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 settings. Since a patient's oxygen, anesthetic gas and carbon dioxide levels can change dramatically within minutes, causing severe side effects or death, continuous monitoring of these parameters is increasing. The Company's monitoring equipment improves patient safety by delivering accurate, comprehensive and instantaneous patient information to the clinician. The Company's products also allow hospitals to contain costs primarily by substituting cost-effective reusable pulse oximetry sensors for disposable sensors, controlling the use of costly anesthetics and increasing personnel productivity.
To meet the needs of end-users in a wide variety of patient settings, the Company has developed a broad line of patient monitors which combine one or more of its patented or other proprietary technologies, for monitoring oxygen saturation, carbon dioxide and anesthetic agents, with standard monitoring technologies that provide electrocardiogram ("ECG"), invasive and noninvasive blood pressures, temperature, heart rate and respiration rate. In addition, the Company's VitalView telemetry system allows one nurse to monitor up to eight
patients simultaneously from a convenient central location. This allows hospitals to move out of the intensive care unit ("ICU") those patients that require continuous monitoring, but do not need all of an ICU's extensive and costly personnel and equipment resources.
The Company was incorporated under the laws of the State of Delaware in October 1984.
Products
Criticare markets a broad range of vital signs and gas monitoring products designed to address the needs of a variety of end-users in different patient settings. Criticare's monitors display information graphically and numerically. All Criticare monitors incorporate adjustable visual and audible alarms to provide reliable patient-specific warnings of critical conditions, and most of the Company's monitors record up to 60 hours of trend data. Criticare monitors are available with printer capability to provide permanent records of patient data.
Model 503, 503S, 504, 504P, 504US, 504USP and 504O (PONI) Pulse Oximeters. Criticare's complete line of pulse oximeters meet the needs of virtually all clinical environments: adult, pediatric and neonatal intensive care units, operating rooms, emergency rooms, nursing homes, physicians' offices and ambulances. The line is designed to provide accuracy and convenience at a competitive cost to the end-user.
Model 507S, 507SD, 507N, 507O and 507E Patient Monitors. The 507 series is comprised of small, compact, portable, full-featured vital signs monitors configured to meet specific clinical needs. The 507S and 507SD are well-suited to dental and physician offices. The 507N and 507O are ideal for patient floor monitoring of noninvasive blood pressure and pulse oximetry. The 507E combines ECG, oxygen saturation and noninvasive blood pressure for a complete vital signs monitor for physician office and hospital applications. Combined with the VitalView central station, the 507E is an effective low-cost monitoring system for the emergency room or the recovery room.
Scholar(TM). The Scholar monitor series specifically addresses the needs of small hospitals with broad clinical needs (the monitoring of ECG, blood oxygen saturation, noninvasive blood pressure, temperature and invasive blood pressure) but whose budgets are small. Scholar offers all the primary features a hospital needs with the capability of adding more features if desired. Scholar monitors are available with printer and recorder capability and can transmit data to Criticare's Maestro and Vital View Central Stations.
Model 1100 Anesthesia Monitor. The Model 1100 monitor provides patient monitoring for a wide variety of cardio-pulmonary parameters in an integrated system. The Model 1100 is able to monitor two ECG waveforms, noninvasive blood pressure, three types of invasive blood pressure, respiration rate, heart rate, temperature, oxygen saturation, inspired/expired oxygen, carbon dioxide and the range of anesthetic gases, including recently developed anesthetic agents such as desflurane and sevoflurane. The Model 1100 uses the Company's proprietary disposable respiratory secretion filter system and is designed to accommodate low-flow anesthesia situations.
Model 602-3B, 602-6B, 602-11 and 602-13 Gas Monitors. The 602 series provides monitoring of carbon dioxide, pulse oximetry and anesthetic agents using Criticare's proprietary infrared technology. The 602 IQ series of operating room monitors provides automatic identification and quantification of all five approved anesthetic agents simultaneously.
Model 820 Maestro(TM) I Telemetry Monitors. The Maestro I Telemetry system addresses the rapidly expanding telemetry market with a reliable, inexpensive ECG telemetry system. The Maestro I system provides a waterproof ECG transmitter capable of five ECG lead configurations at a price approximately 30% lower than Criticare's material competitors. The ability to link Criticare's 507E and Scholar monitors to this versatile central station is expected to expand the market into numerous hospital departments.
Vital View(TM). The Vital View central station makes it possible for one nurse or technician to monitor numerous patients simultaneously. The Vital View can receive, display and store data from a wide variety of Criticare monitors including the Scholar, 507E and MPT.
MPT(TM). The MPT (Multiple Parameter Telemetry) monitor allows the transmission of vital signs (ECG, blood oxygen saturation and noninvasive blood pressure) on a real time basis to a Vital View central station while the patient is ambulatory. The Company believes the MPT is the first device of its kind. In today's healthcare environment, hospitals need to move patients from expensive critical care departments as quickly as possible to less expensive general nursing floors. MPT, because of its complete monitoring capability and its lower cost, allows the patient to be ambulatory while still being monitored for all vital signs. MPT has not yet been approved by the FDA, although the Company has submitted the 510(k) application and expects approval this calendar year.
Pulse Oximetry Sensors. Criticare has designed proprietary, noninvasive sensors that can be used on any patient, from a premature infant to a full-grown adult. Criticare's line of reusable pulse oximetry sensors offers users significant cost savings compared to disposables. Criticare's reusable sensors generally last
longer than the one-year warranty period and are easily and inexpensively cleaned between uses. Criticare's reusable sensors include a finger sensor for routine applications and a multisite sensor for increased placement flexibility. The multisite sensor is fully immersible, allowing for sterilization between patients. Last year the Company introduced the "Shell" sensor, the first reusable sensor with a removable hard cover. The cover can be inexpensively replaced if it becomes damaged, saving hundreds of dollars over buying a new sensor. The Shell sensor is also the first reusable sensor on the market that can be fully dismantled and immersed for improved cleaning and sterilization between patients if required. The Company also sells a range of disposable sensors designed for single use in cases where the facility would prefer to use a patient charge disposable product.
Water Chek/Chek-Mate Filter System. The Company's patented, disposable Water Chek system separates a patient's respiratory secretions from a breath sample before it enters the gas monitor(s) for analysis. The Company's proprietary, disposable Chek-Mate filter enhances the removal of moisture from the sample, while preventing cross-contamination. This system allows the monitor to operate effectively regardless of humidity or patient condition. The self-sealing feature also protects the healthcare provider from potential contamination.
Products Under Development
Digital Oximetry DOT(TM). The Company is in the later stages of developing an improved oxygen saturation monitor incorporating a digital electronic signal which allows more accurate saturation readings in conditions influenced by light, motion or temperature artifact than the analog electronic signal used in current oxygen saturation monitors.
Vital Signs(TM). The hand-held Vital Signs monitor measures heart rate, oxygen saturation, noninvasive blood pressure and temperature using a hand-held monitor weighing less than two pounds. These features make the Vital Signs monitor well-suited for use on nursing floors and in physicians' offices, ambulances and home healthcare organizations.
Home View. The Company is in the active stage of developing a home care application of the MPT (Multiple Parameter Telemetry) monitor and the Vital View central station. When completed, the Home View system will allow patients to be monitored, on a real time basis, using telephone modems to transmit data to the care giver at a remote (hospital or home care) facility thereby further reducing the cost of monitoring certain patients in the high cost hospital environment.
Fetal Oxygen Monitor. The Company is in the active stage of developing a fetal oxygen monitor designed to monitor the blood oxygen saturation of a fetus during labor and delivery. The Company's potential introduction of this product
will depend to a large extent on the need for clinical testing, engineering requirements and, in particular, the FDA approval process. Although there were over 4 million births in the United States in 1990, it is likely that a fetal oxygen monitor would, at least initially, be used only during deliveries where some unusual circumstances or danger were perceived by the physician. No assurance can be given that such product will be successfully developed and marketed by the Company or, if developed and marketed, will be clinically or commercially accepted.
Marketing and Sales
Domestic Sales. The Company's hospital division markets the Company's products through a combination of direct sales employees and select regional specialty dealers. The Company believes this form of distribution allows it to concentrate its efforts on its more sophisticated products, the Model 602 POET IQ, Model 1100 and Scholar Vital Signs monitors, the Vital View central station and MPT (Multiple Parameter Telemetry), products which afford hospitals the opportunity to address cost containment issues. The Company is focusing its distribution efforts on hospitals with over 100 beds; such hospitals comprise over one-half of the United States' 7,500 hospitals.
As of August 31, 1996, the Company's direct sales force included seven sales people, two regional managers and one executive manager. The Company has augmented its direct sales effort by the appointment of ten key regional specialty dealers employing approximately 35 sales people to improve specific market penetration while adhering to prudent cost of sale guidelines. This strategy will be continued until specific market share targets are achieved and demand increases for the new products.
The Company's alternate care division markets the Company's products, primarily the Model 503, Model 504, Model 507 and POET TE monitors, to domestic alternate care providers such as free-standing surgery centers, oral and plastic surgery suites, other out-patient clinics, home care services, extended care facilities and medical transport vehicles. As of August 31, 1996, the Company served this market through 60 independent dealers and distributors employing approximately 650 sales people. The Company also sells monitors to third party rental and leasing companies. The Company does not lease products directly.
International Sales. One of the Company's principal marketing strategies has been to target international markets, particularly Western Europe, Latin America and the Pacific Rim countries. During fiscal 1996, Criticare sold its products principally to hospitals in over 79 countries through over 96 independent dealers. The Company's wholly owned subsidiary, Criticare International GmbH Marketing Services ("Criticare International"), coordinates international sales and
distribution. 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 for improved patient management.
In fiscal 1996, 46.2% of Criticare's net sales, or $14.6 million, was attributable to international sales, of which approximately 44% was from sales in Western Europe, 28% was from sales to Pacific Rim countries and 28% was from sales to Canada and South America. In fiscal 1995, 49.1% of Criticare's net sales, or $14.1 million, was attributable to international sales. In fiscal 1994, 46.5% or $14.0 million, of Criticare's net sales was attributable to exports. There are no material identifiable assets of the Company located in foreign markets. The Company sells its products in United States dollars and is not subject to significant currency risks; however, an increase in the value of the United States dollar relative to foreign currencies could make the Company's products less price competitive in those markets.
Clinical Support. At August 31, 1996, Criticare employed two clinical support specialists to provide customer training and education, primarily to domestic hospitals. The clinical support staff also assists in the periodic training and education of the direct sales force. In addition, the direct sales force maintains contact with end-users and provides additional training and updates. Clinical support in foreign markets is provided by Criticare International sales coordinators.
Warranty and Service. Criticare believes that customer service is a key element of its marketing program. Criticare's monitors are warranted against defects for one year and its reusable sensors for six months. If a problem develops with a Criticare product while under warranty, the Company typically provides a replacement unit until the product can be repaired at the Company's facility. At August 31, 1996, the Company had a customer service staff of 17 people at its Waukesha, Wisconsin facility. The Company also maintains a product repair facility in Bad Homburg, Germany for its international customers. The Company offers extended warranties and service contracts on all of its monitors.
Manufacturing
The Company continually strives to implement manufacturing efficiencies while maintaining product quality and reliability. The Company's oximeters and sensors are assembled from off-the-shelf components and other parts produced to the Company's specifications, such as printed circuit board assemblies, custom transformers and sensor cable/connector subassemblies. However, Criticare produces certain important components in-house. All electronic components are subjected to a 24-hour high-temperature burn-in to eliminate early component
failure. Some subassembly is performed by subcontractors, but final assembly and quality control are performed at Criticare's facility. Criticare maintains test and inspection procedures to minimize errors and enhance the operating reliability of its products. Final test procedures on fully assembled units include an operational test and a continuous 72-hour burn-in procedure.
Certain of Criticare's products incorporate components currently purchased from single sources. While the Company believes these components are available from alternate sources on reasonable terms, an interruption in the delivery of these or other components could have an adverse effect on the Company. In order to reduce the risk of supply interruption, the Company maintains inventories of certain components.
The ISO 9000 series of quality management and assurance standards was developed by the International Organization for Standardization (ISO) and published in 1987. In 1993 the EC (European Community) was formed with the signing of the Maastricht Treaty by 12 European countries. One of the many standards adopted by this group is the ISO 9000 international quality assurance and quality management series under the designation EN2 9000. Based on this action by the EC and specific requirements from European customers, the Company believes ISO 9000 registration will be required to compete in EC and other international markets as an indication of compliance with international quality management and assurance standards. In July 1994 the Food and Drug Administration (FDA) announced its intention of harmonizing the ISO 9000 standards with its Medical Device Good Manufacturing Practices (GMP). The Company has achieved certification under ISO's standards 9001 and 9002. See "Regulation."
Research, Development and Engineering
Criticare has focused its research, development and engineering expenditures on products designed to meet identified market demands. The Company seeks to apply its expertise in gas monitoring and related sensor technology to develop new products and adapt existing products for new markets. At August 31, 1996, the Company had an in-house research, development and engineering staff of 24 people. The Company's research, development and engineering expenditures were $2.6 million in fiscal 1996, $1.9 million in fiscal 1995 and $2.4 million in fiscal 1994.
Competition
The markets for the Company's products are highly competitive. Many of Criticare's competitors, including its principal competitors described below, have greater financial resources, more established brand identities and reputations,
longer histories in the medical equipment industry and larger and more experienced sales forces than Criticare. In these respects, such competitors have a competitive advantage over the Company. The Company competes primarily on the basis of product features, the quality and value of its products (i.e., their relative price compared to performance features provided) and the effectiveness of its sales and marketing efforts. The Company believes that its principal competitive advantages are provided by its focus on cost containment and its patented and other proprietary technology and software for noninvasive, continuous monitoring of oxygen, specific anesthetic gases, carbon dioxide and blood pressure, its cost-efficient manufacturing, the efficiency and speed of its research and development efforts and its established international presence.
The principal competing manufacturers of pulse oximeters are Nellcor Puritan Bennett and Ohmeda, a division of The BOC Group, Inc.. The Company estimates that Nellcor has captured a majority, and that Ohmeda and the Company have each captured significant portions of the worldwide pulse oximeter market. In addition, there are approximately 30 other companies which compete in the market for pulse oximeters. The Company also indirectly competes with manufacturers of numerous other medical equipment products for limited customer funds.
The Company believes that the worldwide anesthetic agent and carbon dioxide monitor markets are comparatively fragmented, with no dominant competitor. The Company's principal competitors in the domestic gas monitor market include Datex Medical Instrumentation, Inc., a United States subsidiary of Instrumentarium OY, a Finnish company, Ohmeda and Datascope Corp. The market for vital signs monitors includes competitors such as Hewlett-Packard Company, Siemens A.G., Datex and SpaceLabs, Inc., a subsidiary of Westmark International Incorporated.
The Company believes that its principal competitors in Western Europe include Datex and Ohmeda and that the Company has a significant share of this market. In the Pacific Rim countries, the Company believes that Ohmeda is the leading competitor and that Datex and the Company also have significant market shares.
Regulation
As a manufacturer of medical diagnostic equipment, the Company is regulated by the FDA and similar foreign governmental agencies. In producing its products, the Company must comply with a variety of regulations, including the good manufacturing practices regulations of the FDA. In addition, it is subject to periodic inspections by this agency. If the FDA believes that its legal requirements have not been fulfilled, it has extensive enforcement powers,
including the ability to ban or recall products from the market and to prohibit the operation of manufacturing facilities. The Company believes its products comply with applicable FDA regulations in all material respects. In addition, the Company received ISO 9002 certification on April 29, 1993 and ISO 9001 certification on July 8, 1994.
Under the Federal Food, Drug and Cosmetic Act, as amended, all medical devices are classified as Class I, Class II or Class III, depending upon the level of regulatory control to which they will be subject. Class III devices, which are the most highly controlled devices, are subject to premarket approval by the FDA prior to commercial distribution in the United States.
The Company's current products have not been subject to the FDA's comprehensive premarket approval requirements, but are generally subject to premarket notification requirements. If a new device is substantially equivalent to a device that did not require premarket approval, premarket review is satisfied through a procedure known as a "510(k) submission," under which the applicant provides product information supporting its claim of substantial equivalence. The FDA may also require that it be provided with clinical trial results showing the device's safety and efficacy.
The Company believes that, with the possible exception of the fetal oxygen monitor, the products it is currently developing generally will be eligible for the 510(k) submission procedure and, therefore, will not be subject to lengthy premarket approval procedures. However, these products are still being developed and there can be no assurance that the FDA will determine that the products may be marketed without premarket approval.
Criticare seeks, where appropriate, to comply with the safety standards of Underwriters' Laboratories and the Canadian Standards Association and the standards of the European Community. To date, the Company has not experienced significant regulatory expense or delay in the foreign markets in which it sells its products. Industry and professional groups such as the American Society of Anesthesiologists, to the extent they have the power to mandate certain practices or procedures as part of their profession's standard of care, are also a source of indirect regulation of the Company's business.
Patents and Trademarks
The Company believes one of its principal competitive advantages is provided by its patented and other proprietary technology including its sensor technology, infrared specific anesthetic gas monitoring technology, UltraSync signal processing software and disposable respiratory secretion filter system. None of the Company's U.S. patents expire before 2004. Criticare also has been
granted three foreign patents and has three foreign patent applications pending on its respiratory secretion filter system. There is no assurance that any patents held or secured by the Company will provide any protection or commercial or competitive benefit to the Company. There is also no assurance that the Company's products will not infringe upon patents held by others. The Company is the owner of a United States trademark registrations for "POET," "Scholar," "Vital View" and "MPT."
The Company also relies upon trade secret protection for certain of its proprietary technology. Although the Company requires its employees having access to its proprietary information to sign confidentiality agreements, no assurance can be given that such agreements can be effectively enforced or that 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, 1996, Criticare had 120 employees in the United States, including 29 in manufacturing and operations, 12 in quality control, 43 in marketing and sales, 12 in administration and 24 in research, development and engineering. At August 31, 1996, Criticare International had 19 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, 1996 and 1995 was approximately $841,000 and $899,000, respectively. The backlog at these dates consisted primarily of products for which the sales order specified a delayed delivery date. Criticare generally delivers its products out of inventory when specified by the customer. The Company does not believe that its backlog at any date is indicative of its future sales.
Item 2.

Item 2. PROPERTIES.
In November 1992, the Company purchased a new 60,000 square foot facility for approximately $4.5 million. The Company's mortgage calls for monthly installments of principal and interest of approximately $35,000 and a final
"balloon" payment of approximately $2.7 million in December 2003. The Company believes this facility will be adequate for the foreseeable future.
Item 3.

Item 3. LEGAL PROCEEDINGS.
On December 15, 1995, Criticare sued a number of its former employees for improperly diverting corporate resources to pursue their personal business interests through a Bahamian corporation called Pro Med. Criticare asserted both breach of fiduciary duty and conspiracy claims again these former employees, breach of employment agreement against Allan Brack (its former Vice President-International), and sought a declaratory ruling that Mr. Brack be barred from exercising any outstanding stock options by virtue of his improper acts. In April of 1996, Criticare amended its complaint to drop Pro Med and one other individual defendant, Richard Buckley, who Criticare was unable to serve. One of the remaining defendants, Jean-Claude Joubert, moved to dismiss for lack of personal jurisdiction. The court granted his motion and entered judgment dismissing him from the case on June 11, 1996. Criticare does not intend at this time to appeal that ruling. The only remaining defendant, Allan Brack, moved for summary judgment on Criticare's breach of fiduciary duty and conspiracy claims. The court recently entered an order refusing to dismiss these claims, but limiting the scope of damages Criticare can seek. Criticare is currently examining settlement possibilities, but remains committed to litigate this action vigorously if it is unable to achieve an overall settlement of its disputed claims with all the former employees who were originally named in the lawsuit. At this time, it is not possible to assess with any degree of accuracy Criticare's likelihood of prevailing on its claims against Mr. Brack, or the potential recovery, if any.
From time to time the Company receives notices from competitors of potential patent infringement. Based on the advice of its patent counsel and other considerations, the Company does not currently believe that any of such claims which it has received, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. However, there can be no assurance that the Company will not be sued for patent infringement or that if sued, the outcome of such suits will not have an adverse effect on the Company.
Item 4.

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, 1996.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated herein by reference to the Company's 1996 Annual Report to Stockholders, page 23.
Item 6.

Item 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the Company's 1996 Annual Report to Stockholders, page 2.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Incorporated herein by reference to the Company's 1996 Annual Report to Stockholders, pages 8 through 10.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets for the Company at June 30, 1996 and 1995 and Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for the years ended June 30, 1996, 1995 and 1994, and notes thereto, are incorporated herein by reference to the Company's 1996 Annual Report to Stockholders, pages 11 through 22.
Item 9.

Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed accountants during the 24 months prior to June 30, 1996. During that period, there were no disagreements with the accountants regarding accounting and financial disclosure.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers and directors of the Company is incorporated herein by reference to the discussions under "Nominee for Election as Director," "Other Directors," "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and "Executive Officers" in the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders (the "Criticare Proxy Statement").
Item 11.

Item 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the discussion under "Executive Compensation" in the Criticare Proxy Statement.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the discussion under "Security Ownership" in the Criticare Proxy Statement.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the discussion under "Certain Transactions" in the Criticare Proxy Statement.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial statements of the Company, included in the annual report of the Company to its Stockholders for the fiscal year ended June 30, 1996, are incorporated by reference in Item 8.
Consolidated Balance Sheets - as of June 30, 1996 and 1995.
Consolidated Statements of Operations - for the years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - for the years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - for the years ended June 30, 1996, 1995 and 1994.
Notes to consolidated financial statements.
2. Financial Statement Schedules:
Independent Auditors' Report.
Financial Statement Schedule for the years ending June 30, 1996, 1995 and 1994:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or the required information is shown in the financial statements or notes thereto, and therefore have been omitted.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
3.2 By-Laws of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
4.1 Specimen Common Stock certificate (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.1 Employment Agreement of Gerhard J. Von der Ruhr (incorporated by reference to the Registration Statement filed on Form S-1 by the Company, Registration No. 33-13050).
10.2 Employment Agreement of N.C. Joseph Lai (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).
10.3 Blatz House Offices Limited Partnership Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1987).
10.4 Option Agreement dated March 12, 1991 between the Company and American Healthcare Systems (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1991).
10.5 1992 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60644).
10.6 1992 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-60214).
10.7 1987 Employee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-33497).
10.8 1987 Nonemployee Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-40038).
10.9 Form of Executive Office and Director Indemnity Agreement (incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-13050).
10.10 Employment Agreement of Richard J. Osowski (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994).
10.11 Revised Option Agreement between the Company and AmHS Purchasing Partners, L.P. dated as of July 1, 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1994).
11.1 Statement regarding computation of per share earnings.
13.1 Annual Report to Stockholders for the Year Ended June 30, 1996.
21.1 Subsidiaries.
23.1 Independent Auditors' Consent.
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months ended June 30, 1996.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate section of this report.
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.e
CRITICARE SYSTEMS, INC.
By /s/ Richard J. Osowski ------------------------ Richard J. Osowski, Senior Vice President-Finance
Date: September 25, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerhard J. Von der Ruhr and Richard J. Osowski, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each 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.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Criticare Systems, Inc.:
We have audited the consolidated financial statements of Criticare Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, and have issued our report thereon dated August 2, 1996; such financial statements and report are included in your 1996 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Criticare Systems, Inc. listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Milwaukee, Wisconsin August 2, 1996
SCHEDULE VIII
CRITICARE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
EXHIBIT INDEX
(1) Exhibit incorporated by reference as indicated in Part IV.


Item 1. DESCRIPTION OF BUSINESS
I/NET, Inc. (The "Company" or "I/NET") was organized under the laws of the state of Delaware during 1986 under the name of a predecessor corporation. The Company had its initial public offering with the Securities and Exchange Commission during 1987.
BUSINESS DEVELOPMENT
I/NET was incorporated in 1983 as a contract research and development firm specializing in software development for digital imaging and voice recognition. Systems created by I/NET are currently in service in; real estate, pharmaceutical research, government, newspapers, and information management.
During 1993 and 1994, the Company issued 1,428,571 shares of its stock for cash, a trademark, and reduction of debt totaling $4,455,000. In connection with the transactions, the Company issued warrants to the purchaser to acquire 2,039,285 shares of common stock at prices ranging from $0.25 to $2.40 per share. These warrants expire in 1997. As part of these transactions, the underwriters were also issued 1,145,714 warrants exercisable at prices ranging from $0.29 to $2.10 and expire in 1999. During 1995, the Company issued an additional 18,859,081 shares of common stock for $3,883,326. These shares were issued for the reduction of indebtedness, for a stock award program for the officers and key employees, and to raise additional capital. There were no warrants issued with these transactions. All warrants were exercisable at December 31, 1996.
BUSINESS
I/NET, in prior years, was engaged in the business of providing a wide range of contract research systems planning, development, and implementation services on a fee basis to public and private sector clients. It was founded in 1982 in response to demand for high-quality information systems services on the part of government, commercial, and not-for-profit organizations, requiring digital imaging as part of their overall solution. Since its formation, I/NET has delivered and installed microcomputer-based decision support systems for systems sold worldwide, supporting hundreds of users and employing distributed databases, sophisticated telecommunications networks, and state-of-the-art development tools. Past projects which the Company has undertaken in multi- media applications have incorporated digital imaging and voice recognition.
The Company has performed development work under contract with IBM for many years, including developing multi-media software running on the IBM system AS/400, a mid-range computer system. The Company's contracts with IBM, a minority stockholder in the Company, were completed at the end of 1995.
During 1995, I/NET brought to the marketplace its own Web Server/400 as the first commercially available product, which can connect the nearly 500,000 AS/400 midrange computers worldwide to the Internet. The "Web" lets Internet users around the world exchange information in the form of displayed text, images, sound, and video. Available since July, 1995, I/NET's Web Server/400 is currently used by businesses around the world, with installations in Hong Kong, Germany, England, the Netherlands, Italy, Korea, Japan, and Israel, in addition to Canada and the United States. Current installations include: IBM AS/400 Homepage (www.as400.ibm.com), Pacific Brokerage Services, Inc. (www.tradepbs.com), Software 2000, Inc., Marcam Corporation, Dynamic Healthcare Technologies, Inc. (www.dht.com), Automated Training Systems (www.ibmuser.com), Mattel Toys, MCI, Eli Lilly, Builders Square, Toyota of America, Caesers Palace, United Technologies Automotive, and Anheuser-Busch.
I/NET's Commerce Server/400 was made available in August, 1996. This product provides AS/400 users with the ability to conduct secured, encrypted financial and other transactions over the Internet. Current customers include IBM, Enterprise Rent-A-Car, MCI, State Bar of California, and Pacific Brokerage Services, Inc. These companies have installed the product in various locations throughout the world.
IBM AS/400 is the world's most popular multi-user business computing system, with nearly 500,000 units installed worldwide supporting from 1 to 7,000 users. IBM and its 8,000 Business Partners offer AS/400 customers 25,000 applications, including 3,000 for the client/server. Among AS/400 customers are 98 percent of the Fortune 100 Industrials.
DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
The Company has signed exclusive worldwide marketing and distribution agreements with International Marketing Strategies, (IMS) for the distribution of its Web Server/400 products. All marketing services will be performed by IMS.
COMPETITIVE BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER'S COMPETITIVE POSITION IN THE INDUSTRY AND METHODS OF COMPETITION
The Company's contract work performed for IBM has been competitively acquired, and usually the final selection is between I/NET and departments within IBM. As mentioned previously, the Company is currently finalizing an agreement with IBM to provide future services for IBM's AS/400 Internet products. I/NET and IBM are the only two companies with software available to connect the AS/400 to the Internet. Currently, I/NET's products are installed on over 90% of the AS/400's operating as Internet servers.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS
Developing software requires few tangible raw materials. The most important element in this process is the personnel who plan, design, and develop the software code. I/NET has consistently hired the best talent available. It recruits top-of-the-class talent from two Kalamazoo-based colleges as well as candidates from the Detroit and Chicago metropolitan areas.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
The Company provided Internet products, facilities management services, and software development services to a few major customers during 1996 and 1995 as follows: 1996 1995 -------------------- ------------------ Internet Products International Marketing Strategies (IMS) $ 346,000 $ 50,000 SUPPORT NET, INC. 158,000 - -------------------- ------------------ 504,000 $ 50,000
Facilities Management Services Greater Kalamazoo Associations of Realtors $ 120,000 $ 149,000 ================ ================== Software Development Services International Business Machines (IBM) $ - $ 978,000 ==================== ==================
IBM is also a minority stockholder in the Company and $40,000 was due from it as of December 31, 1995.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION
I/NET acquired the trademark "Career/NET" in prior years. This trademark was written off during 1995 as the product did not meet the market acceptance as anticipated.
NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTIONS OR SERVICES
The performance of services and the supply of products by the Company is not subject to governmental approval.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
No present governmental regulations have any adverse impact on the present or contemplated business operations of the Company, and no such probable governmental regulations are anticipated to have any adverse effect.
ESTIMATE OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE, THE EXTENT TO WHICH THE COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS
There were no research and development costs incurred by the Company during the calendar years ended December 31, 1996 and 1995.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE, AND LOCAL)
There are no foreseeable adverse effects on the present or contemplated business operations resulting from environmental laws, rules, or regulations.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
As of December 31, 1996, the Company had 13 full-time and total employees.
Item 2.

Item 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive and operating offices at 643 West Crosstown Parkway, Kalamazoo, Michigan, which is comprised of 5,600 square feet.
Item 3.

Item 3. LEGAL PROCEEDINGS
The Company is not the subject of any material legal proceeding, and to the knowledge of management, no proceedings are presently contemplated against the Company by any federal, state, or local governmental agency.
To the knowledge of management, no director or executive officer of the Company is party to any legal proceeding in which it may have an interest adverse to the Company.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during 1996.
PART II
Item 5.

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is listed on the "Electronic Bulletin Board" of the NASD. The stock activity for the calendar years 1996 and 1995 is summarized by quarter below:
1996 1996 1996 1996 1995 1995 1995 1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- ------- ------- ------- -------
HIGH $1.13 $0.97 $0.81 $0.81 $0.71 $0.50 $0.41 $0.77 LOW $0.63 $0.60 $0.41 $0.56 $0.37 $0.18 $0.25 $0.25
These bid prices are quotations of broker-dealers that reflect inter-dealer prices, without retail mark-up, mark- down or commission any may not represent actual transactions.
HOLDERS
The number of record holders of the Company's common stock as of December 31, 1996, was 299. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name.
DIVIDENDS
There are currently present material restrictions that limit the ability of the Company to pay dividends on its common stock as it has a deficit in its stockholders' equity. The Company has not paid any dividends with respect to its common stock nor does it intend to do so in the foreseeable future.
Item 6.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALENDAR YEARS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 1996, were $724,032 as compared to $1,276,757 for the year ended December 31, 1995. When analyzed by product category, revenues of software development services to IBM were $0 in 1996, as compared to $978,000 in 1995 as the contract with IBM expired at the end of 1995. Revenues from facilities management services were $120,000 in 1996 and $149,000 in 1995 as the contract with the Greater Kalamazoo Association of Realtors expired in October 1996. The new Internet products accounted for revenues of $563,000 in 1996 and $96,000 in 1995 as new products were being introduced to the market.
Cost of revenues decreased by $101,000, as compared to 1996. The primary cause for this reduction was the closing of the Phoenix office and the termination of the employees at that location during the first quarter of 1995.
General and administrative expenses increased by $175,000 as compared to 1995. The primary cause for this increase was its accrual of a commission of $250,000 to a former exclusive distributor of the Company's Internet products to release this distributor from it's exclusive contract.
Interest expenses decreased by $92,000 due to the conversion of vendor notes payable in the amount of $597,000 into common stock during late 1995.
During the year ended December 31, 1995, it was determined that the Company would not be able to provide the additional funding necessary to develop, market, deploy and maintain its previously capitalized computer software product named Embarc. This failure to obtain financing has resulted in the write-off of the development costs of the product in the amount of $2,151,000.
In addition, the Company has determined that the carrying amount of a trademark which it acquired at a cost of $225,000 and the related inventory in the amount of approximately $107,000 for its Career/NET product could not be recovered through future operations. Accordingly, the Company wrote off these amounts.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of," the Company assessed the expected recoverability of the carrying amount of the trademark and related inventory discussed above and, due to significant changes in the extent to which these assets were anticipated to be used, it recognized an impairment loss measured as the amount by which the carrying amount of the assets exceeded the expected discounted future cash flows.
During 1995, the Company issued 12,400,000 shares of unregistered common stock to certain officers and key employees in recognition of outstanding service performed during a time of financial instability and severe hardship. Although at the time of issuance, there was no active market in the Company's common stock and there was a deficit in stockholders' equity, an accounting value of $0.20 per share was assigned based upon subsequent cash purchases of the stock. The recipients are restricted in their ability to sell or otherwise transfer the shares within a time frame of two to three years from the date of issuance.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary need for capital has been to invest in computer software development. As of December 31, 1996, the Company's working capital deficit was $1,765,000, as compared to a deficit of $897,000 at December 31, 1995. The resulting increase in working capital deficit is primarily from sales volumes failing to be reached under its distribution agreements for its Internet products, together with a lack of sales of additional products and services.
During February, 1997, the Company signed an agreement to provide development and training of enhanced internet products for HBO & Company. This customer has also committed to purchase an additional $200,000 of Internet products by the end of 1997. In addition, IMS during the first quarter of 1997 has signed non-exclusive distribution agreements with various IBM Managing Industry Remarketers ("MIR's") in the United States. These MIR's provide access to hundreds of software distributors through which I/NET's products can be sold. These agreements are in addition to worldwide agreements signed during the fourth quarter of 1996.
During February, 1997, the Company was awarded IBM's highest recognition for development of Commerce Server/400 by IBM's Partners in Development Program as The AS/400 1996 Product of the Year. This honor was bestowed at IBM's annual Business Partner's Executive Conference, which was attended by 6,000 international guests.
The Company believes that the additional sales provided by the above mentioned agreements, the continued development of new products, together with the renegotiation of its defaulted debt, should provide the Company with sufficient working capital to fund its needs for 1997. However, there can be no assurance these activities will be successful.
Item 7.

Item 7. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants............................20 Consolidated Balance Sheets as of December 31, 1996 and 1995..................21 Consolidated Statements of Operations for the years ended December 31, 1996 and 1995......................................................................22 Consolidated Statements of Stockholders' Equity (Capital Deficit) for the years ended December 31, 1996 and 1995..............................................23 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995......................................................................24 Summary of Accounting Policies.............................................25-26 Notes to Consolidated Financial Statements.................................27-35
Item 8.

Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 9.

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, nature of all position, any offices held by all directors and executive officers of the Company for the calendar year ended December 31, 1996, and to the date hereof, and the period or periods during which each such director or executive officer has served in their respective positions. Position Date of Election or Name Held Designation
James C. Knapp* Chairman of the 1986 Board of Directors
Stephen J. Markee* President, CEO, 1985 Director, 1986 and CFO 1995
Paul A. Bertoldi* Vice President 1989 Systems Development
* These individuals presently serve in the capacities indicated opposite their respective names.
TERM OF OFFICE
The terms of office of the current directors shall continue until the annual meeting of stockholders, which has been scheduled by the Board of Directors to be held on the third Friday in May of each year; the annual meeting of the Board of Directors immediately follows the annual meeting of stockholders, at which executive officers for the coming year are elected.
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BUSINESS EXPERIENCE
James C. Knapp, Chairman. Mr. Knapp, one of I/NET's initial founders, is 46 years of age, and received a BBA Degree from the University of Maryland in 1972. He began his computer education at the age of 15 in a special program sponsored by IBM, and served in the United States Air Force as a teacher for missile computer guidance systems. He has been listed in the ACR Directory of Top Computer Executives since 1981, and was inducted into the "Who's Who in the Computer Industry" in 1990. His efforts in digital imaging and voice recognition have been recognized internationally. Mr. Knapp has been a featured speaker at the Massachusetts Institute of Technology and the Harvard Business School.
Stephen J. Markee, President, CEO and CFO. Mr. Markee is 51 years of age. He received a BS Degree from Ferris State University in 1970 and an MBA from Western Michigan University ("WMU") in 1971. He is a licensed certified public accountant in the state of Michigan. Mr. Markee served in the United States Army during the Vietnam conflict, and was decorated and medically retired in 1968. After completing his education, he served as assistant Auditor General for the state of Michigan before joining WMU as Director of Internal Auditing in 1976. While at WMU, he also taught accounting classes in the MBA program. He then changed directions, from public to private sector, as Vice President of Planning and Control for a division of Standex International Corporation, where he was responsible for information systems, accounting, and human relations. He joined I/NET in 1986 as President and CEO. He has guided I/NET to a successful equity partnership with IBM, and engineered the sale of intellectual property rights to IBM in 1989. Mr. Markee has served on the Board of Directors of the Kalamazoo County Chamber of Commerce, Chairman of the Kalamazoo County Convention and Visitors Bureau, Past President of the local chapter of the Institute of Management Accountants, and President of the Parchment Schools Foundation. He is a frequent speaker to civic and business groups, and has appeared on the Financial News Network ("FNN").
Paul A. Bertoldi, Vice President, Systems Development. Mr. Bertoldi is 34 years of age. He received a BBA Degree from Western Michigan University ("WMU") in 1984, and a MBA Degree from WMU in 1992. He graduated magna cum laude and was named a Presidential Scholar as one of the top undergraduates of WMU. Since becoming one of I/NET's first employees, Mr. Bertoldi has helped design the architecture of state-of-the-art imaging and voice recognition systems in the field of real estate,medical imaging, and document imaging. Mr. Bertoldi is currently involved in the development of application in multi-media and pen computing. He is an active member in both the Data Processing Management Association ("DPMA") and Association of Computer Machinery ("ACM"). In 1988, he was recognized as a Certified Data Processor by the Association for Certification for Computer Professionals.
FAMILY RELATIONSHIPS
With the exception that Mr. Knapp and Mr. Bertoldi are brother-in-laws, there are no family relationships between any directors or executive officers of the Company, either by blood or by happenstance of marriage.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Under the Delaware General Corporation Law, a corporation has the power to indemnify any person who is made a party to any civil, criminal, administrative or investigative proceeding, other than action by or any right of the corporation, by reason of the fact that such person was a director, officer, employee or agent of the corporation, against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement of any such actions; provided, however, in any criminal proceeding, the indemnified person shall have had no reason to believe the conduct committed was unlawful. Regardless, it is the position of the Securities and Exchange Commission that indemnification against liabilities for violation of the federal securities law, rules and regulations is against public policy.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To the knowledge of management, during the past five years, no present or former director, executive officer or person nominated to become a director or an executive officer of the Company:
- Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or association of which he or she was an executive officer at or within two years before the time of such filing;
- Was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
- Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting, the following activities:
- Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, associated person of any of the foregoing, or as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
- Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
- Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described above under this Item, or to be associated with person engaged in any such activity;
- Was found by a court of competent jurisdiction a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended or vacated.
- Was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated.
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Item 10.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the share holdings of the Company's directors and executive officers and those persons or entities who own more than 5% of the Company's common stock.
Amount and Nature of Name Address Beneficial Ownership Percent of Class - ------------------------------------------------------------------------------
Executive Officers and Directors
Paul A. Bertoldi Kalamazoo, MI 410,699 1.33%
James C. Knapp Kalamazoo, MI 5,692,719 18.46%
Stephen J. Markee Richland, MI 6,039,187 19.58% ------------------------------------
Total 12,142,605 39.37% ================================================================================
Owners of 5%
Steven Wallace Beverly Hills, CA 1,844,000 5.98%
================================================================================ CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or pledges of securities of the Company which may result in a change in control of the Company.
Item 12.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Except as stated below, during the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transaction, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest. See the caption "Dependence of One or a Few Major Customers" of the caption "Business" of Item 1, for information concerning contractual services provided to IBM, a stockholder of the Company, which services were the result of competitive bids, and Note 5 to the Consolidated Financial Statements.
CERTAIN BUSINESS RELATIONSHIPS
Except as stated below, during the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest. Services were provided during 1995 to IBM as outlined in Item 2, "Dependence on One or a Few Major Customers."
INDEBTEDNESS OF MANAGEMENT
James C. Knapp, Chairman of the Board of Directors and Stephen J. Markee, President, CEO and CFO, have loaned the Company funds for working capital. These funds were provided at an interest rate of prime plus 2%. The balance outstanding at December 31, 1996 was $390,500. At December 31, 1995, the Company owed $83,500 to Mr. Markee. With the exception of this transaction, there were no material transactions to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own or record of beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had an interest during the last two calendar years ended December 31, 1995 and 1994.
TRANSACTIONS WITH PROMOTERS
During the last two calendar years ended December 31, 1996 and 1995, there were no material transactions or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeded $60,000 and in which any promoter, founder, or member of their immediate family of any of the foregoing persons, had an interest.
Item 13.

Item 13. REPORTS ON FORM 8-K AND EXHIBITS
Reports on Form 8-K:
None
EXHIBITS:
None
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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, thereto duly authorized.
I/NET, Inc.
Date: March 28, 1997 By: /s/ Stephen J. Markee Stephen J. Markee, Director President, CEO, and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Date: March 28, 1997 By /s/ Stephen J. Markee Stephen J. Markee, Director President, CEO, and CFO
Date: March 28, 1997 By: /s/ James C. Knapp James C. Knapp, Chairman of the Board of Directors
Date: March 28 ,1997 By: /s/ Paul A. Bertoldi Paul A. Bertoldi, Vice President Systems Development
I/NET, Inc.
Consolidated Financial Statements Years Ended December 31, 1996 and 1995 --------------------------------------
I/NET, Inc.
Report of Independent Certified Public Accountants 20
Financial Statements:
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Summary of Accounting Policies 25 & 26
Notes to Consolidated Financial Statements 27 - 35
Report of Independent Certified Public Accountants
Board of Directors I/NET, Inc. Kalamazoo, Michigan
We have audited the accompanying consolidated balance sheets of I/NET, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (capital deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of I/NET, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the financial statements, the Company has suffered recurring losses from operations, has a significant working capital deficit and requires additional capital to continue its product development. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP Certified Public Accountants
January 17, 1997
- --------------------------------------------------------------------------------
December 31, 1996 1995 - --------------------------------------------------------------------------------
Assets (Note 3)
Current:
Cash and cash equivalents $ 20,517 $ 682,828
Receivables:
Trade 28,982 12,300
Note - 30,000
Billed contracts (Note 5) - 40,000 - -------------------------------------------------------------------------------- Total Current Assets 49,499 765,128
Office Furniture and Equipment, less accumulated depreciation of $482,553 and $446,095 62,392 85,142
- --------------------------------------------------------------------------------
$111,891 $850,270
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Balance Sheets
December 31, 1996 1995 - --------------------------------------------------------------------------------
Liabilities and Capital Deficit
Current Liabilities: Accounts payable $ 142,605 $ 358,958 Accruals: Commissions (Note 1) 250,000 - Other 179,698 258,124 Advances from stockholders (Note 2) 119,778 119,778 Current maturities of long-term debt (Note 3) 1,122,000 925,000 - --------------------------------------------------------------------------------
Total Current Liabilities 1,814,081 1,661,860
Long-Term Debt, less current maturities (Note 3) 494,642 253,190 - --------------------------------------------------------------------------------
Total Liabilities 2,308,723 1,915,050 - --------------------------------------------------------------------------------
Commitments and Contingency (Notes 1, 8 and 11)
Capital Deficit (Notes 4 and 9):
Common stock, $.001 par value - shares authorized 50,000,000; issued and outstanding 30,837,652 in 1996 and 1995 30,838 30,838
Additional paid-in capital 11,836,874 11,836,874 Deficit (14,064,544) (12,932,492) - -------------------------------------------------------------------------------- Total Capital Deficit (2,196,832) (1,064,780) - -------------------------------------------------------------------------------- $ 111,891 $ 850,270 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Statements of Operations
Year ended December 31, 1996 1995 - --------------------------------------------------------------------------------
Revenues (Note 5) $ 724,032 $ 1,276,757
Cost of Revenues 729,070 830,449 - --------------------------------------------------------------------------------
Gross profit (loss) (5,038) 446,308
Selling, General, and Administrative Expenses 1,060,402 886,057
Special Charges (Note 12) - 4,962,604 - --------------------------------------------------------------------------------
Loss from operations (1,065,440) (5,402,353)
Interest Expense - net of interest income $12,888 in 1996 and $7,084 in 1995 66,612 159,149 - --------------------------------------------------------------------------------
Net Loss $ (1,132,052) $ (5,561,502) - --------------------------------------------------------------------------------
Net Loss per Common Share $ (0.04) $ (0.37) - --------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding 30,837,652 15,199,191 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
- --------------------------------------------------------------------------------
I/NET, Inc.
Consolidated Statements Of Stockholders' Equity (Capital Deficit)
Common Stock Additional ------------------------- Paid-in Shares Amount Capital Deficit Total - -------------------------------------------------------------------------------- Balance, January 1, 1995
11,978,571 $ 11,979 $ 7,972,407 $ (7,370,990) $ 613,396
Issuance of common stock: For accounts & notes payable
2,659,081 2,659 640,667 - 643,326
For compensation
12,400,000 12,400 2,467,600 - 2,480,000
For cash
3,800,000 3,800 756,200 - 760,000
Net loss for the year - - - (5,561,502) (5,561,502) - --------------------------------------------------------------------------------
Balance, December 31, 1995
30,837,652 30,838 11,836,874 (12,932,492) (1,064,780)
Net loss for the year
- - - (1,132,052) (1,132,052) - --------------------------------------------------------------------------------
Balance, December 31, 1996
30,837,652 $ 30,838 $ 11,836,874 $ (14,064,544) $ (2,196,832) - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Year ended December 31, 1996 1995 - --------------------------------------------------------------------------------
Operating Activities (Note 10): Net loss (1,132,052) $ (5,561,502) Depreciation and amortization 36,458 93,855 Provision for bad debts - 154,805 Write-down of miscellaneous other assets - 35,015 Special charges (Note 12) - 4,962,604 Changes in assets and liabilities: Receivables 23,318 62,028 Inventories - 20,787 Prepaid expenses and other assets - 47,282 Accounts payable 7,140 (64,042) Accruals 207,220 214,456
- -------------------------------------------------------------------------------- Cash Used in Operating Activities (857,916) (34,712) - --------------------------------------------------------------------------------
Investing Activities (Note 10): Proceeds from note receivable 30,000 97,600 Developed computer software - (44,564) Capital expenditures (13,708) - - --------------------------------------------------------------------------------
Cash Provided by Investing Activities 16,292 53,036 - -------------------------------------------------------------------------------- Financing Activities (Note 10): - -------------------------------------------------------------------------------- Proceeds from issuance of notes to stockholders 300,000 8,500 Proceeds from issuance of common stock - 760,000 Proceeds from issuance of notes payable - 100,000 Principal payments on long-term debt (120,687) (221,114) - --------------------------------------------------------------------------------
Cash Provided by Financing Activities 179,313 647,386 - --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (662,311) 665,710
Cash and Cash Equivalents, beginning of year 682,828 17,118 - --------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 20,517 $ 682,828 - --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
- --------------------------------------------------------------------------------
I/NET, Inc.
Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company, I/NET, Inc., ( a Delaware Corporation) and its wholly- owned subsidiary I/NET, Inc. (a Michigan Corporation). Only the subsidiary remains an active Company and therefore the consolidated financial statements presented within are those of the subsidiary.
Description of the Business
Prior to 1996, the Company was engaged in the business of providing a wide range of contract research systems planning, development and implementation services, on a fee basis, to public and private sector clients. The Company, during 1996, further developed and began to market Internet computer software products. It's major customer was International Marketing Strategies (IMS) in 1996 and International Business Machines (IBM) in 1995. (See Note 5)
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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Office Furniture,Equipment,and Depreciation
Office furniture and equipment are stated at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes over the estimated useful lives of the assets and by accelerated methods for tax purposes.
Taxes on Income
Deferred income taxes are recorded to reflect the future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at year end.
See accompanying notes to consolidated financial statements.
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I/NET, Inc.
Summery of Accounting Policies
Developed Computer Software
Software development costs are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." Software development costs and certain product enhancements, when significant, are capitalized subsequent to the establishment of technological feasibility for the product and prior to the product's general release to customers. Costs incurred prior to technological feasibility or subsequent to the product's general release to customers, as well as selling, general, and administrative costs associated with the products, are expensed as incurred. See Note 12 for write-off of capitalized computer software costs in 1995.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, notes payable, accounts payable and long-term debt. Due to the short-term nature of the items, other than long-term debt and the variable interest rates on a substantial portion of the long-term debt, management estimates that the carrying amounts of the Company's financial instruments approximate their fair values at December 31, 1996.
Revenue Recognition
Revenues from the sale of the Company's Internet products are recognized when the product has been accepted by the customer. The Company records revenue for its long-term contracts on the percentage-of-completion basis. Under this method, revenues are determined by comparing costs incurred to date to the estimated total costs for the contract. The proportionate amounts of contract revenue are then recorded based on this percentage of completion of costs.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising expenses were approximately $12,000 and $50,000 in 1996 and 1995, respectively.
Loss Per Share
Loss per share amounts have been calculated using the weighted average number of common shares outstanding, for the respective periods. The antidilutive effect of the Company's outstanding options and warrants is excluded from the loss per share calculations.
See accompanying notes to consolidated financial statements.
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I/NET, Inc.
Notes to Consolidated Financial Statements
1. Commissions
During 1996, the Company agreed to release a distributor from it's exclusive contract to distribute certain I/NET products. In exchange for this release, I/NET agreed to pay a commission to the distributor of 7.5% of sales of certain I/NET products sold through September 30, 1999 but at a minimum amount of $250,000 and a maximum amount of $500,000. A commission payable amount of $250,000 has been recorded as of December 31, 1996 as there has not been any commissionable sales of these products to date.
2. Short-Term Advances from Stockholders
Advances from stockholders consist of:
1996 1995 - -----------------------------------------------------------------------------
Non-interest bearing notes payable to stockholders, due on demand $ 29,278 $ 29,278
Stockholders' advances bearing interest at the prime rate plus 2% (effectively 10.25% at December 31, 1996), due on demand 90,500 90,500 - -----------------------------------------------------------------------------
$ 119,778 $ 119,778 - ----------------------------------------------------------------------------- 3. Long-Term Debt Long-term debt consists of:
1996 1995 - ----------------------------------------------------------------------------
Notes payable to vendors (see below) $ 1,134,304 $ 927,929
Notes payable to bank with monthly payments of $5,000, including interest at 1.5% above the bank's prime rate (effectively 9.75% at December 31, 1996), with final payment due in December, 1997. The note is collateralized by all of the Company's assets 50,375 102,261
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I/NET, Inc.
Notes to Consolidated Financial Statements
1996 1995 - --------------------------------------------------------------------------------
Note payable for a trademark, with monthly payments of $1,500 including interest at the prime rate (8.25% at December 31, 1996) with the balance due February 15, 1997 $ 131,963 $ 148,000
Notes payable to stockholders bearing interest at 8% and due in December, 2001 300,000 - - ----------------------------------------------------------------------------
1,616,642 1,178,190 Less current maturities 1,122,000 925,000 - ----------------------------------------------------------------------------
Total Long-Term Debt $ 494,642 $ 253,190 - ----------------------------------------------------------------------------
Notes payable to various vendors totaling $1,134,304 are due in various installments and at varying interest rates.
Two notes totaling $440,655 are due on demand. These notes bear interest at the prime rate plus 2% (effectively 10.25% at December 31, 1996).
The Company is in default on two notes totaling $437,974 and is renegotiating alternative repayment terms with the noteholders.
Another vendor note in the amount of $59,694 is due in monthly installments of 5% of the previous month's cash receipts (as defined) but at a minimum rate of $2,000 bi- monthly and bears interest at the prime rate plus 2%. Final payment, assuming minimum payments only, is due September 2004.
Another vendor note in the amount of $42,155 is due in monthly installments of $2,998 including interest at 11%. Final payment is due March 1998.
Another vendor note in the amount of $153,826 is due in monthly installments of 5% of the previous month's cash receipts (as defined) but at a minimum rate of $3,000 monthly and bears interest at 10%. Final payment, assuming minimum payments only, is due July 2002.
Aggregate maturities of long-term debt over the next five years assuming repayment of stockholders' advances (Note 2) and notes are as follows:
1997 $ 1,122,000 1998 $ 40,000 1999 $ 34,000 2000 $ 37,000 2001 $ 341,000
4. Stock Warrants
During prior years, the Company sold and issued approximately 6,000,000 shares of its common stock for cash, trademark, and extinguishment of debt. In connection with the issuances, the Company issued warrants to the purchasers of the common stock to acquire up to 2,039,285 shares of common stock at prices ranging from $.25 to $2.40 per share. The warrants expire in 1997. In connection with these sales, underwriters were also issued warrants for 1,145,714 shares of common stock at prices ranging from $0.29 to $2.10 and are exercisable for five years, expiring in 1999. All warrants were exercisable at December 31, 1996.
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I/NET, Inc.
Notes to Consolidated Financial Statements
5. Related Party Transactions/Major Customers The Company provided Internet products, facilities management services and software development services to a few major customers as follows:
1996 1995 - ----------------------------------------------------------------------------
Internet Products: International Marketing Strategies - (IMS) $ 346,000 $ 50,000 SUPPORT NET, INC. 158,000 - - ----------------------------------------------------------------------------
$ 504,000 $ 50,000 - ----------------------------------------------------------------------------
Facilities Management Services: Greater Kalamazoo Association of Realtors $ 120,000 $ 149,000 - ----------------------------------------------------------------------------
Software Development: International Business Machines (IBM) $ - $ 978,000 - ----------------------------------------------------------------------------
IBM is also a minority stockholder in the Company and $40,000 was due from it as of December 31, 1995.
6. Taxes on Income Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
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I/NET, Inc.
Notes to Consolidated Financial Statements
Significant components of the Company's deferred tax assets as of December 31, are as follows:
1996 1995 - ----------------------------------------------------------------------------
Deferred Tax Assets: Accruals $ 99,000 $ 15,000 Deferred revenue - 13,000 Depreciation and amortization 12,000 19,000 Trademark 66,000 100,000 Net operating loss carryforwards 3,624,000 2,332,000 Tax credit carryforwards 42,000 42,000 Capital loss carryforwards 24,000 24,000 - ----------------------------------------------------------------------------
Total Deferred Tax Assets 3,867,000 2,545,000
Valuation Allowance (3,867,000) (2,545,000) - ----------------------------------------------------------------------------
$ - $ - - ----------------------------------------------------------------------------
As of December 31, 1996, the Company had a net operating loss carryforward of approximately $10,659,000 and investment tax credit carryforwards of approximately $42,000 available to reduce future taxable income and taxes, respectively. These carryforwards expire from 1998 through 2011.
7. Employee Benefit Plan
The Company has a profit sharing and defined contribution pension plan covering substantially all employees. Under the plan, employees may make tax deferred voluntary contributions which, at the discretion of the Company's Board of Directors, may be matched within certain limits by the Company. In addition, the Company may make additional discretionary contributions to the plan as profit sharing contributions. All contributions to the plan are limited by applicable Internal Revenue Code regulations. There were no Company contributions charged against operations in 1996 or 1995.
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I/NET, Inc.
Notes to Consolidated Financial Statements
8. Operating Leases
The Company leases its facilities and certain equipment under non- cancelable operating leases. Rental expense under these leases was approximately $138,000 for the year ended December 31, 1996 and $195,000 in 1995. Future minimum annual lease payments subsequent to December 31, 1996 are as follows:
1997 $ 88,000 1998 $ 84,000 1999 $ 80,000 2000 $ 80,000 2001 $ 59,000
9. Incentive Stock Option Plan
The Company maintains an incentive stock option plan that provides for the granting of options to officers and other key employees at an exercise price not less than 100% of the fair market value on the date of the grant. Twenty percent of the options become exercisable each year following the date they are granted, and can remain outstanding for five years following the day they become fully vested. Changes in options outstanding are summarized as follows:
Option Price Shares Per Share - ----------------------------------------------------------------------------
January 1, 1995 351,913 $ 0.18-2.50 Lapsed (212,477) $ 0.18-2.50 - ----------------------------------------------------------------------------
December 31, 1995 139,436 $ 0.18-2.50 Lapsed (96,936) $ 0.18-2.50 - ----------------------------------------------------------------------------
December 31, 1996 42,500 $ 2.50 - ----------------------------------------------------------------------------
Of the 351,913 options outstanding at January 1, 1995, all but 77,634 had an exercise price of $2.50. The 77,634 had been granted to one employee, had an exercise price of $.18 and lapsed in 1996.
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I/NET, Inc.
Notes to Consolidated Financial Statements
At December 31, 1996, 582,255 shares of common stock are reserved for the incentive stock option plan and 17,000 options were vested and exercisable. The remaining contractual life of the 42,500 shares outstanding is seven years.
10. Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities are summarized as follows:
1996 1995 ---- ----
Issuance of commonstock for retirement of debt $ - $ 597,000 - -------------------------------------------------------------------------------- Conversion of accounts payable into vendor - - notes payable $ 223,000 $1,417,000 - -------------------------------------------------------------------------------- Conversion of accrued interest payable into vendor notes payable $ 36,000 $ - - --------------------------------------------------------------------------------
Interest paid for the years ended December 31, 1996 and 1995 was $78,000 and $11,000, respectively. The Company paid no income taxes during 1996 and 1995.
11. Litigation
The Company is involved in various legal actions arising from the normal course of business. Management does not anticipate any material losses as a result of these proceedings.
12. Special Charges
During the year ended December 31, 1995, it was determined that the Company would not be able to provide the additional funding necessary to develop, market, deploy and maintain its previously capitalized computer software product named Embarc. This failure to obtain financing has resulted in the write-off of the development costs of the product in the amount of $2,151,000.
In addition the Company has determined that the carrying amount of a trademark which it acquired at a cost of $225,000 and related inventory in the amount of approximately $107,000 for its Career/NET product could not be recovered through future operations. Accordingly, the Company wrote off these amounts. The product had not reached the market acceptance as anticipated.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of," the Company assessed the expected recoverability of the carrying amount of the trademark and related inventory discussed above and, due to significant changes in the extent to which those assets were anticipated to be used, it recognized an impairment loss measured as the amount by which the carrying amount of the assets exceeded the expected discounted future cash flows.
During 1995, the Company issued 12,400,000 shares of unregistered common stock to certain officers and key employees in recognition of outstanding service performed during a time of financial instability and severe hardship. Although at the time of issuance, there was not an active market in the Company's common stock and there was a deficit in stockholders' equity, an accounting value of $0.20 per share was assigned based upon subsequent cash purchases of the stock. The recipients are restricted in their ability to sell or otherwise transfer the shares within a time frame of two to three years from the date of issuance.
Special charges consist of the following for the year ended December 31, 1995:
Capitalized computer software costs $ 2,151,000 Trademark 225,000 Inventory 107,000 Stock award 2,480,000 - ----------------------------------------------------------------------------
Total $ 4,963,000 - ----------------------------------------------------------------------------
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I/NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CONTINUED EXISTENCE
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Although the Company has suffered recurring losses from operations, has a significant working capital deficit and requires additional capital to continue its product development, management believes the Company will continue as a going concern. Management is actively marketing its new products which would enable the Company to meet its current obligations and provide additional funds for continued new product development. In addition, management is currently negotiating several additional contracts for its services and products. However, there can be no assurance these activities will be successful.
PERIOD-TYPE 12 MONTH FISCAL-YEAR-END DEC-31-1996 PERIOD-END DEC-31-1996 CASH 20,517 SECURITIES 0 RECEIVABLES 28,982 ALLOWANCES 0 INVENTORY 0 CURRENT-ASSETS 49,499 PP&E 544,945 DEPRECIATION 482,553 TOTAL-ASSETS 111,891 CURRENT-LIABILITIES 1,814,081 BONDS 0 PREFERRED-MANDATORY 0 PREFERRED 0 COMMON 30,838 OTHERSE 11,836,874 TOTAL-LIABILITY-AND-EQUITY 111,891 SALES 724,032 TOTAL REVENUES 724,032 CGS 729,070 OTHER EXPENSES 1,060,402 LOSS-PROVISION 0 INTEREST-EXPENSE 79,500 INCOME-PRETAX (1,132,052) INCOME-TAX 0 INCOME-CONTINUING (1,132,052) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME (1,132,052) EPS-PRIMARY (.04) EPS-DILUTED (.04)