Criticare June 30, 2006 Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(Mark
One)
[
X
] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For
the
fiscal year ended June 30, 2006
[
] 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 1-31943
Criticare
Systems, Inc.
|
(Exact
Name of Registrant as Specified in Its
Charter)
|
Delaware
|
|
39-1501563
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
20925 Crossroads
Circle, Suite 100, Waukesha, Wisconsin
|
|
53186
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: 262-798-8282
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
Voting
Common Stock, $.04 par value (together with
associated
Preferred
Stock Purchase Rights)
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
[ ] No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
[ ] No [ X ]
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
this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Exchange Act Rule 12b-2. (Check
one)
Large
accelerated filer [ ] Accelerated
filer [ ] Non-accelerated
filer [ X ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
The
aggregate market value of the voting common stock held by nonaffiliates of
the
registrant as of December 30, 2005 (the last business day of the registrant’s
most recently completed second fiscal quarter) was $57,552,011. Shares of voting
common stock held as of December 30, 2005 by any person who was an executive
officer or director of the Registrant as of December 30, 2005 and any person
who
beneficially owned 10% or more of the outstanding voting common stock as of
December 30, 2005 have been excluded from this computation because such persons
may be deemed to be affiliates. This determination of affiliate status is not
a
conclusive determination for other purposes.
On
August
31, 2006, there were 12,293,668 shares of the registrant's $.04 par value voting
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the Annual Meeting of the Stockholders of the
Registrant to be held November 30, 2006 are incorporated by reference into
Part
III of this report.
As
used
in this report, the terms "we," "us," "our," "Criticare" and the "Company"
mean
Criticare Systems, Inc. and its subsidiaries, unless the context indicates
another meaning, and the term "common stock" means our common stock, par value
$0.04 per share.
Special
Note Regarding Forward-Looking Statements
A
number
of the matters and subject areas discussed in this report that are not
historical or current facts deal with potential future circumstances and
developments. These include anticipated product introductions, expected future
financial results, liquidity needs, financing ability, management's or the
Company's expectations and beliefs and similar matters discussed in this report.
These statements may be identified by the use of forward-looking words or
phrases such as "anticipate," "believe," "could," "expect," "intend," "may,"
"hope," "plan," "potential," "should," "estimate," "predict," "continue,"
"future," "will," "would" or the negative of these terms or other words of
similar meaning. Such forward-looking statements are inherently subject to
known
and unknown risks and uncertainties. Our actual results and future developments
could differ materially from the results or developments expressed in, or
implied by, these forward-looking statements. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, but are not limited to, those described under the caption
"Risk Factors" in Item 1A of this report. We undertake no obligation to make
any
revisions to the forward-looking statements contained in this filing or to
update them to reflect events or circumstances occurring after the date of
this
filing.
PART
I
Item
1.
BUSINESS.
Criticare
designs, manufactures and markets vital signs and gas monitoring instruments
and
related noninvasive sensors used to monitor patients in many healthcare
environments. Since a patient's oxygen, anesthetic gas and carbon dioxide levels
can change dramatically within minutes, causing severe side effects or death,
continuous monitoring of these parameters is increasing. The Company's
monitoring equipment improves patient safety by delivering accurate,
comprehensive and instantaneous patient information to the clinician. The
Company's products also allow hospitals to contain costs primarily by
substituting cost-effective reusable pulse oximetry sensors for disposable
sensors, controlling the use of costly anesthetics and increasing personnel
productivity.
To
meet the needs of end-users in a wide variety of
patient environments, the Company has developed a broad line of patient monitors
which combine one or more of its patented or other proprietary technologies,
for
monitoring oxygen saturation, carbon dioxide and anesthetic agents, with
standard monitoring technologies that provide electrocardiogram ("ECG"),
invasive and noninvasive blood pressures, temperature, heart rate and
respiration rate. The Company's VitalView telemetry system allows one nurse
to
monitor up to sixteen patients simultaneously from a convenient central
location. This allows hospitals to move out of the intensive care unit those
patients that require continuous monitoring, but do not need all of an intensive
care unit's extensive and costly personnel and equipment resources. In fiscal
2006, the Company released a new, next generation portable cardiac monitor
(VitalCareTM 506N3) and a new, next generation portable
multi-parameter vital signs monitor (nGenuity 8100E).
Criticare
is implementing several business initiatives as part of its strategy to develop
products for highly technical, growth oriented niche markets. Management
believes that in order to be successful, marketing and sales partnerships in
these areas are required. That effort has resulted in the execution of a number
of agreements with original equipment manufacturers ("OEMs"). To capitalize
on
these business initiatives, modules and stand-alone monitors were developed
and
marketed for specific OEM customers. The Company views OEM agreements as a
complementary component to our strategy to develop products for highly technical
niche markets, and the OEM business has been a significant driver of the
Company’s growth.
The
first
of these initiatives involves monitoring products for anesthesia gases. In
fiscal 2003, the Company introduced an anesthesia monitoring product line for
sale both under the Criticare brand name and for sale to OEMs. A second
initiative is the development of a highly specialized monitoring system for
medical imaging applications in an MRI environment. In 2003, Criticare entered
into an agreement with an OEM, Medrad, Inc. ("Medrad"), to jointly develop
and
exclusively sell a highly specialized medical monitoring product to Medrad.
In
July 2004, Criticare shipped the initial prototypes of this monitoring product
to Medrad and production shipments began in January 2005. Sales to Medrad have
grown quickly and Medrad has become the Company's largest customer in fiscal
2006 and 2005. Following the acquisition, in July 2004, of Alaris Medical
Systems, Inc. ("Alaris"), a long-time OEM customer, by Cardinal Health, Inc.,
the third initiative was implemented to develop an Acute Care distribution
network in the U.S. to sell to markets previously served through Alaris.
Following such acquisition, Cardinal Health exited the vital signs monitor
business and signed a transition agreement with the Company, which enabled
our
new
Acute
Care distribution network the opportunity to sell to the former Alaris customer
base. In conjunction with the transition agreement, in September 2005, we
introduced a new portable cardiac monitor for the Acute Care market. Sales
for
the Acute Care market during the introduction year of fiscal 2006, approached
the largest revenue year Criticare experienced under the Alaris OEM agreement
and greatly exceeded our expectations.
According
to the guidance set by Statement of Financial Accounting Standards No. 131,
the Company operates in one business segment in the healthcare environment.
The
chief operating decision maker does not utilize segmented financial statements
in making decisions about resource allocation because the business activities
that generate revenue do not have expenses specifically associated with them.
Therefore, no segment data is disclosed in the notes to the financial statements
in Item 8. However, the Company's customer base is differentiated by region
(see
note 10 in the notes to the financial statements in Item 8 for an analysis
of
sales by geographic area).
The
Company was incorporated under the laws of the State of Delaware in October
1984.
Products0
Criticare
markets a broad range of vital signs and gas monitoring products designed to
address the needs of a variety of end-users in different patient environments.
Criticare's monitors display information graphically and numerically. Many
of
the Company’s new products, as well as those in development, focus on anesthesia
related monitoring, as management believes this is a high growth area with
relatively few competitors. 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.
VitalCare™
506N3 Portable Cardiac Monitors.
The
Portable Cardiac Monitor provides maximum versatility and cost effectiveness
in
a small, compact, portable, full-featured vital signs monitors configured to
meet specific clinical needs. The unit is available in multiple configurations,
with a choice of Criticare or Nellcor oximetry, ComfortCuff™ noninvasive blood
pressure and temperature (either FILAC FasTemp™ or Alaris TurboTemp). This unit
is ideal for spot checking or continuously monitoring patients’ vital
signs.
nGenuity
8100E Multi Parameter Vital Signs Monitors.
The
full-featured Multi Parameter Vital Signs Monitor combines ECG, ComfortCuff™
noninvasive blood pressure, DOX™ digital oximetry, heart rate, temperature,
respiration rate, and nurse call interface for a complete vital signs monitor
for physician offices, clinics, transport and hospital applications. Optional
features include arrhythmia and ST analysis and an integrated
printer.
Poet™
Plus 8100 Vital Signs Monitors.
The
full-featured CSI 8100 Vital Signs Monitor provides maximum flexibility for
hospital, transport and outpatient care settings. The unit's custom
configurations include ECG, ComfortCuff™ noninvasive blood pressure, DOX™
digital oximetry, heart rate, temperature, respiration rate, and nurse call
interface. Optional features include CO2,
CO2/O2
and
invasive blood pressure monitoring and an integrated printer. The 8100 is well
suited for busy departments that require basic vital signs monitoring to
conscious sedation.
Poet™
IQ 8500 and Poet™ IQ2 8500Q Anesthetic Gas Monitors.
The
Poet™ IQ 8500 gas monitor is used in conjunction with the Poet™ Plus 8100 Vital
Signs Monitor to provide a unique combination of leading edge vital signs
technology and anesthesia gas monitoring in a compact, modular system. The
Poet™
IQ2 8500Q Gas Monitor provides leading edge anesthesia gas monitoring in a
compact stand alone monitor. The operating systems of both monitors consist
of
an integrated, solid state module based upon a proprietary infrared technology
developed by Criticare. The operating systems automatically monitor up to five
anesthetic agents plus nitrous oxide, oxygen, and carbon dioxide. The systems
also utilize a unique, disposable water trap component that is also proprietary
to the Company. These products were released in March 2003 and are being
marketed as configurable systems for applications by OEMs and as Criticare
branded products. The systems’ reliable performance, ease of use, flexible
design, and affordable cost make them the ideal monitoring solutions for
anesthesia applications in hospitals and surgical centers.
Model
503DX and 504DX Pulse Oximeters.
Criticare's complete line of pulse oximeters meets the needs of virtually all
clinical environments, including: adult, pediatric and neonatal intensive care
units, operating rooms, emergency rooms, nursing homes, physicians' offices
and
ambulances. The line is designed to provide accuracy and convenience at a
competitive cost to the end-user.
VitalView™
Central Monitoring Station.
The
VitalView central station makes it possible for one nurse or technician to
monitor up to sixteen patients simultaneously. The VitalView can receive,
display and store data from a wide variety of Criticare monitors and
patient-borne multiple parameter telemetry devices for continuous, comprehensive
vital signs monitoring. In addition, the VitalView can be used as a wireless
device or hardwired and has ST and arrhythmia analysis
capabilities.
Pulse
Oximetry Sensors.
Criticare has designed proprietary, noninvasive sensors that can be used on
any
patient, from a premature infant to a full-grown adult. Criticare's line of
reusable pulse oximetry sensors offers users significant cost savings compared
to disposables. Criticare's reusable sensors generally last longer than the
one-year warranty period and are easily and inexpensively cleaned between uses.
Criticare's reusable sensors include a finger sensor for routine applications
and a multisite sensor for increased placement flexibility. The multisite sensor
is fully immersible, allowing for sterilization between patients. The Company
also sells a range of disposable sensors designed for single use in cases where
the facility would prefer to use a patient charge disposable
product.
WaterChek™/Chek-Mate
Filter System.
The
Company's patented, disposable WaterChek system separates a patient's
respiratory secretions from a breath sample before it enters the gas monitor
for
analysis. The Company's proprietary, disposable Chek-Mate filter enhances the
removal of moisture from the sample, while preventing cross-contamination.
This
system allows the monitor to operate effectively regardless of humidity or
patient condition. The self-sealing feature also protects the healthcare
provider from potential contamination.
Marketing
and Sales
Domestic
Sales.
At
August 31, 2006, the Company's domestic sales force consisted of three employees
and 55 independent dealers. The Company's sales force and independent dealers
market the Company's vital signs monitors and pulse oximeters primarily to
surgery centers, dental and physician offices, and nursing homes.
The
Company sells some of its higher-end monitors (anesthetic agent monitors and
VitalView central stations) to domestic hospitals. With the development of
an
Acute Care distribution network, the Company is working to achieve a significant
presence in U.S. hospitals that generally purchase medical equipment through
large group purchasing organizations (GPOs). These GPOs contract large medical
equipment suppliers who can provide not only medical monitors, but also the
majority of the hospital’s other medical equipment and service needs (such as CT
scanners and MRI equipment). In addition, Cardinal Health and Criticare signed
a
transition agreement which enabled Criticare’s new Acute Care distribution
network the opportunity to sell to the former Alaris customer base. Alaris,
formerly the Company’s largest customer, was acquired by Cardinal Health in
2004, and Cardinal Health subsequently made the decision to exit from vital
signs monitor sales activities, since those products no longer fit within its
core business strategy.
Criticare
is implementing several business initiatives as part of its strategy to develop
products for highly technical, growth oriented niche markets. Management
believes that in order to be successful, marketing and sales partnerships in
these areas are required. That effort resulted in the execution of a number
of
OEM agreements.
To
capitalize on these business initiatives, the Company began to focus on selling
to OEMs with the hiring of a senior manager, in 1999, to lead this effort.
Modules and stand-alone monitors were developed and marketed for specific OEM
customers. The Company views OEM agreements as a critical component to our
strategy to develop products for highly technical niche markets, and the OEM
business has been a significant driver of the Company’s growth with 21.7% of
total net sales in fiscal 2006 and 22.9% of total net sales in fiscal 2005.
In
particular, sales of the Company’s newly developed anesthesia products and a
highly specialized monitoring system for medical imaging applications are
expected to continue to be mainly for new OEM partners. In July 2004, Criticare
shipped the initial prototypes of this monitoring product to Medrad. Medrad,
the
Company's OEM partner for medical imaging applications,
was the
Company's largest customer in fiscal 2006, accounting for net sales of
approximately $5.2 million, which represented 17% of the Company's total
net sales.
International
Sales.
One of
the Company's principal marketing strategies has been to target international
markets, particularly Europe, Latin America and the Pacific Rim countries.
During fiscal 2006, Criticare sold its products, principally to hospitals,
in
over 83 countries
through over 89 independent dealers.
Most
of
the Company's international order processing, invoicing, collection and customer
service functions are handled directly from the Company's headquarters in
Waukesha, Wisconsin. Criticare believes demand for the Company's products in
international markets is primarily driven by cost containment concerns, and
increased interest in using quality patient monitoring products for improved
patient management.
In
fiscal
2006, 40% of Criticare's net sales, or $12.6 million, was attributable to
international sales, of which approximately 59% was from sales in Europe and
the
Middle East, 13% was from sales to Pacific Rim countries and 28% was from sales
to Canada and Central and South America. In fiscal 2005 and 2004, 62% and 41%,
respectively, of Criticare's net sales were attributable to international sales.
Other than inventory and accounts receivable for the Company’s branch office in
India totaling approximately $0.7 million, there are no material identifiable
assets of the Company located in foreign markets. The Company primarily sells
its products in United States dollars and is therefore not subject to currency
risks other than currency fluctuations from its operation in India; however,
an
increase in the value of the United States dollar relative to foreign currencies
could make the Company's products less price competitive in those markets.
In
addition, significant devaluation of certain foreign currencies could adversely
affect the collectibility of accounts receivable from international customers.
The Company analyzes this risk before making shipments to countries it views
as
unstable.
Service,
Support and Warranty.
Criticare believes that customer service is a key element of its marketing
program. At August 31, 2006, the Company had a customer service and
technical support staff of 17 people at its Waukesha, Wisconsin facility.
Customer service support is available 24 hours a day, seven days a week, with
the majority of customers’ technical problems being resolved over the telephone.
The customer service staff also provides periodic training and education of
the
direct sales force who in turn provide training to the dealers and end-users.
Criticare's
monitors and sensors are generally warranted against defects for one year.
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. The Company offers extended warranties and service contracts
on all of its monitors.
Manufacturing
Historically,
Criticare had manufactured and assembled its products internally, principally
at
the Company's facility in Waukesha, Wisconsin. Due mainly to pricing pressures
on monitoring systems worldwide, in fiscal 2001 the Company entered into an
agreement with two offshore contract manufacturing firms located in Taiwan
and
Ireland, respectively, that exclusively manufacture medical devices in a
regulated environment. During fiscal 2005, the Company ended the supply
agreement with the contract manufacturing firm in Ireland. The contract
manufacturing firm in Taiwan also has manufacturing capabilities in China and
the U.S. and a portion of Criticare’s production has been transitioned to China
to continue to receive favorable pricing and a portion has been transitioned
to
the U.S. to satisfy the “made in U.S.A.” requirements of certain customers. The
Company works closely with this firm to maintain product quality and
reliability. This firm performs the same rigorous quality control testing at
its
facilities that Criticare had done in the past at its own facility. With the
majority of the Company’s manufacturing outsourced as of the end of calendar
2001, Criticare concentrates on product enhancements and new product
development, customer service, and increased involvement with its OEM customers.
The Company will manufacture and assemble all proprietary medical devices at
the
Company’s facility in Waukesha, Wisconsin. In addition, the Company will
continue limited production of new products internally during the development
phase and for a short period after commercial introduction until production
can
be effectively transitioned to offshore manufacturers.
Any
inability of the offshore manufacturer to deliver products on a timely basis
could have a material adverse effect on the Company. However, the manufacturer
has the ability to produce the Company’s products in Taiwan, China, and the U.S.
Therefore, the Company is not totally reliant on a single plant or single source
to supply product. This factor, combined with the Company’s ability to continue
to manufacture at its headquarters in Waukesha, Wisconsin, reduces the Company’s
risk of supply interruption.
The
Company has achieved certification under the International Organization for
Standardization’s (ISO) standards 9001 and 9002. The offshore contract
manufacturing firm has achieved certification under ISO's standard 9001. 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, vital signs monitoring, and related sensor
technology to develop new products and adapt existing products for new markets.
At August 31, 2006, the Company had an in-house research, development and
engineering staff of 19 people. The Company's research, development and
engineering expenditures were $2.4 million in fiscal 2006, $2.6 million in
fiscal 2005 and $2.5 million in fiscal 2004.
Research
and development efforts for fiscal 2006 has focused on the development and
release our next generation portable multi-parameter vital signs monitor
(nGenuity 8100E), our next generation portable cardiac monitor (VitalCare™
506N3), and an upgrade to the MRI monitor to provide a wireless option. Research
and development efforts for fiscal 2005 has focused on the development and
release of the Veris MRI compatible vital signs monitor. In addition, research
and development efforts for fiscal 2004 and 2003 have focused on the development
and release of the 8500 series monitors which feature automatic identification
and quantification of all five approved anesthetic agents and the development
of
a highly specialized monitoring system for medical imaging applications.
Competition
The
markets for the Company's products are highly competitive. Many of Criticare's
competitors, including the principal ones described below, have greater
financial resources, more established brand identities and reputations, longer
histories in the medical equipment industry and larger direct and more
experienced sales forces than Criticare. In these respects, such companies
have
a competitive advantage over Criticare. In addition, internationally there
are
many in-country manufacturers that supply duty and tariff-free low cost monitors
that make it difficult for the Company to be price competitive in these
countries.
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, provided
in part by its outsourcing a large portion of its manufacturing, its patented
and other proprietary technology and software for noninvasive, continuous
monitoring of oxygen, anesthetic gases, carbon dioxide and noninvasive blood
pressure, the efficiency and speed of its research and development efforts,
and
its established international presence.
The
Company believes that the worldwide anesthetic agent and carbon dioxide monitor
markets are comparatively fragmented, with Datex/Ohmeda, a subsidiary of General
Electric Company, Andros Incorporated, and Dr’ger Medical as the principal
competitors. The market for vital signs monitors includes competitors such
as
General Electric Company, Dr’ger Medical, Datascope Corp., Philips Electronics,
Welch Allyn Inc., and Spacelabs Medical, Inc., a subsidiary of OSI Systems,
Inc.
Internationally, the market for vital signs monitors includes the competitors
mentioned above, as well as in-country manufacturers that supply low cost
monitors that are not required to comply with the rigorous regulations of the
U.S. Food and Drug Administration ("FDA").
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 the FDA. 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, ISO 9001 certification
on July 8, 1994 and ISO 13485:2003 certification on January 16,
2006.
Under
the
Federal Food, Drug and Cosmetic Act, all medical devices are classified as
Class I, Class II or Class III, depending upon the level of
regulatory control to which they will be subjected. Class III devices, which
are
the most highly controlled devices, are subject to premarket approval by the
FDA
prior to commercial distribution in the United States.
The
Company's current products have not been subject to the FDA's comprehensive
Class III premarket approval requirements, but are generally subject to
premarket notification requirements. If a new device is substantially equivalent
to a device that did not require premarket approval, premarket review is
satisfied through a procedure known as a "510(k) submission," under which the
applicant provides product information supporting its claim of substantial
equivalence. The FDA may also require that it be provided with clinical trial
results showing the device's safety and efficacy.
The
Company believes that the products it is currently developing generally will
be
eligible for the 510(k) submission procedure and, therefore, will not be subject
to lengthy premarket approval procedures. However, these products are still
being developed and there can be no assurance that the FDA will determine that
the products may be marketed without premarket approval.
Criticare
seeks, where appropriate, to comply with the safety standards of Underwriters'
Laboratories and the Canadian Standards Association and the standards of the
European Union. 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. The
Company has 20 issued
U.S. patents. The Company's U.S. patents expire between 2006 and 2022. Criticare
also has 14 issued foreign patents and 9 foreign patent applications pending.
There is no assurance that any patents held or secured by the Company will
provide any protection or commercial or competitive benefit to the Company.
There is also no assurance that the Company's products will not infringe upon
patents held by others. The Company is the owner of United States trademark
registrations for "POET," "POET IQ," "MPT," "REMOTEVIEW," "MICROVIEW,"
"VITALVIEW," "SCHOLAR," and "WATERCHEK."
The
Company also relies upon trade secret protection for certain of its proprietary
technology. Although the Company requires all employees to sign confidentiality
agreements, no assurance can be given that such agreements can be effectively
enforced or that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
the Company's trade secrets.
Employees
At
August
31, 2006 Criticare, had 93 employees in the U.S., including 19 in research,
development and engineering, 17 in customer service and support, 27 in
manufacturing and operations, 14 in administration, 8 in sales and marketing,
and 8 in quality control. Criticare also utilizes four international country
managers that work as independent contractors to support its international
sales
efforts. The Company also has an operation in India with 15
employees.
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, 2006 and 2005 was $5,260,197 and $9,788,662, respectively.
The backlog is driven by the extended delivery schedule from Medrad, which
totaled $4,100,984 as of June 30, 2006 and $8,052,614 as of June 30, 2005.
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
1A.
RISK
FACTORS.
An
investment in our common stock is subject to risks inherent in our business,
including the risks described below. The risks described below are not the
only
risks we face. Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations. If any of the
events or circumstances described in the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such cases, the trading price of our common stock could
decline.
Risks
Related to Our Business
Our
net sales and profitability depend on our ability to conceive, design and market
new products.
The
introduction of new products is critical to our growth strategy. Our future
success will depend in large part upon our ability to conceive, design, and
market new products and upon market acceptance of our existing and future
products. Any significant delays in the introduction of, or the failure to
introduce, new products or additions to our existing product lines or the
failure of our existing or future products to maintain or receive market
acceptance could have a material adverse effect on our net sales and
profitability.
Our
future success will depend on our ability to compete effectively in our
industry.
The
medical equipment industry is highly competitive. Many of our competitors have
greater financial and other resources, more established brand identities and
reputations, greater development capabilities, more experience in testing
products and obtaining regulatory approvals, and larger and more experienced
sales forces than us. In these respects, such companies have a competitive
advantage over us. In addition, internationally there are many in-country
manufacturers that supply duty and tariff-free low cost monitors that make
it
difficult for us to be price competitive in these countries. The medical
equipment market is also experiencing increasing customer concentration, due
to
the emergence of large purchasing groups, which can increase the barriers for
a
small company such as Criticare. If we cannot compete successfully in the
future, our net sales and profitability will likely decline.
We
have a history of significant losses and may not be able to sustain
profitability.
Although
we achieved net income of $212,118 in fiscal 2006, we have historically suffered
net losses, including a net loss of $(422,245) for fiscal 2005 and
$(2,100,573) for fiscal 2004. We achieved positive net income in fiscal 2006
with net sales of $31.4 million, the second highest level of net sales in our
history. If our net sales decline, or if we are not able to control expenses,
we
may not be able to sustain or improve profitability.
Our
business may be adversely affected by the highly regulated environment in which
we operate.
Our
products are subject to regulation by the United States Food and Drug
Administration and comparable foreign governmental authorities. These
regulations can be burdensome and may:
|
l
|
substantially
delay or prevent the introduction of new products;
|
|
|
materially
increase the costs of any new product introductions;
|
|
|
interfere
with or require cessation of product manufacturing and marketing;
and
|
|
|
result
in product recalls.
|
Additionally,
adoption of new regulations or modifications to applicable regulations could
harm our business. Some of the legislative and regulatory changes may benefit
us
and our competitors; other changes, however, could have a material adverse
effect on our business, financial condition and results of operation and/or
provide an advantage to certain of our competitors.
Since
we sell product in foreign markets, we are subject to foreign currency and
other
international business risks that could adversely affect our operating
results.
International
sales account for a significant portion of our total net sales each fiscal
year.
We expect that international sales will continue to constitute a significant
portion of our business. Although our net sales are primarily denominated in
United States dollars and are not subject to significant currency risks, an
increase in the value of the United States dollar relative to foreign currencies
in our international markets could make our products less price competitive
in
such markets. Our international sales are subject to the risks inherent in
doing
business abroad, including:
|
|
complications
in complying with the laws and policies of the United States and
foreign
governments affecting foreign trade, including duties, quotas, taxes
and
export controls;
|
|
l
|
unexpected changes in international regulatory
requirements and tariffs; |
|
|
difficulties
in staffing and managing foreign
operations;
|
|
|
political
or economic changes, especially in developing nations;
and
|
|
|
price
controls and other restrictive actions by foreign
governments.
|
Any of these risks might disrupt sales of our products, increase our expenses
or
decrease our revenues.
Our
reliance on offshore contract manufacturing makes our business susceptible
to
numerous risks that could affect our profitability.
In
response to pricing pressure, in fiscal 2001 we entered into agreements for
offshore contract manufacturing. We completed the transition of the offshore
production of substantially all of our established product lines at the end
of
calendar 2001. Currently, our offshore manufacturing is handled by a contract
manufacturing firm in Taiwan that also has manufacturing capabilities in China
and the U.S. Any inability of the offshore manufacturer to deliver products
on a
timely basis could have a material adverse effect on us.
Our
reliance on offshore contract manufacturing will subject us to numerous risks,
including the following:
l
economic
and political instability in the countries where the contract manufacturing
firms are located;
l restrictive
actions by foreign governments;
l the
laws
and policies of the United States affecting the importation of goods (including
duties, quotas and taxes);
l
production
delays and cost overruns;
l quality
control; and
l foreign
trade and tax laws.
We
depend on a major customer for a significant portion of our
sales.
In
fiscal
2006, our largest customer accounted for net sales of approximately $5.2
million, which represented approximately 17% of our total net sales. We also
had
a receivable balance with this customer of approximately $0.9 million as of
June
30, 2006, which represented approximately 15% of our total receivables as of
that date. An adverse change in our relationship with or the financial viability
of our largest customer could have a material adverse effect on our net sales
and profitability.
As
a manufacturer and marketer of medical equipment, we could experience product
liability claims.
The
nature of our products may expose us to significant product liability risks.
Although, we maintain product liability insurance, we can make no assurance
that
we will be able to maintain this insurance on acceptable terms or that the
insurance will provide adequate coverage against product liability claims.
A
successful product liability claim against us in excess of our insurance
coverage could be extremely damaging to us. Even if a product liability claim
is
without merit, the claim could harm our reputation and divert management's
attention and resources from our business.
Our
success depends on our ability to protect our intellectual
property.
We
rely
on our patented and other proprietary technology including:
|
|
infrared
specific anesthetic gas monitoring
technology;
|
|
|
UltraSync
signal processing software; and
|
|
|
disposable
respiratory secretion filter system.
|
The
actions taken by us to protect our proprietary rights may not be adequate to
prevent imitation of our products, processes or technology. We can not assure
you that:
|
|
our
proprietary information will not become known to competitors;
|
|
|
others
will not independently develop substantially equivalent or better
products
that do not infringe on our intellectual property rights; or
|
|
|
others
will not challenge or assert rights in, and ownership of, our patents
and
other proprietary rights.
|
Health
care cost containment programs could adversely affect our domestic
sales.
The
cost
of a significant portion of medical care in the United States and in
international markets is funded by government or other insurance programs.
Additional limits imposed by such programs on health care cost reimbursements
may further impair the ability of hospitals and other health care providers
to
purchase equipment such as our products and could reduce our domestic
sales.
Our
controls and procedures may be ineffective
Our
management regularly reviews and updates our internal control over financial
reporting, disclosure controls and procedures, and corporate governance policies
and procedures. Any system of controls, no matter how well designed and
operated, is based partly on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are
met.
Any failure or circumvention of our controls and procedures or failure to comply
with regulations related to controls and procedures could have a material
adverse effect on our business, results of operations, and financial condition.
Risks
Related to an Investment in our Common Stock
The
trading price of our common stock has been volatile and investors in our common
stock may experience substantial losses.
The
market price of our common stock has experienced significant volatility from
time to time. There may be volatility in the market price of our common stock
due to factors that may or may not relate to our performance. The trading price
of our common stock could decline or fluctuate in response to a variety of
such
factors, including:
|
l
|
announcements and developments relating to the consent
solicitation to replace a majority of our Board of Directors started
by
BlueLine Partners; |
|
|
the
timing of announcements by us or our competitors concerning significant
acquisitions, financial performance or the introduction of new innovative
products or services;
|
|
|
fluctuations
in our quarterly operating results;
|
|
|
fluctuations
in demand for our products;
|
|
|
fluctuations
in interest rates;
|
|
|
substantial
sales of our common stock; or
|
|
|
general
stock market or other economic
conditions.
|
You may be unable to sell your stock at or above your purchase
price.
Various
restrictions in our certificate of incorporation and by-laws, our rights plan
and Delaware law could prevent or delay a change in control of us which is
not
supported by our board of directors.
Provisions
of our certificate of incorporation and by-laws may make it more difficult
for a
third party to gain control or acquire us without the consent of our board
of
directors, even if such a transaction may be perceived as beneficial to our
stockholders. These provisions include a board of directors divided into three
classes of directors serving staggered terms of three years each.
Each
currently outstanding share of our common stock includes, and each newly issued
share of our common stock will include, one preferred share purchase right.
The
rights are attached to and trade with the shares of common stock and generally
are not exercisable. The rights will become exercisable the tenth business
day
after a person or group acquires 20% or more of our common stock or makes an
offer to acquire 30% or more of our common stock. When exercisable, each right
entitles the holder to purchase for $25, subject to adjustment,
1/100th
of a
share of preferred stock for each share of common stock owned. The rights have
anti-takeover effects and generally will cause substantial dilution to a person
or group that attempts to acquire control of us without conditioning the offer
on either redemption of the rights or amendment of the rights to prevent this
dilution. The rights could have the effect of delaying or preventing a change
of
control. The rights are scheduled to expire on April 1,
2007.
We
are
also subject to Section 203 of the Delaware General Corporation Law which
prohibits a merger, consolidation, asset sale or other similar business
combination between Criticare and any stockholder of 15% or more of our common
stock for a period of three years after the stockholder acquires 15% or more
of
our common stock, unless (1) the transaction is approved by our board of
directors before the stockholder acquires 15% or more of our common stock,
(2)
upon completing the transaction the stockholder owns at least 85% of our common
stock outstanding at the commencement of the transaction, or (3) the transaction
is approved by our board of directors and the holders of 66 2/3% of our common
stock excluding shares of our common stock owned by the
stockholder.
Not
applicable.
Item
2.
PROPERTIES.
In
August
2002, the Company sold its 60,000 square foot building in Waukesha, Wisconsin
for $4,000,000 and leased back approximately 37,000 square feet of this building
to serve as the Company’s headquarters, warehouse, manufacturing, research and
development and service facility. The proceeds from the sale were used to retire
the mortgage note on the facility. The lease expires on August 30, 2007, with
an
option for the Company to extend for an additional three years, with rent
totaling $22,423 per month for the first year of the lease and annual increases
approximating 3% in years two, three and five of the lease.
Item
3.
LEGAL
PROCEEDINGS.
In
the
normal course of business Criticare may be involved in various legal proceedings
from time to time. Criticare does not believe it is currently involved in any
claim or action the ultimate disposition of which would have a material adverse
effect on 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, 2006.
PART
II
Item
5.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
The
Company's common stock trades on the American Stock Exchange under the symbol
“CMD." As of June 30, 2006, there were approximately 199 holders of record
of the common stock. The Company has never paid dividends on its common stock
and has no plans to pay cash dividends in the foreseeable future.
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Quarter
Ended:
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
$
|
5.34
|
|
$
|
4.14
|
|
$
|
2.95
|
|
$
|
1.74
|
|
December
31
|
|
$
|
5.15
|
|
$
|
4.62
|
|
$
|
3.71
|
|
$
|
1.97
|
|
March
31
|
|
$
|
5.30
|
|
$
|
4.55
|
|
$
|
3.72
|
|
$
|
3.00
|
|
June
30
|
|
$
|
5.09
|
|
$
|
3.58
|
|
$
|
5.16
|
|
$
|
2.90
|
|
Item
6.
SELECTED
FINANCIAL DATA.
The
following table sets forth selected financial data with respect to the Company
for each of the periods indicated, which should be read along with our
consolidated financial statements and the notes to those statements and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
31,350,919
|
|
$
|
26,781,627
|
|
$
|
28,591,481
|
|
$
|
28,562,943
|
|
$
|
26,219,618
|
|
Net
income (loss)
|
|
|
212,118
|
|
|
(422,245
|
)
|
|
(2,100,573
|
)
|
|
(938,596
|
)
|
|
(1,425,181
|
)
|
Net
income (loss) per common share--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
$
|
0.02
|
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
$
|
(0.08
|
)
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
12,069,060
|
|
|
11,514,786
|
|
|
11,240,685
|
|
|
11,071,735
|
|
|
10,876,818
|
|
diluted
|
|
|
12,256,431
|
|
|
11,514,786
|
|
|
11,240,685
|
|
|
11,071,735
|
|
|
10,876,818
|
|
Stockholders'
equity
|
|
$
|
15,853,086
|
|
$
|
14,209,140
|
|
$
|
13,789,300
|
|
$
|
15,034,208
|
|
$
|
18,387,067
|
|
Long-term
obligations
|
|
|
134,485
|
|
|
210,592
|
|
|
286,417
|
|
|
38,662
|
|
|
3,151,879
|
|
Working
capital
|
|
|
13,322,276
|
|
|
12,339,332
|
|
|
11,756,441
|
|
|
12,895,476
|
|
|
15,464,899
|
|
Total
assets
|
|
|
22,979,078
|
|
|
19,060,473
|
|
|
19,542,341
|
|
|
18,762,327
|
|
|
25,474,256
|
|
Item
7.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion is intended to provide an analysis of our financial
condition and results of operations and should be read in conjunction with
our
financial statements and the notes to our financial statements included in
Item
8 of this report. The discussion also includes forward-looking statements.
As
indicated on the cover page of this report under "Special Note Regarding
Forward-Looking Statements," undue reliance should not be placed on
forward-looking statements.
Overview
Criticare
designs, manufactures and markets vital signs and gas monitoring instruments
and
related noninvasive sensors used to monitor patients in many healthcare
environments. The Company sells its products both in the U.S. and in
international markets to customers such as hospitals, surgery centers, dental
and physicians offices, and nursing homes. Criticare is implementing several
business initiatives as part of its strategy to develop products for highly
technical, growth oriented niche markets. Management believes that in order
to
be successful, marketing and sales partnerships in these areas are required.
That effort resulted in the execution of a number of OEM agreements.
Criticare
is implementing several new business initiatives as part of its strategy to
develop products for highly technicals growth oriented niche markets. To
capitalize on these business initiatives, modules and stand-alone monitors
were
developed and marketed for specific OEM customers. The Company views OEM
agreements as a critical component to our strategy to develop products for
highly technical niche markets, and the OEM business has been a significant
driver of the Company’s growth with 21.7% of total net sales in fiscal 2006 and
22.9% of total net sales in fiscal 2005.
The
first
of these initiatives involves monitoring products for anesthesia gases. In
fiscal 2003, the Company introduced an anesthesia monitoring product line for
sale both under the Criticare brand name and for sale to OEMs. A second
initiative is the development of a highly specialized monitoring system for
medical imaging applications in an MRI environment. In 2003, Criticare entered
into an agreement with Medrad to jointly develop and exclusively sell a highly
specialized medical monitoring product to Medrad. In July 2004, Criticare
shipped the initial prototypes of this monitoring product to Medrad and
production shipments began in January 2005. Medrad was the Company's largest
customer in fiscal 2006 and 2005, accounting for 16.5% and 11.6%, respectively,
of the Company's net sales in those fiscal years. Following the acquisition,
in
July 2004, of Alaris Medical Systems, Inc., a long-time OEM customer, by
Cardinal Health, Inc., the third initiative was implemented to develop an Acute
Care distribution network in the U.S. to sell to markets previously served
through Alaris. Following such acquisition, Cardinal Health exited the vital
signs monitor business and signed a transition agreement with the Company,
which
enabled our new Acute Care distribution network the opportunity to sell to
the
former Alaris customer base. In conjunction with the transition agreement,
in
September 2005, we introduced a new portable cardiac monitor for the Acute
Care
market. Sales for the Acute Care market totaled approximately $3.49 million
during the introduction year of fiscal 2006, approaching the largest revenue
year Criticare experienced under the Alaris OEM agreement.
Fourth
quarter net sales for fiscal 2006 of $7,095,962 were 11.5% lower than the
$8,020,894 in net sales for the same period of fiscal 2005, principally due
to
the strong OEM sales in fiscal 2005. The Company had a net loss of $(524,220)
for the fourth quarter for fiscal 2006 as compared to net income of $371,271
for
the fourth quarter of fiscal 2005. The fourth quarter of fiscal 2006 included
a
change of $529,700 to reserve a portion of a receivable from a distributor
in
Mexico. For the full year, the Company had net sales of $31,350,919 in fiscal
2006 and net income of $212,118 compared to net sales $26,781,627 and a net
loss
$(422,245) in fiscal 2005.
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,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
61.6
|
|
|
60.9
|
|
|
58.8
|
|
Gross
profit
|
|
|
38.4
|
|
|
39.1
|
|
|
41.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
22.2
|
|
|
21.2
|
|
|
25.0
|
|
Research,
development and engineering
|
|
|
7.5
|
|
|
9.8
|
|
|
8.9
|
|
Administrative
|
|
|
10.1
|
|
|
10.8
|
|
|
12.8
|
|
Total
|
|
|
39.8
|
|
|
41.8
|
|
|
46.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1.4
|
)
|
|
(2.7
|
)
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
--
|
|
Interest
income
|
|
|
0.3
|
|
|
0.2
|
|
|
0.1
|
|
Foreign
currency exchange gain (loss)
|
|
|
(0.3
|
)
|
|
0.5
|
|
|
--
|
|
Other
income
|
|
|
2.2
|
|
|
0.5
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
0.7
|
|
|
(1.6
|
)
|
|
(7.3
|
)
|
Income
tax provision
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
|
0.7
|
%
|
|
(1.6
|
)%
|
|
(7.3
|
)%
|
Fiscal
Year Ended June 30, 2006 Compared to June 30, 2005
Net
sales
increased $4,569,292 to $31,350,919 for fiscal 2006 compared to $26,781,627
for
fiscal 2005. The increase resulted from a 3.5% increase in the number of units
shipped, a 11.7% increase in the average sales price per unit and a 6.5%
increase in accessory sales in the current year. The increased sales were in
part the result of $3,492,754 in acute care sales, which are a successful result
of Criticare’s business initiative to develop an acute care distribution network
in the U.S. to sell to markets previously served through Alaris.
Additionally,
the increased sales were driven by a $827,941 increase in international sales
and a $682,501 increase in OEM sales, which were partially offset by a
$1,025,778 decrease in domestic sales during fiscal 2006. The international
sales increased despite a $357,972 reduction of sales in India during fiscal
2006. The OEM sales of $5,179,879 to Medrad, for medical imaging applications,
was partially offset by reduced sales of $2,034,468 to Alaris, formerly our
largest OEM customer, during fiscal 2006. The decrease in domestic sales was
due
to a number of factors, including Criticare’s movement to exit the defibrillator
market due to the continued trend of direct sales by defibrillator manufacturers
rather than through an establish distribution network, the postponed sales
of
patient monitors awaiting the release of our next generation portable
multi-parameter vital signs monitor and the overall maturation of the oral
surgery market. OEM sales in fiscal 2006 were $6,815,000 and represented 21.7%
of total net sales, compared to $6,132,000 (22.9% of total net sales) in fiscal
2005.
The
gross
profit percentage of 38.4% realized in fiscal 2006 decreased from the 39.1%
generated in the prior year. The margins decreased in the current period as
the
positive effect of a slight change in product mix was offset by the adverse
effect of increased overhead costs associated with the manufacturing start-up
costs related to our new portable cardiac monitor and the portable
multi-parameter vital signs monitor, the replacement of a key supplier and
with
an upward shift in the fixed overhead costs to meet the increased quality and
production demands of our OEM customers.
Charges
to cost of goods sold for potentially obsolete inventory totaled $56,622 in
fiscal 2006 compared to $281,003 for fiscal 2005. This inventory is considered
obsolete and will be disposed of and removed from Criticare’s warehouse during
fiscal 2007.
Operating
expenses for the year ended June 30, 2006 increased $1,293,377 from the same
period in fiscal 2005 as an increase of $1,279,806 in sales and marketing and
$271,193 in administrative expenses was partially offset by a $257,622 reduction
in research, development and engineering expenses. The increase of $1,279,806
in
sales and marketing expenses was due mainly to a $354,918 increase in the
commissions earned due to increased sales and a $148,113 increase in India
operation expenses, combined with a $98,277 increase in advertising, trade
shows
and sales promotion and a $19,154 increase in license fees spending for the
year
ended June 30, 2006. In addition, due to the political climate currently in
Mexico and the age of the receivable, we are concerned that our distributor
will
be unable to complete a previously discussed tender with the Mexican government,
and as a result, we have reserved a portion of the receivable in the amount
of
$529,700, which has significantly increased our sales and marketing expenses.
Administrative expenses increased by $271,193 mainly due to $316,096 in
compensation expenses of which $172,988 was recognized in conjunction with
stock
options under SFAS 123(R), an increase of $38,406 in license fees and an
increase of $37,500 in board of director fees, which was partially offset by
a
$99,211 reduction in legal fees and a $26,506 reduction in recruiting fees.
The
increase in operating expenses was partially offset by a decrease of $257,622
in
research, development and engineering expenses. In the first quarter of fiscal
2005, Criticare received funding of $125,000 from our largest OEM customer
to
jointly develop a highly specialized monitoring system for medical imaging
applications, which reduced the research, development and engineering expenses
for the year ended June 30, 2005 as compared to the year ended June 30, 2006.
Total
other income for the fiscal year ended June 30, 2006 increased $355,657 from
the
same period in fiscal 2005. This increase was mainly due to the $300,000
received pursuant to a patent license agreement, an increase of $136,297 in
royalty income and an increase of $36,120 in interest income. The increase
in
other income was offset in part due to a foreign currency exchange loss of
$108,225 related to the Company’s operation in India, which had a foreign
currency exchange gain of $131,885 in fiscal 2005.
The
$1,572,083 and $355,657 increase in gross profit and total other income,
respectively, partially offset by the increased operating expenses of
$1,293,377, resulted in net income of $212,118 for the year ended June 30,
2006
as compared to a net loss of $(422,245) for the same period in fiscal
2005.
Fiscal
Year Ended June 30, 2005 Compared to June 30, 2004
Net
sales
decreased $1,809,854 to $26,781,627 for fiscal 2005 compared to $28,591,481
for
fiscal 2004. The decrease resulted from a 30.4% decrease in the number of units
shipped that was partially offset by a 25.0% increase in the average sales
price
per unit and a 26.6% increase in accessory sales in the current year. The
reduced sales were also the result of a $1,451,260 decrease in sales to Alaris,
formerly our largest OEM customer, a $2,054,985 decrease in domestic sales
and a
$534,322 decrease in international sales during fiscal 2005. The international
sales decrease was the result of a $1,130,250 order shipped in December 2003,
which increased international sales for the year ended June 30, 2004, without
a
comparable sale in fiscal 2005. The Alaris OEM sales decrease was offset by
$3,100,199 of sales to Medrad, our newest OEM customer for medical imaging
applications, in fiscal 2005. The decrease in domestic sales was due to a number
of factors, including $366,140 of orders that were unable to ship by year end;
the growing trend in the defibrillator market of direct sales rather than
through an established distribution network; the postponed sales of patient
monitors awaiting the release of our next generation portable patient monitor;
the overall maturation of the oral surgery market; and to lost sales following
the cancellation of three oral surgery shows, two oral surgery shows in Florida
and one oral surgery show in Louisiana, as a result of the hurricanes during
the
first quarter of fiscal 2005. The lower unit sales and higher average sales
price per unit were driven, in part, by a large shipment of pulse oximeters
to
supply a government tender in Mexico in fiscal 2004. These units monitor pulse
oximetry only and therefore carried a much lower average selling price than
the
Company’s equipment that monitors multiple vital signs parameters. OEM sales in
fiscal 2005 were $6,132,000 and represented 22.9% of total sales, compared
to
$4,634,000 (16.5% of total sales) in fiscal 2004.
The
gross
profit percentage of 39.1% realized in fiscal 2005 decreased from the 41.2%
generated in the prior year. The reduced margins in the current period were
mainly a result of the decreased manufacturing overhead absorption due to the
decrease in the number of units shipped against relatively fixed overhead costs.
Charges
to cost of goods sold for potentially obsolete inventory totaled $281,003 in
fiscal 2005 which compared to $509,001 for fiscal 2004. This inventory is
considered obsolete and was disposed of and removed from Criticare’s warehouse
during fiscal 2006.
Total
operating expenses in fiscal 2005 decreased by $2,147,534 from the prior year
as
a $88,005 increase in research, development and engineering expenses partially
offset a $1,480,362 reduction in sales and marketing expenses and a $755,177
reduction in administrative expenses. The decrease in sales and marketing
expenses was primarily due to a $471,065 decrease in the commissions earned
by
dealers and employees, a decrease of $339,647 in advertising, trade shows and
sales promotion spending, a $405,953 decrease in operating supplies and a
$434,864 decrease in payroll and related benefit expenses. Administrative
expenses decreased by $755,177 mainly due to the cost containment efforts,
including a reduction in consulting expenses of $117,311, a reduction in
investor expenses of $66,676 and a reduction in business insurance premium
expense of $17,483. In addition, bad debt expense of $421,340 was incurred
in
the prior year to write off the receivable due from an international distributor
as compared to the current year.
Total
other income was $303,950 for the fiscal year ended June 30, 2005 which compared
to total other expense of $(526,060) for fiscal 2004. The increase in other
income was due in part to a foreign currency exchange gain of $131,885 related
to the Company’s operation in India. Moreover, other expense in the prior year
included a $200,000 charge to settle a dispute with a customer, over a 1999
product installation, to avoid litigation. The Company elected to settle this
issue rather than incur the significant legal and administrative costs deemed
necessary to successfully defend its position. Other expenses in fiscal 2004
also included a $400,000 charge for the potential call of a standby letter
of
credit used to guarantee fund borrowings by an international distributor and
a
$90,000 charge to satisfy a claim for duties and Value Added Tax associated
with
importation of products into a foreign country on behalf of the international
distributor.
Critical
Accounting Policies
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, sales returns, inventories,
and
warranty obligations. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates. The Company
believes the following accounting policies require its more significant
judgments and estimates used in the preparation of its financial
statements.
Revenue
Recognition
Revenues
and the costs of products sold are recognized as the related products are
shipped or installed, if there are significant installation costs. This revenue
recognition policy is utilized for shipment of product to customers including
both distributors and end-users.
Revenues
derived from patent and intellectual property license agreements are recognized
when both the delivery of the technology has occurred and all parties have
signed the agreement.
Estimating
Allowances for Doubtful Accounts and Sales Returns
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Management analyzes specific accounts receivable as well as historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends, foreign currency movements, and changes in its customer payment terms
when evaluating the allowance for doubtful accounts. If the financial condition
of any of the Company’s customers were to deteriorate, resulting in impairment
of their ability to make payments, additional allowances may be
required.
The
Company also maintains a sales returns reserve in order to estimate potential
future product returns related to current period revenue. Management analyzes
historical returns, current economic trends, changes in customer demand, and
acceptances of the Company’s products when evaluating the adequacy of the sales
returns reserve. Significant management judgments and estimates must be made
and
used in connection with establishing the sales returns reserve in any accounting
period. Material differences may result in the timing of the Company’s revenue
if management made different judgments or utilized different
estimates.
Valuation
of Inventories
Inventories
are stated at the lower of cost or market, with cost determined on the first-in,
first-out method. The Company maintains a reserve for obsolete inventory that
it
utilizes to write down inventories for estimated obsolescence or unmarketable
inventory equal to the difference between the carrying value of the inventory
and the estimated market value. The Company determines the adequacy of the
obsolescence reserve by considering historical annual usage of component parts
and finished goods as well as assumptions about market conditions and forecasted
demand. When items are physically disposed of the amounts are written off
against the reserve. If future product demand is lower than expected or if
market conditions are less favorable than those projected by the Company,
additional charges to increase the obsolescence reserve may be
required.
During
fiscal 2006, the reserve for obsolete inventory was decreased $78,300 to
$360,000 at June 30, 2006 due mainly to the disposal of obsolete inventory
that
had been reserved for in prior years. During fiscal 2005, the reserve for
obsolete inventory was decreased $171,700 to $438,300 at June 30, 2005 due
mainly to the disposal of obsolete inventory that had been reserved for in
prior
years.
Product
Warranty
The
Company provides for the estimated cost of product warranties at the time
products are shipped based upon its historical experience providing warranty
coverage. The Company’s warranty obligations are affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. If actual product failure rates, material usage or service
delivery costs differ from current projections, revisions to the estimated
warranty reserve would be required.
Liquidity
and Capital Resources
As
of
June 30, 2006, the Company had a cash balance of $3,793,781 as compared with
its
fiscal 2005 year-end cash balance of $3,680,965. The Company has continued
to
maintain a bank debt free balance sheet.
The
Company has been able to increase its cash position by an aggregate of $77,335
over the last three fiscal years despite generating aggregate net losses of
$(2,310,700) during this period. Non-cash expenses consisting primarily of
depreciation expense, provisions for obsolete inventory and provision from
doubtful accounts decreased the Company’s profitability by an aggregate of
$3,955,301 during the last three fiscal years, but did not impact the Company’s
cash flows. Over the last three fiscal years the Company has been able to fund
$1,543,472 of cash used in operations and capital spending of $1,198,505
primarily with $2,940,201 of cash provided by the exercise of stock
options.
In
fiscal
2006, $1,213,677 of cash was generated from the issuance of 473,045 shares
of
common stock upon the exercise of stock options, most of which were scheduled
to
expire in less than one year. This cash partially offset the $581,532 of cash
used in operations and the $669,275 of capital spending in fiscal 2006.
Cash used in operations in fiscal 2006 was primarily driven by the inventory
investment in the new, next generation portable multi-parameter vital signs
monitor. In fiscal 2005, $688,724 of cash was generated from the issuance
of 280,337 shares of common stock upon the exercise of stock options and an
additional $131,250 of cash was generated from the issuance of 70,000 shares
of
common stock upon the exercise of stock warrants, most of which were scheduled
to expire in less than one year. This cash partially offset the $726,064 of
cash
used in operations and the $116,167 of capital spending in fiscal 2005. In
fiscal 2004, $855,664 of cash provided from the issuance of 470,725 shares
of
common stock upon the exercise of stock options, most of which were scheduled
to
expire in less than one year, more than offset $413,063 of capital spending
and
$408,864 of cash used in operations.
The
Company believes all future capital and liquidity requirements will be satisfied
by cash generated from operations, proceeds received from the issuance of common
stock related to the exercise of stock options, and its current cash balances.
No major capital equipment expenditures are expected in the Company’s next
fiscal year ending June 30, 2007. The Company also has a $2,000,000 line of
credit currently in place that could be utilized, if necessary. At June 30,
2006, there were no borrowings outstanding under this line of credit. The credit
facility has covenants which require minimum income or liquidity levels. The
Company was in compliance with the covenants at June 30, 2006. This line expires
in June 2007.
The
following table summarizes the Company’s contractual cash obligations at June
30, 2006 in the categories set forth below, and the effect such obligations
are
expected to have on its liquidity and cash flow in future fiscal
periods:
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
and
Thereafter
|
|
Operating
leases
|
|
$
|
455,239
|
|
$
|
334,427
|
|
$
|
86,479
|
|
$
|
31,664
|
|
$
|
2,669
|
|
|
--
|
|
Capital
leases
|
|
|
227,760
|
|
|
82,560
|
|
|
82,560
|
|
|
52,140
|
|
|
10,500
|
|
|
--
|
|
Contract
manufacturing obligations
|
|
|
555,000
|
|
|
555,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Other
long-term obligations
|
|
|
8,561
|
|
|
7,902
|
|
|
659
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
contractual obligations
|
|
$
|
1,246,560
|
|
$
|
979,889
|
|
$
|
169,698
|
|
$
|
83,804
|
|
$
|
13,169
|
|
|
--
|
|
Item
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The
Company has a demand line of credit facility with a commercial bank with
interest payable monthly at 25 basis points below the bank's reference rate.
The
Company had no borrowings outstanding under this bank facility at June 30,
2006, 2005, and 2004. Due historically to the lack of need to borrow from this
credit facility and due to the Company’s current cash position, the Company is
not subject to financial risk on this obligation if interest rates in the market
change significantly.
The
Company’s net sales are primarily denominated in United States dollars, except
for a small amount of net sales from the Company’s operations in India which are
denominated in Indian rupees. As a result, part of the Company’s accounts
receivable are denominated in rupees and translated into U.S. dollars for
financial reporting purposes. A 10% change in the exchange rate of the U.S.
dollar with respect to the Indian rupee would not have a material adverse effect
on the Company’s financial condition or results of operations for the fiscal
year ended June 30, 2006. The Company does not use any hedges or other
derivative financial instruments to manage or reduce exchange rate
risk.
Item
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL
STATEMENTS
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2006 AND 2005
ASSETS
(Note 6)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents (Notes 1 and 10)
|
|
$
|
3,793,781
|
|
$
|
3,680,965
|
|
Accounts
receivable, less allowance for doubtful accounts
of
$829,700 and $300,000, respectively (Note 1)
|
|
|
6,187,351
|
|
|
6,847,432
|
|
Other
receivables (Note 1)
|
|
|
591,008
|
|
|
645,479
|
|
Short-term
note receivable (Note 1)
|
|
|
50,000
|
|
|
--
|
|
Inventories
(Notes 1 and 2)
|
|
|
9,464,037
|
|
|
5,551,093
|
|
Prepaid
expenses
|
|
|
227,606
|
|
|
255,104
|
|
Total
current assets
|
|
|
20,313,783
|
|
|
16,980,073
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT (Note 1):
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
3,157,328
|
|
|
2,800,269
|
|
Furniture
and fixtures
|
|
|
952,193
|
|
|
947,726
|
|
Leasehold
improvements
|
|
|
243,604
|
|
|
220,407
|
|
Demonstration
and loaner monitors
|
|
|
1,997,844
|
|
|
1,352,267
|
|
Production
tooling
|
|
|
2,294,360
|
|
|
2,009,809
|
|
Property,
plant and equipment - cost
|
|
|
8,645,329
|
|
|
7,330,478
|
|
Less
accumulated depreciation
|
|
|
6,193,015
|
|
|
5,320,061
|
|
Property,
plant and equipment - net
|
|
|
2,452,314
|
|
|
2,010,417
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
License
rights and patents - net (Notes 1 and 3)
|
|
|
62,981
|
|
|
69,983
|
|
Long-term
note receivable (Note 1)
|
|
|
150,000
|
|
|
--
|
|
Total
other assets
|
|
|
212,981
|
|
|
69,983
|
|
TOTAL
ASSETS
|
|
$
|
22,979,078
|
|
$
|
19,060,473
|
|
See
notes
to consolidated financial statements.
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,408,746
|
|
$
|
3,033,559
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
Compensation
and commissions
|
|
|
914,889
|
|
|
900,636
|
|
Product
warranties (Notes 1 and 4)
|
|
|
425,000
|
|
|
452,000
|
|
Obligations
under capital lease (Note 12)
|
|
|
68,205
|
|
|
62,739
|
|
Other
|
|
|
174,667
|
|
|
191,807
|
|
Total
current liabilities
|
|
|
6,991,507
|
|
|
4,640,741
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Obligations
under capital lease (Note 12)
|
|
|
133,826
|
|
|
202,031
|
|
Other
long-term obligations
|
|
|
659
|
|
|
8,561
|
|
Total
long-term liabilities
|
|
|
134,485
|
|
|
210,592
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 7, 9 and 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
7,125,992
|
|
|
4,851,333
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (Notes 1 and 8):
|
|
|
|
|
|
|
|
Preferred
stock - $.04 par value, 500,000 shares authorized,
no
shares issued or outstanding
|
|
|
--
|
|
|
--
|
|
Common
stock - $.04 par value, 15,000,000 shares authorized, 12,398,131
and
11,925,086
shares issued, and 12,291,454 and 11,812,493 outstanding,
respectively
|
|
|
495,925
|
|
|
477,003
|
|
Additional
paid-in capital
|
|
|
26,156,864
|
|
|
24,775,995
|
|
Common
stock held in treasury (106,677 and 112,593 shares, respectively)
|
|
|
(375,813
|
)
|
|
(386,834
|
)
|
|
|
|
|
|
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(10,436,794
|
)
|
|
(10,648,912
|
)
|
Cumulative
translation adjustment
|
|
|
12,904
|
|
|
(8,112
|
)
|
Total
stockholders' equity
|
|
|
15,853,086
|
|
|
14,209,140
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
22,979,078
|
|
$
|
19,060,473
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED JUNE 30, 2006, 2005 AND 2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
NET
SALES (Notes
10 and 11)
|
|
$
|
31,350,919
|
|
$
|
26,781,627
|
|
$
|
28,591,481
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
19,308,353
|
|
|
16,311,144
|
|
|
16,821,782
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
12,042,566
|
|
|
10,470,483
|
|
|
11,769,699
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing (Note 1)
|
|
|
6,950,311
|
|
|
5,670,505
|
|
|
7,150,867
|
|
Research,
development and engineering (Note 1)
|
|
|
2,362,512
|
|
|
2,620,134
|
|
|
2,532,129
|
|
Administrative
(Note 9)
|
|
|
3,177,232
|
|
|
2,906,039
|
|
|
3,661,216
|
|
Total
|
|
|
12,490,055
|
|
|
11,196,678
|
|
|
13,344,212
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(447,489
|
)
|
|
(726,195
|
)
|
|
(1,574,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 12)
|
|
|
(19,820
|
)
|
|
(28,848
|
)
|
|
(9,282
|
)
|
Interest
income
|
|
|
94,830
|
|
|
58,710
|
|
|
37,176
|
|
Foreign
currency exchange gain (loss) (Note 1)
|
|
|
(108,225
|
)
|
|
131,885
|
|
|
--
|
|
Other
income (expense) (Note 14)
|
|
|
692,822
|
|
|
142,203
|
|
|
(553,954
|
)
|
Total
|
|
|
659,607
|
|
|
303,950
|
|
|
(526,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
212,118
|
|
|
(422,245
|
)
|
|
(2,100,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION (Notes
1 and 5)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
212,118
|
|
$
|
(422,245
|
)
|
$
|
(2,100,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE (Note
1):
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.02
|
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES
OUTSTANDING (Note 1):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,069,060
|
|
|
11,514,786
|
|
|
11,240,685
|
|
Diluted
|
|
|
12,256,431
|
|
|
11,514,786
|
|
|
11,240,685
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED JUNE 30, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Common
Stock
|
|
|
|
Earnings
|
|
Cumulative
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Treasury
|
|
Subscriptions
|
|
(Accumulated
|
|
Translation
|
|
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Cost
|
|
Receivable
|
|
Deficit)
|
|
Adjustment
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2003
|
|
|
11,204,024
|
|
$
|
448,161
|
|
$
|
23,360,244
|
|
|
130,192
|
|
$
|
(419,618
|
)
|
$
|
(225,000
|
)
|
$
|
(8,126,097
|
)
|
$
|
(3,482
|
)
|
$
|
15,034,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,100,573
|
)
|
|
|
|
|
(2,100,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of options
|
|
|
370,725
|
|
|
14,829
|
|
|
600,455
|
|
|
|
|
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
840,284
|
|
Employee
common stock
purchased
from treasury
|
|
|
|
|
|
|
|
|
5,201
|
|
|
(5,464
|
)
|
|
10,179
|
|
|
|
|
|
|
|
|
|
|
|
15,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2004
|
|
|
11,574,749
|
|
$
|
462,990
|
|
$
|
23,965,900
|
|
|
124,728
|
|
$
|
(409,439
|
)
|
$
|
0
|
|
$
|
(10,226,670
|
)
|
$
|
(3,482
|
)
|
$
|
13,789,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(422,242
|
)
|
|
|
|
|
(422,242
|
)
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,630
|
)
|
|
(4,630
|
)
|
Comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(426,872
|
)
|
Exercise
of options
|
|
|
280,337
|
|
|
11,213
|
|
|
677,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
688,724
|
|
Exercise
of warrants
|
|
|
70,000
|
|
|
2,800
|
|
|
128,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,250
|
|
Employee
common stock
purchased
from treasury
|
|
|
|
|
|
|
|
|
4,134
|
|
|
(12,135
|
)
|
|
22,605
|
|
|
|
|
|
|
|
|
|
|
|
26,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2005
|
|
|
11,925,086
|
|
$
|
477,003
|
|
$
|
24,775,995
|
|
|
112,593
|
|
$
|
(386,834
|
)
|
$
|
0
|
|
$
|
(10,648,912
|
)
|
$
|
(8,112
|
)
|
$
|
14,209,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,118
|
|
|
|
|
|
212,118
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,016
|
|
|
21,016
|
|
Comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,134
|
|
Exercise
of options
|
|
|
473,045
|
|
|
18,922
|
|
|
1,194,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213,677
|
|
Stock-based
employee compensation
|
|
|
|
|
|
|
|
|
172,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,988
|
|
Employee
common stock
purchased
from treasury
|
|
|
|
|
|
|
|
|
13,126
|
|
|
(5,916
|
)
|
|
11,021
|
|
|
|
|
|
|
|
|
|
|
|
24,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2006
|
|
|
12,398,131
|
|
$
|
495,925
|
|
$
|
26,156,864
|
|
|
106,677
|
|
$
|
(375,813
|
)
|
$
|
0
|
|
$
|
(10,436,794
|
)
|
$
|
12,904
|
|
$
|
15,853,086
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED JUNE 30, 2006, 2005 AND 2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
212,118
|
|
$
|
(422,245
|
)
|
$
|
(2,100,573
|
)
|
Adjustments
to reconcile net income (loss) to
net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
650,142
|
|
|
588,559
|
|
|
635,322
|
|
Amortization
|
|
|
7,002
|
|
|
7,002
|
|
|
7,001
|
|
Share
based compensation
|
|
|
172,988
|
|
|
--
|
|
|
--
|
|
Provision
for doubtful accounts
|
|
|
559,206
|
|
|
87,695
|
|
|
393,758
|
|
Provision
for obsolete inventory
|
|
|
56,622
|
|
|
281,003
|
|
|
509,001
|
|
Note
receivable
|
|
|
(200,000
|
)
|
|
--
|
|
|
--
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
100,875
|
|
|
(445,243
|
)
|
|
(1,256,444
|
)
|
Other
receivables
|
|
|
54,471
|
|
|
(285,673
|
)
|
|
193,341
|
|
Inventories
|
|
|
(4,392,330
|
)
|
|
197,563
|
|
|
(469,269
|
)
|
Prepaid
expenses
|
|
|
27,498
|
|
|
109,271
|
|
|
(23,441
|
)
|
Accounts
payable
|
|
|
2,375,187
|
|
|
(203,846
|
)
|
|
964,452
|
|
Accrued
liabilities
|
|
|
(32,323
|
)
|
|
(640,150
|
)
|
|
737,988
|
|
Net
cash used in operating activities
|
|
|
(408,544
|
)
|
|
(726,064
|
)
|
|
(408,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net
|
|
|
(669,275
|
)
|
|
(116,167
|
)
|
|
(413,063
|
)
|
Net
cash used in investing activities
|
|
|
(669,275
|
)
|
|
(116,167
|
)
|
|
(413,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Retirement
of obligation under capital lease
|
|
|
(68,205
|
)
|
|
(57,712
|
)
|
|
(11,358
|
)
|
Proceeds
from issuance of common stock
|
|
|
1,237,824
|
|
|
846,713
|
|
|
855,664
|
|
Net
cash provided by financing activities
|
|
|
1,169,619
|
|
|
789,001
|
|
|
844,306
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
21,016
|
|
|
(4,630
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
112,816
|
|
|
(57,860
|
)
|
|
22,379
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,680,965
|
|
|
3,738,825
|
|
|
3,716,446
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
3,793,781
|
|
$
|
3,680,965
|
|
$
|
3,738,825
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid—net
|
|
$
|
3,910
|
|
$
|
2,506
|
|
$
|
3,053
|
|
Interest
|
|
|
19,820
|
|
|
26,596
|
|
|
11,535
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Cost
of fixed asset disposals
|
|
|
--
|
|
|
61,522
|
|
|
1,898,210
|
|
Property,
plant, and equipment acquired under capital lease
|
|
|
--
|
|
|
--
|
|
|
333,840
|
|
See
notes
to consolidated financial statements.
NOTES
TO FINANCIAL STATEMENTS
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006, 2005 AND 2004
1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
--
Criticare Systems, Inc. designs, manufactures and markets patient monitoring
equipment and related accessories to the health care community worldwide and
is
headquartered in Waukesha, Wisconsin. The Company sells domestically primarily
to oral and stand-alone general surgery centers and hospitals through regional
sales managers and a dealer network. Internationally, the Company sells mainly
to hospitals through country managers and a worldwide dealer network. In
addition, the Company sells modules and stand-alone monitors worldwide to
original equipment manufacturers (“OEMs”).
Principles
of Consolidation
-- The
consolidated financial statements include the accounts of Criticare Systems,
Inc. (the "Company") and its wholly owned subsidiaries: Criticare International
GmbH Marketing Services ("Criticare International"), CSI Trading, Inc. ("CSI
Trading"), Criticare Service GmbH ("Criticare Service"), Criticare Biomedical,
Inc. ("Criticare Biomedical"), Sleep Care, Inc. ("Sleep Care"), Criticare
Systems Limited ("Criticare Limited"), and Criticare Integration, Inc.
("Criticare Integration"). CSI Trading was incorporated in November 1996 to
assist with European marketing activities and includes an operation in India.
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.
Accounts
Receivable and Allowance for Doubtful Accounts --
Accounts
receivable are customer obligations due under normal trade terms. The Company
sells its products to distributors, OEMs, and end users in medical facilities
such as hospitals, surgery centers, nursing homes, and physician offices. The
Company performs continuing credit evaluations of its customers’ financial
condition, and although it generally does not require collateral, letters of
credit may be required from customers in certain circumstances.
Management
reviews accounts receivable on a monthly basis to determine if any receivables
will potentially be uncollectible. The Company includes any accounts receivable
balances that are determined to be uncollectible, along with a general reserve,
in its overall allowance for doubtful accounts. The general reserve in the
allowance for doubtful accounts is a calculation based upon the accounts
receivable balance and the historical effectiveness of Criticare's collection
of
those receivables. The general reserve as of June 30, 2006 and 2005 is $100,000
and $89,602, respectively. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. Based on the
information available, the Company believes its allowance for doubtful accounts
as of June 30, 2006 and 2005 is adequate. However, actual write-offs might
exceed the recorded allowance.
Inventories
--
Inventories are stated at the lower of cost or market, with cost determined
on
the first-in, first-out method.
Other
Receivables -- Other
receivables as of June 30, 2006 and 2005 consist mainly of tender deposits
in
the amount of $130,880 and $145,090, respectively, bank guarantees in the amount
of $28,917 and $27,574, respectively, and receivables to be paid via letters
of
credit amounting to $259,286 and $256,627, respectively.
Note
Receivable -- Note
receivable as of June 30, 2006 consisted of a non-exclusive license agreement
with quarterly royalty payments ending January 1, 2010. This license agreement
is treated, for accounting purposes, as a non-interest bearing note which is
segregated into a $50,000 short-term note and a $150,000 long-term note,
respectively. The future maturities of the note receivable is $50,000 in each
of
the fiscal years, 2006, 2007, 2008 and 2009, respectively.
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. The Company also 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
estimated useful lives of other property and equipment are as follows:
|
|
Estimated
|
|
Classification
|
|
Useful
Lives
|
|
|
|
|
|
Machinery
and equipment
|
|
5-7
years
|
|
Furniture
and fixtures
|
|
5
years
|
|
Leasehold
improvements
|
|
4-5
years
|
|
Demonstration
and loaner monitors
|
|
4
years
|
|
Production
tooling
|
|
5-7
years
|
|
The
Company periodically assesses the recoverability of long-lived assets, including
property and equipment and intangibles, in accordance with the Statement
of
Financial Accounting Standards No. 144, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 144”),
when indications of potential impairment exist. The amount of any impairment
is
calculated by comparing the estimated fair market value with the carrying
value
of the related asset. Management considers such factors as current operating
results, trends, and future prospects, in addition to other economic factors
in
performing this analysis. No such impairments exist at June 30, 2006 and
2005.
As of July 1, 2005, in accordance with the Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed” (“SFAS No. 86”), the Company will accumulate and
amortize the software costs on a product-by product basis once the technological
feasibility of the product has been established. Amortization of the costs
will
be equal to the straight-line amortization of the costs over the estimated
economic life of the product.
License
Rights and Patents -- The Company adopted SFAS 142, “Goodwill and Other
Intangible Assets,” during the period ended June 30, 2003 to account for its
license rights and patents. License rights and patents are carried at cost
and
are amortized using the straight-line method over their estimated useful life
as
follows:
|
|
Estimated
|
|
Classification
|
|
Useful
Lives
|
|
|
|
|
|
License
rights and patents
|
|
17
years
|
|
License
rights and patents are evaluated for impairment when events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable through the estimated undiscounted future cash flows resulting
from
the use of these assets. When any such impairment exists, the related assets
will be written down to fair value.
Revenue
Recognition
--
Revenues and the costs of products sold are recognized as the related products
are shipped or installed, if there are significant installation costs. This
revenue recognition policy is utilized for shipment of product to customers,
including both distributors and end-users. Revenue for the non-exclusive license
agreement is recognized, in accordance with SAB No. 104, when all four elements
for revenue recognition have been met.
Shipping
Costs -- Any
shipping costs that are billable to the customer are included in revenue and
all shipping
costs are included in cost of goods sold in the accompanying consolidated
statements of operations.
Product
Warranties
--
Estimated costs for product warranties are accrued for and charged to operations
as the related products are shipped and installed.
Marketing
Expenses
--
Marketing expenses include all of the Company's sales related costs. Bad debt
expense totaled $559,206, $87,695 and $393,758 in fiscal 2006, 2005 and 2004,
respectively.
Advertising
Costs --
Advertising costs are expensed as incurred. Advertising costs totaled $97,460,
$68,120 and $101,174 for the years ended June 30, 2006, 2005 and 2004,
respectively.
Research
and Development Expenses
--
Research and development costs are charged to operations as incurred. Such
expenses totaled $2,304,226, $2,561,386 and $2,271,476 in fiscal 2006, 2005
and
2004, 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 statements 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. The Company pays income taxes in certain states that
require an annual minimum tax. These taxes are included in administrative
expenses in the consolidated statements of operations.
Translation
of Foreign Currency --
The
Company follows the translation policy as provided by Financial Accounting
Standards No. 52, “Foreign Currency Translation” in translating the financial
statements of its operation in India from Indian rupees to U.S. dollars.
Accordingly, assets and liabilities are translated at the rate of exchange
at
the balance sheet date. Income and expense items are translated at the average
exchange rate prevailing throughout the year.
Net
Income (Loss) Per Common Share
-- Basic
income (loss) per share is computed using the weighted average number of common
shares outstanding during the periods. Diluted income (loss) per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the periods. The basic and diluted weighted
average number of common shares outstanding in the financial statements are
the
same in fiscal years 2005 and 2004 because including a diluted calculation
in a
loss position would produce an anti-dilutive per share amount. The number of
diluted weighted average common shares outstanding would be higher by 131,230
shares in 2005 and 335,215 shares in 2004 without this anti-dilutive
impact.
Stock
Options --
The
Company grants options to purchase Criticare Systems, Inc. common shares under
stock option plans that are described more fully in Note 8. Prior to fiscal
2006, the Company had adopted the disclosure-only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for
Stock-Based Compensation—Transition and Disclosure." Effective July 1, 2005, the
Company adopted the fair value recognition provisions of SFAS No. 123 (R),
“Share-Based Payment." Under the modified prospective method of adoption
selected by the Company, compensation cost recognized in fiscal 2006 is the
same
as that which would have been recognized had the recognition provisions of
SFAS
No. 123 been applied from its original effective date. Results for the prior
year have not been restated. If the Company had elected to recognize
compensation cost for the options granted during the years ended June 30, 2005
and 2004, 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:
|
|
|
Years
Ended June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
loss - as reported
|
|
$
|
(422,245
|
)
|
$
|
(2,100,573
|
)
|
Deduct:
Total stock-based employee compensation
expense
determined
under fair value based
method
for all awards
|
|
|
(211,498
|
)
|
|
(285,566
|
)
|
Net
loss - pro forma
|
|
$
|
(633,743
|
)
|
$
|
(2,386,139
|
)
|
|
|
|
|
|
|
|
|
Basic
net loss per share - as reported
|
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
Diluted
net loss per share - as reported
|
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
Basic
net loss per share - pro forma
|
|
$
|
(0.06
|
)
|
$
|
(0.21
|
)
|
Diluted
net loss per share - pro forma
|
|
$
|
(0.06
|
)
|
$
|
(0.21
|
)
|
Fair
Value of Financial Instruments
-- The
Company's financial instruments under SFAS No. 107 "Disclosure About Fair
Value of Financial Instruments," includes cash, accounts receivable, accounts
payable, borrowings under line of credit facility and long-term debt. The
Company believes that the carrying amounts of these accounts are a reasonable
estimate of their fair value because of the short-term nature of such
instruments or, in the case of long-term debt because of interest rates
available to the Company for similar obligations.
Comprehensive
Income
--
Comprehensive income consists of net income and foreign currency translation
adjustments, and is presented in the consolidated statements of stockholders'
equity.
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 for fiscal 2004 and fiscal 2005 have been reclassified to conform to
the
fiscal 2006 presentation.
|
Inventories
consist of the following as of June
30:
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Component
parts
|
|
$
|
2,605,751
|
|
$
|
3,573,396
|
|
Work
in process
|
|
|
1,470,893
|
|
|
1,085,172
|
|
Finished
units
|
|
|
5,747,393
|
|
|
1,330,825
|
|
Total
inventories
|
|
|
9,824,037
|
|
|
5,989,393
|
|
Less:
reserve for obsolescence
|
|
|
360,000
|
|
|
438,300
|
|
Net
inventory
|
|
$
|
9,464,037
|
|
$
|
5,551,093
|
|
3.
LICENSE RIGHTS AND PATENTS
The
components of and changes in the carrying amount of license rights and patents
are as follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
License
rights and patents
|
|
$
|
196,777
|
|
$
|
196,777
|
|
Accumulated
amortization
|
|
|
(133,796
|
)
|
|
(126,794
|
)
|
Net
license rights and patents
|
|
$
|
62,981
|
|
$
|
69,983
|
|
Future
amortization of license and patents is as follows at June 30, 2006:
|
|
Year ended June 30,
|
|
|
|
|
|
2007
|
$
7,001
|
|
|
2008
|
7,001
|
|
|
2009
|
7,001
|
|
|
2010
|
7,001
|
|
|
2011
|
7,001
|
|
|
Thereafter
|
27,976
|
|
|
Total
|
$62,981
|
|
Approximately
$7,000 of amortization was charged to operations in each of the fiscal years
ended June 30, 2006, 2005 and 2004.
4.
PRODUCT WARRANTY
The
Company’s products are subject to warranties, and therefore reserves are
established for the estimated future costs of repair or replacement and included
in cost of sales at the time the related sale is recognized. These reserves
are
adjusted based on management’s best estimates of future warranty costs after
considering historical and projected product failure rates and product repair
costs. In the event that actual experience differs from these best estimates,
changes in the Company’s warranty reserves might become necessary.
Changes
in the Company’s warranty reserve for fiscal years 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
452,000
|
|
$
|
444,000
|
|
Warranties
issued
|
|
|
244,093
|
|
|
297,955
|
|
Settlements
|
|
|
(271,093
|
)
|
|
(289,955
|
)
|
Changes
in estimated pre-existing warranties
|
|
|
--
|
|
|
--
|
|
Balance,
end of year
|
|
$
|
425,000
|
|
$
|
452,000
|
|
|
|
|
|
|
|
|
|
|
The
Company’s warranty settlements for fiscal 2004 totaled
$321,212.
|
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 upon 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.
The
valuation allowance was increased $260,000 in 2006 and $360,000 in
2005.
Significant
components of the Company's deferred income tax assets and deferred income
tax
liabilities are as follows:
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and sales allowances
|
|
$
|
341,000
|
|
$
|
148,000
|
|
$
|
133,000
|
|
Inventory
allowances
|
|
|
183,000
|
|
|
196,000
|
|
|
269,000
|
|
Product
warranties
|
|
|
167,000
|
|
|
177,000
|
|
|
174,000
|
|
Other
accrued liabilities
|
|
|
139,000
|
|
|
146,000
|
|
|
135,000
|
|
Severance
pay accrual
|
|
|
3,000
|
|
|
9,000
|
|
|
14,000
|
|
Federal
net operating loss carryforwards
|
|
|
6,020,000
|
|
|
6,004,000
|
|
|
5,772,000
|
|
State
net operating loss carryforwards
|
|
|
597,000
|
|
|
601,000
|
|
|
574,000
|
|
Federal
tax credit carryforwards
|
|
|
143,000
|
|
|
198,000
|
|
|
198,000
|
|
Excess
of book over tax depreciation and amortization
|
|
|
258,000
|
|
|
116,000
|
|
|
0
|
|
Investment
losses not deducted
|
|
|
118,000
|
|
|
118,000
|
|
|
118,000
|
|
Total
deferred income tax assets
|
|
|
7,969,000
|
|
|
7,713,000
|
|
|
7,387,000
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Excess
of tax over book depreciation and amortization
|
|
|
0
|
|
|
0
|
|
|
(22,000
|
)
|
Prepaid
expenses
|
|
|
(38,000
|
)
|
|
(42,000
|
)
|
|
(54,000
|
)
|
Total
deferred income tax liabilities
|
|
|
(38,000
|
)
|
|
(42,000
|
)
|
|
(76,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(7,931,000
|
)
|
|
(7,671,000
|
)
|
|
(7,311,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income taxes recognized in the
consolidated
balance sheets
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
At
June
30, 2006, the Company had federal net operating loss carryforwards of
approximately $17,706,000 which expire in 2008 through 2026. At June 30, 2006,
the Company had available for federal income tax purposes approximately $87,000
of alternative minimum tax credit carryforwards which carry forward indefinitely
and approximately $56,000 of tax credit carryforwards which expire in the years
2007 through 2009. The Company also has approximately $11,930,000 of state
net
operating loss carryforwards, which expire in 2007 through 2021, available
to
offset certain future state taxable income.
|
The
income tax provision consists of the
following:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
State
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
income tax provision
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
A
reconciliation of the provision for income taxes (benefit) at the
federal
statutory income tax rate to the effective income tax rate
follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
34.0
|
%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
Losses
and change in other deferrred assets
for
which no benefit was provided
|
|
|
141.5
|
|
|
77.2
|
|
|
49.1
|
|
Stock
options and warrants
|
|
|
(181.6
|
)
|
|
(46.0
|
)
|
|
15.5
|
|
Other—net
|
|
|
6.1
|
|
|
2.8
|
|
|
0.4
|
|
Effective
income tax rate
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
6.
|
LINE
OF CREDIT FACILITY
|
|
At
June 30, 2006, 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, less 0.25% (8.00% as of June 30, 2006).
As of
June 30, 2006, 2005, and 2004 there were no borrowings against the
line. Borrowings under the line of credit facility are collateralized
by
substantially all assets of the Company. The credit facility has
covenants
which require minimum income or liquidity levels. The Company was
in
compliance with the covenants at June 30,
2006.
|
From
time
to time, various lawsuits arise out of the normal course of business. These
proceedings are handled by outside counsel. Currently management is not aware
of
any claim or action pending against the Company that would have a material
adverse effect on the Company.
Stock
Options
-- At
the
December 1, 2005 annual meeting of the stockholders of the Company, the
stockholders approved an amendment of the Criticare Systems, Inc. 2003 Stock
Option Plan (the “2003 Plan”) to increase the number of shares of common stock
available for future grants by 500,000 shares to 930,000 shares and to authorize
grants of restricted stock and stock appreciation rights under the plan. During
the annual stockholders meeting held on November 14, 2003, the Company’s
stockholders approved the original 2003 Plan. This 2003 Plan replaced the 1992
Employee Stock Option Plan and the 1992 Non-Employee Stock Option Plan
(collectively, the “1992 Plans”) and 179,380 reserved shares of common stock
available under the 1992 Plans were moved to the 2003 Plan. The stockholders
also approved 250,620 shares being available for future grants in addition
to
the 179,380 shares currently available, for a total of 430,000 shares authorized
for issuance under the 2003 Plan. The Company also has options outstanding
under
two plans which existed prior to the approval of the 1992 Plans, the 1987
Employee Stock Option Plan and the 1987 Non-Employee Stock Option Plan
(collectively with the 1992 Plans, the "Old Plans"). As a result of the approval
of the 2003 Plan, no new stock options can be granted under the Old Plans,
although the Company can regrant existing stock options under the Old Plans
to
extend the terms of such options. The
Board
of Directors has authorized in connection with these stock option plans the
issuance of 3,210,620 reserved shares of common stock, of which 495,875 reserved
shares remain available for future issuance at June 30, 2006. The
Board
of Directors increased the number of reserved shares for issuance under the
Plans from 1,720,000 to 2,220,000 during 2001, from 2,220,000 to 2,460,000
during 2002, from 2,460,000 to 2,710,620 during 2003, and from 2,710,620 to
3,210,620 during 2005. The compensation cost that has been charged against
income for the 2003 Plan and the Old Plans was $172,988 for the year ended
June
30, 2006. No income tax benefit was recognized in the income statement for
share-based compensation arrangements due to the valuation allowance. The
activity during 2004, 2005 and 2006 for the above plans is summarized as
follows:
|
|
Number
of
|
|
Stock
Options
|
|
Weighted
Avg.
|
|
|
|
Shares
|
|
Price
Range
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2003
|
|
|
1,426,370
|
|
|
1.50-4.40
|
|
|
2.35
|
|
Granted
|
|
|
414,000
|
|
|
3.05-4.37
|
|
|
3.19
|
|
Cancelled
|
|
|
(39,750
|
)
|
|
1.63-4.30
|
|
|
3.21
|
|
Exercised
|
|
|
(370,725
|
)
|
|
1.50-2.97
|
|
|
1.66
|
|
Outstanding
at June 30, 2004
|
|
|
1,429,895
|
|
|
1.88-4.40
|
|
|
2.75
|
|
Granted
|
|
|
96,000
|
|
|
2.25-5.13
|
|
|
2.97
|
|
Cancelled
|
|
|
(189,200
|
)
|
|
2.88-3.75
|
|
|
3.16
|
|
Exercised
|
|
|
(280,337
|
)
|
|
1.88-4.30
|
|
|
2.46
|
|
Outstanding
at June 30, 2005
|
|
|
1,056,358
|
|
|
1.88-5.13
|
|
|
2.77
|
|
Granted
|
|
|
45,000
|
|
|
4.60-5.19
|
|
|
4.90
|
|
Cancelled
|
|
|
(84,625
|
)
|
|
1.88-3.42
|
|
|
2.51
|
|
Exercised
|
|
|
(473,045
|
)
|
|
1.88-4.40
|
|
|
2.57
|
|
Outstanding
at June 30, 2006
|
|
|
543,688
|
|
|
2.25-5.19
|
|
|
3.17
|
|
The
following table summarizes the option activity as of June 30, 2006:
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Remaining
Contractual
|
|
|
|
|
|
|
|
At
June 30, 2006
|
|
Life-Years
|
|
Price
|
|
at
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
543,688
|
|
|
6.70
|
|
$
|
3.17
|
|
$
|
491,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
242,989
|
|
|
5.81
|
|
$
|
3.01
|
|
$
|
239,789
|
|
Option
awards are granted with an exercise price equal to the market price of the
Company’s stock at the date of the grant; those option awards generally vest
based upon 4 years of continuous service and have 5 and 10 year contractual
terms for the Old Plans and 2003 Plan, respectively, as determined by the
Compensation Committee of the Company's Board of Directors. Certain option
awards provide for accelerated vesting if there is a change in
control.
The
Company has adopted the fair
value recognition provisions of SFAS No. 123 (R), “Share-Based Payment”. Under
the modified prospective method of adoption selected by the Company,
compensation cost recognized in fiscal 2006 is the same as that which would
have
been recognized had the recognition provisions of SFAS No. 123 been applied
from
its original effective date. The fair value of stock options is the estimated
fair value at the grant date using the Black-Scholes option-pricing model.
The
fair value of each option award is estimated on the date of the grant using
the Black-Scholes option-pricing model that uses the assumptions noted in
the
following table. Expected volatilities are based on implied volatilities
from
traded options on the Company’s stock, historical volatility of the Company’s
stock, and other factors. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. The expected
term
of options granted is derived from the output of the option valuation model
and
represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of
the
option is based on the U.S. Treasury yield curve in effect at the time of
the
grant. The weighted average fair market value of the options granted during
fiscal 2006, 2005 and 2004, along with the assumptions used, follows
below:
|
|
|
Years
Ended June 30,
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted
average fair market value of options
granted
during the fiscal year ended June 30
|
|
$
|
2.90
|
|
$
|
1.62
|
|
$
|
0.95
|
|
Assumptions
used:
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
45.0
|
%
|
|
55.0
|
%
|
|
80.0
|
%
|
Risk-free
interest rate
|
|
|
4.29
|
%
|
|
3.74
|
%
|
|
4.39
|
%
|
Expected
option life (in years)
|
|
|
8.88
|
|
|
6.25
|
|
|
9.40
|
|
The
total
intrinsic value of the options exercised during the years ended June 30,
2006,
2005 and 2004 was $1,132,994, $377,138 and $960,387,
respectively.
The
following table summarizes the status of the Company’s nonvested shares as of
June 30, 2006, and changes during the year ended June 30, 2006:
|
|
Number
of
|
|
Weighted-Average
Grant
|
|
Nonvested
Shares
|
|
Shares
|
|
Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2005
|
|
|
398,005
|
|
|
$3.02
|
|
Granted
|
|
|
45,000
|
|
|
4.90
|
|
Cancelled
|
|
|
(3,188
|
)
|
|
3.04
|
|
Vested
|
|
|
(139,118
|
)
|
|
3.02
|
|
Nonvested
at June 30, 2006
|
|
|
300,699
|
|
|
$3.30
|
|
As
of
June 30, 2006 there was $184,717 of total unrecognized compensation cost
related
to nonvested share-based compensation arrangements granted under the 2003
Plan
and Old Plans. That cost is expected to be recognized over a weighted-average
period of 1.48 years. The total fair value of the shares vested during the
year
ended June 30, 2006 was $139,392.
Stock
Warrants
-- In
February 1998, 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 common stock at a price of $3.00 per share. The warrant
was
exercisable as to 30,000 shares upon execution of the agreement and the warrants
to purchase the remaining 120,000 shares were to be exercisable if certain
performance parameters were achieved by February 1999. No such parameters
were
achieved. These warrants expired in February 2003, but were amended. The
30,000
warrants were extended for an additional five years with an exercise price
of
$2.88 per share which represents the closing price of the Company’s stock on the
date the warrants were amended. The fair value of the extended warrants,
based
on the estimated fair value using the Black-Scholes pricing model, totaled
$24,990 and was expensed during the year in which they were extended, fiscal
2003.
In
December 2000, the Company executed another warrant agreement with the
consultant. The warrant agreement provided for the issuance of warrants to
purchase up to 70,000 shares of common stock at a price of $1.875 per share.
The
warrant vested over a four year period in four equal increments each year
on the
anniversary date of the warrant. The warrant was to terminate as to any shares
that were unvested at the time the consultant ceased to provide consulting
services to the Company. As of December 21, 2004, the warrant had fully vested.
During fiscal 2005, this warrant was exercised in full to purchase 70,000
shares. The fair value of this warrant is the estimated fair value using
the
Black-Scholes pricing model. The fair value is expensed over the vesting
period
of the grants.
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. As of June 30, 2006,
no
preferred stock was 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.
Common
Stock Held in Treasury -- At
June
30, 2006 and 2005, the Company held in Treasury 106,677 and 112,593 shares
of
common stock, respectively. On February 28, 2002, the Criticare Board of
Directors approved the purchase in the open market of up to 500,000 shares
of
Criticare common stock. At June 30, 2006 and 2005, the Company held in Treasury
76,223 shares of common stock purchased in
accordance with this stock buyback program.
Employee
Stock Purchase Plan -- The
Company has an Employee Stock Purchase Plan to provide employees of the Company
with an opportunity to purchase common stock of the Company through accumulated
payroll deductions. The plan allows eligible employees to purchase shares
of the
Company’s common stock through monthly offering periods. The option price for
each share of common stock purchased equals 85% of the last quoted sales
price
of a share of the Company’s common stock as reported by the American Stock
Exchange on the first day of the monthly offering period or the last day
of the
monthly offering period, whichever is lower. The Company is authorized to
issue
500,000 shares of common stock under the plan. As of June 30, 2006, the
Company had issued a total of 73,643 shares of common stock under the plan,
and
had 426,357 shares of common stock authorized for future issuance under the
plan. The plan will terminate on July 1, 2009, unless sooner terminated by
the
Board of Directors.
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
$104,000, $97,000 and $96,000 in 2006, 2005 and 2004, respectively.
10. BUSINESS
AND CREDIT CONCENTRATIONS
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash, certificates of deposit, and accounts receivable. These
financial instruments are carried at approximate fair value, less appropriate
allowance, due to their short maturities.
The
Company maintains cash balances which at times may exceed federally insured
limits. As of June 30, 2006 and 2005, the Company held $3,764,888 and
$3,401,743, respectively, in excess of federally insured limits. The Company’s
management evaluates the creditworthiness of the financial institutions in
which
it places its cash. The Company has not experienced any losses in such accounts
and does not believe it is exposed to any significant credit risk for cash
accounts.
The
Company is a manufacturer of medical monitors and telemetry products whose
customers include hospitals and alternative health care sites throughout the
world. Although the Company's products are sold primarily to health care
providers, concentrations of credit risk with respect to trade accounts
receivable are limited due to the Company's large number of customers, their
geographic dispersion, and the Company’s credit evaluation process. The Company
currently coordinates substantially all international sales and distribution
activities through its headquarters in Waukesha, Wisconsin. Other than
inventory, other receivables and accounts receivable for the Company’s operation
in India totaling approximately $1.2 million, 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:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Europe
and Middle East
|
|
$
|
7,355,000
|
|
$
|
7,182,000
|
|
$
|
7,164,000
|
|
Pacific
Rim
|
|
|
1,692,000
|
|
|
1,787,000
|
|
|
1,389,000
|
|
Canada
and Central and South America
|
|
|
3,516,000
|
|
|
2,689,000
|
|
|
3,246,000
|
|
Export
net sales
|
|
$
|
12,563,000
|
|
$
|
11,658,000
|
|
$
|
11,799,000
|
|
U.S.
net sales
|
|
|
18,788,000
|
|
|
15,124,000
|
|
|
16,792,000
|
|
Total
net sales
|
|
$
|
31,351,000
|
|
$
|
26,782,000
|
|
$
|
28,591,000
|
|
Note: Sales
in Europe and the Middle East have been combined above due to joint sales
responsibility in these areas. No foreign country made up more than 10% of
the
Company’s
total net sales.
11.
OTHER
BUSINESS CONCENTRATIONS
During
2003, the Company entered into an OEM agreement with a customer to jointly
develop and exclusively sell a highly specialized medical monitoring product
to
the OEM. In July 2004, Criticare shipped the initial prototypes of this
monitoring product to this OEM and in January 2005 production shipments began.
Sales to this customer approximated $5,177,000 in fiscal 2006 and $3,100,000
in
fiscal 2005, which represented approximately 17% and 12%, respectively, of
the
Company's total net sales. The Company had a receivable balance from this
customer of $939,270 on June 30, 2006 and $1,373,836 on June 30, 2005, which
represented 15% and 20%, respectively, of the Company's total receivables as
of
this date.
During
1999, the Company entered into an OEM agreement with a customer. This agreement
ended on June 30, 2005 with transition sales continuing through August 31,
2005.
Sales to this customer approximated $95,000, $2,129,000 and $3,580,000 in fiscal
2006, 2005 and 2004, respectively, which represented approximately 0.3%, 8%
and
13% of the Company's total net sales in each of these fiscal years. The Company
had a receivable balance from this customer of $1,366 and $218,891 on June
30,
2006 and 2005, respectively, which represented 0% and 3% of the Company's total
receivables as of these dates.
In
fiscal
2001, the Company entered into agreements with two offshore contract
manufacturing firms to supply finished products. During fiscal 2005, the Company
ended the supply partnership agreement with one of the contract manufacturing
firms. A summary of the purchases and outstanding payables to these two
companies for the years ended June 30, 2006, 2005 and 2004 follows
below:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier
I - Purchases
|
|
$
|
9,324,825
|
|
$
|
6,193,106
|
|
$
|
6,756,279
|
|
%
of total purchases
|
|
|
32.3%
|
|
|
29.5%
|
|
|
30.0%
|
|
Accounts
payable balance
|
|
$
|
973,625
|
|
$
|
610,479
|
|
$
|
1,227,116
|
|
%
of total payables
|
|
|
18.0%
|
|
|
20.1%
|
|
|
37.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier
II - Purchases
|
|
$
|
63,000
|
|
$
|
270,058
|
|
$
|
1,115,484
|
|
%
of total purchases
|
|
|
0.2%
|
|
|
1.3%
|
|
|
5.0%
|
|
Accounts
payable balance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
200,978
|
|
%
of total payables
|
|
|
0.0%
|
|
|
0.0%
|
|
|
6.2%
|
|
12. COMMITMENTS
The
Company leases various equipment under both operating leases and a capital
lease, which expire at various dates through fiscal 2010.
On
January 19, 2004 the Company entered into a lease agreement for the hardware
and
software for a new business system. This lease has been accounted for as
a
capital lease in accordance with SFAS No. 13, “Accounting for Leases.” The
following is an analysis of this capital lease:
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Machinery
and equipment
|
|
$
|
333,840
|
|
$
|
333,840
|
|
Less
accumulated depreciation
|
|
|
(119,228
|
)
|
|
(71,537
|
)
|
Net
|
|
$
|
214,612
|
|
$
|
262,303
|
|
Depreciation
expense was $47,691 and $47,691, respectively, in fiscal 2006 and
2005.
In
August
2002 the Company sold its facility headquartered in Waukesha, Wisconsin and
leased back approximately 62% of the building’s square footage through August
2007. Rent expense was $339,024
in 2006
and $337,281
in 2005
for the five year building lease and all other lease commitments.
The
following is a schedule by years of the future minimum lease payments under
this
capital lease and future minimum rental payments required under operating
leases, together with the present value of the net minimum lease payments
at
June 30, 2006:
|
|
Capital
|
|
Operating
|
|
Fiscal
year ending June 30
|
|
Lease
|
|
Leases
|
|
2007
|
|
$
|
82,560
|
|
$
|
334,427
|
|
2008
|
|
|
82,560
|
|
|
86,479
|
|
2009
|
|
|
52,140
|
|
|
31,664
|
|
2010
|
|
|
10,500
|
|
|
2,669
|
|
2011
and thereafter
|
|
|
--
|
|
|
--
|
|
Total
minimum lease payments
|
|
$
|
227,760
|
|
$
|
455,239
|
|
Less
amount representing interest
|
|
|
(25,729
|
)
|
|
|
|
Present
value of net minimum lease payments
|
|
$
|
202,031
|
|
|
|
|
Less
current portion at June 30, 2006
|
|
|
68,205
|
|
|
|
|
Long-term
portion at June 30, 2006
|
|
$
|
133,826
|
|
|
|
|
During
fiscal 2001, the Company entered into supply partnership agreements with
two
offshore contract manufacturing firms that exclusively manufacture medical
devices in a regulated environment. These two firms manufacture specific
products designated by the Company in accordance with formal purchase orders.
The initial term of the agreements is for a period of three years and is
automatically extended for additional periods of two years each, unless either
party gives written notice at least sixty days prior to the end of the initial
term or the then current extension term. During fiscal 2005, the Company
ended
the supply partnership agreement with one of the contract manufacturing firms.
To ensure an adequate supply of products manufactured by the remaining contract
manufacturer is maintained, the remaining agreement, with this manufacturer,
requires that this firm keeps on hand in its finished goods inventories one
full
month of supply of all products under current purchase orders. At June 30,
2006
and 2005, a one month supply of product maintained at the firm would total
approximately $555,000. In the event the Company would cancel a purchase
order
under the agreement, the Company would be required to purchase at cost all
raw
materials, work-in-progress and finished goods inventories for that purchase
order. The total work-in-process and raw material inventories for the agreement
is approximately $555,000. In addition, any property or equipment that this
firm
purchased specifically for the production of the Company's products would
be
purchased at mutually agreed upon prices. There have not been any purchase
order
cancellations under this agreement.
13.
QUARTERLY
RESULTS
-
Unaudited
The
following table contains quarterly information, which includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation.
|
|
Quarters
Ended (Unaudited)
|
|
|
|
June
30,
|
|
March
31,
|
|
Dec.
31,
|
|
Sept.
30,
|
|
June
30,
|
|
March
31,
|
|
Dec.
31,
|
|
Sept.
30,
|
|
|
|
2006
|
|
2006
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,096
|
|
$
|
7,812
|
|
$
|
8,771
|
|
$
|
7,672
|
|
$
|
8,021
|
|
$
|
6,055
|
|
$
|
7,375
|
|
$
|
5,331
|
|
Gross
profit
|
|
|
2,442
|
|
|
3,089
|
|
|
3,576
|
|
|
2,935
|
|
|
3,068
|
|
|
2,430
|
|
|
3,101
|
|
|
1,871
|
|
Net
income (loss)
|
|
|
(524
|
)
|
|
(8
|
)
|
|
607
|
|
|
137
|
|
|
371
|
|
|
(245
|
)
|
|
152
|
|
|
(700
|
)
|
Net
income (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
and diluted
|
|
|
(0.04
|
)
|
|
(0.00
|
)
|
|
0.05
|
|
|
0.01
|
|
|
0.03
|
|
|
(0.02
|
)
|
|
0.01
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. During the fourth quarter
of fiscal 2006, the Company reevaluated the allowance for doubtful accounts
and
increased the allowance by $529,700.
14.
OTHER
INCOME
The
Company recognized $300,000 pursuant to a patent license agreement
and royalty income of $313,500 for the year ended June 30, 2006.
Royalty income of $177,203 and $77,875 for fiscal 2005 and fiscal 2004,
respectively.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of Criticare Systems, Inc.
Waukesha,
Wisconsin
We
have
audited the accompanying consolidated balance sheets of Criticare Systems,
Inc.
as of June 30, 2006 and 2005, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in
the period ended June 30, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Criticare Systems, Inc.
at
June 30, 2006 and 2005, and the results of its operations and its cash flows
for
each of the three years in the period ended June 30, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
BDO
Seidman, LLP
Milwaukee,
Wisconsin
August
11, 2006
Item
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not
applicable.
Item
9A.
CONTROLS
AND PROCEDURES.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Company’s Vice President
- Finance, of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended). Based upon this evaluation, the Company’s Chief Executive Officer and
Vice President - Finance concluded that, as of the end of such period, the
Company’s disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in reports that the Company files with or submits
to the Securities and Exchange Commission. It should be noted that in designing
and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated,
can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating
the
cost-benefit relationship of possible controls and procedures. The Company
has
designed its disclosure controls and procedures to reach a level of reasonable
assurance of achieving the desired control objectives and based upon the
evaluation described above, the Company’s Chief Executive Officer and Vice
President - Finance concluded that the Company’s disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
There
was
no change in the Company’s internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as
amended) during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item
9B.
OTHER
INFORMATION.
Effective
September 28, 2006, the Company entered into an amendment to the employment
agreement of each of Emil H. Soika, President, Chief Executive Officer and
Director, Drew M. Diaz, Vice President-Worldwide Sales, Joseph P. Lester,
Vice President and General Manager, Deborah A. Zane, Vice
President-Marketing and Business Development, Joel D. Knudson, Vice
President-Finance and Secretary, and Michael T. Larsen, Vice
President-Quality and Regulatory Affairs. Each amendment replaces the prior
definition of a "change in control" with a new, more complete definition
which
includes the following changes:
l |
a
change in control will now include a change in the composition of
a
majority of the Board of Directors of the Company (except with the
approval of at least a majority of the incumbent directors);
and
|
l |
a
change in control will occur upon a change in the ownership of 50%
or more
(in place of the prior threshold of 51% or more) of the outstanding
stock
or voting power of the Company.
|
The
employment agreements provide that if the Company experiences a change in
control, and Mr. Soika or Mr. Diaz voluntarily terminates his employment
for any reason after the change in control, or Mr. Lester, Ms. Zane,
Mr. Knudson or Mr. Larsen voluntarily terminates his or her employment for
any reason after completing three months of employment after the change in
control, Mr. Soika is entitled to receive payment of his base salary and
other employee benefits for 30 months after the date of termination, Mr.
Diaz is entitled to receive payment of his total compensation for 24 months
after the date of termination, Mr. Lester is entitled to receive payment of
his total compensation for 18 months after the date of termination, and
each of Ms. Zane, Mr. Knudson and Mr. Larsen is entitled to
receive payment of his or her base salary and other employee benefits for
12 months after the date of termination, or until Mr. Soika,
Mr. Diaz, Mr. Lester, Ms. Zane, Mr. Knudson or
Mr. Larsen secures alternative employment, whichever period is shorter.
The
amendment to Mr. Diaz's employment agreement also increases his severance
period
from 12 months to 24 months following a voluntary termination of employment
by
Mr. Diaz after a change in control or a termination of employment by the
Company
without cause at any time either before or after a change in
control.
The
amendments were unanimously approved by the Board of Directors (including
all of
the independent directors) after the Board received the advice of counsel
that
the new definition of a change in control is customary for similarly-situated
executives of public companies and concluded that the Board desired to diminish
the inevitable distraction of the Company's executive officers by virtue
of the
personal uncertainties created by a pending or threatened change in control,
including one involving a change in a majority of the Board not approved
by the
existing Board, and to encourage each such executive officers' full attention
and dedication to the Company in the event of a threatened or pending change
in
control.
The
amendments, including the complete text of the new definition of a change
in
control, have been filed as exhibits to this report and are incorporated
herein
by reference
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 "Election of Directors," "Section
16(a) Beneficial Ownership Reporting Compliance," "Executive Officers," "Audit
Committee Matters—Audit Committee Financial Expert" and "Corporate Governance
Matters—Code of Business Ethics" in the Company's Proxy Statement for the 2006
Annual Meeting of Stockholders which will be filed on or before October 30,
2006
(the "Criticare Proxy Statement").
The
Audit
Committee of the Company's Board of Directors is an "audit committee" for
purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are Dr. Higgins D. Bailey, Dr. N.C. Joseph Lai
and Stephen K. Tannenbaum (Chairman).
Item
11.
EXECUTIVE
COMPENSATION.
Information
regarding executive compensation is incorporated herein by reference to the
discussion under "Executive Compensation" and "Compensation of Directors" in
the
Criticare Proxy Statement.
Item
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Information
regarding security ownership of certain beneficial owners and management is
incorporated herein by reference to the discussion under "Security Ownership"
in
the Criticare Proxy Statement.
The
following table summarizes share information for the Company’s equity
compensation plans as of June 30, 2006, including the 2003 Stock Option Plan,
the 1992 Employee Stock Option Plan, the 1992 Non-Employee Stock Option Plan,
the 1987 Employee Stock Option Plan, the 1987 Non-Employee Stock Option Plan
and
the Company’s Employee Stock Purchase Plan.
Equity
Compensation Plan Information
|
|
|
Number
of securities
|
|
|
|
remaining
available for
|
|
Number
of securities to be
|
Weighted
average
|
future
issuance under
|
|
issued
upon exercise of
|
exercise
price of
|
equity
compensation
|
|
outstanding
options,
|
outstanding
options,
|
plans
(excluding securities
|
Plan
category
|
warrants
and rights
|
warrants
and rights
|
in
first column)
|
|
|
|
|
Equity
compensation plans
|
|
|
|
approved
by security holders
|
543,688
shares
|
$3.17
per share
|
922,232
shares
|
|
|
|
|
Equity
compensation plans
|
|
|
|
not
approved by security holders
|
30,000 shares
|
$2.88
per share
|
0
shares
|
|
|
|
|
Total
|
573,688 shares
|
$3.15 per share
|
922,232
shares
|
As
noted
in the table above, the Company has issued warrants to a consultant which have
not been approved by the Company’s stockholders. The Company extended warrants
for the purchase of 30,000 shares of Common Stock issued to the consultant
expiring in February 2003 for an additional five years with an exercise price
of
$2.88 per share.
Item
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
Information
regarding certain relationships and related party transactions is incorporated
herein by reference to the discussion under "Executive Compensation—Employment
Agreements” in the Criticare Proxy Statement.
Item
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
Information
regarding the fees and services of the independent registered public accounting
firm is incorporated herein by reference to the discussion under “Audit
Committee Matters—Fees of Independent Registered Public Accounting Firm” in the
Criticare Proxy Statement.
PART
IV
Item
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
(a) The
following documents are filed as part of this report:
1.
Financial
Statements.
The following consolidated financial statements of the Company are included
in
Item 8 of this report.
Consolidated
Balance Sheets - as of June 30, 2006 and 2005.
Consolidated
Statements of Operations - for the years ended June 30, 2006, 2005 and
2004.
Consolidated
Statements of Stockholders' Equity - for the years ended June 30, 2006,
2005 and 2004.
Consolidated
Statements of Cash Flows - for the years ended June 30, 2006, 2005 and
2004.
Notes
to
consolidated financial statements.
Report
of
Independent Registered Public Accounting Firm.
2.
Financial
Statement Schedules:
Report
of
Independent Registered Public Accounting Firm.
Financial
Statement Schedule for the years ending June 30, 2006, 2005 and
2004:
|
Schedule
Number
|
|
Description
|
|
Page
|
|
|
|
|
|
|
|
|
|
II
|
|
Valuation
and Qualifying
|
|
57
|
|
|
|
|
Accounts
and Reserves
|
|
|
|
All
other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions, are inapplicable or the required information is shown in the
financial statements or notes thereto, and therefore have been
omitted.
3.
Exhibits:
3.1 Restated
Certificate of Incorporation of the Company (incorporated by reference to the
Registration Statement on Form S-1, Registration
No. 33-13050).
3.2 Restated
By-Laws of the Company (incorporated by reference to the Company's Current
Report on Form 8-K filed on March 17, 2006).
4.1 Specimen
Common Stock certificate (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No. 33-13050).
4.2 Rights
Agreement (incorporated by reference to the Company's Current Report on Form
8-K
filed on April 18, 1997).
10.1* 2003
Stock Option Plan, as amended (and form of stock option grant agreement, stock
appreciation right grant agreement and restricted stock grant agreement)
(incorporated by reference to the Company's Current Report on Form 8-K
filed on December 7, 2005).
10.2* 1999
Employee Stock Purchase Plan (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 1999).
10.3* 1992
Employee Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, Registration
No. 33-60644).
10.4*
1992
Nonemployee Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, Registration
No. 33-60214).
10.5*
1987
Employee Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, Registration
No. 33-33497).
10.6* 1987
Nonemployee Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-8, Registration
No. 33-40038).
10.7*
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).
10.8*
Employment
Agreement of Emil H. Soika (incorporated by reference to the Company's Current
Report on Form 8-K filed on September 8, 2005).
10.9*
Employment
Agreement of Drew M. Diaz.
10.10
Supply
Partnership Agreement, dated as of August 1, 2000, between the Company and
BioCare Corporation (incorporated by reference to the Company’s Annual Report on
Form 10-K for the year ended June 30, 2001).
10.11* Employment
Agreement of Joseph P. Lester (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002).
10.12*
Employment
Agreement of Deborah A. Zane (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2005).
10.13*
Employment
Agreement of Joel D. Knudson (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2005).
10.14*
Employment
Agreement of Michael Larsen (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2005).
10.15*
Amendment
to Employment Agreement of Emil H. Soika effective September 28,
2006.
10.16*
Amendment
to Employment Agreement of Joseph P. Lester effective September 28,
2006.
10.17*
Amendment
to Employment Agreement of Deborah A. Zane effective September 28,
2006.
10.18*
Amendment
to Employment Agreement of Joel D. Knudson effective September 28,
2006.
10.19*
Amendment
to Employment Agreement of Michael T. Larsen effective September 28,
2006.
21 Subsidiaries.
23.1
Consent
of BDO Seidman, LLP.
24 Power
of
Attorney (incorporated by reference to the signature page hereof).
31.1 Certification
of Emil H. Soika, President and Chief Executive Officer (Principal Executive
Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification
of Joel D. Knudson, Vice President - Finance and Secretary (Principal Financial
Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32** Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
18
U.S.C. Section 1350.
__________________
*
Management contract or compensatory plan or arrangement.
**
This
Certification is not “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act
of
1934, as amended.
(b) Exhibits.
The
response to this portion of Item 15 is submitted as a separate section of this
report.
(c) Financial
Statement Schedules.
The
response to this portion of Item 15 is submitted as a separate section of this
report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CRITICARE SYSTEMS, INC.
By
/s/
Emil H.
Soika
Emil
H.
Soika, President
and
Chief
Executive Officer
Date: September 28, 2006
POWER
OF
ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Emil H. Soika and Joel D. Knudson, 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 Annual 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/
Emil H. Soika
|
President,
Chief Executive Officer
|
September
28, 2006
|
Emil
H. Soika
|
and
Director (Principal Executive
|
|
|
Officer)
|
|
|
|
|
/s/
Joel D. Knudson
|
Vice
President-Finance and Secretary
|
September
28, 2006
|
Joel
D. Knudson
|
(Principal
Financial and Accounting
|
|
|
Officer)
|
|
|
|
|
/s/
Dr. Higgins Bailey
|
Chairman
of the Board and Director
|
September
28, 2006
|
Dr.
Higgins Bailey
|
|
|
|
|
|
|
|
|
/s/
N.C. Joseph Lai, Ph.D.
|
Director
|
September
28, 2006
|
N.C.
Joseph Lai, Ph.D.
|
|
|
|
|
|
|
|
|
/s/
Jeffrey T. Barnes
|
Director
|
September
28, 2006
|
Jeffrey
T. Barnes
|
|
|
|
|
|
|
|
|
/s/
Stephen K. Tannenbaum
|
Director
|
September
28, 2006
|
Stephen
K. Tannenbaum
|
|
|
|
|
|
|
|
|
/s/
Sam B. Humphries
|
Director
|
September
28, 2006
|
Sam
B. Humphries
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Criticare
Systems, Inc.
Waukesha,
Wisconsin
The
audits referred to in our report dated August 11, 2006 relating to the
consolidated financial statements of Criticare Systems, Inc., which is contained
in Item 8 of this Form 10-K included the audit of the financial statement
schedule listed in Item 15. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an
opinion on this financial statement schedule based upon our audits.
In
our
opinion such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/
BDO
Seidman, LLP
Milwaukee,
Wisconsin
August
11, 2006
SCHEDULE II
CRITICARE
SYSTEMS, INC.
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
Column
A
|
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance
at
Beginning
of
Period
|
|
Charged
to
Costs
and
Expenses
|
|
Deductions
|
|
Balance
at
End
of
Period
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED JUNE 30, 2004:
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
300,000
|
|
$
|
393,758
|
|
$
|
433,758
|
|
$
|
260,000
|
|
Reserve
for sales returns and
allowances
|
|
$
|
77,945
|
|
$
|
--
|
|
$
|
--
|
|
$
|
77,945
|
|
Reserve
for obsolete inventory
|
|
$
|
1,400,000
|
|
$
|
509,001
|
|
$
|
1,299,001
|
|
$
|
610,000
|
|
YEAR
ENDED JUNE 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
260,000
|
|
$
|
87,695
|
|
$
|
47,695
|
|
$
|
300,000
|
|
Reserve
for sales returns and
allowances
|
|
$
|
77,945
|
|
$
|
--
|
|
$
|
--
|
|
$
|
77,945
|
|
Reserve
for obsolete inventory
|
|
$
|
610,000
|
|
$
|
281,003
|
|
$
|
452,703
|
|
$
|
438,300
|
|
YEAR
ENDED JUNE 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
300,000
|
|
$
|
559,206
|
|
$
|
29,506
|
|
$
|
829,700
|
|
Reserve
for sales returns and
allowances
|
|
$
|
77,945
|
|
$
|
--
|
|
$
|
37,945
|
|
$
|
40,000
|
|
Reserve
for obsolete inventory
|
|
$
|
438,300
|
|
$
|
56,622
|
|
$
|
134,922
|
|
$
|
360,000
|
|
57