Criticare Fourth Quarter 2004 Form 10-Q
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, 2004
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 1-31943
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, Suite 100
Waukesha,
Wisconsin |
|
53186 |
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant's
telephone number including area code (262)
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
____
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes
____ No X
Number of
shares outstanding of each class of the registrant's classes of common stock as
of December 31, 2004: Class A Common Stock 11,457,111 shares.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2004 AND JUNE 30, 2004
(UNAUDITED)
ASSETS |
|
December
31, 2004 |
|
June
30, 2004 |
|
|
|
|
|
|
|
CURRENT
ASSETS: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
3,773,491 |
|
$ |
3,738,825 |
|
Accounts
receivable, less allowance for doubtful accounts |
|
|
|
|
|
|
|
of
$300,000 and $260,000, respectively |
|
|
6,266,174
|
|
|
6,489,884
|
|
Other
receivables |
|
|
352,224
|
|
|
359,806
|
|
Inventories
|
|
|
5,164,905
|
|
|
6,418,135
|
|
Prepaid
expenses |
|
|
137,643
|
|
|
364,375
|
|
Total
current assets |
|
|
15,694,437
|
|
|
17,371,025
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment - net |
|
|
1,892,465
|
|
|
2,094,330 |
|
|
|
|
|
|
|
|
|
License
rights and patents - net |
|
|
73,484
|
|
|
76,985 |
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS |
|
$ |
17,660,386 |
|
$ |
19,542,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
2,069,469 |
|
$ |
3,237,405 |
|
Accrued
liabilities: |
|
|
|
|
|
|
|
Compensation
and commissions |
|
|
926,659
|
|
|
863,113
|
|
Product
warranties |
|
|
487,000
|
|
|
444,000
|
|
Liability
under guarantees |
|
|
490,000
|
|
|
490,000
|
|
Out
of court settlement |
|
|
— |
|
|
200,000
|
|
Obligations
under capital lease |
|
|
60,173
|
|
|
57,712
|
|
Other
|
|
|
125,759
|
|
|
174,395
|
|
Total
current liabilities |
|
|
4,159,060
|
|
|
5,466,625
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES: |
|
|
|
|
|
|
|
Obligations
under capital lease |
|
|
234,056
|
|
|
264,770
|
|
Other
long-term obligations |
|
|
13,231
|
|
|
21,646
|
|
Total
long-term liabilities |
|
|
247,287
|
|
|
286,416
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES |
|
|
4,406,347
|
|
|
5,753,041
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY: |
|
|
|
|
|
|
|
Preferred
stock - $.04 par value, 500,000 shares authorized |
|
|
|
|
|
|
|
no
shares issued or outstanding |
|
|
— |
|
|
— |
|
Common
stock - $.04 par value, 15,000,000 shares authorized,
11,574,749 |
|
|
|
|
|
|
|
shares
issued, and 11,457,111 and 11,450,021 shares outstanding,
respectively |
|
|
462,990 |
|
|
462,990 |
|
Additional
paid-in capital |
|
|
23,966,075 |
|
|
23,965,900 |
|
Common
stock held in treasury (117,638 and 124,728 shares,
respectively) |
|
|
(396,232 |
) |
|
(409,439 |
) |
Retained
earnings (accumulated deficit) |
|
|
(10,775,312 |
) |
|
(10,226,670 |
) |
Cumulative
translation adjustment |
|
|
(3,482 |
) |
|
(3,482 |
) |
Total
stockholders' equity |
|
|
13,254,039 |
|
|
13,789,299 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
17,660,386 |
|
$ |
19,542,340 |
|
See notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
SIX
MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
NET
SALES |
|
$ |
12,706,362 |
|
$ |
15,352,694 |
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD |
|
|
7,733,536 |
|
|
9,093,679 |
|
|
|
|
|
|
|
|
|
GROSS
PROFIT |
|
|
4,972,826 |
|
|
6,259,015 |
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES: |
|
|
|
|
|
|
|
Sales
and marketing |
|
|
2,872,833 |
|
|
3,372,216 |
|
Research,
development and engineering |
|
|
1,174,935 |
|
|
1,224,313 |
|
Administrative |
|
|
1,490,328 |
|
|
1,725,051 |
|
Total |
|
|
5,538,096 |
|
|
6,321,580 |
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS |
|
|
(565,270 |
) |
|
(62,565 |
) |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE): |
|
|
|
|
|
|
|
Interest
expense |
|
|
(17,027 |
) |
|
— |
|
Interest
income |
|
|
20,073 |
|
|
20,749 |
|
Other
income |
|
|
13,582 |
|
|
62,510 |
|
Total |
|
|
16,628 |
|
|
83,259 |
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE INCOME TAXES |
|
|
(548,642 |
) |
|
20,694 |
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME |
|
$ |
(548,642 |
) |
$ |
20,694 |
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
$ |
0.00 |
|
Diluted |
|
$ |
(0.05 |
) |
$ |
0.00 |
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON |
|
|
|
|
|
|
|
SHARES
OUTSTANDING: |
|
|
|
|
|
|
|
Basic |
|
|
11,453,405 |
|
|
11,098,339 |
|
Diluted |
|
|
11,453,405 |
|
|
11,432,539 |
|
See notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
INCOME STATEMENTS
THREE
MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
NET
SALES |
|
$ |
7,375,005 |
|
$ |
8,980,277 |
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD |
|
|
4,273,613 |
|
|
5,295,668 |
|
|
|
|
|
|
|
|
|
GROSS
PROFIT |
|
|
3,101,392 |
|
|
3,684,609 |
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES: |
|
|
|
|
|
|
|
Sales
and marketing |
|
|
1,558,348 |
|
|
1,864,770 |
|
Research,
development and engineering |
|
|
633,816 |
|
|
623,721 |
|
Administrative |
|
|
740,423 |
|
|
823,793 |
|
Total |
|
|
2,932,587 |
|
|
3,312,284 |
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS |
|
|
168,805 |
|
|
372,325 |
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE): |
|
|
|
|
|
|
|
Interest
expense |
|
|
(10,366 |
) |
|
— |
|
Interest
income |
|
|
11,465 |
|
|
11,009 |
|
Other
(expense) income |
|
|
(18,237 |
) |
|
29,090 |
|
Total |
|
|
(17,138 |
) |
|
40,099 |
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES |
|
|
151,667 |
|
|
412,424 |
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
NET
INCOME |
|
$ |
151,667 |
|
$ |
412,424 |
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
$ |
0.04 |
|
Diluted |
|
$ |
0.01 |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON |
|
|
|
|
|
|
|
SHARES
OUTSTANDING: |
|
|
|
|
|
|
|
Basic |
|
|
11,455,344 |
|
|
11,121,941 |
|
Diluted |
|
|
11,564,946 |
|
|
11,475,656 |
|
See notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
SIX
MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
|
|
2004 |
|
2003 |
|
OPERATING
ACTIVITIES: |
|
|
|
|
|
Net
(loss) income |
|
$ |
(548,642 |
) |
$ |
20,694 |
|
Adjustments
to reconcile net (loss) income to net cash |
|
|
|
|
|
|
|
provided
by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
300,649 |
|
|
282,897 |
|
Amortization |
|
|
3,501 |
|
|
3,501 |
|
Provision
for doubtful accounts |
|
|
40,000 |
|
|
52,442 |
|
Provision
for obsolete inventory |
|
|
200,000 |
|
|
353,103 |
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
183,710 |
|
|
(1,986,967 |
) |
Other
receivables |
|
|
7,582 |
|
|
131,591 |
|
Inventories |
|
|
1,045,029 |
|
|
17,700 |
|
Prepaid
expenses |
|
|
226,732 |
|
|
88,869 |
|
Accounts
payable |
|
|
(1,167,936 |
) |
|
821,508 |
|
Accrued
liabilities |
|
|
(150,505 |
) |
|
232,542 |
|
Net
cash provided by operating activities |
|
|
140,120 |
|
|
17,880 |
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES: |
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net |
|
|
(90,583 |
) |
|
(244,272 |
) |
Net
cash used in investing activities |
|
|
(90,583 |
) |
|
(244,272 |
) |
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
Retirement
of obligations under capital lease |
|
|
(28,253 |
) |
|
— |
|
Proceeds
from issuance of common stock |
|
|
13,382 |
|
|
357,034 |
|
Net
cash (used in) provided by financing activities |
|
|
(14,871 |
) |
|
357,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
34,666 |
|
|
130,642 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
3,738,825 |
|
|
3,716,446 |
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
3,773,491 |
|
$ |
3,847,088 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
Cash
paid for: |
|
|
|
|
|
|
|
Income
taxes paid-net |
|
|
— |
|
|
— |
|
Interest |
|
$ |
17,027 |
|
|
— |
|
See notes
to consolidated financial statements.
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. The three and six month results represent past
performance, and are not necessarily indicative of results for an entire year.
Certain amounts from the fiscal 2004 financial statements have been reclassified
to conform to the 2005 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, 2004 and June 30, 2004, respectively:
|
|
December
31, 2004 |
|
June
30, 2004 |
|
Component
parts |
|
$ |
2,070,348 |
|
$ |
1,988,414 |
|
Work
in process |
|
|
690,771 |
|
|
781,156 |
|
Finished
units |
|
|
3,213,786 |
|
|
4,258,565 |
|
Total
inventories |
|
|
5,974,905 |
|
|
7,028,135 |
|
Less:
reserve for obsolescence |
|
|
810,000 |
|
|
610,000 |
|
Net
inventory |
|
$ |
5,164,905 |
|
$ |
6,418,135 |
|
3.
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
December
31, 2004 |
|
June
30, 2004 |
|
Machinery
and equipment |
|
$ |
2,716,746 |
|
$ |
2,675,093 |
|
Furniture
and fixtures |
|
|
938,893 |
|
|
937,906 |
|
Leasehold
improvements |
|
|
218,423 |
|
|
218,423 |
|
Production
tooling |
|
|
2,078,563 |
|
|
2,030,618 |
|
Demonstration
and loaner monitors |
|
|
944,999 |
|
|
945,339 |
|
Property,
plant and equipment - cost |
|
|
6,897,624 |
|
|
6,807,379 |
|
Less:
accumulated depreciation |
|
|
(5,005,159 |
) |
|
(4,713,049 |
) |
Property,
plant and equipment - net |
|
$ |
1,892,465 |
|
$ |
2,094,330 |
|
4.
Contingencies
The
import and export rules applicable to all United States companies engaged in
international business transactions contain compliance guidelines. Violations
may result in civil or criminal penalties, or both, as well as the potential
loss of export privileges.
On August
6, 2002, in part due to the new regulations imposed under the Sarbanes-Oxley
Act, the Company initiated an internal review of its import and export
procedures. On August 28, 2002, senior management of the Company became aware of
previous events that may have violated United States import/export laws and
regulations. Senior management of the Company immediately authorized an internal
audit of these possible violations, focusing on the sale of medical equipment
directly or indirectly into an embargoed country and possible marking issues.
The
factual investigation pursuant to the internal audit is complete, no additional
compliance issues arose, and no material marking issues were identified as a
result of the investigation.
Subsequently,
the Company has taken action to adopt and implement a written compliance program
with respect to applicable import/export rules. The Company has also undertaken
a voluntary disclosure with the relevant U.S. government agencies, and has filed
its completed internal audit report and all requested documents. As a result of
the completed internal audit and voluntary disclosure, the Company entered into
and paid a settlement with the lead U.S. government agency on December 7, 2004,
which resolved all of the potential violations disclosed by the Company with a
civil penalty of $45,000.
5.
Stock Options
The
Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting
for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure”. If the Company had elected to recognize
compensation cost for the options granted for the three months and six months
ended December 31, 2004 and 2003, consistent with the method prescribed by SFAS
No. 123, net loss and net loss per share would have been changed to the pro
forma amounts indicated below:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) - as reported |
|
$ |
151,667 |
|
$ |
412,424 |
|
$ |
(548,642 |
) |
$ |
20,694 |
|
Net
income (loss) - pro forma |
|
$ |
42,730 |
|
$ |
393,228 |
|
$ |
(766,516 |
) |
$ |
(17,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share - as reported |
|
$ |
0.01 |
|
$ |
0.04 |
|
$ |
(0.05 |
) |
$ |
0.00 |
|
Diluted
net income (loss) per share - as reported |
|
$ |
0.00 |
|
$ |
0.04 |
|
$ |
(0.07 |
) |
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share - pro forma |
|
$ |
0.01 |
|
$ |
0.04 |
|
$ |
(0.05 |
) |
$ |
0.00 |
|
Diluted
net income (loss) per share - pro forma |
|
$ |
0.00 |
|
$ |
0.04 |
|
$ |
(0.07 |
) |
$ |
0.00 |
|
For the
three months ended December 31, 2004, the Company granted options totaling
17,000 shares at a weighted average exercise price of $2.76, which are valued at
$35,392. For the six months ended December 31, 2004, the Company granted options
totaling 67,000 shares at a weighted average exercise price of $2.65, which are
valued at $130,323. The fair value of stock options used to compute pro forma
net loss and net loss per share is the estimated present value at the grant date
using the Black-Scholes option-pricing model.
6.
Income Taxes
No income
tax provision has been made in the consolidated statements of operations due to
federal and state net operating loss carry forwards that will be utilized to
offset taxable income earned. At December 31, 2004, the Company had federal net
operating loss carry forwards of approximately $16,980,000 (which expire from
2008 through 2024) and state net operating loss carry forwards of approximately
$11,476,000 (which expire from 2004 through 2019) available to offset future
taxable income. The Company has recorded a valuation allowance to offset the
related deferred income tax assets arising from these net loss carry forwards
due to the uncertainty of realizing the benefits of these assets in future
years.
7.
Line of Credit Facility
At
December 31, 2004, the Company had a $1,000,000 demand line of credit with a
commercial bank, which matures on November 15, 2005, to meet its short-term
borrowing needs. Borrowings against the line are payable on demand with interest
payable monthly at the bank’s reference rate, plus 25% (5.25% as of December 31,
2004). As of December 31, 2004 and 2003, there were no borrowings against the
line. Borrowings under the line of credit facility are collateralized by
substantially all assets of the Company. The credit facility has no loan
covenant restrictions.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Six
Months Ended December 31, 2004 and 2003
Results
of Operations
Net sales
of $12,706,362 for the six months ended December 31, 2004 were down 17.2% from
$15,352,694 for the same period in fiscal 2004. A 33.7% decrease in the number
of units shipped was partially offset by a 20.3% increase in the average sales
price per unit and a 7.8% increase in accessory sales in the current year. The
reduced sales were the result of a $1,242,255 decrease in sales to our largest
OEM partner, a $633,940 decrease in domestic sales, a $355,957 decrease in
government sales and a $540,117 decrease in international sales in the six month
period. The OEM sales decrease was partially offset by $240,362 in sales to our
new OEM partner for medical imaging applications. The decrease in domestic sales
was due in part to lost sales following the cancellation of two oral surgery
shows in Florida and one oral surgery show in Louisiana as a result of the
hurricanes. The international sales decrease was the result of a $1,130,250
order shipped in December 2003, which boosted the international sales figures
for that period in fiscal 2004, without a comparable sale in the six months
ended December 31, 2004.
The gross
profit percentage of 39.1% for the six months ended December 31, 2004 decreased
from 40.8% for the same period in fiscal 2004. The reduced margins in the
current period were mainly due to the decreased manufacturing overhead
absorption in the first quarter, due to the decrease in the number of units
shipped against relatively fixed overhead costs.
Operating
expenses for the six months ended December 31, 2004 decreased $783,484 from the
same period in fiscal 2004. The decrease of $499,383 in sales and marketing
expenses was due mainly to an $240,329 decrease in the commissions earned by
dealers and employees. In addition, there was a decrease of $234,869 in
advertising, trade shows and sales promotion spending. The decrease of $49,378
in research, development and engineering expenses was mainly due to a $63,906
reduction in depreciation expense. Administrative expenses decreased by $234,723
mainly due to the cost containment efforts such as reducing consulting expenses
by $88,996, reducing accounting fees by $77,872 and reducing investor expenses
by $61,854.
Total
other income for the six months ended December 31, 2004 decreased $66,631 from
the same period in fiscal 2004. This reduction was mainly caused by interest
expense of $17,027 primarily for a new capital lease (which began in April 2004)
and $45,000 paid by the Company for the settlement with the U.S. government for
import/export regulation issues.
The
$1,286,189 reduction in gross profit and the decrease in other income of
$66,631, partially offset by the reduction in operating expenses of $783,484,
resulted in a net loss of $(548,642) for the six months ended December 31, 2004
as compared to net income of $20,694 for the same period in fiscal
2004.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Three
Months Ended December 31, 2004 and 2003
Results
of Operations
Net sales
of $7,375,005 for the three months ended December 31, 2004 were down 17.9% from
$8,980,277 for the same period in fiscal 2004. A 39.8% decrease in the number of
units shipped was partially offset by a 35.4% increase in the average sales
price per unit in the current year. The reduced sales were the result of a
$756,585 decrease in sales to our largest OEM partner, a $355,957 decrease in
government sales and a $624,323 decrease in international sales in the current
period. The international sales decrease was the result of a $1,130,250 order,
for 1,650 units, that was shipped in December 2003, which boosted the
international sales figures for that period in fiscal 2004, without a comparable
sale in the three months ended December 31, 2004.
The gross
profit percentage of 42.1% for the three months ended December 31, 2004
increased from 41.0% for the same period in fiscal 2004. A $160,327 decrease in
the charges for the obsolete inventory reserve, due to improved inventory
controls and practices, increased the gross profit margin.
Operating
expenses for the three months ended December 31, 2004 decreased $379,697 from
the same period in fiscal 2004. The decrease of $306,422 in sales and marketing
expenses was due mainly to a $95,595 decrease in the commissions earned by
dealers and employees and a decrease of $161,187 in advertising, trade shows and
sales promotion spending. Administrative expenses decreased by $83,370 mainly
due to cost containment efforts such as reducing consulting expenses by $16,774,
reducing accounting fees by $15,190 and reducing investor expenses by
$59,720.
Total
other income for the three months ended December 31, 2004 decreased $57,237 from
the same period in fiscal 2004. This reduction was mainly caused by interest
expense of $10,366 primarily for a new capital lease (which began in April 2004)
and $45,000 paid by the Company for the settlement with the U.S.
government for import/export regulation issues.
The
$583,217 reduction in gross profit and the decrease in other income of $57,237,
partially offset by the reduction in operating expenses of $379,697, resulted in
net income of $151,667 for the three months ended December 31, 2004 as compared
to net income of $412,424 for the same period in fiscal 2004.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Liquidity
and Capital Resources
As of
December 31, 2004, the Company had a cash balance of $3,773,491 which was
$34,666 higher than its balance at June 30, 2004 of $3,738,825. The Company
continues to maintain a long-term bank debt free balance sheet since August 30,
2002 when it sold its building and used the proceeds from the sale to retire the
long-term bank debt on the facility.
The
Company increased its cash position by $34,666 for the six months ended December
31, 2004 as $140,120 of cash provided by operations more than offset $90,583 of
capital expenditures and $14,871 of cash used for financing activities. Cash
provided by operations was $140,120 for the six months ended December 31,
2004 as a $1,538,053 decrease in receivables, prepaid expenses and inventory was
nearly offset by a $1,318,441 increase in total liabilities.
The
Company believes all capital and liquidity requirements for the remainder of
fiscal 2005 will be satisfied by cash generated from operations and its current
cash balances. The Company's $1,000,000 line of credit expires in November 2005.
At December 31, 2004 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, compliance with product
safety regulations and product liability and product recall risks, risks
relating to international sales and compliance with U.S. export regulations,
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.
Quantitative
and Qualitative Disclosures about Market Risk
The
Company has a demand line of credit facility with a commercial bank with
interest payable monthly at 25 basis points above the bank's reference rate. The
Company had no borrowings outstanding under this bank facility at December 31,
2004 and June 30, 2004. Due historically to the lack of need to borrow from this
credit facility and due to the Company’s current cash position, the Company is
not subject to financial risk on this obligation if interest rates in the market
change significantly.
The
Company’s net sales are primarily denominated in United States dollars, except
for a small amount of net sales from the Company’s operation in India
denominated in Indian rupees. As a result, part of the Company’s accounts
receivable are denominated in rupees and translated into U.S. dollars for
financial reporting purposes. A 10% change in the exchange rate of the U.S.
dollar with respect to the Indian rupee would not have a material adverse effect
on the Company’s financial condition or results of operations for the quarter
ended December 31, 2004. The Company does not use any hedges or other derivative
financial instruments to manage or reduce exchange rate risk.
Controls
and Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Company’s Vice President
- Finance, of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended). Based on this evaluation, the Company’s Chief Executive Officer and
Vice President - Finance concluded that the Company’s disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company’s periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and based
upon the evaluation described above, the Company’s Chief Executive Officer and
Vice President -Finance concluded that the Company’s disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
There was
no change in the Company’s internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
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 December 3, 2004. 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 one director for a term ending at the 2007 annual meeting of
stockholders.
|
For |
|
Withheld |
Higgins
D. Bailey |
8,630,137 |
|
538,117 |
|
|
|
|
The
Company's other directors consist of Jeffrey T. Barnes and N.C. Joseph Lai
(whose terms end at the 2005 annual meeting of stockholders) and Emil H. Soika
and Stephen K. Tannenbaum (whose terms end at the 2006 annual meeting of
stockholders).
Proposal
2: Ratification of appointment of BDO Seidman, LLP as auditors of the
Company.
For |
Against |
Abstain |
Broker
Non-Votes |
9,082,404 |
70,800 |
15,050 |
0 |
Item
6. 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). |
|
31.1 |
Certification
of Emil H. Soika, President and Chief Executive Officer (Principal
Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
31.2 |
Certification
of Joel D. Knudson, Vice President - Finance and Secretary (Principal
Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
32* |
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350. |
__________________
* This
Certification is not “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
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 11, 2005 BY
/s/
Joel D.
Knudson
Joel D.
Knudson
Vice
President - Finance
(Chief
Accounting Officer and
Duly
Authorized Officer)