<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 SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 (414) 798-8282
------------------------
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 November 5, 1997: Common Stock 8,215,854 shares.
Page 1 of 10
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CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS September 30, June 30,
------ 1997 1997
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,517,090 $2,440,859
Accounts receivable 7,758,158 7,182,237
Other receivables 369,738 236,855
Inventory 7,588,981 7,730,591
Prepaid expenses 290,882 269,620
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Total current assets 18,524,849 17,860,162
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PROPERTY, PLANT AND EQUIPMENT - NET 7,018,896 7,044,729
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OTHER ASSETS:
License and patents - net 147,488 124,882
Convertible debenture issue costs 29,421 115,293
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Total other assets 176,909 240,175
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TOTAL $25,720,654 $25,145,066
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $2,732,288 $3,112,112
Accrued liabilities:
Compensation and commissions 1,097,272 1,000,552
Product warranties 618,018 370,000
Other 1,285,031 1,176,891
Current maturities of long-term debt 124,682 147,442
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Total current liabilities 5,857,291 5,806,997
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LONG-TERM DEBT, less current maturities 3,248,036 3,274,611
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CONVERTIBLE DEBENTURES 590,629 1,836,323
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STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 323,931 311,859
Additional paid-in capital 16,097,125 14,469,406
Retained earnings (accumulated deficit) (343,561) (516,023)
Cumulative translation adjustments (52,797) (38,107)
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Total stockholders' equity 16,024,698 14,227,135
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TOTAL $25,720,654 $25,145,066
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</TABLE>
See notes to consolidated financial statements.
Page 2 of 10
<PAGE> 3
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
NET SALES $7,544,005 $6,478,165
COST OF GOODS SOLD 4,038,401 3,354,426
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GROSS PROFIT 3,505,604 3,123,739
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OPERATING EXPENSES:
Marketing 1,947,080 1,927,294
Research, development and engineering 521,392 566,280
Administrative 451,053 400,519
-------------------------------------------------------------
Total Operating Expenses 2,919,525 2,894,093
-------------------------------------------------------------
INCOME FROM OPERATIONS 586,079 229,646
-------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (438,916) (154,483)
Interest income 25,299 240
Equity in loss of investments (24,000)
-------------------------------------------------------------
Total (413,617) (178,243)
-------------------------------------------------------------
INCOME BEFORE INCOME TAXES 172,462 51,403
INCOME TAX PROVISION 0 0
-------------------------------------------------------------
NET INCOME 172,462 51,403
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EARNINGS PER COMMON SHARE:
Primary $0.02 $0.01
Fully diluted 0.02 0.01
-------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 8,583,978 7,128,272
Fully diluted 8,583,978 7,226,643
-------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 10
<PAGE> 4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 172,462 $ 51,403
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 236,314 153,410
Equity in loss of investments 24,000
Debentures converted to common stock 357,095
Changes in assets and liabilities:
Accounts receivable (575,921) 1,439,875
Other receivables (132,883) (3,111)
Inventories 141,610 (129,662)
Prepaid expenses (21,262) (66,090)
Accounts payable (379,824) (928,161)
Accrued liabilities 438,189 (449,217)
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Net cash provided by (used in) operating activities 235,780 92,447
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment (56,048) (21,418)
Reduction (increase) in loaner and demo equipment (177,041) 25,162
Advances to Immtech International (24,000)
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Net cash (used in) investing activities (233,089) (20,256)
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FINANCING ACTIVITIES:
Payments on line of credit facility (400,000)
Principal payments on long-term debt (49,335) (52,594)
Proceeds from issuance of common stock 122,875
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Net cash provided by (used in) financing activities 73,540 (452,594)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 76,231 (380,403)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 2,440,859 806,645
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CASH AND CASH EQUIVALENTS, END OF
PERIOD $2,517,090 $ 426,242
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</TABLE>
See notes to consolidated financial statements.
Page 4 of 10
<PAGE> 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 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 September 30, 1997 and June 30, 1997, respectively:
September 30, June 30,
1997 1997
----------------------------------------------
Component parts $3,156,799 $2,867,884
Work in process 1,588,466 1,843,018
Finished units 2,843,716 3,019,689
----------------------------------------------
Total inventories $7,588,981 $7,730,591
----------------------------------------------
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<PAGE> 6
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, June 30,
1997 1997
---------------------------------------------------------------
Land and building $4,525,000 $4,525,000
Machinery and equipment 1,682,031 1,674,488
Furniture and fixtures 618,848 617,451
Demonstration and loaner monitors 1,958,739 1,781,698
Production tooling 2,157,988 2,137,986
--------------------------------------------------------------
Property, plant and equipment-cost 10,942,606 10,736,623
Less accumulated depreciation 3,923,710 3,691,894
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Property, plant and equipment-net $7,018,896 7,044,729
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5. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures. The
debentures have a two year term maturity with a stated annual interest rate of
8%, payable in shares of common stock at the conversion date or maturity date.
The holders of the debentures had the option to convert up to $1,250,000 of the
debentures and accrued interest to common stock of the Company sixty-one (61)
days after the February 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. Debentures aggregating $550,000
were converted under the 20% discount conversion feature. The remaining
debentures and accrued interest can be converted to common stock of the Company
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 in February 1999 at a 25% discount. Through
September 30, 1997, $2,000,000 of debentures have been converted to 462,945
shares of common stock with a fair market value of $2,707,456 as of the
conversion dates. As of September 30, 1997, $500,000 of original debentures
were outstanding with a carrying value, including accrued interest and
amortized discount, of $590,629.
Proceeds from the issuance of the debentures were recorded as a liability at
the issuance date. The conversion discount is amortized and reported as
additional interest expense over the life of the debentures. In the event the
debentures are converted prior to February 1999, additional interest expense is
recognized for any unamortized discount as of the conversion date. The
debentures are included in the accompanying consolidated balance sheet at the
issuance price, plus any accrued interest and amortized discount.
Page 6 of 10
<PAGE> 7
6. CONTINGENCIES
The Company is involved in various lawsuits that have arisen from the normal
conduct of business and in connection with liquidating Criticare International
GmbH Marketing Services, a wholly owned subsidiary. These proceedings are
handled by outside counsel. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
7. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." the Company is currently in the process of evaluating
the accounting and disclosure effects of the Statement, which is required to be
adopted in the second quarter of fiscal 1998.
Page 7 of 10
<PAGE> 8
CRITICARE SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 1997 increased 17% to $7.5
million from $6.5 million for the same period in fiscal 1997. Domestic
Hospital sales increased approximately $735,000 due to increased MPT/VitalView
telemetry systems and initial OEM shipments of the 506DX combination (oximetry,
noninvasive blood pressure and temperature) monitor produced for Alaris
Medical. Alternate Care sales increased approximately $272,000 due to
increased Model 507E vital signs monitor and 506DX combination monitor
shipments to non-hospital alternate care sites. International sales were
approximately the same as prior year levels.
The gross profit percentage of 46.5% for the three months ended September 30,
1997 was below the 48.2% gross profit percentage reported in the same period of
the previous fiscal year. Significant increases in gross profit recorded on
MPT/VitalView systems sales were offset by lower gross profit recorded on
International sales and increased unabsorbed manufacturing overhead related to
production start-up costs incurred on both the MPT/VitalView systems and the
506DX combination monitor.
Operating expenses increased approximately $25,000, but declined as a
percentage of sales to 38.7% from the previous year's level of 44.7%.
Marketing expenses increased approximately $20,000 when compared to the same
period in fiscal 1997 due to increased sales commissions related to the higher
sales volume offset in part by reduced expenses resulting from the
restructuring of international sales support from Germany to the corporate
office. Research, development and engineering expense declined approximately
$45,000 related to reduced outside contract and project expense.
Administrative expenses increased approximately $51,000 related to increased
payroll, insurance and legal expenses incurred in the three months ended
September 30, 1997 when compared to the same period in fiscal 1997.
Income from operations increased approximately $356,000 or 155% for the three
months ended September 30, 1997 when compared to the same period in fiscal 1997
due to the increased sales volume and control of operating expenses.
Non-operating expenses were approximately $414,000 and $178,000 for the three
months ended September 30, 1997 and 1996, respectively. The increase was due
to the interest and purchase discount costs associated with the conversion of
$1,150,000 of the $2,500,000 total convertible debentures issued in February
1997, offset in part by lower
Page 8 of 10
<PAGE> 9
line of credit borrowing interest expense and higher interest income from short
term cash investments.
Net income of $172,462 for the three months ended September 30, 1997 compares
to net income of $51,403 for the three months ended September 30, 1996.
LIQUIDITY
During the three months ended September 30, 1997, the Company recorded a
positive cash flow of approximately $236,000 from operations with a cash
balance of approximately $2,517,000 and no short term borrowings. The Company
believes its marketing and research and development activities and other
capital and liquidity requirements will be satisfied by cash generated from
operations and utilization of the proceeds from the convertible debenture issue
of February 1997. In addition, the Company continues to engage in discussions
to establish a bank line of credit.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements. Such statements refer
to the Company's opinion, belief or expectation. Forward looking statements
are 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 uncertainties
inherent in litigation, the timing of new product introductions, delays in
customer delivery requirements, and general economic conditions in the
Company's market segments.
Page 9 of 10
<PAGE> 10
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 September 30, 1997.
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 11/13/97 BY
- --------------- ----------------------------------
Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 10 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,517,090
<SECURITIES> 0
<RECEIVABLES> 7,758,158
<ALLOWANCES> 488,000
<INVENTORY> 7,588,981
<CURRENT-ASSETS> 18,524,849
<PP&E> 10,942,606
<DEPRECIATION> 3,923,710
<TOTAL-ASSETS> 25,720,654
<CURRENT-LIABILITIES> 5,857,291
<BONDS> 0
0
0
<COMMON> 323,931
<OTHER-SE> 15,700,767
<TOTAL-LIABILITY-AND-EQUITY> 25,720,654
<SALES> 7,544,005
<TOTAL-REVENUES> 7,544,005
<CGS> 4,038,401
<TOTAL-COSTS> 6,957,926
<OTHER-EXPENSES> 413,697
<LOSS-PROVISION> 21,000
<INTEREST-EXPENSE> 438,916
<INCOME-PRETAX> 172,462
<INCOME-TAX> 0
<INCOME-CONTINUING> 172,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,462
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
