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 March 31, 2001
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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 March 31, 2001: Class A Common Stock 10,779,524 shares.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND JUNE 30, 2000
(UNAUDITED)
March 31, June 30,
ASSETS 2001 2000
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CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 2,742,445 $ 114,830
Accounts receivable, less allowance for doubtful accounts
of $1,000,000 and $1,300,000, respectively. . . . . . . . . . . . . 7,223,329 6,782,765
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,624,151 5,704,675
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 95,719 116,773
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,966,373 8,178,326
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 435,017 219,852
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 21,087,034 21,117,221
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . 6,039,084 5,988,656
License rights and patents - net . . . . . . . . . . . . . . . . . . . 100,640 104,990
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,226,758 $27,210,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,340,523 $ 2,635,344
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . 919,582 1,243,839
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . 334,900 325,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485,798 574,826
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 85,114 80,432
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 4,165,917 4,859,441
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 3,218,957 3,283,892
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 92,382 268,582
STOCKHOLDERS' EQUITY:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
10,779,524 and 8,976,251 shares issued, respectively . . . . . . . 431,181 359,050
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 22,459,856 18,478,040
Common stock held in treasury (67,692 and 81,122 shares, respectively) (126,919) (151,111)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . (5,638,767) (5,591,702)
Accumulated comprehensive income . . . . . . . . . . . . . . . . . . . 2,624,151 5,704,675
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Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 19,749,502 18,798,952
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,226,758 $27,210,867
============ ============
See notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
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NET SALES . . . . . . . . . . . . . . $20,057,979 $19,634,951
COST OF GOODS SOLD. . . . . . . . . . 12,043,031 11,269,345
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GROSS PROFIT. . . . . . . . . . . . . 8,014,948 8,365,606
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 4,376,088 5,472,763
Research, development and engineering 1,773,657 2,278,059
Administrative. . . . . . . . . . . . 1,802,055 1,815,938
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Total . . . . . . . . . . . . . . . . 7,951,800 9,566,760
INCOME (LOSS) FROM OPERATIONS . . . . 63,148 (1,201,154)
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (190,766) (195,408)
Interest income . . . . . . . . . . . 110,873 77,759
Gain on sale of stock . . . . . . . . - 2,500,000
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Total . . . . . . . . . . . . . . . . (79,893) 2,382,351
(LOSS) INCOME BEFORE INCOME TAXES . . (16,745) 1,181,197
INCOME TAX PROVISION. . . . . . . . . - -
------------ ------------
NET (LOSS) INCOME . . . . . . . . . . $ (16,745) $ 1,181,197
============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . $ 0.00 $ 0.14
Diluted . . . . . . . . . . . . . . . na $ 0.13
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 9,988,834 8,630,390
Diluted . . . . . . . . . . . . . . . na 8,861,107
See notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
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NET SALES . . . . . . . . . . . . . . $ 7,263,979 $ 6,130,915
COST OF GOODS SOLD. . . . . . . . . . 4,340,626 3,896,086
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GROSS PROFIT. . . . . . . . . . . . . 2,923,353 2,234,829
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 1,571,937 1,929,333
Research, development and engineering 641,375 713,397
Administrative. . . . . . . . . . . . 672,854 735,267
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Total . . . . . . . . . . . . . . . . 2,886,166 3,377,997
INCOME (LOSS) FROM OPERATIONS . . . . 37,187 (1,143,168)
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (62,097) (64,895)
Interest income . . . . . . . . . . . 68,477 10,345
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Total . . . . . . . . . . . . . . . . 6,380 (54,550)
INCOME (LOSS) BEFORE INCOME TAXES . . 43,567 (1,197,718)
INCOME TAX PROVISION. . . . . . . . . - -
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NET INCOME (LOSS) . . . . . . . . . . $ 43,567 $(1,197,718)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . $ 0.00 $ (0.14)
Diluted . . . . . . . . . . . . . . . $ 0.00 $ (0.14)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 10,709,603 8,684,029
Diluted . . . . . . . . . . . . . . . 11,023,740 8,684,029
See notes to consolidated financial statements.
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
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OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . $ (16,745) $ 1,181,197
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 577,022 724,982
Amortization . . . . . . . . . . . . . . . . . . . 4,350 13,500
Provision for doubtful accounts. . . . . . . . . . (300,000) -
Obsolescence reserve . . . . . . . . . . . . . . . (75,000) -
Gain on sale of Immtech stock. . . . . . . . . . . - (2,500,000)
Litigation settled with common stock . . . . . . . - 69,375
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . (140,564) (195,250)
Other receivables. . . . . . . . . . . . . . . . 21,054 (41,331)
Inventories. . . . . . . . . . . . . . . . . . . 148,941 (774,636)
Prepaid expenses . . . . . . . . . . . . . . . . (215,165) (42,712)
Accounts payable . . . . . . . . . . . . . . . . (294,821) (268,909)
Accrued liabilities. . . . . . . . . . . . . . . (579,585) (2,448,015)
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Net cash used in operating activities. . . . . . . . . (870,513) (4,281,799)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . (489,438) (418,688)
Proceeds from sale of Immtech stock. . . . . . . . . . - 2,500,000
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Net cash (used in) provided by investing activities. . (489,438) 2,081,312
FINANCING ACTIVITIES:
Principal payments on long-term debt . . . . . . . . . (60,253) (55,236)
Proceeds from issuance of common stock . . . . . . . . 4,047,819 477,629
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Net cash provided by financing activities. . . . . . . 3,987,566 422,393
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 2,627,615 (1,778,094)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . 114,830 2,511,078
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CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . $2,742,445 $ 732,984
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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 March 31, 2001 and June 30, 2000, respectively:
March 31, 2001 June 30, 2000
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Component parts . . . . . . . . $ 4,111,427 $ 3,721,474
Work in process . . . . . . . . 996,064 1,169,609
Finished units. . . . . . . . . 3,183,882 3,687,243
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Total inventories . . . . . . . 8,291,373 8,578,326
Less: reserve for obsolescence 325,000 400,000
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Net inventory . . . . . . . . . $ 7,966,373 $ 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 $5-3/4 per share, on March 30, 2001. 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:
March 31, 2001 June 30, 2000
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Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,088,508 2,009,312
Furniture and fixtures . . . . . . . 865,029 763,282
Production tooling . . . . . . . . . 2,959,640 2,651,145
Demonstration and loaner monitors. . 1,545,599 1,407,587
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Property, plant and equipment - cost 11,983,776 11,356,326
Less: accumulated depreciation. . . 5,944,692 5,367,670
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Property, plant and equipment - net. $ 6,039,084 $ 5,988,656
7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Nine Months Ended March 31, 2001 and 2000
RESULTS OF OPERATIONS
-----------------------
Net sales for the nine months ended March 31, 2001 increased 2% from the same
period in the prior year. However, two significant and isolated sales in the
prior year, combined with the partial return of product from one of these sales
in the current year, had the effect of increasing the prior year and reducing
the current year revenue. Adjusting for these items, the net sales in 2001
increased almost $2.5 million, or 14%, above the same period in the prior year.
Approximately $2.1 million of this increase can be attributed to higher OEM
sales, which have become a significant contributor to revenue in fiscal 2001.
The gross profit percentage was 40% for the first nine months of the current
year compared to 42.6% for the same period in fiscal 2000. Margins fell in the
last two quarters of fiscal 2000, but rebounded to the 40% level in the first
quarter of fiscal 2001, where they have remained for all three quarters of the
current fiscal year. Margins in the current year were favorably impacted by the
recognition of $105,000 in deferred income from the settlement of a contract
that was agreed to in January 2000 and fully satisfied in the third quarter of
fiscal 2001 and from a $75,000 reduction in a reserve for obsolete inventory.
The Company expects to see improvement in its margins after fiscal 2001 as a
result of lower product costs expected from outsourcing the manufacturing of the
majority of its product lines to foreign manufacturers and from anticipated cost
efficiencies from increased sales volume generated from new products introduced
late in fiscal 2000. See "Forward-Looking Statements."
The Company has continued to make a concerted effort to reduce operating
expenses in order to negate the impact of declining margins from pricing
pressures on medical monitoring systems worldwide. A reduction in operating
expenses of over $1.6 million in the current year more than offset the lower
margins realized in the first nine months of fiscal 2001. $300,000 of this
reduction was a reversal of previously recorded bad debt expense related to the
sales return mentioned above. However, the remaining $1.3 million in expense
savings relates to more tangible spending reductions. Approximately $800,000 of
this total is attributed to more cost-effective spending in marketing on travel,
consulting fees, trade shows and other sales promotion expenses, and sales
commissions. The final $500,000 in lower spending was due to significant
engineering project expenses incurred in the first nine months of the prior year
related to the development of new products that were released in late fiscal
2000. The overall $1.6 million savings in operating expenses more than offset
the lower margins, resulting in a small profit from operations for the first
nine months of the current year which was significantly better than the $1.2
million loss from operations that was generated in the prior year period.
Other income and expense is 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, Inc. in which the Company still has a position. The large gain
allowed the Company to recognize net income of $1.2 million in the first nine
months of the prior year, compared to the small net loss produced in the current
year period.
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended March 31, 2001 and 2000
RESULTS OF OPERATIONS
-----------------------
Net sales for the three months ended March 31, 2001 increased 18% to $7.3
million from $6.1 million for the same period in fiscal 2000. A significant
increase in sales internationally drove the majority of the higher revenue
between quarters as the new POET line of monitors introduced late in fiscal 2000
favorably impacted fiscal 2001 third quarter revenue. In addition, for the
third consecutive quarter in fiscal 2001, OEM sales improved over the prior
year, enabling the Company to increase sales in each quarter of the current
fiscal year.
The gross profit percentage was 40.2% for the three months ended March 31, 2001
compared to 36.5% for the same period in the prior year. The recognition of
deferred income in the third quarter of fiscal 2001, combined with the reduction
in the obsolescence reserve, both discussed previously, favorably impacted
margins. Increased sales volume of the Company's high margin accessory business
accounted for the remainder of the margin improvement between quarters.
The Company's concerted efforts to reduce operating expenses continued in the
third quarter of fiscal 2001 as operating expenses were reduced almost $500,000
compared to the same period in the prior year. The majority of this decrease
was realized through cost-effective marketing expense reductions in the areas of
travel, consulting fees, and trade show spending. Another $100,000 in expense
savings was realized from the reversal of bad debt expense recorded in the first
quarter of fiscal 2001 for loaner equipment that was no longer deemed at risk
due to favorable collections experience.
The higher sales volume, improved gross profit performance, and lower operating
expenses discussed above for the three months ended March 31, 2001 produced a
small amount of income from operations which was significantly better than the
$1,143,000 loss from operations that was generated for the same period in the
prior year. In addition, a $58,000 increase in interest income earned from the
investment of proceeds received in October 2000 from the private placement of
shares of the Company's common stock more than offset the interest expense
incurred on the mortgage of the Company's facility. As a result, the Company
generated net income slightly better than breakeven for the second consecutive
quarter, compared to the $1.2 million net loss in the fiscal third quarter of
the prior year.
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
---------
As of March 31, 2001, the Company had a cash balance of approximately $2.7
million and no short-term borrowings. In the nine months ended March 31, 2001,
approximately $871,000 of cash was used in operations to support the transition
of manufacturing to contract suppliers, and another $489,000 was invested in
property, plant and equipment. These items were funded by $4.0 million in
proceeds received in October 2000 from the private placement of shares of the
Company's common stock. The primary intended use of these proceeds is to fund
additional research and development efforts and to expand the Company's
marketing programs. In the nine months ended March 31, 2000, approximately $4.3
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 all 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 March 31, 2001, 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, unanticipated difficulties as the Company
begins to outsource the manufacturing of the majority of its products to foreign
manufacturers and risks related to foreign manufacturing, including economic and
political instability, trade and foreign tax laws, production delays and cost
overruns and quality control, and competition in the Company's markets.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
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(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).
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended March 31, 2001.
11
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 May 10, 2001 BY /s/ Michael J. Sallmann
------------ ----------------------------------
Michael J. Sallmann
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
12