-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LqMNCm1XgQ2vOJQxNc13Q9HlTdq1E3NCJdUdpSIU5B8OuKue87GUTGffOf/FcwHf jKim2lDOoKelrRGyTTdP1w== 0000950124-97-005299.txt : 19971015 0000950124-97-005299.hdr.sgml : 19971015 ACCESSION NUMBER: 0000950124-97-005299 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRITICARE SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000812121 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 391501563 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16061 FILM NUMBER: 97694981 BUSINESS ADDRESS: STREET 1: 20925 CROSSROADS CIRCLE CITY: WAUKESHA STATE: WI ZIP: 53186 BUSINESS PHONE: 4147988282 MAIL ADDRESS: STREET 2: 20925 CROSSROADS CIRCLE CITY: WAUKESHA STATE: WI ZIP: 53186 10-K405 1 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ------- ------- Commission file number 000-16061 --------- Criticare Systems, Inc. ----------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 39-1501563 - ------------------------------- --------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 20925 Crossroads Circle, Waukesha, Wisconsin 53186 - -------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 414-798-8282 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ NA NA ------------------- ------------------------ [COVER PAGE 1 OF 2 PAGES.] 2 Securities registered pursuant to Section 12(g) of the Act: Voting Common Stock, $.04 Par Value (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ X ] The aggregate market value of the voting common stock held by nonaffiliates of the registrant as of August 31, 1997 was $38,499,447. On August 31, 1997, there were outstanding 8,095,486 shares of the registrant's $.04 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended June 30, 1997 are incorporated by reference into Part II of this report. Portions of the Proxy Statement for the Annual Meeting of the Stockholders of the Registrant to be held November 7, 1997 are incorporated by reference into Part III of this report. [COVER PAGE 2 OF 2 PAGES.] 2 3 PART I Item 1. BUSINESS. Criticare Systems, Inc. (the "Company" or "Criticare") designs, manufactures and markets vital signs and gas monitoring instruments and related noninvasive sensors used to monitor patients in many healthcare settings. Since a patient's oxygen, anesthetic gas and carbon dioxide levels can change dramatically within minutes, causing severe side effects or death, continuous monitoring of these parameters is increasing. The Company's monitoring equipment improves patient safety by delivering accurate, comprehensive and instantaneous patient information to the clinician. The Company's products also allow hospitals to contain costs primarily by substituting cost-effective reusable pulse oximetry sensors for disposable sensors, controlling the use of costly anesthetics and increasing personnel productivity. To meet the needs of end-users in a wide variety of patient settings, the Company has developed a broad line of patient monitors which combine one or more of its patented or other proprietary technologies, for monitoring oxygen saturation, carbon dioxide and anesthetic agents, with standard monitoring technologies that provide electrocardiogram ("ECG"), invasive and noninvasive blood pressures, temperature, heart rate and respiration rate. In addition, the Company's VitalView telemetry system allows one nurse to monitor up to eight patients simultaneously from a convenient central location. This allows hospitals to move out of the intensive care unit ("ICU") those patients that require continuous monitoring, but do not need all of an ICU's extensive and costly personnel and equipment resources. The Company was incorporated under the laws of the State of Delaware in October 1984. Products Criticare markets a broad range of vital signs and gas monitoring products designed to address the needs of a variety of end-users in different patient settings. Criticare's monitors display information graphically and numerically. All Criticare monitors incorporate adjustable visual and audible alarms to provide reliable patient-specific warnings of critical conditions, and most of the Company's monitors record up to 60 hours of trend data. Criticare monitors are available with printer capability to provide permanent records of patient data. Model 503, 503S, 504, 504P, 504US, 504USP and 504O (PONI) Pulse Oximeters. Criticare's complete line of pulse oximeters meet the needs of virtually all clinical environments: adult, pediatric and neonatal intensive care units, operating rooms, emergency rooms, nursing homes, physicians' offices and 3 4 ambulances. The line is designed to provide accuracy and convenience at a competitive cost to the end-user. Model 507S, 507SD, 507N, 507O and 507E Patient Monitors. The 507 series is comprised of small, compact, portable, full-featured vital signs monitors configured to meet specific clinical needs. The 507S and 507SD are well-suited to dental and physician offices. The 507N and 507O are ideal for patient floor monitoring of noninvasive blood pressure and pulse oximetry. The 507E combines ECG, oxygen saturation and noninvasive blood pressure for a complete vital signs monitor for physician office and hospital applications. Combined with the VitalView central station, the 507E is an effective low-cost monitoring system for the emergency room or the recovery room. Scholar(TM). The Scholar monitor series specifically addresses the needs of small hospitals with broad clinical needs (the monitoring of ECG, blood oxygen saturation, noninvasive blood pressure, temperature and invasive blood pressure) but whose budgets are small. Scholar offers all the primary features a hospital needs with the capability of adding more features if desired. Scholar monitors are available with printer and recorder capability and can transmit data to Criticare's Maestro and VitalView Central Stations. Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient monitoring for a wide variety of cardio-pulmonary parameters in an integrated system. The Model 1100 is able to monitor two ECG waveforms, noninvasive blood pressure, three types of invasive blood pressure, respiration rate, heart rate, temperature, oxygen saturation, inspired/expired oxygen, carbon dioxide and the range of anesthetic gases, including recently developed anesthetic agents such as desflurane and sevoflurane. The Model 1100 uses the Company's proprietary disposable respiratory secretion filter system and is designed to accommodate low-flow anesthesia situations. Model 602-3B, 602-6B, 602-11 and 602-13 Gas Monitors. The 602 series provides monitoring of carbon dioxide, pulse oximetry and anesthetic agents using Criticare's proprietary infrared technology. The 602 IQ series of operating room monitors provides automatic identification and quantification of all five approved anesthetic agents simultaneously. Model 506DX Combination Monitor. The 506DX combination monitor was developed in conjunction with Alaris Medical ("Alaris") and incorporates Criticare's oximetry and noninvasive blood pressure technology with Alaris's temperature technology. Alaris has rights to market the 506DX combination monitor to hospitals in the United States and Canada. Criticare has rights to market the product to the alternate care market and to international markets. 4 5 Model 820 Maestro(TM) I Telemetry Monitors. The Maestro I Telemetry system addresses the rapidly expanding telemetry market with a reliable, inexpensive ECG telemetry system. The Maestro I system provides a waterproof ECG transmitter capable of five ECG lead configurations. The ability to link Criticare's 507E and Scholar monitors to this versatile central station is expected to expand the market into numerous hospital departments. VitalView(TM). The VitalView central station makes it possible for one nurse or technician to monitor numerous patients simultaneously. The VitalView can receive, display and store data from a wide variety of Criticare monitors including the Scholar, 507E and MPT. MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood pressure) on a real time basis to a VitalView central station while the patient is ambulatory. The Company believes the MPT is the first device of its kind. In today's healthcare environment, hospitals benefit by moving patients from expensive critical care departments as quickly as possible to less expensive general nursing floors. MPT, because of its complete monitoring capability and its lower cost, allows the patient to be ambulatory while still being monitored for all vital signs. MPT was approved by the FDA on December 10, 1996. Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive sensors that can be used on any patient, from a premature infant to a full-grown adult. Criticare's line of reusable pulse oximetry sensors offers users significant cost savings compared to disposables. Criticare's reusable sensors generally last longer than the one-year warranty period and are easily and inexpensively cleaned between uses. Criticare's reusable sensors include a finger sensor for routine applications and a multisite sensor for increased placement flexibility. The multisite sensor is fully immersible, allowing for sterilization between patients. Last year the Company introduced the "Shell" sensor, the first reusable sensor with a removable hard cover. The cover can be inexpensively replaced if it becomes damaged, saving hundreds of dollars over buying a new sensor. The Shell sensor is also the first reusable sensor on the market that can be fully dismantled and immersed for improved cleaning and sterilization between patients if required. The Company also sells a range of disposable sensors designed for single use in cases where the facility would prefer to use a patient charge disposable product. Water Chek/Chek-Mate Filter System. The Company's patented, disposable Water Chek system separates a patient's respiratory secretions from a breath sample before it enters the gas monitor(s) for analysis. The Company's proprietary, disposable Chek-Mate filter enhances the removal of moisture from the sample, while preventing cross-contamination. This system allows the monitor 5 6 to operate effectively regardless of humidity or patient condition. The self-sealing feature also protects the healthcare provider from potential contamination. Products Under Development Digital Oximetry DOX(TM). The Company is in the later stages of developing an improved oxygen saturation monitor incorporating a digital electronic signal which allows more accurate saturation readings in conditions influenced by light, motion or temperature artifact than the analog electronic signal used in current oxygen saturation monitors. Vital Signs(TM). The hand-held Vital Signs monitor measures heart rate, oxygen saturation, noninvasive blood pressure and temperature using a hand-held monitor weighing less than two pounds. These features make the Vital Signs monitor well-suited for use on nursing floors and in physicians' offices, ambulances and home healthcare organizations. Home View. The Company is in the active stage of developing a home care application of the MPT (Multiple Parameter Telemetry) monitor and the VitalView central station. When completed, the Home View system will allow patients to be monitored, on a real time basis, using telephone modems to transmit data to the care giver at a remote (hospital or home care) facility thereby further reducing the cost of monitoring certain patients in the high cost hospital environment. Fetal Oxygen Monitor. The Company is in the active stage of developing a fetal oxygen monitor designed to monitor the blood oxygen saturation of a fetus during labor and delivery. The Company's potential introduction of this product will depend to a large extent on the need for clinical testing, engineering requirements and, in particular, the FDA approval process. Although there were over 4 million births in the United States in 1990, it is likely that a fetal oxygen monitor would, at least initially, be used only during deliveries where some unusual circumstances or danger were perceived by the physician. No assurance can be given that such product will be successfully developed and marketed by the Company or, if developed and marketed, will be clinically or commercially accepted. 6 7 Marketing and Sales Domestic Sales. During fiscal 1997, the Company's domestic sales efforts were divided between a Hospital Division and an Alternate Care Division. As of July 1, 1997, the Company's domestic sales responsibilities are divided between a Systems Division and a Monitoring Division. The Company's Systems Division focuses its efforts on the MPT/VitalView Systems and related monitors such as Scholar I and Scholar II that can interface with the VitalView Central Station. The flexibility of the MPT System affords hospitals the opportunity to place monitoring where it is used rather than being tied to fixed monitoring units. The Systems Division currently consists of four sales specialists, four clinical specialists and one manager. The Company's Monitoring Division focuses its efforts on stand-alone monitoring needs of hospitals, surgery centers, nursing homes and physician offices. Monitoring Division products include pulse oximeters, CO2 monitors, anesthetic agent monitors and vital signs monitors. The Monitoring Division currently consists of five regional managers, approximately 60 independent dealers with approximately 600 sales people and one sales manager. International Sales. One of the Company's principal marketing strategies has been to target international markets, particularly Western Europe, Latin America and the Pacific Rim countries. During fiscal 1997, Criticare sold its products, principally to hospitals, in over 77 countries through over 140 independent dealers. During fiscal 1997, the Company's European sales efforts were coordinated by the Company's wholly-owned subsidiary, Criticare International GmbH Marketing Services, a corporation organized under the laws of Germany ("Criticare International"). During 1997, Criticare International was involved in separate disputes with three former employees with respect to the termination of such employees. Each of the former employees sued Criticare International in the German Labor Court and the Labor Court ultimately entered a judgement against Criticare International in two of the instances and proceedings have been stayed in the third instance pending the resolution of bankruptcy proceedings with respect to Criticare International. Criticare International has appealed both of the judgements to the Labor Court of Appeals for the State of Hessia. However, one of the former employees also filed a motion with the Municipal Court in Bad Homburg, Germany to put Criticare International into bankruptcy. The bankruptcy administrator has stayed Criticare International's appeals of the Labor Court judgements pending the outcome of the bankruptcy proceedings. Criticare International initially contested the bankruptcy motion but dropped the opposition after the Company withdrew its commitment to pay the amount of any judgements against Criticare International with respect to the litigation with its former employees. On August 29, 1997 the Municipal Court officially opened bankruptcy proceedings against Criticare International. Most of the Company's international order processing, invoicing, collection and customer service functions are handled directly from the Company's headquarters in Waukesha, Wisconsin. However, the Company formed CSI Trading, Inc., a wholly-owned subsidiary, in November of 1996 to perform certain marketing and service functions in Europe. The International Division currently consists of 10 regional managers and one sales manager. Criticare believes demand for the Company's products in international markets is primarily driven by cost containment concerns, and increased interest in using quality patient monitoring products for improved patient management. In fiscal 1997, 51% of Criticare's net sales, or $13.3 million, was attributable to international sales, of which approximately 42% was from sales in Western Europe, 29% was from sales to Pacific Rim countries and 29% was from sales to Canada and South America. In fiscal 1996, 46% of Criticare's net sales was attributable to international sales. In fiscal 1995, 49% of Criticare's net sales was attributable to exports. There are no material identifiable assets of the 7 8 Company located in foreign markets. The Company sells its products in United States dollars and is not subject to significant currency risks; however, an increase in the value of the United States dollar relative to foreign currencies could make the Company's products less price competitive in those markets. Clinical Support. At August 31, 1997, Criticare employed four clinical support specialists to provide customer training and education, primarily to domestic hospitals. The clinical support staff also assists in the periodic training and education of the direct sales force. In addition, the direct sales force maintains contact with end-users and provides additional training and updates. Clinical support in foreign markets is provided by Criticare regional managers. Warranty and Service. Criticare believes that customer service is a key element of its marketing program. Criticare's monitors are warranted against defects for one year and its reusable sensors for six months. If a problem develops with a Criticare product while under warranty, the Company typically provides a replacement unit until the product can be repaired at the Company's facility. At August 31, 1997, the Company had a customer service staff of 15 people at its Waukesha, Wisconsin facility. The Company also maintains a product repair facility in Bad Homburg, Germany for its European customers. The Company offers extended warranties and service contracts on all of its monitors. Manufacturing The Company continually strives to implement manufacturing efficiencies while maintaining product quality and reliability. The Company's oximeters and sensors are assembled from off-the-shelf components and other parts produced to the Company's specifications, such as printed circuit board assemblies, custom transformers and sensor cable/connector subassemblies. However, Criticare produces certain important components in-house. All electronic components are subjected to a 24-hour high-temperature burn-in to eliminate early component failure. Some subassembly is performed by subcontractors, but final assembly and quality control are performed at Criticare's facility. Criticare maintains test and inspection procedures to minimize errors and enhance the operating reliability of its products. Final test procedures on fully assembled units include an operational test and a continuous 72-hour burn-in procedure. Certain of Criticare's products incorporate components currently purchased from single sources. While the Company believes these components are available from alternate sources on reasonable terms, an interruption in the delivery of these or other components could have an adverse effect on the Company. In order to reduce the risk of supply interruption, the Company maintains inventories of certain components. 8 9 The ISO 9000 series of quality management and assurance standards was developed by the International Organization for Standardization (ISO) and published in 1987. In 1993 the EC (European Community) was formed with the signing of the Maastricht Treaty by 12 European countries. One of the many standards adopted by this group is the ISO 9000 international quality assurance and quality management series under the designation EN2 9000. Based on this action by the EC and specific requirements from European customers, the Company believes ISO 9000 registration will be required to compete in EC and other international markets as an indication of compliance with international quality management and assurance standards. In July 1994 the Food and Drug Administration (FDA) announced its intention of harmonizing the ISO 9000 standards with its Medical Device Good Manufacturing Practices (GMP). The Company has achieved certification under ISO's standards 9001 and 9002. See "Regulation." Research, Development and Engineering Criticare has focused its research, development and engineering expenditures on products designed to meet identified market demands. The Company seeks to apply its expertise in gas monitoring and related sensor technology to develop new products and adapt existing products for new markets. At August 31, 1997, the Company had an in-house research, development and engineering staff of 24 people. The Company's research, development and engineering expenditures were $2.3 million in fiscal 1997, $2.6 million in fiscal 1996 and $1.9 million in fiscal 1995. Competition The markets for the Company's products are highly competitive. Many of Criticare's competitors, including its principal competitors described below, have greater financial resources, more established brand identities and reputations, longer histories in the medical equipment industry and larger and more experienced sales forces than Criticare. In these respects, such competitors have a competitive advantage over the Company. The Company competes primarily on the basis of product features, the quality and value of its products (i.e., their relative price compared to performance features provided) and the effectiveness of its sales and marketing efforts. The Company believes that its principal competitive advantages are provided by its focus on cost containment and its patented and other proprietary technology and software for noninvasive, continuous monitoring of oxygen, specific anesthetic gases, carbon dioxide and blood pressure, its cost-efficient manufacturing, the efficiency and speed of its research and development efforts and its established international presence. 9 10 The principal competing manufacturers of pulse oximeters are Nellcor Puritan Bennett and Ohmeda, a division of The BOC Group, Inc. The Company estimates that Nellcor has captured a majority, and that Ohmeda and the Company have each captured significant portions of the worldwide pulse oximeter market. In addition, there are approximately 30 other companies which compete in the market for pulse oximeters. The Company also indirectly competes with manufacturers of numerous other medical equipment products for limited customer funds. The Company believes that the worldwide anesthetic agent and carbon dioxide monitor markets are comparatively fragmented, with no dominant competitor. The Company's principal competitors in the domestic gas monitor market include Datex Medical Instrumentation, Inc., a United States subsidiary of Instrumentarium OY, a Finnish company, Ohmeda and Datascope Corp. The market for vital signs monitors includes competitors such as Hewlett-Packard Company, Siemens A.G., Datex and SpaceLabs, Inc., a subsidiary of Westmark International Incorporated. The Company believes that its principal competitors in Western Europe include Datex and Ohmeda and that the Company has a significant share of this market. In the Pacific Rim countries, the Company believes that Ohmeda is the leading competitor and that Datex and the Company also have significant market shares. Regulation As a manufacturer of medical diagnostic equipment, the Company is regulated by the FDA and similar foreign governmental agencies. In producing its products, the Company must comply with a variety of regulations, including the good manufacturing practices regulations of the FDA. In addition, it is subject to periodic inspections by this agency. If the FDA believes that its legal requirements have not been fulfilled, it has extensive enforcement powers, including the ability to ban or recall products from the market and to prohibit the operation of manufacturing facilities. The Company believes its products comply with applicable FDA regulations in all material respects. In addition, the Company received ISO 9002 certification on April 29, 1993 and ISO 9001 certification on July 8, 1994. Under the Federal Food, Drug and Cosmetic Act, as amended, all medical devices are classified as Class I, Class II or Class III, depending upon the level of regulatory control to which they will be subject. Class III devices, which are the most highly controlled devices, are subject to premarket approval by the FDA prior to commercial distribution in the United States. 10 11 The Company's current products have not been subject to the FDA's comprehensive premarket approval requirements, but are generally subject to premarket notification requirements. If a new device is substantially equivalent to a device that did not require premarket approval, premarket review is satisfied through a procedure known as a "510(k) submission," under which the applicant provides product information supporting its claim of substantial equivalence. The FDA may also require that it be provided with clinical trial results showing the device's safety and efficacy. The Company believes that, with the possible exception of the fetal oxygen monitor, the products it is currently developing generally will be eligible for the 510(k) submission procedure and, therefore, will not be subject to lengthy premarket approval procedures. However, these products are still being developed and there can be no assurance that the FDA will determine that the products may be marketed without premarket approval. Criticare seeks, where appropriate, to comply with the safety standards of Underwriters' Laboratories and the Canadian Standards Association and the standards of the European Community. To date, the Company has not experienced significant regulatory expense or delay in the foreign markets in which it sells its products. Industry and professional groups such as the American Society of Anesthesiologists, to the extent they have the power to mandate certain practices or procedures as part of their profession's standard of care, are also a source of indirect regulation of the Company's business. Patents and Trademarks The Company believes one of its principal competitive advantages is provided by its patented and other proprietary technology including its sensor technology, infrared specific anesthetic gas monitoring technology, UltraSync signal processing software and disposable respiratory secretion filter system. None of the Company's U.S. patents expire before 2004. Criticare also has two foreign patent applications pending. There is no assurance that any patents held or secured by the Company will provide any protection or commercial or competitive benefit to the Company. There is also no assurance that the Company's products will not infringe upon patents held by others. The Company is the owner of a United States trademark registrations for "POET," "Scholar," "VitalView" and "MPT." The Company also relies upon trade secret protection for certain of its proprietary technology. Although the Company requires its employees having access to its proprietary information to sign confidentiality agreements, no assurance can be given that such agreements can be effectively enforced or that 11 12 others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose the Company's trade secrets. Employees At August 31, 1997 Criticare had 126 employees; including 27 in manufacturing and operations, 12 in quality control, 36 in domestic marketing and sales, 14 in international marketing and sales, 13 in administration and 24 in research, development and engineering. Many of the Company's technical employees are highly skilled. The Company believes that its continued success depends in part on its ability to continue to attract qualified management, marketing and technical personnel. None of the Company's employees are subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. Backlog Criticare's backlog on June 30, 1997 and 1996 was approximately $1,184,000 and $841,000, respectively. The backlog at these dates consisted primarily of products for which the sales order specified a delayed delivery date. Criticare generally delivers its products out of inventory when specified by the customer. The Company does not believe that its backlog at any date is indicative of its future sales. Item 2. PROPERTIES. In November 1992, the Company purchased a new 60,000 square foot facility for approximately $4.5 million. The Company's mortgage calls for monthly installments of principal and interest of approximately $35,000 and a final "balloon" payment of approximately $2.7 million in December 2003. The Company believes this facility will be adequate for the foreseeable future. Item 3. LEGAL PROCEEDINGS. On December 15, 1995, Criticare sued a number of its former employees in Waukesha County Circuit Court for improperly diverting corporate resources to pursue their personal business interests through a Bahamian corporation called Pro Med. Criticare asserted both breach of fiduciary duty and conspiracy claims against these former employees, breach of employment agreement against Allan Brack (its former Vice President-International), and sought a declaratory ruling that Mr. Brack be barred from exercising any outstanding stock options by virtue of his improper acts. In April of 1996, Criticare amended its complaint to 12 13 drop Pro Med and one other individual defendant, Richard Buckley, who Criticare was unable to serve. One of the remaining defendants, Jean-Claude Joubert, moved to dismiss for lack of personal jurisdiction. The court granted his motion and entered judgment dismissing him from the case on June 11, 1996. Criticare does not intend at this time to appeal that ruling. The only remaining defendant, Allan Brack, moved for summary judgment on Criticare's breach of fiduciary duty and conspiracy claims. The court entered an order refusing to dismiss these claims, but limiting the scope of damages Criticare can seek. Criticare is currently examining settlement possibilities, but remains committed to litigate this action vigorously if it is unable to achieve an overall settlement of its disputed claims with all the former employees who were originally named in the lawsuit. At this time, it is not possible to assess with any degree of accuracy Criticare's likelihood of prevailing on its claims against Mr. Brack, or the potential recovery, if any. Messrs. Buckley and Joubert and Maria Letica, a former cleaning lady for Criticare International, all filed separate wrongful termination suits against Criticare International with the Labor Court in Frankfurt am Main, Germany. Mr. Buckley filed his wrongful termination action against Criticare International on May 4, 1995. On October 22, 1996, the Labor Court awarded Mr. Buckley back wages and accrued interest of approximately $190,000. Mr. Buckley attempted to enforce the judgment by attempting to seize assets though the use of a German bailiff. When the bailiff was unsuccessful, Mr. Buckley filed a motion on February 26, 1997 with the Municipal Court in Bad Homburg, Germany to put Criticare International into bankruptcy. Criticare International appealed the Labor Court's decision to the Labor Court of Appeals for the State of Hessia on March 17, 1997. Criticare International's appeal of the judgment in favor of Mr. Buckley has been stayed pending the outcome of the bankruptcy proceedings against Criticare International. On September 11, 1995, Mr. Joubert filed his wrongful termination suit against Criticare International. The Labor Court awarded Mr. Joubert a judgment for back wages and accrued interest of approximately $45,000. Criticare International appealed this judgment to the Labor Court of Appeals for the State of Hessia on July 11, 1997. Criticare International's appeal has been stayed pending the outcome of bankruptcy proceedings against Criticare International. On July 7, 1997, Ms. Letica, who was fired by the interim bankruptcy administrator, filed her wrongful termination suit against Criticare International in the Labor Court. This case has also been stayed pending the outcome of the bankruptcy proceedings against Criticare International. Criticare International initially contested the motion for bankruptcy and Criticare submitted a support letter guaranteeing that it would pay any judgments rendered against Criticare International which Criticare International was unable to pay. On June 16, 1997, the Municipal Court appointed a temporary receiver prior to deciding whether to officially open bankruptcy proceedings. Shortly thereafter, Criticare revoked its guaranty of payment and Criticare International dropped its opposition to the bankruptcy motion. The Municipal Court subsequently appointed a bankruptcy administrator and officially opened bankruptcy proceedings on August 29, 1997. The administrator has since terminated the remaining employees of Criticare International and seized its assets, which primarily consist of three prototype anesthesia machines, the revoked guaranty from Criticare, tools used for providing customer service and certain assets of CSI Trading, Inc. that were in Criticare International's possession at the time of the bankruptcy, including some inventory, spare parts and a receivable. Criticare and Mr. Brack are in the process of bidding for the assets of Criticare International. At the present time, it is not possible to assess with any degree of accuracy Criticare's likelihood of prevailing in the bidding for these assets. It is likely that after the bankruptcy proceedings are terminated, the wrongful termination case of Ms. Letica and the appeals of Criticare International in the cases involving Messrs. Buckley and Joubert will be closed. Upon such an occurrence, the judgments of Messrs. Buckley and Joubert will be re-entered against Criticare International. It is possible that Messrs. Buckley and Joubert would then attempt to collect the judgments from Criticare. Criticare intends to vigorously defend against any such actions. However, at this time, it is not possible to assess with any degree of accuracy whether such actions will be brought against Criticare or, if so, Criticare's likelihood of prevailing with regard to such claims. 14 Prior to April 4, 1997, Criticare fired two of its sales representatives, John Bombulie and Michael Cox. On April 4, 1997, Criticare sued the former employees, in separate cases, in Waukesha County Circuit Court. Criticare is seeking repayment from both employees of advances made to the employees against unearned future commission payments. On May 16, 1997, Messrs. Bombulie and Cox filed counterclaims against Criticare, in each case alleging breach of contract and failure to pay wages. Messrs. Bombulie and Cox claim that Criticare breached and/or modified their original employment agreements, and that Criticare's actions relieved them of any obligation to repay their unearned draw balances. Both men also claim that Criticare's actions altered their compensation structures, and that Criticare is now liable to them for unpaid wages and stock options. Trial in both cases is scheduled for February of 1998. The judge in the case involving Mr. Bombulie has referred the matter to non-binding mediation. Criticare is currently examining settlement possibilities, but remains committed to litigate these actions vigorously if it is unable to achieve a favorable settlement of the respective actions. At this time, it is not possible to assess with any degree of accuracy Criticare's likelihood of prevailing on its claims against Messrs. Bombulie and Cox, nor the likelihood of prevailing with regard to the claims of Messrs. Bombulie and Cox against Criticare. Prior to August, 1997, Criticare and a distributor of its products, Dynamic Options Corporation ("D.O.C."), had a dispute over whether Criticare could terminate the exclusive marketing agreement between the parties. On August 8, 1997, Criticare filed a Complaint against D.O.C. in the Waukesha County Circuit Court. Criticare did not seek specific damages from D.O.C., but rather a declaratory judgment that Criticare could terminate the exclusive marketing agreement. On August 14, 1997, D.O.C. filed a Complaint in the Circuit Court for Madison County, Alabama against Criticare and one of its employees, Fred Arbona. The Complaint alleged that Criticare breached the terms of the exclusive marketing agreement between the parties and that Criticare had committed fraud and intentional interference with the business relationships between D.O.C. and its customers. D.O.C. also alleged in its Complaint that Criticare violated the Alabama Sales Representative Commission Contract Act by failing to pay commissions due under the exclusive marketing agreement between the parties. D.O.C. is seeking $5 million in compensatory damages plus punitive damages in its Complaint. On September 12, 1997, Criticare filed a Notice of Removal of that case to the Federal District Court in Alabama. However, the District Court recently indicated that it will remand the case to the Madison County Court. Criticare has filed a motion with the Alabama District Court to stay or dismiss the action in Alabama because of the prior existing case in Waukesha County. Likewise, D.O.C. has filed a motion with the Waukesha County Circuit Court to stay or dismiss the action in Waukesha County due to the pending litigation in Alabama. D.O.C. has also filed a counterclaim in the Waukesha County case alleging virtually the same causes of action that it did in its Complaint against Criticare in Alabama. Criticare believes that D.O.C.'s claims lack merit. Criticare is currently examining the possibility of settling both the Wisconsin and the Alabama actions, but remains committed to litigate vigorously if it is unable to achieve an overall settlement satisfactory to it of its disputed claims with D.O.C. At this time, it is not possible to assess with any degree of accuracy Criticare's likelihood of prevailing on its claims against D.O.C., nor the likelihood of prevailing with regard to D.O.C.'s claims against Criticare. The Company does not currently believe that any of such claims which it has received, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. From time to time the Company receives notices from competitors of potential patent infringement. Based on the advice of its patent counsel and other considerations, the Company does not currently believe that any of such claims which it has received, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. However, there can be no assurance that the Company will not be sued for patent infringement or that if sued, the outcome of such suits will not have an adverse effect on the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated herein by reference to the Company's 1997 Annual Report to Stockholders, page 23. 15 Item 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the Company's 1997 Annual Report to Stockholders, page 2. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Incorporated herein by reference to the Company's 1997 Annual Report to Stockholders, pages 7 through 9. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Balance Sheets for the Company at June 30, 1997 and 1996 and Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for the years ended June 30, 1997, 1996 and 1995, and notes thereto, are incorporated herein by reference to the Company's 1997 Annual Report to Stockholders, pages 10 through 22. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has not changed accountants during the 24 months prior to June 30, 1997. During that period, there were no disagreements with the accountants regarding accounting and financial disclosure. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the executive officers and directors of the Company is incorporated herein by reference to the discussions under "Nominee for Election as Director," "Other Directors," "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and "Executive Officers" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders (the "Criticare Proxy Statement"). Item 11. EXECUTIVE COMPENSATION. Incorporated herein by reference to the discussion under "Executive Compensation" in the Criticare Proxy Statement. 14 16 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated herein by reference to the discussion under "Security Ownership" in the Criticare Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated herein by reference to the discussion under "Certain Transactions" in the Criticare Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements. The following consolidated financial statements of the Company, included in the annual report of the Company to its Stockholders for the fiscal year ended June 30, 1997, are incorporated by reference in Item 8. Consolidated Balance Sheets - as of June 30, 1997 and 1996. Consolidated Statements of Operations - for the years ended June 30, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity - for the years ended June 30, 1997, 1996 and 1995. Consolidated Statements of Cash Flows - for the years ended June 30, 1997, 1996 and 1995. Notes to consolidated financial statements. Independent Auditors' Report. 2. Financial Statement Schedules: Independent Auditors' Report. Financial Statement Schedule for the years ending June 30, 1997, 1996 and 1995: 15 17 Schedule Number Description Page -------- --------------------------------------- ----- II Valuation and Qualifying Accounts 22 and Reserves All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or the required information is shown in the financial statements or notes thereto, and therefore have been omitted. 3. Exhibits: 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050). 3.2 By-Laws of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050). 4.1 Specimen Common Stock certificate (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050). 4.2 Specimen Convertible Debenture (incorporated by reference to the Registration Statement filed on Form S-3, Registration No. 333-25153). 10.1 Employment Agreement of Gerhard J. Von der Ruhr (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050). 10.2 Employment Agreement of N.C. Joseph Lai (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050). 10.3 Blatz House Offices Limited Partnership Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1987). 10.4 Option Agreement dated March 12, 1991 between the Company and American Healthcare Systems (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1991). 16 18 10.5 1992 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60644). 10.6 1992 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60214). 10.7 1987 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-33497). 10.8 1987 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-40038). 10.9 Form of Executive Officer and Director Indemnity Agreement (incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-13050). 10.10 Employment Agreement of Richard J. Osowski (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994). 10.11 Revised Option Agreement between the Company and AmHS Purchasing Partners, L.P. dated as of July 1, 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994). 10.12 Amendment to Employment Agreement of Gerhard J. Von der Ruhr. 10.13 Amendment to Employment Agreement of N.C. Joseph Lai. 10.14 Amendment to Employment Agreement of Richard J. Osowski. 10.15 Amended Consultant Warrant Agreement (incorporated by reference to the Company's Post-effective Amendment number 1 to its Registration Statement on Form S-3, Registration No. 333-00861). 10.16 Amendment to Amended Consultant Agreement. 10.17 Rights Agreement (incorporated by reference to the Company's Current Report on Form 8-K filed on April 18, 1997). 10.18 Convertible Debenture Purchase Agreement (incorporated by reference to the Company's Registration Statement on Form S-3, Registration No. 333-25153). 13 Annual Report to Stockholders for the Year Ended June 30, 1997. 21 Subsidiaries. 23 Independent Auditors' Consent. 17 19 24 Power of Attorney. 27 Financial Data Schedule. (b) Reports on Form 8-K. The Company filed a report on Form 8-K on April 18, 1997, reporting that the Company declared a dividend of one preferred share purchase right for each outstanding share of the Company's $.04 per share par value common stock, payable on April 24, 1997, to all stockholders of record on that date. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. 18 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRITICARE SYSTEMS, INC. By /s/ Gerhard J. Von der Ruhr ----------------------------- Gerhard J. Von der Ruhr, President Date: October 10, 1997 19 21 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerhard J. Von der Ruhr and Richard J. Osowski, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------------- ----------------------------------- ---------------------- /s/Gerhard J. Von der Ruhr Chairman of the Board, President and October 10, 1997 - --------------------------- Director Gerhard J. Von der Ruhr * Attorney-in-Fact * Vice Chairman of the Board, October 10, 1997 - --------------------------- Vice President and Director N.C. Joseph Lai /s/ Richard J. Osowski Senior Vice President-Finance October 10, 1997 - --------------------------- (Principal Financial and Accounting Richard J. Osowski Officer) * Attorney-in-Fact * Director October 10, 1997 - --------------------------- Karsten Houm * Director October 10, 1997 - --------------------------- Milton Datsopoulos
20 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Criticare Systems, Inc.: We have audited the consolidated financial statements of Criticare Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, and have issued our report thereon dated August 15, 1997; such financial statements and report are included in your 1997 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Criticare Systems, Inc. listed in Item 14(a). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Milwaukee, Wisconsin August 15, 1997 21 23 SCHEDULE II CRITICARE SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Column A Column B Column C Column D Column E - --------- ----------- ----------- ---------- --------- Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- ----------- ----------- ---------- --------- YEAR ENDED JUNE 30, 1995: Allowance for doubtful accounts $275,000 $ 36,878 $41,878 $270,000 Reserve for sales returns and $204,000 $1,172,464 $1,007,464 $369,000 allowances YEAR ENDED JUNE 30, 1996 Allowance for doubtful $270,000 $ 130,123 $ 105,123 $295,000 accounts Reserve for sales returns and $369,000 $1,062,793 $ 927,793 $504,000 allowances YEAR ENDED JUNE 30, 1997: Allowance for doubtful $295,000 $ 366,505 $ 194,505 $467,000 accounts Reserve for sales returns and $504,000 $1,283,931 $1,647,931 $140,000 allowances
22 24 EXHIBIT INDEX
Sequential Exhibit Page Number Number ------ ------ 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 By-Laws of the Company (1) 4.1 Specimen Common Stock certificate (1) 4.2 Specimen Convertible Debenture (1) 10.1 Employment Agreement of Gerhard J. Von der Ruhr (1) 10.2 Employment Agreement of N.C. Joseph Lai (1) 10.3 Blatz House Offices Limited Partnership Agreement (1) 10.4 Option Agreement dated March 12, 1991 between the Company and American Healthcare Systems (1) 10.5 1992 Employee Stock Option Plan (1) 10.6 1992 Nonemployee Stock Option Plan (1) 10.7 1987 Employee Stock Option Plan (1) 10.8 1987 Nonemployee Stock Option Plan (1) 10.9 Form of Executive Officer and Director Indemnity Agreement (1) 10.10 Employment Agreement of Richard J. Osowski (1)
23 25 10.11 Revised Option Agreement between the Company and AmHS Purchasing Partners, L.P. dated as of July 1, 1993 (1) 10.12 Amendment to Employment Agreement of Gerhard J. Von der Ruhr _____ 10.13 Amendment to Employment Agreement of N.C. Joseph Lai _____ 10.14 Amendment to Employment Agreement of Richard J. Osowski _____ 10.15 Amended Consultant Warrant Agreement (1) 10.16 Amendment to Amended Consultant Warrant Agreement _____ 10.17 Rights Agreement (1) 10.18 Convertible Debenture Purchase Agreement (1) 11 Statement regarding computation _____ of per share earnings 13 Annual Report to Stockholders _____ for the year ended June 30, 1997 21 Subsidiaries _____ 23 Independent Auditors' Consent _____ 24 Power of Attorney _____ 27 Financial Data Schedule _____
- --------------- (1) Incorporated by reference as indicated in Part IV. 24 EX-10.12 2 EX-10.12 1 EXHIBIT 10.12 25 2 AMENDMENT This is an Amendment, dated March 14, 1997, to an Employment Agreement dated March 30, 1987 (the "Agreement"), by and between CRITICARE SYSTEMS, INC., a Delaware corporation ("Criticare"), and GERHARD J. VON DER RUHR ("Employee"). 1. The Agreement is hereby amended to delete section 8 thereof, to delete the phrase "subject to the terms of section 8 of this Agreement" as it appears in sections 6(a) and 6(b) of the Agreement, and to add a new section 5(d) to read in its entirety: (d) Termination Following a Change in Control. "Change in Control" shall mean a sale or other transfer not in the ordinary course of business of all or substantially all of Criticare's assets or a transaction, or series of related transactions, the effect of which is to cause more than 50% of Criticare's issued and outstanding voting capital stock to be beneficially owned by one person or entity or a group of related or affiliated persons or entities. Notwithstanding any of the other provisions of this section 5, after 6 months following a Change in Control, if Employee's employment terminates for any reason, whether such termination is initiated by Employee or Criticare (and regardless of the existence or lack of Cause), Employee (or if Employee dies, his heirs or beneficiaries) will be entitled to receive and Criticare will pay and provide his then Base Salary and the fringe benefits described in sections 4(c)(i), (ii) and (iii), at the levels then in effect, for a period of one year after the date of such termination and the group insurance described in section 5(a) until he reaches age 65. 2. The Agreement is hereby amended to delete section 4(c) thereof and to add a new section 4(c) to read in its entirety: (c) Fringe Benefits. (i) Group Health, Dental and Life Insurance. Employee will be eligible to participate in Criticare's group health, dental and life insurance programs on the same terms and conditions as are available to other employees of Criticare generally. (ii) Automobile. Criticare will provide Employee will full use of an automobile owned or leased by Criticare for use in carrying out his duties for both Criticare and for use in such additional personal business as Employee may deem appropriate. Criticare agrees to provide adequate insurance 3 for the automobile and occupants and to pay all maintenance and operating costs appropriate or necessary to maintain such automobile in prime operating condition. (iii) Split-Dollar Life Policy. Criticare will continue in force and pay the premiums on the $2,000,000 life insurance policies currently in effect on Employee's life. (iv) Vacation. Employee will be entitled to receive paid vacations annually according to the vacation policy established by Criticare. Such vacation shall be taken at such times and in such intervals as are mutually acceptable to Employee and Criticare. 3. The Agreement in all other respects is not amended but remains unchanged and the parties thereto continue to be legally bound by the Agreement, as amended hereby. CRITICARE SYSTEMS, INC. BY /s/ Richard J. Osowski ----------------------------- Richard J. Osowski, Vice President-Finance /s/ Gerhard J. Von der Ruhr ------------------------------- Gerhard J. Von der Ruhr 2 EX-10.13 3 EX-10.13 1 EXHIBIT 10.13 26 2 AMENDMENT This is an Amendment, dated March 14, 1997, to an Employment Agreement dated March 30, 1987 (the "Agreement"), by and between CRITICARE SYSTEMS, INC., a Delaware corporation ("Criticare"), and N.C. JOSEPH LAI ("Employee"). 1. The Agreement is hereby amended to delete section 8 thereof, to delete the phrase "subject to the terms of section 8 of this Agreement" as it appears in sections 6(a) and 6(b) of the Agreement, and to add a new section 5(d) to read in its entirety: (d) Termination Following a Change in Control. "Change in Control" shall mean a sale or other transfer not in the ordinary course of business of all or substantially all of Criticare's assets or a transaction, or series of related transactions, the effect of which is to cause more than 50% of Criticare's issued and outstanding voting capital stock to be beneficially owned by one person or entity or a group of related or affiliated persons or entities. Notwithstanding any of the other provisions of this section 5, after 6 months following a Change in Control, if Employee's employment terminates for any reason, whether such termination is initiated by Employee or Criticare (and regardless of the existence or lack of Cause), Employee (or if Employee dies, his heirs or beneficiaries) will be entitled to receive and Criticare will pay and provide his then Base Salary and the fringe benefits described in sections 4(c)(i), (ii) and (iii), at the levels then in effect, for a period of one year after the date of such termination and the group insurance described in section 5(a) until he reaches age 65. 2. The Agreement is hereby amended to delete section 4(c) thereof and to add a new section 4(c) to read in its entirety: (c) Fringe Benefits. (i) Group Health, Dental and Life Insurance. Employee will be eligible to participate in Criticare's group health, dental and life insurance programs on the same terms and conditions as are available to other employees of Criticare generally. (ii) Automobile. Criticare will provide Employee will full use of an automobile owned or leased by Criticare for use in carrying out his duties for both Criticare and for use in such additional personal business as Employee may deem appropriate. Criticare agrees to provide adequate insurance 3 for the automobile and occupants and to pay all maintenance and operating costs appropriate or necessary to maintain such automobile in prime operating condition. (iii) Split-Dollar Life Policy. Criticare will continue in force and pay the premiums on the $1,000,000 life insurance policies currently in effect on Employee's life. (iv) Vacation. Employee will be entitled to receive paid vacations annually according to the vacation policy established by Criticare. Such vacation shall be taken at such times and in such intervals as are mutually acceptable to Employee and Criticare. 3. The Agreement in all other respects is not amended but remains unchanged and the parties thereto continue to be legally bound by the Agreement, as amended hereby. CRITICARE SYSTEMS, INC. BY /s/ Gerhard J. Von der Ruhr -------------------------------- Gerhard J. Von der Ruhr, President /s/ N.C. Joseph Lai -------------------------------- N.C. Joseph Lai 2 EX-10.14 4 EX-10.14 1 EXHIBIT 10.14 27 2 AMENDMENT This is an Amendment, dated February 20, 1997, to an Employment Agreement dated November 24, 1993 (the "Agreement"), by and between CRITICARE SYSTEMS, INC., a Delaware corporation (the "Corporation"), and RICHARD J. OSOWSKI ("Mr. Osowski"). 1. The Agreement is hereby amended to add a new section 6(c) to read in its entirety: (c) Termination Following a Change in Control. "Change in Control" shall mean a sale or other transfer not in the ordinary course of business of all or substantially all of the Corporation's assets or a transaction, or series of related transactions, the effect of which is to cause more than 50% of the Corporation's issued and outstanding voting capital stock to be beneficially owned by one person or entity or a group of related or affiliated persons or entities. Notwithstanding any of the other provisions of this section 6, after 3 months following a Change in Control, if Mr. Osowski's employment terminates for any reason, whether such termination is initiated by Mr. Osowski or the Corporation (and regardless of the existence or lack of Cause), Mr. Osowski (or if Mr. Osowski dies, his heirs or beneficiaries) will be entitled to receive and the Corporation will pay and provide his then Base Salary and the fringe benefits described in sections 5(b), 5(c) and 5(e), at the levels then in effect, for a period of one year after the date of such termination and the group insurance described in section 5(a) until he reaches age 65. 2. The Agreement in all other respects is not amended but remains unchanged and the parties thereto continue to be legally bound by the Agreement, as amended hereby. CRITICARE SYSTEMS, INC. /s/ Gerhard J. Von der Ruhr --------------------------------------- Gerhard J. Von der Ruhr, President /s/ Richard J. Osowski ---------------------------------------- Richard J. Osowski EX-10.16 5 EX-10.16 1 EXHIBIT 10.16 2 MINUTES BOARD OF DIRECTORS MEETING FRIDAY, MARCH 14, 1997 TELEPHONIC MEETING ORIGINATING AT CRITICARE HEADQUARTERS IN WAUKESHA, WISCONSIN A telephonic meeting of the Board of Directors of Criticare Systems, Inc. was held on Friday, March 14, 1997, and originated at Criticare's headquarters in Waukesha, Wisconsin. Board members present were: Milton Datsopoulos, Karsten Houm, N.C. Joseph Lai, Ph.D., and Gerhard Von der Ruhr. Richard Osowski (Vice President-Finance) attended the meeting at the request of the Board. The meeting convened at 9:00 a.m. CST. 1. Shareholder Rights Plan A Shareholder Rights Plan was a recommendation that Robertson Stephens & Co. had made to the Board to ensure that a potential acquirer would be dealing with the Board and not investors, thereby giving the Board a better tool to reach the right valuation. Mr. Datsopoulos moved to approve the Shareholders Rights Plan, Mr. Houm seconded it, and after due discussion, the motion was unanimously carried. 2. Stock Options for Domestic Sales Force The Board then discussed stock options for the domestic sales force. It was agreed that options should only be awarded to associates who have proven they are good performers. Mr. Datsopoulos moved that any stock options for the sales force have a vesting period of five years and a minimum performance standard of $750,000 in annual sales. Dr. Lai seconded the motion, and it was unanimously carried. 3. Approval of Employment Agreements The Board approved the Employment Agreements for Messrs. Osowski and Von der Ruhr. 4. CCR Warrants Approval In response to the efforts Mr. McGuire has undertaken on behalf of Criticare to reach expeditious financing, particularly with the Dutchess Capital Group, he was awarded the balance of the warrants. 3 5. Immtech Financing The Board then reviewed Immtech and its financing proposal by Cohen. Cohen indicated that any new investors would insist on having higher priority rights for dividends and an earlier redemption rate. With respect to the outstanding note, the Board recommended half be converted into equity and half repaid over four quarters after a successful private placement. There being no further business, the meeting was adjourned at 10:30 a.m. CST. Respectfully submitted, /s/ Gerhard J. Von der Ruhr Gerhard J. Von der Ruhr President 2 EX-13 6 ANNUAL REPORT 1 EXHIBIT 13 28 2 MISSION STATEMENT [CSI LOGO] Founded in 1984, Criticare Systems, Inc. (CSI) is dedicated to addressing the needs of a rapidly changing health care system by designing, manufacturing, and marketing cost-effective patient monitoring systems and noninvasive sensors--using proprietary technology--that reduce health care costs and improve patient management. FINANCIAL HIGHLIGHTS
Years Ended June 30, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------------------------------- Net Sales $26,235,355 $31,528,266 $28,660,275 $30,114,679 $29,195,578 Income (Loss) Before Income Taxes and Extraordinary Gain (2,749,435) (4,280,989) 175,643 114,141 167,753 Net Income (Loss) (2,179,489) (4,330,989) 105,643 64,141 114,753 Net Income (Loss) Per Common Share (0.30) (0.63) 0.02 0.01 0.02 Average Shares Outstanding 7,267,184 6,913,557 6,764,236 6,719,979 6,798,155 Stockholders' Equity 14,227,135 13,917,549 17,130,449 17,022,753 16,958,709 Convertible Debentures 1,836,323 Other Long-term Obligations 3,274,611 4,669,975 3,646,867 3,835,751 4,021,226 Working Capital 12,053,165 10,282,033 13,401,741 13,258,880 12,725,583 Total Assets 25,145,066 27,075,922 25,468,428 25,171,231 24,418,857
2 3 LETTER TO STOCKHOLDERS Dear Fellow Stockholders: During this past fiscal year, your Company made significant technical progress. In January, we received clearance from the Food and Drug Administration (FDA) to market our new telemetry system and filed for a number of patents to cover the innovative technologies used in this remarkable system. The telemetry system consists of three individual elements: the patient-borne monitor (MPT(TM)), the central station (VitalView(TM)) which collects and displays all of the information and a total disclosure system (MicroView(TM)) which analyzes the cardiovascular status of a patient over a 72-hour period. With FDA clearance, your Company was able to start promoting the MPT System in the third quarter to institutions beyond our beta sites. We are proud to announce that the Company has already sold systems to several prestigious teaching institutions in the United States and abroad. In addition, several community-based hospitals, which are the backbone of the American health care system, have also acquired MPT Systems. Many of these institutions have been impressed with the system's capability and flexibility as well as its ability to help reduce costs and improve patient care. Criticare is the first company in the world to introduce a patient-borne, multi-parameter monitoring device that uses state-of-the-art telemetry to transmit its signal to a central station. We are especially proud of the fact that our system easily and economically addresses the four key parameters required of health care professionals to assess a patient's status (ECG, heart rate, blood pressure and oxygen saturation). Our major competitors, companies with far greater resources, are still trying to accomplish the same. This achievement, like many in the health care industry, is an example of true innovation coming from a smaller company that can turn concepts into real, marketable products more quickly and efficiently than its larger competitors. We believe that multiple parameter telemetry will soon become the accepted standard throughout the health care delivery system. As we communicated earlier, your Company made a strategic investment in Immtech International, Inc., a Chicago-based company devoted to developing new drugs that will improve "disease state management" in cancer and AIDS patients. During the last year, Immtech made major advances in the research of cancer treatment. Pre-clinical tests have shown that the growth of prostatic tumor cells was slowed and the shedding of the PSA tumor antigen is markedly reduced with the help of Immtech's proprietary compound rmCRP. Further research has indicated that the injection of this compound can slow the spread of cancer in advanced stages, such as metastasis. Immtech's researchers were also able to achieve a major commercial breakthrough by lowering the production costs of rmCRP. Most of Immtech's technology is covered by patents; and during this past year, a vital patent covering the Company's proprietary compound was issued. Although Immtech will likely need significant additional capital to continue as a going concern, we believe that the advances made by Immtech during the last year continue to strengthen its viability. With today's emphasis on managed care, Criticare has positioned itself to address its key issues: how to improve clinical outcomes, reduce costs and better manage patients by managing their disease states. While this past year's sales and earnings were disappointing, we believe we have properly positioned the Company to increase sales, improve profit margins and ultimately enhance stockholder value. In addition, we intend to focus our activities on reducing inventory levels and increasing our accounts receivable collection activities. Your management is looking at the future with great confidence and is convinced that the decisions we have made will allow the Company to take advantage of opportunities that will continue to surface as a result of the changing health care environment. On behalf of the management and the Board of Directors, we would like to thank our devoted associates, our loyal customers, our quality-conscious vendors and our dedicated stockholders for their continued support. Sincerely, /s/ Gerhard J. Von der Ruhr Gerhard J. Von der Ruhr N.C. Joseph Lai, Ph.D. President and Chief Executive Officer Senior Vice President 3 4 INNOVATIVE AND CORE PRODUCTS SET STAGE FOR STABILITY AND GROWTH Regardless of the clinical environment, Criticare offers reliable, cost-effective monitors that facilitate patient management and greatly improve quality of care. Since its inception, Criticare pulse oximetry and capnography systems have had a strong presence wherever patients were under general anesthesia or conscious sedation (operating room, surgicenter, endoscopy lab, cardiac cath lab, oral and maxillofacial surgery, plastic and reconstructive surgery, etc.). Now, with multiple parameter telemetry capability, Criticare has the opportunity to expand its presence throughout the hospital and other patient care areas. Because the MPT(TM) System employs technologies unique to Criticare, we have a strong competitive advantage over larger companies with greater market presence in these broader segments of the healthcare market. Further, we believe that establishing Criticare as an innovator in monitor`ing technology will bolster our reputation in our traditional market segments--anesthesiology and post-anesthesia care as well as alternate care (non-hospital) areas. Thus, we anticipate that sales of what have been our core products (pulse oximeters, capnographs and vital signs monitors) will benefit from this innovation. Innovative Products Position Company for Growth The MPT System is the first system in the world capable of comprehensively monitoring an ambulatory patient for multiple vital signs: ECG (electrocardiogram), NIBP (non-invasive blood pressure), HR (heart rate or pulse) and SpO2 (oxygen saturation). Knowledge of these vital signs (in real-time and trend form) is essential in assessing patient condition and in determining when it is safe to move a patient from a very expensive care area (i.e., the ICU) to a less expensive care area (step-down ICU or general medical unit) and eventually to patient discharge. ". . . Multiparameter telemetry and ECG telemedicine are the segments of the market that will drive expansion in the overall market." ". . . The recent emphasis by managed care organizations on cost containment has translated into a tendency to move patients expeditiously from high- cost critical care units to step-down care facilities where patients need continuous vital signs monitoring but do not need individuated nursing care. This represents a boom in demand for telemetry systems, especially the cutting edge multi-parameter systems that are capable of monitoring non-invasive blood pressure and pulse oximetry in addition to ECG. . ." Telemetry Monitoring Report, MarketLine International, pg. 1 [ARTWORK] The addition of blood pressure and oxygen saturation capabilities in patient-borne telemetry systems has provided an application for continuous surveillance of subacute respiratory and surgical patients. Many of the hospitals that are presently using the MPT System have reported substantial improvements in their delivery of patient care along with significant cost savings. 4 5 INNOVATIVE AND CORE PRODUCTS SET STAGE FOR STABILITY AND GROWTH "Criticare has been directly responsible for a dramatic reduction in cost at the University of Maryland." Tessa Abate, Senior Capital Equipment Buyer University of Maryland Hospital Baltimore, Maryland ". . . It really has been great to have the technology that allows a community hospital of our size to have clinical data available where you need it most--at the bedside. . . Since we've gone with the MPT System house-wide, we went back to a regular medical/ surgical room rate and only charge patients for their use of telemetry . . ." Roberta Horcher, RN, Director of Cardiology Services Holy Family Medical Center Des Plaines, Illinois [ARTWORK] In addition to the accurate monitoring of multiple parameters (ECG, NIBP, HR and SpO2), another unique aspect of the MPT System is its transceiver technology and the radio frequency it employs. Only the MPT telemetry system permits signals to travel in both directions (data from the patient to the central station and commands from the central station to the patient). Such information flow is essential to maximize department efficiency and clinical efficacy. "MPT (ECG, HR, BP, SpO2) is vastly superior to ECG only telemetry and has the potential to eliminate routine vital signs gathering, allowing the care giver to spend more time with the critical patient." Stephen Cohn, M.D. Chief of Trauma Surgery Ryder Trauma Center Miami, Florida According to Medical Strategic Planning, Inc.'s recent Emerging Hospital Monitoring Markets report, the MPT System from Criticare is the only technology in the field of ambulatory care rated "outstanding." Another unique feature of the MPT System is the Total Disclosure option (MicroView(TM)). With this, clinicians can collect and analyze a full 72 hours of patient data (this is the average length of stay in an ICU or step-down ICU) which can then be easily transferred into the hospital's information system. The availability of such data is essential for proper analysis of clinical outcomes, cost justification and proper patient management. By having a flexible multi-parameter telemetry system, virtually any bed in the hospital can be turned into a monitored bed. Whether in the emergency room or on the general medical floor, with Total Disclosure a hospital is better protected against potential misdiagnosis of acute MIs (heart attacks). Historically, up to 13% of acute MI patients are not recognized by the emergency room physician. Rather, they are sent home where the mortality rate can be as high as 25%. Collecting the most critical vital signs over a substantial period of time also enables the hospital to perform outcome research--the first step in assessing true costs by type of patient and procedure. An industry study recently concluded that "multiparameter telemetry systems definitely represent the future of telemetry monitoring and may well represent the future of the overall patient monitoring market." With its MPT System and related VitalView Central Station and MicroView Total Disclosure System, Criticare has positioned itself to be a strong partner for any hospital that is serious about analyzing its performance. [ARTWORK] 5 6 CORE PRODUCTS ADDRESS EVERYDAY NEEDS OF HEALTH CARE PROVIDERS MODEL 506DX The Company's new Model 506DX improves patient care while enhancing productivity by combining three commonly used functions (blood pressure, temperature and SpO2) in one portable, cost-effective monitor. While competitive blood pressure monitors overinflate the cuff, then slowly step down the pressure to take a reading, Criticare's proprietary ComfortCuff (TM) technology permits the reading to be taken on inflation, causing less discomfort or even trauma to the patient. Criticare's unique DOX(TM) oximetry offers enhanced performance on patients where previously it was difficult to obtain a reading. [ARTWORK] Also incorporated in the product is IVAC(R) temperature technology which provides temperature readings in seconds. During fiscal 1997, Criticare entered into a marketing agreement with Alaris (formerly Imed and IVAC) to distribute this product to hospitals in the U.S. and Canada. The 506DX has been well received because it permits hospital staff to take the necessary readings in less time and with greater accuracy. SCHOLAR I AND SCHOLAR II VITAL SIGN MONITORS Criticare's product family of Scholar monitors are addressing the needs of certain surgical environments as well as recovery rooms and step-down ICU areas. Their portability and broad range of parameter options make them ideal products for a variety of applications in hospitals and non-hospital healthcare settings. [ARTWORK] POET(TM) GAS MONITORS Criticare's proprietary gas technology is still the gold standard in the industry. Our POET IQ is the only bedside system that can identify any of five different anesthetic agents in a mixture. In addition to our direct sales, Criticare has begun to aggressively cultivate the OEM potential for this technology. We believe there will be a continued demand for this kind of monitoring worldwide. [ARTWORK] UPDATE ON IMMTECH INTERNATIONAL, INC. Your Company's investment in Immtech has enabled several major accomplishments this year, including: - - rmCRP has demonstrated the ability to reduce growth of prostatic tumor cells. - - Research has revealed that patients with advanced cancers (i.e. metastatic disease) lack the normal form of rmCRP. We believe that restoring a normal level of rmCRP by injection could be helpful in limiting the spread of the disease. - - Significant reduction in the cost to produce mCRP. - - A vital patent covering rmCRP has been granted which will play a pivotal role in protecting Immtech's unique technology. 6 7 Results of Operations The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Operations expressed as percentages of net sales.
Percentage of Net Sales Years Ended June 30, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 53.6 52.5 50.3 - -------------------------------------------------------------------------------- Gross profit 46.4 47.5 49.7 - -------------------------------------------------------------------------------- Operating expenses: Marketing 33.4 37.1 34.9 Research, development and engineering 8.8 8.1 6.7 Administrative 9.6 6.0 6.3 - -------------------------------------------------------------------------------- Total 51.8 51.2 47.9 - -------------------------------------------------------------------------------- Income (loss) from operations (5.4) (3.7) 1.8 Interest expense (4.0) (1.4) (1.3) Interest income .1 .1 .6 Equity in loss of investments (1.2) (8.6) (.5) - -------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary gain (10.5) (13.6) .6 - -------------------------------------------------------------------------------- Income tax provision .2 Extraordinary gain on extinguishment of debt 2.2 - -------------------------------------------------------------------------------- Net income (loss) (8.3)% (13.7)% .4% - --------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1997 Compared to June 30, 1996 Net sales for the twelve months ended June 30, 1997 decreased 17% to $26,235,355 from $31,528,266 for the twelve months ended June 30, 1996. Domestic hospital sales decreased 40%, due to lower unit sales in all products and continued competitive pricing conditions. In addition, marketing and sales efforts in this division were concentrated on the market introduction of the MPT(TM)/VitalView(TM) telemetry product. Alternate care sales decreased 12% and international sales decreased 8%, due primarily to lower oximeter and gas monitor sales due to a combination of competitive pricing and market demand conditions in these two market areas. The gross profit percentage decreased to 46.4% in fiscal 1997 from 47.5% in fiscal 1996. This decrease was due primarily to increased manufacturing expenses related to new product introductions, the effect of lower sales volume on fixed manufacturing expenses and continued price competition in the oximetry product line affecting both the alternate care and international sales markets. Although the Company has developed and released lower cost vital signs and telemetry monitors and continues to develop lower cost oximeter and gas products, the effect of pricing competition may continue to negatively affect gross profit margins. Operating expenses of $13,591,892 for fiscal 1997 decreased 16% from $16,155,513 for fiscal 1996. As a percentage of net sales, operating expenses increased to 51.8% in fiscal 1997 from 51.2% in fiscal 1996. Marketing expenses for fiscal 1997 decreased 25% to $8,761,731 from $11,686,368 for fiscal 1996 due primarily to decreased sales commissions related to the lower sales volume and lower advertising and sales promotion expenses. Research, development and engineering expenses for fiscal 1997 decreased 10%, or $248,057 from fiscal 1996 expense levels due to slightly lower staffing and project expenses. Administrative expenses increased 32% or $609,073 when compared to fiscal 1996 due to an increased provision for doubtful accounts receivable of $236,382 and costs associated with a judgment against and the liquidation of Criticare International GmbH Marketing Services ("Criticare International") of $417,553 offset in part by lower insurance costs. Interest expense increased during fiscal 1997 due to increased short-term line of credit borrowings and the interest and purchase discount associated with the $2,500,000 convertible debentures issued during February 1997. Interest income declined slightly due to lower cash balances invested during fiscal 1997. Equity in loss of investments for fiscal 1997 included cash advances of $24,000 to Immtech International, Inc. and a $300,000 charge related to the write-off of an investment in a sleep apnea company compared to the fiscal 1996 charge of $2,716,163 related to cash advances to and the purchase of 2,200,000 shares of Immtech International, Inc. preferred stock. Extraordinary gain on extinguishment of debt in the amount of $569,946 resulted from the exchange of 200,000 shares of newly issued restricted Criticare common stock in full payment of the $1,240,000 promissory note plus accrued interest of approximately $110,000 associated with the fiscal 1996 purchase of Immtech International, Inc. preferred stock. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS Fiscal Year Ended June 30, 1996 Compared to June 30, 1995 Net sales for the twelve months ended June 30, 1996 increased 10% to $31,528,266 from $28,660,275 for the twelve months ended June 30, 1995. Domestic hospital sales increased 25% due primarily to the introduction of new Scholar(TM) Vital Signs monitors and ECG telemetry. Alternate care and foreign sales both increased modestly, 1% and 3%, respectively, related to increased vital signs monitor sales. The gross profit percentage decreased to 47.5% in fiscal 1996 from 49.7% in fiscal 1995. This decrease was due primarily to continued price competition in the oximetry and gas product lines affecting both the alternate care and foreign sales markets. Operating expenses of $16,155,513 for fiscal 1996 represented an increase of 17.7% from $13,723,594 for fiscal 1995. As a percentage of net sales, operating expenses increased to 51.2% in fiscal 1996 from 47.9% in fiscal 1995. Marketing expenses for fiscal 1996 increased 17% to $11,686,368 from $10,014,656 for fiscal 1995 due primarily to increased domestic hospital sales staffing, advertising and promotion. Research, development and engineering expenses for fiscal 1996 increased 35%, or $670,308 from fiscal 1995 expense levels due to increased staffing and project costs related to vital signs, digital oximetry, and MPT(TM) (Multiple Parameter Telemetry) product development. Administrative expenses increased 5% or $89,899 when compared to fiscal 1995 due to increased legal and professional consulting expenses. Interest expense increased during fiscal 1996 due to increased short-term line of credit borrowing and the $1,240,000 note related to the Immtech International, Inc. stock purchase. Interest income declined due to lower cash balances invested during fiscal 1996. Equity in loss of investments increased to $2,716,163 during fiscal 1996 due to the purchase of 2,200,000 shares of Immtech International, Inc. preferred stock and a note receivable of $50,000 at a cost of $2,136,000 and cash advances to the company of $580,163. Quarterly Results The following table contains unaudited quarterly information, which includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation. The Company recorded a charge of $2,136,000 for the investment loss related to the additional investment in Immtech International, Inc. in the quarter ended December 31, 1995 and charges of $418,000 for a judgement against and the liquidation of Criticare International and a $300,000 write-off of the Intercare Technologies, Inc. investment in the quarter ended June 30, 1997. These items were unusual, nonrecurring adjustments.
Quarters Ended - ------------------------------------------------------------------------------------------------------------------------- Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 1995 1995 1996 1996 1996 1996 1997 1997 - ------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Net sales $6,958 $8,736 $7,711 $8,123 $6,478 $6,581 $5,481 $7,695 Gross profit 3,312 4,360 3,715 3,609 3,124 3,061 2,444 3,547 Income (loss) from operations 182 287 (239) (1,389) 230 (151) (618) (877) Extraordinary gain on extinguishment of debt 570 Net income (loss) 64 (2,375) (218) (1,802) 51 (297) (284) (1,649) Net income (loss) per common share .01 (.35) (.03) (.26) .01 (.04) (.04) (.23)
8 9 The Company typically receives a substantial volume of its quarterly sales orders at or near the end of each quarter. In anticipation of meeting this expected demand, the Company usually builds a significant inventory of finished products throughout each quarter. If the expected volume of sales orders is not received during the quarter, or is received too late to allow the Company to ship the products ordered during the quarter, the Company's quarterly results and stock of finished inventory can be significantly affected. Liquidity and Capital Resources In fiscal 1997, the Company generated $1,491,171 from operating activities, $2,500,000 from the issuance of convertible debentures, $400,919 from the exercise of stock options and $180,000 from the exercise of warrants. The Company used $2,300,000 for the retirement of borrowings under the bank line of credit facility, $220,657 for costs associated with the issuance of the convertible debentures, $217,619 for retirement of long-term debt, $175,600 for capital expenditures and $24,000 for advances to Immtech International, Inc. These sources and uses of cash resulted in a net positive cash flow of $1,634,214 for the 1997 fiscal year. The Company used $1,767,603 of cash for operating activities in fiscal 1996, $1,576,304 for capital expenditures and sales demonstration equipment, $199,013 for retirement of long-term debt and $580,163 for advances to Immtech International, Inc. The mortgage note requires annual debt service payments of approximately $420,000 with a final payment of approximately $2,688,000 due in December 2003. The bank note requires debt service payments of approximately $56,000 through November 1997. The promissory note issued in connection with the Immtech acquisition and accrued interest was satisfied in March 1997 in exchange for 200,000 shares of newly issued restricted Criticare common stock. The convertible debentures issued in February 1997 and accrued interest are convertible into Criticare common stock at a 25% discount from the average closing bid price of the common stock for the previous five (5) trading days before the conversion date. The Company expects its continued programs to increase accounts receivable collections, decrease inventory levels, reduce product development tooling requirements, stabilize sales demonstration equipment levels and eliminate advances to Immtech International, Inc. will have a positive affect on cash flow activities in the next fiscal year. Consequently, the Company believes its research and development activities and other capital and liquidity requirements for the next one to two years will be satisfied by cash generated from operations and other borrowings. During 1997, the Company also had access to a commercial bank line of credit of up to $2,000,000. At June 30, 1997, there were no borrowings outstanding on the line of credit. This line of credit was terminated on September 16, 1997. The Company is investigating various financing alternatives, including additional convertible debenture financing alternatives, with other financial institutions in the event additional funds are required to finance liquidity requirements. There can be no assurance, however, that other financing will be available on terms acceptable to the Company. Forward-Looking Statements A number of the matters and subject areas discussed in this Annual Report that are not historical or current facts deal with potential future circumstances and developments. These include expected future financial results, liquidity needs, financing ability, management's or the Company's expectations and beliefs and similar matters discussed in Management's Discussion and Analysis or elsewhere in this Annual Report. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience. The Company's business, operations and financial performance are subject to certain risks and uncertainties which could result in material differences in actual results from management's or the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, demand for the Company's products and costs of operations. 9 10 BALANCE SHEETS CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996
ASSETS 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents (Notes 1 and 5) $ 2,440,859 $ 806,645 Accounts receivable, less allowance for doubtful accounts of $467,000 and $295,000, respectively 7,182,237 9,870,158 Other receivables 236,855 354,638 Inventories (Notes 1 and 2) 7,730,591 7,550,858 Prepaid expenses 269,620 188,132 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 17,860,162 18,770,431 - -------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5): Land 925,000 925,000 Building 3,600,000 3,600,000 Machinery and equipment 1,674,488 1,671,309 Furniture and fixtures 617,451 882,682 Demonstration and loaner monitors 1,781,698 2,054,783 Production tooling 2,137,986 2,049,632 - -------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment - cost 10,736,623 11,183,406 Less accumulated depreciation 3,691,894 3,290,760 - -------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment - net 7,044,729 7,892,646 - -------------------------------------------------------------------------------------------------------------------------- INVESTMENTS (Notes 1, 3 and 5) 300,000 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS (Notes 1 and 5): License rights and patents - net 124,882 92,467 Convertible debenture issuance costs - net 115,293 Goodwill - net 20,378 - -------------------------------------------------------------------------------------------------------------------------- Total other assets 240,175 112,845 - -------------------------------------------------------------------------------------------------------------------------- TOTAL $25,145,066 $27,075,922 ==========================================================================================================================
See notes to consolidated financial statements. 10 11
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 3,112,112 $ 3,609,188 Accrued liabilities: Compensation and commissions 1,000,552 1,040,441 Product warranties (Note 1) 370,000 300,000 Other (Note 7) 1,176,891 1,029,072 Current maturities of long-term debt (Note 5) 147,442 209,697 Borrowings under line of credit facility (Note 5) 2,300,000 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 5,806,997 8,488,398 - ------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, less current maturities (Note 5) 3,274,611 4,669,975 - ------------------------------------------------------------------------------------------------------------- CONVERTIBLE DEBENTURES (Note 6) 1,836,323 - ------------------------------------------------------------------------------------------------------------- CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Notes 5, 6 and 8): Preferred stock - $.04 par value, 500,000 shares authorized, no shares issued or outstanding Common stock - $.04 par value, 10,000,000 shares authorized, 7,796,465 and 7,128,272 shares issued and outstanding, respectively 311,859 285,131 Additional paid-in capital 14,469,406 11,995,118 Retained earnings (accumulated deficit) (516,023) 1,663,466 Cumulative translation adjustments (38,107) (26,166) - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 14,227,135 13,917,549 - ------------------------------------------------------------------------------------------------------------- TOTAL $ 25,145,066 $ 27,075,922 =============================================================================================================
11 12 OPERATIONS CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 NET SALES (Note 10) $26,235,355 $31,528,266 $28,660,275 COST OF GOODS SOLD 14,059,508 16,531,970 14,419,179 - --------------------------------------------------------------------------------------------------------------- GROSS PROFIT 12,175,847 14,996,296 14,241,096 - --------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Marketing 8,761,731 11,686,368 10,014,656 Research, development and engineering 2,320,655 2,568,712 1,898,404 Administrative 2,509,506 1,900,433 1,810,534 - --------------------------------------------------------------------------------------------------------------- Total 13,591,892 16,155,513 13,723,594 - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (1,416,045) (1,159,217) 517,502 - --------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (1,048,391) (447,348) (374,264) Interest income 39,001 41,739 167,092 Equity in loss of investments (Notes 1 and 3) (324,000) (2,716,163) (134,687) - --------------------------------------------------------------------------------------------------------------- Total (1,333,390) (3,121,772) (341,859) - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY GAIN (2,749,435) (4,280,989) 175,643 INCOME TAX PROVISION (Notes 1 and 4) 50,000 70,000 - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (2,749,435) (4,330,989) 105,643 EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (Note 5) 569,946 - --------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(2,179,489) $(4,330,989) $105,643 =============================================================================================================== NET INCOME (LOSS) PER COMMON SHARE (Note 1) Before extraordinary gain $(.38) $(.63) $.02 Extraordinary gain .08 - --------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE $(.30) $(.63) $.02 - --------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,267,184 6,913,557 6,709,485 ===============================================================================================================
See notes to consolidated financial statements. 12 13 STOCKHOLDERS' EQUITY CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Additional Retained Earnings Cumulative Total Common Stock Paid-In (Accumulated Translation Stockholders' Shares Amount Capital Deficit) Adjustments Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance, July 1, 1994 6,697,218 $267,889 $10,884,910 $5,888,812 $(18,858) $17,022,753 Foreign currency translation adjustments 2,053 2,053 Net income 105,643 105,643 - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 6,697,218 267,889 10,884,910 5,994,455 (16,805) 17,130,449 Common stock issued in connection with an acquisition 333,154 13,326 882,674 896,000 Exercise of options and warrants 97,900 3,916 227,534 231,450 Foreign currency translation adjustments (9,361) (9,361) Net loss (4,330,989) (4,330,989) - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 7,128,272 285,131 11,995,118 1,663,466 (26,166) 13,917,549 Common stock issued in connection with extinguishment of debt 200,000 8,000 772,000 780,000 Exercise of options and warrants 252,020 10,081 570,838 580,919 Convertible debentures converted to common stock, net of $61,872 of unamortized issuance costs 216,173 8,647 1,047,075 1,055,722 Issuance of warrants for services 84,375 84,375 Foreign currency translation adjustments (11,941) (11,941) Net loss (2,179,489) (2,179,489) - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 7,796,465 $311,859 $14,469,406 $ (516,023) $ (38,107) $14,227,135 ==============================================================================================================================
See notes to consolidated financial statements. 13 14 CASH FLOWS CRITICARE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 OPERATING ACTIVITIES: Net income (loss) $(2,179,489) $ (4,330,989) $ 105,643 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 709,618 601,682 528,260 Amortization 74,749 44,706 101,321 Interest and discount accrued on convertible debentures 451,438 Provision for doubtful accounts 366,505 130,123 36,878 Expense related to equity in loss of investments 324,000 2,716,163 134,687 Expense related to issuance of warrants for services 84,375 Extraordinary gain on extinguishment of debt (569,946) Changes in assets and liabilities: Accounts receivable 2,321,416 (1,391,941) 699,075 Other receivables 117,783 (75,180) (41,982) Inventories 93,351 (911,053) (2,268,256) Prepaid expenses (81,488) (21,160) (3,996) Accounts payable (509,017) 938,269 794,920 Accrued liabilities 287,876 531,777 (420,825) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,491,171 (1,767,603) (334,275) - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (134,785) (1,576,304) (537,275) Purchase of license rights (40,815) Advances to Immtech International, Inc. (24,000) (580,163) - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (199,600) (2,156,467) (537,275) - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Borrowings (payments) under line of credit facility (2,300,000) 2,300,000 Proceeds from the issuance of convertible debentures 2,500,000 Principal payments on long-term debt (217,619) (199,013) (182,541) Convertible debenture issuance costs (220,657) Proceeds from issuance of common stock 580,919 231,450 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 342,643 2,332,437 (182,541) - --------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,634,214 (1,591,633) (1,054,091) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 806,645 2,398,278 3,452,369 - --------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,440,859 $ 806,645 $ 2,398,278 ===================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Income taxes (refunded) paid--net $ (87,626) $ 133,783 $ 103,920 Interest 456,880 414,784 375,343 Noncash investing and financing activities: Common stock issued in connection with extinguishment of debt 780,000 Common stock issued upon conversion of convertible debentures, net of $61,872 of unamortized issuance costs 1,055,722 Issuance of warrants for services 84,375 The Company purchased Series A and B preferred stock of Immtech International, Inc. and a note receivable in exchange for common stock and a note payable. The amounts were as follows: Common stock 896,000 Note payable 1,240,000 =====================================================================================================================
See notes to consolidated financial statements. 14 15 NOTES TO FINANCIAL STATEMENTS CRITICARE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 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 Biomedical, Inc. ("Criticare Biomedical"), Sleep Care, Inc. ("Sleep Care"), Criticare (FSC), Inc. and CSI International Corp. (DISC). Criticare International is in the process of being liquidated. CSI Trading was incorporated in November 1996 to assist with European marketing activities. All significant intercompany accounts and transactions have been eliminated. Cash Equivalents -- The Company considers all investments with purchased maturities of less than three months to be cash equivalents. Inventories -- Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out method. Investments -- The Company accounts for its investment in Intercare Technologies, Inc. ("Intercare") on the cost method and accounts for its investment in Immtech International, Inc. ("Immtech") and Blatz House Offices Limited Partnership (the "Blatz Partnership") on the equity method (see Note 3). Property, Plant and Equipment -- Property, plant and equipment is recorded at cost. Each member of the Company's sales force is provided with demonstration monitors to assist them in their sales efforts. Also, the Company has loaner monitors which are used to temporarily replace a customer's unit when it is being repaired or upgraded. Depreciation is provided over the estimated useful lives of the assets. The building is being depreciated over 40 years, and the remaining assets are being depreciated over three to seven years, using primarily the straight-line method. License Rights and Patents -- License rights and patents are amortized over the estimated useful lives of the related agreements using primarily the straight-line method. Approximately $9,000, $42,000 and $73,000 of amortization was charged to operations in 1997, 1996 and 1995, respectively. Accumulated amortization approximated $71,000 and $62,000 at June 30, 1997 and 1996, respectively. Convertible Debenture Issuance Costs -- Convertible debenture issuance costs are amortized over the two-year term of the debentures. Approximately $46,000 of amortization was charged to operations in 1997. The prorata amount of unamortized debenture issuance costs are 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 $61,872 during 1997. Goodwill -- Goodwill is the excess of the cost over the fair value of the net assets of an acquired subsidiary and is being amortized on the straight-line method over approximately five years. Approximately $20,000, $29,000 and $29,000 of amortization was charged to operations in 1997, 1996 and 1995, respectively. Accumulated amortization approximated $263,000 and $243,000 at June 30, 1997 and 1996, respectively. Revenue Recognition -- Revenues and the costs of products sold are recognized as the related products are shipped. Product Warranties -- Estimated costs for product warranties are accrued for and charged to operations as the related products are shipped. Research and Development Expenses -- Research and development costs are charged to operations as incurred. Such expenses approximated $2,175,000, $2,400,000 and $1,800,000 in 1997, 1996 and 1995, respectively. Income Taxes -- The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Foreign Currency Translation -- The effects of unrealized exchange rate fluctuations from translating foreign currency assets and liabilities into United States dollars are accumulated as cumulative translation adjustments in stockholders' equity. Realized gains and losses from foreign currency transactions are included in operating results for the period. 15 16 NOTES TO FINANCIAL STATEMENTS Net Income (Loss) per Common Share -- Net income (loss) per common share amounts are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Fair Value of Financial Statements -- The Company's financial instruments under Statement of Financial Account Standards ("SFAS") No. 107 "Disclosure About Fair Value of Financial Instruments," includes cash, accounts receivable, accounts payable, borrowings under line of credit facility, long-term debt and convertible debentures. The Company believes that the carrying amounts of these accounts are a reasonable estimate of their fair value because of the short-term nature of such instruments or, in the case of long-term debt and convertible debentures, because of interest rates available to the Company for similar obligations. Approved Accounting Standards -- In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure." These statements are required to be adopted in the second quarter of fiscal 1998. In 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" which will be effective for the Company in fiscal 1999. The Company is currently evaluating the impact of adopting these new statements. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications -- Certain amounts previously reported have been reclassified to conform to the current presentation. 2. INVENTORIES Inventories consist of the following:
1997 1996 Component parts $2,867,884 $2,879,286 Work in process 1,843,018 1,561,481 Finished units 3,019,689 3,110,091 -------------------------------------------------------------------------------------------------- Total inventories $7,730,591 $7,550,858 --------------------------------------------------------------------------------------------------
3. INVESTMENTS Intercare Technologies, Inc. -- During 1992, the Company's subsidiary, Sleep Care, transferred certain assets to Intercare Technologies, Inc. ("Intercare") in exchange for 75,000 shares of convertible preferred stock of Intercare with an estimated fair value of $300,000, at that time. In connection with the transfer, Sleep Care licensed to Intercare the rights to certain intellectual property and technology, primarily license rights and patents, related to products previously marketed by Sleep Care. In exchange for the license rights, the Company is to receive royalties of 5% of the gross revenues from sales of products licensed under the agreement. Royalty income approximated $33,000 and $68,000 in 1996 and 1995, respectively. No income was recognized during 1997. The assets retained by Sleep Care were fully amortized as of June 30, 1996. Amortization of the intellectual property approximated $8,000 and $68,000 in 1996 and 1995, respectively. During the year ended June 30, 1997, management of the Company concluded the investment in Intercare was impaired and the carrying value of the investment was reduced from $300,000 to zero. Immtech International, Inc. -- During 1989, the Company acquired an initial investment interest in the common stock of Immtech International, Inc. ("Immtech") for $500,000. Immtech is a biopharmaceutical company focused on the development of therapeutic products based on a modified form of protein occurring naturally in the body known as C-Reactive Protein ("CRP") and a form of that protein, identified as modified CRP ("mCRP") and diagnostic products which monitor long-term diabetes control and detect chronic alcoholism. Certain officers and directors of the Company serve in similar capacities at Immtech. On December 21, 1995, the Company's subsidiary, Criticare Biomedical, purchased from Marquette Venture Partners II, L.P. and MVP Affiliates Fund, L.P. (collectively, the "Sellers") 1,000,000 shares of the $.01 par value Series A Preferred Stock ("Series A"), 1,200,000 shares of the $.01 par value Series B Preferred Stock ("Series B") of Immtech and a promissory note payable by Immtech to the Sellers in the principal amount of $50,000 for approximately $2,136,000 payable in the form of 333,154 shares of the Company's common stock and a note payable for $1,240,000. The Series A and Series B preferred stock are convertible by the holders to an equivalent number of shares of Immtech common stock and are redeemable at the option of the holders in December 1997. 16 17 The Series A and Series B preferred stock have cumulative dividend preferences at a rate of 8% per annum. The Series A and Series B preferred stock contain voting rights equivalent to the number of shares of common stock issuable upon conversion. The acquisition price has been assigned a value of approximately $2,136,000 based upon an estimate by Company management of the fair value of the consideration given by the Company. The investment in Immtech is accounted for using the equity method. The purchase price was allocated to in-process research and development and charged to expense as an investment loss upon the consummation of the agreement. There was no significant tax benefit available on this charge. The following is a summary of the Company's investment in and advances to Immtech as of June 30, 1997 and 1996: Investment in Immtech:
1997 1996 Common Stock $ 500,000 $ 500,000 Series A and B preferred stock 2,086,000 2,086,000 -------------------------------------------------------------------------------------------------- Total 2,586,000 2,586,000 Advances to Immtech 743,940 719,940 -------------------------------------------------------------------------------------------------- Total 3,329,940 3,305,940 Less investment losses recognized (3,329,940) (3,305,940) -------------------------------------------------------------------------------------------------- Net investment $ 0 $ 0 --------------------------------------------------------------------------------------------------
The Series A and Series B preferred stock owned by the Company had a stated redemption value of approximately $3,398,000 and $3,150,000 as of June 30, 1997 and 1996, respectively. The Company has recognized investment losses related to the investment in Immtech of $24,000, $2,716,163, and $134,687 in 1997, 1996 and 1995, respectively. As of June 30, 1997, the Company owned approximately 5.3% and 65% of Immtech's issued and outstanding common and preferred stock respectively, or approximately 30% of the common stock on a fully diluted and as converted basis. Immtech was incorporated in 1984. Thus far, Immtech has directed its efforts toward research and development, hiring scientific and management personnel, arranging for facilities and conducting clinical trials. Immtech has no products currently available for sale, and none are expected to be commercially available for several years. Immtech has a March 31 fiscal year end. Since inception, Immtech has incurred accumulated losses of approximately $11,627,000 through March 31, 1997. Immtech is expected to continue to incur significant losses during the next several years. In addition, as of March 31, 1997, Immtech's current liabilities exceeded its current assets by approximately $2,540,000 and Immtech had a common stockholders' deficiency of approximately $8,089,000. In addition, Immtech was not in compliance with certain of its note agreements. Immtech is currently negotiating with the note holders to restructure the note agreements. These factors, among others, indicate that Immtech may be unable to continue as a going concern. Immtech's ability to continue as a going concern is dependent upon its ability to generate sufficient funds to meet its obligations as they become due and ultimately, to obtain profitable operations. Immtech's financial plans for the forthcoming year include the refinancing of existing debt and continuing efforts to obtain additional debt and/or equity financing. The following is summarized financial information for Immtech at March 31, 1997 and 1996 and for the years then ended.
1997 1996 Current assets $ 93,000 $ 14,000 Noncurrent assets 76,000 104,000 Current liabilities 2,633,000 1,778,000 Noncurrent liabilities 332,000 384,000 Redeemable preferred stock 5,293,000 4,590,000 Common stockholders' equity (deficit) (8,089,000) (6,634,000) Revenues 15,000 335,000 Net loss (1,193,000) (760,000) Net loss attributable to common stockholders (1,461,000) (1,006,000)
Blatz Partnership -- The Company is the sole limited partner in a real estate limited partnership which owns the Blatz Phase II Commercial Office Buildings located in Milwaukee, Wisconsin. Under terms of the Partnership Agreement (the "Agreement"), profits and losses (other than those resulting from a sale or refinancing of the Project) are to be allocated 40% to the general partners and 60% to the Company. 17 18 The carrying value of the investment is zero. Recognition of any income by the Company for its interest in the Blatz Partnership will occur only after the Blatz Partnership has earnings in excess of previously unrecorded losses. The following is summarized financial information for the Blatz Partnership at June 30, 1997 and 1996 and for the years then ended:
1997 1996 Current assets $ 360,000 $ 140,000 Noncurrent assets 3,975,000 4,332,000 Current liabilities 1,689,000 1,477,000 Noncurrent liabilities 4,679,000 4,679,000 Net deficit (2,033,000) (1,684,000) Revenues 799,000 717,000 Net loss (349,000) (462,000)
4. INCOME TAXES The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company's financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax asset will not be realized. A valuation allowance is used to offset the related net deferred income tax assets due to uncertainties of realizing the benefits of certain net operating loss and tax credit carryforwards. Significant components of the Company's deferred income tax assets and deferred income tax liabilities are as follows:
June 30, June 30, July 1, 1997 1996 1995 Deferred income tax assets: Accounts receivable and sales allowances $ 237,000 $ 312,000 $ 249,000 Inventory allowances 207,000 43,000 32,000 Product warranties 144,000 117,000 127,000 Other accrued liabilities 98,000 80,000 97,000 Federal net operating loss carryforwards 1,183,000 736,000 35,000 State net operating loss carryforwards 231,000 188,000 132,000 Federal tax credit carryforwards 198,000 198,000 152,000 Investment losses not deducted 1,434,000 1,307,000 233,000 - ------------------------------------------------------------------------------------------------------------------- Total deferred income tax assets 3,732,000 2,981,000 1,057,000 - ------------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Excess of tax over book depreciation and amortization (1,007,000) (928,000) (765,000) Prepaid expenses (6,000) (5,000) (7,000) - ------------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities: (1,013,000) (933,000) (772,000) - ------------------------------------------------------------------------------------------------------------------- Valuation allowance (2,719,000) (2,048,000) (285,000) - ------------------------------------------------------------------------------------------------------------------- Net deferred income taxes recognized in the consolidated balance sheets $ 0 $ 0 $ 0 - -------------------------------------------------------------------------------------------------------------------
At June 30, 1997, the Company had net operating loss carryforwards of approximately $3,800,000 which expire in 2008 through 2012. At June 30, 1997, the Company had available for federal income tax purposes approximately $87,000 of alternative minimum tax credit carryforwards which carry forward indefinitely and approximately $111,000 tax credit carryforwards which expire in the years 2007 through 2009. The Company also has approximately $4,400,000 of state net operating loss carryforwards, which expire in 2003 through 2012, available to offset certain future state taxable income. The income tax provision consists of the following:
1997 1996 1995 Current Federal $ 0 $35,000 $57,000 State 0 15,000 13,000 ----------------------------------------------------------------------------------------------------------- Total income tax provision $ 0 $50,000 $70,000 -----------------------------------------------------------------------------------------------------------
18 19 A reconciliation of the provision for income taxes (benefit) at the federal statutory income tax rate to the effective income tax rate follows:
1997 1996 1995 Federal statutory income tax rate (34.0)% (34.0)% 34.0% State income taxes, net of federal benefit 4.9 Non-deductible life insurance premiums 1.4 Non-deductible losses of subsidiaries 4.0 21.6 8.7 Non-deductible meals and entertainment expenses 9.1 Non-deductible interest expense 6.3 Goodwill amortization 5.6 Benefit of foreign sales corporation (14.4) Benefit of federal and state net operating loss carryforward recognized (11.4) Losses for which no benefit was provided 22.8 13.4 Other--net .9 .1 2.0 - ------------------------------------------------------------------------------------------------------------ Effective income tax rate 0% 1.1% 39.9% - ------------------------------------------------------------------------------------------------------------
5. LINE OF CREDIT FACILITY AND LONG-TERM DEBT Long-term debt consists of the following:
1997 1996 Mortgage note, 9.625%, due in monthly installments of $34,983 with a final payment of $2,688,336 due in December 2003, collateralized by real estate with a carrying value of approximately $4,114,000 at June 30, 1997 $3,366,046 $3,457,048 Bank note 8.5%, due in monthly installments of $11,440 through November 1997, collateralized by certain machinery and equipment with a carrying value of approximately $52,000 at June 30, 1997 56,007 182,624 Promissory note, 7%, interest payable quarterly, principal due in December 2002, exchanged for common stock in March 1997 1,240,000 ------------------------------------------------------------------------------------------------------- Total 3,422,053 4,879,672 Less current maturities 147,442 209,697 ------------------------------------------------------------------------------------------------------- Long-term debt $3,274,611 $4,669,975 -------------------------------------------------------------------------------------------------------
Aggregate annual principal payments required under terms of the long-term debt agreements are as follows:
Fiscal Year Ending June 30, Principal Payments 1998 $ 147,442 1999 109,354 2000 120,356 2001 132,465 2002 145,793 Thereafter 2,766,643 ------------------------------------------------------------ Total $3,422,053 ------------------------------------------------------------
At June 30, 1997, the Company had a $2,000,000 demand line of credit facility with a commercial bank to meet its short-term borrowing needs. Borrowings against the line were payable on demand with interest payable monthly at the bank's reference rate (8.75% as of June 30, 1997). As of June 30, 1997, there were no borrowings against the line. The line expires on October 31, 1997. Borrowings under the line of credit facility are collateralized by substantially all assets of the Company. In March 1997, the Company satisfied the $1,240,000 promissory note plus interest accrued on the note of approximately $110,000 in exchange for 200,000 shares of newly issued common stock. Under the provisions of the agreement, the shares must be held for one full year prior to resale. In conjunction with this transaction, the Company recorded an extraordinary gain on the extinguishment of debt of $569,946 for the outstanding indebtedness under the promissory note in excess of the estimated fair market value of the restricted stock. 19 20 6. CONVERTIBLE DEBENTURES In February 1997, the Company issued $2,500,000 of convertible debentures. The debentures have 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 can be 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. Any unconverted debentures and accrued interest will be automatically converted to common stock in February 1999 at a 25% discount. Through June 30, 1997, $850,000 of debentures have been converted to 216,173 shares of common stock with a fair market value of $1,117,594 as of the conversion dates. As of June 30, 1997, $1,650,000 of original debentures were outstanding with a carrying value, including accrued interest and amortized discount, of $1,836,323. Proceeds from the issuance of the debentures were recorded as a liability at the issuance date. The conversion discount is amortized and reported as additional interest expense over the life of the debentures. In the event the debentures are converted prior to February 1999, additional interest expense is recognized for any unamortized discount as of the conversion date. The debentures are included in the accompanying consolidated balance sheet at the issuance price, plus any accrued interest and amortized discount. 7. CONTINGENCIES The Company is involved in various lawsuits that have arisen from the normal conduct of business and in connection with liquidating Criticare International. These proceedings are handled by outside counsel. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements. The Company has received two grants from the State of Wisconsin for research and development of certain products. The grants are to be repaid only upon successful completion and marketing of the related product. Repayment of these grants is to be made on a sales by unit basis, up to an aggregate of $600,000. Repayments approximated $14,000, $30,000 and $32,000 in 1997, 1996 and 1995, respectively, and in the aggregate, approximated $246,000 as of June 30, 1997. The repayments are charged to expense as the related products are sold. The Company has been awarded a third grant from the State of Wisconsin for an amount up to $100,000 which requires repayment of the grant amount plus interest at 8%, plus payment of a royalty in the amount of 1% of net sales of the related product for a five-year period, as defined. No funds have been received under this grant at June 30, 1997. 8. STOCKHOLDERS' EQUITY Stock Options -- In December 1992, the Board of Directors approved a new Employee Stock Option Plan and Non-Employee Stock Option Plan. No new stock options can be granted under the Employee Stock Option Plan and Non-Employee Stock Option Plan which existed prior to the approval of the new plans. The Board of Directors has authorized in connection with these new plans the issuance of 1,220,000 reserved shares of common stock of which 79,650 reserved shares of common stock remain available for future issuance under the stock option plans at June 30, 1997. The activity during 1995, 1996 and 1997 for the above plans are summarized as follows:
Weighted Average Number of Stock Options Exercise Shares Price Range Price -------------------------------------------------------------------------------------------------------------- Outstanding at July 1, 1994 872,750 $1.88-8.50 $2.37 Granted 421,500 2.00-2.19 2.07 Cancelled (253,350) 1.88-2.75 2.16 -------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1995 1,040,900 1.88-8.50 2.30 Granted 246,000 2.13-3.75 2.82 Cancelled (123,580) 2.00-5.75 2.25 Exercised (93,900) 2.00-2.63 2.38 -------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1996 1,069,420 1.88-8.50 2.45 Granted 250,500 2.50-5.25 2.64 Cancelled (113,500) 2.00-8.50 3.38 Exercised (162,020) 2.00-2.63 2.47 -------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1997 1,044,400 1.88-5.25 2.40 -------------------------------------------------------------------------------------------------------------- Exercisable at June 30, 1997 591,900 1.88-3.75 2.38
20 21 The following table summarizes information about stock options outstanding as of June 30, 1997:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Weighted Shares Average Weighted Shares Weighted Outstanding Remaining Average Exercisable Average Range of at June 30, Contractual Exercise at June 30, Exercise Exercise Prices 1997 Life-Years Price 1997 Price $1.88 - $2.50 691,200 2.85 $2.16 398,900 $2.12 $2.54 - $3.63 347,200 2.82 2.85 192,000 2.92 $3.64 - $5.25 6,000 3.80 4.00 1,000 3.75 --------- ------- $1.88 - $5.25 1,044,400 2.84 2.40 591,900 2.38 ========= =======
Outstanding options have fixed terms and are exercisable over a period determined by the Compensation Committee of the Company's Board of Directors but no longer than five years after the date of grant. A substantial portion of the options issued are contingent on future services or future events. At June 30, 1997, 1,260,400 shares of common stock were reserved under the above plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. If the Company had elected to recognize compensation cost for the options granted during the years ended June 30, 1997 and 1996, consistent with the method prescribed by SFAS No. 123, net loss and net loss per share would have been changed to the pro forma amounts indicated below:
Year Ended June 30, 1997 1996 Net loss--as reported $(2,179,489) $(4,330,989) Net loss--pro forma $(2,325,795) $(4,390,340) Net loss per common share--as reported $(.30) $(.63) Net loss per common share--pro forma $(.32) $(.64)
The fair value of stock options used to compute pro forma net loss and net loss per common share is the estimated present value at the grant date using the Black-Scholes option-pricing model. The assumptions used to estimate compensation cost were: expected volatility of 58%, risk-free interest rate of 6% and expected option lives of three years. The pro forma effect on net loss for 1997 and 1996 is not representative of the pro forma effect in future years because it does not take into consideration pro forma compensation cost related to grants made prior to 1996. Stock Warrants -- In September 1995, the Company executed a warrant agreement with a consultant. The warrant agreement provided for the issuance of warrants to purchase up to 150,000 shares of the common stock of the Company, exercisable at a price of $2.00 per share. The warrant was exercisable as to 37,500 shares upon execution of the agreement and the warrants to purchase the remaining 112,500 shares were to become exercisable if certain performance parameters were achieved by September 1996. Such parameters were not met as of such date. In January 1997, the agreement was extended and the parameters were changed. During the year ended June 30, 1997, the Company recognized $84,375 of expense related to the value of the services performed by the consultant under the extended agreement. By June 30, 1997, warrants to purchase the remaining 112,500 shares of common stock at a price of $2.00 per share became exercisable. The warrant holder exercised rights and purchased 90,000 and 4,000 shares of common stock at $2.00 per share during the years ended June 30, 1997 and 1996, respectively. Warrants to purchase 56,000 shares of common stock at $2.00 per share were exercisable as of June 30, 1997. Such warrants expire in September 2000. 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 $81,000, $61,000 and $40,000 in 1997, 1996 and 1995, respectively. 21 22 10. BUSINESS AND CREDIT CONCENTRATIONS The Company's customers include domestic hospitals, domestic alternative health care sites and foreign health care markets. Although the Company's products are sold primarily to health care providers, concentrations of credit risk with respect to trade accounts receivable are limited due to the Company's large number of customers and their geographic dispersion. The Company currently coordinates substantially all international sales and distribution activities. Such activities were previously provided by the Company with the assistance of Criticare International. Identifiable assets located outside of the United States are insignificant in relation to the Company's total assets. Net export sales by geographic area are as follows:
1997 1996 1995 Europe $ 5,606,000 $ 6,417,000 $ 5,910,000 Pacific Rim 3,784,000 4,147,000 4,013,000 Canada and South America 3,867,000 4,012,000 4,146,000 ------------------------------------------------------------------------------------------------- Net export sales $13,257,000 $14,576,000 $14,069,000 -------------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT To the Stockholders and Directors of Criticare Systems, Inc.: We have audited the accompanying consolidated balance sheets of Criticare Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Criticare Systems, Inc. and subsidiaries at June 30, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Milwaukee, Wisconsin August 15, 1997 22 23 DIRECTORS AND OFFICERS Directors Milton Datsopoulos Attorney and Partner Datsopoulos, MacDonald & Lind Karsten Houm Management Consultant N.C. Joseph Lai, Ph.D. Vice Chairman of the Board, Secretary, Senior Vice President Criticare Systems, Inc. Gerhard J. Von der Ruhr Chairman of the Board, Treasurer, President Criticare Systems, Inc. Officers and Senior Staff Andrew Diaz Vice President International Sales Division N.C. Joseph Lai, Ph.D. Vice Chairman of the Board Senior Vice President Michael T. Larsen Vice President Quality Control/Quality Assurance Gloria Najera Vice President Operations Stephen D. Okland Vice President Monitoring Sales Division Richard J. Osowski Senior Vice President--Finance Assistant Secretary Herschel Q. Peddicord Senior Vice President Systems Sales Division Gerhard J. Von der Ruhr Chairman of the Board President Kenneth F. Wineman Vice President Latin American Sales FACT SHEET Fact Sheet as of July 1, 1997 Common Stock Market Price Range and Dividend Policy Criticare Systems, Inc. common stock is traded on the Nasdaq National Market (Symbol CXIM). As of June 30, 1997, there were approximately 326 holders of record of Criticare's common stock. The Company has never paid dividends on its common stock and has no plans to pay cash dividends in the foreseeable future.
Year Ended June 30, 1997 1996 -------------------------------------------------------------- Quarter Ended: High Low High Low September 30 $3-1/4 $2-3/8 $3-1/2 $1-3/4 December 31 $3-1/16 $2-3/8 $4-3/8 $2-3/16 March 31 $7-7/16 $2-1/2 $4-1/8 $3-1/8 June 30 $6-1/16 $4-3/4 $4-1/8 $3-1/16
Corporate General Counsel Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. Milwaukee, Wisconsin Patent, Trademark and Copyright Counsel Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. Milwaukee, Wisconsin Transfer Agent and Registrar Firstar Trust Company Milwaukee, Wisconsin Auditors Deloitte & Touche LLP Milwaukee, Wisconsin Corporate Headquarters 20925 Crossroads Circle Waukesha, WI 53186 U.S.A. Nasdaq Symbol: CXIM Annual Meeting of Stockholders The annual meeting of stockholders will be held on Friday, November 7, 1997 at 3:30 p.m. at the Milwaukee Athletic Club, 758 North Broadway, Milwaukee, Wisconsin. Forms 10-K and 10-Q The Company has filed an annual report with the Securities and Exchange Commission on Form 10-K. The Company also files quarterly reports on Form 10-Q. Stockholders may obtain copies of these reports, without charge, by writing: Secretary Criticare Systems, Inc. 20925 Crossroads Circle Waukesha, Wisconsin 53186 U.S.A. 23 EX-21 7 EX-21 1 EXHIBIT 21 29 2 SUBSIDIARIES All of the Company's subsidiaries are wholly-owned:
Company Jurisdiction of Organization - -------------------------------------------------- ---------------------------- Criticare International GmbH Marketing Services Germany Sleep Care, Inc. Delaware Criticare (FSC), Inc. U.S. Virgin Islands CSI International Corp. (DISC) Wisconsin Criticare Biomedical, Inc. Wisconsin CSI Trading, Inc. Wisconsin
EX-23 8 EX-23 1 EXHIBIT 23 30 2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of Criticare Systems, Inc.: We consent to the incorporation by reference in Registration Statements on Form S-8 (File Nos. 33-33497, 33-40038, 33-60214 and 33-60644) of our reports dated August 15, 1997 included and incorporated by reference in the Annual Report on Form 10-K of Criticare Systems, Inc. for the year ended June 30, 1997. /s/ Deloitte & Touche LLP Milwaukee, Wisconsin October 10, 1997 EX-24 9 EX-24 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerhard J. Von der Ruhr and Richard J. Osowski, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------------- ----------------------------------- ---------------------- /s/ Gerhard J. Von der Ruhr Chairman of the Board, President and September 29, 1997 - --------------------------- Director Gerhard J. Von der Ruhr Vice Chairman of the Board, September 29, 1997 - --------------------------- Vice President and Director N.C. Joseph Lai /s/ Richard J. Osowski Senior Vice President-Finance September 29, 1997 - --------------------------- (Principal Financial and Accounting Richard J. Osowski Officer) Attorney-in-fact /s/ Karsten Houm Director September 29, 1997 - --------------------------- Karsten Houm /s/ Milton Datsopoulos Director September 29, 1997 - --------------------------- Milton Datsopoulos
20 EX-27 10 FDS
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 2,440,859 0 7,182,237 (467,000) 7,730,591 17,860,162 10,736,623 (3,691,394) 25,145,066 (5,806,997) (5,110,934) 0 0 (311,859) (13,915,276) (25,145,066) 26,235,355 26,235,355 (14,059,508) (27,651,400) (1,333,390) (366,505) (1,048,391) (2,749,435) 0 (2,749,435) 0 569,946 0 (2,179,489) (.30) (.30)
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