<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, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number -0-16061
CRITICARE SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1501563
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
20925 Crossroads Circle, Waukesha, Wisconsin 53186
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (414) 798-8282
--------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding of each class of the registrant's classes of
common stock as of November 11, 1998: Class A Common Stock 8,315,151 shares.
<PAGE> 2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1998 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,160,861 $ 2,729,998
Accounts receivable 7,153,664 6,921,713
Other receivables 205,581 322,976
Inventory 8,390,659 7,682,471
Prepaid expenses 418,421 338,297
-------------------------------------------------------------------
Total current assets 18,329,187 17,995,455
-------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,586,977 6,612,371
-------------------------------------------------------------------
LICENSE RIGHTS AND PATENTS - NET 114,492 118,993
-------------------------------------------------------------------
TOTAL $ 25,030,656 $24,726,819
-------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,002,933 $ 2,305,721
Accrued liabilities:
Compensation and commissions 866,809 819,886
Product warranties 407,283 328,000
Other 642,209 715,603
Current maturities of long-term debt 112,239 109,354
-------------------------------------------------------------------
Total current liabilities 5,031,473 4,278,564
-------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 3,136,009 3,165,258
---------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 334,046 334,046
Additional paid-in capital 17,964,250 17,964,250
Retained earnings (accumulated deficit) (1,435,122) (1,015,299)
---------------------------------------------------------------------
Total stockholders' equity 16,863,174 17,282,997
---------------------------------------------------------------------
TOTAL $ 25,030,656 $24,726,819
---------------------------------------------------------------------
</TABLE>
See condensed notes to consolidated financial statements.
Page 2 of 10
<PAGE> 3
CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
NET SALES $6,724,424 $7,544,005
COST OF GOODS SOLD 3,465,408 4,038,401
---------------------------------------------------------------
GROSS PROFIT 3,259,016 3,505,604
---------------------------------------------------------------
OPERATING EXPENSES:
Marketing 2,218,182 1,947,080
Research, development and engineering 747,560 521,392
Administrative 507,469 451,053
---------------------------------------------------------------
Total 3,473,211 2,919,525
---------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (214,195) 586,079
---------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (78,373) (438,916)
Interest income 22,745 25,299
Equity in the loss of investments (150,000) -
---------------------------------------------------------------
Total (205,628) (413,617)
---------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (419,823) 172,462
INCOME TAX PROVISION - -
---------------------------------------------------------------
NET INCOME (LOSS) (419,823) 172,462
---------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic $(.05) $.02
Diluted $(.05) $.02
---------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 8,715,151 8,010,694
Diluted 8,715,151 8,476,843
---------------------------------------------------------------
</TABLE>
See condensed notes to consolidated financial statements.
Page 3 of 10
<PAGE> 4
CRITICARE SYSTEMS, INC,
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ $ (419,823) $ 172,462
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 232,230 236,314
Equity in loss of investments 150,000 -
Changes in assets and liabilities:
Accounts receivable (231,951) (575,921)
Other receivables 117,395 (132,883)
Inventories (768,579) 141,610
Prepaid expenses (80,124) (21,262)
Accounts payable 697,212 (379,824)
Accrued liabilities 52,812 438,189
- -------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (250,828) 235,780
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (141,945) (233,089)
Advances to Immtech International, Inc. (150,000) -
- -------------------------------------------------------------------------------
Net cash used in investing activities (291,945) (233,089)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (26,364) (49,335)
Proceeds from the exercise of stock options 122,875
- -------------------------------------------------------------------------------
Net cash used in financing activities (26,364) 73,540
- -------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (569,137) 76,231
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,729,998 2,440,859
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,160,861 $2,517,090
- -------------------------------------------------------------------------------
</TABLE>
See condensed 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
three months 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, 1998 and June 30, 1998, respectively:
<TABLE>
September 30, June 30,
1998 1998
-----------------------------------------------
<S> <C> <C>
Component parts $3,255,568 $2,647,231
Work in process 1,599,747 1,409,187
Finished units 3,535,344 3,626,053
-----------------------------------------------
Total inventories $8,390,659 $7,682,471
-----------------------------------------------
</TABLE>
Page 5 of 10
<PAGE> 6
CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------------------------------------------------------------
<S> <C> <C>
Land and building $4,525,000 $ 4,525,000
Machinery and equipment 1,894,049 1,796,120
Furniture and fixtures 735,557 712,428
Demonstration and loaner monitors 1,844,002 1,783,611
Production tooling 2,026,721 2,005,834
----------------------------------------------------------------
Property, plant and equipment - cost 11,025,329 10,822,993
Less accumulated depreciation 4,438,352 4,210,622
----------------------------------------------------------------
Property, plant and equipment - net $6,586,977 $ 6,612,371
----------------------------------------------------------------
</TABLE>
Page 6 of 10
<PAGE> 7
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 1998 and 1997
Results of Operations
Net sales for the three months ended September 30, 1998 decreased 11% to $6.7
million from $7.5 million for the same period in fiscal 1998. The decrease in
sales can be attributed to the International division. This decrease is due
primarily to increased competition and the economic down turn occurring in the
Pacific Rim. We expect International sales to improve as new products are
introduced during the second and third quarters of fiscal 1999.
The gross profit percentage improved from 46% for the quarter ended September
30, 1997 to 48% for the quarter ended September 30, 1998. The improved gross
profit can be attributed to product mix.
Operating expenses increased approximately $554,000, or 19%, for the quarter
ended September 30, 1998 when compared with the same period in fiscal 1998.
Marketing expenses increased approximately $271,000 when compared to the same
period in fiscal 1998. This increase is due to expanded sales promotion
activities (attendance at more trade shows and increased advertising).
Research, development and engineering expenses for the quarter ended September
30, 1998 increased approximately $226,000 when compared to the same period in
fiscal 1998. This increase relates to expenses incurred for the development of
new products expected to be released during the second and third quarters of
fiscal 1999. The increase in administrative expenses relates to primarily to
legal fees incurred in conjunction with lawsuits that have arisen out of the
normal course of business.
Non-operating expenses were $205,629 and $413,617 for the three months ended
September 30, 1998 and 1997, respectively. The decrease in non-operating
expenses is due to a reduction in interest expense resulting from all
debentures being converted to stock during fiscal 1998. The $150,000 equity in
loss of investments relates to the purchase of certain intangible assets and an
additional 172,414 shares of Immtech International, Inc. common stock. Since
this investment is accounted for on the equity method, the purchase price was
expensed.
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, 1998 and 1997
The net loss of $419,823 for the three months ended September 30, 1998
represents a decrease from the net income of $172,462 recorded for the three
months ended September 30, 1997. This decreased profitability is due to
decreased sales combined with an increase in operating expenses resulting from
the increased marketing, research, development and engineering activities and
the increased consulting fees associated with the Company's current litigation.
Liquidity
At September 30, 1998, the Company had a cash balance of approximately
$2,200,000 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, if
needed, periodic utilization of the $4,000,000 line of credit currently in
place.
Year 2000 Preparations
The Company has developed a plan to address Company-wide Year 2000 readiness.
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because
the year 1900 could also be translated as two zeroes, systems which use two
digits could read the date incorrectly for a number of date sensitive
applications resulting in the potential calculation errors or the shutdown of
major systems. The Company is in the process of updating its internal computer
software, other information technology and other operating systems for the
purpose of Year 2000 compliance. The Company currently expects to complete its
Year 2000 compliance plan during fiscal 1999 and does not expect that its costs
to become Year 2000 Compliant will be material to its financial condition or
results of operations.
The Company's operation may also be adversely affected to the extent that
suppliers and other third parties are not Year 2000 compliant. The Company
intends to circulate surveys to its key third party vendors during fiscal 1999
to assess the Year 2000 compliance status of the operating systems of such
vendors and the potential impact on
Page 8 of 10
<PAGE> 9
CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended September 30, 1998 and 1997
the Company of non-compliance. However, a number of risks relating to the year
2000 issue may be out of the Company's control, including reliance on outside
links for essential services such as communications and power. There can be no
assurance that a failure of systems of third parties on which the Company's
systems and operations will rely to be Year 2000 compliant will not have a
material adverse effect on the Company's business, financial condition or
operating results.
Forward Looking Statements
This report contains certain forward-looking statements. Such statements refer
to the Company's opinion, belief or expectation. Forward-looking are subject
to certain risk 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 customers
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.
(b) The registrant filed no reports on Form 8-K during the quarter
ended September 30, 1998.
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 11/12/98 BY
------------------- -----------------------------------
Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 10 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,160,861
<SECURITIES> 0
<RECEIVABLES> 7,153,664
<ALLOWANCES> 0
<INVENTORY> 8,390,659
<CURRENT-ASSETS> 18,329,187
<PP&E> 11,025,329
<DEPRECIATION> 4,438,352
<TOTAL-ASSETS> 25,030,656
<CURRENT-LIABILITIES> 5,031,473
<BONDS> 0
0
0
<COMMON> 334,046
<OTHER-SE> 16,529,128
<TOTAL-LIABILITY-AND-EQUITY> 25,030,656
<SALES> 6,724,424
<TOTAL-REVENUES> 6,724,424
<CGS> 3,465,408
<TOTAL-COSTS> 6,938,619
<OTHER-EXPENSES> 205,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,373
<INCOME-PRETAX> (419,823)
<INCOME-TAX> 0
<INCOME-CONTINUING> (419,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (419,823)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
