<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 March 31, 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.
-------------------------------------------------------------
(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
- --------------------------------------------------------------------------
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 May 2, 1997: Common Stock 7,567,039 shares.
Page 1 of 12
<PAGE> 2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1997 1996
------ ----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,129,627 $ 806,645
Accounts receivable 7,356,275 9,870,158
Other receivables 347,959 354,638
Inventory 7,802,512 7,550,858
Prepaid expenses 345,725 188,132
-------------------------------------------------------------------
Total current assets 16,982,098 18,770,431
-------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 7,269,217 7,892,646
-------------------------------------------------------------------
INVESTMENTS 300,000 300,000
-------------------------------------------------------------------
OTHER ASSETS:
Convertible debentures issue costs - net 183,334 0
License and patents - net 98,732 92,467
Goodwill - net 0 20,378
-------------------------------------------------------------------
Total other assets 282,066 112,845
-------------------------------------------------------------------
TOTAL $24,833,381 $27,075,922
-------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Borrowings under line of credit facility $ 0 $ 2,300,000
Accounts payable 2,377,794 3,609,188
Accrued liabilities:
Compensation and commissions 596,844 1,040,441
Income taxes -- --
Product warranties 386,092 300,000
Other 741,122 1,029,072
Current maturities of long-term debt 178,535 209,697
-------------------------------------------------------------------
Total current liabilities 4,280,387 8,488,398
-------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 3,299,760 4,669,975
-------------------------------------------------------------------
CONVERTIBLE DEBENTURES 2,611,470 0
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STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 300,465 285,131
Additional paid-in capital 13,234,402 11,995,118
Retained earnings 1,133,063 1,663,466
Cumulative translation adjustments (26,166) (26,166)
-------------------------------------------------------------------
Total Stockholders' equity 14,641,764 13,917,549
-------------------------------------------------------------------
TOTAL $24,833,381 $27,075,922
-------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 12
<PAGE> 3
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $18,540,327 $23,405,685
COST OF GOODS SOLD 9,911,814 12,018,780
------------------------------------------------------------------
GROSS PROFIT 8,628,513 11,386,905
------------------------------------------------------------------
OPERATING EXPENSES:
Marketing 6,112,063 7,884,941
Research, development and engineering 1,656,299 1,817,447
Administrative 1,399,092 1,455,563
------------------------------------------------------------------
Total Operating Expenses 9,167,454 11,157,951
------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (538,941) 228,954
------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (554,788) (313,548)
Interest income 17,380 41,511
Equity in loss of investments (24,000) (2,500,000)
------------------------------------------------------------------
Total (561,408) (2,772,037)
------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,100,349) (2,543,083)
INCOME TAX (BENEFIT) PROVISION 0 15,000
------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $(1,100,349) $(2,528,083)
------------------------------------------------------------------
EXTRAORDINARY GAIN DEBT CONVERSION 569,946 0
------------------------------------------------------------------
NET INCOME (LOSS) (530,403) (2,528,083)
------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ (0.07) $ (0.37)
Fully diluted (0.07) (0.37)
------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 7,154,021 6,811,268
Fully diluted 7,154,021 6,811,268
------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 12
<PAGE> 4
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
NET SALES $5,480,970 $7,711,343
COST OF GOODS SOLD 3,036,982 3,996,217
----------------------------------------------------------------
GROSS PROFIT 2,443,988 3,715,126
----------------------------------------------------------------
OPERATING EXPENSES:
Marketing 1,996,883 2,820,973
Research, development and engineering 539,040 632,977
Administrative 525,663 500,552
----------------------------------------------------------------
Total Operating Expenses 3,061,586 3,954,502
----------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (617,598) (239,376)
----------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (253,932) (116,693)
Interest income 16,906 3,387
Equity in loss of investments -- --
----------------------------------------------------------------
Total (237,026) (113,306)
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INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (854,624) (352,682)
INCOME TAX (BENEFIT) PROVISION 0 (135,000)
----------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ (854,624) (217,682)
----------------------------------------------------------------
EXTRAORDINARY GAIN DEBT CONVERSION 569,946 0
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NET INCOME (LOSS) (284,678) (217,682)
----------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ (0.04) $ (0.03)
Fully diluted (0.04) (0.03)
----------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 7,154,021 6,811,268
Fully diluted 7,154,021 6,811,268
----------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Page 4 of 12
<PAGE> 5
CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (530,403) $(2,528,083)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 461,576 481,549
Equity in loss of investments 24,000 2,500,000
Convertible debenture discount amortization 128,136 0
Extraordinary gain on debt extinguishment (569,946) 0
Changes in assets and liabilities:
Accounts receivable 2,513,883 (938,927)
Other receivables 6,679 (137,460)
Inventories 57,614 (1,734,436)
Prepaid expenses (157,593) (172,272)
Accounts payable (1,231,394) 1,854,517
Accrued liabilities (535,510) (679,583)
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Net cash (used in) provided by operating activities 167,042 (1,354,695)
------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (133,302) (1,262,542)
Advances to Immtech International (24,000) 0
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Net cash used in investing activities (157,302) (1,262,542)
------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (161,376) (147,299)
Utilization (payments) on line of credit facility (2,300,000) 500,000
Proceeds from the exercise of stock options 474,618 176,950
Proceeds from issue of convertible debentures 2,500,000 0
Convertible debenture issue costs (200,000) 0
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Net cash (used in) provided by financing activities 313,242 529,651
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 322,982 (2,087,586)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 806,645 2,398,278
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CASH AND CASH EQUIVALENTS, END OF
PERIOD 1,129,627 310,692
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</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 March 31, 1997 and June 30, 1996, respectively:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------------------------------------------
<S> <C> <C>
Component parts $2,838,439 $2,879,286
Work in process 1,341,708 1,561,481
Finished units 3,622,365 3,110,091
--------------------------------------------
Total inventories $7,802,512 $7,550,858
--------------------------------------------
</TABLE>
Page 6 of 12
<PAGE> 7
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------------------------------------------------------------
<S> <C> <C>
Land and building $ 4,525,000 $ 4,525,000
Machinery and equipment 1,706,755 1,671,309
Furniture and fixtures 893,934 882,682
Demonstration and loaner monitors 1,745,515 2,054,783
Production tooling 2,123,671 2,049,632
--------------------------------------------------------------
Property, plant and equipment-cost 10,994,875 11,183,406
Less accumulated depreciation 3,725,658 3,290,760
--------------------------------------------------------------
Property, plant and equipment-net $ 7,269,217 $ 7,892,646
--------------------------------------------------------------
</TABLE>
5. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
-----------------------------------------------------------
<S> <C> <C>
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.
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
Page 7 of 12
<PAGE> 8
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.
On March 27, 1997, the Company issued 200,000 shares of restricted common stock
in full payment to the holder of a $1,240,000 note plus accrued interest of
$109,946 related to the 1995 Immtech stock purchase. The Company recognized an
extraordinary gain of $569,946 on the transaction.
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.
9. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SPAS 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 8 of 12
<PAGE> 9
CRITICARE SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
RESULTS OF OPERATIONS
Net sales for the nine months ended March 31, 1997 decreased 21% to $18.5
million from $23.4 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 slight increase due to higher
accessory shipments and International shipments of oximeters and anesthetic
agent monitors declined from previous fiscal year levels.
The gross profit percentage decreased from 48.7% for the nine months ended
March 31, 1996 to 46.5% for the nine months ended March 31, 1997 due primarily
to increased manufacturing expenses related to new product start-up costs and
the effect of the lower sales volume on fixed manufacturing expenses.
Operating expenses declined approximately $1,990,000, or 18%, for the nine
months ended March 31, 1997 when compared with the same period in the previous
fiscal year. Marketing expenses decreased approximately $1,773,000, or 22%,
when compared to the same period in fiscal 1996 due to lower sales commission,
trade show and advertising expenses. Research development and engineering
expenses declined approximately $161,000 although product development has been
increased on both the MPT/VitalView Telemetry System and the combination
digital oximetry, noninvasive blood pressure and temperature monitor being
developed for OEM hospital distribution with IVAC Medical Systems.
Administrative expenses declined approximately $56,000 due primarily to lower
payroll and insurance expenses incurred in the nine months ended March 31, 1997
when compared to the same period in the previous fiscal year.
Non-operating expenses were approximately $561,000 for the nine months ended
March 31, 1997 compared to approximately $2,772,000 for the same period in
fiscal 1996, which included a $2,500,000 charge related to the investment in
Immtech. For the nine months ended March 31, 1997, interest income declined
approximately $24,000 due to lower cash investments while interest expense
increased approximately $241,000 due to increased borrowing against the
Company's bank line of credit, increased interest expense related to the note
issued upon the investment in Immtech, and increased interest expense related
to the convertible debentures issued on February 3, 1997, when compared to the
same period in fiscal 1996.
Page 9 of 12
<PAGE> 10
The Company recorded an extraordinary gain of approximately $570,000 related to
the issuance of 200,000 shares of restricted common stock in full payment to
the holders of the $1,240,000 note plus accrued interest of approximately
$110,000 related to the 1995 Immtech stock purchase.
The net loss of approximately $530,000 for the nine months ended March 31, 1997
compares to a net loss of approximately $2,528,000 which included the
$2,500,000 Immtech investment charge for the same period ended March 31, 1996.
CRITICARE SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 1997 were $5.5 million compared
to $7.7 million for the same period in the previous fiscal year. Hospital
sales declined primarily due to lower anesthetic agent monitor, combination
vital signs monitor, and Maestro ECG Telemetry shipments; Alternate Care
shipments increased primarily due to increased combination vital signs monitor
shipments; and International shipments of oximeters and combination vital signs
monitors declined from the levels recorded in the comparable three month period
ended March 31, 1996.
The gross profit percentage decreased to 44.6% for the three months ended March
31, 1997 from 48.2% for the three months ended March 31, 1996 due primarily to
lower margins on International oximeter and vital signs monitor shipments and
increased manufacturing expense related to new product start-up costs.
Operating expenses decreased approximately $893,000 for the three months ended
March 31, 1997 when compared with the same period in the previous fiscal year.
Marketing expenses decreased approximately $824,000 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
$94,000 despite accelerated project activity related to the MPT/VitalView
Telemetry System and the combination digital oximetry, noninvasive blood
pressure and temperature monitor being developed for OEM hospital distribution
with IVAC Medical Systems. Administrative expenses increased approximately
$25,000 due to higher consulting fees incurred in the three months ended March
31, 1997 when compared to the same period in fiscal 1996.
Page 10 of 12
<PAGE> 11
Non-operating expenses were approximately $237,000 for the three months ended
March 31, 1997 compared to approximately $113,000 for the same period in fiscal
1996. For the three months ended March 31, 1997, interest income increased due
to increased cash investments resulting from the February 3, 1997 convertible
debenture issue while interest expense increased due to higher borrowing
against the Company's bank line of credit, increased interest expense related
to the note issued upon the investment in Immtech, and increased interest
expense related to the convertible debenture issue when compared to the same
period in fiscal 1996.
The Company recorded an extraordinary gain of approximately $570,000 related to
the conversion of the $1,240,000 note plus accrued interest of approximately
$110,000 for 200,000 shares of restricted common stock issued to the holders of
the note related to the 1995 Immtech stock purchase.
LIQUIDITY
During the nine months ended March 31, 1997, the Company was able to generate a
positive cash flow from operations of approximately $167,000 and reduce its
bank line of credit borrowings by $2,300,000. 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 proceeds of the 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
March 31, 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 5/13/97 BY Richard J. Osowski
----------------------
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 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 1,129,627 1,129,627
<SECURITIES> 0 0
<RECEIVABLES> 7,748,775 7,748,775
<ALLOWANCES> (392,500) (392,500)
<INVENTORY> 7,802,512 7,802,512
<CURRENT-ASSETS> 16,982,098 16,982,098
<PP&E> 10,994,875 10,994,875
<DEPRECIATION> (3,725,658) (3,725,658)
<TOTAL-ASSETS> 24,833,381 24,833,381
<CURRENT-LIABILITIES> (4,280,387) (4,280,387)
<BONDS> 0 0
0 0
0 0
<COMMON> (300,465) (300,465)
<OTHER-SE> (14,341,299) (14,341,299)
<TOTAL-LIABILITY-AND-EQUITY> (24,833,381) (24,833,381)
<SALES> 5,480,970 18,540,327
<TOTAL-REVENUES> 5,480,970 18,540,327
<CGS> 3,036,982 (9,911,814)
<TOTAL-COSTS> 6,098,568 (19,079,268)
<OTHER-EXPENSES> (237,026) (561,408)
<LOSS-PROVISION> (22,500) (97,500)
<INTEREST-EXPENSE> (253,932) (554,788)
<INCOME-PRETAX> (854,624) (1,100,349)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (854,624) (1,100,349)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 569,946 569,946
<CHANGES> 0 0
<NET-INCOME> (284,678) (530,403)
<EPS-PRIMARY> (.04) (.07)
<EPS-DILUTED> (.04) (.07)
</TABLE>
