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, 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 December 31, 2001: Common Stock 10,965,724 shares.
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND JUNE 30, 2001
(UNAUDITED)
December 31, June 30,
ASSETS 2001 2001
-------------- ------------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 3,457,158 $ 3,362,104
Accounts receivable, less allowance for doubtful accounts
of $1,000,000, respectively . . . . . . . . . . . . . . . . . . . . 5,506,403 7,122,464
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,395,964 3,970,454
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 18,447 33,788
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,095,472 8,600,413
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,305 502,172
-------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 19,845,749 23,591,395
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . 6,121,709 6,182,470
License rights and patents - net . . . . . . . . . . . . . . . . . . . 94,488 97,989
-------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,061,946 $29,871,854
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,060,147 $ 3,421,776
Accrued liabilities:
Compensation and commissions . . . . . . . . . . . . . . . . . . . 901,197 1,187,493
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . 230,000 220,000
Accrued taxes other than income. . . . . . . . . . . . . . . . . . 126,440 96,947
Accrued contract costs . . . . . . . . . . . . . . . . . . . . . . 267,662 207,039
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,472 375,886
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 90,117 86,766
-------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 3,946,035 5,595,907
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 3,151,552 3,197,126
OTHER LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . 53,823 73,005
STOCKHOLDERS' EQUITY:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.04 par value, 15,000,000 shares authorized,
10,965,724 and 10,796,224 shares issued, respectively. . . . . . . 438,629 431,849
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 22,838,643 22,494,548
Common stock held in treasury (61,634 and 64,134 shares, respectively) (114,810) (119,467)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . (6,647,890) (5,771,568)
Accumulated comprehensive income . . . . . . . . . . . . . . . . . . . 2,395,964 3,970,454
-------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 18,910,536 21,005,816
-------------- ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,061,946 $29,871,854
============== ============
See notes to consolidated financial statements.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ ------------
NET SALES . . . . . . . . . . . . . . $12,835,733 $12,794,000
COST OF GOODS SOLD. . . . . . . . . . 8,160,154 7,702,405
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . 4,675,579 5,091,595
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 3,103,433 2,804,151
Research, development and engineering 1,167,701 1,132,282
Administrative. . . . . . . . . . . . 1,243,596 1,129,201
------------ ------------
Total . . . . . . . . . . . . . . . . 5,514,730 5,065,634
(LOSS) INCOME FROM OPERATIONS . . . . (839,151) 25,961
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (124,947) (128,669)
Interest income . . . . . . . . . . . 47,999 42,396
Other . . . . . . . . . . . . . . . . 39,777 -
------------ ------------
Total . . . . . . . . . . . . . . . . (37,171) (86,273)
LOSS BEFORE INCOME TAXES. . . . . . . (876,322) (60,312)
INCOME TAX PROVISION. . . . . . . . . - -
------------ ------------
NET LOSS. . . . . . . . . . . . . . . $ (876,322) $ (60,312)
============ ============
NET LOSS PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . $ (0.08) $ (0.01)
Diluted . . . . . . . . . . . . . . . $ (0.08) $ (0.01)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 10,761,035 9,636,284
Diluted . . . . . . . . . . . . . . . 10,761,035 9,636,284
See notes to consolidated financial statements.
3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
2001 2000
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NET SALES . . . . . . . . . . . . . . $ 7,346,596 $ 6,564,123
COST OF GOODS SOLD. . . . . . . . . . 4,482,453 3,983,575
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GROSS PROFIT. . . . . . . . . . . . . 2,864,143 2,580,548
OPERATING EXPENSES:
Marketing . . . . . . . . . . . . . . 1,503,078 1,329,042
Research, development and engineering 580,618 551,000
Administrative. . . . . . . . . . . . 582,818 566,963
------------ ------------
Total . . . . . . . . . . . . . . . . 2,666,514 2,447,005
INCOME FROM OPERATIONS. . . . . . . . 197,629 133,543
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . (62,271) (63,862)
Interest income . . . . . . . . . . . 14,954 35,977
Other . . . . . . . . . . . . . . . . 35,201 -
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Total . . . . . . . . . . . . . . . . (12,116) (27,885)
INCOME BEFORE INCOME TAXES . . . . . 185,513 105,658
INCOME TAX PROVISION. . . . . . . . . - -
------------ ------------
NET INCOME. . . . . . . . . . . . . . $ 185,513 $ 105,658
============ ============
NET INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . $ 0.02 $ 0.01
Diluted . . . . . . . . . . . . . . . $ 0.02 $ 0.01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . 10,789,041 10,373,962
Diluted . . . . . . . . . . . . . . . 11,499,734 10,517,441
See notes to consolidated financial statements.
4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
2001 2000
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OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . $ (876,322) $ (60,312)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . 389,675 320,837
Amortization . . . . . . . . . . . . . 3,501 8,100
Provision for doubtful accounts - (200,000)
Changes in assets and liabilities:
Accounts receivable . . . . . . . 1,616,061 67,346
Other receivables . . . . . . . . 15,341 18,126
Inventories . . . . . . . . . . . 323,847 306,044
Prepaid expenses. . . . . . . . . 129,867 (238,658)
Accounts payable. . . . . . . . . (1,361,629) (267,575)
Accrued liabilities . . . . . . . (310,776) (313,219)
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Net cash used in operating activities . . . . . (70,435) (359,311)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (147,820) (257,340)
------------ -----------
Net cash used in investing activities . . . . . (147,820) (257,340)
FINANCING ACTIVITIES:
Principal payments on long-term debt. . . . . . (42,223) (39,107)
Proceeds from issuance of common stock. . . . . 355,532 4,068,385
------------ -----------
Net cash provided by financing activities . . . 313,309 4,029,278
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . 95,054 3,412,627
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. 3,362,104 114,830
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CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . $ 3,457,158 $3,527,457
============ ===========
See notes to consolidated financial statements.
5
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 December 31 and June 30, 2001, respectively:
December 31, 2001 June 30, 2001
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Component parts . . . . . . . . $ 3,567,160 $ 3,784,491
Work in process . . . . . . . . 1,257,185 1,372,587
Finished units. . . . . . . . . 3,660,263 3,768,335
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Total inventories . . . . . . . 8,484,608 8,925,413
Less: reserve for obsolescence 389,136 325,000
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Net inventory . . . . . . . . . $ 8,095,472 $ 8,600,413
3. INVESTMENTS
The Company held 456,374 shares of Immtech stock, which was trading at $5.25 per
share, on December 31, 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.
6
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, 2001 June 30, 2001
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Land and building. . . . . . . . . . $ 4,525,000 $ 4,525,000
Machinery and equipment. . . . . . . 2,027,189 2,055,518
Furniture and fixtures . . . . . . . 813,247 837,238
Demonstration and loaner monitors. . 1,645,003 1,463,909
Production tooling . . . . . . . . . 3,229,316 3,122,938
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Property, plant and equipment - cost 12,239,755 12,004,603
Less: accumulated depreciation. . . 6,118,046 5,822,133
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Property, plant and equipment - net. $ 6,121,709 $ 6,182,470
7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 2001 and 2000
RESULTS OF OPERATIONS
-----------------------
Strong net sales in the fiscal second quarter ended December 31, 2001 increased
year-to-date sales for the six months ended December 31, 2001 slightly above
prior year. A 3% increase in the number of units shipped and an 18% increase in
accessory sales basically offset an 8% decrease in the average selling price per
unit that was mainly driven by a reduction in unit sales of the Company's higher
end monitors. The continued growth in OEM sales, which were up 19% for the six
months ended December 31, 2001 from the same period in the prior year, offset a
7% decrease in domestic sales. The events of September 11th virtually eliminated
sales from one of the Company's largest domestic trade shows that took place
that week and was the main reason for the lower domestic sales for the six
months ended December 31, 2001 from the same period in the prior year.
The gross profit percentage for the first six months of the current year
improved to 36.4% from the 33.0% generated in the fiscal first quarter of the
current year, but was still down from the 39.8% realized for the first six
months of the prior year. Higher manufacturing costs in the first six months of
the current year to support the Company's efforts to transition its
manufacturing offshore during this period was the major contributor to the lower
margin between years. The Company has completed its outsourcing plan at the end
of calendar year 2001 and expects 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 for the six months ended December 31, 2001 were higher than
the same period in the prior year by $449,096. However, operating expenses in
the fiscal second quarter of the prior year included the release of previously
recorded specific bad debt reserve of $335,000 and the reversal of previously
recorded commission expense of $37,000. The release of the specific reserve for
bad debts related to the repossession of product from a foreign distributor that
had been reserved for as an at risk receivable in a prior period. The reversal
of commission expense related to commissions accrued in a prior period for
salespeople that left the Company prior to payment being received from the
customer. Excluding the impact of these expense reversals from the prior
period, operating expenses for the six months ended December 31, 2001 were
actually up only $77,096, or 1.4%, from the same period in the prior year.
The reduction in gross profit performance and the higher operating expenses
resulted in the recognition of a loss of $876,322 for the six months ended
December 31, 2001, compared to the loss of $60,312 for the same period in the
prior year. The Company expects to continue to improve profitability in the
last half of fiscal 2002 through higher sales, stronger margins, and reduced
operating expenses compared to the results generated in the first half of fiscal
2002. See "Forward-Looking Statements."
8
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 2001 and 2000
RESULTS OF OPERATIONS
-----------------------
Net sales for the three months ended December 31, 2001 increased 12% from the
same period in the prior year, driven by a 13% increase in the number of units
shipped in the current quarter. Higher international shipments and the
continued growth of OEM business in the quarter more than offset domestic sales
that were basically flat between periods. As noted above, the events of
September 11th virtually eliminated sales from one of the Company's largest
domestic trade shows and was the major reason for the lack of growth in domestic
sales in the current quarter from the prior year.
The gross profit percentage of 39.0% for the three months ended December 31,
2001 rebounded significantly from the 33.0% produced in the fiscal first quarter
of the current year and was basically level to the 39.3% generated for the three
months ended December 31, 2000. Excluding the impact of sales of excess and
slow moving inventory sold at cost of $127,000 from the current period, the
gross profit percentage would improve to 39.7% for the three months ended
December 31, 2001.
Operating expenses in the current year period increased $219,509 from the same
period in the prior year. However, as noted above, expenses in the second
quarter of fiscal 2001 included the reversal of expenses recognized in prior
periods totaling $372,000. Excluding the impact of these expense reversals from
the prior year fiscal second quarter results, operating expenses for the three
months ended December 31, 2001 were actually down $152,491, or 5.4%, from the
same period in the prior year.
Income from operations of $197,629 for the three months ended December 31, 2001
increased $64,086 from the prior year and represented its highest level in four
years since the second quarter of fiscal 1998. A $15,769 reduction in other
expenses in the current year period resulted in net income of $185,513 that was
$79,855 higher than the same period in the prior year.
9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
---------
As of December 31, 2001, the Company had a cash balance of $3,457,158 and no
short-term borrowings. The cash position was up almost $2.0 million from its
level at September 30, 2001 and is $95,054 higher than the balance at June 30,
2001 of $3,362,104, primarily due to strong cash collections in the fiscal
second quarter of the current year. For the six months ended December 31, 2001,
$70,435 of cash was used to support operating activities and $147,820 was
invested in property, plant, and equipment. These uses of cash were funded by
$355,532 in proceeds received from the issuance of common stock related to the
exercise of stock options in the fiscal second quarter.
The Company believes all capital and liquidity requirements for the remainder of
fiscal 2002 will be satisfied by cash generated from operations and its current
cash balances. The Company also has a $4,000,000 line of credit currently in
place that expires in November 2003 that could be utilized, if necessary. At
December 31, 2001, there were no borrowings outstanding under this line of
credit.
FORWARD LOOKING STATEMENTS
----------------------------
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.
10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The annual meeting of stockholders of the Company was held on November 30,
2001. The matters voted upon, including the number of votes cast for, against,
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
Proposal 1: Election of directors for a term ending at the 2004 annual meeting
of stockholders.
For Withheld
--- --------
Milton Datsopoulos. . 9,555,913 107,227
Dr. Higgins D. Bailey 9,553,013 110,127
The Company's other directors consist of N.C. Joseph Lai and Jeffrey
T. Barnes (whose terms end at the 2002 annual meeting of stockholders) and
Karsten Houm, Emil H. Soika and Stephen K. Tannenbaum (whose terms end at the
2003 annual meeting of stockholders).
Proposal 2: Ratification of appointment of BDO Seidman, LLP as auditors of
the Company.
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
9,562,395 88,380 12,365 0
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).
10.1 Settlement Agreement, dated as of November 2, 2001, between the
Company and Immtech International, Inc.
(b) Reports on Form 8-K: None in the quarter ended December 31, 2001.
11
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: February 7, 2002 BY /s/ Michael J. Sallmann
-------------------------------------
Michael J. Sallmann
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
12