UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
Quarterly
Report Under Section 13 or 15 (d)
of the
Securities Exchange Act of 1934
For the
Quarterly Period Ended March 31, 2005
Commission
File Number 0-13839
CAS
MEDICAL SYSTEMS, INC.
(Exact
name of small business issuer as specified in its charter)
|
Delaware |
06-1123096 |
|
(State
or other jurisdiction of |
(I.R.S.
employer |
|
incorporation
or organization) |
identification
no.) |
44 East
Industrial Road, Branford, Connecticut 06405
(Address
of principal executive offices)
(Issuer’s
telephone number, including area code)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the 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
o
State the
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: Common Stock, $.004 par value 9,891,494
shares as of May 1, 2005.
Transitional
Small Business Disclosure Format (check one): Yes o No
x
Form
10-QSB
March 31,
2005
Page
2
INDEX
|
PART
1 |
Financial
Information |
|
Page
No. |
|
| |
|
|
|
|
|
Item
1 |
Financial
Statements |
|
|
|
| |
|
|
|
|
| |
Condensed
Balance Sheets as of March 31, 2005 |
|
|
|
| |
and
December 31, 2004 |
|
3 |
|
| |
|
|
|
|
| |
Condensed
Statements of Income for the Three |
|
|
|
| |
Months
Ended March 31, 2005 and 2004 (Restated) |
|
5 |
|
| |
|
|
|
|
| |
Condensed
Statements of Cash Flow for the Three |
|
|
|
| |
Months
Ended March 31, 2005 and 2004 (Restated) |
|
6 |
|
| |
|
|
|
|
| |
Notes
to Condensed Financial Statements |
|
7 |
|
| |
|
|
|
|
|
Item
2 |
Management’s
Discussion and Analysis of Financial Condition |
|
|
|
| |
and
Results of Operations |
|
11 |
|
| |
|
|
|
|
|
Item
3 |
Controls
and Procedures |
|
14 |
|
| |
|
|
|
|
|
PART
II |
Other
Information |
|
|
|
| |
|
|
|
|
|
Item
6 |
Exhibits |
|
15 |
|
| |
|
|
|
|
|
Signatures |
|
|
16 |
|
Form
10-QSB
March 31,
2005
Page
3
PART I
- FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CAS
Medical Systems, Inc.
Condensed
Balance Sheets
| |
|
(Unaudited) |
|
|
|
Assets |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
Current
Assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
1,702,456 |
|
$ |
1,973,452 |
|
Accounts
receivable, net of allowance |
|
|
|
|
|
|
|
for
doubtful accounts |
|
|
2,741,249 |
|
|
2,929,167 |
|
Inventories |
|
|
2,831,526 |
|
|
2,662,686 |
|
Deferred
income taxes |
|
|
250,342 |
|
|
250,342 |
|
|
Other
current assets |
|
|
287,095 |
|
|
355,367 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Total
current assets |
|
|
7,812,668 |
|
|
8,171,014 |
|
| |
|
|
|
|
|
|
|
Property
and Equipment: |
|
|
|
|
|
|
|
Land
and improvements |
|
|
535,000 |
|
|
535,000 |
|
Building
and improvements |
|
|
1,473,698 |
|
|
1,473,698 |
|
|
Machinery
and equipment |
|
|
3,216,701 |
|
|
2,908,376 |
|
| |
|
|
|
|
|
|
|
| |
|
|
5,225,399 |
|
|
4,917,074 |
|
| |
|
|
|
|
|
|
|
|
Accumulated
depreciation |
|
|
(2,730,597 |
) |
|
(2,649,031 |
) |
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
2,494,802 |
|
|
2,268,043 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Intangible
and other assets, net |
|
|
199,316 |
|
|
167,990 |
|
| |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
385,935 |
|
|
385,935 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
10,892,721 |
|
$ |
10,992,982 |
|
Form
10-QSB
March 31,
2005
Page
4
CAS
Medical Systems, Inc.
Condensed
Balance Sheets
| |
|
(Unaudited) |
|
|
|
| |
|
March
31, |
|
December
31, |
|
|
Liabilities
and Stockholders’ Equity |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
Current
portion of long-term debt |
|
$ |
59,735 |
|
$ |
58,929 |
|
Accounts
payable |
|
|
861,284 |
|
|
734,939 |
|
Income
taxes |
|
|
40,505 |
|
|
417,130 |
|
|
Accrued
expenses |
|
|
605,939 |
|
|
854,410 |
|
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
1,567,463 |
|
|
2,065,408 |
|
| |
|
|
|
|
|
|
|
Long-term
debt, less current portion |
|
|
1,019,255 |
|
|
1,034,495 |
|
| |
|
|
|
|
|
|
|
Retirement
benefit obligation |
|
|
775,288 |
|
|
736,988 |
|
| |
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Stockholders'
Equity: |
|
|
|
|
|
|
|
Common
stock, $.004 par value per share, |
|
|
|
|
|
|
|
19,000,000
shares authorized, 9,977,494 and |
|
|
|
|
|
|
|
9,959,173
shares issued at March 31, 2005 and |
|
|
|
|
|
|
|
December
31, 2004, respectively, including |
|
|
|
|
|
|
|
shares
held in treasury |
|
|
39,910 |
|
|
39,837 |
|
Additional
paid-in capital |
|
|
3,054,031 |
|
|
3,031,387 |
|
Common
stock held in treasury, at cost - 86,000 shares |
|
|
(101,480 |
) |
|
(101,480 |
) |
|
Retained
earnings |
|
|
4,538,254 |
|
|
4,186,347 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity |
|
|
7,530,715 |
|
|
7,156,091 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity |
|
$ |
10,892,721 |
|
$ |
10,992,982 |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Form
10-QSB
March 31,
2005
Page
5
CAS
Medical Systems, Inc.
Condensed
Statements of Income
(Unaudited)
Three
Months Ended
March
31,
| |
|
|
|
|
|
|
|
|
|
2004 |
|
| |
|
2005 |
|
Restated |
|
| |
|
|
|
|
|
REVENUES |
|
$ |
4,948,511 |
|
$ |
4,556,442 |
|
| |
|
|
|
|
|
|
|
OPERATING
EXPENSES: |
|
|
|
|
|
|
|
Cost
of product sales |
|
|
2,703,191 |
|
|
2,509,911 |
|
Research
and development |
|
|
252,750 |
|
|
273,649 |
|
|
Selling,
general and administrative |
|
|
1,472,218 |
|
|
1,536,004 |
|
|
|
|
|
|
|
|
|
| |
|
|
4,428,159 |
|
|
4,319,564 |
|
| |
|
|
|
|
|
|
|
Operating
income |
|
|
520,352 |
|
|
236,878 |
|
| |
|
|
|
|
|
|
|
|
Interest
expense |
|
|
2,945 |
|
|
27,780 |
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
517,407 |
|
|
209,098 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
INCOME
TAXES (BENEFIT) |
|
|
165,500 |
|
|
(7,327 |
) |
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
351,907 |
|
$ |
216,425 |
|
| |
|
|
|
|
|
|
|
Weighted
average number of |
|
|
|
|
|
|
|
common
shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
9,889,662 |
|
|
9,724,002 |
|
| |
|
|
|
|
|
|
|
|
Diluted |
|
|
11,435,494 |
|
|
11,012,856 |
|
| |
|
|
|
|
|
|
|
Earnings
per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
$ |
0.02
|
|
| |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.03 |
|
$ |
0.02 |
|
The
accompanying notes are an integral part of these financial
statements.
Form
10-QSB
March 31,
2005
Page
6
CAS
Medical Systems, Inc.
Condensed
Statements of Cash Flow
(Unaudited)
| |
|
Three
Months Ended |
|
| |
|
|
|
March
31, |
|
| |
|
March
31, |
|
2004 |
|
|
|
|
2005 |
|
Restated |
|
|
|
|
|
|
|
OPERATING
ACTIVITIES: |
|
|
|
|
|
Net
income |
|
$ |
351,907 |
|
$ |
216,425 |
|
Adjustments
to reconcile net income |
|
|
|
|
|
|
|
to
net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
105,938 |
|
|
113,064 |
|
Deferred
income taxes |
|
|
— |
|
|
(17,678 |
) |
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
187,918
|
|
|
375,911
|
|
Inventories |
|
|
(168,840 |
) |
|
(271,779 |
) |
Other
current assets |
|
|
68,272 |
|
|
205,862 |
|
Retirement
benefit obligation |
|
|
38,300 |
|
|
50,522 |
|
|
Accounts
payable and accrued expenses |
|
|
(498,751 |
) |
|
98,718 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
|
84,744
|
|
|
771,045
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES: |
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(308,325 |
) |
|
(5,787 |
) |
|
Purchase
of intangible and other assets |
|
|
(55,699 |
) |
|
(28,894 |
) |
| |
|
|
|
|
|
|
|
Net
cash used by investing activities |
|
|
(364,024 |
) |
|
(34,681 |
) |
| |
|
|
|
|
|
|
|
FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
Repayments
under notes payable |
|
|
|
|
|
(103,048 |
) |
Repayments
of long-term debt |
|
|
(14,434 |
) |
|
(116,215 |
) |
|
Proceeds
from issuance of common stock |
|
|
22,718 |
|
|
8,399 |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided
(used)
by
financing activities |
|
|
8,284 |
|
|
(210,864 |
) |
| |
|
|
|
|
|
|
|
Change
in cash and cash equivalents |
|
|
(270,996 |
) |
|
525,500 |
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period |
|
|
1,973,452 |
|
|
881,087 |
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period |
|
$ |
1,702,456 |
|
$ |
1,406,587 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
Cash
paid during the period for interest |
|
$ |
15,148 |
|
$ |
30,648 |
|
Cash
paid (received) during the period for income taxes, net |
|
|
542,125 |
|
$ |
(176,637 |
) |
The
accompanying notes are an integral part of these financial
statements.
Form
10-QSB
March 31,
2005
Page
7
CAS
Medical Systems, Inc.
Notes to
Condensed Financial Statements
(Unaudited)
March 31,
2005
(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 both
internationally and in the United States. The Company's operations and
manufacturing facilities are located in the United States. During fiscal
years 2004,
2003 and 2002, the Company had sales to one customer which, in the aggregate,
accounted for approximately 18%, 18% and 20% of revenues, respectively. The
Company generated revenues from international sales of approximately $4.5
million, $3.5 million and $2.6 million in fiscal
years 2004,
2003, and 2002, respectively. In the normal course of business the Company
grants credit to customers and does not require collateral. Credit losses are
provided for in the sales period based on experience and an evaluation of the
likelihood of collection. Credit losses have been within management’s
expectations.
(2) Basis of
Presentation
The
financial statements included herein have been prepared, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
filed on Form 10-KSB for the year ended December 31, 2004. The condensed balance
sheet as of December 31, 2004 was derived from the audited financial statements
for the year then ended.
In the
opinion of the Company, all adjustments necessary to present fairly the
financial position of the
Company
CAS as of
March 31, 2005, and the results of its operations and its cash flows for the
three months ended March 31, 2005 and 2004 (restated) have been included in the
accompanying unaudited financial statements. The results of operations for
interim periods are not necessarily indicative of the expected results for the
full year 2005.
(3) Restatement
During
the 2004 year-end audit, management, together with the Audit Committee of the
Board of Directors, determined that its accounting with respect to a
postretirement benefit plan (the “Plan”) was not in accordance with Financial
Accounting Standards Board Statement No. 106, “Accounting for Post-Retirement
Benefits Other than Pensions”. Under Statement No. 106, companies are required
to estimate the total future costs of providing postretirement benefits and
recognize that cost over the employees service period. During January 2002, the
Company established the Plan for its qualifying employees who reach age
sixty-five and have provided ten years of service to the Company. The Plan
provides certain prescription drug and supplemental health benefits for Medicare
qualified retirees of the Company. The Company’s obligation under the Plan is to
provide benefits under an insurance contract paid on behalf of the participants.
As described in Note 6, the
Company has modified the Plan during February 2005 to reduce its costs to the
Company.
Statement
No. 106 requires the Company to estimate the total cost of providing
post-retirement benefits and recognize that cost over the employees’ service
period. Prior to retroactively applying Statement No. 106, the Company
recognized the benefit cost using the cash basis of accounting. The benefits are
funded through the purchase of medical insurance for each retiree each year. The
Company continues to fund the Plan on a “pay-as-you-go” basis.
The
Company has evaluated its post-retirement benefit arrangements in accordance
with FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003”. The Act
introduces a prescription drug benefit under Medicare (“Medicare Part D”) as
well as a federal subsidy to
Form
10-QSB
March 31,
2005
Page
8
sponsors
of retirement benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Company’s post-retirement benefit costs do
not reflect amounts associated with the subsidy because it is unable to conclude
whether the benefits provided by the Plan are actuarially equivalent to Medicare
Part D.
The
accompanying statements of income and cash flows for the three month period
ended March 31, 2004 have been restated to include additional benefit expense
related to the Plan of $50,522 and for the related deferred income tax benefit
of $17,678.
(4)
Inventories
Inventories
consisted of the following:
| |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
Raw
material |
|
$ |
2,114,568 |
|
$ |
1,727,578 |
|
Work-in-process |
|
|
8,835 |
|
|
144,628 |
|
|
Finished
inventory |
|
|
708,123 |
|
|
790,480 |
|
| |
|
$ |
2,831,526 |
|
$ |
2,662,686 |
|
(5) Warranty
Costs
The
Company warranties its products for up to three years and records the estimated
cost of such product warranties at the time the sale is recorded. Estimated
warranty costs are based upon actual past experience of product returns and the
related estimated cost of labor and material to make the necessary repairs. If
actual future product return rates or the actual costs of material and labor
differ from the estimates, adjustments to the accrued warranty liability would
be made.
A summary
of the changes in the Company’s warranty accrual follows:
| |
|
Three
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
Beginning
balance |
|
$ |
122,000 |
|
$ |
122,000 |
|
Provisions |
|
|
21,800 |
|
|
31,500 |
|
|
Warranty
costs incurred |
|
|
(21,800 |
) |
|
(31,500 |
) |
|
Ending
balance |
|
$ |
122,000
|
|
$ |
122,000 |
|
(6) Post-Retirement
Health Benefit Plan
Components
of the net periodic benefit cost of the Company’s post-retirement health benefit
plans were as follows:
| |
|
Three
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
Service
cost |
|
$ |
16,636 |
|
$ |
22,216 |
|
Interest
cost |
|
|
12,262 |
|
|
11,730 |
|
Prior
service cost recognition |
|
|
16,090 |
|
|
28,265 |
|
|
Gain
recognition |
|
|
(106 |
) |
|
(5,003 |
) |
|
Net
periodic benefit cost |
|
$ |
44,882 |
|
$ |
57,208 |
|
Form
10-QSB
March 31,
2005
Page
9
In
February 2005, the Company amended the plan to require participants to
contribute fifty percent of health insurance premiums under the plan beginning
September 1, 2005. The plan amendment reduced the accumulated postretirement
benefit obligation by approximately $524,500 resulting in an unrecognized prior
service gain of approximately $185,000. This gain is being recognized over the
average remaining service life of the plan participants which is approximately
5.6 years. Refer to Note 2 to the
financial statements presented in the 2004 annual report on Form 10-KSB for
additional plan information.
Plan
health insurance premiums paid by the Company were $7,898 and $6,195 for the
three months ended March 31, 2005 and 2004, respectively.
(7) Earnings per
Common Share
The
Company computes basic earnings per share by dividing net income by the weighted
average number of shares of common stock outstanding during the period. No
potentially dilutive securities are included in the denominator. Diluted
earnings per share assumes the exercise or conversion of dilutive securities.
Warrants to purchase 22,500 shares of the Company’s Common Stock outstanding at
March 31, 2004 were not included in the computation of diluted earnings per
share because their exercise price was greater than the average market price of
the common shares and, therefore, their inclusion would have been anti-dilutive.
There were no anti-dilutive securities for the three months ended March 31,
2005.
The
following summarizes the Company's calculation of basic and diluted earnings per
share:
| |
|
Three
Months Ended March 31, |
|
| |
|
|
|
2004 |
|
| |
|
2005 |
|
Restated |
|
| |
|
|
|
|
|
|
Net
income |
|
$ |
351,907 |
|
$ |
216,425 |
|
| |
|
|
|
|
|
|
|
Weighted
average shares outstanding |
|
|
9,889,662 |
|
|
9,724,002 |
|
| |
|
|
|
|
|
|
|
|
Dilutive
effect of warrants and options |
|
|
1,545,832 |
|
|
1,288,854 |
|
| |
|
|
|
|
|
|
|
Total
weighted average shares and |
|
|
|
|
|
|
|
|
dilutive
securities |
|
|
11,435,494 |
|
|
11,012,856 |
|
| |
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
$ |
0.02 |
|
| |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.03 |
|
$ |
0.02 |
|
(8) Stock-Based
Compensation
The
Company primarily grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of the grant. The Company has adopted the disclosure only provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No.
148, “Accounting for Stock-Based Compensation Transition and Disclosure.” 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
Form
10-QSB
March 31,
2005
Page
10
interpretations
where, generally, when the exercise price of stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recorded. Had compensation cost for the stock option awards been determined to
be consistent with SFAS No. 123, the Company’s net income and earnings per share
would have been changed to the following pro forma amounts:
| |
|
|
Three
Months Ended March 31, |
|
| |
|
|
|
|
2004 |
|
| |
|
|
2005 |
|
Restated |
|
| |
|
|
|
|
|
|
|
Net
income: |
As
reported |
|
$ |
351,907 |
|
$ |
216,425 |
|
| |
Compensation
expense for |
|
|
|
|
|
|
|
| |
stock
options based on fair value |
|
|
68,704 |
|
|
1,686 |
|
| |
Pro
forma |
|
$ |
283,203 |
|
$ |
214,739 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
| |
As
reported - Basic |
|
$ |
0.04 |
|
$ |
0.02 |
|
| |
Pro
forma - Basic |
|
|
0.03 |
|
|
0.02 |
|
| |
As
reported - Diluted |
|
|
0.03 |
|
|
0.02 |
|
| |
Pro
forma - Diluted |
|
|
0.02 |
|
|
0.02 |
|
FAS No.
123R, “Share-Based Payment” requires that a public entity measure the cost of
equity based service awards based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award or the vesting period. No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. A public entity will initially measure the
cost of liability based service awards based on current fair value. The fair
value of those awards will be re-measured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite period
will be recognized as compensation cost over the period. The Company is required
to adopt FAS No. 123R on January 1, 2006. The Company has not yet evaluated the
likely effects on its financial statements.
(9) Financing
Arrangements
The
Company has a $3,000,000 line-of-credit with its bank which expires in September
2005. Borrowings under the line-of-credit are payable on demand and bear
interest at the bank's base rate which may change from time to time (5.75% at
March 31, 2005). At March 31, 2005 there were no borrowings under the line of
credit. Under the terms of the loan agreement, the Company is permitted to
borrow against accounts receivable and inventories according to pre-established
criteria. Substantially all assets of the Company are required to be pledged as
collateral for borrowings under the line-of-credit.
(10) Grant
Awards
The
Company has been awarded various grants by the National Institute of
Neurological Disorders and Stroke of the NIH under its Small Business Innovative
Research Program. Grants under this program are being used to support
development of a new technology, Near-Infrared Spectroscopy (“NIRS”) which can
non-invasively measure the brain oxygenation level of a neonatal patient. In
accordance with the terms of these grants, the Company is reimbursed for certain
qualifying expenditures.
Form
10-QSB
March 31,
2005
Page
11
Grants
under the NIH program include a phase II award received during May 2004
approximating $1,000,000 for continued development in the adult population.
During March 2004, the Company was awarded a $100,000 grant for developing a new
generation of automated non-invasive blood pressure (“NIBP”) monitors, which
have incorporated advanced NIBP algorithms that compensate for arterial
stiffness.
During
the three months ended March 31, 2005 and 2004, approximately $141,000 and
$29,000, respectively, of such research and development costs were reimbursed
under the grants. Funding provided to the Company is being recorded as a
reduction in R&D expenses. The Company recognizes the reimbursement on an
accrual basis as the qualifying costs are incurred.
The
Company is pursuing additional NIH grants to support its NIRS
research.
(11) Commitments
and Contingencies
The
Company is committed under an employment agreement with its Chief Executive
Officer for payments aggregating approximately $262,500 per year, which expires
on August 31, 2005.
The
Company’s certificatearticles of
incorporation provides that the
Company will indemnify its directors and
officers to the
full extent legally permissible, against all liabilities reasonably incurred in
connection with any action in which such individual may be involved by reason of
being or having been a director or
officer of the
Company. Given the nature of this indemnification, the Company is unable to make
a reasonable estimate of the maximum potential amount that the Company could be
required to pay. Historically, the Company has not made any significant payments
related to the above indemnification. Currently, there are no known matters for
which the Company may be required to provide indemnification. As such, no amount
has been accrued in the accompanying financial statements. In December 2004 the
Company entered into a non-cancelable operating lease for office and limited
warehouse space adjacent to its owned facilities. Under this lease, the Company
is committed to minimum annual rental payments of $37,000 in 2005, $38,000 in
2006 and $39,000 in 2007.
We enter
into standard indemnification agreements in our ordinary course of business.
Pursuant to these agreements, we indemnify, hold harmless, and agree to
reimburse the indemnified parties for losses suffered or incurred by the
indemnified parties, generally our business partners or customers, in connection
with any U.S. patent, copyright or other intellectual property infringement
claim by any third party with respect to our products. The term of these
indemnification agreements is generally perpetual. The maximum potential amount
of future payments we could be required to make under these indemnification
agreements is unlimited. We have no liabilities recorded for these agreements as
of March 31, 2005.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain
statements included in this report, including without limitation statements in
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are not historical facts, are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company’s current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: foreign currency fluctuations, regulations and other
economic and political factors which affect the Company’s ability to market its
products internationally, new product introductions by the Company’s
competitors, increased price competition, dependence upon significant customers,
availability and cost of components for the Company’s products, marketplace
acceptance for the Company’s new products, FDA and other governmental regulatory
and enforcement actions, and changes to federal research and development grant
programs presently utilized by the Company.
Form
10-QSB
March 31,
2005
Page
12
Restatement
During
the 2004 year-end audit, management, together with the Audit Committee of the
Board of Directors, determined that its accounting with respect to a
postretirement benefit plan (the “Plan”) was not in accordance with Financial
Accounting Standards Board Statement No. 106, “Accounting for Post-Retirement
Benefits Other than Pensions”. Under Statement No. 106, companies are required
to estimate the total future costs of providing postretirement benefits and
recognize that cost over the employees service period. During January 2002, the
Company established the Plan for its qualifying employees who reach age
sixty-five and have provided ten years of service to the Company. The Plan
provides certain prescription drug and supplemental health benefits for Medicare
qualified retirees of the Company. The Company’s obligation under the Plan is to
provide benefits under an insurance contract paid on behalf of the participants.
In February 2005, the Company amended the plan to require participants to
contribute fifty percent of health insurance premiums under the plan beginning
September 1, 2005.
Statement
No. 106 requires the Company to estimate the total cost of providing
post-retirement benefits and recognize that cost over the employees’ service
period. Prior to retroactively applying Statement No. 106, the Company
recognized the benefit cost using the cash basis of accounting. The benefits are
funded through the purchase of medical insurance for each retiree each year. The
Company continues to fund the Plan on a “pay-as-you-go” basis.
The
Company has evaluated its post-retirement benefit arrangements in accordance
with FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003”. The Act
introduces a prescription drug benefit under Medicare (“Medicare Part D”) as
well as a federal subsidy to sponsors of retirement benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. The
Company’s post-retirement benefit costs do not reflect amounts associated with
the subsidy because it is unable to conclude whether the benefits provided by
the Plan are actuarially equivalent to Medicare Part D.
The
accompanying statements of income and cash flows for the three month period
ended March 31, 2004 have been restated to include additional benefit expense
related to the Plan of $50,522 and for the related deferred income tax benefit
of $17,678.
The
discussion which follows reflects, as applicable, restated amounts for the three
months ended March 31, 2004.
Results
of Operations
For the
quarter ended March 31, 2005, the Company reported net income of approximately
$352,000, or $0.03 per common share on a diluted basis compared to net income of
$216,000 or $0.02 per common share on a diluted basis reported for the same
period of 2004. Pre-tax income for the quarter ended March 31, 2005 increased
$308,000 to $517,000 from $209,000 for the quarter ended March 31, 2004. Net
income for the first quarter of 2004 was affected by $80,000 of income tax
benefits, primarily from a refund pertaining to state research and development
tax credits that lowered the effective tax rate for the quarter. Net income for
the first quarter of 2004 was also negatively impacted by $53,000 of accrued
severance costs paid throughout the second and third quarters of 2004.
The
Company generated revenue of $4,949,000 for the first quarter ended March 31,
2005, an increase of $393,000 or 9% over sales of $4,556,000 for the first
quarter of 2004. Overall sales were led by an 18% increase in blood pressure
product sales generated primarily by a 30% increase in sales to original
equipment manufacturers (“OEM”), an 11% increase in vital signs monitors sales
and a 30% increase in sales of vital signs monitors into the veterinary market
under a private label distribution agreement. Neonatal product sales increased
by 38% primarily driven by strong demand for the Company’s Klear-Trace® ECG
electrodes. Partially offsetting these increases was a 25% decline in sales of
apnea monitors and accessories.
The cost
of product sold as a percentage of revenues was 54.6% for the three month period
ended March 31, 2005, compared to 55.1% for the same period of 2004. The
reduction in the cost of product sold as a percentage of revenues is generally
product mix related.
Form
10-QSB
March 31,
2005
Page
13
Research
and Development (“R&D”) expenses decreased $21,000 or 8%, to $253,000 for
the three months ended March 31, 2005 compared to $274,000 for the first three
months of 2004. Increases in reimbursements from the National Institutes of
Health (“NIH”) under established grant programs of $112,000 compared to prior
year were primarily responsible for the decrease in R&D expenses for this
period which were partially offset by increased salaries and related fringe
benefits and clinical expenses. The Company has ongoing grant programs with the
NIH and anticipates continued reimbursements under these programs during the
remainder of 2005.
Selling,
general and administrative expenses (“S,G&A”) decreased $64,000, or
approximately 4%, to $1,472,000 or 30% of revenues for the three months ended
March 31, 2005, compared to $1,536,000 or 34% of revenues for the first three
months of 2004. Increased field sales travel and entertainment expenses and
increased legal expenses were offset by decreases in advertising, promotional
materials and meetings and conventions costs. S,G&A expenses for the first
quarter of 2005 include approximately $40,000 of outside accounting and
actuarial fees related to the Company’s restatement of its prior years financial
results.
Interest
expense was $3,000 for the first quarter of 2005 compared to interest expense of
$28,000 for the first quarter of 2004.
The
provision for income
taxes of $165,500 for the first quarter of 2005 reflects an expected effective
rate of approximately 32% for 2005. The combined estimated federal and state
effective tax rate is lower than the statutory rate as a result of anticipated
R&D tax credits. The income tax benefit of $7,000 for the first quarter of
2004 reflects a provision for income taxes at an effective tax rate of 35%
offset by an $80,000 income tax benefit resulting primarily from a refund
pertaining to state research and development tax credits.
Financial
Condition, Liquidity and Capital Resources
At March
31, 2005, the Company's cash and cash equivalents totaled $1,702,000 compared to
$1,973,000 at December 31, 2004. Working capital increased by $139,000 to
$6,245,000 at March 31, 2005, from $6,106,000 on December 31, 2004. The
Company’s current ratio improved to 5.0 to 1 from 4.0 to 1.
Cash
provided by operations for the three months ended March 31, 2005 was $85,000
compared to $771,000 for the first three months of the prior year. Payments of
federal income taxes and employee bonuses and increases in inventory were
primarily responsible for the decrease in cash provided by operations compared
to the three months ended March 31, 2004.
Cash used
by investing activities was $364,000 for the first quarter of 2005 compared to
$35,000 for the first quarter of the prior year reflecting increased
expenditures for equipment and intangible assets. Equipment purchases of
$308,000 were primarily related to the acquisition and installation of the
Company’s new enterprise resource planning system, leasehold improvements
related to a three year facilities lease agreement effective December 2004 and
manufacturing inspection equipment.
Cash
provided by financing activities for the first quarter of 2005 was $8,000
compared to cash used of $211,000 for the first quarter of the prior year.
During the first quarter of 2004, the Company repaid $219,000 of outstanding
debt obligations.
The
Company has a $3,000,000 line-of-credit with its bank which expires in September
2005. Borrowings under the line-of-credit are payable on demand and bear
interest at the bank's base rate which may change from time to time (5.75% at
March 31, 2005). At March 31, 2005, there were no borrowings under the line of
credit. Under the terms of the loan agreement, the Company is permitted to
borrow against accounts receivable and inventories according to pre-established
criteria. Substantially all assets of the Company are required to be pledged as
collateral for borrowings under the line-of-credit.
Form
10-QSB
March 31,
2005
Page
14
The
Company believes that its source of funds consisting of cash and cash
equivalents and funds available from the revolving credit facility will be
sufficient to meet its current and expected requirements over the next twelve
months. Although there can be no assurance that the Company’s revolving credit
facility will be renewed, management believes that, if needed, it would be able
to find alternative sources of funds on commercially acceptable terms.
Critical
Accounting Judgments and Estimates
The
Company’s discussion and analysis of financial condition and results of
operations are based upon the condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. The Company’s estimates include those related to revenue
recognition, the valuation of inventory, and valuation of deferred tax assets
and liabilities, useful lives of intangible assets, warranty obligations and
accruals. The Company bases its estimates on historical experience and on
various other assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. For a complete description of accounting policies,
see Note 3 to our financial statements included in the Company’s Form 10-KSB for
the year ended December 31, 2004. There were no significant changes in critical
accounting estimates during the three months ended March 31, 2005.
ITEM 3
CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based on the definition of "disclosure controls
and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of March 31, 2005. Based upon the foregoing evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of that date.
In
response to a material weakness in the Company’s disclosure controls and
procedures as of December 31, 2004, during the quarter ended March 31, 2005 the
Company implemented internal control improvements to insure that its benefit
plans are reviewed and properly accounted for. There have been no other changes
in the Company's internal control over financial reporting during the quarter
ended March 31, 2005 that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial
reporting.
Reference
is made to the Certifications of the Chief Executive Officer and the Chief
Financial Officer about these and other matters attached as Exhibits 31.1, 31.2
and 32.1 to this report.
Form
10-QSB
March 31,
2005
Page
15
PART
II - OTHER INFORMATIION
ITEM
6 EXHIBITS
| |
|
|
| |
|
|
|
31.1 |
|
Certification
pursuant to Rule 13a-14(a) of Louis P. Scheps, President and Chief
Executive Officer |
|
31.2 |
|
Certification
pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief Financial
Officer |
|
32.1 |
|
Certification
of Periodic Financial Report of Louis P. Scheps, President and Chief
Executive Officer and Jeffery A. Baird, Chief Financial
Officer |
Form
10-QSB
March 31,
2005
Page
16
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
|
|
| |
CAS
MEDICAL SYSTEMS, INC.
|
|
|
|
| Date: May
12, 2005 |
By: |
/s/ Louis P. Scheps
|
| |
Louis P. Scheps |
| |
Chairman of the Board, President
and Chief Executive Officer |
| |
|
|
| |
|
|
|
|
| Date: May 12, 2005 |
By: |
/s/ Jeffery A. Baird
|
| |
Jeffery A. Baird |
| |
Chief
Financial Officer |