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 September 30, 1999
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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 (414) 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
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Number of shares outstanding of each class of the registrant's classes of common
stock as of December 8, 1999: Class A Common Stock 8,706,151 shares.
Item 1.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND JUNE 30, 1999
(UNAUDITED)
September 30, June 30,
1999 1999
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 2,426,284 $ 2,511,078
Accounts receivable. . . . . . . . . . . . . . . . . . 5,828,830 6,358,487
Other receivables. . . . . . . . . . . . . . . . . . . 55,949 83,106
Inventory. . . . . . . . . . . . . . . . . . . . . . . 8,425,045 8,510,975
Prepaid expenses . . . . . . . . . . . . . . . . . . . 243,826 192,290
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TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . 16,979,934 17,655,936
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PROPERTY, PLANT AND EQUIPMENT - NET. . . . . . . . . . . 6,275,479 6,274,060
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LICENSE RIGHTS AND PATENTS - NET . . . . . . . . . . . . 107,492 111,991
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,362,905 $24,041,987
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,205,023 $ 3,078,020
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . 1,024,877 1,446,614
Product warranties . . . . . . . . . . . . . . . . . 450,000 325,000
Lawsuit settlement . . . . . . . . . . . . . . . . . 600,000 1,600,000
Deferred income. . . . . . . . . . . . . . . . . . . - 380,000
Other. . . . . . . . . . . . . . . . . . . . . . . . 435,813 412,395
Current maturities of long-term debt . . . . . . . . . 75,319 73,893
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TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . 4,791,032 7,315,922
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LONG-TERM DEBT, less current maturities. . . . . . . . . 3,345,334 3,364,356
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OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . 634,353 650,000
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STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . . . . . . . - -
Common stock . . . . . . . . . . . . . . . . . . . . . 348,246 348,246
Additional paid-in capital . . . . . . . . . . . . . . 17,960,363 17,960,363
Common stock held in treasury 103,840 shares - at cost (193,430) (193,430)
Retained earnings (accumulated deficit). . . . . . . . (3,522,993) (5,403,470)
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TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . 14,592,186 12,711,709
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,362,905 $24,041,987
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See condensed notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
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NET SALES. . . . . . . . . . . . . . . . . . . . . . $6,603,337 $6,724,424
COST OF GOODS SOLD . . . . . . . . . . . . . . . . . 3,614,526 3,465,408
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GROSS PROFIT . . . . . . . . . . . . . . . . . . . . 2,988,811 3,259,016
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OPERATING EXPENSES:
Marketing. . . . . . . . . . . . . . . . . . . . . 1,606,379 2,218,182
Research, development and engineering. . . . . . . 711,456 747,560
Administrative . . . . . . . . . . . . . . . . . . 514,000 507,469
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . 2,831,835 3,473,211
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INCOME (LOSS) FROM OPERATIONS. . . . . . . . . . . . 156,976 (214,195)
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OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . . . . . . . (65,781) (78,373)
Interest income. . . . . . . . . . . . . . . . . . 29,281 22,745
Gain on sale of Immtech International, Inc. stock. 1,760,000 -
Equity in the loss of investments. . . . . . . . . - (150,000)
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . 1,723,500 (205,628)
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INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . 1,880,476 (419,823)
INCOME TAX PROVISION . . . . . . . . . . . . . . . . - -
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NET INCOME (LOSS). . . . . . . . . . . . . . . . . . 1,880,476 (419,823)
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NET INCOME (LOSS) PER COMMON SHARE:
Basic. . . . . . . . . . . . . . . . . . . . . . . $ .22 $ (.05)
Diluted. . . . . . . . . . . . . . . . . . . . . . $ .21 $ (.05)
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic. . . . . . . . . . . . . . . . . . . . . . . 8,706,151 8,715,151
Diluted. . . . . . . . . . . . . . . . . . . . . . 8,921,806 8,715,151
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See condensed notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC,
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 1,880,476 $ (419,823)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 236,283 232,230
Equity in loss of investments . . . . . . . . . . . . . - 150,000
Gain on sale of Immtech International, Inc. stock . . . (1,760,000) -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . 529,657 (231,951)
Other receivables . . . . . . . . . . . . . . . . . . . 27,157 117,395
Inventories . . . . . . . . . . . . . . . . . . . . . . (68,690) (768,579)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . (51,536) (80,124)
Accounts payable. . . . . . . . . . . . . . . . . . . . (872,997) 697,212
Accrued liabilities . . . . . . . . . . . . . . . . . . (1,668,965) 52,812
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Net cash (used in) operating activities. . . . . . . . . . . (1,748,615) (250,828)
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net. . . . . . . (78,583) (141,945)
Proceeds from the sale of Immtech International, Inc. stock. 1,760,000 -
Advances to Immtech International, Inc.. . . . . . . . . . . - (150,000)
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Net cash provided by (used in) investing activities. . . . . 1,681,417 (291,945)
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FINANCING ACTIVITIES:
Principal payments on long-term debt . . . . . . . . . . . . (17,596) (26,364)
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Net cash used in financing activities. . . . . . . . . . . . (17,596) (26,364)
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(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . (84,794) (569,137)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . 2,511,078 2,729,998
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CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . $ 2,426,284 $2,160,861
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See condensed notes to consolidated financial statements.
4
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 September 30, 1999 and June 30, 1999, respectively:
September 30, June 30,
1999 1999
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Component parts . $ 3,938,706 $3,790,728
Work in process . 1,296,593 1,261,709
Finished units. . 3,189,746 3,458,538
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Total inventories $ 8,425,045 $8,510,975
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5
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 30, June 30,
1999 1999
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Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,070,673 2,051,442
Furniture and fixtures . . . . . . . 834,095 819,579
Demonstration and loaner monitors. . 1,571,513 1,416,893
Production tooling . . . . . . . . . 2,203,214 2,158,378
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Property, plant and equipment - cost 11,204,495 10,971,292
Less accumulated depreciation. . . . 4,929,016 4,697,232
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Property, plant and equipment - net. $ 6,275,479 $ 6,274,060
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6
Item 2.
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 1999 and 1998
Results of Operations
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Net sales for the three months ended September 30, 1999 decreased 2% to $6.6
million from $6.7 million for the same period in fiscal 1999. The decrease in
sales can be attributed to a decrease in accessory sales.
The gross profit percentage decreased from 48% for the quarter ended September
30, 1998 to 45% for the quarter ended September 30, 1999. The decrease in the
gross profit percentage can be attributed to product mix and pricing
competition. The Company expects to experience a slight decrease in gross
profit until a new family of monitors are introduced later in fiscal 2000. It
is expected that sales of these new monitors will be at higher gross margins
than the Company is currently experiencing
Operating expenses decreased approximately $641,000, or 18%, for the quarter
ended September 30, 1999 when compared with the same period in fiscal 1999.
This cost reduction is a direct result of the Company's restructuring plan that
became effective July 1, 1999. Marketing expenses decreased approximately
$612,000 when compared to the same period in fiscal 1999. This decrease is due
to a reduction of payroll costs, travel and entertainment expenses and trade
show expenses. Research, development and engineering expenses for the quarter
ended September 30, 1999 decreased approximately $36,000 when compared to the
same period in fiscal 1999. This decrease relates to expenses incurred for the
development of new products which were released during the third and fourth
quarters of fiscal 1999. Administrative expenses were relatively consistent
with those recorded in the same period of fiscal 1999.
Net non-operating income was $1,723,500 for the three months ended September 30,
1999 compared to net non-operating expenses of $205,628 for the same period in
fiscal 1999. The significant increase in non-operating income is due to the
sale of a portion of the stock held in Immtech International, Inc. This sale
took place in a private placement. The $150,000 equity in loss of investments
recorded in the three months ended September 30, 1998 relates to the purchase of
certain intangible assets and an additional 86,207 shares (after giving effect
to a reverse stock split) of Immtech International, Inc. common stock. Since
this investment is accounted for on the equity method, the purchase price was
expensed.
7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 1999 and 1998
The net income of $1,880,476 for the three months ended September 30, 1999
represents a significant improvment from the net loss of $419,823 recorded for
the three months ended September 30, 1998. This increased profitability is due
to the sale of the Immtech stock and the decrease in operating expenses.
Liquidity
- ---------
At September 30, 1999, the Company 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 and, if needed, periodic
utilization of the $4,000,000 line of credit currently in place. At September
30, 1999, there were no borrowings outstanding under the line of credit.
The Company currently holds an investment in Immtech International, Inc.
("Immtech"). Immtech's common stock is currently traded on the Nasdaq SmallCap
Market. As part of Immtech's initial public offering, the Company signed a
lock-up agreement. All terms of the lock-up have been met other than the
holding period which continues until April 2000.
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 potential calculation errors or the shutdown of major
systems. The Company has updated its internal computer software, other
information technology and other operating systems for the purposes of Year 2000
compliance. The Company also addressed the Year 2000 compliance of the
Company's new and existing products. The Company substantially completed its
Year 2000 compliance plan during November 1999 and the costs to become Year 2000
compliant were not material to its financial condition or results of operations.
The Company incurred approximately $350,000 of costs related to Year 2000
readiness.
The Company's operations 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.
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 1999 and 1998
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
- ----------------------------
A number of the matters and subject areas discussed in this report 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, Year 2000 compliance,
management's or the Company's expectations and beliefs and similar matters
discussed in Management's Discussion and Analysis or elsewhere in this report.
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, government regulation, health care cost containment
programs, and competition in the Company's markets.
9
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).
27 Financial Data Schedule.
(b) Reports on Form 8-K: none in the first quarter of fiscal 2000.
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 12/09/99 BY /s/ Joseph M. Siekierski
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Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
10