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, 1999
---------------
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 12, 1999: Common Stock, $.04 par value, 8,701,151 shares.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND JUNE 30, 1998
(UNAUDITED)
March 31, June 30,
ASSETS 1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,059,143 $ 2,729,998
Accounts receivable 7,009,954 6,921,713
Other receivables 148,326 322,976
Inventory 8,466,171 7,682,471
Prepaid expenses 244,093 338,297
- --------------------------------------------------------------------------------
Total current assets 17,927,687 17,995,455
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,261,072 6,612,371
- --------------------------------------------------------------------------------
INVESTMENTS -- --
- --------------------------------------------------------------------------------
LICENSE RIGHTS AND PATENTS 105,493 118,993
- --------------------------------------------------------------------------------
TOTAL $ 24,294,252 $ 24,726,819
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,159,201 $ 2,305,721
Accrued liabilities:
Compensation and commissions 1,006,340 819,886
Product warranties 375,000 328,000
Other 821,993 715,603
Current maturities of long-term debt 77,390 109,354
- --------------------------------------------------------------------------------
Total current liabilities 5,439,924 4,278,564
- --------------------------------------------------------------------------------
OTHER OBLIGATIONS 441,000 --
- --------------------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 3,372,610 3,165,258
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 334,046 334,046
Common stock repurchased (103,840 shares) (193,684) --
Additional paid-in capital 17,964,250 17,964,250
Retained earnings (accumulated deficit) (3,063,894) (1,015,299)
- --------------------------------------------------------------------------------
Total stockholders' equity 15,040,718 17,282,997
- --------------------------------------------------------------------------------
TOTAL $ 24,294,252 $ 24,726,819
- --------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 2 of 12
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
NET SALES $ 21,290,165 $ 20,960,466
COST OF GOODS SOLD 11,140,076 11,263,024
- --------------------------------------------------------------------
GROSS PROFIT 10,150,089 9,697,442
- --------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 6,823,052 5,651,509
Research, development and engineering 2,223,853 1,612,777
Administrative 2,105,365 1,354,717
Severance pay 728,000 --
- --------------------------------------------------------------------
Total 11,880,270 8,619,003
- --------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS (1,730,181) 1,078,439
- --------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (367,078) (718,373)
Interest income 48,664 82,991
Equity in loss of investments -- (120,000)
- --------------------------------------------------------------------
Total (318,414) (755,382)
- --------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (2,048,595) 323,057
- --------------------------------------------------------------------
INCOME TAX PROVISION -- --
- --------------------------------------------------------------------
NET (LOSS) INCOME $ (2,048,595) $ 323,057
- --------------------------------------------------------------------
(LOSS) INCOME PER COMMON SHARE:
Basic $ (0.24) $ 0.04
Diluted (0.24) 0.04
- --------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,701,151 8,181,452
Diluted 8,701,151 8,744,045
- --------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 3 of 12
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
NET SALES $7,275,682 $6,278,961
COST OF GOODS SOLD 3,897,129 3,359,896
- ------------------------------------------------------------------
GROSS PROFIT 3,378,553 2,919,065
- ------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 2,343,321 1,774,236
Research, development and engineering 735,593 560,391
Administrative 785,225 514,168
- ------------------------------------------------------------------
Total 3,864,139 2,848,795
- ------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS (485,586) 70,270
- ------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (207,362) (79,617)
Interest income 12,217 28,348
Equity in loss of investments --
- ------------------------------------------------------------------
Total (195,145) (51,269)
- ------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (680,731) 19,001
- ------------------------------------------------------------------
INCOME TAX PROVISION -- --
- ------------------------------------------------------------------
NET (LOSS) INCOME $ (680,731) $ 19,001
- ------------------------------------------------------------------
(LOSS) INCOME PER COMMON SHARE:
Basic $ (0.08) $ 0.00
Diluted (0.08) 0.00
- ------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,701,151 8,333,262
Diluted 8,701,151 8,895,855
- ------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 4 of 12
5
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
OPERATING ACTIVITIES:
Net (loss) income $(2,048,595) $ 323,057
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 527,104 691,010
Amortization 13,500 13,500
Equity in loss of investments - 120,000
Interest and discount accrued on convertible debentures - 476,476
Changes in assets and liabilities:
Accounts receivable (88,241) (162,747)
Other receivables 174,650 (55,609)
Inventories (510,515) 357,343
Prepaid expenses 94,204 (83,928)
Accounts payable 853,480 (1,139,645)
Accrued liabilities 780,844 (592,034)
- -------------------------------------------------------------------------------------
Net cash (used in) operating activities (203,569) (52,577)
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (448,990) (214,798)
Advances to Immtech International, Inc. - (120,000)
- -------------------------------------------------------------------------------------
Net cash used in investing activities (448,990) (334,798)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (81,025) (121,638)
Repurchase of Company stock (193,684) -
Net proceeds from mortgage refinancing 256,413 -
Proceeds from the sale of common stock - 120,000
Proceeds from the exercise of stock options - 261,541
- -------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (18,296) 259,903
- -------------------------------------------------------------------------------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (670,855) (127,472)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,729,998 2,440,859
- -------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,059,143 $ 2,313,387
- -------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
Page 5 of 12
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 filed 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, 1999 and June 30, 1998, respectively:
March 31, June 30,
1999 1998
----------------------------------------------------------------
Component parts $3,667,146 $2,647,231
Work in process 1,168,411 1,409,187
Finished units 3,630,614 3,626,053
----------------------------------------------------------------
Total inventories $8,466,171 $7,682,471
----------------------------------------------------------------
Page 6 of 12
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,
1999 1998
---- ----
Land and building $4,525,000 $4,525,000
Machinery and equipment 2,005,067 1,796,120
Furniture and fixtures 821,784 712,428
Demonstration and loaner monitors 1,510,426 1,783,611
Production tooling 2,136,521 2,005,834
----------------------------------------------------------------------
Property, plant and equipment - cost 10,998,798 10,822,993
Less accumulated depreciation 4,737,726 4,210,622
----------------------------------------------------------------------
Property, plant and equipment - net $6,261,072 $6,612,371
----------------------------------------------------------------------
5. CONTINGENCIES
The Company is involved in a lawsuit that has arisen from the normal conduct of
business. This lawsuit is a result of a dispute between the Company and a former
distributor over the termination of an exclusive marketing agreement. This
proceeding is handled by outside counsel. Based upon the status of this
litigation, it is not currently possible for management to determine the effect
this lawsuit will have on the consolidated financial statements.
Page 7 of 12
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Nine Months Ended March 31, 1999 and 1998
RESULTS OF OPERATIONS
Net sales for the nine months ended March 31, 1999 increased 1.6% to $21,300,000
from $21,000,000 for the same period in fiscal 1998. OEM sales continued to
increase while international sales decreased due to the unstable economic
climate in the Pacific Rim and continued competitive pressures in other parts of
the world. We expect international sales to improve as new products are released
in the first and second quarters of fiscal 2000.
The gross profit percentage of 47.7% for the nine months ended March 31, 1999
was an improvement from the 46.2% gross profit percentage reported in the same
period of the previous fiscal year. Improvements in gross profit relate to
product mix and an increase in domestic sales, which generally have higher gross
margins than international sales, as a percentage of total sales.
Operating expenses increased approximately $3,300,000. Marketing expenses
increased approximately $1,200,000 when compared to the same period in fiscal
1998 due primarily to increased trade show and sales promotion expenses as the
Company continues to promote the new products as they are released. Research,
development and engineering expense increased approximately $600,000 related to
additional payroll, outside contract and project expense which are all
associated with the new products under development. Administrative expenses
increased approximately $750,000 in the nine months ended March 31, 1999 when
compared to the same period in fiscal 1998. This increase is due primarily to
increased litigation expense related to a lawsuit that the Company is involved
in and increased investor relations expenses. The Company also recorded a
restructuring charge of $728,000 during the nine months ended March 31, 1999.
This restructuring charge relates to severance pay and other benefits payable to
the two co-founders of the Company. Both of these individuals resigned from
their positions with the Company in November 1998. The severance accrual
includes a portion of their respective salary and fringe benefits for a period,
which approximates three years.
Income from operations decreased approximately $2,809,000 for the nine months
ended March 31, 1999 when compared to the same period in fiscal 1998 and due to
the increased operating expenses.
Non-operating expenses were approximately $318,000 and $755,000 for the nine
months ended March 31, 1999 and 1998, respectively. The decrease in 1999 was due
to the absence of interest and conversion discount costs associated with the
conversion of $1,650,000 of convertible debentures to common stock during the
nine months ended March 31, 1998. This decrease was partially offset by
approximately $125,000 of expenses incurred to refinance the mortgage on the
Company's office and manufacturing facility.
Page 8 of 12
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended March 31, 1999 and 1998
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 1999 increased 15.9% to
$7,300,000 from $6,300,000 for the same period in fiscal 1998. This increase is
due to increased OEM sales.
The gross profit percentage of 46.4% for the three months ended March 31, 1999
was consistant with the 46.5% gross profit percentage reported in the same
period of the previous fiscal year.
Operating expenses increased approximately $1,015,000. Marketing expenses
increased approximately $569,000 when compared to the same period in fiscal 1998
due primarily to increased trade show and sales promotion expenses as the
Company continues to promote new products as they are released. Research,
development and engineering expenses increased approximately $175,000 related to
additional payroll, outside contract and project expense which are all
associated with the new products under development. Administrative expenses
increased approximately $271,000 in the three months ended March 31, 1999 when
compared to the same period in fiscal 1998. This increase is due primarily to
increased travel expenses and litigation expense related to a lawsuit that the
Company is involved in.
Income from operations decreased approximately $556,000 for the three months
ended March 31, 1999 when compared to the same period in fiscal 1998 due to
increased spending related to new products and the outstanding litigation.
Non-operating expenses were approximately $195,000 and $51,000 for the three
months ended March 31, 1999 and 1998, respectively. The increase in 1999 was due
to the costs incurred to refinance to Company's building mortgage (primarily a
prepayment penalty on the previous mortgage). The Company was able to reduce its
interest rate on this mortgage from 9.625% to 7.5%.
Page 9 of 12
10
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
As of March 31, 1999, the Company had a cash balance of approximately $2,000,000
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 and periodic utilization of a line
of credit currently in place. Approximately $3,000,000 was available under this
line of credit at March 31, 1999. Availability is determined by the amount of
"eligible receivables" recorded by the Company, as defined in the loan
agreement. The maximum availability under the line of credit is $4,000,000.
YEAR 2000 PREPARATIONS
The Company has developed a plan to address Company-wide Year 2000 readiness.
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because the
year 1900 could also be translated as two zeroes, systems which use two digits
could read the date incorrectly for a number of date sensitive applications
resulting in the potential calculation errors or the shutdown of major systems.
The Company is in the process of updating its internal computer software, other
information technology and other operating systems for the purpose of Year 2000
compliance. The Company currently expects to complete its Year 2000 compliance
plan during October 1999 and does not expect that its costs to become Year 2000
Compliant will be material to its financial condition or results of operations.
The majority of the Company's internal Year 2000 issues have been or will be
corrected through system upgrades for other business purposes or normal
maintenance contracts.
The Company's operation may also be adversely affected to the extent that
suppliers and other third parties are not Year 2000 compliant. The Company has
circulated surveys to its key third party vendors to assess the Year 2000
compliance status of the operating systems of such vendors and the potential
impact on the Company of non-compliance. The Company has plans to assess the
surveys received from suppliers and other third parties during fiscal 1999 and
to evaluate the compliance status of such third parties. The Company believes
that its reasonably likely worse case scenario relating to the Year 2000
Page 10 of 12
11
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
issue would involve a significant disruption or slowdown in the receipt of
products from one or more key suppliers. The Company believes that the risk of
such a disruption is reduced through the Company's use of multiple sources of
supply for key products. However, a number of risks relating to the year 2000
issue may be out of the Company's control, including reliance on outside links
for essential services such as communications and power. There can be no
assurance that a failure of systems of third parties on which the Company's
systems and operations will rely to be Year 2000 compliant will not have a
material adverse effect on the Company's business, financial condition or
operating results.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements. Such statements refer
to the Company's opinion, belief or expectation. Forward-looking are subject to
certain risk 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 customers
delivery requirements and general economic conditions in the Company's market
segments
Page 11 of 12
12
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, 1999.
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 05/14/99 BY /s/ Joseph M. Siekierski
- ------------------------ ------------------------------------
Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 12 of 12