SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
-------------------
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-16061
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CRITICARE SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1501563
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (262) 798-8282
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of each class of the registrant's classes of common
stock as of December 31, 2000: Class A Common Stock - 10,778,524 shares.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND JUNE 30, 2000
(UNAUDITED)
December 31, June 30,
ASSETS 2000 2000
-------------- ------------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 3,527,457 $ 114,830
Accounts receivable, less allowance for doubtful accounts
of $1,100,000 and $1,300,000, respectively. . . . . . . . . . . . . 6,915,419 6,782,765
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,449,647 5,704,675
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 98,647 116,773
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,794,206 8,178,326
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 458,510 219,852
-------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 23,243,886 21,117,221
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . 6,003,235 5,988,656
License rights and patents - net . . . . . . . . . . . . . . . . . . . 96,890 104,990
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,344,011 $27,210,867
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,367,769 $ 2,635,344
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . 1,081,719 1,243,839
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . 325,000 325,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549,926 574,826
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 83,548 80,432
-------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 4,407,962 4,859,441
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 3,241,669 3,283,892
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 142,383 268,582
STOCKHOLDERS' EQUITY:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
10,778,524 and 8,976,251 shares issued, respectively . . . . . . . 431,141 359,050
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 22,457,885 18,478,040
Common stock held in treasury (72,288 and 81,122 shares, respectively) (134,656) (151,111)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . (5,652,020) (5,591,702)
Accumulated comprehensive income . . . . . . . . . . . . . . . . . . . 4,449,647 5,704,675
-------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 21,551,997 18,798,952
-------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,344,011 $27,210,867
============== ============
See notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ ------------
NET SALES . . . . . . . . . . . . . . $12,794,000 $13,504,036
COST OF GOODS SOLD. . . . . . . . . . 7,702,405 7,373,259
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . 5,091,595 6,130,777
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 2,804,151 3,543,432
Research, development and engineering 1,132,282 1,564,662
Administrative. . . . . . . . . . . . 1,129,201 1,080,671
------------ ------------
Total . . . . . . . . . . . . . . . . 5,065,634 6,188,765
INCOME (LOSS) FROM OPERATIONS . . . . 25,961 (57,988)
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (128,669) (130,513)
Interest income . . . . . . . . . . . 42,396 67,413
Gain on sale of stock . . . . . . . . - 2,500,000
------------ ------------
Total . . . . . . . . . . . . . . . . (86,273) 2,436,900
(LOSS) INCOME BEFORE INCOME TAXES. . (60,312) 2,378,912
INCOME TAX PROVISION. . . . . . . . . - -
------------ ------------
NET (LOSS) INCOME . . . . . . . . . . $ (60,312) $ 2,378,912
============ ============
NET (LOSS) INCOME PER COMMON SHARE
Basic . . . . . . . . . . . . . . . . $ (0.01) $ 0.27
Diluted . . . . . . . . . . . . . . . na $ 0.26
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 9,636,284 8,707,809
Diluted . . . . . . . . . . . . . . . na 9,004,686
See notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ -----------
NET SALES . . . . . . . . . . . . . . $ 6,564,123 $6,900,699
COST OF GOODS SOLD. . . . . . . . . . 3,983,575 3,758,733
------------ -----------
GROSS PROFIT. . . . . . . . . . . . . 2,580,548 3,141,966
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 1,329,042 1,937,053
Research, development and engineering 551,000 853,206
Administrative. . . . . . . . . . . . 566,963 566,670
------------ -----------
Total . . . . . . . . . . . . . . . . 2,447,005 3,356,929
INCOME (LOSS) FROM OPERATIONS . . . . 133,543 (214,963)
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (63,862) (64,732)
Interest income . . . . . . . . . . . 35,977 38,131
Gain on sale of stock . . . . . . . . - 740,000
------------ -----------
Total . . . . . . . . . . . . . . . . (27,885) 713,399
INCOME BEFORE INCOME TAXES . . . . . 105,658 498,436
INCOME TAX PROVISION. . . . . . . . . - -
------------ -----------
NET INCOME. . . . . . . . . . . . . . $ 105,658 $ 498,436
============ ===========
NET INCOME PER COMMON SHARE
Basic . . . . . . . . . . . . . . . . $ 0.01 $ 0.06
Diluted . . . . . . . . . . . . . . . $ 0.01 $ 0.06
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 10,373,962 8,707,809
Diluted . . . . . . . . . . . . . . . 10,517,441 9,004,686
See notes to consolidated financial statements.
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
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OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . $ (60,312) $ 2,378,912
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 320,837 450,843
Amortization . . . . . . . . . . . . . . . . . . . 8,100 9,000
Provision for doubtful accounts. . . . . . . . . . (200,000) -
Gain on sale of Immtech stock. . . . . . . . . . . - (2,500,000)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . 67,346 (34,861)
Other receivables. . . . . . . . . . . . . . . . 18,126 78,845
Inventories. . . . . . . . . . . . . . . . . . . 306,044 (99,794)
Prepaid expenses . . . . . . . . . . . . . . . . (238,658) (215,055)
Accounts payable . . . . . . . . . . . . . . . . (267,575) (593,357)
Accrued liabilities. . . . . . . . . . . . . . . (313,219) (2,017,687)
----------- ------------
Net cash used in operating activities. . . . . . . . . (359,311) (2,543,154)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . (257,340) (317,212)
Proceeds from sale of Immtech stock. . . . . . . . . . - 2,500,000
----------- ------------
Net cash (used in) provided by investing activities. . (257,340) 2,182,788
FINANCING ACTIVITIES:
Principal payments on long-term debt . . . . . . . . . (39,107) (36,244)
Proceeds from issuance of common stock . . . . . . . . 4,068,385 -
----------- ------------
Net cash provided by (used in) financing activities. . 4,029,278 (36,244)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 3,412,627 (396,610)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . 114,830 2,511,078
----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . $3,527,457 $ 2,114,468
=========== ============
See notes to consolidated financial statements.
5
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Criticare
Systems, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments necessary for a fair statement of results for each
period shown. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
prevent the financial information given from being misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report and
previously filed Form 10-K.
2. INVENTORY VALUATION
Inventory is stated at the lower of cost or market, with cost determined on the
first-in, first-out method. Components of inventory consisted of the following
at December 31 and June 30, 2000, respectively:
December 31, 2000 June 30, 2000
------------------ --------------
Component parts . . . . . . . . $ 3,431,280 $ 3,721,474
Work in process . . . . . . . . 1,230,727 1,169,609
Finished units. . . . . . . . . 3,532,199 3,687,243
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Total inventories . . . . . . . 8,194,206 8,578,326
Less: reserve for obsolescence 400,000 400,000
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Net inventory . . . . . . . . . $ 7,794,206 $ 8,178,326
3. INVESTMENTS
During August, September and October 1999, the Company sold 500,000 shares of
Immtech International, Inc. ("Immtech") stock for $2,500,000 in a private
placement. The funds were used primarily to settle a long-standing lawsuit,
which was settled in July 1999. The Company held 456,374 shares of Immtech
stock, which was trading at $9-3/4 per share, on December 31, 2000. The market
value of these shares could change substantially due to overall market risk.
6
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, 2000 June 30, 2000
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Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,058,456 2,009,312
Furniture and fixtures . . . . . . . 848,755 763,282
Production tooling . . . . . . . . . 2,773,868 2,651,145
Demonstration and loaner monitors. . 1,485,663 1,407,587
------------------ --------------
Property, plant and equipment - cost 11,691,742 11,356,326
Less: accumulated depreciation. . . 5,688,507 5,367,670
------------------ --------------
Property, plant and equipment - net. $ 6,003,235 $ 5,988,656
7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 2000 and 1999
RESULTS OF OPERATIONS
-----------------------
Sales revenue for the six months ended December 31, 2000 was $700 thousand less
than that of the same period in the prior year. Two significant, isolated sales
in the prior year period, and the partial return of product from one of these
sales in the current year period increased sales revenue for the prior year
period and reduced sales revenue for the current year period. After adjusting
for both, sales revenue is relatively comparable. In addition, the selling
price of some of the Company's older product line have hurt overall revenue even
though the number of units sold in the current year period was up 8% from the
prior year period. OEM sales, which were minimal in the prior year period,
accounted for an incremental $1.5 million.
The gross profit percentage of 40% in the first six months of the current year
is 6% below that of the same period in fiscal 2000. Margins fell throughout the
prior year and rebounded to 40% in the first quarter of fiscal 2001, which is
where they have remained. As the cost per unit has not changed dramatically,
the decline is attributed to the lower sales prices on established products as
discussed above, and introductory pricing on the Company's newly introduced
products. As these newer products begin selling at prices that more closely
approximate list price, the Company expects to see further improvement in its
margins. See "Forward-Looking Statements."
To offset the drop in margins, the Company has had to continue to find ways to
reduce operating expenses, and has done so with much success. Operating expenses
for the current year period were over $1 million less than that of the prior
year period. Of this total, $300 thousand was a reversal of previously recorded
bad debt expense related to the sales return mentioned above; however, the
remaining $700 thousand relates to more tangible savings. Approximately $300
thousand of this total is attributed to better controls over trade show expenses
and a reduction of sales related salaries and commissions. The final $400
thousand of the decrease was a result of a reduction in engineering project
expense as there was a significant amount of activity in the first half of the
prior year related to the development of the new products released in late
fiscal 2000. The net $1 million savings in operational expenses was enough to
offset the reduction in margins, and leave a slight profit from operations for
the current year period while the prior year period showed a loss.
Other income and expense for the current year period was comparable to that of
the prior year period with the exception of the $2.5 million gain recorded in
fiscal 2000. This gain relates to the private placement sale of a portion of
the stock in Immtech International in which the Company still has a position.
This gain essentially accounts for the difference in net income/(loss), as well.
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 2000 and 1999
RESULTS OF OPERATIONS
-----------------------
As was the case in the first quarter of fiscal 2001, sales volume (number of
units sold) for the three months ended December 31, 2000 exceeded the sales
volume for the same period in fiscal 2000. And after adjusting for a $300
thousand return of product, previously reserved for as an at risk receivable,
sales revenue was at approximately the same level in the current year period as
in the prior year period. Both the sales revenue level and gross margin were
adversely affected by two major factors. The first was promotional pricing
designed to accelerate the introduction of the new POET line of monitors, and
the second was the heavily discounted sale of remaining obsolete products to
avoid significant inventory write downs. As all of the promotional units have
been cleared from the backlog, it is anticipated that future sales will be
closer to list price, resulting in a rise in the third quarter margins. See
"Forward-Looking Statements."
Operating expenses in the current year period decreased $900 thousand from that
of the prior year period, of which $300 thousand was a reversal of previously
recorded bad debt expense related to the sales return mentioned above. Another
$300 thousand of this decrease is attributed to improved expense control over
trade shows and a reduction of sales related salaries and commissions. The
final $300 thousand of the decrease was a result of a reduction in engineering
project expense.
The second quarter of fiscal 2001 was the first quarter in which the Company was
able to generate income from operations ($100 thousand) since the first quarter
of fiscal 2000. These numbers reflected a nice turn around as compared to the
three months ended December 31, 1999 when the same level of sales resulted in a
loss from operations ($200 thousand). If the level of operating expense can be
maintained while improving margins, the Company expects that this number should
also continue to improve. See "Forward-Looking Statements."
Non-operating expenses of approximately $65 thousand (mortgage interest) in the
current year period were partially offset by $35 thousand of interest income on
the private placement proceeds (see "Liquidity"). These amounts are comparable
to those in the prior year period. However, the prior year period also included
a $740 thousand gain on the sale of Immtech stock, which accounted for the
difference in the non-operating expense totals and turned the operating loss for
the prior year period into a net profit.
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
---------
As of December 31, 2000, the Company had a cash balance of approximately $3.5
million and no short-term borrowings. In the preceding six months,
approximately $360 thousand was used in operations, and another $260 thousand
was invested in property, plant and equipment. In October 2000, the Company
received $4.0 million in proceeds from the private placement of additional
shares of the Company's own common stock. The primary intended use of these
funds is for additional research and development and an expanded marketing
program. In the prior year, approximately $2.5 million was used in operations,
of which a significant portion was attributed to the settlement of a
long-standing lawsuit. Proceeds for this settlement were obtained from the sale
of 500,000 shares of Immtech stock for $2.5 million in a private placement sale.
The Company believes future capital and liquidity requirements will be satisfied
by cash generated from operations, its current cash balances and periodic
utilization of a $4,000,000 line of credit currently in place, if necessary. At
December 31, 2000, there were no borrowings outstanding under the line of
credit.
FORWARD LOOKING STATEMENTS
----------------------------
A number of the matters and subject areas discussed herein that are not
historical or current facts deal with potential future circumstances and
developments. These include anticipated product introductions, expected future
financial results, liquidity needs, financing ability, management's or the
Company's expectations and beliefs and similar matters discussed in Management's
Discussion and Analysis or elsewhere herein. The discussions of such matters
and subject areas are qualified by the inherent risk and uncertainties
surrounding future expectations generally, and also may materially differ from
the Company's actual future experience.
The Company's business, operations and financial performance are subject to
certain risks and uncertainties which could result in material differences in
actual results from management's or the Company's current expectations. These
risks and uncertainties include, but are not limited to, general economic
conditions, demand for the Company's products, costs of operations, the
development of new products, the reliance on single sources of supply for
certain components in the Company's products, government regulation, health care
cost containment programs, the effectiveness of the Company's programs to manage
working capital and reduce costs, and competition in the Company's markets.
10
Item 2. Changes in Securities and Use of Proceeds
(c) On October 17, 2000, the Company issued 1,786,273 shares of common
stock to Oxford Bioscience Partners III, L.P., Oxford Bioscience Partners
(Bermuda) III Limited Partnership and mRNA Fund L.P. at a price of $2.25 per
share. These shares were issued in a private placement exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act")
pursuant to Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on December 1,
2000. The matters voted upon, including the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
Proposal 1: Election of directors for a term ending at the 2003 annual meeting
of stockholders.
For Withheld
--- --------
Karsten Houm 6,273,535 750,827
Emil H. Soika 6,339,512 684,850
The Company's other directors consist of Milton Datsopoulos and Higgins D.
Bailey (whose terms end at the 2001 annual meeting of stockholders) and N.C.
Joseph Lai and Jeffrey T. Barnes (whose terms end at the 2002 annual meeting of
stockholders).
Proposal 2: Approval of the Amendment to the Criticare Systems, Inc. 1992
Employee Stock Option Plan to increase the number of authorized shares under the
Plan from 1,540,000 to 2,040,000.
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
1,818,204 1,045,207 115,280 4,045,671
Proposal 3: Ratification of appointment of BDO Seidman, LLP as auditors of the
Company.
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
6,863,464 147,173 13,725 0
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------------
(a) 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 Purchase Agreement, dated as of October 17, 2000, among
the Company, Oxford Bioscience Partners III L.P., Oxford
Bioscience Partners (Bermuda) III Limited Partnership
and mRNA Fund L.P. (incorporated by reference to the
Registration Statement filed on Form S-1, Registration
No. 333-50884).
(b) Reports on Form 8-K. None during the quarter ended December
31, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRITICARE SYSTEMS, INC.
(Registrant)
Date: February 9, 2001 BY /s/ Mark S. Ruehle
----------------------------------
Mark S. Ruehle
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
13