criticaredec312007form10q.htm
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,
2007
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 of
Incorporation
or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large
accelerated
filer _____
Accelerated filer _____
Non-accelerated
filer _____
Smaller reporting company X
(Do
not
check if smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes
_____ No __X__
Number
of
shares outstanding of each class of the registrant's classes of common stock
as
of December 31, 2007: Voting Common Stock, 12,336,695
shares.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2007 AND JUNE 30, 2007
(UNAUDITED)
ASSETS
|
|
December
31,
2007
|
|
|
June
30,
2007
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,373,909 |
|
|
$ |
4,635,823 |
|
Accounts
receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
$360,000 and
$497,638, respectively
|
|
|
6,527,816 |
|
|
|
5,991,999 |
|
Other
receivables
|
|
|
227,580 |
|
|
|
251,950 |
|
Short-term
note receivable
|
|
|
100,000 |
|
|
|
50,000 |
|
Inventories
|
|
|
8,149,284 |
|
|
|
8,177,523 |
|
Prepaid
expenses
|
|
|
308,604 |
|
|
|
219,859 |
|
Total
current assets
|
|
|
21,687,193 |
|
|
|
19,327,154 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment – net
|
|
|
2,225,992 |
|
|
|
2,190,389 |
|
|
|
|
|
|
|
|
|
|
License
rights and patents – net
|
|
|
52,479 |
|
|
|
55,980 |
|
Long-term
note receivable
|
|
|
62,500 |
|
|
|
75,000 |
|
Total
other assets
|
|
|
114,979 |
|
|
|
130,980 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
24,028,164 |
|
|
$ |
21,648,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
4,189,909 |
|
|
$ |
3,826,834 |
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Compensation
and commissions
|
|
|
1,182,503 |
|
|
|
836,720 |
|
Product
warranties
|
|
|
352,000 |
|
|
|
349,000 |
|
Other
|
|
|
110,335 |
|
|
|
191,389 |
|
Obligations
under capital lease
|
|
|
76,115 |
|
|
|
74,148 |
|
Total
current liabilities
|
|
|
5,910,862 |
|
|
|
5,278,091 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Obligations
under capital lease
|
|
|
63,715 |
|
|
|
59,678 |
|
Total
long-term liabilities
|
|
|
63,715 |
|
|
|
59,678 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,974,577 |
|
|
|
5,337,769 |
|
|
|
|
|
|
|
|
|
|
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, 12,427,255
and
12,409,631
shares issued, and 12,336,695 and
12,313,321 shares outstanding,
respectively
|
|
|
497,090 |
|
|
|
496,385 |
|
Additional
paid-in capital
|
|
|
26,429,966 |
|
|
|
26,338,267 |
|
Common
stock held in treasury at cost (90,560 and 96,310 shares,
respectively)
|
|
|
(345,791 |
) |
|
|
(356,502 |
) |
Retained
earnings (accumulated deficit)
|
|
|
(8,420,884 |
) |
|
|
(10,088,767 |
) |
Other
comprehensive income (loss)
|
|
|
(106,794 |
)
|
|
|
(78,629 |
)
|
Total
stockholders' equity
|
|
|
18,053,587 |
|
|
|
16,310,754 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
24,028,164 |
|
|
$ |
21,648,523 |
|
See
notes to consolidated financial
statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
SIX
MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
|
2007
|
|
|
2006
|
|
NET
SALES
|
|
$ |
19,359,091 |
|
|
$ |
16,669,334 |
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
11,737,599 |
|
|
|
10,132,140 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
7,621,492 |
|
|
|
6,537,194 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
3,363,808 |
|
|
|
2,887,549 |
|
Research,
development and engineering
|
|
|
1,245,030 |
|
|
|
1,199,694 |
|
Administrative
|
|
|
1,554,322 |
|
|
|
1,882,345 |
|
Total
|
|
|
6,163,160 |
|
|
|
5,969,588 |
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
1,458,332 |
|
|
|
567,606 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(7,045 |
) |
|
|
(7,889 |
) |
Interest
income
|
|
|
106,080 |
|
|
|
62,661 |
|
Foreign
currency exchange gain
|
|
|
45,848 |
|
|
|
73,931 |
|
Other
(expense) income
|
|
|
64,668 |
|
|
|
(12,700 |
)
|
Total
|
|
|
209,551 |
|
|
|
116,003 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
1,667,883 |
|
|
|
683,609 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
1,667,883 |
|
|
$ |
683,609 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
Diluted
|
|
$ |
0.13 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,320,152 |
|
|
|
12,295,483 |
|
Diluted
|
|
|
12,363,717 |
|
|
|
12,362,820 |
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
THREE
MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
|
2007
|
|
|
2006
|
|
NET
SALES
|
|
$ |
10,221,365 |
|
|
$ |
8,462,740 |
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
6,045,253 |
|
|
|
5,046,620 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
4,176,112 |
|
|
|
3,416,120 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
1,701,138 |
|
|
|
1,591,173 |
|
Research,
development and engineering
|
|
|
694,557 |
|
|
|
557,411 |
|
Administrative
|
|
|
827,399 |
|
|
|
1,026,117 |
|
Total
|
|
|
3,223,094 |
|
|
|
3,174,701 |
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
953,018 |
|
|
|
241,419 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,991 |
) |
|
|
(3,770 |
) |
Interest
income
|
|
|
61,320 |
|
|
|
28,936 |
|
Foreign
currency exchange gain
|
|
|
13,519 |
|
|
|
73,677 |
|
Other
income
|
|
|
5,375 |
|
|
|
10,471 |
|
Total
|
|
|
76,223 |
|
|
|
109,314 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
1,029,241 |
|
|
|
350,733 |
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
1,029,241 |
|
|
$ |
350,733 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
Diluted
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,322,825 |
|
|
|
12,297,193 |
|
Diluted
|
|
|
12,359,351 |
|
|
|
12,357,641 |
|
See
notes
to consolidated financial statements.
CRITICARE
SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
SIX
MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
|
2007
|
|
|
2006
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,667,883 |
|
|
$ |
683,609 |
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
207,307 |
|
|
|
253,126 |
|
Amortization
|
|
|
3,501 |
|
|
|
3,501 |
|
Share
based compensation
|
|
|
36,625 |
|
|
|
56,545 |
|
Provision
for doubtful accounts
|
|
|
4,187 |
|
|
|
1,674 |
|
Provision
for obsolete inventory
|
|
|
152,168 |
|
|
|
102,000 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(540,874 |
) |
|
|
156,569 |
|
Other
receivables
|
|
|
(13,130 |
) |
|
|
54,688 |
|
Inventories
|
|
|
(6,829 |
) |
|
|
1,198,237 |
|
Prepaid
expenses
|
|
|
(88,745 |
) |
|
|
108,318 |
|
Accounts
payable
|
|
|
363,075 |
|
|
|
(2,259,859 |
) |
Accrued
liabilities
|
|
|
260,681 |
|
|
|
(76,742 |
)
|
Net
cash provided by operating
activities
|
|
|
2,045,849 |
|
|
|
281,666 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net
|
|
|
(343,280 |
)
|
|
|
(115,982 |
)
|
Net
cash used in investing activities
|
|
|
(343,280 |
) |
|
|
(115,982 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Retirement
of obligations under capital lease
|
|
|
(31,843 |
) |
|
|
(33,391 |
) |
Proceeds
from issuance of common stock
|
|
|
66,490 |
|
|
|
19,325 |
|
Net
cash provided by (used in) financing
activities
|
|
|
34,647 |
|
|
|
(14,066 |
) |
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
870 |
|
|
|
1,898 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,738,086 |
|
|
|
153,516 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
4,635,823 |
|
|
|
3,793,781 |
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
6,373,909 |
|
|
$ |
3,947,297 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Income
taxes paid-net
|
|
$ |
6,025 |
|
|
$ |
9,325 |
|
Interest
|
|
$ |
7,045 |
|
|
$ |
7,889 |
|
Fixed
assets purchased with capital lease
|
|
$ |
44,895 |
|
|
|
-- |
|
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 2007 financial statements have been reclassified to conform to the fiscal
2008 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, 2007 and June 30, 2007, respectively:
|
|
December
31, 2007
|
|
|
June
30, 2007
|
|
Component
parts
|
|
$ |
3,084,555 |
|
|
$ |
2,507,293 |
|
Work
in process
|
|
|
1,094,435 |
|
|
|
1,106,885 |
|
Finished
units
|
|
|
4,497,294 |
|
|
|
4,938,345 |
|
Total
inventories
|
|
|
8,676,284 |
|
|
|
8,552,523 |
|
Less: reserve
for obsolescence
|
|
|
527,000 |
|
|
|
375,000 |
|
Net
inventory
|
|
$ |
8,149,284 |
|
|
$ |
8,177,523 |
|
3.
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
December
31, 2007
|
|
|
June
30, 2007
|
|
Machinery
and equipment
|
|
$ |
3,656,814 |
|
|
$ |
3,415,501 |
|
Furniture
and fixtures
|
|
|
896,137 |
|
|
|
946,668 |
|
Leasehold
improvements
|
|
|
342,031 |
|
|
|
290,084 |
|
Production
tooling
|
|
|
2,406,312 |
|
|
|
2,389,507 |
|
Demonstration
and loaner monitors
|
|
|
1,939,707 |
|
|
|
2,025,924 |
|
Property,
plant and equipment – cost
|
|
|
9,241,001 |
|
|
|
9,067,684 |
|
Less: accumulated
depreciation
|
|
|
(7,015,009 |
) |
|
|
(6,877,295 |
) |
Property,
plant and equipment - net
|
|
$ |
2,225,992 |
|
|
$ |
2,190,389 |
|
4.
Stock Options
The
Company has adopted the fair value recognition
provisions of SFAS No. 123 (R), “Share-Based Payment”. Under the
modified prospective method of adoption selected by the Company, compensation
cost recognized is the same as that which would have been recognized had the
recognition provisions of SFAS No. 123 been applied from its original effective
date. Stock-based employee compensation expense included in reported
net income totaled $27,486 and $27,078 for
the three months ended
December 31, 2007 and 2006, respectively. Stock-based employee
compensation expense included in reported net income totaled $36,625 and $56,545 for
the six months ended
December 31, 2007 and 2006, respectively.
The
Company did not grant any options for the three and six months ended December
31, 2007. The fair value of stock options used to compute net income
per share is the estimated fair value at the grant date using the Black-Scholes
option-pricing model. The assumptions used when calculating the
option-pricing model include the expected volatility of Criticare’s common stock
at 51.0%, the risk-free interest rate of 4.73%, the expected option life of
9.00
years and the forfeiture rate of option grants at 0%.
5.
Income Taxes
No
income
tax provision has been made in the consolidated statements of income due to
federal and state net operating loss carry forwards that will be utilized to
offset taxable income earned. At December 31, 2007, the Company had
federal net operating loss carry forwards of approximately $17,301,000 (which
expire from 2008 through 2027) and state net operating loss carry forwards
of
approximately $10,187,000 (which expire from 2008 through 2021) 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 operating loss carry forwards due to the uncertainty of realizing the
benefits of these assets in future years.
The
Company and one of its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on July 1, 2007. As a result of the
implementation of Interpretation 48, the Company did not recognize an increase
in the liability for unrecognized tax benefits. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
Balance
at July 1, 2007
|
|
$ |
0 |
|
Additions
based on tax positions related to the current year
|
|
|
-- |
|
Additions
for tax positions of prior years
|
|
|
-- |
|
Reductions
for tax positions of prior years
|
|
|
-- |
|
Settlements
|
|
|
-- |
|
Balance
at December 31, 2007
|
|
$ |
0 |
|
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. As of December
31, 2007, the Company had not accrued for any payments of interest and
penalties.
6.
Line of Credit Facility
At
December 31, 2007, the Company had a $2,000,000 demand line of credit facility
with a commercial bank to meet its short-term borrowing
needs. Borrowings against the line were payable on demand with
interest payable monthly at the bank's reference rate, less 0.25% (7.00% as
of
December 31, 2007). As of December 31, 2007 and June 30, 2007, 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 covenants, which require minimum
income or liquidity levels. The Company was in compliance with the
covenants at December 31, 2007.
7.
Net Income Per Common Share
Basic
net
income per share is computed using the weighted average number of common shares
outstanding during the periods. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the periods. Additionally,
antidilution occurs when the exercise price of the option is higher than the
average market price of the common stock. The diluted weighted
average common shares outstanding would be higher by 142,750 shares
for the three and
six months ended December 31, 2007 and by 80,000 shares
for the three and
six months ended December 31, 2006 without this anti-dilutive
impact.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Six
Months Ended December 31, 2007 and 2006
Results
of
Operations
The
Company had record net sales of $19,359,091 for the six months ended December
31, 2007, which increased 16.1% from $16,669,334 for the same period in fiscal
2007. The record net sales drove income from operations of $1,458,332
for the six months ended December 31, 2007, which increased 156.9% from $567,606
for the same period in fiscal 2007. These served to drive the
increased net income for the Company to $1,667,883 for the six months ended
December 31, 2007, which was 144.0% higher than $683,609 for the same period
in
fiscal 2007. A 24.8% increase in the average unit sales price and a
10.6% increase in the accessory sales were partially offset by a 4.9% reduction
in number of units shipped, due to variations in the product mix, in the current
period. The increased sales were driven by increases of $2,370,720 in
OEM sales and $2,137,850 in international sales, which were partially offset
by
a $1,036,630 decrease in domestic alternate care sales and a $786,546 decrease
in domestic acute care sales. The OEM sales increase was driven by
sales to Medrad, which increased $1,637,295 to $4,641,258, and due to the start
of the production shipments to our newest OEM partner, Fukuda Denshi, Inc.
of
Japan. The increase in international sales was due in large part to
the partial shipment of an order to the ministry of health of the Republic
of
Iraq of $1,520,257 and a 171.3% growth in the number of units shipped to the
international market for Criticare’s multi-parameter vital signs monitor
(nGenuity 8100E). The decrease in domestic alternate care sales was
due to a large order to replace vital signs monitors in domestic plasma
collection centers shipped in the first quarter of fiscal 2007 with no
corresponding sales in fiscal 2008. The decrease in domestic acute
care sales in fiscal 2008 was anticipated as the Company capitalized on
opportunities within the market during fiscal 2007 to participate in bid
requests without institutional contract requirements.
The
gross
profit percentage of 39.4% for the six months ended December 31, 2007 increased
slightly from 39.2% for the same period in fiscal 2007. The increased margins
in
the current period were mainly due to the small variations in the product
mix.
Operating
expenses for the six months ended December 31, 2007 increased $193,572 from
the
same period in fiscal 2007 due mainly to an increase of $476,259 in sales and
marketing expenses, which was partially offset by a decrease of $328,023 in
administrative expenses. The increase of $476,259 in sales and
marketing expenses was driven by a $383,853 increase in commissions earned
which
included commissions earned by the Company’s dealer of $263,140 for the partial shipment of the
order to the ministry of health of the Republic of Iraq, a $21,538 increase
in
travel expenses and a $13,089 increase in advertising and trade show expenses
for the six months ended December 31, 2007. Administrative
expenses decreased by $328,023 as $362,693 of expenses were incurred during
the
first six months of fiscal 2007 in connection with the BlueLine consent
solicitation with no corresponding expense in fiscal 2008, more than offsetting
increased expenses of $35,793 relating to the Company’s preparation for
compliance with Section 404 of the Sarbanes-Oxley Act.
Total
other income for the six months ended December 31, 2007 increased $93,548 from
the same period in fiscal 2007. This increase was mainly driven by
increased interest income of $43,419 and increased royalty income of $25,200
received during the period.
Income
from operations of $1,458,332 for the six months ended December 31, 2007
increased $890,726 as compared to income from operations of $567,606 for the
same period in fiscal 2007, which was the result of a $1,084,298 increase in
gross profit combined with increased operating expenses of
$193,572. The increase in income from operations together with an
increase in other income of $93,548, resulted in an increase in net income
of
$984,274 to net income of $1,667,883 for the six months ended December 31,
2007
as compared to net income of $683,609 for the same period in fiscal
2007.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Three
Months Ended December 31, 2007 and 2006
Results
of
Operations
Record
quarterly net sales of $10,221,365 for the three months ended December 31,
2007
increased 20.8% from $8,462,741 for the same period in fiscal
2007. The record net sales drove income from operations of $953,018
for the three months ended December 31, 2007, which increased 294.8% from
$241,419 for the same period in fiscal 2007. These served to drive
the increased net income for the Company to $1,029,241 for the three months
ended December 31, 2007, which was 193.5% higher than $350,733 for the same
period in fiscal 2007. A 28.5% increase in the average unit sales
price and an 5.5% increase in the accessory sales were partially offset by
a
1.9% reduction in number of units shipped, due to variations in the product
mix,
in the current period. The increased sales were
driven by a $1,815,546 increase in OEM sales and a $513,097 increase in
international sales, which were partially offset by a $597,034 decrease in
domestic acute care sales. The increase in OEM sales
was driven by sales to Fukuda Denshi, Inc. of Japan and
Medrad. Medrad sales increased $1,494,374 to $2,930,985 for the three
months ended December 31, 2007. The increase in international sales
has been driven by 100.5% growth in the number of units shipped for Criticare’s
multi-parameter vital signs monitor (nGenuity 8100E), as the monitor, which
was
released in late fiscal 2006, continues to gain acceptance and
momentum.
The
gross
profit percentage of 40.9% for the three months ended December 31, 2007
increased slightly from 40.4% for the same period in fiscal 2007. The increased
margins in the current period were mainly due to the small variations in the
product mix.
Operating
expenses for the three months ended December 31, 2007 increased $48,393 from
the
same period in fiscal 2007 due mainly to an increase of $137,146 in research,
development and engineering expenses and an increase of $109,965 in sales and
marketing expenses, which were partially offset by a decrease of $198,718 in
administrative expenses. The increase of $137,146 in research,
development and engineering expenses is mainly due to the specific cycle
variations of the on-going development projects. The increase of
$109,965 in sales and marketing expenses was driven by a $38,791 increase in
commissions earned, a $29,331 increase in advertising and trade show expenses
and a $27,922 increase in travel expenses for the three months ended December
31, 2007. Administrative
expenses decreased by $198,718 as $271,153 of expenses were incurred during
the
second quarter of fiscal 2007 in connection with the BlueLine consent
solicitation with no corresponding expense in fiscal 2008, more than offsetting
increased expenses of $35,793 relating to the Company’s preparation for
compliance with Section 404 of the Sarbanes-Oxley Act.
Total
other income for the three months ended December 31, 2007 decreased $33,091
from
the same period in fiscal 2007. This decrease was mainly due to a
decrease in foreign currency exchange gain of $60,158, which was partially
offset by increased interest income of $32,384 received during the
quarter.
Net
income of $1,029,241 for the three months ended December 31, 2007 increased
by
$678,508 as compared to net income of $350,733 for the same period in fiscal
2007, as the result of a $759,992 increase in gross profit and a $48,393
decrease in operating expenses.
CRITICARE
SYSTEMS, INC.
Management's
Discussion and Analysis of
Results
of Operations and Financial Condition
Liquidity
and Capital
Resources
As
of
December 31, 2007, the Company had a cash balance of $6,373,909, which was
$1,738,086 higher than its balance at June 30, 2007 of $4,635,823 and $2,426,612
higher than its balance at December 31, 2006. The Company continues
to maintain a long-term bank debt free balance sheet since August 30, 2002
when
it sold it’s building and used the proceeds from the sale to retire the
long-term bank debt on the facility.
The
Company’s cash position increased by $1,738,086 for the six months ended
December 31, 2007 driven by $2,045,849 of cash provided by operating activities,
which was partially offset by $343,280 of capital expenditures. Cash provided by operations
was $2,045,849 for the six months ended December 31, 2007 as net income of
$1,667,883, an increase of $363,075 in accounts payable, an increase of $260,681
in accruals and depreciation of $207,307 were partially offset by a $540,874
increase in accounts receivable.
The
Company believes all future capital and liquidity requirements will be satisfied
by cash generated from operations, proceeds received from the issuance of common
stock related to the exercise of stock options, and its current cash balances.
No major capital equipment expenditures are expected in the Company’s current
fiscal year ending June 30, 2008. The Company also has a $2,000,000
line of credit currently in place that could be utilized, if
necessary. At both December 31, 2007 and June 30, 2007, there were no
borrowings outstanding under this line of credit. The credit facility
has covenants that require minimum income or liquidity levels. The
Company was in compliance with the covenants at December 31,
2007. This line expires in June 2008.
Forward
Looking
Statements
A
number
of the matters and subject areas discussed in this report that are not
historical or current facts deal with potential future circumstances and
developments. These include anticipated product introductions,
expected future financial results, liquidity needs, financing ability,
management's or the Company's expectations and beliefs and similar matters
discussed in Management's Discussion and Analysis or elsewherein
this
report. These statements may be identified by the use of
forward-looking words or phrases such as "anticipate," "believe," "could,"
"expect," "intend," "may," "hope," "plan," "potential," "should," "estimate,"
"predict," "continue," "future," "will," "would" or the negative of these terms
or other words of similar meaning.
Such
forward-looking statements are inherently subject to known and unknown risks
and
uncertainties. The Company's actual results and future developments
could differ materially from the results or developments expressed in, or
implied by, these forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements 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. Such uncertainties and other risks that may affect the
Company's performance are discussed further in Part I, Item 1A, "Risk Factors,"
in the Company's Form 10-K for the year ended June 30, 2007. The
Company undertakes no obligation to make any revisions to the forward-looking
statements contained in this report or to update them to reflect events or
circumstances occurring after the date of this report.
Quantitive
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 below the bank's reference
rate. The Company had no borrowings outstanding under this bank
facility at December 31, 2007 and June 30, 2007. 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, 2007. 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, as of the end of such
period, the Company’s disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in reports that the Company files with
or submits to 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
1A. Risk
Factors
There
have been no material changes from the risk factors previously disclosed in
Part
I, Item 1A, "Risk Factors," of the Company's Form 10-K for the year ended June
30, 2007. Please refer to that section for disclosures regarding the
risks and uncertainties relating to the Company's business.
Item
4. Submission of Matters
to a
Vote of Security Holders.
The
annual meeting of stockholders of the Company was held on November 27,
2007. 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 five directors to serve for a one-year term ending at
the 2008 annual meeting of stockholders.
|
|
For
|
|
|
Withheld
|
|
Jeffrey
T. Barnes
|
|
|
6,278,289
|
|
|
|
3,428,949
|
|
N.C.
Joseph Lai
|
|
|
6,416,279
|
|
|
|
3,290,959
|
|
William
M. Moore
|
|
|
9,454,646
|
|
|
|
252,592
|
|
Robert
E. Munzenrider
|
|
|
9,453,246
|
|
|
|
253,992
|
|
Emil
H. Soika
|
|
|
5,954,290
|
|
|
|
3,752,948
|
|
Proposal
2: Ratification of appointment
of BDO Seidman, LLP as independent auditors of the Company.
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Votes
|
9,648,797
|
|
49,620
|
|
8,821
|
|
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
|
|
Amended
and Restated Rights Agreement, dated as of March 27, 2007, between
the
Company and LaSalle Bank, National Association, as rights agent
(incorporated by reference to the Company’s Current Report on Form 8-K
filed on March 30, 2007).
|
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
Exhibit 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 7,
2008
BY
/s/
Joel D.
Knudson
Joel
D. Knudson
Vice
President - Finance
(Chief
Accounting Officer and
Duly
Authorized Officer)