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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, 2004

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 1-31943

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, 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 March 31, 2004: Class A Common Stock 11,436,430 shares.


   

CRITICARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND JUNE 30, 2003

(UNAUDITED)

 
ASSETS
  
March 31,
2004
June 30,
2003
   
CURRENT ASSETS:
    
 
    
 
  
Cash and cash equivalents
  
$
3,985,309
  
$
3,716,446
  
Accounts receivable, less allowance for doubtful accounts
    
 
    
 
  
of $350,000 and $300,000, respectively
    
6,842,557
    
5,627,198
  
Other receivables
    
496,074
    
553,147
  
Inventories
   
6,268,064
    
6,347,208
  
Prepaid expenses
    
311,995
    
340,934
  
   
 
 
Total current assets
    
17,903,999
    
16,584,933
  
 
    
 
    
 
  
Property, plant and equipment – net
    
2,358,864
    
2,093,408
  
 
    
 
    
 
  
License rights and patents – net
   
78,735
    
83,986
  
   
 
 
TOTAL ASSETS
  
$
20,341,598
  
$
18,762,327
  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
    
 
    
 
  
 
    
 
    
 
  
CURRENT LIABILITIES:
    
 
    
 
  
Accounts payable
  
$
2,968,682
  
$
2,272,953
  
Accrued liabilities:
    
 
    
 
  
Compensation and commissions
    
854,175
    
850,034
  
Product warranties
   
444,000
    
312,000
  
Other
   
246,283
    
254,470
  
   
 
 
Total current liabilities
    
4,513,140
    
3,689,457
  
 
    
 
    
 
  
LONG-TERM LIABILITIES:
    
 
    
 
  
Obligations under capital lease
  
 
333,840
    
—
  
Other long-term obligations
   
25,263
    
38,662
  
   
 
 
Total long-term liabilities
    
359,103
    
38,662
  
 
    
 
    
 
  
TOTAL LIABILITIES
    
4,872,243
    
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,
   
 
    
 
  
11,562,749 and 11,204,024 shares issued, and
    
 
    
 
  
11,436,430 and 11,073,832 outstanding, respectively
    
462,510
    
448,161
  
Additional paid-in capital
    
23,940,739
    
23,360,244
  
Common stock held in treasury (126,319 and 130,192 shares, respectively)
    
(412,403
)
  
(419,618
)
Subscriptions receivable
    
—
    
(225,000
)
Retained earnings (accumulated deficit)
    
(8,518,009
)
  
(8,126,097
)
Cumulative translation adjustment
    
(3,482
)
  
(3,482
)
   
 
 
Total stockholders' equity
    
15,469,355
    
15,034,208
 
   
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
20,341,598
  
$
18,762,327
  
   
 
 

See notes to consolidated financial statements.

  2  

CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003

(UNAUDITED)

 
  
2004
2003
   
NET SALES
  
$
21,923,864
  
$
21,857,740
  
 
    
 
    
 
  
COST OF GOODS SOLD
    
12,855,828
    
13,041,237
  
   
 
 
GROSS PROFIT
    
9,068,036
    
8,816,503
  
 
    
 
    
 
  
OPERATING EXPENSES:
    
 
    
 
  
Sales and marketing
   
5,316,293
    
4,875,229
  
Research, development and engineering
    
1,810,732
    
2,078,572
  
Administrative
    
2,484,791
    
2,977,022
  
   
 
 
Total
    
9,611,816
    
9,930,823
  
 
    
 
    
 
  
LOSS FROM OPERATIONS
    
(543,780
)
  
(1,114,320
)
 
    
 
    
 
  
OTHER INCOME (EXPENSE):
    
 
    
 
  
Interest expense
    
—
    
(91,533
)
Interest income
    
29,496
    
40,544
  
Other
    
122,371
   
1,513,513
  
   
 
 
Total
    
151,867
    
1,462,524
  
 
    
 
    
 
  
(LOSS) INCOME BEFORE INCOME TAXES
   
(391,913
)
  
348,204
  
 
    
 
    
 
  
INCOME TAX PROVISION
   
—
    
—
  
   
 
 
 
    
 
    
 
  
NET (LOSS) INCOME
 
$
(391,913
)
$
348,204
  
   
 
 
 
    
 
    
 
  
NET (LOSS) INCOME PER COMMON SHARE:
    
 
    
 
  
Basic
  
$
(0.04
)
$
0.03
  
Diluted
  
$
(0.04
)
$
0.03
  
 
    
 
    
 
  
WEIGHTED AVERAGE NUMBER OF COMMON
    
 
    
 
  
SHARES OUTSTANDING:
    
 
    
 
  
Basic
    
11,173,768
    
11,071,267
  
Diluted
    
11,173,768
    
11,423,100
  

See notes to consolidated financial statements.

  3  

CRITICARE SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
                                                                                       
(UNAUDITED)

 
  
2004
2003
   
NET SALES
  
$
6,571,171
  
$
6,503,787
  
 
    
 
    
 
  
COST OF GOODS SOLD
    
3,762,149
    
4,022,771
  
   
 
 
GROSS PROFIT
    
2,809,022
    
2,481,016
  
 
    
 
    
 
  
OPERATING EXPENSES:
    
 
    
 
  
Sales and marketing
   
1,944,077
    
1,533,931
  
Research, development and engineering
    
586,419
    
692,917
  
Administrative
    
759,740
    
888,261
  
   
 
 
Total
    
3,290,236
    
3,115,109
  
 
    
 
    
 
  
LOSS FROM OPERATIONS
    
(481,214
)
  
(634,093
)
 
    
 
    
 
  
OTHER INCOME (EXPENSE):
    
 
    
 
  
Interest expense
    
—
    
—
  
Interest income
    
8,748
    
12,016
  
Other
    
59,859
   
1,081,761
  
   
 
 
Total
    
68,607
    
1,093,777
  
 
    
 
    
 
  
(LOSS) INCOME BEFORE INCOME TAXES
   
(412,607
)
  
459,684
  
 
    
 
    
 
  
INCOME TAX PROVISION
   
—
    
—
  
   
 
 
NET (LOSS) INCOME
  
$
(412,607
)
$
459,684
  
   
 
 
NET (LOSS) INCOME PER COMMON SHARE:
    
 
    
 
  
Basic
  
$
(0.04
)
$
0.04
  
Diluted
  
$
(0.04
)
$
0.04
  
 
    
 
    
 
  
WEIGHTED AVERAGE NUMBER OF COMMON
    
 
    
 
  
SHARES OUTSTANDING:
    
 
    
 
  
Basic
    
11,326,283
    
11,071,273
  
Diluted
    
11,326,283
   
11,370,087
  

See notes to consolidated financial statements.

  4  

CRITICARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003

(UNAUDITED)

 
  
2004
2003
   
OPERATING ACTIVITIES:
    
 
    
 
  
Net (loss) income
 
$
(391,913
)
$
348,204
  
Adjustments to reconcile net (loss) income to net cash
    
 
    
 
  
provided by operating activities:
    
 
    
 
  
Depreciation
    
442,910
    
713,839
  
Amortization
    
5,251
    
5,251
  
Provision for doubtful accounts
    
80,602
    
—
  
Provision for obsolete inventory
    
429,073
    
184,225
  
Gain on sale of Immtech stock
    
—
    
(1,290,252
)
Gain on sale of building
    
—
    
(41,208
)
Changes in assets and liabilities:
    
 
    
 
  
Accounts receivable
    
(1,295,961
)
  
57,132
  
Other receivables
    
57,073
    
211,149
  
Inventories
    
(400,094
)
  
(473,197
)
Prepaid expenses
    
28,939
    
120,979
  
Accounts payable
    
695,729
    
822,633
  
Accrued liabilities
    
114,555
    
(127,827
)
   
 
 
Net cash (used in) provided by operating activities
    
(233,836
)
  
530,928
  
 
    
 
    
 
  
INVESTING ACTIVITIES:
    
 
    
 
  
Purchases of property, plant and equipment, net
   
(324,360
)
  
(674,757
)
Proceeds from sale of Immtech stock
    
—
    
1,290,252
  
Proceeds from sale of building
    
—
    
3,795,164
  
   
 
 
Net cash (used in) provided by investing activities
    
(324,360
)
  
4,410,659
  
 
    
 
    
 
  
FINANCING ACTIVITIES:
    
 
    
 
  
Retirement of long-term debt
    
—
    
(3,197,125
)
Repurchase of Company common stock
   
—
    
(121,359
)
Proceeds from issuance of common stock
    
827,059
    
17,368
  
   
 
 
Net cash provided by (used in) financing activities
    
827,059
    
(3,301,116
)
 
    
 
    
 
  
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
—
    
268
  
 
    
 
    
 
  
NET INCREASE IN CASH AND CASH EQUIVALENTS
    
268,863
    
1,640,739
  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
3,716,446
    
3,523,070
  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
3,985,309
  
$
5,163,809
  
   
 
 

See notes to consolidated financial statements.

  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 filed Form 10-K. Certain amounts from the fiscal 2003 financial statements have been reclassified to conform to the 2004 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 March 31, 2004 and June 30, 2003, respectively:
 
 
  
March 31, 2004
June 30, 2003
Component parts
  
$
2,198,612
  
$
2,762,803
  
Work in process
    
693,622
    
811,906
  
Finished units
    
4,247,694
    
4,172,499
  
   
 
 
Total inventories
    
7,139,928
    
7,747,208
  
Less: reserve for obsolescence
    
871,864
    
1,400,000
  
   
 
 
Net inventory
  
$
6,268,064
  
$
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 three quarters of fiscal 2003 ended March 31, 2003 the Company sold all 456,374 shares of its Immtech stock and realized the following gains:

 
  
Shares
Sold
Realized
Gain
   
   
  
1st quarter ended September 30, 2002
    
50,000
  
$
241,746
  
2nd quarter ended December 31, 2002
    
4,000
    
14,097
  
3rd quarter ended March 31, 2003