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, 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 September 30, 2001: Class A Common Stock 10,796,224 shares.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND JUNE 30, 2001
(UNAUDITED)
September 30, June 30,
2001 2001
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 1,477,696 $ 3,362,104
Accounts receivable, less allowance for doubtful accounts
of $1,075,000 and $1,000,000, respectively. . . . . . . . . . . . . 6,248,352 7,122,464
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,464,420 3,970,454
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 32,451 33,788
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,998,080 8,600,413
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 454,764 502,172
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Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 19,675,763 23,591,395
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . 6,289,716 6,182,470
License rights and patents - net . . . . . . . . . . . . . . . . . . . 96,238 97,989
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,061,717 $29,871,854
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,474,783 $ 3,421,776
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . 914,234 1,196,493
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . 230,000 220,000
Accrued taxes other than income. . . . . . . . . . . . . . . . . . 107,976 96,947
Accrued royalty. . . . . . . . . . . . . . . . . . . . . . . . . . 96,871 68,351
Accrued audit and legal fees . . . . . . . . . . . . . . . . . . . 36,998 35,900
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,249 469,674
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 88,430 86,766
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Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 4,386,541 5,595,907
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 3,174,887 3,197,126
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 57,171 73,005
STOCKHOLDERS' EQUITY:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
10,796,224 shares issued and outstanding. . . . . . . . . . . . . . 431,849 431,849
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 22,497,058 22,494,548
Common stock held in treasury (62,706 and 64,134 shares, respectively) (116,806) (119,467)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . (6,833,403) (5,771,568)
Accumulated comprehensive income . . . . . . . . . . . . . . . . . . . 2,464,420 3,970,454
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Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 18,443,118 21,005,816
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TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,061,717 $29,871,854
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See notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
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NET SALES. . . . . . . . . . . . . . . $ 5,489,137 $6,229,877
COST OF GOODS SOLD . . . . . . . . . . 3,677,701 3,718,831
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GROSS PROFIT . . . . . . . . . . . . . 1,811,436 2,511,046
OPERATING EXPENSES:
Marketing. . . . . . . . . . . . . . . 1,600,355 1,475,109
Research, development and engineering. 587,083 581,282
Administrative . . . . . . . . . . . . 660,778 562,238
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Total. . . . . . . . . . . . . . . . . 2,848,216 2,618,629
(LOSS) FROM OPERATIONS . . . . . . . . (1,036,780) (107,583)
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . (62,676) (64,806)
Interest income. . . . . . . . . . . . 33,044 6,419
Other income/(expense) . . . . . . . . 4,577 -
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Total. . . . . . . . . . . . . . . . . (25,055) (58,387)
(LOSS) BEFORE INCOME TAXES. . . . . . (1,061,835) (165,970)
INCOME TAX PROVISION . . . . . . . . . - -
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NET (LOSS) . . . . . . . . . . . . . . $ (1,061,835) $ (165,970)
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NET (LOSS) PER COMMON SHARE
Basic. . . . . . . . . . . . . . . . . $ (0.10) $ (0.02)
Diluted. . . . . . . . . . . . . . . . $ (0.10) $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic. . . . . . . . . . . . . . . . . 10,733,029 8,898,607
Diluted. . . . . . . . . . . . . . . . 10,733,029 8,898,607
See notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
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OPERATING ACTIVITIES:
Net (loss). . . . . . . . . . . . . . . . . . . . . . $(1,061,835) $(165,970)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . 246,045 127,499
Amortization. . . . . . . . . . . . . . . . . . . 1,751 3,600
Provision for doubtful accounts . . . . . . . . . 75,000 100,000
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . 799,112 231,108
Other receivables . . . . . . . . . . . . . . . 1,337 (7,130)
Inventories . . . . . . . . . . . . . . . . . . (660,432) 430,907
Prepaid expenses. . . . . . . . . . . . . . . . 47,408 (271,628)
Accounts payable. . . . . . . . . . . . . . . . (946,993) (249,210)
Accrued liabilities . . . . . . . . . . . . . . (279,871) (4,967)
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Net cash (used in) provided by operating activities . (1,778,478) 194,209
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net . . . (90,526) (116,434)
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Net cash (used in) provided by investing activities . (90,526) (116,434)
FINANCING ACTIVITIES:
Principal payments on long-term debt. . . . . . . . . (20,575) (19,023)
Proceeds from issuance of common stock. . . . . . . . 5,171 39,258
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Net cash provided by (used in) financing activities . (15,404) 20,235
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. (1,884,408) 98,010
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. . . . . 3,362,104 114,830
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CASH AND CASH EQUIVALENTS, END OF YEAR. . . . . . . . $ 1,477,696 $ 212,840
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See 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 filed Form 10-K. Certain amounts from the fiscal 2001 financial
statements have been reclassified to conform to the 2002 presentation.
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 September 30, 2001 and June 30, 2001, respectively:
September 30, 2001 June 30, 2001
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Component parts . . . . . . . . $ 3,955,229 $ 3,784,491
Work in process . . . . . . . . 1,598,046 1,372,587
Finished units. . . . . . . . . 3,811,099 3,768,335
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Total inventories . . . . . . . 9,364,374 8,925,413
Less: reserve for obsolescence 366,294 325,000
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Net inventory . . . . . . . . . $ 8,998,080 $ 8,600,413
3. INVESTMENTS
The Company held 456,374 shares of Immtech International, Inc. ("Immtech")
stock, which was trading at $5.40 per share, on September 28, 2001. The market
value of these shares could change substantially due to overall market risk.
The Company entered into an agreement with Immtech dated November 2, 2001 in
order to have the restricted legends removed from the Immtech stock
certificates. Under the agreement, portions of the Company's Immtech stock will
be subject to restrictions on transfer for relatively short-term periods of up
to six months, after which time all such stock will be free of restrictions.
5
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, 2001 June 30, 2001
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Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,009,480 2,055,518
Furniture and fixtures . . . . . . . 812,931 837,238
Demonstration and loaner monitors. . 1,726,674 1,463,909
Production tooling . . . . . . . . . 3,201,683 3,122,938
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Property, plant and equipment - cost 12,275,768 12,004,603
Less: accumulated depreciation. . . 5,986,052 5,822,133
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Property, plant and equipment - net. $ 6,289,716 $ 6,182,470
6
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 2001 and 2000
RESULTS OF OPERATIONS
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Net sales for the three months ended September 30, 2001 decreased 12% from the
same period in fiscal 2000. The sales reduction was driven by a 10% shortfall
in the number of units sold and a 2-4% decrease in the average sales price per
unit from the prior year of products contributing the majority of the revenue
for the quarter. The decrease in sales volume can be attributed to a
combination of the slowing economy and the events of September 11th, which
basically eliminated sales from one of the Company's largest domestic trade
shows that was held that week. In each of the last two fiscal years this trade
show has generated up to 5% of the Company's total annual revenue, the majority
being contributed in the first and second fiscal quarters. In addition,
international sales that historically represent approximately 40% of total
Company sales were down in the first quarter from the same period in the prior
year. On a positive note, OEM sales continued to be a significant distribution
channel for the Company for the three months ended September 30, 2001,
increasing 22% from the same period the prior year and contributing 21% to
overall Company sales. This trend towards higher OEM sales is expected to
continue for the remainder of fiscal 2002 and future years. See
"Forward-Looking Statements."
Pricing pressures, combined with higher manufacturing costs to support the
Company's efforts to transition its manufacturing offshore, were the major
contributors to the lower gross profit percentage of 33% generated in the first
quarter of the current year. The gross profit percentage was down seven
percentage points from the 40% gross profit percentage that was generated in the
first quarter of the prior year. In addition to the lower sales prices for
monitors discussed above, margins on accessory sales declined 4 percentage
points in the current quarter from the prior year. The Company expects to
complete its outsourcing plan by the end of calendar year 2001 and to see
improved margins for the last two quarters of fiscal 2002 as it begins to
realize lower product costs from its foreign manufacturers. See
"Forward-Looking Statements."
Operating expenses increased $229,587 for the three months ended September 30,
2001 compared to the prior year due to higher marketing and administrative
spending. Marketing expenses increased $125,246 mainly due to higher contract
labor costs and operating supply spending for warranty repairs and paid service
work. Administrative expenses increased $98,540 due mostly to higher accounting
and consulting fees and legal expenses related to various corporate matters.
The lower sales and the decrease in gross profit performance for the three
months ended September 30, 2001, combined with the higher operating expenses,
resulted in a net loss before taxes of $1,061,835 which was $895,865 greater
than the $165,970 loss generated for the same period in the prior year. The
Company expects profitability to improve significantly in the last three
quarters of fiscal 2002 from the results generated in the first quarter, driven
by higher sales, stronger margins as it begins to realize the cost savings from
its outsourced manufacturing plan, and lower operating expenses. See
"Forward-Looking Statements."
7
LIQUIDITY
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As of September 30, 2001, the Company had a cash balance of $1,477,696, which
was down from a balance of $3,362,104 at June 30, 2001, and no short-term
borrowings. $1,778,478 of the $1,884,408 reduction in cash in the quarter was
used to support operating activities, while another $90,526 was invested in
property, plant, and equipment and $20,575 was used to pay down long term debt.
The decrease in the Company's cash position in the fiscal first quarter was
primarily a timing issue as strong cash collections in the first month of the
fiscal second quarter have increased the Company's cash and cash equivalents
balance to approximately $2.6 million in early November. The favorable cash
inflow in October 2001 was driven mainly by payments of receivables for sales
made in June 2001 with extended payment terms. The Company believes all capital
and liquidity requirements for the remainder of fiscal 2002 will be satisfied by
cash generated from operations and periodic utilization of a $4,000,000 line of
credit currently in place, if necessary. At September 30, 2001, there were no
borrowings outstanding under this line of credit. The line of credit expires in
November 2002.
FORWARD LOOKING STATEMENTS
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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, competition in the Company's markets,
unanticipated difficulties in outsourcing 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 the
Company's ability to reduce costs by eliminating excess capacity at its
principal facility.
8
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).
4.2 Rights Agreement (incorporated by reference to the Company's
Current Report on Form 8-K filed on April 18, 1997).
(b) Reports on Form 8-K: None in the quarter ended September 30, 2001.
9
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: November 14, 2001 BY /s/ Michael J. Sallmann
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Michael J. Sallmann
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
10