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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 OR 15 (d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 2-96271-B
CAS MEDICAL SYSTEMS, INC.
-------------------------
(Exact name of registrant 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)
(203) 488-6056
--------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange 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, 1999 were
$8,511,230.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 22, 2000 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 $4,054,736. The number of shares of the Registrant's Common Stock
outstanding as of March 22, 2000 was 9,457,577.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 14, 2000 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.
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<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 designs, manufactures and markets medical products, specifically
blood pressure measurement equipment and products for neonatal intensive care.
The Company's products are designed to improve the quality of patient care and
provide exceptional value and performance. The Company has several other
products in various stages of development which it believes may be applicable to
both adult and neonatal/pediatric medicine.
Principal Products and Services
OscilloMate(R) Blood Pressure Monitors and Blood Pressure Measurement Technology
--------------------------------------------------------------------------------
CAS offers its non-invasive blood pressure technology in the form of both
stand-alone monitors that it has developed and manufactured and as modules for
inclusion into other manufacturers' multi-parameter monitoring systems.
The Company offers two monitors for use in the emergency medical service (EMS)
marketplace. The Company also has a line of monitors for the hospital, alternate
site and home care marketplaces. These monitors offer the basic monitoring
parameters of non-invasive blood pressure, pulse oximetry and predictive
temperature.
The Company has agreements to supply modules via original equipment manufacturer
(OEM) agreements to various companies throughout the world. These modules are
used in larger monitoring systems where non-invasive blood pressure is but one
measurement parameter. The Company's OEM agreements are typically multi-year
arrangements to supply technology.
Pedisphyg(R), Safe-Cuff(TM) and Tuff-Cuff(R) Blood Pressure Cuffs
-----------------------------------------------------------------
The Company has developed and sells a complete line of blood pressure cuffs for
the full range of patient population - neonate through adult. These cuffs are
based on design criteria developed from scientific studies to ensure the highest
degree of accuracy and ease of use. CAS cuffs can be used with any blood
pressure monitor currently available, thereby not limiting their potential
marketplace.
Klear-Trace(R) Electrodes
-------------------------
Specifically designed for neonatal application, Klear-Trace electrodes use a
water-based gel adhesive that is gentle to delicate skin and can remain on the
patient for extended periods of time without causing skin irritation.
NeoGuard(R)Reflectors, Limboard(R) Arm Boards, Klear-Temp(R) Temperature Probes,
--------------------------------------------------------------------------------
Klear-Wipe(TM) Preps
--------------------
The product line includes a Reflector to hold skin temperature probes in place
for accurate monitoring, arm boards support IV sites, and sterile water wipes to
remove harmful agents from the skin.
Event-Link(R) Monitoring System
-------------------------------
In October 1999, CAS acquired the Event-Link(R) product line from a third party.
The purchase includes the infant and adult apnea monitors and accessories for
hospital and home use, as well as the Event-Link(R) Software for data retrieval
and display. The Event-Link system offers options that combine
cardio-respiratory monitoring, pulse oximetry and event recording to provide
complete, objective documentation and monitoring of all age groups.
- 2 -
<PAGE>
The Event-Link(R) Monitoring system is a natural extension for both the neonatal
specialty and diagnostic monitoring product lines, as CAS builds its hospital
monitoring business and expands into the homecare marketplace.
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 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.
Financial Information Relating to Sales
Year Ended December 31,
1999 1998 1997
----------------------------------------------
Domestic Sales $6,151,194 $4,765,323 $4,649,474
Export (including
licensing fees) 2,360,036 2,254,619 2,251,702
----------------------------------------------
$8,511,230 $7,019,942 $6,901,176
========== ========== ==========
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.
- 3 -
<PAGE>
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 1999, 1998, and 1997 the Company had sales to one customer which in the
aggregate accounted for approximately 14%, 13% and 13% of sales, respectively.
Research and Development
------------------------
In 1999, 1998 and 1997, the Company spent approximately $575,000, $548,000 and
$519,000, respectively, on activities relating to the development of new
products and the improvement of existing products.
The Company will continue to develop and expand its patient monitoring
capability, by adding new physiological parameters. In addition, plans are in
process to improve information processing within the monitor, using new screen
and communication technology. This will allow the Company to attempt to
significantly increase sales penetration in the Acute and Intensive Care market.
Employees
---------
As of December 31, 1999, the Company had 65 employees of whom 63 were full-time.
The Company has no collective bargaining agreements and believes that relations
with its employees are good.
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.
- 4 -
<PAGE>
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.
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 patterned its new Quality System Regulation after
ISO 9001. CAS is in full compliance with the new Quality System Regulation.
Backlog
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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, 1999, the
Company had a backlog of orders from customers for products with requested ship
dates in 2000 totaling approximately $3,196,000, deliverable throughout 2000, as
compared to $1,184,000 as of December 31, 1998. During the first quarter of
2000, the Company will fulfill approximately $1,374,000 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: CASR, PedisphygR, OscilloMateR, NeoGuardR, Tuff-CuffR, LimboardR,
Klear-TraceR, and the heart shaped mark for use as a thermal reflector and the
Company's corporate logo. The Company continues to use the Safe-CuffTM common
law trademark.
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 and Event-Link monitors.
- 5 -
<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. The
Company is the sole tenant of this new facility.
During January 1999, the Company obtained a nineteen year, 7.25 percent 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 payments are approximately $11,000
per month. The Company believes that the 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
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None.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
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(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, 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
March 31, 1999 7/16 7/16
June 30, 1999 7/16 7/16
September 30, 1999 13/32 13/32
December 31, 1999 15/32 15/32
(b) The following table sets forth the approximate number of holders of
record of Common Stock of the Company on December 31, 1999.
Title of Class Number of Shareholders
-------------- ----------------------
Common Stock, $.004 par value 415
(c) No cash dividends have been declared on the Company's common stock
during 1999 or 1998.
- 6 -
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
Results of Operations
---------------------
1999 Compared to 1998
---------------------
The Company earned $504,000 ($.05 per common share on a diluted basis)
in 1999, compared to $816,000 ($.08 per common share on a diluted basis) in
1998. The 1999 earnings performance was impacted unfavorably by increased
personnel costs in the sales and research and development departments, in
contrast to 1998, when earnings in 1998 were favorably impacted by non-operating
income from a one-time contract settlement.
The Company's revenues were approximately $8,511,000 for 1999 and
exceeded the prior year by approximately $1,491,000, or 21.2 percent. Revenues
for 1999 reflected strong sales of non-invasive blood pressure monitors, and
NIBP modules to Original Equipment Manufacturers ("OEM") who utilize the
Company's technology in their system.
Total cost of product sales as a percentage of net product sales was
42.9 percent for 1999 compared to 43.6 percent for 1998. The favorable impact of
product cost is the result of added production efficiency and product cost
reduction.
Research and development expenses increased by 5 percent during 1999 to
approximately $575,000 compared to approximately $548,000 for the same period of
1998. This increase during 1999 is due primarily to development cost of new
products.
Selling, general and administrative expenses were approximately
$3,402,000 in the year ended December 31, 1999 compared to approximately
$3,011,000 in the prior year, an increase of 13 percent. The overall increase is
the result of additional sales personnel, both domestic and abroad.
The Company received $83,810 in interest income and incurred $87,826 of
interest expense during 1999 compared with interest income of $106,425 in the
same period of 1998. The increase in interest expenses for 1999 is largely due
to the mortgage obtained from a local bank on the Company's new facilities in
Branford, Connecticut.
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 non-operating
income 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. Revenues for 1998 reflect a significant increase of 22
percent for Klear-Trace disposable products, whereas diagnostic equipment sales
decreased by 21 percent. This was attributed to the loss of a few key OEM
accounts due to their corporate restructuring.
Total cost of product sales increased to 43.6 percent as a percentage of
net product sales from 42.7 percent when comparing 1998 to 1997. This 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.
- 7 -
<PAGE>
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.
During 1998, the Company earned approximately $106,000 of interest
income compared to approximately $76,000 for 1997.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
As of December 31, 1999, the Company's cash and cash equivalents totaled
$1,255,450 compared to $1,442,342 at December 31, 1998 (a decrease of 15%), and
the Company's working capital totaled $3,448,401 on December 31, 1999, compared
to $1,974,600 on December 31, 1998. The Company's decreased cash position is due
to internally financing the acquisition of the Event-Link(R) product line from a
third party. The purchase includes the infant and adult apnea monitors and
accessories for hospital and home use as well as the Event-Link(R) Software for
data retrieval and display. The purchase price was $725,000.
In January 1999, the Company obtained a nineteen year, 7.25 percent
fixed rate, $1,310,000 mortgage from a local bank. The mortgage is secured by a
first mortgage lien on the company operating facilities consisting of 4.6 acres
of land and the 24,000 square foot building. The monthly payments, including
interest, are approximately $11,000. The borrowing provided additional working
capital in 1999. Consequently, the Company's working capital ratio increased
from 2.31 at December 31, 1998 to 4.25 at December 31, 1999.
At December 31, 1999, 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 rate plus 0.5%. At December 31, 1999, there were no borrowings outstanding
under this line.
On July 27, 1994, the Company entered into a 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 the agreement, the Company will receive license fees of
$1,500,000 plus royalties, of which $1,300,000 in license fees has been received
through December 31, 1999. 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 2000 operations and its existing line of credit arrangement
will provide the Company with adequate liquidity and capital resources to meet
its 2000 financial requirements.
Year 2000 Compliance
Regarding the Year 2000 ("Y2K") issue: There have been no adverse
effects on the Company's systems or operations or with its suppliers.
- 8 -
<PAGE>
Item 7. Index to Financial Statements
--------------------------------------
Report of Independent Public Accountants F-1
Balance Sheets - December 31, 1999 and 1998 F-2
Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 F-3
Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Notes to Financial Statements F-6 to F-12
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 Disclosures
---------------------
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 21, 2000, and to be 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 21, 2000, and to be 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 21, 2000, and to be filed with the Securities
Exchange Commission.
- 9 -
<PAGE>
Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------
The Company and Louis P. Scheps have entered into an employment agreement
pursuant to which Mr. Scheps serves as President and Chief Executive 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 occurring, 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 Company'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 acquirer or acquirers 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 exercisable solely in the
event of a Change of Control.
The Company also has an employment agreement with Dr. Myron Cohen under which he
serves as Executive Vice President of the Company through December 31, 2000 at
an annual base salary of $102,400. There are no benefits payable to Dr. Cohen
upon termination of the agreement.
PART IV
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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.
- 10 -
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Index to Financial Statements
Page
----
Report of Independent Public Accountants F-1
Balance Sheets -- December 31, 1999 and 1998 F-2
Statements of Income for the Years Ended December 31,
1999, 1998 and 1997 F-3
Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 F-5
Notes to Financial Statements F-6 to F-12
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>
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, 1999 and 1998, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/Arthur Andersen LLP
---------------------------
Stamford, Connecticut
January 28, 2000
F-1
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Balance Sheets
December 31, 1999 and 1998
<TABLE><CAPTION>
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,255,450 $1,442,342
Accounts receivable, net of allowance for doubtful accounts of $30,000 and
$17,000 in 1999 and 1998, respectively 1,624,676 895,699
Inventories 1,429,692 948,293
Deferred tax asset 137,500 94,500
Other current assets 61,810 79,711
---------- ----------
Total current assets 4,509,128 3,460,545
---------- ----------
PROPERTY AND EQUIPMENT:
Land and improvements 535,000 535,000
Buildings and improvements 1,392,837 1,379,590
Machinery and equipment 1,414,141 1,151,946
3,341,978 3,066,536
Less- accumulated depreciation 891,493 704,849
---------- ----------
2,450,485 2,361,687
---------- ----------
OTHER ASSETS, net 221,650 2,901
---------- ----------
Total assets $7,181,263 $5,825,133
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 35,560 $
-
Accounts payable 286,533 614,355
Income taxes payable 321,870 444,720
Accrued payroll 147,087 259,697
Accrued professional fees 73,816 90,500
Accrued warranty expenses 30,000 20,000
Other accrued expenses 165,861 56,673
---------- ----------
Total current liabilities 1,060,727 1,485,945
---------- ----------
LONG-TERM DEBT 1,244,005 -
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 11) SHAREHOLDERS' EQUITY:
Common stock, $.004 par value per share, 19,000,000 shares authorized, 9,457,577
and 9,329,277 shares issued and outstanding in 1999 and 1998, respectively 37,831 37,317
Additional paid-in capital 2,730,626 2,697,364
Retained earnings 2,108,074 1,604,507
---------- ----------
Total shareholders' equity 4,876,531 4,339,188
---------- ----------
Total liabilities and shareholders' equity $7,181,263 $5,825,133
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE><CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Net product sales $ 8,266,392 $ 6,726,764 $ 6,620,328
Licensing fees 244,838 293,178 280,848
----------- ----------- -----------
8,511,230 7,019,942 6,901,176
OPERATING EXPENSES:
Cost of product sales 3,531,003 2,933,512 2,826,718
Selling, general and administrative 3,571,166 3,010,884 2,501,894
Research and development 575,478 547,718 519,227
----------- ----------- -----------
Operating income 833,583 527,828 1,053,337
OTHER INCOME -- 725,000 --
INTEREST (EXPENSE) INCOME, net (4,016) 106,424 75,706
----------- ----------- -----------
Income before provision for income taxes 829,567 1,359,252 1,129,043
PROVISION FOR INCOME TAXES 326,000 543,000 464,000
----------- ----------- -----------
Net income $ 503,567 $ 816,252 $ 665,043
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic 9,347,748 9,329,277 9,329,277
=========== =========== ===========
Assuming dilution 9,703,854 9,839,689 9,979,489
=========== =========== ===========
Earnings per common share:
Basic $ .05 $ .09 $ .07
=========== =========== ===========
Assuming dilution $ .05 $ .08 $ .07
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE><CAPTION>
Common Stock Additional
-------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 9,329,277 $ 37,317 $2,697,364 $ 123,212 $2,857,893
Net income -- -- -- 665,043 665,043
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1997 9,329,277 37,317 2,697,364 788,255 3,522,936
Net income -- -- -- 816,252 816,252
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1998 9,329,277 37,317 2,697,364 1,604,507 4,339,188
Net income -- -- -- 503,567 503,567
Common stock issued 128,300 514 33,262 -- 33,776
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1999 9,457,577 $ 37,831 $2,730,626 $2,108,074 $4,876,531
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE><CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 503,567 $ 816,252 $ 665,043
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 192,894 124,066 92,175
Deferred income taxes (43,000) 17,500 --
Changes in operating assets and liabilities:
Accounts receivable (728,977) 160,182 56,636
Inventories (111,399) (223,172) 34,641
Other current assets 17,902 (4,074) 7,890
Accounts payable and accrued expenses (460,778) 615,342 (135,199)
----------- ----------- -----------
Net cash (used in) provided by operating activities (629,791) 1,506,096 721,186
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets (725,000) -- --
Expenditures for property and equipment (145,442) (2,254,099) (137,820)
----------- ----------- -----------
Net cash used in investing activities (870,442) (2,254,099) (137,820)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long-term debt 1,310,000 -- --
Repayments under long-term debt (30,435) -- --
Proceeds from issuance of common stock 33,776 -- --
----------- ----------- -----------
Net cash provided by financing activities 1,313,341 -- --
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (186,892) (748,003) 583,366
CASH AND CASH EQUIVALENTS, beginning of year 1,442,342 2,190,345 1,606,979
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,255,450 $ 1,442,342 $ 2,190,345
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 86,153 $ 1,040 $ 765
Cash paid during the year for taxes 489,353 329,000 543,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
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 1999, 1998 and
1997, the Company had sales to one customer which in the aggregate accounted for
approximately 14%, 13% and 13%, respectively, of revenues in each of the three
years reported. The Company generated revenues from international sales
(principally to Europe), including licensing fee revenues, of approximately $2.4
million, $2.3 million and $2.3 million, respectively, in each of the three years
reported.
During October 1999, the Company acquired certain assets related to the
Event-Link(R) product line from a third party for a purchase price of $725,000.
This product line includes infant and adult apnea monitors and accessories for
hospital and home use, as well as the Event-Link(R) Software for data retrieval
and display. The acquisition included inventory, related manufacturing
equipment, intellectual property and licensed technology. Sales related to the
new line were approximately $83,000 in 1999. The purchase price was allocated to
the assets acquired based upon their estimated fair values at the date of
acquisition as follows:
Inventory $370,000
Equipment 130,000
Licensed technology 225,000
--------
$725,000
========
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.
Licensed Technology
-------------------
Licensed technology acquired in connection with the product line assets acquired
in 1999 is being amortized over five years on the straight-line basis and is
included within other assets in the accompanying balance sheet at December 31,
1999. Amortization expense associated with this intangible asset was $6,250 for
the year ended December 31, 1999.
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 (Note 5).
F-6
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
Research and Development Costs
------------------------------
The Company expenses all research and development costs as incurred.
Earnings per Common Share
-------------------------
The Company computes earnings per common share in accordance with 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 number 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.
As of December 31, 1999, the Company had outstanding options and warrants to
purchase 963,900 and 1,395,000 shares of common stock, respectively.
Under SFAS No. 128, a summary of the Company's basic and diluted earnings per
share is as follows:
<TABLE><CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 503,567 $ 816,252 $ 665,043
========== ========== ==========
Weighted average shares outstanding 9,347,748 9,329,277 9,329,277
Add: Dilutive warrants and options 356,106 510,412 650,212
---------- ---------- ----------
Total weighted average shares and dilutive
securities outstanding 9,703,854 9,839,689 9,979,489
========== ========== ==========
Earnings per share - basic $ .05 $ .09 $ .07
========== ========== ==========
Earnings per share - assuming dilution $ .05 $ .08 $ .07
========== ========== ==========
</TABLE>
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.
New Accounting Pronouncements
-----------------------------
In December 1999, Staff Accounting Bulletin No. 101 (SAB 101) Revenue
Recognition, was issued. SAB 101 will require a company to defer revenue
recognition on product shipments until contractual terms of customer acceptance,
including inspection and installation requirements, are met. The Company will be
required to adopt this new accounting principle through a cumulative charge to
retained earnings in accordance with the provisions of APB Opinion No. 20 no
later than the first quarter of fiscal 2001. The Company does not believe that
the adoption of this standard will have a material impact on its future
operating results.
3. INVENTORIES
-----------
Inventories include costs of materials, labor and manufacturing overhead.
F-7
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
Inventories are stated at the lower of first-in, first-out (FIFO) cost or market
and consist of the following:
1999 1998
---------- ----------
Raw materials $ 916,837 $ 622,501
Work in process 256,402 89,866
Finished goods 256,453 235,926
---------- ----------
$1,429,692 $ 948,293
========== ==========
4. FINANCING ARRANGEMENTS
----------------------
Line of Credit
--------------
At December 31, 1999, 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 September 1, 2000 and bears interest at the prime rate
(8.5% at December 31, 1999) plus 0.5%. There were no borrowings on the line in
1998. During 1999, the maximum month-end borrowing outstanding under this line
was $400,000, the weighted average borrowing was $19,726 and the weighted
average interest rate on amounts outstanding was 8.75%. There were no borrowings
outstanding at December 31, 1999. The bank has a first security interest in
substantially all assets of the Company and requires a compensating balance
equal to 10% of the line of credit.
Long-term Debt
--------------
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 operating facilities consisting of 4.6 acres of land and
the 24,000 square foot industrial building. The monthly payments, including
interest, are approximately $11,000. Scheduled maturities of principal under the
mortgage over the next five years is as follows:
2000 $ 35,560
2001 38,250
2002 41,120
2003 44,200
2004 47,510
Thereafter 1,072,925
----------
$1,279,565
==========
F-8
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
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 $1,300,000 has been received through December 31, 1999. 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. STOCK-BASED COMPENSATION PROGRAMS
---------------------------------
Stock Options
-------------
In December 1984, the Board of Directors and shareholders 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 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) purchases. 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 shareholders 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.
During 1999, the Board of Directors approved an increase in the number of shares
of common stock issuable under stock options under the 1994 Plan to 1,250,000.
This amendment is contingent upon the approval of the shareholders of the
Company within twelve months from the date of the amendment.
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 1999,
F-9
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
1998 and 1997 net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE><CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income: As reported $503,567 $816,252 $665,043
Pro forma 488,508 795,584 639,074
Earnings per share: As reported - Basic .05 .09 .07
Pro forma - Basic .05 .09 .07
As reported - Diluted .05 .08 .07
Pro forma - Diluted .05 .08 .06
</TABLE>
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 1999 and 1998 (none were granted in 1997):
risk-free interest rates of 6.3% and 5.1%, expected lives of 10 years; expected
volatility of 73% and 75%, respectively.
A summary of the Company's stock option plans at December 31, 1999, 1998 and
1997 and changes during the years then ended is presented below:
<TABLE><CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
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 650,100 $.57 625,100 $.57 625,100 $.57
Granted 474,400 .54 25,000 .50 --
Exercised (128,300) .26 -- --
Canceled (32,300) 1.10 -- --
------- ------- -------
Outstanding at end of
year 963,900 $.57 650,100 $.57 625,100 $.57
======= ======= =======
Exercisable at end of
year 483,250 $.61 625,100 $.57 569,350 $.52
======= ======= =======
Weighted average fair
value of options
granted during the
year $.44 $.41 $--
</TABLE>
F-10
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE><CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Exercisable at
Range of Exercise December 31, Contractual Life Weighted-Average December 31, Weighted-Average
Prices 1999 (Years) Exercise Price 1999 Exercise Price
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$.31 to $.38 212,500 3.0 $.36 212,500 $.36
.50 to .75 639,900 8.1 .58 159,250 .73
.82 to .93 111,500 6.0 .91 111,500 .91
----------------- ------- -------
$.31 to $.93 963,900 6.7 $.57 483,250 $.61
======= =======
</TABLE>
Warrants
--------
Prior to 1999, the Company granted outstanding warrants to purchase 1,395,000
shares of common stock at exercise prices ranging from $.31 to $1.00 per common
share. None of the warrants have been exercised as of December 31, 1999.
7. LIFE INSURANCE
--------------
During 1999, 1998 and 1997, the Company paid term-life insurance premiums of
approximately $27,900, $23,000 and $20,000, 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.
8. 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 1999, 1998 and 1997 contributions by the
Company were $44,075, $48,553 and $32,260, respectively.
The Company does not provide other post-retirement or other post-employment
benefits.
9. 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 to the extent that realization of such benefits are more likely than
not.
F-11
<PAGE>
CAS MEDICAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1999
The 1999, 1998 and 1997 provisions are comprised of the following:
<TABLE><CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 286,000 $ 446,700 $ 392,000
State 83,000 78,800 72,000
--------- --------- ---------
Total 369,000 525,500 464,000
--------- --------- ---------
Deferred (Benefit):
Federal (33,000) 15,300 --
State (10,000) 2,200 --
--------- --------- ---------
Total (43,000) 17,500 --
--------- --------- ---------
Provision for income taxes $ 326,000 $ 543,000 $ 464,000
========= ========= =========
</TABLE>
The effective tax rate differs for the federal statutory rate of 34% in each
year principally due to state income taxes.
The components of the Company's deferred tax assets at December 31, 1999 and
1998 are as follows:
1999 1998
-------- --------
Inventories $ 74,000 $ 52,200
Warranty reserve 12,000 7,400
Bad debt reserve 12,000 6,700
Other 39,500 28,200
-------- --------
$137,500 $ 94,500
======== ========
10. 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-operating nature.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
Employment Agreements
The Company is committed under employment agreements with two officers for
payments aggregating approximately $287,000 per year which expire on August 31,
2000 and December 31, 2000.
F-12
<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)
/s/ Louis P. Scheps Date: May 19, 2000
-------------------------------------
By: Louis P. Scheps
(President, Chief Executive Officer and
Chief Financial Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Myron L. Cohen Date: May 19, 2000
-----------------------------------
Myron L. Cohen, Director
/s/ Lawrence Burstein Date: May 19, 2000
-----------------------------------
Lawrence Burstein, Director
/s/ Jerome Baron Date: May 19, 2000
--------------------------------------
Jerome Baron, Director
/s/ Saul Milles Date: May 19, 2000
-----------------------------------------
Saul Milles, Director
/s/ Louis P. Scheps Date: May 19, 2000
--------------------------------------
Louis P. Scheps, Director
