<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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 14, 1997: Common Stock 7,168,772 shares.
Page 1 of 12
<PAGE> 2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
December 31, June 30,
ASSETS 1996 1996
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 234,862 $ 806,645
Accounts receivable 8,091,443 9,870,158
Other receivables 375,898 354,638
Inventory 7,869,139 7,550,858
Prepaid expenses 352,453 188,132
---------------------------------------- ----------- -----------
Total current assets 16,923,795 18,770,431
---------------------------------------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 7,525,791 7,892,646
---------------------------------------- ----------- -----------
INVESTMENTS 300,000 300,000
---------------------------------------- ----------- -----------
OTHER ASSETS:
License and patents - net 98,267 92,467
Goodwill - net 5,978 20,378
---------------------------------------- ----------- -----------
Total other assets 104,245 112,845
---------------------------------------- ----------- -----------
TOTAL $24,853,831 $27,075,922
---------------------------------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit facility $ 1,500,000 $ 2,300,000
Accounts payable 2,883,928 3,609,188
Accrued liabilities:
Compensation and commissions 700,302 1,040,441
Income taxes -- --
Product warranties 381,900 300,000
Other 942,583 1,029,072
Current maturities of long-term debt 208,202 209,697
---------------------------------------- ----------- -----------
Total current liabilities 6,616,915 8,488,398
---------------------------------------- ----------- -----------
LONG-TERM DEBT, less current maturities 4,565,092 4,669,975
---------------------------------------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 285,131 285,131
Additional paid-in capital 11,995,118 11,995,118
Retained earnings 1,417,741 1,663,466
Cumulative translation adjustments (26,166) (26,166)
---------------------------------------- ----------- -----------
Total Stockholders' equity 13,671,824 13,917,549
---------------------------------------- ----------- -----------
TOTAL $24,853,831 $27,075,922
---------------------------------------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 12
<PAGE> 3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
1996 1995
----------- -----------
NET SALES $13,059,357 $15,694,342
COST OF GOODS SOLD 6,874,832 8,022,563
------------------------------------ ----------- -----------
GROSS PROFIT 6,184,525 7,671,779
------------------------------------ ----------- -----------
OPERATING EXPENSES:
Marketing 4,115,180 5,063,968
Research,development and engineering 1,117,259 1,184,470
Administrative 873,429 955,011
------------------------------------ ----------- -----------
Total 6,105,868 7,203,449
------------------------------------ ----------- -----------
INCOME FROM OPERATIONS 78,657 468,330
------------------------------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (300,856) (196,855)
Interest income 474 38,124
Equity in loss of investments (24,000) (2,500,000)
------------------------------------ ----------- -----------
Total (324,382) (2,658,731)
------------------------------------ ----------- -----------
INCOME BEFORE INCOME TAXES (245,725) (2,190,401)
------------------------------------ ----------- -----------
INCOME TAX PROVISION -- 120,000
------------------------------------ ----------- -----------
NET INCOME $ (245,725) $(2,310,401)
------------------------------------ ----------- -----------
EARNINGS PER COMMON SHARE:
Primary $ (0.03) $ (0.34)
Fully diluted (0.03) (0.34)
------------------------------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 7,128,272 6,723,233
Fully diluted 7,128,272 6,723,233
------------------------------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 12
<PAGE> 4
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
1996 1995
---------- -----------
NET SALES $6,581,192 $ 8,736,012
COST OF GOODS SOLD 3,520,406 4,376,124
------------------------------------ ---------- -----------
GROSS PROFIT 3,060,786 4,359,888
------------------------------------ ---------- -----------
OPERATING EXPENSES:
Marketing 2,187,886 2,891,090
Research,development and engineering 550,979 668,642
Administrative 472,910 513,477
------------------------------------ ---------- -----------
Total 3,211,775 4,073,209
------------------------------------ ---------- -----------
INCOME FROM OPERATIONS (150,989) 286,679
------------------------------------ ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense (146,373) (99,821)
Interest income 234 15,623
Equity in loss of investments -- (2,500,000)
------------------------------------ ---------- -----------
Total (146,139) (2,584,198)
------------------------------------ ---------- -----------
INCOME BEFORE INCOME TAXES (297,128) (2,297,519)
------------------------------------ ---------- -----------
INCOME TAX PROVISION -- 77,000
------------------------------------ ---------- -----------
NET INCOME $ (297,128) $(2,374,519)
------------------------------------ ---------- -----------
EARNINGS PER COMMON SHARE:
Primary $ (0.04) $ (0.35)
Fully diluted (0.04) (0.35)
------------------------------------ ---------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 7,128,272 6,723,233
Fully diluted 7,128,272 6,723,233
------------------------------------ ---------- -----------
</TABLE>
See notes to consolidated financial statements.
Page 4 of 12
<PAGE> 5
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
1996 1995
---------- ------------
OPERATING ACTIVITIES:
Net income $ (245,725) $(2,310,401)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 292,776 279,595
Amortization 18,600 26,106
Equity in loss of investments 24,000 2,500,000
Changes in assets and liabilities:
Accounts receivable 1,778,715 (909,583)
Other receivables (21,260) (67,494)
Inventories (151,481) (820,139)
Prepaid expenses (164,321) (9,419)
Accounts payable (725,260) 873,469
Accrued liabilities (344,729) (307,065)
--------------------------------------------------- ---------- ------------
Net cash (used in) provided by operating activities 461,315 (744,931)
--------------------------------------------------- ---------- ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (102,721) (480,388)
Advances to Immtech International (24,000) --
--------------------------------------------------- ---------- ------------
Net cash (used in) investing activities (126,721) (480,388)
--------------------------------------------------- ---------- ------------
FINANCING ACTIVITIES:
Payments under line of credit facility (800,000) --
Principal payments on long-term debt (106,377) (97,072)
Proceeds from the exercise of stock options -- 32,500
--------------------------------------------------- ---------- ------------
Net cash (used in) provided by financing activities (906,377) (64,572)
--------------------------------------------------- ---------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (571,783) (1,289,891)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 806,645 2,398,278
--------------------------------------------------- ---------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD 234,862 1,108,387
--------------------------------------------------- ---------- ------------
</TABLE>
See notes to consolidated financial statements.
Page 5 of 12
<PAGE> 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
one year 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, 1996 and June 30, 1996, respectively:
<TABLE>
<S> <C> <C>
December 31, June 30,
1996 1996
----------------- -------------- ----------
Component parts $2,691,757 $2,879,286
Work in process 1,417,925 1,561,481
Finished units 3,759,457 3,110,091
----------------- -------------- ----------
Total inventories $7,869,139 $7,550,858
----------------- -------------- ----------
</TABLE>
Page 6 of 12
<PAGE> 7
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
1996 1996
---------------------------------- ---------- ----------
Land and building $4,525,000 $4,525,000
Machinery and equipment 1,691,801 1,671,309
Furniture and fixtures 886,447 882,682
Demonstration and loaner monitors 1,887,983 2,054,783
Production tooling 2,118,096 2,049,632
---------------------------------- ---------- ----------
Property, plant and equipment-cost 11,109,327 11,183,406
Less accumulated depreciation 3,583,536 3,290,760
---------------------------------- ---------- ----------
Property, plant and equipment-net $7,525,791 $7,892,646
---------------------------------- ---------- ----------
</TABLE>
5. INVESTMENTS
Investments consist of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
1996 1996
---------------------------- ------------ --------
Intercare Technologies, Inc. $300,000 $300,000
Immtech International, Inc. -- --
---------------------------- ------------ --------
Total investments $300,000 $300,000
---------------------------- ------------ --------
</TABLE>
6. CONTINGENCIES
The Company's German subsidiary is subject to a court judgment in Germany in
the amount of approximately $185,000 related to an employment termination
dispute. The subsidiary and the Company vigorously object to the court's
ruling, and the subsidiary intends to appeal this judgment. If the judgment
stands, the Company's consolidated income statement is likely to be required to
reflect that judgment.
Page 7 of 12
<PAGE> 8
7. FINANCING
On February 3, 1997 the Company completed a $2,500,000 convertible debenture
purchase agreement with an investment company, Paresco, Inc. The convertible
debentures have a two year term to maturity with an annual interest rate of 8%
payable in shares of common stock at the conversion date or maturity date.
$1,250,000 of the debentures may be converted to common stock of the Company
sixty-one (61) days after the February 3, 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.
$1,250,000 of the debentures may be converted to common stock of the company
ninety-one (91) days after the February 3, 1997 closing date 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. Any
unconverted debentures and accrued interest will be automatically converted to
common stock on February 2, 1999. The purchaser of the debentures is
prohibited from converting any portion of the debenture which would result in
the purchaser being deemed the beneficial owner of 4.99% or more of the
Company's outstanding common stock.
8. STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning July 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share in its annual financial
statement.
Page 8 of 12
<PAGE> 9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 1996 and 1995
RESULTS OF OPERATIONS
Net sales for the six months ended December 31, 1996 decreased 17% to $13.1
million from $15.7 million for the same period in fiscal 1996. Hospital sales
decreases were primarily due to lower anesthetic agent monitor and Maestro ECG
telemetry shipments, Alternate Care experienced a decrease in oximeter
shipments, and International shipments of anesthetic agent monitors decreased
from the previous fiscal year levels.
The gross profit percentage decreased from 48.9% for the six months ended
December 31, 1995 to 47.4% for the six months ended December 31, 1996 due
primarily to increased manufacturing expenses related to new product start-up
costs and the effect of the lower sales volume on manufacturing fixed expenses.
Operating expenses decreased approximately $1,098,000, or 15%, for the six
months ended December 31, 1996 when compared with the same period in the
previous fiscal year. Marketing expenses decreased approximately $949,000, or
19%, when compared to the same period in fiscal 1996 due to lower trade show,
advertising and sales commission expenses. Research development and
engineering expense declined approximately $67,000 although product development
has been increased on the MPT/VitalView Telemetry product as well as the
combination digital oximetry noninvasive blood pressure and temperature product
being developed for IVAC Medical Systems OEM distribution. Administrative
expenses declined approximately $82,000 related to lower payroll, insurance and
consulting expenses incurred in the six months ended December 31, 1996 when
compared to the same period in the previous fiscal year.
Non-operating expenses were approximately $324,000 for the six months ended
December 31, 1996 compared to approximately $2,659,000 for the same period in
fiscal 1996, which included a $2,500,000 charge related to the investment in
Immtech. Interest income declined approximately $38,000 due to lower cash
investments while interest expense increased approximately $104,000 due to
increased borrowing against the Company's line of credit and increased interest
expense related to the note issued upon the investment in Immtech for the six
months ended December 31, 1996 when compared to the same period in fiscal 1996.
The net loss of approximately $246,000 for the six months ended December 31,
1996 compares to a net loss of approximately $2,310,000 which includes the
$2,500,000 Immtech investment charge for the same period ended December 31,
1995.
Page 9 of 12
<PAGE> 10
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 1996 and 1995
RESULTS OF OPERATIONS
Net sales for the three months ended December 31, 1996 were $6.6 million
compared to $8.7 million for the same period in the previous fiscal year.
Hospital sales decreases were primarily due to lower anesthetic agent monitor
and Maestro ECG Telemetry shipments, Alternate Care oximeter product sales
decreased, and International oximeter and vital signs monitor sales decreased
from the levels recorded in the comparable three month period ended December
31, 1995.
The gross profit percentage decreased to 46.5% for the three months ended
December 31, 1996 from 49.9% for the three months ended December 31, 1995 due
primarily to lower margins on International oximeter and vital signs monitor
sales and increased manufacturing expense related to new product start-up
costs.
Operating expenses decreased approximately $861,000 for the three months ended
December 31, 1996 when compared with the same period in the previous fiscal
year. Marketing expenses decreased approximately $703,000 when compared to the
same period in fiscal 1996 due to lower trade show, advertising and sales
commission expenses. Research development and engineering expense declined
approximately $118,000 despite accelerated project activity related to the
MPT/VitalView Telemetry product and the combination digital oximetry,
noninvasive blood pressure and temperature product being developed for IVAC
Medical Systems OEM distribution. Administrative expenses declined
approximately $41,000 due to lower insurance and consulting expenses incurred
in the three months ended December 31, 1996 when compared to the same period in
fiscal 1996.
Non-operating expenses were approximately $146,000 for the three months ended
December 31, 1996 compared to approximately $2,584,000 for the same period in
fiscal 1996 which included a $2,500,000 charge related to the investment in
Immtech. Interest income declined due to reduced cash investments while
interest expense increased due to increased borrowing against the company's
line of credit and increased interest expense related to the note issued upon
the investment in Immtech for the three months ended December 31, 1996 compared
to the same period in fiscal 1996.
Page 10 of 12
<PAGE> 11
The net loss of approximately $297,000 for the three months ended December 31,
1996 compares to a net loss of approximately $2,375,000 which includes the
$2,500,000 Immtech investment charge for the same period ended December 31,
1995.
LIQUIDITY
During the six months ended December 31, 1996 the Company was able to generate
a positive cash flow from operations of approximately $461,000 and reduced its
bank line of credit borrowings by $800,000. The Company believes its marketing
and research and development activities and other capital and liquidity
requirements will be satisfied by cash generated from operations, utilization
of its bank line of credit, and the $2,500,000 convertible debenture financing
completed on February 3, 1997.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report contains
certain forward-looking statements and is 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 timing of new product introductions,
delays in customer delivery requirements, and general economic conditions in
the Company's market segments.
Page 11 of 12
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The registrant filed no reports on Form 8-K during the quarter
ended December 31, 1996.
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 2/14/97 BY
- --------------- -----------------------------
Richard J. Osowski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> OCT-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 234,862 234,862
<SECURITIES> 0 0
<RECEIVABLES> 8,461,443 8,461,443
<ALLOWANCES> (370,000) (370,000)
<INVENTORY> 7,869,139 7,869,139
<CURRENT-ASSETS> 16,923,795 16,923,795
<PP&E> 11,109,327 11,109,327
<DEPRECIATION> (3,583,536) (3,583,536)
<TOTAL-ASSETS> 24,853,831 24,853,831
<CURRENT-LIABILITIES> (6,616,915) (6,616,915)
<BONDS> 0 0
0 0
0 0
<COMMON> (285,131) (285,131)
<OTHER-SE> (13,386,693) (13,386,693)
<TOTAL-LIABILITY-AND-EQUITY> (24,853,831) (24,853,831)
<SALES> 6,581,192 13,059,357
<TOTAL-REVENUES> 6,581,192 13,059,357
<CGS> (3,520,406) (6,874,832)
<TOTAL-COSTS> (6,732,181) (12,980,700)
<OTHER-EXPENSES> (146,139) (324,382)
<LOSS-PROVISION> (52,500) (75,000)
<INTEREST-EXPENSE> (146,373) (300,856)
<INCOME-PRETAX> (297,128) (245,725)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (297,128) (245,725)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (297,128) (245,725)
<EPS-PRIMARY> (.04) (.03)
<EPS-DILUTED> (.04) (.03)
</TABLE>
