CRITICARE SYSTEMS INC /DE/ - 10-Q Quarterly Report

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, 2003

_____ 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 of incorporation or organization)	(I.R.S. Employer Identification Number)

20925 Crossroads Circle, Suite 100, Waukesha, Wisconsin 53186

(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code (262) 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 ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No X

Number of shares outstanding of each class of the registrant's classes of common stock as of September 30, 2003: Class A Common Stock 11,075,269 shares.

CRITICARE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003 AND JUNE 30, 2003

(UNAUDITED)

ASSETS		September 30, 2003			June 30, 2003

CURRENT ASSETS:
Cash and cash equivalents	$	3,866,322		$	3,716,446
Accounts receivable, less allowance for doubtful accounts of $300,000		5,502,349			5,627,198
Other receivables		454,885			553,147
Inventories		6,277,910			6,347,208
Prepaid expenses		364,817			340,934

Total current assets		16,466,283			16,584,933

Property, plant and equipment – net		2,065,034			2,093,408

License rights and patents – net		82,236			83,986

TOTAL ASSETS	$	18,613,553		$	18,762,327

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,425,979		$	2,272,953
Accrued liabilities:
Compensation and commissions		870,381			850,034
Product warranties		353,729			312,000
Other		282,669			254,470

Total current liabilities		3,932,758			3,689,457

OTHER LONG-TERM OBLIGATIONS		34,654			38,662

TOTAL LIABILITIES		3,967,412			3,728,119

STOCKHOLDERS' EQUITY:
Preferred stock - $.04 par value, 500,000 shares authorized no shares issued or outstanding		---			---
Common stock - $.04 par value, 15,000,000 shares authorized, 11,204,024 shares issued, and 11,075,269 and 11,073,832 outstanding, respectively		448,161			448,161
Additional paid-in capital		23,361,230			23,360,244
Common stock held in treasury (128,755 and 130,192 shares, respectively)		(416,941	)		(419,618	)
Subscriptions receivable		(225,000	)		(225,000	)
Retained earnings (accumulated deficit)		(8,517,827	)		(8,126,097	)
Cumulative translation adjustment		(3,482	)		(3,482	)

Total stockholders' equity		14,646,141			15,034,208

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	18,613,553		$	18,762,327

See notes to consolidated financial statements.


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CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

		2003			2002

NET SALES	$	6,372,417		$	6,304,347

COST OF GOODS SOLD		3,798,010			3,907,000

GROSS PROFIT		2,574,407			2,397,347

OPERATING EXPENSES:
Sales and marketing		1,507,446			1,326,960
Research, development and engineering		600,593			628,940
Administrative		901,258			957,229

Total		3,009,297			2,913,129

LOSS FROM OPERATIONS		(434,890	)		(515,782	)

OTHER INCOME (EXPENSE):
Interest expense		—			(91,533	)
Interest income		9,739			15,865
Other income		33,421			299,799

Total		43,160			224,131

LOSS BEFORE INCOME TAXES		(391,730	)		(291,651	)

INCOME TAX PROVISION		—			—

NET LOSS	$	(391,730	)	$	(291,651	)

NET LOSS PER COMMON SHARE
Basic and diluted	$	(0.04	)	$	(0.03	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted		11,074,738			11,072,682

See notes to consolidated financial statements.


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CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

		2003			2002

OPERATING ACTIVITIES:
Net loss	$	(391,730	)	$	(291,651	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		143,178			228,655
Amortization		1,750			1,750
Provision for doubtful accounts		2,352			—
Provision for obsolete inventory		95,000			364,000
Gain on sale of Immtech stock		—			(241,746	)
Gain on sale of building		—			(41,208	)
Changes in assets and liabilities:
Accounts receivable		122,497			544,245
Other receivables		98,262			(84,914	)
Inventories		(43,842	)		(568,513	)
Prepaid expenses		(23,883	)		(2,135	)
Accounts payable		153,026			94,687
Accrued liabilities		86,267			117,731

Net cash provided by operating activities		242,877			120,901

INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net		(96,664	)		(306,073	)
Proceeds from sale of Immtech stock		—			241,746
Proceeds from sale of building		—			3,795,164

Net cash (used in) provided by investing activities		(96,664	)		3,730,837

FINANCING ACTIVITIES:
Retirement of long-term debt		—			(3,197,125	)
Repurchase of Company common stock		—			(121,359	)
Proceeds from issuance of common stock		3,663			9,986

Net cash provided by (used in) financing activities		3,663			(3,308,498	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			268

NET INCREASE IN CASH AND CASH EQUIVALENTS		149,876			543,508
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,716,446			3,523,070

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,866,322		$	4,066,578

See 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 filed Form 10-K. Certain amounts from the fiscal 2002 finan cial statements have been reclassified to conform to the 2003 presentation.

2. 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, 2003 and June 30, 2003, respectively:

	September 30, 2003		June 30, 2003

Component parts	$	2,981,099	$	2,762,803
Work in process		664,566		811,906
Finished units		4,127,245		4,172,499

Total inventories		7,772,910		7,747,208
Less: reserve for obsolescence		1,495,000		1,400,000

Net inventory	$	6,277,910	$	6,347,208

3. Investments

During fiscal 2003, the Company completely liquidated its position in its Immtech International, Inc. (“Immtech”) common stock. In the first quarter of fiscal 2003 ended September 30, 2002, the Company sold 50,000 shares and realized a gain of $241,746 that was included in other income in the accompanying consolidated statement of operations. The remaining 406,374 shares of Immtech stock after this sale were sold in the second and third quarters of fiscal 2003.


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4. Property, Plant and Equipment

Property, plant and equipment consist of the following:

		September 30, 2003		June 30, 2003

Machinery and equipment	$	2,308,061	$	2,264,697
Furniture and fixtures		919,408		919,077
Leasehold improvements		212,229		212,229
Demonstration and loaner monitors		1,253,148		1,346,459
Production tooling		3,670,314		3,617,345

Property, plant and equipment – cost		8,363,160		8,359,807
Less: accumulated depreciation		6,298,126		6,266,399

Property, plant and equipment - net	$	2,065,034	$	2,093,408

On August 30, 2002, the Company sold its building in Waukesha, Wisconsin and leased back approximately 62% of the building’s square footage. The building was sold for $4,000,000 and a gain of $41,208 was realized on the sale after the payment of commissions and fees and the funding of $105,396 in capitalized build out costs needed to split the building into two leasable spaces. The proceeds from the sale were used to retire the $3,182,160 of debt on the Company’s balance sheet at August 30, 2002 and increased the Company’s cash position by approximately $500,000.

5. Contingencies

The import and export rules applicable to all United States companies engaged in international business transactions contain compliance guidelines. Violations may result in civil or criminal penalties, or both, as well as the potential loss of export privileges.

On August 6, 2002, in part due to the new regulations imposed under the Sarbanes-Oxley Act, the Company initiated an internal review of its import and export procedures. On August 28, 2002, senior management of the Company became aware of previous events that may have violated United States import/export laws and regulations. Senior management of the Company immediately authorized an internal audit of these possible violations, focusing on the sale of medical equipment directly or indirectly into an embargoed country and possible marking issues.

The factual investigation pursuant to the internal audit is complete, no additional compliance issues arose, and no material marking issues were identified as a result of the investigation.

Subsequently, the Company has taken action to adopt and implement a written compliance program with respect to applicable import/export rules. The Company has also undertaken a voluntary disclosure with the relevant government agencies and has filed its completed internal audit report and all requested documents. Although there is no assurance, based upon the results of the completed internal audit and precedents, the Company believes a negotiated settlement of any violations will not have a material adverse effect on the Company. In addition, the Company does not believe that the audit result supports the denial of export privileges; however, any such penalty would have a material adverse effect on the Company's business. The Comp any further believes that the voluntary disclosure, along with other internal actions taken, will serve to mitigate any potential adverse consequences that otherwise might accrue.


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6. Guarantees

Criticare Integration, Inc., a wholly owned U.S. subsidiary of the Company, was incorporated on April 8, 2003 to supply medical equipment and supplies to medical facilities in countries in the Black Sea Economic Zone (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Romania, and the Ukraine). The Company had set up a standby letter of credit for $300,000 on behalf of a Romanian company it is working with in connection with this new venture. The standby letter of credit served as a guarantee for a $2,000,000 line of credit that had been extended by a large Austrian bank to the Romanian company to fund this project. The standby letter of credit was to expire on November 15, 2003. The line of credit was no longer deemed necessary to fund the project and was therefore cancelled prior to expiration. The related standby letter of credit from the Company guaranteeing the line of credit was also cancelled on October 2 0, 2003.

The Company also maintains a second standby letter of credit for $300,000 on behalf of the Romanian company that serves as a guarantee to fund borrowings by the Romanian company used to set up and market this project. This standby letter of credit was to expire on November 1, 2003, but was renewed through November 1, 2004 on October 16, 2003. This standby letter of credit would only be called if the cash flows from the project were not adequate to fund these costs and the Romanian company would not be able to retire the debt. The value of this remaining guarantee that was renewed was not material to the Company’s financial statements.

7. Stock Options

The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. If the Company had elected to recognize compensation cost for the options granted for the three months ended September 30, 2003 and 2002, consistent with the method prescribed by SFAS No. 123, net loss and net loss per share would have been changed to the pro forma amounts indicated below: