criticarejune302007form10k.htm
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, 2007
[ ] 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
29,
2006 (the last business day of the registrant’s most recently completed second
fiscal quarter) was $35,549,668. Shares of voting common
stock held as of December 29, 2006 by any person who was an executive officer
or
director of the Registrant as of December 29, 2006 has 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, 2007, there were
12,318,219 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 27,
2007 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 vital signs 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
and distribute products for highly technical, growth oriented niche
markets. Management believes that in order to be successful,
marketing, distribution 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. Production shipments to our newest OEM partner, Fukuda
Denshi, Inc. of Japan, began in August 2007. 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 2007, fiscal 2006 and fiscal
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 vital signs monitor for the Acute Care
market. Sales for the Acute Care market during fiscal 2007 and fiscal
2006 have 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.
Products
Criticare
markets a broad range of
vital signs and gas monitoring products designed to address the needs of a
variety of end-users in different patient 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 Vital Signs Monitors. The Portable Vital Signs Monitor
provides maximum versatility and cost effectiveness in a small, compact,
portable, full-featured vital signs monitor 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 proprietary to the Company. These products are
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 Water Chek 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, 2007, the Company's domestic sales force consisted of three employees
and 54 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 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 net sales of $7.3 million or 23.3% of total net sales in fiscal
2007, $6.8 million or 21.7% of total net sales in fiscal 2006 and $6.1 million
or 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 2007, 2006, and 2005, accounting for net
sales of approximately $6.3 million in fiscal 2007, which represented 20.0%
of
the Company's total net sales in fiscal 2007.
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 2007, Criticare sold its
products, principally to hospitals, in over 71 countries
through over 93 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 outcomes.
In
fiscal 2007, 34.0% of
Criticare's net sales, or $10.7 million, was attributable to international
sales, of which 53.4% was from sales in Europe and the Middle East, 11.6%
was from sales to Pacific Rim countries and 35.0% was from sales to
Canada and Central and South America. In fiscal 2006 and 2005, 40.1%
and 43.5%, 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 $0.4 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, 2007, the Company had a
customer service and technical support staff of 19 people at its
Waukesha, Wisconsin facility. Customer service support is available
24 hours a day, seven days a week, in which numerous customers’ technical
problems are 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. A portion of Criticare’s production has been transitioned to China to
continue to receive favorable pricing. 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 manufactures and assembles all proprietary
medical devices and "made in the USA" requirements at the Company’s facility in
Waukesha, Wisconsin. In addition, the Company continues 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 and China. 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) standard
13485:2003. The offshore contract manufacturing firm has achieved
certification under ISO's standards 13485 and 2000. 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,
2007, the Company had an in-house research, development and engineering staff
of 18 people. The Company's research, development and
engineering expenditures were $2.4 million in fiscal 2007, $2.4 million in
fiscal 2006 and $2.6 million in fiscal 2005.
Research
and development efforts for
fiscal 2007 focused on the development and release our next generation full
featured vital signs monitor, our design of a high quality, reasonably featured
and low cost portable vital signs monitor, and an upgrade to the portable
multi-parameter vital signs monitor to provide a option with CO2. Research
and development efforts for fiscal 2006 focused on the development and release
our next generation portable multi-parameter vital signs monitor
(nGenuity 8100E), our next generation portable vital signs monitor
(VitalCare™ 506N3), and an upgrade to the MRI monitor to provide additional
technological enhancements. Research and development efforts for
fiscal 2005 focused on the development and release of the Veris MRI compatible
vital signs monitor.
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 Dräger Medical as the principal competitors. The
market for vital signs monitors includes competitors such as General Electric
Company, Dräger Medical, Datascope Corp., Philips Electronics, Welch
Allyn Inc., Mindray Medical International Limited, CAS Medical Systems, Inc.,
Nihon Kohden Corporation 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 and 1 U.S. patent pending. The
Company's U.S. patents expire between 2007 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 "CRITICARE", "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, 2007 Criticare, had 95
employees in the U.S., including 18 in research, development and engineering,
19
in customer service and support, 27 in manufacturing and operations, 14 in
administration, 9 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 3
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, 2007
and 2006 was $4,789,244 and $5,260,197, respectively. The
backlog is driven by the extended delivery schedule from Medrad, which totaled
$1,170,546 as of June 30, 2007 and $4,100,984 as of June 30,
2006. 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.
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:
|
●
|
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;
|
|
●
|
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. 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:
|
●
|
economic
and political instability in the countries where the contract
manufacturing firms are located;
|
|
●
|
restrictive
actions by foreign governments;
|
|
●
|
the
laws and policies of the United States affecting the importation
of goods
(including duties, quotas and
taxes);
|
|
●
|
production
delays and cost overruns;
|
|
●
|
foreign
trade and tax laws.
|
We
depend on a major customer for a significant portion of our
sales.
In
fiscal 2007, our largest customer
accounted for net sales of approximately $6.3 million, which represented
20.0% of our total net sales. We also had a receivable balance with
this customer of approximately $1.6 million as of June 30, 2007, which
represented 27.7% 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 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. We are in the
process of documenting and testing our internal control procedures in order
to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which will
require annual management assessments of the effectiveness of our internal
control over financial reporting beginning with our annual report for fiscal
2008 and annual attestation reports by our independent auditors addressing
the
effectiveness of our internal control over financial reporting beginning with
our annual report for fiscal 2009. We expect our efforts to achieve
initial compliance with these provisions will require a significant commitment
of management resources and will result in significant additional expenses
over
the next two fiscal years. We may not be able to achieve and maintain
effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act by the required deadlines. Further, 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:
|
●
|
the
timing of announcements by us or our competitors concerning significant
acquisitions, financial performance or the introduction of new innovative
products or services;
|
|
●
|
fluctuation
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 March 27, 2017.
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 leased
approximately 37,000 square feet of a building in Waukesha, Wisconsin to serve
as the Company’s headquarters, warehouse, manufacturing, research and
development and service facility. The lease originally was to expire
on August 30, 2007, but the Company exercised its option to extend the lease
for
an additional three years so that the lease now expires on August 31,
2010. The Company currently leases approximately 32,000 square feet,
with rent currently totaling $23,545 per month. The Company has also
leased approximately 8,800 square feet of a building near the Company's
headquarters to serve as an additional warehouse facility. This lease
expires on August 31, 2010, with rent totaling $4,925 per month for the term
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,
2007.
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, 2007, there were approximately 183 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. The following table shows the high and low closing prices of
the Company's common stock as reported by the American Stock Exchange for the
periods indicated.
|
|
Years
Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended:
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
September
30
|
|
$ |
4.25
|
|
|
$ |
2.79
|
|
|
$ |
5.34
|
|
|
$ |
4.14
|
|
December
31
|
|
$ |
4.25
|
|
|
$ |
2.94
|
|
|
$ |
5.15
|
|
|
$ |
4.62
|
|
March
31
|
|
$ |
3.83
|
|
|
$ |
3.11
|
|
|
$ |
5.30
|
|
|
$ |
4.55
|
|
June
30
|
|
$ |
3.81
|
|
|
$ |
3.20
|
|
|
$ |
5.09
|
|
|
$ |
3.58
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
31,431,810
|
|
|
$ |
31,350,919
|
|
|
$ |
26,781,627
|
|
|
$ |
28,591,481
|
|
|
$ |
28,562,943
|
|
Net
income
(loss)
|
|
|
348,027
|
|
|
|
212,118
|
|
|
|
(422,245 |
) |
|
|
(2,100,573 |
) |
|
|
(938,596 |
) |
Net
income (loss) per common share--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and
diluted
|
|
$ |
0.03
|
|
|
$ |
0.02
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
12,299,411
|
|
|
|
12,069,060
|
|
|
|
11,514,786
|
|
|
|
11,240,685
|
|
|
|
11,071,735
|
|
diluted
|
|
|
12,332,296
|
|
|
|
12,256,431
|
|
|
|
11,514,786
|
|
|
|
11,240,685
|
|
|
|
11,071,735
|
|
Stockholders'
equity
|
|
$ |
16,310,754
|
|
|
$ |
15,853,086
|
|
|
$ |
14,209,140
|
|
|
$ |
13,789,300
|
|
|
$ |
15,034,208
|
|
Long-term
obligations
|
|
|
59,678
|
|
|
|
134,485
|
|
|
|
210,592
|
|
|
|
286,417
|
|
|
|
38,662
|
|
Working
capital
|
|
|
14,049,063
|
|
|
|
13,322,276
|
|
|
|
12,339,332
|
|
|
|
11,756,441
|
|
|
|
12,895,476
|
|
Total
assets
|
|
|
21,648,523
|
|
|
|
22,979,078
|
|
|
|
19,060,473
|
|
|
|
19,542,341
|
|
|
|
18,762,327
|
|
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 and distribute
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 and distribute products for highly technical 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 net sales of $7,335,059 or
23.3% of total net sales in fiscal 2007, $6,814,623 or 21.7% of total net sales
in fiscal 2006 and $6,132,122 or 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. Production shipments to our newest OEM partner, Fukuda
Denshi, Inc. of Japan, began in August 2007. 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 2007, 2006 and 2005, accounting
for 20.0%, 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 and group purchasing organizations
(GPO’s) 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 vital signs monitor for the Acute Care
market. Sales for the Acute Care market totaled approximately $3.16
million during fiscal 2007 and $3.49 million during the introduction year of
fiscal 2006. This key initiative will remain ongoing as the Company works
to obtain and maintain tier I and tier II GPO contracts which will allow the
net
sales for the Acute Care network to exceed the largest revenue year Criticare
experienced under the Alaris OEM agreement.
The
Company posted total net sales of $7,640,927 for the fourth quarter of fiscal
2007, which were 7.7% higher than the $7,095,962 in net sales for the same
period of fiscal 2006, principally due to the strong OEM and international
sales
in fiscal 2007. The Company reported a net loss of $(365,709) for the
fourth quarter of fiscal 2007 as compared to a net loss of $(524,220) for the
fourth quarter for fiscal 2006. For the full year, the Company had total
net sales of $31,431,810 in fiscal 2007 compared to net sales of
$31,350,919 in fiscal 2006. Additionally, for the second consecutive year
the Company posted net income, with net income of $348,027 in fiscal 2007
compared to net income of $212,118 in fiscal 2006.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of goods
sold
|
|
|
62.5
|
|
|
|
61.6
|
|
|
|
60.9
|
|
Gross
profit
|
|
|
37.5
|
|
|
|
38.4
|
|
|
|
39.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and
marketing
|
|
|
19.1
|
|
|
|
22.2
|
|
|
|
21.2
|
|
Research,
development and
engineering
|
|
|
7.6
|
|
|
|
7.5
|
|
|
|
9.8
|
|
Administrative
|
|
|
10.9
|
|
|
|
10.1
|
|
|
|
10.8
|
|
Total
|
|
|
37.6
|
|
|
|
39.8
|
|
|
|
41.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from
operations
|
|
|
(0.1 |
) |
|
|
(1.4 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0.0
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Interest
income
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Foreign
currency exchange gain
(loss)
|
|
|
0.5
|
|
|
|
(0.3 |
) |
|
|
0.5
|
|
Other
income
|
|
|
0.3
|
|
|
|
2.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income
taxes
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
(1.6 |
) |
Income
tax
provision
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Net
income
(loss)
|
|
|
1.1 |
% |
|
|
0.7 |
% |
|
|
(1.6 |
)% |
Fiscal
Year Ended June 30, 2007 Compared to June 30, 2006
Net
sales increased $80,891 to
$31,431,810 for fiscal 2007 compared to $31,350,919 for fiscal 2006. The
increase resulted from a 5.3% increase in the average sales price per unit,
which was partially offset by a 3.9% decrease in accessory sales and a 1.0%
decrease in the number of units shipped in the current year. The increased
sales were driven by a $1,093,031 increase in domestic alternate care sales
and
a $520,436 increase in OEM sales, which were partially offset by a $1,027,626
decrease in international sales and a $335,453 decrease in acute care sales
during fiscal 2007. OEM sales in fiscal 2007 were $7,335,000 and
represented 23.3% of total net sales, compared to $6,815,000 (21.7% of total
net
sales) in fiscal 2006. The OEM sales of $6,290,137 to Medrad in
fiscal 2007, for medical imaging applications, increased $1,110,258 from fiscal
2006. The increased domestic alternate care sales was due to a number
of factors, including Criticare’s release of our next generation portable
multi-parameter vital signs monitor and the initial order to replace all vital
signs monitors in over 50 domestic plasma collection
centers. International sales were lower than expected, due in large
part to a $1,874,000 partial shipment of an order from the ministry of health
of
the Republic of Iraq which shipped in the fourth quarter of fiscal 2007, but
which did not meet all the strict criteria for revenue recognition in accordance
with SAB No. 104. Due to the size and risks associated with a
contract of this nature, the Company obtained a confirmed letter of credit
to
secure payment. As a result, while the order met the revenue
recognition criteria of ensuring collectibility, the terms of the letter of
credit did not allow the transfer of title to occur until after June 30,
2007. The
majority of this sale will be included in the first quarter results for fiscal
2008.
The
gross profit percentage of 37.5%
realized in fiscal 2007 decreased from the 38.4% generated in the prior
year. Margins decreased in the current year as the positive effect of
a slight change in product mix was offset the continued upward shift in fixed
overhead costs to meet the increased quality and production demands of our
OEM
customers and the increased overhead costs associated with manufacturing
start-up costs related to our new portable multi-parameter vital signs
monitor.
Charges
to cost of goods sold for
potentially obsolete inventory totaled $ 167,144 in fiscal 2007 compared to
$56,622 in fiscal 2006. Inventory considered obsolete will be
disposed of and removed from Criticare’s warehouse during fiscal
2008.
Operating
expenses for the year ended
June 30, 2007 decreased $672,357 from fiscal 2006 due mainly to a decrease
of
$941,355 in sales and marketing expenses, which was partially offset by an
increase of $257,165 in administrative expenses. The increase of
$257,165 in administrative expenses was due to the $451,564 of expenses incurred
during the year in connection with the two consent solicitation actions
initiated by BlueLine Partners and the subsequent settlement of those actions
in
the third quarter. The decrease of $941,355 in sales and marketing
expenses was due mainly to a $528,709 decrease in bad debt expenses from the
reserve established in fiscal 2006 of a portion of the receivable due from
one
of our distributors with no corresponding reserve in fiscal 2007, a
$135,676 decrease in India operation expenses, a $112,695 decrease in
commissions earned and a $83,178 decrease in advertising and trade show expenses
for the year ended June 30, 2007. In fiscal 2006, the Company
reserved a portion of the receivable due from the distributor referred to in
the
previous sentence, in the amount of $529,700. Due to a reduction in
the receivable from the distributor, the reserve has been reduced to $227,638
as
of June 30, 2007.
Total
other income for the fiscal year
ended June 30, 2007 decreased $273,525 from fiscal 2006. This
decrease was mainly due to the $300,000 received pursuant to a patent license
agreement in fiscal 2006 with no corresponding income in fiscal 2007, and a
decrease of $295,400 in royalty income partially offset by an increase of
$41,395 in interest income and a foreign currency exchange gain of $171,361
in
fiscal 2007 related to the Company’s operation in India, which had a foreign
currency exchange loss of $(108,225) in fiscal 2006.
Loss
from
operations of $(38,055) for the year ended June 30, 2007 decreased $409,434
as
compared to a loss from operations of $(447,489) for the same period in fiscal
2006, which was the result of a decrease of $672,357 in operating expenses
and a
decrease in gross profit of $262,923. The decreased loss from
operations was partially offset by the decrease in other income of $273,525,
resulting in net income of $348,027 for the year ended June 30, 2007 as compared
to net income of $212,118 for fiscal 2006.
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 alternate care 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 alternate care
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 vital signs 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. Inventory
considered obsolete 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 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 have reserved a portion of
a receivable from one of our distributors in the amount of $529,700,
which has significantly increased our sales and marketing
expenses. Administrative expenses increased by $271,193 mainly due to
an increase of $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 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, partially offset by 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 fiscal 2005.
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. Revenue is recognized in accordance with SAB No. 104, when all
four elements for revenue recognition have been met. This revenue
recognition policy is utilized for shipment of product to customers including
both distributors and end-users.
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 2007, the reserve for
obsolete inventory was increased $15,000 to $375,000 at June 30, 2007 due
to normal variations in the inventory mix. 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.
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, 2007, the Company had a
cash balance of $4,635,823 as compared with its fiscal 2006 year-end cash
balance of $3,793,781. The Company has continued to maintain a bank
debt free balance sheet.
With
the
Company’s return to profitability, Criticare has been able to increase its cash
position by an aggregate of $896,998 over the last three fiscal
years. Non-cash expenses consisting primarily of depreciation
expense, share based compensation expense as a result of SFAS 123(R), provision
for obsolete inventory and provision for doubtful accounts decreased the
Company’s profitability by an aggregate of $3,379,846 over 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 $1,192,915 of capital
spending primarily with $2,147,192 of cash provided by the exercise of stock
options over that period.
In
fiscal
2007, $1,255,824 of cash was generated from operations. This increase
in cash was primarily driven by a combination of the reduction of the inventory,
which was increased in fiscal 2006 due to the release of the next generation
portable multi-parameter vital signs monitor, and the profitability of the
Company. The cash generated from operations was partially offset by
capital spending of $407,473 and $11,493 of cash used in financing
activities. In fiscal 2007, $62,655 of cash was generated from the
issuance of 11,500 shares of common stock upon 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 $408,544 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.
The
Company believes all near term 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, 2008. The Company also has
a $2,000,000 line of credit currently in place that could be utilized, if
necessary. At June 30, 2007, 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, 2007. This line expires in
June 2008.
The
following table summarizes the Company’s contractual cash obligations at June
30, 2007 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
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
and Thereafter
|
|
Operating
leases
|
|
$ |
1,187,990
|
|
|
$ |
378,597
|
|
|
$ |
383,459
|
|
|
$ |
365,270
|
|
|
$ |
60,664
|
|
|
|
--
|
|
Capital
leases
|
|
|
145,200
|
|
|
|
82,560
|
|
|
|
52,140
|
|
|
|
10,500
|
|
|
|
--
|
|
|
|
--
|
|
Contract
Mfg obligations
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Other
long-term obligations
|
|
|
5,476
|
|
|
|
5,476
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
contractual obligations
|
|
$ |
1,688,666
|
|
|
$ |
816,633
|
|
|
$ |
435,599
|
|
|
$ |
375,770
|
|
|
$ |
60,664
|
|
|
|
--
|
|
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, 2007, 2006 and
2005. 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, 2007. 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, 2007 AND 2006
ASSETS
(Note 6)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents (Notes 1 and 10)
|
|
$ |
4,635,823
|
|
|
$ |
3,793,781
|
|
Accounts
receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
$497,638 and $829,700, respectively (Note 1)
|
|
|
5,991,999
|
|
|
|
6,446,637
|
|
Other
receivables (Note 1)
|
|
|
251,950
|
|
|
|
331,722
|
|
Short-term
note receivable (Note 1)
|
|
|
50,000
|
|
|
|
50,000
|
|
Inventories
(Notes 1 and 2)
|
|
|
8,177,523
|
|
|
|
9,464,037
|
|
Prepaid
expenses
|
|
|
219,859
|
|
|
|
227,606
|
|
Total
current assets
|
|
|
19,327,154
|
|
|
|
20,313,783
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT (Note 1):
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
3,415,501
|
|
|
|
3,157,328
|
|
Furniture
and fixtures
|
|
|
946,668
|
|
|
|
952,193
|
|
Leasehold
improvements
|
|
|
290,084
|
|
|
|
243,604
|
|
Demonstration
and loaner monitors
|
|
|
2,025,924
|
|
|
|
1,997,844
|
|
Production
tooling
|
|
|
2,389,507
|
|
|
|
2,294,360
|
|
Property,
plant and equipment – cost
|
|
|
9,067,684
|
|
|
|
8,645,329
|
|
Less
accumulated depreciation
|
|
|
6,877,295
|
|
|
|
6,193,015
|
|
Property,
plant and equipment – net
|
|
|
2,190,389
|
|
|
|
2,452,314
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
License
rights and patents – net (Notes 1 and 3)
|
|
|
55,980
|
|
|
|
62,981
|
|
Long-term
note receivable (Note 1)
|
|
|
75,000
|
|
|
|
150,000
|
|
Total
other assets
|
|
|
130,980
|
|
|
|
212,981
|
|
TOTAL
ASSETS
|
|
$ |
21,648,523
|
|
|
$ |
22,979,078
|
|
See
notes
to consolidated financial statements.
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,826,834
|
|
|
$ |
5,408,746
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Compensation
and commissions
|
|
|
836,720
|
|
|
|
914,889
|
|
Product
warranties (Notes 1 and 4)
|
|
|
349,000
|
|
|
|
425,000
|
|
Other
|
|
|
191,389
|
|
|
|
174,667
|
|
Obligations
under capital lease (Note 12)
|
|
|
74,148
|
|
|
|
68,205
|
|
Total
current liabilities
|
|
|
5,278,091
|
|
|
|
6,991,507
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Obligations
under capital lease, less current portion (Note 12)
|
|
|
59,678
|
|
|
|
133,826
|
|
Other
long-term obligations
|
|
|
--
|
|
|
|
659
|
|
Total
long-term liabilities
|
|
|
59,678
|
|
|
|
134,485
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 7, 9 and 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,337,769
|
|
|
|
7,125,992
|
|
|
|
|
|
|
|
|
|
|
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, 12,409,631
and
|
|
|
|
|
|
|
|
|
12,398,131
shares issued, and 12,313,321 and 12,291,454 outstanding,
respectively
|
|
|
496,385
|
|
|
|
495,925
|
|
Additional
paid-in capital
|
|
|
26,338,267
|
|
|
|
26,156,864
|
|
Common
stock held in treasury (96,310 and 106,677 shares,
respectively)
|
|
|
(356,502 |
) |
|
|
(375,813 |
) |
Retained
earnings (accumulated deficit)
|
|
|
(10,088,767 |
) |
|
|
(10,436,794 |
) |
Cumulative
translation adjustment
|
|
|
(78,629 |
)
|
|
|
12,904
|
|
Total
stockholders' equity
|
|
|
16,310,754
|
|
|
|
15,853,086
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
21,648,523
|
|
|
$ |
22,979,078
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES (Notes 1, 10 and 11)
|
|
$ |
31,431,810
|
|
|
$ |
31,350,919
|
|
|
$ |
26,781,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
19,652,167
|
|
|
|
19,308,353
|
|
|
|
16,311,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
11,779,643
|
|
|
|
12,042,566
|
|
|
|
10,470,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing (Note 1)
|
|
|
6,008,956
|
|
|
|
6,950,311
|
|
|
|
5,670,505
|
|
Research,
development and engineering (Note 1)
|
|
|
2,374,345
|
|
|
|
2,362,512
|
|
|
|
2,620,134
|
|
Administrative
(Note 9)
|
|
|
3,434,397
|
|
|
|
3,177,232
|
|
|
|
2,906,039
|
|
Total
|
|
|
11,817,698
|
|
|
|
12,490,055
|
|
|
|
11,196,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(38,055 |
) |
|
|
(447,489 |
) |
|
|
(726,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 12)
|
|
|
(14,354 |
) |
|
|
(19,820 |
) |
|
|
(28,848 |
) |
Interest
income
|
|
|
136,225
|
|
|
|
94,830
|
|
|
|
58,710
|
|
Foreign
currency exchange gain (loss) (Note 1)
|
|
|
171,361
|
|
|
|
(108,225 |
) |
|
|
131,885
|
|
Other
income (Note 14)
|
|
|
92,850
|
|
|
|
692,822
|
|
|
|
142,203
|
|
Total
|
|
|
386,082
|
|
|
|
659,607
|
|
|
|
303,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
348,027
|
|
|
|
212,118
|
|
|
|
(422,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION (Notes 1 and 5)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
348,027
|
|
|
$ |
212,118
|
|
|
$ |
(422,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE (Note
1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.03
|
|
|
$ |
0.02
|
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,299,411
|
|
|
|
12,069,060
|
|
|
|
11,514,786
|
|
Diluted
|
|
|
12,332,296
|
|
|
|
12,256,431
|
|
|
|
11,514,786
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED JUNE 30, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Common
Stock
|
|
|
Earnings
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
(Accumulated
|
|
|
Translation
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Cost
|
|
|
Deficit)
|
|
|
Adjustment
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2004
|
|
|
11,574,749
|
|
|
$ |
462,990
|
|
|
$ |
23,965,900
|
|
|
|
124,728
|
|
|
$ |
(409,439 |
) |
|
$ |
(10,226,667 |
) |
|
$ |
(3,482 |
) |
|
$ |
13,789,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(422,245 |
) |
|
|
|
|
|
|
(422,245 |
) |
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,630 |
) |
|
|
(4,630 |
) |
Comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(426,875 |
) |
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 |
) |
|
$ |
(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 |
) |
|
$ |
(10,436,794 |
) |
|
$ |
12,904
|
|
|
$ |
15,853,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,027
|
|
|
|
|
|
|
|
348,027
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,533 |
) |
|
|
(91,533 |
) |
Comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256,494
|
|
Exercise
of options
|
|
|
11,500
|
|
|
|
460
|
|
|
|
32,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
Stock-based
employee
compensation
|
|
|
|
|
|
|
|
|
|
|
138,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,519
|
|
Employee
common stock
purchased from treasury
|
|
|
|
|
|
|
|
|
|
|
10,011
|
|
|
|
(10,367 |
) |
|
|
19,311
|
|
|
|
|
|
|
|
|
|
|
|
29,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
12,409,631
|
|
|
$ |
496,385
|
|
|
$ |
26,338,267
|
|
|
|
96,310
|
|
|
$ |
(356,502 |
) |
|
$ |
(10,088,767 |
) |
|
$ |
(78,629 |
) |
|
$ |
16,310,754
|
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
348,027
|
|
|
$ |
212,118
|
|
|
$ |
(422,245 |
) |
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
457,440
|
|
|
|
650,142
|
|
|
|
588,559
|
|
Amortization
|
|
|
7,001
|
|
|
|
7,002
|
|
|
|
7,002
|
|
Share
based compensation
|
|
|
138,519
|
|
|
|
172,988
|
|
|
|
--
|
|
Provision
for doubtful accounts
|
|
|
(44,221 |
) |
|
|
559,206
|
|
|
|
87,695
|
|
Provision
for obsolete inventory
|
|
|
167,144
|
|
|
|
56,622
|
|
|
|
281,003
|
|
Note
receivable
|
|
|
--
|
|
|
|
(200,000 |
) |
|
|
--
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
402,143
|
|
|
|
(158,411 |
) |
|
|
(445,243 |
) |
Other
receivables
|
|
|
154,772
|
|
|
|
313,757
|
|
|
|
(285,673 |
) |
Inventories
|
|
|
1,331,328
|
|
|
|
(4,392,330 |
) |
|
|
197,563
|
|
Prepaid
expenses
|
|
|
7,747
|
|
|
|
27,498
|
|
|
|
109,271
|
|
Accounts
payable
|
|
|
(1,581,913 |
) |
|
|
2,375,187
|
|
|
|
(203,846 |
) |
Accrued
liabilities
|
|
|
(132,163 |
) |
|
|
(32,323 |
) |
|
|
(640,150 |
) |
Net
cash provided by (used in) operating activities
|
|
|
1,255,824
|
|
|
|
(408,544 |
) |
|
|
(726,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net
|
|
|
(407,473 |
) |
|
|
(669,275 |
) |
|
|
(116,167 |
) |
Net
cash used in investing activities
|
|
|
(407,473 |
) |
|
|
(669,275 |
) |
|
|
(116,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
of obligation under capital lease
|
|
|
(74,148 |
) |
|
|
(68,205 |
) |
|
|
(57,712 |
) |
Proceeds
from issuance of common stock
|
|
|
62,655
|
|
|
|
1,237,824
|
|
|
|
846,713
|
|
Net
cash (used in) provided by financing activities
|
|
|
(11,493 |
) |
|
|
1,169,619
|
|
|
|
789,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
5,184
|
|
|
|
21,016
|
|
|
|
(4,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
842,042
|
|
|
|
112,816
|
|
|
|
(57,860 |
) |
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,793,781
|
|
|
|
3,680,965
|
|
|
|
3,738,825
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
4,635,823
|
|
|
$ |
3,793,781
|
|
|
$ |
3,680,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid—net
|
|
$ |
10,547
|
|
|
$ |
3,910
|
|
|
$ |
2,506
|
|
Interest
|
|
|
14,355
|
|
|
|
19,820
|
|
|
|
26,596
|
|
See
notes
to consolidated financial statements.
NOTES
TO FINANCIAL STATEMENTS
CRITICARE
SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2007, 2006 AND 2005
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. and its wholly owned subsidiaries (the
"Company"). 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 calculated based
upon
the accounts receivable balance and the historical effectiveness of Criticare’s
collection of those receivables. The general reserve as of June 30,
2007 and 2006 is $70,000 and $100,000, 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, 2007 and
2006 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,
2007 and 2006 consist mainly of tender deposits in the amount of $116,458 and
$130,880, respectively, bank guarantees in the amount of $26,725 and $28,917,
respectively.
Note
Receivable -- Note receivable as of June 30, 2007
and 2006 is the result of the grant of a non-exclusive license with quarterly
payments ending January 1, 2010. This license agreement is treated,
for accounting purposes, as a non-interest bearing note. The future
maturities of the note receivable are $50,000 in each of the fiscal years 2008
and 2009 and $25,000 in 2010. The balance of the short-term note on
each of June 30, 2007 and 2006 was $50,000. The balance of the
long-term note on June 30, 2007 and 2006 respectively, was $75,000 and
$150,000.
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:
Classification
|
|
Estimated
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, subject to amortization, 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 as the shortfall of the estimated fair
market value from 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, 2007 and
2006. 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
after 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. As of June 30, 2007 and 2006, the Company had
capitalized $108,720 of software costs. Amortization of $21,744 and
$10,872 was recorded in fiscal 2007 and fiscal 2006, respectively.
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:
Classification
|
|
Estimated
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 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 revenues for the related products are
recognized.
Marketing
Expenses -- Marketing expenses include all of the Company's sales
related costs. Bad debt expense(recoveries) totaled
$(44,221) , $559,206 and $87,695 in fiscal 2007, 2006 and 2005,
respectively.
Advertising
Costs -- Advertising costs are expensed as
incurred. Advertising costs totaled $61,807, $97,460 and $68,120 for
the years ended June 30, 2007, 2006 and 2005, respectively.
Research
and Development Expenses -- Research and development costs are charged
to operations as incurred. Such expenses totaled $2,275,053,
$2,304,226 and $2,561,386 in fiscal 2007, 2006 and 2005,
respectively.
Income
Taxes -- The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are
computed for differences between the financial statements and tax basis 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. The results are shown as a
component of other comprehensive income.
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. For fiscal 2007 and fiscal 2006, the
number of diluted weighted average common shares outstanding would be higher
by
122,750 and 28,000 shares, respectively, without this anti-dilutive
impact. The basic and diluted weighted average number of common
shares outstanding in the financial statements are the same in fiscal year
2005 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 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 2007 and 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 year ended June
30, 2005, consistent with the method prescribed by SFAS No. 123, net loss
and net loss per share would have been changed to the pro forma amounts
indicated below:
|
|
Year
Ended June 30, |
|
|
|
2005
|
|
|
|
|
|
Net
loss--as reported
|
|
$ |
(422,245 |
) |
Add:
Stock-based employee compensation
expense included in reported net loss
|
|
|
--
|
|
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards
|
|
|
(211,498 |
) |
Net
loss – pro forma
|
|
$ |
(633,743 |
) |
|
|
|
|
|
Basic
net loss per share – as reported
|
|
$ |
(0.04 |
) |
Diluted
net loss per share – as reported
|
|
$ |
(0.04 |
) |
|
|
|
|
|
Basic
net loss per share – pro forma
|
|
$ |
(0.06 |
) |
Diluted
net loss per share – pro forma
|
|
$ |
(0.06 |
) |
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 2005 and fiscal 2006 have been
reclassified to conform to the fiscal 2007 presentation.
|
Inventories
consist of the following as of June
30:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Component
parts
|
|
$ |
2,507,293
|
|
|
$ |
2,605,751
|
|
Work
in process
|
|
|
1,106,885
|
|
|
|
1,470,893
|
|
Finished
units
|
|
|
4,938,345
|
|
|
|
5,747,393
|
|
Total
inventories
|
|
|
8,552,523
|
|
|
|
9,824,037
|
|
Less: reserve
for obsolescence
|
|
|
375,000
|
|
|
|
360,000
|
|
Net
inventory
|
|
$ |
8,177,523
|
|
|
$ |
9,464,037
|
|
3.
LICENSE RIGHTS AND PATENTS
The
components of and changes in the carrying amount of license rights and patents
are as follows as of June 30:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
License
rights and patents
|
|
$ |
196,777
|
|
|
$ |
196,777
|
|
Accumulated
amortization
|
|
|
(140,797 |
) |
|
|
(133,796 |
) |
Net
license rights and patents
|
|
$ |
55,980
|
|
|
$ |
62,981
|
|
Future
amortization of license and patents is as follows at June 30, 2007:
|
|
Year
ended June 30,
|
|
|
|
|
|
2008
|
|
$ |
7,001
|
|
2009
|
|
|
7,001
|
|
2010
|
|
|
7,001
|
|
2011
|
|
|
7,001
|
|
2012
|
|
|
7,001
|
|
Thereafter
|
|
|
20,975
|
|
Total
|
|
$ |
55,980
|
|
Approximately
$7,000 of amortization was charged to operations in each of the fiscal years
ended June 30, 2007, 2006 and 2005.
4.
PRODUCT WARRANTY
The
Company’s products are subject to a standard warranty of 12 months, 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. The Company also sells
extended warranties, which result in a deferral of revenue, amortized over
the
extended warranty period.
Changes
in the Company’s warranty reserve for fiscal years 2007 and 2006 are as
follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
425,000
|
|
|
$ |
452,000
|
|
Warranties
issued
|
|
|
181,328
|
|
|
|
244,093
|
|
Settlements
|
|
|
(257,328 |
) |
|
|
(271,093 |
) |
Changes
in estimated pre-existing warranties
|
|
|
--
|
|
|
|
--
|
|
Balance,
end of year
|
|
$ |
349,000
|
|
|
$ |
425,000
|
|
|
The
Company’s warranty settlements for fiscal 2005 totaled
$289,955.
|
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 decreased $268,000 in 2007 and increased $263,000 in
2006.
Significant
components of the Company's deferred income tax assets and deferred income
tax
liabilities are as follows:
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable and sales allowances
|
|
$ |
211,000
|
|
|
$ |
341,000
|
|
|
$ |
148,000
|
|
Inventory allowances
|
|
|
180,000
|
|
|
|
183,000
|
|
|
|
196,000
|
|
Product warranties
|
|
|
139,000
|
|
|
|
167,000
|
|
|
|
177,000
|
|
Other accrued liabilities
|
|
|
144,000
|
|
|
|
139,000
|
|
|
|
146,000
|
|
Compensation
|
|
|
125,000
|
|
|
|
71,000
|
|
|
|
9,000
|
|
Federal net operating loss carryforwards
|
|
|
5,882,000
|
|
|
|
5,958,000
|
|
|
|
6,004,000
|
|
State net operating loss carryforwards
|
|
|
505,000
|
|
|
|
591,000
|
|
|
|
601,000
|
|
Federal tax credit carryforwards
|
|
|
132,000
|
|
|
|
143,000
|
|
|
|
198,000
|
|
Excess of book over tax depreciation and amortization
|
|
|
269,000
|
|
|
|
258,000
|
|
|
|
116,000
|
|
Investment losses not deducted
|
|
|
118,000
|
|
|
|
118,000
|
|
|
|
118,000
|
|
Total deferred income tax assets
|
|
|
7,705,000
|
|
|
|
7,969,000
|
|
|
|
7,713,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of tax over book depreciation and amortization
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Prepaid expenses
|
|
|
(39,000 |
) |
|
|
(38,000 |
) |
|
|
(42,000 |
) |
Total deferred income tax liabilities
|
|
|
(39,000 |
) |
|
|
(38,000 |
) |
|
|
(42,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(7,666,000 |
) |
|
|
(7,931,000 |
) |
|
|
(7,671,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income taxes recognized in the
consolidated
balance sheets
|
|
$ |
0
|
|
|
$ |
0
|
|
|
$ |
0
|
|
At
June
30, 2007, the Company had federal net operating loss carryforwards of
approximately $17,301,000 which expire in 2008 through 2027. At June
30, 2007, the Company had available for federal income tax purposes
approximately $87,000 of alternative minimum tax credit carryforwards which
carry forward indefinitely and approximately $45,000 of tax credit carryforwards
which expire in 2009. The Company also has approximately $10,187,000
of state net operating loss carryforwards, which expire in 2008 through 2021,
available to offset certain future state taxable income.
|
The
income tax provision consists of the
following:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State
taxes net of federal benefit
|
|
|
5.2
|
|
|
|
5.2
|
|
|
|
5.2
|
|
Expired
net operating loss and credits
|
|
|
26.8
|
|
|
|
25.7
|
|
|
|
0.0
|
|
Permanent
items
|
|
|
9.8
|
|
|
|
(187.5 |
) |
|
|
49.8
|
|
Valuation
adjustment
|
|
|
(75.8 |
) |
|
|
122.6
|
|
|
|
(89.0 |
)
|
Effective
income tax rate
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
6.
|
LINE
OF CREDIT FACILITY
|
|
At
June 30, 2007, 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 are payable on demand with
interest payable monthly at the bank's reference rate, less 0.25%
(8.00%
as of June 30, 2007). As of June 30, 2007 and 2006 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,
2007.
|
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 427,440 reserved shares remain available for
future issuance at June 30, 2007. 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 $138,519 and $172,988 for the years ended
June 30, 2007 and 2006, respectively. No income tax benefit was
recognized in the income statement for share-based compensation arrangements
due
to the valuation allowance. The activity during 2005, 2006 and 2007
for the above plans is summarized as follows:
|
|
Number
of
|
|
|
Stock
Options
|
|
|
Weighted
Avg.
|
|
|
|
Shares
|
|
|
Price
Range
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Granted
|
|
|
79,000
|
|
|
|
3.36-3.76
|
|
|
|
3.61
|
|
Cancelled
|
|
|
(13,315 |
) |
|
|
2.25-3.60
|
|
|
|
3.00
|
|
Exercised
|
|
|
(11,500 |
) |
|
|
2.88-3.05
|
|
|
|
2.90
|
|
Outstanding
at June 30, 2007
|
|
|
597,873
|
|
|
$ |
2.51-5.19
|
|
|
$ |
3.24
|
|
|
The
following table summarizes the option details as of June 30,
2007:
|
|
|
Shares
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Remaining Contractual
|
|
|
Average
Exercise
|
|
|
Intrinsic
Value
|
|
|
|
At
June 30, 2007
|
|
|
Life-Years
|
|
|
Price
|
|
|
at
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
597,873
|
|
|
|
6.31
|
|
|
$ |
3.24
|
|
|
$ |
175,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
372,425
|
|
|
|
5.19
|
|
|
$ |
3.07
|
|
|
$ |
131,938
|
|
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 2007
and 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 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 analysis of the Company’s historical patterns and represents the period of
time that options granted are expected to be outstanding. The
risk-free rate for periods within the expected 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 2007,
2006 and 2005, along with the assumptions used, follows below:
|
|
Years
Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair market value of options
granted
during the fiscal year ended June 30
|
|
$ |
2.27
|
|
|
$ |
2.90
|
|
|
$ |
1.62
|
|
Assumptions
used:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
51.0 |
% |
|
|
45.0 |
% |
|
|
55.0 |
% |
Risk-free
interest rate
|
|
|
4.73 |
% |
|
|
4.29 |
% |
|
|
3.74 |
% |
Expected
option life (in years)
|
|
|
9.00
|
|
|
|
8.88
|
|
|
|
6.25
|
|
Dividend
yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Forfeiture
rate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
The
total
intrinsic value of the options exercised during the years ended June 30, 2007,
2006 and 2005 was $10,253, $1,132,994 and $377,138, respectively.
The
following table summarizes the status of the Company’s nonvested shares as of
June 30, 2007, and changes during the year ended June 30, 2007:
|
|
Number
of
|
|
|
Weighted-Average
Grant
|
|
Nonvested
Shares
|
|
Shares
|
|
|
Date
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
300,699
|
|
|
$ |
3.30
|
|
Granted
|
|
|
79,000
|
|
|
|
3.61
|
|
Cancelled
|
|
|
(5,815 |
) |
|
|
2.82
|
|
Vested
|
|
|
(148,436 |
) |
|
|
3.15
|
|
Nonvested
at June 30, 2007
|
|
|
225,448
|
|
|
$ |
3.51
|
|
As
of
June 30, 2007, there was $221,937 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 1.40 years. The total fair value of the
shares vested during the years ended June 30, 2007 and 2006 was $160,333 and
$139,392, respectively.
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 represented 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 was the estimated fair value
using the Black-Scholes pricing model.
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, 2007, 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. Each share of common stock
that shall become outstanding between the record date and the earliest of the
distribution date, redemption date and the final expiration date shall be issued
one Right. 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 March 27,
2017.
Common
Stock Held in Treasury -- At June 30, 2007 and 2006, the Company held
in Treasury 96,310 and 106,677 shares of common stock, respectively, shown
at
cost. 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. The Company has purchased 180,063 shares of common stock as of
June 30, 2007. At June 30, 2007 and 2006, 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 purchase 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. Compensation expense under this plan is
immaterial. The Company is authorized to issue 500,000 shares of
common stock under the plan. As of June 30, 2007, the Company
had issued a total of 83,753 shares of common stock under the plan, and had
416,247 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 $103,000, $104,000 and $97,000 in
2007, 2006 and 2005, 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, 2007 and 2006, the Company held $4,692,519 and
$3,764,888, 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. Due in part to the risks involved in conducting business
internationally, the Company currently coordinates substantially all
international sales, distribution and credit activities through its headquarters
in Waukesha, Wisconsin. Other than inventory, other receivables and
accounts receivable for the Company’s operation in India totaling approximately
$660,000, identifiable assets located outside of the United States are
insignificant in relation to the Company's total assets. Net sales
into geographic area are as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Europe
and Middle East
|
|
$ |
5,712,000
|
|
|
$ |
7,355,000
|
|
|
$ |
7,182,000
|
|
Pacific
Rim
|
|
|
1,240,000
|
|
|
|
1,692,000
|
|
|
|
1,787,000
|
|
Canada
and Central and South America
|
|
|
3,747,000
|
|
|
|
3,516,000
|
|
|
|
2,689,000
|
|
Export
net sales
|
|
$ |
10,699,000
|
|
|
$ |
12,563,000
|
|
|
$ |
11,658,000
|
|
U.S.
net sales
|
|
|
20,733,000
|
|
|
|
18,788,000
|
|
|
|
15,124,000
|
|
Total
net sales
|
|
$ |
31,432,000
|
|
|
$ |
31,351,000
|
|
|
$ |
26,782,000
|
|
|
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 $6,326,000 in fiscal 2007,
$5,177,000 in fiscal 2006, and $3,100,000 in fiscal 2005, which represented
20.0%, 16.5% and 11.6%, respectively, of the Company's total net
sales. The Company had a receivable balance from this customer of
$1,641,260 on June 30, 2007, $939,270 on June 30, 2006, and $1,373,836 on June
30, 2005 which represented 27.7%, 15.2% and 20.1%, respectively, of the
Company's total receivables as of those 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, 2007, 2006 and
2005
follows below:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Supplier
I - Purchases
|
|
$ |
5,648,427
|
|
|
$ |
9,324,825
|
|
|
$ |
6,193,106
|
|
%
of total purchases
|
|
|
22.4 |
% |
|
|
32.3 |
% |
|
|
29.5 |
% |
Accounts
payable balance
|
|
$ |
1,369,312
|
|
|
$ |
973,625
|
|
|
$ |
610,479
|
|
%
of total payables
|
|
|
35.8 |
% |
|
|
18.0 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
12. COMMITMENTS
The
Company leases various equipment under both operating leases and a capital
lease, which expire at various dates through fiscal 2011.
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, 2007
|
|
|
June
30,2006
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$ |
333,840
|
|
|
$ |
333,840
|
|
Less
accumulated depreciation
|
|
|
(166,920 |
) |
|
|
(119,228 |
) |
Net
|
|
$ |
166,920
|
|
|
$ |
214,612
|
|
Depreciation
expense was $47,691 in fiscal 2007, 2006 and 2005.
The
Company’s Waukesha building lease was to expire in August 2007, but the Company
has exercised its option to extend the lease for an additional three
years. The lease expires in August 2010 with the Company now leasing
approximately 53% of the building’s square footage. The Company has
also leased an additional warehouse facility. This lease also expires
in August 2010. Rent expense was $335,318 in fiscal 2007, $339,024 in
fiscal 2006 and $337,281 in fiscal 2005 for the 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, 2007:
Fiscal
year ending June 30
|
|
Capital
Lease
|
|
|
Operating
Leases
|
|
2008
|
|
$ |
82,560
|
|
|
$ |
378,597
|
|
2009
|
|
|
52,140
|
|
|
|
383,459
|
|
2010
|
|
|
10,500
|
|
|
|
365,270
|
|
2011
|
|
|
--
|
|
|
|
60,664
|
|
2012
and thereafter
|
|
|
--
|
|
|
|
--
|
|
Total
minimum lease payments
|
|
$ |
145,200
|
|
|
$ |
1,187,990
|
|
Less
amount representing interest
|
|
|
(11,374 |
) |
|
|
|
|
Present
value of net minimum lease payments
|
|
$ |
133,826
|
|
|
|
|
|
Less
current portion at June 30, 2007
|
|
|
74,148
|
|
|
|
|
|
Long-term
portion at June 30, 2007
|
|
$ |
59,678
|
|
|
|
|
|
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
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, 2007 and 2006, a one month
supply of product maintained at the firm would total approximately $350,000
and
$555,000, respectively. 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 $350,000. In addition,
any property or equipment that this firm purchased specifically for the
production of the Company's products would be purchased, by the Company, at
mutually agreed upon prices in the event of termination of the
agreement. 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,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
7,641
|
|
|
$ |
7,121
|
|
|
$ |
8,463
|
|
|
$ |
8,207
|
|
|
$ |
7,096
|
|
|
$ |
7,812
|
|
|
$ |
8,771
|
|
|
$ |
7,672
|
|
Gross
profit
|
|
|
2,366
|
|
|
|
2,877
|
|
|
|
3,416
|
|
|
|
3,121
|
|
|
|
2,442
|
|
|
|
3,089
|
|
|
|
3,576
|
|
|
|
2,935
|
|
Net
income (loss)
|
|
|
(366 |
) |
|
|
30
|
|
|
|
351
|
|
|
|
333
|
|
|
|
(524 |
) |
|
|
(8 |
) |
|
|
607
|
|
|
|
137
|
|
Net
income (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
and diluted
|
|
|
(0.03 |
) |
|
|
0.00
|
|
|
|
0.03
|
|
|
|
0.03
|
|
|
|
(0.04 |
) |
|
|
(0.00 |
) |
|
|
0.05
|
|
|
|
0.01
|
|
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
Royalty
income was $18,100, $313,500 and $177,203 for the years ended June 30, 2007,
2006 and 2005, respectively. The Company recognized $300,000 of
income pursuant to a patent license agreement for the year ended June 30,
2006.
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.
and subsidiaries as of June 30, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the
three years in the period ended June 30, 2007. 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, 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.
and
subsidiaries at June 30, 2007 and 2006, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2007,
in
conformity with accounting principles generally accepted in the United States
of
America.
/s/
BDO
Seidman, LLP
Milwaukee,
Wisconsin
September
24, 2007
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
|
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.
Not
applicable.
PART
III
Item
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
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 2007 Annual Meeting of
Stockholders which will be filed on or before October 29, 2007 (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,
Jeffrey T. Barnes, Dr. N.C. Joseph Lai and Robert E. Munzenrider
(Chairman).
Item
11. EXECUTIVE COMPENSATION.
Information
regarding executive
compensation is incorporated herein by reference to the discussion under
"Executive Compensation" and "Director Compensation" in the Criticare Proxy
Statement.
The
information incorporated by
reference from the "Report of the Compensation Committee" in the Criticare
Proxy
Statement shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except as shall be expressly set forth by specific
reference in such filing.
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, 2007,
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
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities in first
column)
|
|
|
|
|
Equity
compensation plans approved by security holders
|
597,873
shares
|
$3.24
per share
|
843,687
shares
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
30,000
shares
|
$2.88
per share
|
0
shares
|
Total
|
627,873
shares
|
$3.22
per share
|
843,687
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 AND DIRECTOR
INDEPENDENCE.
|
Information
regarding review and
approval of related party transactions is incorporated herein by reference
to
the discussion under "Corporate Governance Matters-Review and Approval of
Related Person Transactions" in the Criticare Proxy Statement.
Information
regarding director independence is incorporated herein by reference to the
discussion under "Corporate Governance Matters-Director Independence" 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, 2007 and 2006.
Consolidated
Statements of Operations - for the years ended June 30, 2007, 2006 and
2005.
Consolidated
Statements of Stockholders' Equity - for the years ended June 30, 2007,
2006 and 2005.
Consolidated
Statements of Cash Flows - for the years ended June 30, 2007, 2006 and
2005.
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, 2007, 2006 and 2005:
Schedule
Number
|
Description
|
Page
|
|
|
|
II
|
Valuation
and Qualifying
Accounts
and Reserves
|
62
|
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 Amended
and Restated Rights Agreement, dated as of March 27, 2007, between the Company
and LaSalle Bank National Association, as rights agent (incorporated by
reference to the Company's Current Report on Form 8-K filed on March 27,
2007).
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 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended June 30, 2006).
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
(incorporated by reference to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2006).
10.16* Amendment
to Employment Agreement of Joseph P. Lester effective September 28, 2006
(incorporated by reference to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2006).
10.17* Amendment
to Employment Agreement of Deborah A. Zane effective September 28, 2006
(incorporated by reference to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2006).
10.18* Amendment
to Employment Agreement of Joel D. Knudson effective September 28, 2006
(incorporated by reference to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2006).
10.19* Amendment to Employment Agreement of
Michael T. Larsen effective September 28, 2006 (incorporated by reference
to the Company’s Annual Report on Form 10-K for the year ended June 30,
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
27, 2007
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
27, 2007
|
Emil
H. Soika
|
|
and
Director (Principal Executive
|
|
|
|
|
Officer)
|
|
|
|
|
|
|
|
/s/
Joel D. Knudson |
|
Vice
President-Finance and Secretary
|
|
September
27, 2007
|
Joel
D. Knudson
|
|
(Principal
Financial and Accounting
|
|
|
|
|
Officer)
|
|
|
|
|
|
|
|
/s/
N.C. Joseph Lai |
|
Director
|
|
September
27, 2007
|
N.C.
Joseph Lai, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey T. Barnes |
|
Director
|
|
September
27, 2007
|
Jeffrey
T. Barnes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert E. Munzenrider |
|
Director
|
|
September
27, 2007
|
Robert
E. Munzenrider
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William M. Moore |
|
Director
|
|
September
27, 2007
|
William
M. Moore
|
|
|
|
|
|
|
|
|
|
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 September 24, 2007 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
September
24, 2007
SCHEDULE II
CRITICARE
SYSTEMS, INC.
VALUATION
AND QUALIFYING ACCOUNTS
FOR
THE
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
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, 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
|
|
YEAR
ENDED JUNE 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
829,700
|
|
|
$ |
(44,221 |
) |
|
$ |
287,841
|
|
|
$ |
497,638
|
|
Reserve
for sales returns and
allowances
|
|
$ |
40,000
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
40,000
|
|
Reserve
for obsolete inventory
|
|
$ |
360,00
|
|
|
$ |
167,144
|
|
|
$ |
152,144
|
|
|
$ |
375,000
|
|