UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 2-96271-B
CAS MEDICAL SYSTEMS, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 06-1123096
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21 Business Park Drive
Branford, Connecticut 06405
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (203) 488-6056
Securities registered under Section 12(b) of theExchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title_of_Each_Class
Common Stock, $.004 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this form 10-KSB [X]
The Registrant's revenues for the fiscal year ended December 31, 1997 were
$6,901,176.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of December 31, 1997 was based upon the last sale price of such
stock on that date on the over-the counter market commonly referred to as the
"pink sheets" was $3,132,973. The number of shares of the Registrant's Common
Stock outstanding as of December 31, 1997 was 9,329,277.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 10, 1998 are incorporated by reference in Part
III of this Report. Except as expressly incorporated by reference, the
Registrant's Proxy Statement shall not be deemed to be part of this Form
10-KSB.
<PAGE>
PART I
ITEM 1. BUSINESS
The Company
CAS Medical Systems, Inc. ("CAS" or the "Company") was organized in 1984
primarily to serve neonatal and pediatric units in hospitals. Today, CAS is
engaged in the business of developing, manufacturing and distributing
diagnostic equipment and medical products for use by adults and children in
many areas of the health care industry.
The Company has developed and is manufacturing a full line of non-invasive
blood pressure monitors, blood pressure cuffs for both adult and neonatal
patients, silver/silver chloride electrodes for neonatal hospital intensive
care units, and a line of disposable products for neonatal use. These
products are being sold by the Company directly through its own sales force
via distributors and pursuant to original equipment manufacturer (OEM)
agreements in Europe and the United States. The Company has agreements to
supply its blood pressure monitors, cuffs and electrodes to companies for
distribution in major segments of the international market. The Company also
has OEM agreements to supply custom versions of its blood pressure measuring
technology in the form of plug-in modules for patient monitoring systems. The
Company has several other products in various stages of development which it
believes are applicable to both adult and neonatal/pediatric medicine.
Narrative Description of Business
Principal Products and Services
OscilloMate Blood Pressure Monitors
The Company manufactures a complete line of state-of-the-art blood pressure
monitors which it has developed. Distribution is to the hospital and
professional markets through its sales force and distributors, and through
international distributors and OEM agreements.
Pedisphyg, Safe-Cuff, Tuff-Cuff and PAPERCUFF Blood Pressure Cuffs
The Company manufactures and sells complete lines of disposable and multi-use
blood pressure cuffs for hospital use. These cuffs are based on design
criteria developed from scientific studies to ensure the highest degree of
accuracy. They can be used with all of the blood pressure monitors currently
available in hospitals, thus permitting hospitals to use the Company as a
sales supplier for blood pressure cuffs.
Klear-Trace Electrodes
The Company manufactures and sells prewired, X-ray translucent
electrocardiographic electrodes. They utilize a conductive solid-gel adhesive
that allows them to remain on the patient for extended periods of time without
causing skin irritation.
<PAGE>
NeoGuard Reflectors, Klear-Temp Disposable Temperature Probes
The Company manufactures and sells thermal reflectors to shield temperature
probes while in use within radiant warmers. They perform an important role in
maintaining the proper thermal environment for neonatal patients while
assuring that no skin irritation takes place. Klear-Temp disposable skin
temperature probes are designed to be a standard replacement part in all
incubators and radiant warmers.
NeoGuard Limboard Arm Boards
The Company manufactures and sells a line of neonatal arm boards used to
immobilize and support intravenous sites with minimal patient skin trauma.
The electrodes, arm boards, and reflectors utilize a polymeric solid gel
adhesive, manufactured and sold by the Company, to minimize damage to neonatal
skin.
Sales and Marketing
The Company conducts its sales in the domestic hospital market by means of
exclusive distributors utilizing full time sales personnel. Sales to
emergency medical services are managed nationwide by a full time sales
manager. OEM sales and international sales are conducted by personnel located
within the Company.
Domestic sales are conducted by 25 distributors across the country each of
whom has exclusive sales rights in a limited geographic area. Effective
October 1, 1997, the Company entered into a non-exclusive Marketing and
Distribution Agreement (the "Agreement") with Graphic Controls Corporation
("Graphic Controls"), pursuant to which Graphic Controls will sell certain of
the Company's neo-natal specialty products solely to specific large hospital
purchasing groups. The Company anticipates that sales to Graphic Controls
will constitute a material portion of the Company's revenues during the term
of the Agreement.
The Company has sales agreements with several distributors internationally.
These agreements provide for distribution of products within an assigned
territory. Other agreements are being negotiated to allow for expanded
international distribution.
The Company sells its non-invasive blood pressure technology, in the form of
sub-assemblies to be joined to multi-parameter hospital monitors, to several
firms operating on both a domestic and international basis. The Company is in
the process of negotiating other agreements for the use of its technology as
components in other medical monitoring systems.
<PAGE>
Financial Information Relating to Sales
Year Ended December 31,
1997 1996 1995
Domestic Sales $4,649,474 $4,816,108 $4,273,483
Export (Including
Licensing Revenues) 2,251,702 2,371,007 2,155,748
_________ _________ _________
$6,901,176 $7,187,115 $6,429,231
_________ _________ _________
Competition
The Company competes in the hospital market where there are many suppliers
with greater financial and personnel resources that sell a broad line of
commodity products and have a dedicated selling capability. The Company's
products are targeted to the neonatal and pediatric intensive care units
segment of the hospital market. The Company has been supplying competitively
priced, uniquely designed products responsive to this segment in which no
major company currently focuses its total resources.
In both the hospital and emergency medical service markets, the Company's
line of non-invasive blood pressure monitoring equipment has significant
advantages over competitive products. The equipment is compact, portable,
lightweight and user-friendly. The monitors maintain a high professional
standard of accuracy and quality in demanding environments such as those
encountered in hospital and transport situations.
With respect to all of its products, the Company competes on the basis of
price, features, product quality, promptness of delivery and customer service.
Customers
During 1997, 1996 and 1995, the Company had sales to one customer which in
the aggregate accounted for approximately 13%, 13% and 12% of sales,
respectively.
Research and Development
In 1997, 1996 and 1995, the Company spent approximately $519,000, $396,000
and $405,000, respectively, on activities relating to the development of new
products and the improvement of existing products.
The Company is building on its base of non-invasive blood pressure technology
by developing a family of next-generation patient-monitoring equipment.
Employees
As of December 31, 1997, the Company had 53 employees of whom 50 were
full-time. The Company has no collective bargaining agreements and believes
that relations with its employees are good. The Company maintains employee
benefit plans providing for disability income, life insurance, dental and
<PAGE>
medical and hospitalization coverage. The Company sponsors a 401K benefit
plan for its employees which generally allows participants to make
contributions by salary deductions up to allowable Internal Revenue Service
limits on a tax-deferred basis and discretionary contributions by the Company.
The 1997, 1996 and 1995 contributions were $32,260, $31,512 and $28,166,
respectively.
Government Regulation
Medical products of the type currently being marketed and under development
by the Company are subject to regulation under the Food, Drug and Cosmetic Act
(the "FDA Act") as amended in the Medical Device Amendments of 1976 (the "1976
Amendments") the 1990 "Safe Medical Devices Act", and most recently, the new
Quality System Regulation (QSR) which replaces the regulations formerly called
Good Manufacturing Practice (GMP's).
In addition, depending upon product type, the Company must also comply with
those regulations governing the Conduct of Human Investigations, Pre-Market
Approval Regulations and other requirements, as promulgated by the Food and
Drug Administration (FDA). The FDA is authorized to inspect a device, its
labeling and advertising, and the facilities in which it is manufactured in
order to ensure that the device is not manufactured or labeled in a manner
which could cause it to be injurious to health.
Under the 1976 Amendment and the Safe Medical Device Act, the FDA has adopted
regulations which classify medical devices based upon the degree of regulation
it believes is necessary to assure safety and efficacy. A device is
classified as a Class I, II, or III device. Class I devices are subject only
to general controls. Class II devices, in addition to general controls, are
or will be subject to "performance standards." Most devices are also subject
to the 501(K) pre-market notification provision. In addition, some Class III
devices require FDA pre-market approval before they may be marketed
commercially because their safety and effectiveness cannot be assured by the
general controls and performance standards of Class I or II devices. The
Company's products are mostly Class II devices and several of them have
required FDA notification under Section 510(k) of the FDA Act.
The FDA has the authority to, among other things: deny marketing approval
until all regulatory protocols are deemed acceptable; halt the shipment of
defective products; and seize defective products sold to customers. Adverse
publicity from the FDA, if any, could have a negative impact upon sales. To
date, the Company has had no FDA oversight problems, and none are pending to
its knowledge.
Manufacturing and Quality Assurance
The Company assembles its products at its facility in Branford, Connecticut.
The various components for the products, which include plastic sheeting,
plastic moldings, wire, semi-conductor circuits, electronic and pneumatic
components and power supplies are obtained from outside vendors. The Company
does not anticipate any difficulties in obtaining the components necessary to
manufacture its products.
<PAGE>
Quality control procedures are performed by the Company at its facility and
occasionally at its suppliers' facilities to standards set forth in the FDA's
"Quality System Regulation". These procedures include the inspection of
components and full testing of finished goods. The Company has a controlled
clean environment where the final assembly of single-patient-use products is
conducted.
ISO 9001
In September 1996, the quality system at CAS was certified to ISO 9001/EN
46001 by the accredited notified body, BSI Inc. This certification recognizes
CAS for its achievement in implementing and maintaining a world class quality
system and prepares CAS for the use of the "CE" mark. The CE mark will be
required in June, 1998 for medical devices to gain access to the European
Union common market. The FDA, recognizing the value of a universally accepted
quality system, has patterened its new Quality System Regulation after ISO
9001. CAS is in full compliance with the new Quality System Regulation.
Backlog
The Company's practice is to ship its products upon receipt of a customer's
order or pursuant to customer-requested ship dates. On December 31, 1997, the
Company had a backlog of orders from customers for products with requested
ship dates in 1998 totaling approximately $1,188,000 deliverable throughout
1998, as compared to $434,000 as of December 31, 1996. During the first
quarter of 1998, the Company will fulfill approximately $125,000 of this
backlog.
Trademarks, Patents and Copyrights
Certificates of Registration have been issued to the Company by the United
States Department of Commerce Patent and Trademark Office for the following
marks: CAS (Registered trademark), Pedisphyg (Registered trademark),
OscilloMate (Registered trademark), NeoGuard (Registered trademark), Tuff-Cuff
(Registered trademark), Limboard (Registered trademark), Klear-Trace
(Registered trademark), and the heart shaped mark for use as a thermal
reflector and the Company's corporate logo. The Company continues to use the
PAPERCUFF (Trademark) and Safe-Cuff (Trademark) common law trademarks.
The Company filed a patent application on behalf of an employee covering the
method of operation of its blood pressure measurement monitor. This patent
was issued under Patent Number 4,796,184 and assigned to the Company. The
Company also holds Patent Number 4,966,992, which covers the design of a blood
pressure monitor for use with hyperbaric chambers. The Company holds Patent
Number 5,101,830, which covers the design of a blood pressure cuff.
The Company has copyright protection for the software used in its blood
pressure monitors.
<PAGE>
ITEM 2. PROPERTIES
The Company occupies leased facilities comprising approximately 17,500 square
feet of office, laboratory and assembly space, including a controlled clean
environment, located at 21 Business Park Drive, Branford, Connecticut 06405.
Minimum annual rentals under the Company's lease agreement, which expires on
December 31, 1998, are:
1998 $110,000
These amounts are in addition to the Company's share of increases in real
estate taxes and certain utility costs.
The Company does not intend to extend its current lease and is in the process
of building a 24,000 square foot office, laboratory and manufacturing
facility, on 4.6 acres in Branford, Connecticut. The total cost is extimated
to be $1,800,000. Present plans are to occupy the new facility in late 1998.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings involving the Company are pending at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
(a) The Common Stock of the Company is traded in the over-the-counter
market, commonly referred to as the "pink sheets". The following table shows
the high and low bid quotations for the Company's Common Stock for each
quarterly period for the last two years. These prices reflect inter-dealer
prices and may not represent actual transactions and do not include retail
mark-ups, mark-downs or commissions.
Period Ended High Low
March 31, 1996 $1 1/4 $1 1/16
June 30, 1996 1 1/2 1 1/4
September 30, 1996 15/16 7/8
December 31, 1996 7/8 3/4
March 31, 1997 11/16 7/16
June 30, 1997 3/4 1/2
September 30, 1997 27/32 5/8
December 31, 1997 7/8 19/32
<PAGE>
(b) The following table sets forth the approximate number of holders of
record of Common Stock of the Company on December 31, 1997.
Title of Class Number of Shareholders
Common Stock, $.004 par value 400
(c) No cash dividends have been declared on the Company's common stock
for 1997 or 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition, Liquidity and Capital Resources
As of December 31, 1997, the Company's cash and cash equivalents totaled
$2,190,345, compared to $1,606,979 at December 31, 1996 (an increase of 36%),
and the Company's working capital totaled $3,346,083 on December 31, 1997,
compared to $2,663,685 on December 31, 1996. The Company's increased cash
position is due to cash provided by operating activities in 1997. As a result
of improved liquidity in 1997, the Company was able to internally finance
approximately $138,000 of property and equipment additions as well as make
investments in short-term notes, earning approximately $76,000 for 1997.
The Company's working capital ratio increased from 3.65 at December 31,
1996 to 5.14 at December 31, 1997.
At December 31, 1997, the Company had a line of credit with a Connecticut
bank totaling $750,000. Borrowings under the line of credit bear interest at
prime plus 1.0%. At December 31, 1997, there were no borrowings outstanding
under this line.
On July 27, 1994, the Company entered into a new four year licensing
agreement with a major European manufacturer of patient monitors, granting a
nonexclusive license to use the Company's blood pressure technology for a
specific application, and allowing the exchange of technical know-how. During
February 1997, the Company amended the original licensing agreement through
the year 2000. As part of this agreement, the Company will receive license
fees of $1,500,000 plus royalties, of which $895,000 in license fees has been
received through December 31, 1997. The manufacturer has the option to extend
the license to the year 2006 and only be liable for royalties. License fees
are being recognized on a straight line basis over the contract period.
The Company believes that existing funds together with internally
generated funds from 1998 operations and its existing line of credit
arrangement will provide the Company with adequate liquidity and capital
resources to meet its 1998 financial requirements.
The Company is currently evaluating new Enterprise Resource Planning
(ERP) software to replace the existing software package. All ERP software
being evaluated is year 2000 compliant and, if purchased, should be in
operation by November 1998.
<PAGE>
Results of Operations
1997 Compared to 1996
The Company earned $665,000 ($.07 per common share assuming dilution) in
1997, compared to $905,714 ($.09 per common share assuming dilution) in 1996.
The 1997 earnings performance was impacted by softness in sales of certain of
the Company's product lines and increased personnel in the sales and research
development departments.
The Company's revenues were approximately $6,901,000 for 1997, a decrease
of approximately $286,000 for the comparable period of 1996. The decrease in
1997 is due primarily by softness in sales of non-invasive blood pressure
modules to Original Equipment Manufacturers ("OEM") who utilize the Company's
technology in their systems.
Total cost of product sales as a percentage of net product sales was 42.7
percent for 1997 compared to 43.7 percent for 1996. The favorable impact of
product cost improvements is the result of added production efficiency and
product cost reductions.
Research and product development (R&D) expenses increased by 31 percent or
approximately $123,000 to approximately $519,000 for the year ended December
31, 1997. The increase during 1997 is due primarily to additional personnel
in conjunction with the Company's product development objectives.
Selling, general and administrative expenses were approximately
$2,502,000 in the year ended December 31, 1997 compared to approximately
$2,273,000 in the prior year, an increase of 10 percent. The overall increase
in 1997 is the result of additional sales personnel, both domestic and abroad.
The Company currently invests its excess cash in low-risk, short-term
interest bearing instruments. During 1997, the Company earned approximately
$76,000 of interest income compared to approximately $37,000 for 1996.
1996 Compared to 1995
The Company earned $905,714 ($.09 per common share assuming dilution) in
1996, compared to $849,000 ($.09 per common share assuming dilution) in 1995.
The 1996 earnings performance was favorably impacted by incremental gross
margin generated by higher sales volume and an increase in licensing fee
revenues.
The Company's revenues for the year ended December 31, 1996 were
approximately $7,187,000 and exceeded the comparable period in 1995 by
approximately $758,000. Sales of non-invasive blood pressure modules to
Original Equipment Manufacturers ("OEM") who utilize the Company's technology
in their systems and Klear-Trace disposable products, were primarily
responsible for the growth in overall sales revenues.
<PAGE>
Total cost of product sales decreased as a percentage of net product
sales from 45.9 percent to 43.7 percent when comparing 1996 to 1995. The
decrease in cost reflects an on-going quality and cost reduction efforts and a
more profitable product mix.
Selling, general and administrative expenses were approximately
$2,273,000 for the year ended December 31, 1995 and 1996. However, as a
percentage of net revenues, 1996 decreased to 31.6 percent from 35.3 percent
in 1995.
The Company's strong cash position enabled all outstanding debt to be
paid in full and resulted in excess cash. The Company earned approximately
$37,000 in 1996 from various investment accounts.
ITEM 7. INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Balance Sheets - December 31, 1997 and 1996 F-2 to F-3
Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Financial Statements F-8 to F-13
Schedules called for under Regulation S-X are not submitted because they
are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Reference is made to the sections entitled "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Registrant's definitive proxy statement to be mailed to shareholders on or
about April 28, 1998 and filed with the Securities and Exchange Commission.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Reference is made to the sections entitled "Compensation of Executive
Officers" and "Election of Directors" in the Registrant's definitive proxy
statement to be mailed to shareholders on or about April 28, 1998, and filed
with the Securities and Exchange Commission.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the sections entitled "Stock Ownership" and
"Election of Directors" in the Registrant's definitive proxy statement to be
mailed to shareholders on or about April 28, 1998, and filed with the
Securities and Exchange Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 17, 1990, by agreement, the Company and Dr. Myron L. Cohen
amended Dr. Cohen's employment contract and provided that he shall be employed
as Executive Vice President of the Company until December 31, 1995 in
accordance with the terms of the agreement. Since January 1, 1996, the
Company has extended Dr. Cohen's employment contract annually. Dr. Cohen's
employment contract has been extended to December 31, 1998. Compensation for
1997 was approximately $91,000.
In September of 1996, the Company entered into a two year employment
agreement with Louis P. Scheps as President and Chief Executive Officer. On
September 1, 1996, the Company extended Mr. Scheps' employment contract
through August 31, 1998. Compensation was approximately $185,000 for 1996.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) 3.1 (a) Certificate of Incorporation of Registrant*
(b) By-Laws of Registrant*
27.1 Financial Data Schedule
* Incorporated by reference from the Exhibits filed in the Registrant's
Registration Statement dated April 15, 1985, filed with the Securities and
Exchange Commission.
(B) Reports on Form 8-K
None filed.
<PAGE>
CAS MEDICAL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-1
Balance Sheets -- December 31, 1997 and 1996 F-2 to F-3
Statements of Income for the Years Ended December 31, F-4
1997, 1996 and 1995
Statements of Shareholders' Equity for the Years Ended F-5
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995 F-6 to F-7
Notes to Financial Statements F-8 to F-13
Schedules called for under Regulation S-X are not submitted because they are
not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
<PAGE>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
CAS Medical Systems, Inc.:
We have audited the accompanying balance sheets of CAS Medical
Systems, Inc. (a Delaware corporation) as of December 31, 1997
and 1996, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of CAS Medical Systems, Inc. as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
January 23, 1998
<PAGE>
<TABLE>
F-2
CAS MEDICAL SYSTEMS, INC.
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,190,345 $1,606,979
Accounts receivable, net of allowance for
doubtful accounts of $27,289 and $26,125
in 1997 and 1996, respectively 1,055,881 1,112,517
Inventories (Note 3) 725,121 759,762
Deferred tax asset 112,000 112,000
Other current assets 70,339 78,229
Total current assets 4,153,686 3,669,487
PROPERTY AND EQUIPMENT (Note 2):
Furniture and equipment 1,048,430 921,509
Leasehold improvements 58,079 47,181
1,106,509 968,690
Less-accumulated depreciation 874,855 782,680
231,654 186,010
Other assets 8,199 8,199
Total Assets $4,393,539 $3,863,696
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</TABLE>
<PAGE>
<TABLE>
F-3
CAS MEDICAL SYSTEMS, INC.
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
(continued)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 239,172 $ 206,644
Income taxes payable 247,392 317,623
Accrued payroll 198,639 255,880
Accrued professional fees 61,000 67,729
Accrued warranty 30,000 45,000
Other accrued expenses 88,512 112,926
Deferred revenue 5,888 -
Total current liabilities 807,603 1,005,802
SHAREHOLDERS' EQUITY (Notes 2, 6 and 7):
Common stock, $.004 par value, 19,000,000
shares authorized, 9,329,277 shares issued
and outstanding in 1997 and 1996 37,317 37,317
Additional paid-in capital 2,697,364 2,697,364
Retained earnings 788,255 123,213
Total shareholders' equity 3,522,936 2,857,894
Total liabilities and shareholders' equity $4,393,539 $3,863,696
<FN>
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
F-4
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Net product sales $6,620,328 $6,910,827 $6,163,848
Licensing fees (Note 5) 280,848 276,288 265,383
6,901,176 7,187,115 6,429,231
OPERATING EXPENSES:
Cost of product sales 2,826,718 3,019,282 2,831,369
Selling, general and administrative 2,501,894 2,272,602 2,272,329
Research and development 519,227 396,234 405,022
Operating income 1,053,337 1,498,997 920,511
INTEREST INCOME, net 75,705 36,717 13,380
Income before income taxes 1,129,042 1,535,714 933,891
PROVISION FOR INCOME TAXES (Note 8) 464,000 630,000 85,000
Net income $ 665,042 $ 905,714 $ 848,891
--------- -------- --------
Weighted average number of common
shares outstanding:
Basic 9,329,277 9,316,202 9,256,144
--------- --------- ---------
Assuming dilution 9,979,489 10,228,275 9,894,875
--------- ---------- ---------
Earnings per common share:
Basic $.07 $.10 $.09
--------- ---------- ---------
Assuming dilution $.07 $.09 $.09
--------- ---------- ---------
<FN>
The accompanying nots to financial statements are an integral part of these
statements
</TABLE>
<PAGE>
<TABLE>
F-5
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Preferred Stock Common Stock
Additional Retained
---------------- ------------------
Paid-In Earnings/
Shares Amount Shares Amount
Capital (Deficit)
______ ________ ______ ______
__________ _________
<S> <C> <C> <C> <C>
<C> <C>
BALANCE, December 31, 1994 5,000 500,000 9,239,477 36,958
2,664,728 (1,591,392)
Common stock issued - - 40,000 160
10,741 -
Redemption of Preferred
Stock (2,000) (200,000) - -
- -
Net income - - - -
- 848,891
Preferred dividends - - - -
- (40,000)
------ ------- --------- ------
- ---------- ----------
BALANCE, December 31, 1995 3,000 300,000 9,279,477 37,118
2,675,469 (782,501)
Common stock issued - - 49,800 199
21,895 -
Redemption of Preferred
Stock (3,000) (300,000) - -
- -
Net income - - - -
- 905,714
------ ------- --------- ------
- --------- ----------
BALANCE, December 31, 1996 - - 9,329,277 $37,317
$2,697,364 $ 123,213
Net income - - - -
- 665,042
------ ------- --------- ------
- --------- ---------
BALANCE, December 31, 1997 - $ - 9,329,277 $37,317
$2,697,364 $ 788,255
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</TABLE>
<PAGE>
<TABLE>
F-6
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $665,043 905,714 848,891
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 92,175 76,968 79,089
(Increase) decrease in deferred tax asset - (87,000) (25,000)
(Increase) decrease in accounts receivable 56,636 (378,642) 60,684
(Increase) decrease in inventory 34,641 83,542 (32,316)
(Increase) decrease in other current assets 7,890 (3,789) 641
Increase (decrease) in accounts
payable and accrued expenses (141,087) 334,867 339,578
Increase (decrease) in deferred revenue 5,888 (44,444) (47,778)
------- ------- ---------
Net cash provided by operating activities 721,186 887,216 1,223,789
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (137,820) (84,334) (69,748)
Net cash used in investing activities (137,820) (84,334) (69,748)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends - - (40,000)
Repayment of debt to related parties - - (144,411)
Proceeds from issuance of common stock - 22,094 10,901
Redemption of shares of preferred stock - (300,000) (200,000)
--------- ------- -------
Net cash used in financing activities - (277,906) (373,510)
--------- ------- -------
Net increase in cash and cash
equivalents 583,366 524,976 780,531
CASH AND CASH EQUIVALENTS, beginning of
year 1,606,979 1,082,003 301,472
CASH AND CASH EQUIVALENTS, end of year $2,190,345 $1,606,979 $1,082,003
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
F-7
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 765 $ 1,555 $ 5,458
Cash paid during the year for taxes $543,000 $424,175 $52,650
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</TABLE>
<PAGE>
F-8
CAS MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) The Company:
CAS Medical Systems, Inc. (the "Company") is engaged in the business of
developing, manufacturing and distributing diagnostic equipment and
medical products for use in the healthcare and medical industry. These
products are sold by the Company through its own sales force, via
distributors and pursuant to original equipment manufacturer agreements
internationally and in the United States. The Company's operations and
manufacturing facilities are located in the United States. During
1997, 1996 and 1995, the Company had sales to one customer which in the
aggregate accounted for approximately 13%, 13% and 12% of sales,
respectively, and had export sales principally to Europe, including
licensing fee revenues, of $2,251,702, $2,371,007, and $2,155,748,
respectively.
(2) Summary of Significant Accounting Policies:
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment-
Property and equipment are stated at cost. Furniture and
equipment are depreciated using the straight-line method based on the
estimated useful lives of the assets, which range from two to five
years. Leasehold improvements are amortized over the life of the
lease.
Revenue Recognition-
Revenues from product sales are recognized upon passage of title,
generally upon shipment. Revenues from licensing fees are recognized
over the term of the agreement (see Note 5).
Research and Development Costs
The Company expenses all research and development costs as incurred.
<PAGE>
F-9
Net Income per Common Share-
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share ("SFAS No. 128")." Under SFAS No. 128, primary earnings per
share ("EPS") has been replaced with Basic EPS, which is calculated by
dividing net income by the weighted average nunmber of shares of
commonstock outstanding during the year. No dilution for any
potentially dilutive securities is included. Fully diluted EPS has
been replaced with Diluted EPS and assumes the conversion of all
potentially dilutive securities using the treasury stock method. The
Company adopted SFAS No. 128 in 1997 and, as required, has applied it
retroactively to the 1996 and 1995 financial statements.
As of December 31, 1997, the Company had 1,180,100 options and 750,000
warrants to purchase shares of common stock outstanding.
Under SFAS No. 128, the Company's Basic and Diluted EPS are as follows:
1997 1996 1995
Net income 665,043 905,714 848,891
Weighted average shares outsanding 9,329,277 9,316,202 9,256,144
Add: dilutive warrants and options 650,212 912,073 638,731
--------- --------- ---------
Total weighted average shares and
dilutive securities outstanding 9,979,489 10,228,275 9,894,875
--------- ---------- ---------
Net income per share - Basic $.07 $.10 $.09
--------- ---------- ---------
Net income per share - Assuming
Dilution $.07 $.09 $.09
--------- ---------- ---------
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
F-9
(3) Inventories:
Inventories include costs of materials, labor and manufacturing
overhead.
Inventories are stated at the lower of first-in, first-out (FIFO) cost
or market and consist of the following:
1997 1996
Raw materials $459,358 472,761
Work in process 173,598 135,955
Finished goods 92,165 151,046
_______ _______
$725,121 $759,762
(4) Debt:
At December 31, 1997, the Company's line of credit arrangement allowed
for maximum borrowings of $750,000, all of which was available. The
line of credit arrangement expires on August 1, 1998 and bears interest
at the prime rate (8.25% at December 31, 1997) plus 1%. During 1997,
1996 and 1995, the maximum month end borrowings outstanding under
this line were $100,000, $100,000 and $50,000, the weighted average
borrowings were $8,333, $8,333 and $4,167, and the weighted average
interest rates on amounts outstanding were 9.5%, 9.5% and 10.3%,
respectively. The bank has a first security interest in all assets of
the Company and requires a compensating balance equal to 20% of the
line of credit ($150,000 at December 31, 1997).
(5) License Agreements:
On July 27, 1994, the Company entered into a four year licensing
agreement (subsequently amended through the year 2000) with a major
European manufacturer of medical equipment, canceling and superseding a
prior licensing agreement with this company. The agreement granted a
nonexclusive license to use the Company's blood pressure technology for
a specific application. As part of this agreement, the Company will
<PAGE>
F-10
receive $1,500,000 plus royalties through the year 2000, of which $885,000
has been received through December 31, 1997. The manufacturer has the
option to extend the license to 2006 for which the Company will earn
royalties. License fees from this agreement and deferred revenue of
$140,000 from the prior license agreement are being recognized over the
life of the current agreement.
(6)Capital Stock:
Holders of the Series C cumulative preferred stock were entitled to a
cumulative dividend, payable quarterly, at the annual rate of $10 per
share. On July 1, 1995, 2,000 shares of the Company's Series C preferred
stock were redeemed at $100 per share plus dividends accrued. On January
17, 1996, the remaining 3,000 shares of the Company's Series C preferred
stock were redeemed at $100 per share plus accrued dividends. Preferred
dividends of $40,000 were paid on these shares in 1995.
(7)Employee Benefit Programs:
Stock Options-
In December 1984, the Board of Directors and stockholders adopted the 1984
Employee Incentive Stock Option Plan (the "1984 Plan"). The exercise
price for common stock issued under the 1984 Plan is to be no less than
the fair market value of the stock at the grant date of the options.
Pursuant to the 1984 Plan, 750,000 shares of common stock have been
reserved for employee (including officers and directors) purchase. An
option granted under the 1984 Plan becomes exercisable in two equal annual
installments, commencing one year from the date of the grant of the
option. Options begin to expire between five and ten years from the date
of grant, depending on the optionholder's percentage of ownership of the
Company. In the event employment is terminated, the employee no longer
has the right to exercise his or her options unless expressly permitted by
the Board of Directors.
<PAGE>
F-11
In June 1994, the Board of Directors and stockholders adopted the 1994
Employees' Incentive Stock Option Plan (the "1994 Plan"). Pursuant to the
1994 Plan, 250,000 shares of common stock have been reserved for employee
(including officers and directors) purchase. The 1994 Plan is the
successor to the 1984 Plan and contains provisions which are similar to
those of the 1984 Plan.
In 1993, the Company granted a warrant to purchase 750,000 shares of
common stock to an officer of the Company. The exercise price ($.31 per
share) was equal to the fair market value of the stock at the grant date
of the warrant. The warrant has no expiration date.
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation ("SFAS No. 123")," encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees," and related interpretations. Accordingly, had
compensation cost for these plans been determined consistent with SFAS No.
123, the Company's 1997 and 1996 net income and earnings per share would
have been reduced to the following pro forma amounts:
1997 1996
Net income: As reported $665,043 $905,714
Pro Forma 655,315 782,890
Earnings per share: As reported-Basic .07 .10
Pro Forma-Basic .07 .08
As reported-Diluted .07 .09
Pro Forma-Diluted .07 .08
<PAGE>
<TABLE>
F-11 continued
A summary of the Company's stock option plans at December 31, 1997, 1996 and
1995 and
changes during the years then ended is presented in the table and narrative
below:
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------
Weighted Weighted
Weighted
Average Average
Average
Exercise Exercise
Exercise
Shares Price Shares Price Shares
Price
<S> <C> <C> <C> <C> <C>
<C>
Outstanding at
Beginning of year 1,180,100 $.58 980,900 $.49 990,900
$.48
Granted - 256,500 .96 75,000
.52
Exercised - ( 39,800) .29 ( 40.000)
.27
Cancelled - ( 17,500) .31 ( 45,000)
.44
_________ _________ _______
Outstanding at
end of year 1,180,100 $.58 1,180,100 $.58 980,900
$.49
Exercisable at
end of year 1,148,850 1,105,100 895,900
</TABLE>
<PAGE>
F-12
Of the 1,180,100 options outstanding at December 31, 1997, 495,600 have
exercise prices between $.25 and $.375, with a weighted average exercise
price of $.34 and a weighted average remaining contractual life of 3.86
years. All of these options are exercisable. 659,500 of the options
outstanding have exercise prices between $.625 and $.93, with a weighted
average exercise price of $.78 and a weighted average remaining
contractual life of 5.81 years. 640,750 of these options are exercisable;
their weighted average exercise price is $.81. The remaining 25,000
options have an exercise and weighted average exercise price of $1.25 and
a weighted average remaining contractual life of 8.5 years. 12,500 of
these options are exercisable. The weighted average fair value of options
granted during 1996 was $.80. No options were granted in 1997.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk-free interest rates of
6.06 and 6.94 percent; expected lives of 10 years; expected volatility of
74 percent.
Life Insurance-
During 1997, 1996 and 1995, the Company paid life insurance premiums of
approximately $20,000, $17,000 and $14,000, respectively, for life
insurance policies on the lives of two officers of the Company. The
policies are in the face amounts of $1,000,000 and $650,000. The
beneficiaries of $250,000 and $150,000, respectively, of the policies are
designated by the insured. The Company is the beneficiary of the balance.
401(k) Plan-
The Company maintains a 401(k) benefit plan for its employees which
generally allows participants to make contributions by salary deductions
up to allowable Internal Revenue Service limits on a tax-deferred basis
and discretionary contributions by the Company. The 1997, 1996 and 1995
contributions by the Company were $,32,260, $31,512 and $28,166,
respectively.
The Company does not provide other post-retirement or other
post-employment benefits.
(8) Income Taxes:
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), which requires the recognition
of deferred tax assets and liabilities for future tax consequences
resulting from differences between the book and tax basis of existing
assets and liabilities. In addition, SFAS 109 requires the recognition of
future tax benefits of net operating loss carryforwards to the extent that
realization of such benefit is more likely than not.
<PAGE>
F-13
The 1997 provision for income taxes of $464,000 consists of federal and
state taxes of $392,000 and $72,000, respectively. The 1996 provision for
income taxes of $630,000 consists of federal and state taxes of $535,000
and $95,000, respectively. These provisions relate primarily to current
income taxes. The 1995 provision for income taxes of $85,000 represents
state income taxes and is net of tax benefits of net operating loss
carryforwards utilized of $874,000. As of December 31, 1995, the Company
had utilized substantially all of its net operating loss carryforwards.
The effective tax rate differs from the federal statutory rate of 34%
principally because of state income taxes and, in 1995, the utilization of
net operating loss carryforwards. The deferred tax assets relate
primarily to certain inventory related expenses and accured liabilities,
which are not currently deductible for income tax purposes.
(9) Commitments and Contingencies:
Employment Agreements-
The Company is committed under employment agreements with certain officers
for payments aggregating approximately $276,000 which expire in 1998.
Other Commitments-
Minimum annual rentals under the Company's non-cancelable lease agreement
covering its principal office space, which expires on December 31, 1998
and includes escalations for real estate taxes, are $110,000. Rent
expense was approximately $116,000, $108,000 and $102,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company hs entered into a contract to build a 24,000 square foot
office, laboratory and manufacturing facility. The total cost is estimated
to be approximately $1,800,000. Through January 23, 1998, approximately
$55,000 hs been incurred on this project.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
CAS MEDICAL SYSTEMS, INC.
(Registrant)
March 25, 1997 Louis P. Scheps
Date Louis P. Scheps
President and Chief Executive Officer
and Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
March 25, 1998 Myron L. Cohen
Date Myron L. Cohen
Director
March 25, 1998 Lawrence Burstein
Date Lawrence Burstein
Director
March 25, 1998 Jerome Baron
Date Jerome Baron
Director
March 25, 1998 Saul Milles
Date Saul Milles
Director
March 25, 1998 Louis P. Scheps
Date Louis P. Scheps
Director
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000764579
<NAME> CAS MEDICAL SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,190,345
<SECURITIES> 0
<RECEIVABLES> 1,055,881
<ALLOWANCES> 0
<INVENTORY> 725,121
<CURRENT-ASSETS> 4,153,686
<PP&E> 1,106,509
<DEPRECIATION> 874,855
<TOTAL-ASSETS> 4,393,539
<CURRENT-LIABILITIES> 807,603
<BONDS> 0
<COMMON> 37,317
0
0
<OTHER-SE> 788,255
<TOTAL-LIABILITY-AND-EQUITY> 4,393,539
<SALES> 6,620,328
<TOTAL-REVENUES> 6,901,176
<CGS> 2,826,718
<TOTAL-COSTS> 2,501,894
<OTHER-EXPENSES> 519,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75,706)
<INCOME-PRETAX> 1,129,042
<INCOME-TAX> 464,000
<INCOME-CONTINUING> 665,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665,042
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
