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 (VitalCare
TM
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
CO
2
, CO
2
/O
2
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:
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substantially
delay or prevent the introduction of new
products;
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materially
increase the costs of any new product
introductions;
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interfere
with or require cessation of product manufacturing and marketing;
and
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result
in product recalls.
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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:
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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;
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unexpected
changes in international regulatory requirements and
tariffs;
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difficulties
in staffing and managing foreign
operations;
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political
or economic changes, especially in developing nations;
and
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price
controls and other restrictive actions by foreign
governments.
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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:
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economic
and political instability in the countries where the contract
manufacturing firms are located;
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restrictive
actions by foreign governments;
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the
laws and policies of the United States affecting the importation
of goods
(including duties, quotas and
taxes);
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production
delays and cost overruns;
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foreign
trade and tax laws.
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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:
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infrared
specific anesthetic gas monitoring
technology;
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UltraSync
signal processing software; and
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disposable
respiratory secretion filter
system.
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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:
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our
proprietary information will not become known to
competitors;
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others
will not independently develop substantially equivalent or better
products
that do not infringe on our intellectual property rights;
or
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others
will not challenge or assert rights in, and ownership of, our patents
and
other proprietary rights.
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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:
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the
timing of announcements by us or our competitors concerning significant
acquisitions, financial performance or the introduction of new innovative
products or services;
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fluctuation
in our quarterly operating results;
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fluctuations
in demand for our products;
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fluctuations
in interest rates;
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substantial
sales of our common stock; or
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general
stock market or other economic
conditions.
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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,
1/100
th
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.