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, 1998
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)
44 East Industrial Road
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, 1998 were
$7,019,942.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 23, 1999 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 $2,363,790. The number of shares of the Registrant's Common
Stock outstanding as of March 23, 1999 was 9,346,777.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 16, 1999 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 sole
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
Domestic sales are conducted by 18 specialty distributors across the country,
each of whom has exclusive sales rights in a limited geographic area and
covers either the hospital arena or emergency medical services. During 1998,
the Company had a non-exclusive Marketing and Distribution Agreement (the
"Agreement") with Graphic Controls Corporation ("Graphic Controls"), pursuant
to which Graphic Controls sold certain of the Company's neonatal specialty
products solely to specific large hospital purchasing groups. This Agreement
was mutually terminated by the parties in December 1998.
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,
1998 1997 1996
Domestic Sales $4,765,323 $4,649,474 $4,816,108
Export (Including
Licensing Revenues) 2,254,619 2,251,702 2,371,007
_________ _________ _________
$7,019,942 $6,901,176 $7,187,115
_________ _________ _________
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 1998, 1997 and 1996, the Company had sales to one customer which in
the aggregate accounted for approximately 13% of sales in each of the three
years reported.
Research and Development
In 1998, 1997 and 1996, the Company spent approximately $548,000, $519,000
and $396,000, respectively, on activities relating to the development of new
products and the improvement of existing products.
The Company wil continue to develop and expand its patient monitoring
capability, by adding new physiological parameters. In addition, plans are in
process to greatly improve information processing within the monitor, using
new screen and communication technology. This will allow the Company to
significantly increase sales penetration in the Acute and Intensive Care
market.
Employees
As of December 31, 1998, the Company had 58 employees of whom 55 were
full-time. The Company has no collective bargaining agreements and believes
that relations with its employees are good.
<PAGE>
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 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 is now required
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, 1998, the
Company had a backlog of orders from customers for products with requested
ship dates in 1999 totaling approximately $1,184,000 deliverable throughout
1999, as compared to $1,188,000 as of December 31, 1997. During the first
quarter of 1999, the Company will fulfill approximately $147,000 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,
issued under Patent Number 4,796,184, was 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
During November 1998, the Company relocated to a 24,000 square foot office,
laboratory and manufacturing facility owned by the Company in Branford,
Connecticut. Total cost of this new facility was approximately $1,933,000.
TheCompany is the sole tenant of this new facility.
During January 1999, the Company obtained a nineteen year, 7.25% fixed rate
$1,310,000 mortgage from a local bank. The mortgage is secured by a first
mortgage lien on the Company property consisting of 4.6 acres of land and the
24,000 square foot industrial building.The estimated payments are
approximately $10,600 per month. The Company believes that insurance on the
property is adequate.
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 EQUITY 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, 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
March 31, 1998 21/32 19/32
June 30, 1998 11/16 5/8
September 30, 1998 33/64 25/64
December 31, 1998 21/32 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, 1998.
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
during 1998 or 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition, Liquidity and Capital Resources
As of December 31, 1998, the Company's cash and cash equivalents totaled
$1,442,342, compared to $2,190,345 at December 31, 1997 (a decrease of 34%),
and the Company's working capital totaled $1,974,600 on December 31, 1998,
compared to $3,283,083 on December 31, 1997. The Company's decreased cash
position is due to internally financing approximately $1,933,000 for the new
24,000 square foot office, laboratory and manufacturing facility, on 4.6 acres
of acquired land in Branford, Connecticut. Consequently, the Company's
working capital ratio decreased from 5.14 at December 31, 1997 to 2.31 at
December 31, 1998.
At December 31, 1998, the Company had a line of credit with a Connecticut
bank totaling $1,000,000. Borrowings under the line of credit bear interest
at prime plus 1.0%. At December 31, 1998, 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 $1,100,000 in license fees has
been received through December 31, 1998. 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 1999 operations and its existing line of credit
arrangement will provide the Company with adequate liquidity and capital
resources to meet its 1999 financial requirements.
<PAGE>
Year 2000 Compliance
The Year 2000 ("Y2K") issue relates to the inability of information
systems to properly recognize and process date sensitive information beyond
January 1, 2000. Many computer systems and software products may not be able
to interpret dates after December 31, 1999 because such systems and products
allow only two digits to indicate the year in a date. As a result, these
systems and products are unable to distinguish January 1, 2000 from January 1,
1900, which could have adverse consequences on the operations of an entity and
the integrity of its information processing.
The Company's management has recognized the need to address the Year 2000
issue within its internal operational systems as well as with suppliers and
other third parties. As with many other companies, a significant number of
the Company's information systems have required and will require modification
to render these systems Y2K compliant. The company recognizes that failure by
the Company to timely resolve internal Y2K issues could result in an inability
of the Company to ship products, to receive raw materials, to pay for
materials received (which could delay delivery of undelivered materials), and
to otherwise process its daily business for an indeterminate period of time,
each of which could materially and adversely affect the Company's financial
conditions and results of operations. However, the Company's management
presently believes these scenarios are unlikely based on the progress the
Company has made in its Y2K compliance process.
The Company purchased a new Enterprise Resource Planning (ERP) software
to replace the existing software package and migrate its current MMPII package
onto IBM hardware running Microsoft NT. This total package is fully year 2000
compliant and the total cost is estimated under $50,000. The Company is also
surveying all suppliers to determine their compliance with the Y2K issue and
what impact, if any, their efforts will have on the Company's business.
However, if the Company and third parties, upon which it relies, are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur,
the Company plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner.
<PAGE>
Results of Operations
1998 Compared to 1997
The Company earned $816,000 ($.08 per common share on a diluted basis) in
1998, compared to $665,000 ($.07 per common share on a diluted basis) in 1997.
The 1998 earnings performance was favorably impacted by revenues from a
one-time contract settlement and an increase in licensing fee revenues.
The Company's revenues for the year ended December 31, 1998 were
approximately $7,020,000 and exceeded the comparable period in 1997 by
approximately $119,000. Sales revenues for 1998 reflects a significant
increase of 22 percent for Klear-Trace disposable products, whereas diagnostic
equipment sales decreased by 21 percent. This is attributed to the loss of a
few key OEM accounts due to their corporate restructuring.
Total cost of product sales as a percentage of net product sales was 43.6
percent for 1998 compared to 42.7 percent for 1997. The slight increase in
cost is due primarily to product mix.
Research and development expenses increased by 6 percent during 1998 to
approximately $548,000 compared to approximately $519,000 for the same period
of 1997, primarily due to development cost of new products.
Selling, general and administrative expenses were approximately
$3,011,000 in the year ended December 31, 1998 compared to approximately
$2,502,000 in the prior year, an increase of 20 percent. The increase is due
to the continued growth in personnel in sales and marketing, both domestic and
international.
The Company currently invests its excess cash in low-risk, short-term
interest bearing instruments. During 1998, the Company earned approximately
$106,000 of interest income compared to approximately $76,000 for 1997.
1997 Compared to 1996
The Company earned $665,000 ($.07 per common share on a diluted basis) in
1997, compared to $906,000 ($.09 per common share on a diluted basis) 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.
<PAGE>
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.
ITEM 7. INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Balance Sheets - December 31, 1998 and 1997 F-2 to F-3
Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 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.
<PAGE>
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 23, 1999 and filed with the Securities and Exchange Commission.
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 23, 1999, 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 23, 1999, and filed with the
Securities and Exchange Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Mr. Scheps have entered into an employment agreement
pursuant to which Mr. Scheps serves as President and Chief Excutive Officer of
the Company. As of September 1, 1998, the employment agreement was amended
(as amended, the "Employment Agreement") to extend its term through August 31,
2000 and provide for a base salary of $185,000 per year. The Employment
Agreement also provides that if a "Change of Control" (as defined below)
occurs, and upon such Change of Control occuring, the Employment Agreement is
not extended for a period of at least one year following the stated
termination date of the Employment Agreement, then Mr. Scheps shall be paid a
lump sum of $250,000 on such stated termination date. "Change of Control" is
defined in the Employment Agreement to mean (i) a sale of all or substantially
all of the Compay's assets, (ii) a merger involving the Company in which the
Company is not the survivor and the Company's stockholders prior to the merger
control less than fifty percent of the voting stock of the surviving entity,
(iii) a sale by the Company's stockholders to an acquiror or acquirors acting
in concert of more than a majority of the then outstanding stock of the
Company owned by the Company's stockholders, or (iv) any event similar to any
of the foregoing. In connection with the amendment of the Employment
Agreement, Mr. Scheps was granted a warrant to purchase 100,000 shares of the
Company common stock at an exercise price of $1.00 per share. This warrant is
exrcisable solely in the event of a Change of Control.
The Company also has an employment agreement with Dr. Cohen under which
he serves as Executive Vice President of the Company through December 31, 1999
at an annual base salary of $99,600. There are no benefits payable to Dr.
Cohen upon termination of the agreement.
<PAGE>
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*
23.1 Consent of Independent Public Accountants
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, 1998 and 1997 F-2 to F-3
Statements of Income for the Years Ended December 31, F-4
1998, 1997 and 1996
Statements of Shareholders' Equity for the Years Ended F-5
December 31, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996 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, 1998
and 1997, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
January 22, 1999
<PAGE>
<TABLE>
F-2
CAS MEDICAL SYSTEMS, INC.
BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,442,342 $2,190,345
Accounts receivable, net of allowance for
doubtful accounts of $16,838 and $27,289
in 1998 and 1997, respectively 859,699 1,055,881
Inventories 948,293 725,121
Deferred tax asset 94,599 112,000
Other current assets 79,711 70,339
Total current assets 3,460,545 4,153,686
PROPERTY AND EQUIPMENT:
Land and improvements 535,000 -
Buildings and improvements 1,379,590 -
Machinery and equipment 1,151,946 1,048,430
Leasehold improvements - 58,079
Less-accumulated depreciation 704,849 874,855
2,361,687 231,654
OTHER ASSETS 2,901 8,199
Total Assets $5,825,133 $4,393,539
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</FN>
</TABLE>
<PAGE>
<TABLE>
F-3
CAS MEDICAL SYSTEMS, INC.
BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
(continued)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 614,355 $ 239,172
Income taxes payable 444,720 247,392
Accrued payroll 259,697 198,639
Accrued professional fees 90,500 61,000
Accrued warranty expense 20,000 30,000
Other accrued expenses 56,673 94,400
Total current liabilities 1,485,945 807,603
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value, 19,000,000
shares authorized, 9,329,277 shares issued
and outstanding in 1998 and 1997 37,317 37,317
Additional paid-in capital 2,697,364 2,697,364
Retained earnings 1 604,507 788,255
Total shareholders' equity 4,339,188 3,522,936
Total liabilities and shareholders' equity $5,825,133 $4,393,539
<FN>
The accompanying notes to financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
F-4
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Net product sales $6,726,764 $6,620,328 $6,910,827
Licensing fees 293,178 280,848 276,288
6,901,176 7,187,115
OPERATING EXPENSES:
Cost of product sales 2,933,512 2,826,718 3,019,282
Selling, general and administrative 3,010,884 2,501,894 2,272,602
Research and development 547,718 519,227 396,234
Operating income 527,828 1,053,337 1,498,997
OTHER INCOME 725,000 - -
INTEREST INCOME, net 106,424 75,706 36,717
Income before income taxes 1,359,252 1,129,043 1,535,714
PROVISION FOR INCOME TAXES 543,000 464,000 630,000
Net income $ 816,252 $ 665,043 $ 905,714
--------- -------- --------
Weighted average number of common
shares outstanding:
Basic 9,329,277 9,329,277 9,316,202
--------- --------- ---------
Assuming dilution 9,839,689 9,979,489 10,228,275
--------- ---------- ---------
Earnings per common share:
Basic $.09 $.07 $.10
--------- ---------- ---------
Assuming dilution $.08 $.07 $.09
--------- ---------- ---------
<FN>
The accompanying nots to financial statements are an integral part of these
statements
</FN>
</TABLE>
<PAGE>
<TABLE>
F-5
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 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
Net income - - - -
- 816,252
------ ------- --------- ------
- --------- ---------
BALANCE, December 31, 1998 - - 9,329,277 $37,317
$2,697,364 $1,604,507
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</FN>
</TABLE>
<PAGE>
<TABLE>
F-6
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 816,252 $665,043 $ 905,714
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 124,066 92,175 76,968
Decrease (increase) in deferred tax asset 17,500 - (87,000)
Decrease (increase) in accounts receivable 160,182 56,636 (378,642)
(Increase) decrease in inventory (223,172) 34,641 83,542
(Increase) decrease in other current assets ( 4,074) 7,890 (3,789)
Increase (decrease) in accounts
payable and accrued expenses 615,342 (135,199) 290,423
--------- ------ -------
Net cash provided by operating activities 1,506,096 721,186 887,216
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (2,254,099) (137,820) (84,334)
Net cash used in investing activities (2,254,099) (137,820) (84,334)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 22,094
Redemption of shares of preferred stock - - (300,000)
--------- -------- -------
Net cash used in financing activities - - (277,906)
--------- -------- -------
Net (decrease) increase in cash and
cash equivalents ( 748,003) 583,366 524,976
CASH AND CASH EQUIVALENTS, beginning of
year 2,190,345 1,606,979 1,082,003
CASH AND CASH EQUIVALENTS, end of year $1,442,342 $2,190,345 $1,606,979
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
F-6 continued
CAS MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Continued)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 1,040 $ 765 $ 1,555
Cash paid during the year for taxes $329,000 $543,000 $424,175
<FN>
The accompanying notes to financial statements are an integral part of these
statements
</FN>
</TABLE>
<PAGE>
F-7
CAS MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) The Company:
CAS Medical Systems, Inc. (the "Company")operates in one business
segment and 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 1998, 1997 and 1996, the
Company had sales to one customer which in the aggregate accounted for
approximately 13% of sales, in each of the three years reported, and
had export sales principally to Europe, including licensing fee
revenues, of $2,254,619, $2,251,702, and $2,371,007, 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. Property 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 and the
building which has a life of 20 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-8
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, Basic Earnings Per Share
is calculated by dividing net income by the weighted average nunmber of
shares of common stock outstanding during the year. No dilution for
any potentially dilutive securities is included. Diluted Earnings Per
Share assumes the conversion of all potentially dilutive securities
using the treasury stock method. The Company adopted SFAS No. 128 in
1997 and, as required, applied it retroactively to the 1996 financial
statements.
As of December 31, 1998, the Company had 650,100 options and 1,295,000
warrants to purchase shares of common stock outstanding.
Under SFAS No. 128, the Company's Basic and Diluted EPS are as follows:
1998 1997 1996
Net income $ 816,252 665,043 905,714
Weighted average shares outsanding 9,329,277 9,329,277 9,316,202
Add: dilutive warrants and options 510,412 650,212 912,073
--------- --------- ---------
Total weighted average shares and
dilutive securities outstanding 9,839,689 9,979,489 10,228,275
--------- ---------- ---------
Net income per share - Basic $.09 $.07 $.10
--------- ---------- ---------
Net income per share - Assuming
Dilution $.08 $.07 $.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:
1998 1997
Raw materials $622,501 $459,358
Work in process 89,866 173,598
Finished goods 235,926 92,165
_______ _______
$948,293 $725,121
(4) Debt:
At December 31, 1998, the Company's line of credit arrangement allowed
for maximum borrowings of $1,000,000, all of which was available. The
line of credit arrangement expires on August 1, 1999 and bears interest
at the prime rate (8.5% at December 31, 1999) plus 1%. During 1997 and
1996, the maximum month end borrowings outstanding under this line were
$100,000, the weighted average borrowings were $8,333, and the weighted
average interest rates on amounts outstanding were 9.5%. There were no
borrowings against the line of credit during 1998. The bank has a
first security interest in all assets of the Company and requires a
compensating balance equal to 10% of the line of credit ($100,000 at
December 31, 1998).
(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 grants a
nonexclusive license to use the Company's blood pressure technology for
a specific application. As part of this agreement, the Company will
receive $1,500,000 plus royalties through the year 2000, of which
$1,100,000 has been received through December 31, 1998. 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 Company's Series C cumulative preferred stock were
entitled to a cumulative dividend, payable quarterly, at the annual
rate of $10 per share. On July 17, 1996, the final 3,000 shares of the
Company's Series C preferred stock were redeemed at $100 per share plus
accrued dividends.
<PAGE>
F-10
(7) Employee Benefit Programs:
Stock Options-
In December 1984, the Board of Directors and stockholders adopted the
1984 Employee Incentive Stock Option Plan (the "1984 Plan"). The
exercise price for common stock issued under the 1984 Plan is to be no
less than the fair market value of the stock at the grant date of the
options. Pursuant to the 1984 Plan, 750,000 shares of common stock
have been reserved for employee (including officers and directors)
purchase. An option granted under the 1984 Plan becomes exercisable in
two equal annual installments, commencing one year from the date of the
grant of the option. Options begin to expire between five and ten
years from the date of grant, depending on the optionholder's
percentage of ownership of the Company. In the event employment is
terminated, the employee no longer has the right to exercise his or her
options unless expressly permitted by the Board of Directors.
In June 1994, the Board of Directors and stockholders adopted the 1994
Employees' Incentive Stock Option Plan (the "1994 Plan"). Pursuant to
the 1994 Plan, 250,000 shares of common stock have been reserved for
employee (including officers and directors) purchase. The 1994 Plan is
the successor to the 1984 Plan and contains provisions which are
similar to those of the 1984 Plan.
In 1993, the Company granted a warrant to purchase 750,000 shares of
common stock to an officer of the Company. The exercise price ($.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 1998, 1997
and 1996 net income and earnings per share would have been reduced to
the following pro forma amounts:
1998 1997 1996
Net income: As reported $816,252 $665,043 $905,714
Pro Forma 795,584 639,074 891,776
Earnings per share: As reported-Basic .09 .07 .10
Pro Forma-Basic .09 .07 .10
As reported-Diluted .08 .07 .09
Pro Forma-Diluted .08 .06 .09
<PAGE>
<TABLE>
F-11
A summary of the Company's stock option plans at December 31, 1998, 1997 and
1996 and
changes during the years then ended is presented in the table and narrative
below:
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
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 625,100 $.57 625,100 $.57 580,900 $
.49
Granted 25,000 .50 - 111,500
1.05
Exercised - - ( 39,800)
.29
Cancelled - - ( 27,500)
.46
_________ _________ _______
Outstanding at
end of year 650,100 $.57 625,100 $.57 625,100 $
.62
Exercisable at
end of year 650,100 .57 569,350 560,121
.59
The following table summarizes information about stock options outstanding at
December
31, 1998:
<CAPTION>
Options Outstanding Options
Exercisable
__________________________________________________________
_______________________
Number Number
Outstanding Weighted Weighted Exercisable
Weighted
at Average Average at
Average
Range of December 31, Remaining Exercise December 31,
Exercise
Exercise Prices 1998 Contractual Life Price 1998
Price
<C> <C> <C> <C> <C>
<C>
$.25 to $.38 343,100 3.06 years $.32 343,100 $
.32
.50 to .75 170,500 4.04 .71 145,500
.75
.82 to .93 111,500 7.02 .91 111,500
.91
1.25 25,000 7.50 1.25 25,000
1.25
____________ _______ __________ ____ _______
_____
$.25 to $1.25 650,100 4.17 years $.57 625,100 $
.57
</TABLE>
<PAGE>
F-12
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 1998 and 1996: risk-free interest rates of
5.08% and 6.06%; expected lives of 10 years; expected volatility of 75%
and 74%, respectively.
(8) Life Insurance-
During 1998, 1997 and 1996, the Company paid life insurance premiums of
approximately $23,000, $20,000 and $17,000, 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.
(9) 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 1998, 1997 and 1996
contributions by the Company were $48,553, $32,260 and $31,512,
respectively.
The Company does not provide other post-retirement or other
post-employment benefits.
(10) Income Taxes:
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes ("SFAS No. 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 No. 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.
The components of the Company's deferred tax assets at December 31, 1998
and 1997 are as follows:
1998 1997
____ ____
Inventories $33,000 $ 25,500
Obsolescense reserve 19,200 29,900
Warranty reserve 7,400 11,100
Bad debt reserve 6,700 10,100
Other 28,200 35,400
______ ______
$94,500 $112,000
<PAGE>
F-13
<TABLE>
The 1998, 1997 and 1996 provisions are comprised of the following:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $446,700 $392,000 $609,500
State 78,800 72,000 107,500
_______ _______ _______
Total 525,500 464,000 717,000
Deferred (Benefit):
Federal 15,300 - ( 74,500)
State 2,200 - ( 12,500)
_______ _______ _______
Total 17,500 - ( 87,000)
Provision for income taxes
$543,000 $464,000 $630,000
</TABLE>
The effective tax rate differs for the federal statutory rate of 34% in
ech year principally due to state income taxes.
(11) Other Income
During 1998, the Company and a third party distributor terminated a sales
contract. The Company received a $725,000 settlement from the third party
and has recorded this amount in other income due to its non-recurring
nature.
(12) Commitments and Contingencies:
Employment Agreements-
The Company is committed under employment agreements with two officers for
payments aggregating approximately $281,000 which expire on December 31,
1999 and August 31, 2000.
(13) Subsequent Event
In February 1999, the Company obtained a nineteen year, 7.25% fixed rate
$1,310,000 mortgage from a bank. The mortgage is secured by a first
mortgage lien on the Company's property consisting of a 4.627 acre parcel
of land and the 24,000 square foot industrial building and associated
improvements on it. The interest rate will be subject to a rate
adjustment ten years from the anniversary date. The interest rate will be
adjusted to 2.50% over the weekly average yield on United States Treasury
Securities in affect 45 days prior to the adjustment date. Monthly
installment payments of $11,000, which includes interest, are required.
<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, 1999 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, 1999 Myron L. Cohen
Date Myron L. Cohen
Director
March 25, 1999 Lawrence Burstein
Date Lawrence Burstein
Director
March 25, 1999 Jerome Baron
Date Jerome Baron
Director
March 25, 1999 Saul Milles
Date Saul Milles
Director
March 25, 1999 Louis P. Scheps
Date Louis P. Scheps
Director
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CAS Medical Systems, Inc.:
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-KSB into the Company's
previously filed Registration Statements on Form S-8 Files Nos. 33-90512
and 33-90514.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Stamford, Connecticut
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000764579
<NAME> CAS MEDICAL SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,442,342
<SECURITIES> 0
<RECEIVABLES> 895,699
<ALLOWANCES> 0
<INVENTORY> 948,293
<CURRENT-ASSETS> 3,460,545
<PP&E> 3,066,536
<DEPRECIATION> 704,849
<TOTAL-ASSETS> 5,825,133
<CURRENT-LIABILITIES> 1,485,945
<BONDS> 0
<COMMON> 37,317
0
0
<OTHER-SE> 1,604,507
<TOTAL-LIABILITY-AND-EQUITY> 5,825,133
<SALES> 6,726,764
<TOTAL-REVENUES> 7,019,942
<CGS> 2,933,512
<TOTAL-COSTS> 3,010,884
<OTHER-EXPENSES> 547,718
<LOSS-PROVISION> (725,000)
<INTEREST-EXPENSE> (106,424)
<INCOME-PRETAX> 1,359,252
<INCOME-TAX> 543,000
<INCOME-CONTINUING> 816,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 816,252
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
