,376
Drew M. Diaz 56,000 84,000 30,003 32,629
<FN>
(1) Based on the reported closing bid price of $2.3438 per share of common stock on June 30, 2000.
</TABLE>
22
<PAGE>
Employment Agreements and Severance Arrangements. On June 1, 1999, we
entered into employment agreements with Emil H. Soika, President, Chief
Executive Officer and Director, Stephen D. Okland, Vice President-Domestic
Sales, and Drew M. Diaz, Vice President-International Sales. The agreements
provide, respectively, that Mr. Soika will receive a base salary of $125,000 per
year, and Mr. Okland and Mr. Diaz will continue to receive their respective
current compensation, with an annual review of the compensation within 30 days
prior to the end of each fiscal year. Mr. Soika is eligible to participate in a
cash bonus program and each of Mr. Soika, Mr. Okland and Mr. Diaz is entitled to
receive health and life insurance coverage and disability insurance. We 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 we
terminate employment without cause at any time either prior to or after a change
in control, Mr. Soika is entitled to receive payment of his base salary and his
other employee benefits for 12 months, Mr. Okland is entitled to receive payment
of $18,750 per month and his other employee benefits for 24 months, and Mr. Diaz
is entitled to receive payment of his then current compensation and his other
employee benefits for 12 months, respectively, 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, the terminated employee will not be entitled
to receive any base salary or other benefits for periods after the termination
date. If we experience a change in control, and Mr. Soika, Mr. Okland or Mr.
Diaz voluntarily terminates his employment for any reason after completing three
months of employment after the change in control, Mr. Soika is entitled to
receive payment of his base salary and his other employee benefits for 12
months, Mr. Okland is entitled to receive payment of $18,750 per month and his
other employee benefits for 24 months, and Mr. Diaz is entitled to receive
payment of his then current compensation and his other employee benefits for 12
months, respectively, after the date of termination, or until Mr. Soika, Mr.
Okland or Mr. Diaz secures alternative employment, whichever period is shorter.
Each of Mr. Soika, Mr. Okland and Mr. Diaz have agreed not to compete with us
during employment and for a period of 3, 24 and 12 months, respectively, after
any voluntary termination of employment or for a period of 12, 24 and 12 months,
respectively, after any termination by us without cause. Mr. Soika, Mr. Okland
and Mr. Diaz have each agreed to maintain the confidentiality of our financial
statements and other financial information.
On November 16, 1998, we entered into a severance agreement with Gerhard J.
Von der Ruhr, our former Chairman of the Board, President (CEO) and Treasurer
and a former director. Mr. Von der Ruhr also beneficially owns 5.2% of our
outstanding common stock as of October 31, 2000. Pursuant to this severance
agreement, we are required to make payments to Mr. Von der Ruhr of $6,000 per
month over the 36 months from December 1998 through November 2001. We also
agreed to (i) allow Mr. Von der Ruhr to continue to use office space and
secretarial services for a period of up to 12 months, (ii) continue to provide
fringe benefits to Mr. Von der Ruhr through September 30, 2001, and (iii)
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, we also transferred patent and technology rights that we had received
from Immtech International, Inc. relating to treatment for sepsis and
prophylaxis and relating to fetal monitoring, and 172,414 shares of Immtech
common stock to Mr. Von der Ruhr. Mr. Von der Ruhr subsequently transferred
such patent rights to GU Technologies which in turn transferred them to its
majority-owned subsidiary, O.B. Scientific, Inc., in exchange for the payment by
Mr. Von der Ruhr of $150,000 in ten semi-annual installments of $15,000 each
starting on June 1, 1999. We also agreed to supply our existing oximetry
monitors to Mr. Von der Ruhr at a formula price. We received 12% of the
outstanding shares of GU Technologies and the right to elect one member of the
board of directors of GU Technologies.
On November 16, 1998, we also entered into a severance agreement with N.C.
Joseph Lai, Ph.D., our former Senior Vice President, Vice Chairman of the Board
and Secretary. Pursuant to this severance agreement, we are required to make
payments to Dr. Lai of $5,000 per month over the 36 months from December 1998
through November 2001. We also agreed to (i) allow Dr. Lai to continue to use
office space and secretarial services for a period of up to 12 months, (ii)
continue to provide fringe benefits to Dr. Lai through September 30, 2001, and
(iii) 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.
23
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial
ownership of our common stock as of October 31, 2000 by:
- each stockholder known by us to be the beneficial owner of more than
5% of our common stock;
- each director;
- each named executive officer; and
- all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons and
entities included in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws. Shares of common stock subject to options that are either
currently exercisable or exercisable within 60 days of October 31, 2000 are
treated as outstanding and beneficially owned by the option holder for the
purpose of computing the percentage ownership of the option holder. However,
these shares are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF
BENEFICIAL OWNER (1) SHARES OWNED PERCENT
------------------------------------------ ----------------- -------
<S> <C> <C>
Emil H. Soika. . . . . . . . . . . . . . . 60,969 (2) *
Jeffrey T. Barnes. . . . . . . . . . . . . 1,769,084 (3) 16.4
N.C. Joseph Lai, Ph.D. . . . . . . . . . . 577,290 (4) 5.4
Karsten Houm . . . . . . . . . . . . . . . 111,065 (5) 1.0
Milton Datsopoulos . . . . . . . . . . . . 85,300 (6) *
Stephen D. Okland. . . . . . . . . . . . . 32,238 (7) *
Drew M. Diaz . . . . . . . . . . . . . . . 58,414 (8) *
Entities affiliated with Oxford
Bioscience Partners. . . . . . . . . . . . 1,786,273 (9) 16.6
Gerhard J. Von der Ruhr. . . . . . . . . . 555,075 (10) 5.2
All directors and executive officers as a
group (11 persons) . . . . . . . . . . . . 2,751,376 (3)(11) 24.7
_____________________
<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. Barnes and Oxford
Bioscience Partners is 31 St. James Avenue, Suite 905, Boston, MA 02116; the
address of Mr. Houm is Kristinelundvn 21, 0268 Oslo, Norway; the address of Mr.
Datsopoulos is Central Square Building, 201 West Main, Missoula, Montana 59802
and the address of Mr. Von der Ruhr is N112 W18741 Mequon Road, Germantown, WI
53022.
24
<PAGE>
(2) Includes 60,000 shares which Mr. Soika has the right to acquire under
currently exercisable options and 969 shares in Mr. Soika's account under our
Employee Stock Purchase Plan.
(3) Includes 1,000 shares owned directly by Mr. Barnes. Also includes
1,547,529 shares held of record by Oxford Bioscience Partners III L.P. and
220,555 shares held of record by Oxford Bioscience Partners (Bermuda) III
Limited Partnership. Mr. Barnes may be deemed to share beneficial ownership of
these shares, and he disclaims such beneficial ownership except to the extent of
his pecuniary interest in such shares.
(4) Includes 116,000 shares owned of record by Helen Lai, Dr. Lai's 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.
(5) Includes 95,000 shares which Mr. Houm has the right to acquire under
currently exercisable options.
(6) Includes 85,000 shares which Mr. Datsopoulos has the right to acquire
under currently exercisable options.
(7) Includes 23,500 shares which Mr. Okland has the right to acquire under
currently exercisable options and 5,238 shares in Mr. Okland's account under our
Employee Stock Purchase Plan.
(8) Includes 56,000 shares which Mr. Diaz has the right to acquire under
currently exercisable options and 2,414 shares in Mr. Diaz's account under our
Employee Stock Purchase Plan.
(9) Oxford Bioscience Partners III and related entities (collectively
"Oxford") filed a Schedule 13D dated October 27, 2000, reporting that as of
October 27, 2000 it was the beneficial owner of 1,786,273 shares of common
stock. The shares of common stock beneficially owned by Oxford include (i)
1,547,529 shares held of record by Oxford Bioscience Partners III, L.P. ("OBP
Partners"), with shared voting and investment power as to all of such shares
(OBP Management III L.P. may be deemed to share voting and investment power as
to all of such shares); (ii) 220,555 shares held of record by Oxford Bioscience
Partners (Bermuda) III Limited Partnership ("OBP Partners (Bermuda)"), with
shared voting and investment power as to all of such shares (OBP Management
(Bermuda) III Limited Partnership may be deemed to share voting and investment
power as to all of such shares); and (iii) 18,189 shares held of record by mRNA
Fund, L.P., with shared voting and investment power as to all of such shares
(mRNA Partners, L.P. may be deemed to share voting and investment power as to
all of such shares). Jonathon J. Fleming and Alan G. Walton may be deemed to
share voting and investment power as to all of the shares held by Oxford, and
they disclaim beneficial ownership of such shares. Jeffrey T. Barnes and
Michael J. Brennan may be deemed to share voting and investment power as to all
of the shares held by OBP Partners and OBP Partners (Bermuda), and they disclaim
beneficial ownership of such shares.
(10) 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.
(11) Includes 344,500 shares of common stock the members of the group have a
right to acquire under currently exercisable options and 10,387 shares in the
accounts of the members of the group under our Employee Stock Purchase Plan.
</TABLE>
25
<PAGE>
SELLING STOCKHOLDERS
All of the shares of our common stock offered for sale pursuant to this
prospectus are being offered by the selling stockholders. We issued 1,786,273
shares of our Company Stock to the selling stockholders on October 17, 2000 at a
price of $2.25 per share, as part of a private placement transaction between the
selling stockholders and us. We appointed Jeffrey T. Barnes as one of our
directors on October 17, 2000, in connection with the investment by the selling
stockholders.
Information with respect to the shares of our common stock beneficially
owned by the selling stockholders follows.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
OWNED PRIOR TO THE SHARES OFFERED SHARES TO BE OWNED
OFFERING FOR SALE HEREBY AFTER THE OFFERING*
----------------------- --------------- -------------------
Number Percent
--------- --------
<S> <C> <C> <C> <C>
Oxford Bioscience Partners III L.P. 1,547,529 1,547,529 -- --
Oxford Bioscience Partners
(Bermuda) III Limited Partnership 220,555 220,555 -- --
mRNA Fund L.P. 18,189 18,189 -- --
<FN>
*Assumes sale of all shares offered by this prospectus.
</TABLE>
PLAN OF DISTRIBUTION
The selling stockholders may, without limitation and from time to time,
sell all or a portion of their shares of our common stock being registered under
this prospectus on any stock exchange, market or trading facility on which the
common stock is traded, at market prices prevailing at the time of sale, fixed
prices or at negotiated prices. The shares may, without limitation, be sold by
the selling stockholders by one or more of the following methods:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer engaged by the selling
stockholders will attempt to sell the shares as agent for the selling
stockholders but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account;
- privately negotiated transactions;
- in accordance with Rule 144 promulgated under the Securities Act of
1933, as amended, rather than pursuant to this prospectus;
- a combination of any such methods of sale; or
- any other method permitted pursuant to applicable law.
From time to time the selling stockholders may pledge their shares pursuant
to the margin provisions of the selling stockholders' customer agreements with
their brokers. Upon a default by the selling stockholders, the broker may, from
time to time, offer and sell the pledged shares.
26
<PAGE>
In effecting sales, brokers-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate in such sales. Brokers-dealers
may receive commissions or discounts from the selling stockholders (or, if any
such broker-dealer acts as agent for the purchase of such shares, from such
purchaser) in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with
the selling stockholders to sell a specified number of shares of the common
stock at a stipulated price per share, and, to the extent such broker-dealer is
unable to do so acting as agent for the selling stockholders, to purchase as
principal any unsold shares at the price required to fulfill the broker-dealer
commitment to the selling stockholders.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act of 1933, as amended.
We are required to pay all fees and expenses incident to the registration
of the selling stockholders' shares, other than the fees and disbursements of
counsel to the selling stockholders and underwriting discounts or commissions,
if any. Additionally, we have agreed to indemnify the selling stockholders from
certain liabilities in connection with the offering, including liabilities under
the federal securities laws.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 15,000,000 shares of common stock,
$0.04 par value per share and 500,000 shares of preferred stock, $0.04 par value
per share. The following description of our capital stock is qualified in all
respects by reference to our Restated Certificate of Incorporation.
COMMON STOCK
As of October 31, 2000, 10,777,524 shares of common stock were outstanding,
held of record by 278 stockholders. The holders of common stock are entitled to
one vote per share on all matters to be voted upon by stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may declared
by the Board of Directors out of funds legally available for that purpose. In
the event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding preferred stock.
The common stock has no preemptive or conversion rights, other subscription
rights, or redemption or sinking fund provisions. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
offered under this prospectus will be fully paid and non-assessable. Wisconsin
law, however, may make our shareholders personally liable for unpaid wages due
employees for up to six months' services, but not in an amount greater than the
par value of the shares.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 500,000 shares of preferred stock in one or more
series and the designate the rights, preferences, privileges and restrictions of
each such series. The issuance of preferred stock could have the effect of
restricting dividends on the common stock, diluting the voting power of the
common stock, impairing the liquidation rights of the common stock or delaying
or preventing our change in control without further action by the stockholders.
We have no present plans to issue any shares of preferred stock. We have,
however, rights which may become exercisable to purchase preferred stock under
our rights plan. See "Rights Plan."
27
<PAGE>
DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BY-LAW
PROVISIONS
Delaware law and our Certificate of Incorporation and By-laws could make
more difficult our acquisition by a third party and the removal of our incumbent
officers and directors. We have summarized the relevant provisions of Delaware
law and our existing charter and By-laws below. These provisions are expected
to discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Criticare to first negotiate
with us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law which
regulates corporate acquisitions. Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
- upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, he or she owned at
least 85 % of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding shares owned by persons who
are directors and also officers; or
- on or subsequent to such date the business combination is approved by
the Board of Directors and authorized at an annual or special meeting
of stockholders by the holders of at least 66 2/3% of our outstanding
voting stock which is not owned by the interested stockholder.
A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock.
Our Restated Certificate of Incorporation permits the Board of Directors to
issue preferred stock with voting or other rights without any stockholder
action. Our By-laws provide that our Board of Directors is divided into three
classes, with each class serving staggered three year terms. The classification
of our Board of Directors could have the effect of making it more difficult for
a third party to acquire control of Criticare or discourage a third party from
attempting to acquire control of Criticare. These provisions may have the
effect of deterring hostile takeovers or delaying changes in our management.
RIGHTS PLAN
On March 27, 1997, our Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of our common stock.
The dividend was payable on April 24, 1997 to the stockholders of record on that
date. Each purchase right entitles the registered holder to purchase from us
one one-hundredth of one of our preferred shares at a price of $25 per one
one-hundredth share, subject to adjustment. The description and terms of the
purchase rights are set forth in a Rights Agreement between us and Firstar Trust
Company, as rights agent.
28
<PAGE>
Initially, the purchase rights are attached to all certificates
representing common stock then outstanding and no separate certificates
representing the purchase rights will be distributed. The purchase rights will
separate from the common stock upon the distribution date, which is the earlier
to occur of:
- 10 days following a public announcement that an acquiring person,
which includes a person or group of affiliated or associated persons,
has acquired beneficial ownership of 20% or more of our outstanding
common stock; or
- 10 business days, or such later date as may be determined by action
of our Board of Directors prior to such time as any person or group
becomes an acquiring person, following the commencement of, or
announcement of an intention to make, a tender offer or exchange
offer the consummation of which would result in the beneficial
ownership by an acquiring person of 30% or more of our outstanding
common stock.
The Rights Agreement provides that, until the distribution date, or earlier
redemption or expiration of the purchase rights:
- the purchase rights will be transferred with and only with the common
stock;
- new common share certificates issued after April 24, 1997 upon
transfer or new issuance of common stock will contain a notation
incorporating the Rights Agreement by reference; and
- the surrender for transfer of any certificates for common stock
outstanding as of April 24, 1997, even without such notation, will
also constitute the transfer of the purchase rights associated with
the common stock represented by such certificate.
As soon as practicable following the distribution date, separate
certificates evidencing the purchase rights will be mailed to holders of record
of the common stock as of the close of business on the distribution date and the
separate right certificates alone will evidence the purchase rights.
The purchase rights are not exercisable until the distribution date. The
purchase rights will expire at the close of business on April 1, 2007, unless
the final expiration date is extended or unless the purchase rights are earlier
redeemed or exchanged by us, in each case, as described below.
The purchase price payable, and the number of one one-hundredths preferred
shares or other securities or property issuable, upon exercise of the purchase
rights are subject to adjustment from time to time to prevent dilution. With
certain exceptions, no adjustment in the purchase price would be required until
cumulative adjustments require an adjustment of at least 1% in such purchase
price. We are not required to issue any fractional preferred shares and in lieu
of fractional shares, an adjustment in cash may be made based on the market
price of the preferred shares on the last trading day prior to the date of
exercise.
If, without the prior approval of a majority of our disinterested
directors:
- we are the surviving corporation in a merger with an acquiring person
and the common stock is not changed or exchanged;
- an acquiring person becomes the beneficial owner of more than 30% of
our then outstanding common stock;
- an acquiring person engages in one or more "self-dealing"
transactions as set forth in the Rights Agreement; or
- during such time as there is an acquiring person, an event occurs
which results in the acquiring person's ownership interest being
increased by more than 1% (e.g., a reverse stock split),
29
<PAGE>
at any time following the distribution date, but no earlier than the expiration
of the redemption period of the purchase rights, each holder of a purchase right
will thereafter have the right to receive, upon exercise, common stock or, in
certain circumstances, cash, property or other of our securities, having a value
equal to two times the exercise price of the purchase right. Following the
occurrence of any of the events set forth above, all purchase rights that are
or, under certain circumstances specified in the Rights Agreement, were
beneficially owned by any acquiring person would be null and void.
For example, at an exercise price of $25 per purchase right, each purchase
right not owned by an acquiring person, or by certain related parties, following
an event set forth in the preceding paragraph would entitle its holder to
purchase $50 worth of common stock, or other consideration, as noted above, for
$25. Assuming that the common stock had a per share value of $10 at such time,
the holder of each valid purchase right would be entitled to purchase five
shares of common stock for $25.
If, at any time following the stock acquisition date:
- we are acquired in a merger or other business combination
transaction, other than a merger in which we are the surviving
corporation in a merger with an acquiring person and the common stock
is not changed or exchanged; or
- 50% or more of our assets or earning power is sold or transferred,
each holder of a purchase right shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the purchase right.
At any time prior to the twentieth day after the acquisition by an
acquiring person of beneficial ownership of 20% or more of our outstanding
common stock, our Board of Directors may redeem the purchase rights in whole,
but not in part, at a redemption price of $.01 per purchase right. The
redemption of the purchase rights may be made effective at such time on such
basis with such conditions as our Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the purchase rights, the right to
exercise the purchase rights will terminate and the only right of the holders of
purchase rights will be to receive the redemption price.
Other than those provisions relating to the principal economic terms of the
purchase rights and an amendment lengthening the redemption period of the
purchase rights, any of the provisions of the Rights Agreement may be amended by
our Board of Directors prior to the distribution date. After the distribution
date, the provisions of the Rights Agreement may be amended by the Board:
- in order to cure any ambiguity;
- to make changes which do not adversely affect the interests of
holders of purchase rights, excluding the interests of any acquiring
person; or
- to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment to lengthen the time period governing
redemption shall be made.
Until a purchase right is exercised, the holder thereof, as such, will have
no rights as one of our stockholders, including, without limitation, the right
to vote or to receive dividends.
Our rights plan may have antitakeover effects. The purchase rights will
cause substantial dilution to any person or group that attempts to acquire
Criticare on terms not approved by our Board of Directors, except pursuant to an
offer conditioned on a substantial number of the purchase rights being acquired.
The purchase rights should not interfere with any merger or other business
combination approved by our Board of Directors.
30
<PAGE>
TRANSFER AGENT
The transfer agent and registrar for our common stock is Firstar Trust
Company. The transfer agent's address is 1555 North RiverCenter Drive, Suite
301, Milwaukee, Wisconsin 53212, and its telephone number is 414-276-3737.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for our company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
EXPERTS
The consolidated financial statements for the years ended June 30, 2000 and 1999
and schedules included in this prospectus and in the registration statement have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing elsewhere
herein and in the registration statement, and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements for the year ended June 30, 1998,
included in this prospectus, the related consolidated financial statement
schedule for the year ended June 30, 1998 included elsewhere in the registration
statement, and the consolidated financial statement from which the Selected
Consolidated Financial Data for the year ended June 30, 1998 included in this
prospectus have been derived, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the registration statement. Such consolidated financial statements,
consolidated financial statement schedule, and Selected Consolidated Financial
Data have been included herein and elsewhere in the registration statement in
reliance upon the reports of such firm given their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission (SEC). You may read and copy any reports, proxy
statements or other information we file at the SEC's public reference room at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 or at its public
reference rooms in New York, New York. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. You can also obtain
copies of our SEC filings by writing to the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, many of our SEC
filings are available at the SEC's website on the Internet at
"http://www.sec.gov."
We have filed a Registration Statement on Form S-1 to register with the SEC
the common stock offered by this prospectus. This prospectus is part of that
registration statement. As allowed by SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to the registration statement. Statements contained in this prospectus
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the SEC.
31
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets of June 30, 2000 and 1999. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-9
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Consolidated Balance Sheet as of September 30, 2000. . . . . . . . . . . . . F-19
Unaudited Consolidated Income Statements for the three months ended
September 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
Unaudited Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors Criticare Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Criticare
Systems, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Criticare
Systems, Inc. and subsidiaries at June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2000, in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 15, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Criticare Systems, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Criticare Systems, Inc. and subsidiaries
for the year ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Criticare
Systems, Inc. and subsidiaries present fairly, in all material respects, the
results of their operations and their cash flows for the year ended June 30,
1998 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 20, 1998
F-3
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS (Note 5):
Cash and cash equivalents (Note 1) . . . . . . . . . . . . $ 114,830 $ 2,511,078
Accounts receivable, less allowance for doubtful accounts
of $1,300,000 and $375,000, respectively . . . . . . . . 6,782,765 6,358,487
Investments (Notes 1, 3 and 5) . . . . . . . . . . . . . . 5,704,675 -
Other receivables. . . . . . . . . . . . . . . . . . . . . 116,773 83,106
Inventories (Notes 1 and 2). . . . . . . . . . . . . . . . 8,178,326 8,510,975
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 219,852 192,290
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 21,117,221 17,655,936
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,000 925,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 3,600,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 2,009,312 2,051,442
Furniture and fixtures . . . . . . . . . . . . . . . . . . 763,282 819,579
Demonstration and loaner monitors. . . . . . . . . . . . . 1,407,587 1,416,893
Production tooling . . . . . . . . . . . . . . . . . . . . 2,651,145 2,158,378
----------- -----------
Property, plant and equipment - cost . . . . . . . . . . . 11,356,326 10,971,292
Less accumulated depreciation. . . . . . . . . . . . . . . 5,367,670 4,697,232
----------- -----------
Property, plant and equipment - net. . . . . . . . . . . . 5,988,656 6,274,060
OTHER ASSETS (Notes 1 and 5):
License rights and patents - net . . . . . . . . . . . . . 104,990 111,991
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . 104,990 111,991
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $27,210,867 $24,041,987
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,635,344 $ 3,078,020
Accrued liabilities:
Compensation and commissions. . . . . . . . . . . . . . . . . . . . . 1,243,839 1,446,614
Product warranties (Note 1) . . . . . . . . . . . . . . . . . . . . . 325,000 325,000
Lawsuit settlement. . . . . . . . . . . . . . . . . . . . . . . . . . - 1,600,000
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . - 380,000
Other (Note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . 574,826 412,395
Current maturities of long-term debt (Note 5) . . . . . . . . . . . . . 80,432 73,893
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 4,859,441 7,315,922
LONG-TERM DEBT, less current maturities (Note 5). . . . . . . . . . . . 3,283,892 3,364,356
OTHER LONG-TERM OBLIGATIONS (Note 12) . . . . . . . . . . . . . . . . . 268,582 650,000
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,
8,976,251 and 8,706,151 shares issued
and outstanding, respectively . . . . . . . . . . . . . . . . . . . . 359,050 348,246
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 18,478,040 17,960,363
Common stock held in treasury
(81,122 and 103,840 shares, respectively) . . . . . . . . . . . . . . (151,111) (193,430)
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . (5,591,702) (5,403,470)
Accumulated comprehensive income. . . . . . . . . . . . . . . . . . . . 5,704,675 -
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 18,798,952 12,711,709
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,210,867 $24,041,987
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
NET SALES (Note 10). . . . . . . . . . . . . . $27,154,236 $28,512,507 $27,908,364
COST OF GOODS SOLD . . . . . . . . . . . . . . 16,462,477 15,528,314 14,870,453
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . 10,691,759 12,984,193 13,037,911
OPERATING EXPENSES:
Marketing (Note 1) . . . . . . . . . . . . . . 8,014,129 8,941,036 7,454,619
Research, development and
engineering (Note 8) . . . . . . . . . . . . 2,861,733 2,963,134 3,278,714
Administrative (Note 7). . . . . . . . . . . . 2,333,445 4,157,811 1,998,362
Severance pay (Note 12). . . . . . . . . . . . - 810,000 -
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 13,209,307 16,871,981 12,731,695
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . (2,517,548) (3,887,788) 306,216
OTHER INCOME (EXPENSE):
Interest expense (Note 5 and 6). . . . . . . . (259,280) (432,477) (797,376)
Interest income. . . . . . . . . . . . . . . . 90,440 82,094 111,884
Equity in loss of investments
(Notes 1 and 3). . . . . . . . . . . . . . . - (150,000) (120,000)
Gain on sale of stock. . . . . . . . . . . . . 2,500,000 - -
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 2,331,160 (500,383) (805,492)
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN . . . . . . . . . . . (186,388) (4,388,171) (499,276)
INCOME TAX PROVISION (Notes 1 and 4) . . . . . - - -
------------ ------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . $ (186,388) $(4,388,171) $ (499,276)
============ ============ ============
NET LOSS PER COMMON SHARE
Basic. . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.51) $ (0.06)
Diluted. . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.51) $ (0.06)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 8):
Basic. . . . . . . . . . . . . . . . . . . . . 8,694,918 8,581,863 8,309,240
Diluted. . . . . . . . . . . . . . . . . . . . 8,694,918 8,581,863 8,309,240
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL COMMON STOCK EARNINGS ACCUMULATED
COMMON STOCK PAID-IN TREASURY (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES COST DEFICIT) INCOME/LOSS
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997. . . . . . . 7,796,465 $311,859 $14,469,406 $ (516,023) $ (38,107)
Net loss. . . . . . . . . . . . . . (499,276)
Foreign currency translation. . . . 38,107
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 (1,015,299)
Net loss. . . . . . . . . . . . . . (4,388,171)
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) (5,403,470) -
Net loss. . . . . . . . . . . . . . (186,388)
Unrealized gain on investment . . . 5,704,675
Comprehensive income/loss . . . . .
Common stock issued in
settlement of lawsuit . . . . . . 30,000 1,200 68,175
Exercise of options . . . . . . . . 240,100 9,604 448,746
Employee common stock
purchased from treasury . . . . . 756 (22,718) 42,319 (1,844)
BALANCE, JUNE 30, 2000. . . . . . . 8,976,251 $359,050 $18,478,040 81,122 $(151,111) $(5,591,702) $ 5,704,675
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
BALANCE, JUNE 30, 1997. . . . . . . $14,227,135
Net loss. . . . . . . . . . . . . . (499,276)
Foreign currency translation. . . . 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. . . . . . . 17,282,997
Net loss. . . . . . . . . . . . . . (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. . . . . . . 12,711,709
Net loss. . . . . . . . . . . . . . (186,388)
Unrealized gain on investment . . . 5,704,675
Comprehensive income/loss . . . . . 5,518,287
Common stock issued in
settlement of lawsuit . . . . . . 69,375
Exercise of options . . . . . . . . 458,350
Employee common stock
purchased from treasury . . . . . 41,231
BALANCE, JUNE 30, 2000. . . . . . . $18,798,952
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING ACTIVITIES: 2000 1999 1998
<S> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (186,388) $(4,388,171) $ (499,276)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 871,510 486,610 721,476
Amortization . . . . . . . . . . . . . . . . . . . . . . . . 7,001 7,002 21,440
Interest and discount accrued on convertible debentures. . . - - 462,034
Provision for doubtful accounts. . . . . . . . . . . . . . . 925,000 380,004 99,000
Expense related to equity in loss of investments . . . . . . - - 120,000
Expense related to issuance of warrants for services . . . . - - 23,065
Expense related to commitment to issue common stock
for patented technology. . . . . . . . . . . . . . . . . . - - 900,000
Gain on sale of Immtech stock. . . . . . . . . . . . . . . . (2,500,000) - -
Litigation settled with common stock . . . . . . . . . . . . 69,375 - -
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . (1,349,278) 183,222 161,524
Other receivables. . . . . . . . . . . . . . . . . . . . . (33,667) 239,870 (86,121)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 341,955 (461,786) 46,207
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . (27,562) 146,007 (68,677)
Accounts payable . . . . . . . . . . . . . . . . . . . . . (442,676) 772,299 (768,284)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . (2,401,762) 2,950,520 (683,954)
------------ ------------ -----------
Net cash (used in) provided by operating activities . . . . . . (4,726,492) 315,577 448,434
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . . . . . . (595,412) (515,017) (287,205)
Purchase of license rights . . . . . . . . . . . . . . . . . . . - - (1,080)
Advances to Immtech International, Inc.. . . . . . . . . . . . . - - (120,000)
Proceeds from Sale of Immtech Stock. . . . . . . . . . . . . . . 2,500,000 - -
------------ ------------ -----------
Net cash provide by (used in) investing activities . . . . . . . 1,904,588 (515,017) (408,285)
FINANCING ACTIVITIES:
Net proceeds from mortgage refinancing . . . . . . . . . . . . . - 256,413 -
Repurchase of Company stock. . . . . . . . . . . . . . . . . . . - (193,430) -
Principal payments on long-term debt . . . . . . . . . . . . . . (73,925) (92,776) (147,441)
Proceeds from issuance of common stock . . . . . . . . . . . . . 499,581 10,313 396,431
------------ ------------ -----------
Net cash provided by (used in) financing activities. . . . . . . 425,656 (19,480) 248,990
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . (2,396,248) (218,920) 289,139
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . 2,511,078 2,729,998 2,440,859
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . $ 114,830 $ 2,511,078 $2,729,998
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes paid-net. . . . . . . . . . . . . . . . . . . . . $ 7,535 $ 8,010 $ 8,525
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,590 437,401 335,342
Noncash investing and financing activities:
Common stock issued upon conversion of convertible debentures,
net of $100,822 of unamortized issuance costs. . . . . . . . - - 2,197,535
Issuance of warrants for services. . . . . . . . . . . . . . . - - 23,065
Commitment to issue common stock for patented technology . . . - - 900,000
Litigation settled with common stock . . . . . . . . . . . . . 69,375 - -
Cost of fixed asset disposals. . . . . . . . . . . . . . . . . 201,072 - -
Unrealized gain on investment in Immtech . . . . . . . . . . . 5,704,675 - -
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
CRITICARE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
-----------------------------------------------
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 Blatz House Offices Limited Partnership (the "Blatz Partnership")
on the equity method. In Fiscal 2000, the Company ceased accounting for its
investment in Immtech International, Inc. ("Immtech") under the equity method
and recorded the asset on the balance sheet at its fair market value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." (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 of amortization was charged to
operations in fiscal years ended June 30, 2000, 1999 and 1998. Accumulated
amortization approximated $92,000 and $85,000 at June 30, 2000 and 1999,
respectively.
CONVERTIBLE DEBENTURE ISSUANCE COSTS - Convertible debenture issuance costs
were amortized over the two-year term of the debentures. Approximately $15,000
of amortization was charged to operations in 1998. The pro rata 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 during
1998. (See Note 6.)
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.
F-9
<PAGE>
MARKETING EXPENSES - Marketing expenses include all of the Company's
sales-related costs. The amount incurred in fiscal 2000 includes a $900,000
charge to bad debt expense related to the accounts receivable balance of certain
international customers. Total bad debt expense was $1,160,614, $380,004 and
$99,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
charged to operations as incurred. Such expenses approximated $2,696,000,
$2,798,000, $3,156,000 in 2000, 1999 and 1998, 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.
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, foreign currency translation adjustments, and unrealized
gains on investments 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 - Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133) issued by the FASB is effective for financial statements with fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial statements.
F-10
<PAGE>
In 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB No. 101)
dealing with revenue recognition which is effective in the fourth quarter of
fiscal 2000. The Company does not expect its adoption of SAB No. 101 to have a
material effect on the Company's financial statements.
In March 2000, the FASB issued FASB interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation ("FIN 44") which is effective
July 1, 2000. This interpretation clarifies the application of APB Opinion 25
for certain issues related to stock issued to employees. The Company believes
its existing stock based compensation policies and procedures are in compliance
with FIN 44 and, therefore, that the adoption of FIN 44 will not have a material
effect on the Company's financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following as of June 30:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Component parts . . . . . . . . $3,721,474 $3,790,728
Work in process . . . . . . . . 1,169,609 1,261,709
Finished units. . . . . . . . . 3,687,243 4,018,142
---------- ----------
Total inventories . . . . . . . 8,578,326 9,070,579
Less: reserve for
obsolescence. . . . . . . . . 400,000 559,604
---------- ----------
Net inventory . . . . . . . . . $8,178,326 $8,510,975
</TABLE>
3. INVESTMENTS
IMMTECH INTERNATIONAL, INC. - The Company owns common stock of Immtech
International, Inc. ("Immtech"). Immtech is a biopharmaceutical company
focusing on the discovery and commercialization of therapeutics for treatment of
patients afflicted with opportunistic infectious diseases, cancer, or comprised
immune systems. Immtech has two independent programs for developing drugs: one
based on a technology for the design of a class of pharmaceutical compounds
referred to as dications. The second is based on developing a series of
biological proteins that work in conjunction with the immune system. Immtech
has no products currently for sale, and none are expected to be commercially
available for several years. Immtech has a March 31 fiscal year end.
During the first and second quarters of fiscal 2000, the Company sold a
portion of its Immtech stock in a Private Placement. The proceeds from this
sale were $2,500,000.
As a result, the Company owns less than 20% of Immtech's issued and
outstanding common stock as of June 30, 2000. Therefore, in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company ceased accounting for the Immtech investment under the
equity method and recorded the asset on the balance sheet at the fair market
value of $5,704,675. An unrealized gain was also recorded as a component of
stockholder's equity. The Company held 456,374 shares of Immtech common stock,
which was trading at $12.50 per share, on June 30, 2000.
F-11
<PAGE>
The following is a summary of the Company's investment in and advances to
Immtech as of June 30, 1999:
<TABLE>
<CAPTION>
1999
<S> <C>
Investment in Immtech . . . . . . . $ 2,736,000
Advances to Immtech . . . . . . . . 863,940
------------
Total . . . . . . . . . . . . . . . 3,599,940
Less: investment losses
recognized. . . . . . . . . . . . (3,599,940)
------------
Net investment. . . . . . . . . . . $ 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 12).
The Company has recognized investment losses related to the investment in
Immtech of $150,000 and $120,000 in 1999 and 1998, respectively.
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. At June 30, 2000, the lock-up provisions have been
satisfied.
The following is summarized financial information for Immtech at June 30,
1999 for the twelve months then ended.
<TABLE>
<CAPTION>
1999
<S> <C>
Current assets. . . . . . . . . . . . . . . . $ 8,541,000
Noncurrent assets . . . . . . . . . . . . . . 68,000
Current liabilities . . . . . . . . . . . . . 253,000
Noncurrent liabilities. . . . . . . . . . . . -
Redeemable preferred stock. . . . . . . . . . -
Common stockholders' equity (deficit) . . . . 8,356,000
Revenues. . . . . . . . . . . . . . . . . . . 136,000
Net loss. . . . . . . . . . . . . . . . . . . (8,341,000)
Net loss attributable to
common stockholders . . . . . . . . . . . . (4,657,000)
</TABLE>
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.
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.
F-12
<PAGE>
Significant components of the Company's deferred income tax assets and
deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
<S> <C> <C> <C>
Deferred income tax assets:
Accounts receivable and sales allowances . . . . . . . . $ 533,000 $ 170,000 $ 156,000
Inventory allowances . . . . . . . . . . . . . . . . . . 191,000 254,000 110,000
Product warranties . . . . . . . . . . . . . . . . . . . 128,000 128,000 128,000
Other accrued liabilities. . . . . . . . . . . . . . . . 246,000 392,000 86,000
Severance pay accrual. . . . . . . . . . . . . . . . . . 145,000 279,000 -
Lawsuit settlement . . . . . . . . . . . . . . . . . . . - 626,000 -
Federal net operating loss carryforwards . . . . . . . . 3,320,000 2,014,000 1,870,000
State net operating loss carryforwards . . . . . . . . . 483,000 291,000 270,000
Federal tax credit carryforwards . . . . . . . . . . . . 152,000 152,000 152,000
Investment losses not deducted . . . . . . . . . . . . . 709,000 1,532,000 1,481,000
--------------- --------------- ---------------
Total deferred income tax assets . . . . . . . . . . . . 5,907,000 5,838,000 4,253,000
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
Deferred income tax liabilities:
Excess of tax over book depreciation and amortization. . (616,000) (620,000) (596,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (13,000) (7,000) (3,000)
Unrealized gain on investments . . . . . . . . . . . . . (2,237,000) - -
--------------- --------------- ---------------
Total deferred income tax liabilities. . . . . . . . . . (2,866,000) (627,000) (599,000)
Valuation allowance. . . . . . . . . . . . . . . . . . . (3,041,000) (5,211,000) (3,654,000)
Net deferred income taxes recognized in the consolidated
balance sheets . . . . . . . . . . . . . . . . . . . . $ 0 $ 0 $ 0
</TABLE>
At June 30, 2000, the Company had federal net operating loss carryforwards
of approximately $9,765,000 which expire in 2008 through 2020. At June 30,
2000, 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 $9,667,000 of
state net operating loss carryforwards, which expire in 2002 through 2015,
available to offset certain future state taxable income.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
<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>
2000 1999 1998
<S> <C> <C> <C>
Federal statutory income tax rate. . . . (34.0)% (34.0)% (34.0)%
Losses for which no benefit
was provided . . . . . . . . . . . . . 35.3 29.3 30.9
Non-deductible losses of subsidiaries. . 27.6 3.2 -
Other-net. . . . . . . . . . . . . . . . (28.9) 1.5 3.1
Effective income tax rate. . . . . . . . 0 % 0 % 0 %
</TABLE>
F-13
<PAGE>
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
<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
$3,844,000 at June 30, 2000. . . . . . . . . . . . . . . . . . . . . $3,364,324 $3,438,249
Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . 80,432 73,893
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,283,892 $3,364,356
</TABLE>
Aggregate annual principal payments required under terms of the long-term
debt agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30, PRINCIPAL PAYMENTS
<S> <C>
2001. . . . . . . . . $ 80,432
2002. . . . . . . . . 86,766
2003. . . . . . . . . 93,599
2004. . . . . . . . . 3,103,526
2005. . . . . . . . . 0
-------------------
Total . . . . . . . . $ 3,364,324
</TABLE>
At June 30, 2000, 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% (9.75% as of June 30, 2000). As of June
30, 2000, there were no borrowings against the line. Borrowings under the line
of credit facility are collateralized by substantially all assets of the
Company. The credit facility has covenants which require minimum levels of
tangible net worth and income levels. The Company was not in compliance with
these covenants at June 30, 2000. This non-compliance was waived by the lending
institution.
In March 1999, the Company refinanced its mortgage note on the Company's
office and manufacturing facility. The Company incurred a prepayment penalty of
approximately $120,000 which was recorded as interest expense.
6. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures.
The debentures had a two year term to maturity with a stated annual interest
rate of 8%, payable in shares of common stock at the conversion date or maturity
date. The holders of the debentures had the option to convert up to $1,250,000
of the debentures and accrued interest to common stock of the Company sixty-one
(61) days after the February 1997 closing date at a conversion price equal to a
20% discount from the average closing bid price of the Company's common stock
for the five days preceding the conversion date. Debentures aggregating
$550,000 were converted under the 20% discount conversion feature. The
remaining debentures and accrued interest were converted to common stock of the
Company at a conversion price equal to a 25% discount from the average closing
bid price of the Company's common stock for the five days preceding the
conversion date. For the years ended June 30, 1998, $1,650,000 of debentures
were converted to 407,761 shares of common stock with a fair market value of
$2,298,357 as of the conversion date.
F-14
<PAGE>
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.
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 constituted full repayment of one of these grants in 1999 and
constituted full repayment of one of these grants. 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, 2000.
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 139,350 reserved
shares of common stock remain available for future issuance under the stock
option plans at June 30, 2000. 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 1998, 1999 and 2000 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, 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
Granted. . . . . . . . . . . . . . . . . . 489,100 2.00-2.25 2.24
Cancelled. . . . . . . . . . . . . . . . . (287,700) 1.63-3.63 1.99
Exercised. . . . . . . . . . . . . . . . . (240,100) 1.50-2.75 1.91
Outstanding at June 30, 2000 . . . . . . . . 1,152,900 1.50-2.75 1.96
Exercisable at June 30, 2000 . . . . . . . . 502,500 1.50-2.75 1.98
Weighted average fair market value of
options granted during the fiscal year ended
June 30, 2000. . . . . . . . . . . . . . . . $ 0.38
</TABLE>
F-15
<PAGE>
The following table summarizes information about stock options outstanding
as of June 30, 2000:
<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, 2000 LIFE-YEARS PRICE | AT JUNE 30, 2000 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
1.50-1.875 . . . . . 622,400 2.71 1.71 | 284,000 1.76
2.00-3.00. . . . . . 530,500 3.39 2.25 | 218,500 2.28
1.50-3.00. . . . . . 1,152,900 3.02 1.96 | 502,500 1.98
</TABLE>
Outstanding options have fixed terms and are exercisable over a period
determined by the Compensation Committee of the Company's Board of Directors but
no longer than five years after the date of grant.
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, 2000, 1999 and 1998, 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,
2000 1999 1998
<S> <C> <C> <C>
Net loss-as reported . . . . . . . . . $(186,388) $(4,388,171) $(499,276)
Net loss-pro forma . . . . . . . . . . $(365,626) $(4,555,200) $(779,276)
Net loss per common
share-as reported. . . . . . . . . . $ (0.02) $ (0.51) $ (0.06)
Net loss per common share-pro forma. . $ (0.04) $ (0.53) $ (0.09)
Assumptions used:
Expected volatility . . . . . . . . 23% 15% 14%
Risk-free interest rate . . . . . . 6% 5% 5%
Expected option life (in years) . . 4 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.
STOCK WARRANTS - In September 1995, the Company executed a warrant
agreement with a consultant. The warrant agreement provided for the issuance of
warrants to purchase up to 150,000 shares of the common stock of the Company,
exercisable at a price of $2.00 per share. The warrant was exercisable as to
37,500 shares upon execution of the agreement and the warrants to purchase the
remaining 112,500 shares were to become exercisable if certain performance
parameters were achieved by September 1996. Such parameters were not met as of
such date. In January 1997, the agreement was extended and the parameters were
changed. 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 year ended June 30, 1998. Warrants to purchase
15,000 shares of common stock at $2.00 per share were exercisable as of June 30,
2000. 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, 2000, 30,000 warrants were exercisable.
Such warrants expire in February 2003.
F-16
<PAGE>
COMMITMENT TO ISSUE SHARES OF COMMON STOCK - In April 1998, the Company
agreed to and accepted the patent rights assigned to them by a third party with
respect to certain technology related to the transmission of clinical data. In
consideration for the patent, the Company has agreed to provide the third party
with 400,000 shares of common stock payable over a four-year time period with
additional consideration of up to 112,000 shares contingent upon the achievement
of certain sales levels. The Company recorded a charge to operations of
$900,000 in fiscal 1998 with respect to the value of the in-process technology
which was expensed as research and development costs. The 400,000 shares to be
issued have been considered to be outstanding shares for purposes of computing
basic and diluted income (loss) per common share in 1998. 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.
PREFERRED STOCK - The Company's Board of Directors has the authority to
determine the relative rights and preferences of any series it may establish
with respect to the 500,000 shares of $.04 par value authorized preferred
shares. No preferred stock is issued or outstanding.
On March 27, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock of the Company. The dividend was made on April 24, 1997
to the stockholders of record on that date to purchase Preferred Stock
("Preferred") upon the occurrence of certain events. The Rights will be
exercisable the tenth business day after a person or group acquires 20% of the
Company's common stock, or makes an offer to acquire 30% or more of the
Company's common stock. When exercisable, each right entitles the holder to
purchase for $25, subject to adjustment, one-hundredth of a share of Preferred
for each share of common stock owned. Each share of Preferred will be entitled
to a minimum preferential quarterly dividend of $25 per share, but not less than
an aggregate dividend of 100 times the common stock dividend. Each share will
have 100 votes, voting together with the common stock. In the event of any
merger, each share of Preferred will be entitled to receive 100 times the amount
received per share of common stock. The Rights expire on April 1, 2007.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan which covers substantially all employees.
Company contributions to the plan are discretionary and determined annually by
the Company's Board of Directors. The Company's contributions were
approximately $77,000, $84,000, and $77,000 in 2000, 1999 and 1998,
respectively.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company is a manufacturer of medical monitoring and telemetry products
whose customers include hospitals and alternative health care sites throughout
the world. Although the Company's products are sold primarily to health care
providers, concentrations of credit risk with respect to trade accounts
receivable are limited due to the Company's large number of customers and their
geographic dispersion. The Company currently coordinates substantially all
international sales and distribution activities. Such activities were
previously provided by the Company with the assistance of Criticare
International. Identifiable assets located outside of the United States are
insignificant in relation to the Company's total assets. Net export sales by
geographic area are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Europe and Middle East . . . . . . . $ 5,437,000 $ 4,635,000 $ 5,464,000
Pacific Rim. . . . . . . . . . . . . 2,662,000 2,243,000 3,895,000
Canada and Central
and South America. . . . . . . . . 3,035,000 3,634,000 3,414,000
Export net sales . . . . . . . . . . $11,134,000 $10,512,000 $12,773,000
U.S. net sales . . . . . . . . . . . 16,020,000 18,001,000 15,135,000
Total net sales. . . . . . . . . . . 27,154,000 28,513,000 27,908,000
</TABLE>
F-17
<PAGE>
11. SIGNIFICANT CUSTOMER
During 1999, a customer entered into an OEM agreement with the Company and
purchased approximately $4,360,000 of the Company's products. This represents
approximately 15% of the Company's total sales. This customer had a receivable
balance of $448,546 on June 30, 1999, which represents 7% of the Company's total
receivables as of this date. During 2000, purchases approximated $1,988,000 and
a receivable balance of $944,326, which represented 14% of accounts receivable
on June 30, 2000.
12. SEVERANCE PAY
During November 1998, the two cofounders 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.
F-18
<PAGE>
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 2000
---------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 212,840
Accounts receivable, less allowance for doubtful accounts
of $1,400,000. . . . . . . . . . . . . . . . . . . . . . . 6,451,657
Investments . . . . . . . . . . . . . . . . . . . . . . . . . 7,558,694
Other receivables . . . . . . . . . . . . . . . . . . . . . . 123,903
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 7,788,891
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . 491,480
---------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 22,627,465
Property, plant and equipment - net . . . . . . . . . . . . . 5,936,119
License rights and patents - net. . . . . . . . . . . . . . . 101,390
---------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,664,974
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 2,386,134
Accrued liabilities:
Compensation and commissions. . . . . . . . . . . . . . . 1,264,811
Product warranties. . . . . . . . . . . . . . . . . . . . 325,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 585,298
Current maturities of long-term debt. . . . . . . . . . . . . 81,984
---------------
Total current liabilities . . . . . . . . . . . . . . . . . . 4,643,227
LONG-TERM DEBT, less current maturities . . . . . . . . . . . 3,263,317
OTHER LONG-TERM OBLIGATIONS . . . . . . . . . . . . . . . . . 232,171
STOCKHOLDERS' EQUITY:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . -
Common stock - $.04 par value, 15,000,000 shares authorized,
8,991,251 shares issued and outstanding . . . . . . . . . 359,650
Additional paid-in capital. . . . . . . . . . . . . . . . . . 18,507,981
Common stock held in treasury (76,439 shares) . . . . . . . . (142,388)
Retained earnings (accumulated deficit) . . . . . . . . . . . (5,757,678)
Accumulated comprehensive income. . . . . . . . . . . . . . . 7,558,694
---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 20,526,259
---------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,664,974
===============
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
NET SALES . . . . . . . . . . . . . . $6,229,877 $6,603,337
COST OF GOODS SOLD. . . . . . . . . . 3,718,831 3,614,526
----------- -----------
GROSS PROFIT. . . . . . . . . . . . . 2,511,046 2,988,811
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 1,475,109 1,606,379
Research, development
and engineering . . . . . . . . . . 581,282 711,456
Administrative. . . . . . . . . . . . 562,238 514,000
----------- -----------
Total . . . . . . . . . . . . . . . . 2,618,629 2,831,835
(LOSS) INCOME FROM OPERATIONS . . . . (107,583) 156,976
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (64,806) (65,781)
Interest income . . . . . . . . . . . 6,419 29,281
Gain on sale of stock . . . . . . . . - 1,760,000
----------- -----------
Total . . . . . . . . . . . . . . . . (58,387) 1,723,500
(LOSS) INCOME BEFORE INCOME TAXES . . (165,970) 1,880,476
INCOME TAX PROVISION. . . . . . . . . - -
----------- -----------
NET (LOSS) INCOME . . . . . . . . . . $ (165,970) $1,880,476
=========== ===========
NET (LOSS) INCOME PER COMMON SHARE
Basic . . . . . . . . . . . . . . . . $ (0.02) $ 0.22
Diluted . . . . . . . . . . . . . . . $ (0.02) $ 0.21
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 8,898,607 8,706,151
Diluted . . . . . . . . . . . . . . . 8,898,607 8,921,806
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . $(165,970) $ 1,880,476
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 127,499 231,784
Amortization . . . . . . . . . . . . . . . . . . . 3,600 4,499
Provision for doubtful accounts. . . . . . . . . . 100,000 57,838
Gain on sale of Immtech stock. . . . . . . . . . . - (1,760,000)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . 231,108 471,819
Other receivables. . . . . . . . . . . . . . . . (7,130) 27,157
Inventories. . . . . . . . . . . . . . . . . . . 430,907 (68,690)
Prepaid expenses . . . . . . . . . . . . . . . . (271,628) (51,536)
Accounts payable . . . . . . . . . . . . . . . . (249,210) (872,997)
Accrued liabilities. . . . . . . . . . . . . . . (4,967) (1,668,965)
---------- ------------
Net cash provided by (used in) operating activities. . 194,209 (1,748,615)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . (116,434) (78,583)
Proceeds from sale of Immtech stock. . . . . . . . . . - 1,760,000
---------- ------------
Net cash (used in) provide by investing activities . . (116,434) 1,681,417
FINANCING ACTIVITIES:
Principal payments on long-term debt . . . . . . . . . (19,023) (17,596)
Proceeds from issuance of common stock . . . . . . . . 39,258 -
---------- ------------
Net cash provided by (used in) financing activities. . 20,235 (17,596)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 98,010 (84,794)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . 114,830 2,511,078
---------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . $ 212,840 $ 2,426,284
========== ============
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
CRITICARE SYSTEMS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Criticare Systems, Inc. (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the opinion of the
Company, include all adjustments necessary for a fair statement of results for
each period shown. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. The Company believes that the disclosures made are adequate to
prevent the financial information given from being misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
2. INVENTORY VALUATION
Inventory is stated at the lower of cost or market, with cost determined on
the first-in, first-out method. Components of inventory consisted of the
following at September 30, 2000 and June 30, 2000, respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------- --------------
<S> <C> <C>
Component parts . . . . . . . . $ 3,705,418 $ 3,721,474
Work in process . . . . . . . . 1,167,141 1,169,609
Finished units. . . . . . . . . 3,316,332 3,687,243
------------------- --------------
Total inventories . . . . . . . 8,188,891 8,578,326
Less: reserve for
obsolescence. . . . . . . . . 400,000 400,000
------------------- --------------
Net inventory . . . . . . . . . $ 7,788,891 $ 8,178,326
</TABLE>
3. INVESTMENTS
During August, September and October 1999, the Company sold 500,000 shares
of Immtech International, Inc. ("Immtech") stock for $2,500,000 in a private
placement. The funds were used primarily to settle a long-standing lawsuit,
which was settled in July 1999. The Company held 456,374 shares of Immtech
stock, which was trading at $16 9/16 per share, on September 30, 2000. The
market value of these shares could change substantially due to overall market
risk.
F-22
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------- --------------
<S> <C> <C>
Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,037,639 2,009,312
Furniture and fixtures . . . . . . . 805,055 763,282
Demonstration and loaner monitors. . 1,366,115 2,651,145
Production tooling . . . . . . . . . 2,697,479 1,407,587
------------------- --------------
Property, plant and
equipment - cost . . . . . . . . . 11,431,288 11,356,326
Less: accumulated depreciation. . . 5,495,169 5,367,670
------------------- --------------
Property, plant and
equipment - net. . . . . . . . . . $ 5,936,119 $ 5,988,656
</TABLE>
F-23
<PAGE>
You should rely on the information contained in this document or other
information we referred you to. We have not authorized anyone to provide you
with information that is different. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of common stock offered by this prospectus, nor does it constitute an
offer to sell or a solicitation of an offer to buy shares of common stock in any
jurisdiction where such offer or solicitation would be unlawful. Neither the
delivery of this prospectus nor any sales made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Criticare since the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------------------------------------------------
<S> <C>
Summary. . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . 3
Forward Looking Statements May Prove to be
be Inaccurate. . . . . . . . . . . . . 5
Market Information and Dividend Policy . . 5
Use of Proceeds. . . . . . . . . . . . . . 6
Determination of Offering Price. . . . . . 6
Selected Consolidated Financial Data . . . 7
Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . 8
Business . . . . . . . . . . . . . . . . . 12
Management . . . . . . . . . . . . . . . . 19
Principal Stockholders . . . . . . . . . . 24
Selling Stockholders . . . . . . . . . . . 26
Plan of Distribution . . . . . . . . . . . 26
Description of Capital Stock . . . . . . . 27
Legal Matters. . . . . . . . . . . . . . . 31
Experts. . . . . . . . . . . . . . . . . . 31
Where You Can Find More Information. . . . 31
Consolidated Financial Statements. . . . . F-1
</TABLE>
CRITICARE SYSTEMS, INC.
1,786,273 SHARES OF COMMON STOCK
PROSPECTUS
__________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses relating to the registration of the shares of common stock
being offered hereby, other than underwriting discounts and commissions, will be
borne by the Company. Such expenses are estimated to be as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
---------------------------------- -------
<S> <C>
Securities and Exchange Commission
Registration Fee . . . . . . . . . $ 1,146
Nasdaq Listing Fees. . . . . . . . 17,500
Printing and Engraving Fees. . . . 5,000
Legal Fees and Expenses. . . . . . 20,000
Accounting Fees and Expenses . . . 5,000
Miscellaneous Expenses . . . . . . 1,354
-------
Total $50,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-Laws provide that the Company shall, to the fullest extent
permitted by the Delaware General Corporation Law and other applicable laws, as
in effect from time to time, indemnify any person who was or is a party or is
threatened to be made a party to any formal or informal threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, including, without limitation, any action brought under federal
or state securities laws, rules or regulations (collectively, "Actions"), other
than in certain limited circumstances, because he is or was a director or
officer of the Company, or because he is or was a director or officer of the
Company and is or was serving at the request of the Company as a director,
officer, employee, consultant or agent of another corporation or other
enterprise or is or was serving at the request of the Company as a fiduciary of
an employee benefit plan or as an employee or agent of the Company; provided,
however, that no director or officer shall be entitled to indemnification
unless, with respect to the conduct that is the subject of the Action, he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Company and, with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful.
This indemnification obligation mirrors the permissive indemnification provided
under section 145 of the Delaware General Corporation Law. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be made (a) by arbitration; (b) by the Board of Directors by a
majority vote of a quorum consisting of directors who are not parties to the
subject Action; (c) if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or (d) by the affirmative vote of a majority of the shares
entitled to vote thereon.
II-1
<PAGE>
The Company's Certificate of Incorporation provides that a director will
not be personally liable for monetary damages to the Company or its stockholders
for or with respect to any acts or omissions in the performance of his or her
duties as a director, except for liability (i) for any breach of the director's
duty of loyalty to such corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for paying a dividend or approving a stock repurchase in
violation of section 174 of the Delaware General Corporation Law or (iv) with
respect to any transaction from which the director derived an improper personal
benefit.
Article VI, section 6.01 of the Company's Restated By-Laws provides that a
director or officer is not liable to the Company for damages arising out of any
action taken or omitted to be taken by such person if he exercised and used the
same degree of care and skill as a prudent man would have exercised or used
under the circumstances in the conduct of his own affairs or took or omitted to
take such action in reliance on the advice of the Company's counsel or
statements made or information furnished by officers or employees of the Company
which he had reasonable grounds to believe were true.
The indemnification provided as set forth above is not exclusive of any
other rights to which a director or an officer of the Company may be entitled.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Effective November 3, 1998, the Company issued 350,000 shares of common
stock to Telemed Technologies International, Inc. in exchange for certain patent
and other intellectual property rights. These shares were issued in a private
placement exempt from the registration requirements of the Securities Act of
1933, as amended (the "Act"), pursuant to Section 4(2) of the Act.
Effective March 3, 2000, the Company issued 30,000 shares of Common Stock
to one investor in settlement of pending litigation. These shares were issued in
a private placement exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
On October 17, 2000, the Company issued an aggregate of 1,786,273 shares of
common stock to Oxford Bioscience Partners III, L.P., Oxford Bioscience Partners
(Bermuda) III Limited Partnership and mRNA Fund L.P. at a price of $2.25 per
share. These shares were issued in a private placement exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to the Registration Statement filed on Form S-1,
Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No. 33-13050).
4.2 Specimen Convertible Debenture (incorporated by reference to the
Registration Statement filed on Form S-3, Registration No.
333-25153).
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
II-2
<PAGE>
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 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 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended June 30,
1999).
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).
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, (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended June 30,
1999).
II-3
<PAGE>
10.18 Employment Agreement of Stephen D. Okland, (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended June
30, 1999).
10.19 Employment Agreement of Drew M. Diaz, (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended June 30,
1999).
10.20 Purchase Agreement, dated as of October 17, 2000, among the Company,
Oxford Bioscience Partners III L.P., Oxford Bioscience Partners
(Bermuda) III Limited Partnership and mRNA Fund L.P.
21 Subsidiaries (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1999).
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
(included in its opinion filed as Exhibit 5 hereto).
24 Power of Attorney (incorporated by reference to the signature page
hereof).
FINANCIAL STATEMENT SCHEDULES
-------------------------------
Financial Statement Schedule for the years ending June 30, 2000, 1999
and 1998:
Schedule
Number Description Page
------ ----------- ----
II 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.
ITEM 17. UNDERTAKINGS
The undersigned Registrant undertakes as follows:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement; Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement, and
II-4
<PAGE>
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
2. That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Waukesha,
State of Wisconsin, on the 28th day of November, 2000.
CRITICARE SYSTEMS, INC.
BY /s/ Emil H. Soika
-------------------------------
Emil H. Soika, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Emil H. Soika and
Mark S. Ruehle, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement and file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ Emil H. Soika President, Chief Executive November 28, 2000
---------------------------
Emil H. Soika Officer and Director
/s/ Mark S. Ruehle Vice President-Finance and November 28, 2000
---------------------------
Mark S. Ruehle Secretary (Principal
Accounting Officer and
Principal Financial Officer)
/s/ Karsten Houm Chairman of the Board and November 28, 2000
---------------------------
Karsten Houm Director
/s/ Milton Datsopoulos Director November 28, 2000
---------------------------
Milton Datsopoulos
Director November 28, 2000
---------------------------
N.C. Joseph Lai, Ph.D.
/s/ Jeffrey T. Barnes Director November 28, 2000
---------------------------
Jeffrey T. Barnes
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors
Criticare Systems, Inc.
The audits referred to in our report dated August 15, 2000 relating to the
consolidated financial statements of Criticare Systems, Inc., which is contained
in this Registration Statement on Form S-1 included the audit of the financial
statement schedules listed in Item 16. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based upon our audits.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Milwaukee, Wisconsin
August 15, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Criticare Systems, Inc.:
We have audited the consolidated financial statements of Criticare Systems, Inc.
and subsidiaries for the year ended June 30, 1998, and have issued our report
thereon dated August 20, 1998; such report is included elsewhere in this
Registration Statement on Form S-1. Our audit also included the consolidated
financial statement schedule information of Criticare Systems, Inc. for the year
ended June 30, 1998, listed in Item 16. This consolidated financial statement
schedule information is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
August 20, 1998
<PAGE>
SCHEDULE II
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------ ------------- ----------- ----------- ---------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------------------------------------ ------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts. . . . . $ 467,000 $ 99,000 $ 266,000 $ 300,000
Reserve for sales returns
and allowances . . . . . . . . . . . . $ 140,000 $ 1,357,917 $ 1,397,917 $ 100,000
YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts. . . . . $ 300,000 $ 380,004 $ 305,004 $ 375,000
Reserve for sales returns
and allowances . . . . . . . . . . . . $ 100,000 $ 760,194 $ 800,194 $ 60,000
YEAR ENDED JUNE 30, 2000:
Allowance for doubtful accounts. . . . . $ 375,000 $ 1,160,614 $ 235,614 $ 1,300,000
Reserve for sales returns
and allowances . . . . . . . . . . . . $ 60,000 $ 554,101 $ 554,101 $ 60,000
</TABLE>
