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 December 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 February 12, 1999: Common Stock, $.04 par value, 8,701,151 shares.
2
CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1998
(UNAUDITED)
December 31, June 30,
ASSETS 1998 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,532,062 $ 2,729,998
Accounts receivable 7,151,758 6,921,713
Other receivables 118,551 322,976
Inventory 8,957,330 7,682,471
Prepaid expenses 183,187 338,297
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Total current assets 18,942,888 17,995,455
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PROPERTY, PLANT AND EQUIPMENT - NET 6,302,734 6,612,371
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INVESTMENTS -- --
- ---------------------------------------------------------------------------
LICENSE RIGHTS AND PATENTS 109,993 118,993
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TOTAL $ 25,355,615 $ 24,726,819
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,618,468 $ 2,305,721
Accrued liabilities:
Compensation and commissions 955,508 819,886
Product warranties 375,000 328,000
Other 894,341 715,603
Current maturities of long-term debt 115,194 109,354
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Total current liabilities 5,958,511 4,278,564
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Other Obligations 478,000 --
LONG-TERM DEBT, less current maturities 3,106,050 3,165,258
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STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 334,046 334,046
Common stock repurchased (52,090 shares) (103,549) --
Additional paid-in capital 17,964,250 17,964,250
Retained earnings (accumulated deficit) (2,381,693) (1,015,299)
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Total stockholders' equity 15,813,054 17,282,997
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TOTAL $ 25,355,615 $ 24,726,819
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See condensed notes to consolidated financial statements.
Page 2 of 12
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CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
NET SALES $ 14,014,480 $ 14,681,507
COST OF GOODS SOLD 7,192,945 7,903,128
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GROSS PROFIT 6,821,535 6,778,379
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OPERATING EXPENSES:
Marketing 4,479,724 3,877,272
Research, development and engineering 1,488,262 1,052,387
Administrative 1,220,137 840,549
Severance pay 728,000 -
- -----------------------------------------------------------------------------------------------------
Total 7,916,123 5,770,208
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(LOSS) INCOME FROM OPERATIONS (1,094,588) 1,008,171
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OTHER INCOME (EXPENSE):
Interest expense (158,251) (638,756)
Interest income 36,445 54,644
Equity in loss of investments (150,000) (120,000)
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Total (271,806) (704,112)
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(LOSS) INCOME BEFORE INCOME TAXES (1,366,394) 304,059
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INCOME TAX PROVISION - -
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NET (LOSS) INCOME $ (1,366,394) $ 304,059
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(LOSS) INCOME PER COMMON SHARE:
Basic $ (0.16) $ 0.04
Diluted (0.16) 0.04
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,701,151 8,107,197
Diluted 8,701,151 8,608,032
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See condensed notes to consolidated financial statements.
Page 3 of 12
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CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
NET SALES $ 7,290,056 $ 7,137,503
COST OF GOODS SOLD 3,727,537 3,864,726
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GROSS PROFIT 3,562,519 3,272,777
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OPERATING EXPENSES:
Marketing 2,261,542 1,930,193
Research, development and engineering 740,702 530,995
Administrative 712,669 389,444
Severance pay 728,000 -
- ---------------------------------------------------------------------------------------------------
Total 4,442,913 2,850,684
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(LOSS) INCOME FROM OPERATIONS (880,394) 422,093
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OTHER INCOME (EXPENSE):
Interest expense (79,877) (199,839)
Interest income 13,701 29,344
Equity in loss of investments - (120,000)
Total (66,176) (290,495)
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(LOSS) INCOME BEFORE INCOME TAXES (946,570) 131,598
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INCOME TAX PROVISION - -
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NET (LOSS) INCOME $ (946,570) $ 131,598
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(LOSS) INCOME PER COMMON SHARE:
Basic $ (0.11) $ (0.04)
Diluted (0.11) (0.04)
- ---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,701,151 8,203,699
Diluted 8,701,151 8,704,534
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See condensed notes to consolidated financial statements.
Page 4 of 12
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CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
OPERATING ACTIVITIES:
Net (loss) income $(1,366,394) $ 304,059
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 458,040 464,725
Amortization 9,000 9,000
Equity in loss of investments 150,000 120,000
Interest and discount accrued on convertible debentures - 476,476
Changes in assets and liabilities:
Accounts receivable (230,045) (828,938)
Other receivables 204,425 (141,595)
Inventories (1,042,395) 103,875
Prepaid expenses 155,110 (10,969)
Accounts payable 1,312,747 295,453)
Accrued liabilities 839,360 (120,931)
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Net cash provided by operating activities 489,848 80,249
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment (380,867) (245,986)
Investment in Immtech International, Inc. (150,000) (120,000)
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Net cash used in investing activities (530,867) (365,986)
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FINANCING ACTIVITIES:
Principal payments on long-term debt (53,368) (96,509)
Repurchase of Treasury stock (103,549) -
Proceeds from the sale of common stock - 120,000
Proceeds from the exercise of stock options - 193,710
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Net cash (used in) provided by financing activities (156,917) 217,201
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NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (197,936) (68,536)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,729,998 2,440,859
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,532,062 $ 2,372,323
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See condensed notes to consolidated financial statements.
Page 5 of 12
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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 filed 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 December 31, 1998 and June 30, 1998, respectively:
December 31, June 30,
1998 1998
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Component parts $3,914,295 $2,647,231
Work in process 1,425,336 1,409,187
Finished units 3,617,699 3,626,053
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Total inventories $8,957,330 $7,682,471
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Page 6 of 12
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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:
December 31, June 30,
1998 1998
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Land and building $ 4,525,000 $ 4,525,000
Machinery and equipment 2,018,979 1,796,120
Furniture and fixtures 793,919 712,428
Demonstration and loaner monitors 1,551,147 1,783,611
Production tooling 2,082,351 2,005,834
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Property, plant and equipment - cost 10,971,396 10,822,993
Less accumulated depreciation 4,668,662 4,210,622
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Property, plant and equipment - net $ 6,302,734 $ 6,612,371
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5. CONTINGENCIES
The Company is involved in a lawsuit that has arisen from the normal conduct of
business. This lawsuit is a result of a dispute between the Company and a former
distributor over the termination of an exclusive marketing agreement. This
proceeding is handled by outside counsel. In the opinion of management, the
ultimate resolution of this matter will not have a material effect on the
consolidated financial statements.
Page 7 of 12
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six Months Ended December 31, 1998 and 1997
RESULTS OF OPERATIONS
Net sales for the six months ended December 31, 1998 decreased 4.5% to
$14,000,000 from $14,700,000 for the same period in fiscal 1997. International
sales decreased due to the unstable economic climate in the Pacific Rim and
continued competitive pressures in other parts of the world. We expect
International sales to improve as new products are released in the third quarter
of fiscal 1999. Monitoring sales decreased slightly as the demand for our
products in hospitals decreased. OEM sales increased significantly from the
previous year, and System (MPT) sales also increased during the six months ended
December 31, 1998 when compared to the same period in fiscal 1998.
The gross profit percentage of 48.7% for the six months ended December 31, 1998
was an improvement from the 46.2% gross profit percentage reported in the same
period of the previous fiscal year. Improvements in gross profit relate to
product mix and an increase in domestic sales, which generally have higher gross
margins than international sales, as a percentage of total sales.
Operating expenses increased approximately $2,100,000. Marketing expenses
increased approximately $602,000 when compared to the same period in fiscal 1998
due primarily to increased trade show and sales promotion expenses as the
Company continues to promote MPT and the new products as they are released.
Research, development and engineering expenses increased approximately $436,000
related to additional payroll, outside contract and project expense which are
all associated with the new products under development. Administrative expenses
increased approximately $380,000 in the six months ended December 31, 1998 when
compared to the same period in fiscal 1998. This increase is due primarily to
increased litigation expense related to a lawsuit that the Company is involved.
The Company also recorded a charge of $728,000 during the six months ended
December 31, 1998. This charge relates to severance pay and other benefits
payable to the two co-founders of the Company. Both of these individuals
resigned from their positions with the Company in November 1998. The
severance accrual includes a portion of their respective salary and fringe
benefits for a period, which approximates three years.
Income from operations decreased approximately $2,103,000 for the six months
ended December 31, 1998 when compared to the same period in fiscal 1998 due to
the decreased sales volume and increased operating expenses.
Non-operating expenses were approximately $272,000 and $704,000 for the six
months ended December 31, 1998 and 1997, respectively. The decrease in 1998 was
due to the absence of interest and conversion discount costs associated with the
conversion of $1,650,000 of convertible debentures to common stock during the
six months ended December 31, 1997.
Page 8 of 12
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended December 31, 1998 and 1997
RESULTS OF OPERATIONS
Net sales for the three months ended December 31, 1998 increased 2.1% to
$7,300,000 from $7,100,000 for the same period in fiscal 1997. OEM and System
(MPT) sales increased due to increased promotional emphasis in these
areas. International sales decreased due to the economic problems in the Pacific
Rim.
The gross profit percentage of 48.9% for the three months ended December 31,
1998 was significantly better than the 45.9% gross profit percentage reported in
the same period of the previous fiscal year. Improvements in gross profit relate
to product mix and an increase in domestic sales, which generally have higher
margins than international sales, as a percentage of total sales.
Operating expenses increased approximately $1,600,000. Marketing expenses
increased approximately $331,000 when compared to the same period in fiscal 1998
due primarily to increased trade show and sales promotion expenses as the
Company continues to promote MPT and the new products as they are released.
Research, development and engineering expenses increased approximately $210,000
related to additional payroll, outside contract and project expense which are
all associated with the new products under development. Administrative expenses
increased approximately $323,000 in the three months ended December 31, 1998
when compared to the same period in fiscal 1998. This increase is due primarily
to increased investor relation expenses and litigation expenses related to a
lawsuit that the Company is involved. The Company also recorded a charge of
$728,000 during the three months ended December 31, 1998. This charge relates
to severance pay and other benefits payable to the two co-founders of the
Company. Both of these individuals resigned from their positions with the
Company in November 1998. The severance accrual includes a portion of their
respective salary and fringe benefits for a period, which approximates three
years.
Income from operations decreased approximately $1,302,000 for the three months
ended December 31, 1998 when compared to the same period in fiscal 1998 due to
increased spending related to new products and the severance accrual recorded.
Non-operating expenses were approximately $66,000 and $290,000 for the three
months ended December 31, 1998 and 1997, respectively. The decrease in 1998 was
due to the absence of interest and conversion discount costs associated with the
conversion of $500,000 of convertible debentures to common stock in the period
ended December 31, 1997.
Page 9 of 12
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
LIQUIDITY
During the six months ended December 31, 1998, the Company recorded a positive
cash flow from operations of approximately $257,000 and had a cash balance of
approximately $2,500,000 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
periodic utilization of a line of credit currently in place. Approximately
$3,000,000 was available under this line of credit at December 31, 1998.
Availability is determined by the amount of "eligible receivables" recorded by
the Company, as defined in the loan agreement. The maximum availability under
the line of credit is $4,000,000.
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 majority of the Company's internal Year 2000 issues have been or will be
corrected through system upgrades for other business purposes or normal
maintenance contracts.
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 has
circulated surveys to its key third party vendors to assess the Year 2000
compliance status of the operating systems of such vendors and the potential
impact on the Company of non-compliance. The Company plans to assess the surveys
received from suppliers and other third parties during fiscal 1999 and to
evaluate the compliance status of such third parties. The Company believes that
its reasonably likely worse case scenario relating to the Year 2000
Page 10 of 12
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CRITICARE SYSTEMS, INC.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
issue would involve a significant disruption or slowdown in the receipt of
products from one or more key suppliers. The Company believes that the risk of
such a disruption is reduced through the Company's use of multiple sources of
supply for key products. 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 pro duct introductions, uncertainties in the
Company's assessment of the Year 2000 issue, including the timing of the
completion of the Company's compliance efforts and the consequences of
non-compliance by the Company or third parties, the adequacy of the Company's
capital resources, delays in customers delivery requirements and general
economic conditions in the Company's market segments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The Company does not use financial instruments for trading purposes and holds no
derivative financial instruments which would expose the Company to significant
market risk. The Company did not have any outstanding borrowings during the
first six months of fiscal 1999. Accordingly, the Company does not currently
have any material exposure to market risk for changes in interest rates. The
Company is subject to foreign currency exchange rate exposure due to its
international sales. The Company does not hedge against any foreign currency
risks.
Page 11 of 12
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Effective November 3, 1998, the Company issued 350,000 shares of
Common Stock to TeleMed Technologies International, Inc. in exchange for certain
patent and other intellectual property rights. These shares were issued in a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act.
(d) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on November
12, 1998. 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 Milton Datsopoulos as a director for a term
ending at the 2001 Annual Meeting of Stockholders.
For Withheld
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6,684,635 662,340
The Company's other directors consist of Gerhard J. Von der Ruhr and
N.C. Joseph Lai (whose terms end at the 1999 annual meeting of stockholders) and
Karsten Houm (whose term ends at the 2000 annual meeting of stockholders).
Proposal 2: Amendment of Certificate of Incorporation to increase the
total number of authorized shares of Common Stock from 10,000,000 to 15,000,000.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
6,080,738 1,219,987 46,250 ----
Proposal 3: Ratification of appointment of Deloitte & Touche LLP as
auditors of the Company for its fiscal year ending June 30, 1999.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
6,250,963 509,840 586,172 ----
Item 6. Exhibits and Reports on Form 8-K.
(a) 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 Specimen Convertible Debenture (incorporated by reference to the
Registration Statement filed on Form S-3, Registration No. 333-25153).
10.1 Assignment of Rights to Patent Applications, Patents and/or
Inventions, effective November 3, 1998, between the Company and TeleMed
Technologies International, Inc.
10.2 Registration Agreement, dated as of November 3, 1998, between
the Company and TeleMed Technologies International, Inc.
27 Financial Data Schedule.
(b) The registrant filed no reports on Form 8-K during the quarter ended
December 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 02/12/99 BY /s/ Joseph M. Siekierski
- ------------------------ -------------------------
Joseph M. Siekierski
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
Page 12 of 12