1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number -0-16061
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
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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 May 6, 1998: Class A Common Stock 8,351,151 shares.
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CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997
(UNAUDITED)
March 31, June 30,
ASSETS 1998 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 2,313,387 $ 2,440,859
Accounts receivable 7,344,984 7,182,237
Other receivables 292,664 236,855
Inventory 7,024,240 7,730,591
Prepaid expenses 353,548 269,620
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Total current assets 17,328,823 17,860,162
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PROPERTY, PLANT AND EQUIPMENT - NET 6,891,445 7,044,729
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INVESTMENTS -- --
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OTHER ASSETS:
License and patents - net 137,462 124,882
Convertible debenture issuance costs -net -- 115,293
Goodwill - net -- --
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Total other assets 137,462 240,175
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TOTAL $ 24,357,730 $ 25,145,066
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,972,467 $ 3,112,112
Accrued liabilities:
Compensation and commissions 889,671 1,000,552
Product warranties 440,798 370,000
Other 624,940 1,176,891
Current maturities of long-term debt 107,478 147,442
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Total current liabilities 4,035,354 5,806,997
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LONG-TERM DEBT, less current maturities 3,192,937 3,274,611
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CONVERTIBLE DEBENTURES -- 1,836,323
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STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 334,086 311,859
Additional paid-in capital 17,041,115 14,469,406
Retained earnings (accumulated deficit) (192,966) (516,023)
Cumulative translation adjustments (52,796) (38,107)
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Total stockholders' equity 17,129,439 14,227,135
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TOTAL $ 24,357,730 $ 25,145,066
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See condensed notes to consolidated financial statements.
Page 2 of 13
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CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
NET SALES $ 20,960,466 $ 18,540,327
COST OF GOODS SOLD 11,263,024 9,911,814
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GROSS PROFIT 9,697,442 8,628,513
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OPERATING EXPENSES:
Marketing 5,651,509 6,112,063
Research, development and engineering 1,612,777 1,656,299
Administrative 1,354,717 1,399,092
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Total 8,619,003 9,167,454
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INCOME (LOSS) FROM OPERATIONS 1,078,439 (538,941)
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OTHER INCOME (EXPENSE):
Interest expense (718,373) (554,788)
Interest income 82,991 17,380
Equity in loss of investments (120,000) (24,000)
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Total (755,382) (561,408)
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INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 323,057 (1,100,349)
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INCOME TAX PROVISION -- --
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 323,057 (1,100,349)
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EXTRAORDINARY GAIN DEBT CONVERSION -- 569,946
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NET INCOME (LOSS) $ 323,057 $ (530,403)
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EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.04 $ (0.07)
Diluted 0.04 (0.07)
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,181,452 7,154,021
Diluted 8,744,045 7,154,021
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See condensed notes to consolidated financial statements.
Page 3 of 13
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CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
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NET SALES $ 6,278,961 $ 5,480,970
COST OF GOODS SOLD 3,359,896 3,036,982
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GROSS PROFIT 2,919,065 2,443,988
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OPERATING EXPENSES:
Marketing 1,774,236 1,996,883
Research, development and engineering 560,391 539,040
Administrative 514,168 525,663
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Total 2,848,795 3,061,586
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INCOME (LOSS) FROM OPERATIONS 70,270 (617,598)
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OTHER INCOME (EXPENSE):
Interest expense (79,617) (253,932)
Interest income 28,348 16,906
Equity in loss of investments -- --
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Total (51,269) (237,026)
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INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 19,001 (854,624)
INCOME TAX PROVISION -- --
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 19,001 (854,624)
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EXTRAORDINARY GAIN DEBT CONVERSION -- 569,946
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NET INCOME $ 19,001 $ (284,678)
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EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.00 $ (0.04)
Diluted 0.00 (0.04)
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 8,333,262 7,154,021
Diluted 8,895,855 7,154,021
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See condensed notes to consolidated financial statements.
Page 4 of 13
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CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
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OPERATING ACTIVITIES:
Net (loss) income $ 323,057 $ (530,403)
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 691,010 448,076
Amortization 13,500 13,500
Equity in loss of investments 120,000 24,000
Interest and discount accrued on convertible debentures 476,476 128,136
Extraordinary gain on debt extinguishment -- (569,946)
Changes in assets and liabilities:
Accounts receivable (162,747) 2,513,883
Other receivables (55,609) 6,679
Inventories 357,343 57,614
Prepaid expenses (83,928) (157,593)
Accounts payable (1,139,645) (1,231,394)
Accrued liabilities (592,034) (535,510)
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Net cash (used in) provided by operating activities (52,577) 167,042
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INVESTING ACTIVITIES-
Purchases of property, plant and equipment (214,798) (133,302)
Advances to Immtech International, Inc. (120,000) (24,000)
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Net cash used in investing activities (334,798) (157,302)
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FINANCING ACTIVITIES:
Payments under line of credit facility -- (2,300,000)
Principal payments on long-term debt (121,638) (161,376)
Proceeds from the sale of common stock 120,000 --
Proceeds from issue of convertible debentures -- 2,500,000
Convertible debenture issue costs -- (200,000)
Proceeds from the exercise of stock options 261,541 474,618
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Net cash provided by financing activities 259,903 313,242
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (127,472) 322,982
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,440,859 806,645
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,313,387 $ 1,129,627
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See condensed notes to consolidated financial statements.
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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 March 31, 1998 and June 30, 1997, respectively:
March 31, June 30,
1998 1997
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Component parts $2,937,969 $2,867,884
Work in process 1,362,373 1,843,018
Finished units 2,723,898 3,019,689
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Total inventories $7,024,240 $7,730,591
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Page 6 of 13
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CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, June 30,
1998 1997
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Land and building $ 4,525,000 $ 4,525,000
Machinery and equipment 1,766,173 1,674,488
Furniture and fixtures 658,964 617,451
Demonstration and loaner monitors 2,130,706 1,781,698
Production tooling 2,193,506 2,137,986
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Property, plant and equipment - cost 11,274,349 10,736,623
Less accumulated depreciation 4,382,904 3,691,894
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Property, plant and equipment - net $ 6,891,445 $ 7,044,729
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5. CONVERTIBLE DEBENTURES
In February 1997, the Company issued $2,500,000 of convertible debentures. The
debentures had a two year term maturity with a stated annual interest rate of
8%, payable in shares of common stock at the conversation 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 were 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. All
of the debentures were converted to common stock prior to December 31, 1997.
Proceeds from the issuance of the debentures were recorded as a liability at the
issuance date. The conversion discount was amortized and reported as additional
interest expense over the life of the debentures. Additional interest expense
was recognized for any unamortized discount as of the conversion date. The
debentures were included in the accompanying June 30, 1997, consolidated balance
sheet at the issuance price, plus any accrued interest and amortized discount.
Page 7 of 13
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CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
6. EXTRAORDINARY GAIN ON DEBT CONVERSION
In March 1997, the Company satisfied a $1,240,000 promissory note plus accrued
interest of approximately $110,000 for 200,000 shares of newly issued common
stock. The stock must be held one year before resale. In conjunction with this
transaction, the Company recorded an extraordinary gain on the extinguishment of
debt of $569,946 for the outstanding indebtedness under the promissory note in
excess of the estimated fair market value of the restricted stock.
7. NET INCOME (LOSS) PER SHARE
Effective for the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," which
established new standards for the calculation of net income per share effective
for interim and annual periods ending after December 15, 1997. Net income (loss)
information for the three months and nine months ended March 31, 1998 and 1997
have been restated in accordance with the new accounting pronouncement.
Reconciliations of the numerator and denominator of the basic and diluted per
share computations are summarized as follows:
NINE MONTHS ENDED MARCH 31: 1998 1997
Net Income Per Share - Basic:
Net income (loss) $ 323,057 $ (530,403)
Weighted average shares outstanding 8,181,452 7,154,021
Net income per share - basic $ .04 $ (.07)
Net Income Per Share - Diluted:
Net income (loss) $ 323,057 $ (530,403)
Weighted average shares outstanding 8,181,452 7,154,021
Effect of dilutive securities-
Stock options 562,593
Weighted average shares assuming dilution 8,744,045 7,154,021
Net income per share - diluted $ .04 $ (.07)
Page 8 of 13
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CRITICARE SYSTEMS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
THREE MONTHS ENDED MARCH 31: 1998 1997
Net Income Per Share - Basic:
Net income (loss) $ 19,001 $ (284,678)
Weighted average shares outstanding 8,333,262 7,154,021
Net income per share - basic $ .00 $ (.04)
Net Income Per Share - Diluted:
Net income (loss) $ 19,001 $ (297,128)
Weighted average shares outstanding 8,333,262 7,154,021
Effect of dilutive securities-
Stock options 562,593
Weighted average shares assuming dilution 8,895,855 7,154,021
Net income per share - diluted $ .00 $ (.04)
8. 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.
9. SUBSEQUENT EVENT
In April 1998, the Company agreed to and accepted the patent rights assigned to
them by Telemed Technologies International, Inc. ("TTI") with respect to certain
technology related to the transmission of clinical data. In consideration for
the patent, the Company has agreed to provide TTI with 400,000 shares of common
stock payable over a four year time period with additional consideration of up
to 112,000 shares contingent upon the achievement of certain sales levels. The
Company anticipates recording a non-cash charge of approximately $1,000,000 in
the fourth quarter of fiscal 1998 with respect to the value of the in-process
technology which will be expensed as research and development costs.
Page 9 of 13
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Nine Months Ended March 31, 1998 and 1997
RESULTS OF OPERATIONS
Net sales for the nine months ended March 31, 1998 increased 13% to $21.0
million from $18.5 million for the same period in fiscal 1997. Domestic Hospital
sales increased due to OEM shipments of the 506DX combination (oximetry,
noninvasive blood pressure and temperature) monitor produced for Alaris Medical.
Alternate Care sales increased due to increased Model 507E vital signs monitor
and 506DX combination monitor shipments to non-hospital alternate care sites.
International sales decreased slightly due to a decreased demand for pulse
oximeters.
The gross profit percentage of 46.3% for the nine months ended March 31, 1998
was consistent with the 46.5% gross profit percentage reported in the same
period of the previous fiscal year.
Operating expenses decreased approximately $548,000, and declined as a
percentage of sales to 41.1% from the previous year's level of 49.4%. Marketing
expenses decreased approximately $461,000 when compared to the same period in
fiscal 1997 due to decreased payroll in the Domestic Hospital division and
reduced expenses resulting from the restructuring of international sales support
from Germany to the corporate office. Research, development and engineering
expense declined approximately $44,000 related to reduced outside contract and
project expense. Administrative expenses decreased approximately $43,000 in the
nine months ended March 31, 1998 when compared to the same period in fiscal
1997.
Income from operations increased approximately $1,617,000 for the nine months
ended March 31, 1998 when compared to the same period in fiscal 1997 due to the
increased sales volume and the decrease of operating expenses.
Non-operating expenses were approximately $755,000 and $561,000 for the nine
months ended March 31, 1998 and 1997, respectively. The increase was due to the
interest and conversion discount costs associated with the conversion of
$1,650,000.
Net income of approximately $323,000 for the nine months ended March 31, 1998
represents an improvement from the net loss of approximately $530,000 recorded
in the same period of fiscal 1997. The improved net income results from
increased sales and decreased operating expense which were partially offset by
increased non-operating expenses.
Page 10 of 13
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended March 31, 1998 and 1997
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 1998 increased 15% to $6.3
million from $5.5 million for the same period in fiscal 1997. Domestic Hospital
sales increased due primarily to OEM shipments of the 506DX combination
(oximetry, noninvasive blood pressure and temperature) monitor produced for
Alaris Medical. Alternate Care sales increased due to increased Model 507E vital
signs monitor and 506DX combination monitor shipments to non-hospital alternate
care sites. International sales were consistent with the same period in the
prior year.
The gross profit percentage of 46.5% for the three months ended March 31, 1998
was an improvement from the 44.6% gross profit percentage reported in the same
period of the previous fiscal year. This improvement was due primarily to
product mix.
Operating expenses decreased approximately $213,000, and declined as a
percentage of sales to 45.3% from the previous year's level of 55.9%. Marketing
expenses decreased approximately $223,000 when compared to the same period in
fiscal 1997 due to decreased payroll in the Domestic Hospital division and by
reduced expenses resulting from the restructuring of international sales support
from Germany to the corporate office. Research, development and engineering and
Administrative expenses were relatively consistent with the same period in
fiscal 1997.
Income from operations increased approximately $688,000 for the three months
ended March 31, 1998 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 $51,000 and $237,000 for the three
months ended March 31, 1998 and 1997, respectively. The decrease was due to the
interest and conversion discount costs associated with the conversion of
convertible debentures to common stock during the three months ended March 31,
1997 and the settlement of the promissory note with common stock during March
1997.
Net income of approximately $19,000 for the three months ended March 31, 1998
represents an improvement from the net loss of approximately $285,000 recorded
in the same period of fiscal 1997. The improved net income results from
increased sales, decreased operating and non-operating expenses.
Page 11 of 13
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis
Results of Operations and Financial Condition
LIQUIDITY
At March 31, 1998, the Company had a cash balance of approximately $2,300,000
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.
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 12 of 13
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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, 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 05/14/98 BY
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Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 13 of 13