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 December 31, 1997
----------------
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 February 10, 1998: Class A Common Stock 8,319,901 shares.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1997
(UNAUDITED)
December 31, June 30,
ASSETS 1997 1997
---------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,372,323 $ 2,440,859
Accounts receivable 8,011,175 7,182,237
Other receivables 378,450 236,855
Inventory 7,626,716 7,730,591
Prepaid expenses 280,589 269,620
- ----------------------------------------------------------------------------------------------------
Total current assets 18,669,253 17,860,162
- ----------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,799,909 7,044,729
- ----------------------------------------------------------------------------------------------------
INVESTMENTS - -
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS:
License and patents - net 141,962 124,882
Convertible debenture issuance costs -net - 115,293
Goodwill - net - -
- ----------------------------------------------------------------------------------------------------
Total other assets 141,962 240,175
- ----------------------------------------------------------------------------------------------------
TOTAL $ 25,611,124 $25,145,066
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,816,659 $ 3,112,112
Accrued liabilities:
Compensation and commissions 1,108,643 1,000,552
Product warranties 611,157 370,000
Other 706,712 1,176,891
Current maturities of long-term debt 104,727 147,442
- ----------------------------------------------------------------------------------------------------
Total current liabilities 5,347,898 5,806,997
- ----------------------------------------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 3,220,817 3,274,611
- ----------------------------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 1,836,323
- ----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 332,796 311,859
Additional paid-in capital 16,974,374 14,469,406
Retained earnings (accumulated deficit) (211,964) (516,023)
Cumulative translation adjustments (52,797) (38,107)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 17,042,409 14,227,135
- ----------------------------------------------------------------------------------------------------
TOTAL $25,611,124 $25,145,066
- ----------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 2 of 13
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
NET SALES $14,681,507 $13,059,357
COST OF GOODS SOLD 7,903,128 6,874,832
- --------------------------------------------------------------------------------------------------
GROSS PROFIT 6,778,379 6,184,525
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 3,877,272 4,115,180
Research, development and engineering 1,052,387 1,117,259
Administrative 840,549 873,429
- --------------------------------------------------------------------------------------------------
Total 5,770,208 6,105,868
- --------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,008,171 78,657
- --------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (638,756) (300,856)
Interest income 54,644 474
Equity in loss of investments (120,000) (24,000)
- --------------------------------------------------------------------------------------------------
Total (704,112) (324,382)
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 304,059 (245,725)
- --------------------------------------------------------------------------------------------------
INCOME TAX PROVISION - -
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 304,059 $ (245,725)
- --------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.04 $ (0.03)
Diluted 0.04 (0.03)
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,107,197 7,128,272
Diluted 8,608,032 7,128,272
- --------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 3 of 13
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
NET SALES $ 7,137,503 $ 6,581,192
COST OF GOODS SOLD 3,864,726 3,520,406
- ------------------------------------------------------------------------------------------------
GROSS PROFIT 3,272,777 3,060,786
- ------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 1,930,193 2,187,886
Research, development and engineering 530,995 550,979
Administrative 389,496 472,910
- ------------------------------------------------------------------------------------------------
Total 2,850,684 3,211,775
- ------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 422,093 (150,989)
- ------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (199,839) (146,373)
Interest income 29,344 234
Equity in loss of investments (120,000) -
- ------------------------------------------------------------------------------------------------
Total (290,495) (146,139)
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 131,598 (297,128)
- ------------------------------------------------------------------------------------------------
INCOME TAX PROVISION - -
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 131,598 $ (297,128)
- ------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.02 $ (0.04)
Diluted 0.02 (0.04)
- ------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 8,203,699 7,128,272
Diluted 8,704,534 7,128,272
- ------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 4 of 13
5
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
OPERATING ACTIVITIES:
Net (loss) income $ 304,059 $ (245,725)
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 464,725 292,776
Amortization 9,000 18,600
Equity in loss of investments 120,000 24,000
Interest and discount accrued on convertible debentures 476,476
Changes in assets and liabilities:
Accounts receivable (828,938) 1,778,715
Other receivables (141,595) (21,260)
Inventories 103,875 (151,481)
Prepaid expenses (10,969) (164,321)
Accounts payable (295,453) (725,260)
Accrued liabilities (120,931) (344,729)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 80,249 461,315
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES-
Purchases of property, plant and equipment (245,986) (102,721)
Advances to Immtech International, Inc. (120,000) (24,000)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (365,986) (126,721)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments under line of credit facility - (800,000)
Principal payments on long-term debt (96,509) (106,377)
Proceeds from the sale of common stock 120,000 -
Proceeds from the exercise of stock options 193,710 -
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities 217,201 (906,377)
- ----------------------------------------------------------------------------------------------------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (68,536) (571,783)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,440,859 806,645
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,372,323 $ 234,862
- ----------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 5 of 13
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 December 31, 1997 and June 30, 1997, respectively:
December 31, June 30,
1997 1997
---------------------------------------------------------------------------------
Component parts $3,284,477 $2,867,884
Work in process 1,627,572 1,843,018
Finished units 2,714,667 3,019,689
---------------------------------------------------------------------------------
Total inventories $7,626,716 $7,730,591
---------------------------------------------------------------------------------
Page 6 of 13
7
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, June 30,
1997 1997
------------------------------------------------------------------------------
Land and building $4,525,000 $4,525,000
Machinery and equipment 1,713,935 1,674,488
Furniture and fixtures 621,024 617,451
Demonstration and loaner monitors 1,911,007 1,781,698
Production tooling 2,185,562 2,137,986
------------------------------------------------------------------------------
Property, plant and equipment - cost 10,956,528 10,736,623
Less accumulated depreciation 4,156,619 3,691,894
------------------------------------------------------------------------------
Property, plant and equipment - net $6,799,909 $7,044,729
------------------------------------------------------------------------------
5. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures.
The debentures have a two year term maturity with a stated annual interest rate
of 8%, payable in shares of common stock at the conversation date or maturity
date. The holders of the debentures had the option to convert up to $1,250,000
of the debentures and accrued interest to common stock of the Company sixty-one
(61) days after the February 1997 closing date at a conversion price equal to a
20% discount from the average closing bid price of the Company's common stock
for the five days preceding the conversion date. Debentures aggregating
$550,000 were converted under the 20% discount conversion feature. The
remaining debentures and accrued interest were converted to common stock of the
Company at a conversion price equal to a 25% discount from the average closing
bid price of the Company's common stock for the five days preceding the
conversion date. All of the debentures were converted to common stock prior to
December 31, 1997.
Proceeds from the issuance of the debentures were recorded as a liability at
the issuance date. The conversion discount is amortized and reported as
additional interest expense over the life of the debentures. Additional
interest expense is recognized for any unamortized discount as of the
conversion date. The debentures are included in the accompanying consolidated
balance sheet at the issuance price, plus any accrued interest and amortized
discount.
Page 7 of 13
8
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
6. NET INCOME (LOSS) PER SHARE
Effective for the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which established new standards for the calculation of net income per share
effective for interim and annual periods ending after December 15, 1997. Net
income (loss) information for the three months and six months ended December
31, 1997 and 1996 have been restated in accordance with the new accounting
pronouncement. Reconciliations of the numerator and denominator of the basic
and diluted per share computations are summarized as follows:
SIX MONTHS ENDED DECEMBER 31: 1997 1996
Net Income Per Share - Basic:
Net income (loss) $ 304,059 $ (245,725)
Weighted average shares outstanding 8,107,197 7,128,272
Net income per share - basic $ .04 $ (.03)
Net Income Per Share - Diluted:
Net income (loss) $ 304,059 $ (245,725)
Weighted average shares outstanding 8,107,197 7,128,272
Effect of dilutive securities-
Stock options 500,835
Weighted average shares assuming dilution 8,608,032 7,128,272
Net income per share - diluted $ .04 $ (.03)
THREE MONTHS ENDED DECEMBER 31:
Net Income Per Share - Basic:
Net income (loss) $ 131,598 $ (297,128)
Weighted average shares outstanding 8,203,699 7,128,272
Net income per share - basic $ .02 $ (.04)
Net Income Per Share - Diluted:
Net income (loss) $ 131,598 $ (297,128)
Weighted average shares outstanding 8,203,699 7,128,272
Effect of dilutive securities-
Stock options 500,835
Weighted average shares assuming dilution 8,704,534 7,128,272
Net income per share - diluted $ .02 $ (.04)
Page 8 of 13
9
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
7. CONTINGENCIES
The Company is involved in various lawsuits that have arisen from the normal
conduct of business and in connection with liquidating Criticare International
Gmbh Marketing Services, a wholly owned subsidiary. These proceedings are
handled by outside counsel. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the
consolidated financial statements.
Page 9 of 13
10
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 1997 and 1996
RESULTS OF OPERATIONS
- ---------------------
Net sales for the six months ended December 31, 1997 increased 12% to $14.7
million from $13.1 million for the same period in fiscal 1997. Domestic
Hospital sales increased due to increased MPT/VitalView telemetry systems and
initial OEM shipments of the 506DX combination (oximetry, noninvasive blood
pressure and temperature) monitor produced for Alaris Medical. Alternate Care
sales increased due to increased Model 507E vital signs monitor and 506DX
combination monitor shipments to non-hospital alternate care sites.
International sales decreased slightly due to a decreased demand for pulse
oximeters.
The gross profit percentage of 46.2% for the six months ended December 31, 1997
was below the 47.4% gross profit percentage reported in the same period of the
previous fiscal year. Improvements in gross profit recorded on MPT/VitalView
systems sales were offset by lower gross profit recorded on Alternate Care and
International sales due to continued price competition.
Operating expenses decreased approximately $336,000, and declined as a
percentage of sales to 39.3% from the previous year's level of 46.8%.
Marketing expenses decreased approximately $238,000 when compared to the same
period in fiscal 1997 due to decreased payroll in the Domestic Hospital
division and reduced expenses resulting from the restructuring of international
sales support from Germany to the corporate office. Research, development and
engineering expense declined approximately $65,000 related to reduced outside
contract and project expense. Administrative expenses decreased approximately
$33,000 in the six months ended December 31, 1997 when compared to the same
period in fiscal 1997.
Income from operations increased approximately $930,000 for the six months
ended December 31, 1997 when compared to the same period in fiscal 1997 due to
the increased sales volume and control of operating expenses.
Non-operating expenses were approximately $704,000 and $324,000 for the six
months ended December 31, 1997 and 1996, respectively. The increase was due to
the interest and conversion discount costs associated with the conversion of
$1,650,000 of convertible debentures to common stock.
Net income of approximately $304,000 for the six months ended December 31, 1997
represents an improvement from the net loss of approximately $246,000 recorded
in the same period of fiscal 1997. The improved net income results from
increased sales and decreased operating expenses which were partially offset by
increased non-operating expenses.
Page 10 of 13
11
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 1997 and 1996
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended December 31, 1997 increased 8% to $7.1
million from $6.6 million for the same period in fiscal 1997. Domestic
Hospital sales increased due primarily to OEM shipments of the 506DX
combination (oximetry, noninvasive blood pressure and temperature) monitor
produced for Alaris Medical. Alternate Care sales increased due to increased
Model 507E vital signs monitor and 506DX combination monitor shipments to
non-hospital alternate care sites. International sales decreased due to a
reduction in sales of the combination oximeter and carbon dioxide monitor.
The gross profit percentage of 45.9% for the three months ended December 31,
1997 was slightly below the 46.5% gross profit percentage reported in the same
period of the previous fiscal year. Slight price erosion was reported in all
three divisions due to continued competition in these areas.
Operating expenses decreased approximately $361,000, and declined as a
percentage of sales to 39.9% from the previous year's level of 48.8%.
Marketing expenses decreased approximately $258,000 when compared to the same
period in fiscal 1997 due to decreased payroll in the Domestic Hospital
division and by reduced expenses resulting from the restructuring of
international sales support from Germany to the corporate office. Research,
development and engineering expense declined approximately $20,000 related to
reduced outside contract and project expense. Administrative expenses
decreased approximately $83,000 related primarily to reduced bad debt expenses
incurred in the three months ended December 31, 1997 when compared to the same
period in fiscal 1997.
Income from operations increased approximately $573,000 for the three months
ended December 31, 1997 when compared to the same period in fiscal 1997 due to
the increased sales volume and control of operating expenses.
Non-operating expenses were approximately $290,000 and $146,000 for the three
months ended December 31, 1997 and 1996, respectively. The increase was due to
the interest and conversion discount costs associated with the conversion of
$500,000 of convertible debentures to common stock.
Net income of approximately $132,000 for the three months ended December 31,
1997 represents an improvement from the net loss of approximately $297,000
recorded in the same period of fiscal 1997. The improved net income results
from increased sales, decreased operating expenses which were partially offset
by increased non-operating expenses.
Page 11 of 13
12
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
- ---------
During the six months ended December 31, 1997, the Company recorded a positive
cash flow from operations of approximately $80,000 and had a cash balance of
approximately $2,400,000 and no short term borrowings. The Company believes
its marketing and research and development activities and other capital and
liquidity requirements will be satisfied by cash generated from operations. In
addition, the Company has received a commitment letter on a new bank line of
credit and it is in the processing of finalizing the agreement.
FORWARD LOOKING STATEMENTS
- -------------------------
This report contains certain forward-looking statements. Such statements refer
to the Company's opinion, belief or expectation. Forward looking statements
are subject to certain risks and uncertainties that could cause actual future
results and developments to differ materially from those currently projected.
Such risks and uncertainties include, but are not limited to, the uncertainties
inherent in litigation, the timing of new product introductions, delays in
customer delivery requirements, and general economic conditions in the
Company's market segments.
Page 12 of 13
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(b) The registrant filed a report on Form 8-K on December 3, 1997
which reported the naming of Joseph M. Siekierski as the Company's
new Vice President - Finance, chief accounting officer and chief
financial officer.
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 02/13/98 BY
- ------------------------ -------------------------------
Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 13 of 13