1
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, 1996
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
CRITICARE SYSTEMS, INC.
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1501563
----------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (414) 798-8282
---------------------------
N/A
- ------------------------------------------------------------------------------
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 May 9, 1996: Class A Common Stock 7,103,272 shares.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND JUNE 30, 1995
(UNAUDITED)
March 31, June 30,
ASSETS 1996 1995
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 310,692 $ 2,398,278
Accounts receivable 9,547,267 8,608,340
Other receivables 416,918 279,458
Inventory 8,374,241 6,639,805
Prepaid expenses 339,244 166,972
--------------------------------------------------------------
Total current assets 18,988,362 18,092,853
--------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 7,734,423 6,918,024
--------------------------------------------------------------
INVESTMENTS 300,000 300,000
--------------------------------------------------------------
OTHER ASSETS:
License and patents - net 94,567 108,373
Goodwill - net 27,578 49,178
--------------------------------------------------------------
Total other assets 122,145 157,551
--------------------------------------------------------------
TOTAL $27,144,930 $25,468,428
--------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,516,095 $ 2,661,558
Accrued liabilities:
Compensation and commissions 546,141 714,171
Income taxes (115,515) 21,800
Product warranties 350,000 375,000
Other 741,527 726,765
Short-term borrowings 500,000
Current maturities of long-term debt 189,314 191,818
--------------------------------------------------------------
Total current liabilities 6,727,562 4,691,112
--------------------------------------------------------------
LONG-TERM DEBT, less current
maturities 4,742,072 3,646,867
--------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 284,131 267,889
Additional paid-in capital 11,941,618 10,884,910
Retained earnings 3,466,372 5,994,455
Cumulative translation adjustments (16,825) (16,805)
--------------------------------------------------------------
Total stockholders' equity 15,675,296 17,130,449
--------------------------------------------------------------
TOTAL $27,144,930 $25,468,428
--------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 2 of 11
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- ----------
NET SALES $23,405,685 $21,224,716
COST OF GOODS SOLD 12,018,780 10,561,680
---------------------------------------------------------------------
GROSS PROFIT 11,386,905 10,663,036
---------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 7,884,941 7,181,284
Research, development and engineering 1,817,447 1,368,513
Administrative 1,455,563 1,397,323
---------------------------------------------------------------------
Total 11,157,951 9,947,120
---------------------------------------------------------------------
INCOME FROM OPERATIONS 228,954 715,916
---------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (313,548) (279,801)
Interest income 41,511 137,377
Equity in loss of investments (2,500,000) (45,000)
---------------------------------------------------------------------
Total (2,772,037) (187,424)
---------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,543,083) 528,492
---------------------------------------------------------------------
INCOME TAX (BENEFIT) PROVISION (15,000) 207,000
---------------------------------------------------------------------
NET INCOME (LOSS) $(2,528,083) $ 321,492
---------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ (0.37) $ 0.05
Fully diluted (0.37) 0.05
---------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 6,811,268 6,730,389
Fully diluted 6,811,268 6,730,389
---------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 3 of 11
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
NET SALES $7,711,343 $7,227,302
COST OF GOODS SOLD 3,996,217 3,509,791
--------------------------------------------------------------------
GROSS PROFIT 3,715,126 3,717,511
--------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 2,820,973 2,585,037
Research, development and engineering 632,977 532,742
Administrative 500,552 451,345
--------------------------------------------------------------------
Total 3,954,502 3,569,124
--------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (239,376) 148,387
--------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (116,693) (92,234)
Interest income 3,387 46,784
Equity in loss of investments (15,000)
--------------------------------------------------------------------
Total (113,306) (60,450)
--------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (352,682) 87,937
--------------------------------------------------------------------
INCOME TAX PROVISION (BENEFIT) (135,000) 35,000
--------------------------------------------------------------------
NET INCOME (LOSS) $ (217,682) $ 52,937
--------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ (0.03) $ 0.01
Fully diluted (0.03) 0.01
--------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 6,811,268 6,730,389
Fully diluted 6,811,268 6,730,389
--------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 4 of 11
5
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
OPERATING ACTIVITIES:
Net (loss) income $(2,528,083) $ 321,492
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 446,143 428,454
Amortization 35,406 85,065
Equity in loss of investments 2,500,000 45,000
Changes in assets and liabilities:
Accounts receivable (938,927) 684,777
Other receivables (137,460) (188,003)
Inventories (1,734,436) (2,801,052)
Prepaid expenses (172,272) 3,120
Accounts payable 1,854,517 1,623,655
Accrued liabilities (679,583) (151,306)
------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,354,695) 51,202
------------------------------------------------------------------------------
INVESTING ACTIVITIES-
Purchases of property, plant and equipment (1,262,542) (360,231)
------------------------------------------------------------------------------
Net cash used in investing activities (1,262,542) (360,231)
------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (147,299) (144,272)
Utilization of line of credit 500,000
Proceeds from the exercise of stock options 176,950
------------------------------------------------------------------------------
Net cash used in financing activities 529,651 (144,272)
------------------------------------------------------------------------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (2,087,586) (453,301)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,398,278 3,452,369
------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 310,692 $ 2,999,068
------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 5 of 11
6
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 issued Form 10-K.
2. Cash Equivalents
The Company considers all investments with purchased maturities of less than
three months to be cash equivalents.
3. 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, 1996 and June 30, 1995, respectively:
March 31, June 30,
1996 1995
--------------------------------------------
Component parts $3,371,105 $2,996,313
Work in process 1,747,372 1,138,060
Finished units 3,255,764 2,505,432
--------------------------------------------
Total inventories $8,374,241 $6,639,805
--------------------------------------------
Page 6 of 11
7
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
March 31, June 30,
1996 1995
--------------------------------------------------------------
Land and building $4,525,000 $4,525,000
Machinery and equipment 1,668,994 1,586,177
Furniture and fixtures 886,384 859,182
Demonstration and loaner monitors 1,918,423 1,402,841
Production tooling 1,844,973 1,208,032
--------------------------------------------------------------
Property, plant and equipment - cost 10,843,774 9,581,232
Less accumulated depreciation 3,109,351 2,663,208
--------------------------------------------------------------
Property, plant and equipment - net $7,734,423 $6,918,024
--------------------------------------------------------------
5. Investments
Investments consist of the following:
March 31, June 30,
1996 1995
----------------------------------------------------
Intercare Technologies, Inc. $300,000 $300,000
Immtech International, Inc. - -
----------------------------------------------------
Total investments $300,000 $300,000
----------------------------------------------------
During the second quarter of fiscal 1996, the Company, through its wholly owned
subsidiary Criticare Biomedical, Inc., purchased from Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. (collectively, "Sellers"),
two entities which are not affiliated with the Company, 1,000,000 shares of the
Series A Preferred Stock and 1,200,000 shares of the Series B Preferred Stock
of Immtech International, Inc. ("Immtech") and a promissory note payable by
Immtech in the principal amount of $50,000 pursuant to the terms of a certain
Purchase and Sale Agreement.
Page 7 of 11
8
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
The acquisition price has been assigned a value of $2,500,000 based upon a
preliminary estimate by Company management of the fair value of the
consideration given by the Company. In consideration of the Immtech stock and
Note, the Company issued to the Sellers 333,154 shares of the Company's Common
Stock and Criticare Biomedical has issued a subordinated promissory note,
secured solely by the Immtech stock and note, in the principal amount of
$1,240,000. The principal balance of the note is payable on the earlier of (a)
the seventh anniversary of the date of the note; (b) the closing date of an
initial public offering of the stock of Immtech or any sale of the Immtech
stock by Criticare Biomedical; or (c) the Company purchasing any additional
Immtech stock. The note bears interest at 7% per annum. No interest is
payable during the first 12 months of the note and thereafter interest is to be
paid quarterly in arrears. In accordance with applicable accounting rules, the
purchase price was allocated to research and development and charged to expense
upon the consummation of the agreement. The Company currently owns
approximately 35% of the outstanding common stock of Immtech on a fully diluted
and as converted basis. The investment in Immtech is accounted for using the
equity method.
Page 8 of 11
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Nine Months Ended March 31, 1996 and 1995
Results of Operations
Net sales for the nine months ended March 31, 1996 increased 10% to $23.4
million from $21.2 million for the same period in fiscal 1995. Sales increased
in all three divisions. The Domestic Hospital sales increase is due primarily
to improved Maestro ECG telemetry sales and the introduction of the "Scholar",
which represents the Company's next generation of monitoring products. The
Alternate Care sales improvement is attributable to increased sales of
combination oximetry and blood pressure monitors. The International sales
improvement is due to the introduction of the "Scholar" and "Scholar II" and
increased sales of the Model 1100 Vital Signs monitor.
The gross profit percentage decreased from 50% for the nine months ended March
31, 1995 to 49% for the nine months ended March 31, 1996. The decrease in
gross profit can be attributed to continued price competition.
Operating expenses increased approximately $1,211,000, or 12%, for the nine
months ended March 31, 1996 when compared with the same period in fiscal 1995.
Marketing expenses increased approximately $700,000, or 10%, when compared to
the same period in fiscal 1995. The increase in marketing expenses relates to
increased commissions resulting from the increased sales and additional
promotional expenses related to the new product introductions. Research,
development and engineering expenses for the nine months ended March 31, 1996
increased approximately $449,000, or 33%, when compared to the same period in
fiscal 1995. This increase relates to expenses incurred in connection with new
product development, primarily new vital signs monitors, telemetry projects and
digital oximetry designed for the changing health care environment.
Non-operating expenses were $2,772,037 and $187,424 for the nine months ended
March 31, 1996 and 1995, respectively. The March 31, 1996 amount includes the
$2,500,000 write-off recorded upon the acquisition of additional stock in
Immtech. The write-off relates to the allocation of the purchase price to
research and development which must be expensed.
The net loss of $2,528,083 for the nine months ended March 31, 1996 compares to
net income of $321,492 recorded for the nine months ended March 31, 1995. The
change reflects the write-off related to the Immtech acquisition and the
increased operating expenses.
Page 9 of 11
10
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended March 31, 1996 and 1995
Results of Operations
Net sales for the three months ended March 31, 1996 increased 7% to $7.7
million from $7.2 million for the same period in fiscal 1995. The increased
sales is primarily attributable to the International division. This increase
is due primarily to sales of "Scholar" and "Scholar II", products which were
introduced in the second quarter of fiscal 1996.
The gross profit percentage decreased from 51% for the quarter ended March 31,
1995 to 48% for the quarter ended March 31, 1996. The decrease is due to
continued price competition.
Operating expenses increased approximately $385,000, or 11%, for the quarter
ended March 31, 1996 when compared with the same period in fiscal 1995.
Marketing expenses for the quarter ended March 31, 1996 increased approximately
$236,000, or 9%, when compared to the same period in 1995. This increase in
marketing expenses relates to increased commissions resulting from the
increased sales and additional promotional expenses related to new product
introductions. Research, development and engineering expenses for the quarter
ended March 31, 1996 increased approximately $100,000, or 19%, when compared to
the same period in fiscal 1995. This increase relates to expenses incurred in
connection with new product development, primarily new vital signs monitors,
telemetry projects and digital oximetry designed for the changing health care
environment.
Non-operating expenses were $113,306 and $60,450 for the three months ended
March 31, 1996 and 1995, respectively. This increase is due to additional
interest expense resulting from the note issued upon the acquisition of
additional Immtech stock and periodic borrowing under the Company's line of
credit. Interest income decreased due to lower cash balances on hand.
The net loss of $217,682 for the three months ended March 31, 1996 compares to
net income of $52,937 recorded for the three months ended March 31, 1995. This
change is due to the increased operating expenses incurred for new product
development and promotion.
The Company's cash balance has decreased due to increased accounts receivable
and inventory levels, increased investment in demonstration and loaner monitors
and production tooling and increased spending related to new product
development and promotion. Accounts receivable have increased as a result of
international sales becoming a larger percentage of total sales.
Historically, international sales have had a longer collection period. The
increase in inventory is due to the expanded product line and sales for the
quarter ended March 31, 1996 being below forecasted levels. The increase in
demonstration and loaner monitors is due to the expanded product line and the
increased number of sales representatives requiring demonstration monitors.
The production tooling acquisitions relate to the new products offered by the
Company. The Company believes its marketing and research and development
activities and other capital and liquidity requirements will be satisfied by
cash generated from operations and periodic utilization of a commercial line of
credit of up to $4,000,000 currently in place.
Page 10 of 11
11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) The registrant filed no reports on Form 8-K during the quarter
ended March 31, 1996.
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 5/09/96 BY
- ----------------- ---------------------------------
Richard J. Osowski
Senior Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 11 of 11