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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2006
Commission File Number 0-13839
CAS MEDICAL SYSTEMS, INC.
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(Name of small business issuer in its charter)
Delaware 06-1123096
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(State or other jurisdiction (I.R.S. Employer
incorporation or of organization) Identification No.)
44 East Industrial Road, Branford, Connecticut 06405
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(Address of principal executive offices)
(203) 488-6056
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(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:
Common Stock, $.004 par value
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(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]
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 [_]
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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The Registrant's revenues for the fiscal year ended December 31, 2006 were
$35,202,011.
The aggregate market value of common equity held by non-affiliates of the
Registrant as of March 1, 2007 based upon the last sale price of such stock on
that date on the NASDAQ Global Market was $70,367,844. The number of shares of
the Registrant's Common Stock outstanding as of March 1, 2007 was 10,670,959.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 13, 2007 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.
Transitional Small Business Disclosure format (check one): Yes [_] No [X]
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INDEX Page
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PART I
Item 1 Description of Business 3
Item 2 Description of Property 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities 9
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7 Financial Statements 14
Report of UHY LLP, Independent Registered Public Accounting
Firm F-1
Consolidated Balance Sheets as of December 31, 2006 and 2005 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2006 and 2005 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6 to F-18
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Item 8A Controls and Procedures 15
Item 8B Other Information 15
PART III
Item 9 Directors, Executive Officers, Promoters, Control Persons,
and Corporate Governance; Compliance with Section 16(a) of
the Exchange Act 16
Item 10 Executive Compensation 16
Item 11 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 16
Item 12 Certain Relationships and Related Transactions, and Director
Independence 17
Item 13 Exhibits 17
Item 14 Principal Accountant Fees and Services 18
Signatures 19
Page 3
PART I
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This report may contain information that includes or is based on forward-looking
statements within the meaning of the federal securities laws that are subject to
risks and uncertainties. These statements may be identified by the use of words
such as "anticipates," "expects," "estimates," "projects," "intends" and
"believes" and variations thereof and other terms of similar meaning. Factors
that could cause the Company's actual results and financial condition to differ
from the Company's expectations include, but are not limited to: price and
product competition; rapid technological changes; dependence on new product
development; failure to introduce new products effectively or on a timely basis;
the mix of products sold; supply and prices of raw materials and products;
customer demand for the Company's products; regulatory actions; changes in
reimbursement levels from third-party payors; product liability claims; changes
in economic conditions that adversely affect the level of demand for the
Company's products; changes in foreign exchange markets; changes in financial
markets; and changes in the competitive environment. While the Company believes
that the assumptions underlying such forward-looking statements are reasonable,
there can be no assurance that future events or developments will not cause such
statements to be inaccurate. All forward-looking statements contained in this
report are qualified in their entirety by this cautionary statement.
Item 1. Description of Business
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The Company
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CAS Medical Systems, Inc. ("CASMED" or the "Company") is a Delaware corporation
organized in 1984. The Company designs, manufactures and markets innovative
medical technologies and products for non-invasive vital signs monitoring. The
Company's products include blood pressure measurement technology, blood pressure
cuffs, vital signs measurement equipment, cardio-respiratory monitoring
equipment and supplies for neonatal intensive care. The products are designed to
improve the quality of patient care and provide exceptional value and
performance.
On May 15, 2005, CASMED completed the purchase of all of the outstanding capital
stock of Statcorp, Inc. from its stockholders for cash. The cost of the
acquisition was $5.1 million including a post-closing working capital
adjustment, a purchase price adjustment based upon Statcorp's sales level for
the 12 months following the acquisition and direct acquisition costs. Statcorp,
a privately-owned company based in Jacksonville, Florida, develops, assembles
and sells blood pressure cuffs, IV rapid infusor cuffs, and blood transfusion
filters for use in the medical industry worldwide.
The Company currently designs, markets, services and manufacturers all finished
product out of its Branford and Jacksonville facilities. The Company has several
products in various stages of development that it believes will add to and
complement its current product lines.
Principal Products and Services
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Blood Pressure Measurement Technology
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The Company has developed a proprietary non-invasive blood pressure measurement
technology, MAXNIBP(R). The Company believes this technology is more accurate,
reliable, and able to produce a measurement result faster than its competitors.
These advantages strengthen the Company's competitive position, especially in
clinical situations where measurements can be difficult. The Company has entered
into original equipment manufacturer ("OEM") agreements to supply its MAXNIBP
technology in the form of modules 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.
Blood Pressure Cuffs
--------------------
The Company offers a complete line of disposable and reusable blood pressure
cuffs that can be used on any manufacturer's monitoring equipment. The product
line includes cuffs and pressure infusors manufactured by Statcorp, Inc. which
was purchased by CASMED in 2005. The blood pressure cuffs, including
UltraCheck(R) and Tuff-
Page 4
Cuff(R) Reusable Cuffs, and SoftCheck(R) and Safe-Cuff(TM) Disposable Cuffs, can
be used on patients from neonate through adult, as well as on veterinary
patients, and complement the Company's MAXNIBP blood pressure measurement
technology. The Company's Unifusor(R) line of infusor cuffs are used to rapidly
infuse intra-venous fluids into a patient. The Company has various private label
versions of both the blood pressure and infusor cuffs available for OEM
partners.
Vital Signs Monitoring Equipment
--------------------------------
The Company offers two platforms of vital signs monitors incorporating various
combinations of industry-leading measurement parameters. The product lines
include options for measurement of non-invasive blood pressure using the
Company's proprietary MAXNIBP technology, pulse oximetry, electro-cardiography,
temperature, and capnography. CASMED monitors are ideal for a range of clinical
settings (both human and veterinary) including emergency medical service,
medical/surgical units, out-patient care, and procedural sedation. The Company's
vital signs monitors have been awarded a multi-year, sole-source purchasing
agreement by the U.S. Department of Veterans Affairs.
Cardio-Respiratory Monitoring Equipment
---------------------------------------
The CASMED line of cardio-respiratory monitors is used to monitor apnea in
home-based and hospital settings. The Company's product line includes two of the
industry's best selling infant apnea monitoring products and has the broadest
range of capabilities available to the market. The AMI(R) and 511 monitors allow
cardio-respiratory and pulse oximetry monitoring and recording for a range of
patients. Proprietary CAS EXPRESS(R) software saves patient data from the
monitors and generates reports for review by the clinician.
Supplies for Neonatal Intensive Care
------------------------------------
The Company's specialty neonatal supplies are a foundation of its business.
CASMED has a long record of producing high quality products designed
specifically to meet the unique needs of neonatal intensive care. The varied
product line includes Klear-Trace(R) ECG Electrodes, NeoGuard(R) skin
temperature probes and adhesive reflectors, SoftCheck(R) neonatal blood pressure
cuffs, BiliBottoms(TM) light permeable diapers for use during phototherapy, and
the Premie Nestie(R) neonatal positioning device.
Sales and Marketing
-------------------
The Company markets its products globally, through hospital, alternate site,
homecare, veterinary and emergency medical distribution channels.
Sales in the United States are conducted by specialty distributors working under
both exclusive and non-exclusive arrangements, in conjunction with nine full
time Company field managers. International sales are conducted through exclusive
distributors in the European, African, Middle Eastern, Pacific Rim and Latin
American regions and Canada, working together with regional sales consultants
and two employees located outside of the United States.
The Company also sells its non-invasive blood pressure technology, in the form
of sub-assemblies to be joined to multi-parameter monitors, to various firms
operating on both a domestic and international basis. The Company is in the
process of pursuing other OEM agreements.
Financial Information Relating to Sales
Year Ended December 31
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2006 2005
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Domestic Sales $ 27,518,584 $ 21,891,805
Export Sales 7,683,427 4,992,616
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$ 35,202,011 $ 26,884,421
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Page 5
Competition
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The Company competes in the medical equipment market where there are many
suppliers with greater financial and personnel resources that sell a broad line
of both commodity products and monitoring equipment and have a dedicated selling
capability. The Company's products primarily serve the hospital and emergency
medical services markets. The Company's equipment is compact, portable,
lightweight and user-friendly. The monitors are all built in the USA and contain
best-in-class technology. 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 and promptness
of delivery and overall quality of customer service.
Research and Development
------------------------
During 2006 and 2005, the Company incurred expenses of approximately $2,782,000
and $2,162,000, respectively, on activities related to the research and
development of new products, and improvement of existing products. These amounts
are before consideration of reimbursements received from the National Institutes
of Health ("NIH") further explained under Grant Awards below. Net research and
development ("R&D") expenses after reimbursements from the NIH approximated
$2,762,000 for 2006 and $1,631,000 for 2005.
The majority of the Company's 2006 development efforts were directed toward the
design and development of its patented Near-Infrared Spectroscopy ("NIRS")
technology. The Company has been actively researching this technology since
1999. The Company's NIRS technology has multiple potential product applications
including the Company's initial targeted development project - a monitor that
can non-invasively and directly measure brain oxygenation levels. This monitor,
the FORE-SIGHT(TM) Cerebral Oximeter, has been the primary focus of development
efforts during 2006, culminating in market introduction at the end of 2006, and
expected product availability in the first half of 2007.
The initial target procedures for the FORE-SIGHT product include high risk
cardiovascular surgeries, of which there are about 700,000 performed each year
in the U.S. This is a key market entry point for the product due to the
recognized need for cerebral protection during these procedures and the large
volume of clinical data available to support the need for a device that can
directly monitor oxygen saturation levels in the brain during these procedures.
Independent, published clinical studies have shown that approximately one in
sixteen patients, or 6%, undergoing cardiopulmonary bypass surgery, may
experience severe adverse cerebral outcomes and that approximately 17% - 23% of
patients undergoing cardiopulmonary bypass surgery suffer from cerebral venous
oxygen desaturation, resulting in compromised cognitive outcomes.
Future applications for the FORE-SIGHT Cerebral Oximeter include use of the
device in a broad range of general surgical procedures, as well as
post-operative and critical care settings in which cerebral protection is an
important goal. The FORE-SIGHT Cerebral Oximeter provides new information that
allows clinicians to monitor and respond to instances of brain tissue oxygen
deprivation before damage to the brain occurs, thereby resulting in the
potential for improved clinical response times and better clinical outcomes.
During 2006, the Company received 510(k) clearance from the FDA to expand the
patient population for use of the FORE-SIGHT Cerebral Oximeter to include
infants and children over forty kilograms. The Company was awarded two
additional patents in 2006 related to the FORE-SIGHT NIRS platform and now holds
a total of three U.S. patents on the technology, with several patents pending.
The Company intends to continue to actively seek further patent protection.
Additional development efforts have focused on the continued support of, and
enhancements to, the Model 740 & 750 monitors; the Company's proprietary
non-invasive blood pressure technology; and the Company's apnea and neonatal
products. The Company continues to develop and expand its patient monitoring
capabilities by adding new complementary physiological parameters. The Company
believes that this forward-thinking development strategy will enable the Company
to pursue sales opportunities in key markets.
The Company's 2006 research efforts centered on enhancements to the NIRS
platform. In support of research and product development efforts, adult and
neonatal clinical studies were conducted at various institutions throughout the
U.S. Results from these clinical studies were presented at major medical
meetings.
Page 6
Grant Awards
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The Company has, in prior years, 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 the Company's NIRS development. In accordance with the terms of these
grants, the Company is reimbursed for certain qualifying expenditures. Such
grant awards provide substantial support for the Company's clinical efforts
currently being undertaken at multiple adult and neonatal sites.
Reimbursements were approximately $20,000 for 2006 and $531,000 for 2005.
Funding provided to the Company is being recorded as a reduction in R&D
expenses. The Company has additional NIH grants pending as of December 31, 2006
to support its NIRS research.
Trademarks, Patents and Copyrights
----------------------------------
Certificates of Registration have been issued to the Company by the United
States Department of Commerce Patent and Trademark Office for the following
marks: CAS(R), Pedisphyg(R), OscilloMate(R), NeoGuard(R), Tuff-Cuff(R),
Limboard(R), Klear-Trace(R), Premie Nestie(R), MAXNIBP(R), UltraCheck(R),
SoftCheck(R), Unifusor(R), SWANK(R), Woods Pump(R), the heart shaped mark for
use as a thermal reflector and the Company's corporate logo. The Company
continues to use the CASMED(TM), FORE-SIGHT(TM), For What's Vital(TM), For Every
Life and Breath Situation(TM), Safe-Cuff(TM), BiliBottoms(TM) and CAS
Express(TM) common law trademarks. The Company also holds trademarks for the
Event-Link(R) monitoring system, the Edentec Assurance(R) monitor, Edentrend(R)
software and the AMI(R) and AMI(R) Plus monitors.
The Company holds various patents for its blood pressure measurement technology
which it believes provide it with a competitive market advantage. In addition,
it has patents with respect to apnea monitor technology. Although the Company
holds such patents and has patents pending related to certain of its products,
it does not believe that its business as a whole is significantly dependent upon
patent protection with the exception of the Near Infra Red Spectroscopy (NIRS)
cerebral oximetry technology.
The FORE-SIGHT NIRS cerebral oximetry technology has three U.S. patents issued
(US 6,456,862 B2, US 7,047,054 and US 7,072,701). In addition, the Company
currently has several patents pending with US and foreign patent offices. The
Company believes the design concepts covered in its current patent applications
and provisional patent applications are important to providing a cerebral
oximeter capable of absolute brain tissue oxygen saturation measurements.
Other patents have previously been issued to third parties involving optical
spectroscopy and the interaction of light with tissue, some of which relate to
the use of optical spectroscopy and NIRS in the area of brain metabolism
monitoring. The Company is not aware of any infringement by its products of the
claims of any issued patents, and no charge of patent infringement has been
asserted against the Company.
The Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology.
The Company has copyright protection for the software used in its blood
pressure, apnea and cerebral oximeter monitors.
The Company will continue to actively seek patent, trademark and copyright
protections as it deems advisable to protect the market for its products and its
R&D efforts.
We believe that neither our patents nor our other legal rights will necessarily
prevent third parties from developing or using a similar or a related technology
to compete against our products.
Employees
---------
As of December 31, 2006, the Company had 152 employees, of which 151 were
full-time. The Company has no collective bargaining agreements and believes that
relations with its employees are good.
Page 7
Government Regulation
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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
"FDC Act") and numerous acts and amendments such as the Quality System
Regulations ("QSR"), often referred to as Good Manufacturing Practices
("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.
The FDA has adopted regulations which classify medical devices based upon the
degree of regulation believed 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
510(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 primarily Class I and II devices and several of them
have required FDA notification under Section 510(k) of the FDC Act.
The FDA has the authority to, among other things, deny marketing approval until
all regulatory protocols are deemed acceptable, halt the shipment of defective
products, and seize defective products sold to customers. Adverse publicity from
the FDA, if any, could have a negative impact upon sales. The FDA last completed
a factory audit of the Company in March 2005. There were no material
non-conformities.
Manufacturing and Quality Assurance
-----------------------------------
The Company assembles its products at its facilities in Branford, Connecticut
and Jacksonville, Florida. 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 have any long-term contracts with its
suppliers and believes that needed components are available from alternative
sources if needed. While the Company has not experienced any sustained
interruption in production or the supply of components and does not anticipate
any difficulties in obtaining the components necessary to manufacture its
products, there can be no assurance that the Company will continue to receive
its components as needed and would be able to readily find alternative sources.
Quality control procedures are performed by the Company at its facilities and
occasionally at its suppliers' facilities to standards set forth in the FDA's
"Quality System Regulations." These procedures include the inspection of
components and full testing of finished goods. The Company has a controlled
environment where the final assembly of single-patient-use products is
conducted.
ISO 9001 and 13485
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In September 1996, the quality system at CASMED was first certified to ISO
9001/EN 46001 by the accredited body, BSI Inc. This certification recognizes
CASMED for its achievement in implementing and maintaining a world-class quality
system and prepares CASMED 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 Quality System Regulations after ISO 9001 and ISO 13485.
Page 8
CASMED maintains full compliance with the FDA Quality System Regulations. In
2003, CASMED became certified to another universal Quality System Standard, ISO
13485, meeting a requirement for sales in Canada, and in preparation for the
termination of the 1994 version of ISO 9001 which ended August 31, 2003. In
December 2005, the Company's Branford, Connecticut facility achieved
certification to ISO13485:2003, a process oriented quality system update. The
Jacksonville, Florida facility was awarded its certification during May 2006.
Customers
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During 2006 and 2005, the Company had sales to Medtronic, Inc. which accounted
for approximately 11% and 14% of net sales, respectively.
Backlog
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The Company's backlog includes orders pursuant to long-term OEM agreements as
well as orders for products shippable on a current basis. Total backlog,
therefore, is not a meaningful indicator of future sales.
Item 2. Description of Property
----------------------------------
The Company's corporate facilities in Branford, Connecticut are situated on
approximately 4.6 acres and comprise 24,000 square feet of office, laboratory
and manufacturing space designed and constructed for the Company in 1998 at a
total cost of approximately $1.9 million. The Company relocated to this facility
during November 1998 and is the sole occupant. During January 1999, the Company
entered into a nineteen-year, $1,310,000 mortgage obligation. The payments are
approximately $9,750 per month. The mortgage, as amended, is secured by a first
mortgage lien on the property.
The Company is leasing approximately 8,300 square feet of office and limited
warehouse space at an adjacent facility under a three-year agreement effective
June 1, 2006. Minimum annual rental expense is approximately $73,000 excluding
apportioned real estate taxes and certain utility costs.
The Company's subsidiary, Statcorp, is leasing approximately 17,500 square feet
of warehouse and office space under a five-year agreement effective April 1,
2004. Minimum annual rental expense is approximately $102,000 excluding
apportioned real estate taxes and certain common area maintenance charges.
On January 31, 2007, the Company entered into a lease agreement for
approximately 13,000 square feet of office and warehouse space at a facility
adjacent to its corporate facilities in Connecticut. The lease is effective June
1, 2007 and expires May 31, 2012. Minimum annual rental expense is approximately
$114,000 excluding apportioned real estate taxes and certain common area
maintenance charges.
The Company believes that its premises are adequately insured.
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.
Page 9
PART II
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Item 5. Market for Common Equity, Related Stockholder Matters and Small
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Business Issuer Purchases of Equity Securities
----------------------------------------------
Effective December 2005, the common stock of the Company began trading on the
NASDAQ Capital Market, under the symbol "CASM." Prior to that date during 2005,
the Company's common stock was traded on the Over-the-Counter Bulletin Board
under the symbol "CAMY.OB." Effective December 2006, the common stock of the
Company began trading on the NASDAQ Global Market while continuing to utilize
the CASM symbol.
The following table shows the high and low bid quotations for the Company's
common stock during each quarterly period for the last two years.
Over-the-Counter Bulletin Board prices reflect inter-dealer prices and may not
represent actual transactions and do not include retail mark-ups, mark-downs or
commissions.
Quarter Ended High Low
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March 31, 2005 $ 2.72 $ 2.20
June 30, 2005 $ 4.15 $ 2.33
September 30, 2005 $ 5.60 $ 3.75
December 31, 2005 $ 9.10 $ 4.21
March 31, 2006 $ 15.01 $ 7.30
June 30, 2006 $ 9.17 $ 5.37
September 30, 2006 $ 7.67 $ 5.21
December 31, 2006 $ 9.89 $ 6.36
The following table sets forth the approximate number of holders of record of
common stock of the Company on December 31, 2006.
Title of Class Number of Shareholders
-------------- ----------------------
Common stock, $.004 par value 2,434
No cash dividends have been declared on the Company's common stock during 2005
or 2006.
The Company did not issue any shares of common stock during the fourth quarter
of 2006 that were not registered under the Securities Act. In addition, the
Company did not repurchase any of its common stock during the fourth quarter of
2006.
Item 6. Management's Discussion and Analysis of Financial Condition and
--------------------------------------------------------------------------
Results of Operations
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Acquisition
-----------
On May 15, 2005, the Company purchased all the outstanding capital stock of
Statcorp, Inc., a privately-owned company based in Jacksonville, Florida from
its stockholders for cash. The cost of the acquisition was $5.1 million
including a post-closing working capital adjustment and a purchase price
adjustment based upon Statcorp's achieved sales level for the 12 months
following the acquisition.
Statcorp develops, assembles and sells blood pressure cuffs, liquid infusion
devices, and blood transfusion filters for worldwide use in the medical
industry. The acquisition enhances the Company's position in the non-invasive
blood pressure monitoring market by enabling it to offer a complete, low cost,
high performance accessories solution to its customers to complement its
proprietary monitoring products and OEM technologies. Statcorp also enjoys
certain key OEM, private label, and distributor relationships which the Company
may seek to expand to its other product lines.
Page 10
Results of Operations
---------------------
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
---------------------------------------------------------------------
Net income for 2006 was $1,747,000 or $0.14 per common share on a diluted basis
compared to $1,815,000 or $0.15 per diluted common share for 2005. Net income
for 2006 was affected by $390,000 of stock compensation expense of which
$343,000 was non-deductible for income tax purposes. As of January 1, 2006, the
Company adopted FASB No. 123R, "Share-Based Payment". This standard requires
that all stock-based awards be recognized as expenses in the financial
statements at the fair value of the award over their vesting term. Diluted
earnings per share were reduced by $0.03 as a result. The Company's effective
tax rate for 2006 approximates 36% primarily as a result of non-deductible
charges.
Revenues for 2006 increased 31% or $8,318,000 to $35,202,000 from $26,884,000
for 2005. Statcorp product sales accounted for $3,665,000 or 44% of the
increase. Statcorp was acquired by the Company during May 2005. Increases in
blood pressure product sales of 40%, primarily from sales of vital signs
monitors and accessories to domestic accounts including the Department of
Veterans Affairs ("VA"), a private label veterinarian distribution partner and
international customers, accounted for 48% of the overall increase in revenues.
Sales of original equipment manufacturer ("OEM") modules also increased,
accounting for 5% of the overall growth in revenues.
Cost of products sold as a percentage of net revenues increased to 59.1% of net
revenues for 2006 compared to 56.2% of net revenues for 2005. The increase for
2006 was related to the increased percentage of Statcorp revenues as a
percentage of overall revenues compared to 2005 as well as increased cost of
sales as a percentage of revenues on Statcorp product shipments.
R&D expenses increased $1,131,000 or 69% to $2,762,000 for 2006 from $1,631,000
for 2005. R&D expenses are reported net of reimbursements received from the
National Institutes of Health ("NIH") primarily pertaining to the Company's
development of its Near-Infrared Spectroscopy ("NIRS") technology. Amounts
reimbursed from the NIH, including accruals, for 2006 and 2005 were $21,000 and
$531,000, respectively. R&D expenses for both 2006 and 2005 before NIH
reimbursement approximated 8.0% of revenues. R&D expenses before reimbursement
reflected an increase of 29% for 2006 over 2005. Increased spending for salaries
and related benefits, engineering project materials, facilities rental expense,
clinical expenses and professional services were responsible.
Selling, General and Administrative ("S,G&A") expenses increased $1,220,000 or
16% to $8,659,000 or 25% of revenues for 2006 from $7,439,000 or 27% of revenues
for 2005. Non-cash stock compensation expense accounted for $224,000 of the
increase. During 2006, the Company expanded its sales and marketing personnel
worldwide to support its increased sales activities and the launch of the
Company's "Foresight"(TM) cerebral oximeter. Increases in marketing expenses
were also driven by increased travel and entertainment, sales promotion and
advertising, and meetings and convention expenses. General and administrative
("G&A") expenses increased primarily as a result of additional shareholder and
investor communication expenses and legal and accounting fees.
Net interest expense increased $81,000 to $248,000 for 2006 from $167,000 for
2005. Interest expense associated with the Statcorp acquisition loan accounted
for $224,000 of the overall net interest expense. Mortgage related interest
expense partially offset by interest income from excess cash balances primarily
accounted for the remainder of the net interest expense.
Income tax expense for 2006 was $983,000 compared to income tax expense of
$741,000 for 2005. The provision for income taxes for 2005 represents an
effective tax rate of 36% which is greater than the statutory rate primarily as
a result of non-deductible stock compensation expense and state income taxes
partially offset by R&D and other tax credits. The provision for income taxes
for 2005 represents an effective tax rate of approximately 29% resulting
primarily from R&D and other tax credits.
Page 11
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
---------------------------------------------------------------------
Net income for 2005 was $1,815,000 or $0.15 per common share on a diluted basis
compared to $1,205,000 or $0.11 per diluted common share for 2004. During the
fourth quarter of 2005, the Company recorded a $401,000 credit from the
curtailment of its retirement benefit plan. Pre-tax income for 2005 was affected
by a significant increase in research and development ("R&D") expenses of
$599,000 primarily pertaining to the development of the Company's Near-Infrared
Spectroscopy ("NIRS") monitoring device. Reductions in selling, general and
administrative ("S,G&A") expenses as a percentage of sales contributed to the
increase in operating income to $2,723,000 for 2005 compared to operating income
of $1,708,000 in 2004.
Revenues for 2005 increased 34% or $6,825,000 to $26,884,000 from $20,059,000
for 2004. The growth in revenues was led by sales of Statcorp products which
accounted for $4,386,000 of the increase. Sales of blood pressure products
increased 34% and accounted for 45% of the increase in revenues. Sales to
domestic customers including the Department of Veterans Affairs ("VA") under the
Company's multi-year contract and sales to the veterinary market under a
private-label distribution arrangement were primarily responsible for the
increase in blood pressure product sales. Increases in neonatal product sales
and service revenues also contributed to the overall growth in revenue.
Partially offsetting the increase were reductions in sales of Apnea monitors and
accessories.
Cost of products sold as a percentage of net revenues increased to 56.1% for
2005 from 54.4% for the prior year. The increase in cost of products sold as a
percentage of revenue was related to the lower average gross margins on products
sold by Statcorp. Cost of products sold for 2005 includes a net credit of
$243,000 which includes a $301,000 credit related to the curtailment gain on the
retirement benefit plan and $57,000 of retirement benefit expenses. 2004
includes $151,000 of retirement benefit expenses. Cost of products sold for 2005
excluding Statcorp and net retirement benefit credits were unchanged from 2004.
The Company continued to pursue product cost reductions through improvements in
manufacturing processes and inventory control, capital expenditures to replace
aged equipment, adoption of company-wide quality initiatives and increases in
employee training.
R&D expenses increased $599,000 or 58% to $1,631,000 for 2005 from $1,032,000
for 2004. R&D expenses are reported net of reimbursements received from the
National Institutes of Health ("NIH") primarily pertaining to the Company's
development of its Near-Infrared Spectroscopy ("NIRS") technology. Amounts
reimbursed from the NIH, including accruals, for 2005 and 2004 were $531,000 and
$521,000, respectively. R&D expenses for 2005 and 2004 before reimbursement
approximated 8.0% and 7.8% of revenues, respectively. R&D expenses before
reimbursement reflected an increase of 39% for 2005 as compared to the prior
year. Increased expenditures for salaries and related benefits, engineering
project materials, clinical expenses and outside services were responsible for
the increases in spending.
Selling, General and Administrative ("S,G&A") expenses increased $1,176,000 or
19% to $7,439,000 or 27% of revenues for 2005 from $6,263,000 or 31% of revenues
for 2004. Sales, marketing and administrative expenses of Statcorp accounted for
$781,000 of the increase in expenses. General and administrative expenses
("G&A") accounted for $180,000 or 7.2% of the increase in S,G&A expenses due to
increases in legal fees, shareholder and investor communication expenses
including NASDAQ listing fees and post-transaction travel and entertainment
expenses pertaining to the Statcorp acquisition, and were partially offset by
reductions in bad debt expense, depreciation and amortization and bonuses. G&A
expenses for 2005 included a reduction in retirement benefit expenses of
$112,000 compared to expenses of $51,000 for 2004. Increases in marketing
salaries and related fringe benefits were primarily responsible for the
remainder of the increase in S,G&A expenses.
Net interest expense increased $95,000 or 132% to $167,000 for 2005 from $72,000
for the prior year. Interest expense associated with the Statcorp acquisition
loan accounted for $157,000 of the overall interest expense. Mortgage related
interest expense partially offset by interest income from excess cash balances
primarily accounted for the remainder of the net interest expense.
Income tax expense for 2005 was $741,000 compared to income tax expense of
$430,000 for 2004. The provision for income taxes for 2005 represented an
effective tax rate of 29% which was lower than the statutory rate primarily as a
result of R&D and other tax credits. The provision for income taxes for 2004
represented an effective tax rate of approximately 26% resulting primarily from
R&D and other tax credits and realized net operating loss carry forwards.
Page 12
-------
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
The Company's cash and cash equivalents were $1,335,000 at December 31, 2006
compared to $1,893,000 at December 31, 2005. Working capital increased
$1,614,000 to $9,096,000 at December 31, 2006 from $7,482,000 at December 31,
2005. The Company's current ratio declined slightly to 2.81 to 1 from 2.85 to 1.
Cash provided by operations for 2006 was $282,000 compared to $1,150,000 for the
prior year primarily as a result of increases in accounts receivable partially
offset by increases in accounts payable and accrued expenses.
Cash used for investing activities was $1,500,000 for 2006 compared to
$5,480,000 for 2005. During 2006, the Company incurred $1,042,000 of capital
expenditures compared to $657,000 for 2005. Equipment purchases for 2006 were
varied in nature and included manufacturing equipment, leasehold improvements
commensurate with the expansion of the Company's adjacent leased space,
engineering equipment and enhancements to the Company's IT infrastructure. Cash
used for investing activities in 2005 included $4,524,000 for the purchase of
Statcorp.
Net cash provided by financing activities was $659,000 for 2006 compared to
$4,249,000 provided for 2005. During 2006, the Company repaid $1,023,000 of
long-term debt and notes payable compared to payments of $389,000 during 2005.
Proceeds from financing insurance policies were $312,000 in 2006 and $292,000 in
2005. During 2005, the Company also borrowed $4,200,000 to partially finance the
acquisition of Statcorp. The Company received $505,000 of proceeds during 2006
from the issuance of common stock resulting from the exercise of employee stock
options and director stock options and warrants compared to $146,000 during
2005. The Company also received income tax benefits of $866,000 in 2006 from the
exercise of the warrants.
During October 2006, the Company amended its line-of-credit agreement with its
bank lender to increase the maximum borrowings, subject to certain terms and
conditions, from $3.0 million to $5.0 million. Borrowings under the
line-of-credit are payable on demand and bear interest at the one-month London
Interbank Offering Rate ("LIBOR") plus 225 basis points (7.60% at December 31,
2006) which may change from time to time. The agreement expires on May 1, 2008.
Under the terms of the related agreement, the Company is permitted to borrow
based on accounts receivable and inventories according to pre-established
criteria. The bank has a first security interest on substantially all assets of
the Company for funds borrowed. There were no outstanding borrowings as of
December 31, 2006 and as of March 16, 2007.
As a result of the exercise of warrants during 2006 by certain outside directors
to purchase the Company's common stock, the Company has recorded a reduction in
its current federal and state income taxes payable in the amount of $866,000.
Further, at December 31, 2006, the Company had recoverable income taxes of
$390,000 which consisted of estimated tax deposits in excess of current income
taxes provided.
During 2007, the Company intends to significantly increase its spending
associated with the NIRS based FORE-SIGHT Cerebral Oximeter launched during late
2006. Such spending includes additional R&D, on-going clinical studies,
marketing expenses and capital expenditures. The Company believes that its
sources of funds consisting of cash and cash equivalents, cash flow from
operations and funds available from the revolving credit facility will be
sufficient to meet its current and expected short-term requirements. Management
believes that, if needed, it would be able to find additional sources of funds
on commercially acceptable terms which may be required to support the Company's
long-term initiatives.
The Company expects its core business to continue to grow during 2007 despite
being negatively impacted by Medtronic's Physio-Control division's voluntary
suspension of U.S. shipments of products manufactured at its facility in
Redmond, Washington. The suspension, to address quality system issues identified
by Physio-Control, Medtronic and the US Food and Drug Administration affects the
Company because its OEM technology is sold for use in Physio-Control's
multi-parameter patient defibrillators. Physio-Control contributed approximately
11% to the Company's 2006 revenues. The impact to the Company's 2007 operating
results cannot be determined at this time.
Page 13
The following table sets forth a summary of the Company's cash commitments under
contractual obligations as of December 31, 2006:
Contractual One Year 2 - 4 5 - 7 More Than
Obligations Total or Less Years Years Seven Years
------------ ----------- ----------- ----------- ----------- -----------
Long-term debt $ 4,416,202 $ 609,615 $ 2,063,959 $ 1,314,942 $ 427,686
Notes payable 69,241 69,241 -- -- --
Operating leases 490,273 198,407 289,391 2,475 --
----------- ----------- ----------- ----------- -----------
$ 4,975,716 $ 877,263 $ 2,353,350 $ 1,317,417 $ 427,686
=========== =========== =========== =========== ===========
Subsequent to December 31, 2006, the Company entered into a five year lease
agreement for approximately 13,000 square feet of office and warehouse space at
a facility adjacent to its corporate headquarters. The lease is effective June
1, 2007 and requires minimum aggregated lease payments of $571,000 over the term
of the lease.
Off-Balance Sheet Arrangements
------------------------------
The Company has no off-balance sheet arrangements other than operating leases
for office and warehouse space.
Critical Accounting Policies
----------------------------
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. In preparing the
financial statements, the Company is required to make estimation judgments. Such
judgments are based upon historical experience and certain assumptions that are
believed to be reasonable in the particular circumstances. Those judgments
affect both balance sheet and income statement accounts and disclosures. The
Company evaluates its assumptions on an ongoing basis by comparing actual
results with its estimates. Actual results may differ from the original
estimates. The following accounting policies are those that the Company believes
to be most critical to the preparation of its financial statements.
Inventory Valuation--The Company's inventories are stated at the lower of cost
or market. The Company provides allowances on inventories for any material that
has become obsolete or may become unsaleable based on estimates of future demand
and sale price in the market. Judgments with respect to salability and usage of
inventories, estimated market value, and recoverability upon sale are complex
and subjective. Such assumptions are reviewed periodically and adjustments are
made, as necessary, to reflect changed conditions.
Deferred Income Tax Assets--The Company has recorded deferred income tax assets
for the estimated benefit of future tax deductions on inventories, property and
equipment, retirement benefit obligation and other accruals and various tax
credits. Based on the Company's projection of future taxable income and certain
prudent tax planning strategies, management believes its deferred income tax
assets will be realized and no valuation allowance is necessary. Should
circumstances change and the Company determine that some or all of the deferred
income tax assets would not be realized, a valuation allowance would be recorded
resulting in a charge to operations in the period the determination is made.
Accrued 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. Warranty costs have not been material to operating
results over the past several years. However, 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.
Recent Accounting Pronouncements
--------------------------------
Recent accounting pronouncements potentially affecting the Company's future
financial statements are described under the caption, "New accounting
pronouncements" in Note 3 - Summary of Significant Accounting Policies. In
summary, there are no new pronouncements which are likely to effect the
Company's financial statements.
Page 14
Item 7. Financial Statements
-------------------------------
Page
Report of UHY LLP, Independent Registered Public Accounting Firm F-1
Financial Statements
Consolidated Balance Sheets as of December 31, 2006 and 2005 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2006 and 2005 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6 to F-18
F-1
REPORT OF UHY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
CAS Medical Systems, Inc:
We have audited the accompanying consolidated balance sheets of CAS Medical
Systems, Inc. (the "Company") as of December 31, 2006 and 2005 and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for years then ended. 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 audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Standards Oversight Board (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 consolidated financial position of the Company at
December 31, 2006 and 2005 and the consolidated results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Financial Accounting Standards Board
Statement No. 123 (Revised 2004) - "Share-Based Payment".
/s/ UHY LLP
New Haven, Connecticut
March 16, 2007
F-2
CAS MEDICAL SYSTEMS, INC.
Consolidated Balance Sheets
As of December 31, 2006 and 2005
ASSETS 2006 2005
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,334,535 $ 1,892,584
Accounts receivable, less allowance of $75,000 in 2006
and 2005 4,906,303 3,218,963
Recoverable taxes receivable 320,943 --
Inventories 6,808,193 5,592,807
Deferred income taxes 329,458 318,262
Other current assets 408,171 494,182
------------ ------------
Total current assets 14,107,603 11,516,798
PROPERTY AND EQUIPMENT:
Land and improvements 535,000 535,000
Buildings and improvements 1,663,116 1,584,159
Machinery and equipment 4,661,643 3,698,457
------------ ------------
6,859,759 5,817,616
Accumulated depreciation (3,535,915) (3,080,160)
------------ ------------
Property and equipment, net 3,323,844 2,737,456
INTANGIBLE AND OTHER ASSETS, net 457,352 360,186
GOODWILL 3,379,021 3,079,021
DEFERRED INCOME TAXES 175,611 224,620
------------ ------------
Total assets $ 21,443,431 $ 17,918,081
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 609,615 $ 574,115
Notes payable 69,241 206,359
Accounts payable 3,228,265 2,167,396
Income taxes payable -- 18,999
Accrued expenses 1,104,726 1,068,035
------------ ------------
Total current liabilities 5,011,847 4,034,904
------------ ------------
LONG-TERM DEBT, less current portion 3,806,587 4,416,202
RETIREMENT BENEFIT OBLIGATION -- 349,567
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Series A cumulative convertible preferred stock, $.001
par value per share, 1,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.004 par value per share, 40,000,000
shares authorized, 10,679,307 and 10,113,860 shares
issued as of December 31, 2006 and 2005, respectively,
including shares held in treasury 42,717 40,456
Common stock held in treasury, at cost - 86,000 shares (101,480) (101,480)
Additional paid-in capital 4,935,538 3,176,911
Retained earnings 7,748,222 6,001,521
------------ ------------
Total shareholders' equity 12,624,997 9,117,408
------------ ------------
Total liabilities and shareholders' equity $ 21,443,431 $ 17,918,081
============ ============
See accompanying notes.
F-3
CAS MEDICAL SYSTEMS, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2006 and 2005
2006 2005
------------ ------------
NET SALES $ 35,202,011 $ 26,884,421
OPERATING EXPENSES:
Cost of product sales 20,802,677 15,092,322
Research and development 2,762,269 1,630,681
Selling, general and administrative 8,658,812 7,438,511
------------ ------------
32,223,758 24,161,514
Operating income 2,978,253 2,722,907
Interest expense 248,404 166,613
Income before income taxes 2,729,849 2,556,294
Income taxes 983,148 741,120
------------ ------------
NET INCOME $ 1,746,701 $ 1,815,174
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.17 $ 0.18
============ ============
Diluted $ 0.14 $ 0.15
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 10,373,225 9,941,670
============ ============
Diluted 12,147,373 11,729,347
============ ============
See accompanying notes.
F-4
CAS MEDICAL SYSTEMS, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2006 and 2005
COMMON STOCK
ISSUED HELD IN TREASURY PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2004 9,959,173 $ 39,837 86,000 $ (101,480) $ 3,031,387 $ 4,186,347 $ 7,156,091
Net income 1,815,174 1,815,174
Common stock issued upon
exercise of stock options 124,375 498 99,063 99,561
Common stock issued under
stock purchase plan 30,312 121 46,461 46,582
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2005 10,113,860 40,456 86,000 (101,480) 3,176,911 6,001,521 9,117,408
Net income
Common stock issued upon 1,746,701 1,746,701
exercise of stock options
and warrants 493,425 1,973 401,349 403,322
Common stock issued under
stock purchase plan 25,022 100 101,341 101,441
Tax benefit from exercise
of warrants 865,842 865,842
Restricted stock issued
under equity incentive
plans 47,000 188 (188) --
Stock compensation charges 390,283 390,283
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2006 10,679,307 $ 42,717 86,000 $ (101,480) $ 4,935,538 $ 7,748,222 $12,624,997
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
F-5
CAS MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2006 and 2005
2006 2005
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,746,701 $ 1,815,174
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 516,150 542,073
Deferred income taxes 37,813 36,940
Provision for doubtful accounts -- 4,000
Stock compensation 390,283 --
Curtailment gain on retirement benefit plan -- (400,739)
Changes in operating assets and liabilities:
Accounts receivable (1,687,340) 126,558
Recoverable income taxes (320,943) --
Inventories (1,215,386) (1,409,062)
Other current assets 86,011 (122,462)
Accounts payable and accrued expenses 1,097,560 544,296
Income taxes (18,999) --
Retirement benefit obligation (349,567) 13,318
------------ ------------
Net cash provided by operating activities 282,283 1,150,096
------------ ------------
INVESTING ACTIVITIES:
Purchases of intangible assets (157,561) (299,214)
Purchase of business, net of cash acquired of
$250,060 in 2005 (300,000) (4,524,249)
Purchases of property and equipment (1,042,143) (656,896)
------------ ------------
Net cash used by investing activities (1,499,704) (5,480,359)
------------ ------------
FINANCING ACTIVITIES:
Borrowing under notes payable 312,182 292,267
Repayments of notes payable (449,300) (85,908)
Proceeds from long-term debt agreement -- 4,200,000
Repayments of long-term debt (574,115) (303,107)
Tax benefit from exercise of warrants 865,842 --
Proceeds from issuance of common stock 504,763 146,143
------------ ------------
Net cash provided by financing activities 659,372 4,249,395
------------ ------------
Net change in cash and cash equivalents (558,049) (80,868)
Cash and cash equivalents, beginning of year 1,892,584 1,973,452
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,334,535 $ 1,892,584
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 247,663 $ 148,656
Cash paid during the year for income taxes $ 417,710 $ 1,164,873
See accompanying notes.
F-6
CAS MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
(1) THE COMPANY
CAS Medical Systems, Inc. ("CAS Medical") and its wholly-owned
subsidiary, Statcorp, Inc. ("Statcorp") operate as one reportable
business segment. Together, CAS Medical and Statcorp (the "Company")
develop, manufacture and distribute 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 2006
and 2005, the Company had sales to one customer which accounted for
approximately 11% and 14%, respectively, of net sales. The Company
generated revenues from international sales of approximately $7.7 million
in 2006 and $5.0 million in 2005. In the normal course of business, the
Company grants credit to customers and does not require collateral.
Credit losses are provided for in the period the related sales are
recognized based on experience and an evaluation of the likelihood of
collection. Credit losses have been within management's expectations.
(2) ACQUISITION
On May 15, 2005, CAS Medical purchased all the outstanding capital stock
of Statcorp. Statcorp develops, assembles and sells blood pressure cuffs,
liquid infusion devices, and blood transfusion filters for worldwide use
in the medical industry. The acquisition enhances CAS Medical's position
in the non-invasive blood pressure monitoring market by enabling it to
offer a complete, low cost, high performance accessories solution to its
customers to compliment its proprietary monitoring products and OEM
technologies. Statcorp also enjoys certain key OEM, private label, and
distributor relationships which CAS Medical may seek to expand to its
other product lines. The cost of the Statcorp acquisition has been
allocated to the assets acquired and the liabilities assumed based on an
internal valuation of their estimated fair values as follows:
Cash $ 250,060
Accounts receivable 420,354
Inventories 1,521,059
Other current assets 16,353
Property and equipment 243,646
Intangible assets, other than goodwill 3,926
Goodwill 3,079,021
Accounts payable (579,067)
Accrued expenses (46,053)
Income taxes (62,563)
Deferred income taxes (56,455)
Capital lease obligations (15,972)
------------
$ 4,774,309
============
During the quarter ended September 30, 2006, the Company paid a purchase
price adjustment of $300,000 based on Statcorp's achieved sales level for
the 12 months following its acquisition. The additional consideration
paid has been charged to goodwill. None of the goodwill is expected to be
deductible for tax purposes. The consolidated results of operations
include Statcorp from its acquisition date.
F-7
Unaudited pro forma results, assuming the acquisition of Statcorp
occurred as of January 1, 2005 follow:
Net sales $ 29,676,900
Net income $ 1,995,500
Per share:
Basic $ 0.20
Diluted $ 0.17
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Estimates
that are particularly sensitive to change in the near term are the
inventory valuation allowances, capitalized software development costs,
allowance for doubtful accounts and warranty accrual. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CAS Medical
and its wholly-owned subsidiary. All intercompany accounts and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company has
deposits in a limited number of financial institutions with federally
insured limits. Cash (including cash equivalents) at these institutions
is normally in excess of the insured limits. However, the Company
believes that the institutions are financially sound and there is only
nominal risk of loss.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the
assets, which range from two to five years for machinery and equipment,
and twenty years for building and improvements. Maintenance and repairs
are charged to expense when incurred.
Depreciation expense on property and equipment was $455,755 in 2006 and
$431,129 in 2005.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company believes
that the carrying amounts of its long-lived assets are fully recoverable.
Accordingly, no impairment loss has been reflected in the Company's
reported results of operations for either 2006 or 2005.
F-8
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of:
2006 2005
------------ ------------
Patents, purchased technology and other $ 513,581 $ 356,018
Deferred finance charges 26,484 26,484
Capitalized software 160,063 160,063
------------ ------------
700,128 542,565
Accumulated amortization (242,776) (182,379)
------------ ------------
$ 457,352 $ 360,186
============ ============
Patents and purchased technology costs are amortized over their estimated
useful lives. Deferred finance charges are amortized over the term of the
related debt. Costs associated with the development of new external use
software products are expensed as incurred until technological
feasibility has been established in accordance with SFAS No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Technological feasibility is demonstrated by the
completion of a detailed design plan. Capitalization ceases when the
product is available for general release to customers. Capitalized costs
are amortized over their estimated useful lives. Amortization expense was
$60,395 in 2006 and $110,944 in 2005.
Approximate amortization expense of intangible assets as of December 31,
2006 over the next five years follows:
2007 $ 45,900
2008 29,000
2009 19,300
2010 6,000
2011 6,000
------------
$ 106,200
============
REVENUE AND ACCOUNTS RECEIVABLE RECOGNITION
Revenues from sales and accounts receivable are recognized when evidence
of an arrangement exists, delivery has occurred based on shipping terms
(which are generally FOB shipping point for sales within the United
States and EX-Works for export sales), the selling price is fixed and
determinable, and collectibility is reasonably assured. Accounts
receivable are charged to the allowance for doubtful accounts when deemed
uncollectible.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for
future tax consequences resulting from differences between the book and
tax bases of existing assets and liabilities. A valuation allowance is
provided for that portion of deferred income tax assets which may not be
realized.
During 2006, certain outside directors exercised warrants to purchase
257,500 shares of the Company's common stock. The exercise of the
warrants resulted in income tax deductions in excess of compensation
expense recognized of $2,735,875. Such amount is included in the taxable
income of the applicable directors and deducted by the Company for
federal and state income tax reporting purposes. As a result, the Company
has reduced its current federal and state income tax obligation by
$865,842 and credited additional paid-in capital.
WARRANTY COSTS
The Company warrants some of its products against defects and failures
for up to three years and records the estimated cost of such warranties
at the time the sale is recorded. Estimated warranty costs are based upon
actual past experiences of product returns and the related estimated cost
of labor and material to make the necessary repairs.
F-9
A summary of the changes in the Company's warranty accrual follows:
2006 2005
------------ ------------
Beginning balance $ 122,000 $ 122,000
Provision (reversal for change in estimate) (22,214) 91,234
Warranty costs incurred (49,786) (91,234)
------------ ------------
Ending balance $ 50,000 $ 122,000
============ ============
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
Research and development includes, among other expenses, direct costs for
salaries, employee benefits, professional services, materials and
facility related expenses.
The Company has received various grants which support its research and
development efforts. In accordance with the terms of these grants, the
Company is being reimbursed for certain qualifying expenditures under the
agreement. 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.
As of December 31, 2006, there were no remaining active grants; however,
the Company has additional grants pending.
ADVERTISING COSTS
Non-direct response advertising costs are expensed as incurred and
include product promotion, samples, meetings and conventions, and print
media. Advertising expense was $680,000 in 2006 and $594,000 in 2005.
EARNINGS PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. Diluted earnings per share assumes the exercise or conversion of
dilutive securities using the treasury stock method.
A summary of the denominators used to compute basic and diluted earnings
per share follow:
2006 2005
------------ ------------
Weighted average shares outstanding, net
of restricted shares - used to compute
basic earnings per share 10,373,225 9,941,670
Dilutive effect of restricted shares, and
outstanding warrants and options 1,774,148 1,787,677
------------ ------------
Weighted average shares of dilutive
securities outstanding - used to
compute diluted earnings per share 12,147,373 11,729,347
============ ============
F-10
STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted Financial Accounting
Standards Board Statement No. 123 (Revised 2004) - "Share-Based Payment"
("FAS 123R") using the modified-prospective transition alternative. Under
this method, compensation cost is recognized for all share-based payments
granted, modified or settled after January 1, 2006, as well as for any
unvested equity awards that were granted prior thereto. Compensation cost
for the unvested awards granted prior to January 1, 2006 is recognized
using the same estimate of the grant-date fair value and the same
attribution method used to determine the pro forma disclosures under FAS
No. 123, "Accounting for Stock-Based Compensation," prior to its
revision.
Prior to January 1, 2006, the Company accounted for its stock options
under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based compensation cost was recognized
in operations since all options granted had an exercise price equal to
the market price of the underlying common stock on the date of grant. The
effect of adopting 123R was to increase compensation cost and reduce
income before income taxes by $390,000 and net income by $373,000 for
2006 ($0.04 and $0.03 per basic and diluted share). The stock
compensation cost was largely not deductible for income tax purposes;
there was no effect on cash flows.
Pro forma information using the fair value method to record stock-based
compensation cost follows:
2005
------------
Net income:
As reported $ 1,815,174
Compensation expense for stock
options based on fair value 485,393
------------
Pro forma $ 1,329,781
============
Earnings per share
As reported - Basic $ 0.18
Pro forma - Basic 0.13
As reported - Diluted 0.15
Pro forma - Diluted 0.11
As of December 31, 2006, the unrecognized stock-based compensation cost
related to non-vested stock awards was $336,006. Such amount, reduced for
forfeitures, will be recognized in operations over a weighted average
period of 2.7 years.
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 both 2006 and 2005: risk-free interest
rates of 4.4%; expected lives of 7 years; dividend yield of 0% and
expected volatility of 130%.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of long-term debt approximates its fair value based on
current market conditions and risks. The carrying amounts of the
Company's other financial instruments approximate their fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109" (FIN 48). FIN 48 clarifies the accounting and disclosure for
uncertain tax positions, as defined, and seeks to reduce the diversity in
practice associated with certain aspects of the recognition and
measurement related to accounting for income taxes. This interpretation
is effective for fiscal years beginning after December 15, 2006. The
Company does not believe that the adoption of FIN 48 will have a
significant impact on its financial statements.
F-11
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosure requirements regarding fair value measurement. This statement
simplifies and codifies fair value related guidance previously issued and
is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
The Company does not believe that SFAS 157 will significantly impact its
financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108
provides guidance on the consideration of the effects of prior year
unadjusted errors in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 requires registrants to
apply the new guidance the first time that it identifies material errors
in existence at the beginning of the first fiscal year ending after
November 15, 2006 by correcting those errors through a one-time
cumulative effect adjustment to beginning-of-year retained earnings. The
Company's financial statements were not effected by SAB 108.
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts follow:
2006 2005
------------ ------------
Balance at beginning of year $ 75,000 $ 94,000
Provision 27,000 4,000
Accounts written off (27,000) (23,000)
------------ ------------
Balance at end of year $ 75,000 $ 75,000
============ ============
(5) INVENTORIES
Inventories consist of:
2006 2005
------------ ------------
Raw materials $ 5,161,884 $ 4,452,407
Work in process 99,663 --
Finished goods 1,546,646 1,140,400
------------ ------------
$ 6,808,193 $ 5,592,807
============ ============
(6) FINANCING ARRANGEMENTS
LINE-OF-CREDIT
During October 2006, the Company extended the maturity date of its
line-of-credit with its bank to May 1, 2008. Borrowings under the
line-of-credit are payable on demand and bear interest at the one-month
London Inter-bank Offering Rate ("LIBOR") plus 225 basis points (7.60% at
December 31, 2006). Under the terms of the related agreement, the Company
is permitted to borrow based on accounts receivable and inventories
according to pre-established criteria. The maximum available funds under
the line of credit are $5,000,000.
NOTES PAYABLE
The Company financed the premiums for its directors and officers and
property casualty insurance policies during 2006 with short-term
borrowings of $312,182. The outstanding balance as of December 31, 2006
of $69,241 is comprised of two notes which total $29,780 in monthly
installments including interest at 5.20% and 5.89%, respectively, and
expire at varying times to August 2007.
F-12
LONG-TERM DEBT
Long-term debt consists of: 2006 2005
------------ ------------
Mortgage payable to a bank in monthly
installments of $9,750, including
interest at 5.45%, as amended, to
January 2018 $ 972,273 $ 1,034,495
Note payable to a bank in monthly
installments of $61,533, including
interest at 6.0% to May 2012 3,443,929 3,955,822
------------ ------------
4,416,202 4,990,317
Less current portion 609,615 574,115
------------ ------------
$ 3,806,587 $ 4,416,202
============ ============
Scheduled principal maturities of long-term debt follow:
2007 $ 609,615
2008 646,823
2009 687,314
2010 729,822
2011 774,962
Thereafter 967,666
------------
$ 4,416,202
============
COLLATERAL AND COVENANTS
Substantially all assets are pledged as collateral for long-term debt and
borrowings under the line-of-credit. In addition, the Company is required
to meet, among others, debt service and debt to equity covenants. The
Company was in compliance with such covenants as of December 31, 2006.
(7) ACCRUED EXPENSES
Accrued expenses consist of:
2006 2005
------------ ------------
Payroll $ 185,143 $ 214,402
Professional fees 181,980 218,808
Warranty 50,000 122,000
Bonuses 350,010 300,000
Customer refunds 44,722 53,514
Other 292,871 159,311
------------ ------------
$ 1,104,726 $ 1,068,035
============ ============
(8) SHARE-BASED PAYMENT PLANS
Under the CAS Medical Systems, Inc. 2003 Equity Incentive Plan (the
"Incentive Plan") 1,000,000 shares of common stock have been reserved for
issuance. Awards that may be granted under the Incentive Plan include
options, restricted stock, restricted stock units, and other stock-based
awards. The purposes of the Incentive Plan are to make available to our
key employees and directors, certain compensatory arrangements related to
growth in the value of our stock so as to generate an increased incentive
to contribute to the Company's financial success and prosperity; to
enhance the Company's ability to attract and retain exceptionally
qualified individuals whose efforts can affect the Company's financial
growth and profitability; and align in general the
F-13
interests of our employees and directors with the interests of our
stockholders. The Incentive Plan is administered by the Compensation
Committee of the Board of Directors, which in turn determines the
employees, officers and directors to receive awards and the terms and
conditions of these awards.
As of December 31, 2005, 466,750 shares were available for issuance under
the Incentive Plan. During 2006, under the Incentive Plan, options for
10,000 shares of common stock were granted to the Company's employees and
options to purchase 40,000 shares were cancelled. Further, 55,000 shares
of restricted stock were issued during 2006 of which 8,000 shares were
cancelled. As such 449,750 shares of common stock remain available for
issuance under the Incentive Plan as of December 31, 2006.
As of December 31, 2006, options to purchase 148,500 shares remain
outstanding under the 1994 Employees Incentive Stock Option Plan (the
"1994 Plan"). The 1994 Plan expired during 2003 and, as such, there are
no further options available for issuance under the 1994 Plan.
The Company's board of directors did not receive stock based compensation
during 2006. During 2005, non-qualified stock options to purchase 7,500
shares were granted to each of the Company's three outside directors
under the Incentive Plan.
A summary of the Company's stock option plans and changes during the
years follow:
2006 2005
WEIGHTED WEIGHTED
AVERAGE AGGREGATE AVERAGE AGGREGATE
OPTION EXERCISE INTRINSIC OPTION EXERCISE INTRINSIC
SHARES PRICE VALUE SHARES PRICE VALUE
----------- --------- --------- ----------- --------- ---------
Outstanding at
beginning of year 803,575 $ 1.73 640,450 $ 0.96
Granted 10,000 9.49 317,500 2.94
Exercised (235,925) 1.03 (124,375) 0.80
Canceled (40,000) 4.26 (30,000) 2.10
----------- -----------
Outstanding at
end of year 537,650 1.98 $ 6.02 803,575 1.73 6.92
=========== ===========
Exercisable at
end of year 408,900 1.65 6.35 388,200 0.85 7.80
=========== ===========
Vested or expected
to vest at end of
year 535,392 1.98 $ 6.02 792,420 1.73 $ 6.93
=========== ===========
Weighted average
grant-date fair
value of options
granted during
the year $ 8.83 $ 2.94
The weighted-average grant date fair value of stock options granted
during 2006 and 2005 was $8.83 and $2.94, respectively. The total
intrinsic value of stock options exercised during 2006 and 2005 was
$2,196,024 and $414,944, respectively. The intrinsic value of a stock
option is the amount by which the current market value of the underlying
stock exceeds the option exercise price.
F-14
Additional information about stock options outstanding and exercisable at
December 31, 2006 follows:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
--------------- ----------- ------------- -------- ----------- ---------
$ 0.53 - $ 0.67 78,500 4.2 $ 0.56 78,500 0.56
0.70 - 0.82 70,000 5.4 0.77 70,000 0.84
1.37 - 2.30 206,650 7.5 1.72 169,150 1.59
2.50 - 4.65 182,500 8.5 3.36 91,250 3.36
----------- -----------
$ 0.53 - $ 4.65 537,650 7.1 $ 1.58 408,900 1.65
=========== ===========
During 2006, the Company issued an aggregate of 55,000 shares of
restricted stock to employees under its 2003 Equity Incentive Plan.
During 2006, 8,000 shares were forfeited due to employee terminations and
47,000 shares remain outstanding and nonvested as of December 31, 2006.
The restricted stock vests thirty-six months from date of grant. The
weighted average value of the restricted stock was $6.04 a share and the
aggregate fair value of the stock issued was $332,100. Stock compensation
expense of $47,627 has been recognized to December 31, 2006 related to
the restricted shares. The unamortized stock compensation expense
associated with the restricted shares at December 31, 2006 is $238,133
and will be recognized ratably through 2009.
Warrants to purchase 1,229,000 shares of common stock at a weighted
average exercise price of $0.49 per share were outstanding at December
31, 2006. These warrants have no specific expiration date and have an
exercise price range of $0.30 to $1.44 per share. Also outstanding at
December 31, 2006 is a warrant issued to the Company's President and
Chief Executive Officer to purchase 100,000 shares of the Company's
common stock at $1.00 per share. This warrant is exercisable solely in
the event of a change of control of the Company as defined.
During 2006, certain outside directors exercised warrants to purchase a
total of 257,500 shares of common stock at a weighted average exercise
price of $0.61 per share.
Under the CAS Medical Systems, Inc. Employee Stock Purchase Plan (the
"Purchase Plan") 150,000 shares of common stock have been reserved for
issuance. Under the Purchase Plan employees may purchase the Company's
common stock through payroll deductions. To December 31, 2006, 55,334
shares of common stock have been issued to plan participants under the
Purchase Plan and amounts had been withheld from employees' compensation
for an additional 12,652 shares for issuance during January 2007.
(9) LIFE INSURANCE
During 2006 and 2005, the Company paid term-life insurance premiums of
approximately $40,300 and $32,100 respectively, on policies on the lives
of three officers of the Company. The face amount of insurance on one of
the policies is $1,000,000; the Company is named as a beneficiary for
$750,000 and Mr. Louis P. Scheps (see Note 13) is named as the insured
party for $250,000. In accordance with Mr. Scheps employment agreement
(see Note 13), such coverage will remain in effect until October 1, 2007.
Subsequent to this date, the Company will use commercially reasonable
efforts to secure continuation of Mr. Scheps' Company paid life insurance
for the period from October 1, 2007 to March 31, 2009 in amounts
commensurate with existing coverage of $250,000.
The remaining two policies have face amounts that are the equivalent of
two times each officer's annual salaries. The Company is not a
beneficiary on either of these two policies.
F-15
(10) BENEFIT PLANS
The Company maintains a 401(k) benefit plan for its employees, which
generally allows participants to make contributions via salary deductions
up to allowable Internal Revenue Service limits on a tax-deferred basis.
Such deductions are matched in part by discretionary contributions by the
Company. Matching contributions by the Company were $99,266 in 2006 and
$91,077 in 2005.
The Company offered certain retirement benefits through a plan accounted
for under Financial Accounting Standards Board Statement No. 106,
"Accounting for Post-Retirement Benefits Other than Pensions" as a
post-retirement benefit plan (the "Plan"). The benefits were funded
through the purchase of medical insurance for each retiree each year. The
Company funded the Plan on a "pay-as-you-go" basis.
The Plan became effective in January 2002 for qualifying employees who
retire at age 65 or later and have provided ten continuous years of
service to the Company. The Plan provides certain prescription drug and
supplemental health benefits for Medicare qualified retirees of the
Company.
During February 2005, the Company initiated certain changes to the Plan
to significantly reduce its future funding requirements. Effective
September 1, 2005, participants under the Plan were required to share
fifty percent of the premiums for benefit costs.
As of December 1, 2005, the Plan was also amended to allow only those
participants retired and receiving benefits as of that date to remain
eligible to receive future benefits under the Plan. In addition, the
Company also advised those participants that it would no longer provide
benefits after December 31, 2006. In connection therewith, the Company
recognized a curtailment gain of $400,739 during the fourth quarter of
2005.
Components of net periodic benefit cost under the Plan follow:
2006 2005
------------ ------------
Service cost $ -- $ 43,249
Interest cost 216 32,148
Amortization of prior service cost (195,921) (22,258)
Amortization of unrecognized gain (145,710) (13,155)
------------ ------------
Net periodic benefit (income) cost before
curtailment (341,415) 39,984
Recognized curtailment gain -- (400,739)
------------ ------------
Net periodic benefit income $ (341,415) $ (360,755)
============ ============
Changes in the benefit obligation under the Plan and a reconciliation of
its funded status as of the measurement date (December 31) to amounts
shown in the Company's balance sheets follow:
2006 2005
------------ ------------
Benefit obligation at beginning of year $ 7,936 $ 1,036,500
Service cost -- 43,249
Interest cost 216 32,148
Plan curtailment gain -- (400,739)
Plan amendment -- (576,581)
Actuarial loss (gain) -- (99,975)
Benefits paid (8,152) (26,666)
------------ ------------
Benefit obligation at end of year -- 7,936
Unrecognized prior service costs -- 195,921
Unrecognized net gain -- 145,710
------------ ------------
Accrued post-retirement benefit costs $ -- $ 349,567
============ ============
F-16
The negative unrecognized prior service costs of $195,921 applicable to
current retirees receiving benefits and the unrecognized net gain of
$145,710 as of December 31, 2005 were amortized to the date coverage
expired (December 31, 2006) in accordance with the closure of the Plan.
No benefits will be paid under the Plan after December 31, 2006.
Because the Plan's benefit formula granted credit only for service after
age 55, the expected post-retirement benefit obligation for an employee
was attributed from age 55 to age 65.
Weighted average discount rate assumptions used under the Plan for 2005
follow: 1) Year-end benefit obligation - 5.5%; and 2) net periodic
benefit cost - 5.75%.
Further, the health care trend rate assumptions used to develop cost
under the Plan at year-end follow:
Initial trend rate 8.00%
Ultimate trend rate 5.00%
Years to ultimate trend rate 3
(11) INCOME TAXES
Recoverable income taxes as of December 31, 2006, consist of estimated
tax deposits in excess of the current provision.
The provision for income taxes consists of:
2006 2005
------------ ------------
Current:
Federal $ 914,089 $ 642,630
State (benefit) 31,246 61,549
------------ ------------
945,335 704,179
Deferred:
Federal 79,527 86,599
State (benefit) (41,714) (49,658)
------------ ------------
37,813 36,941
------------ ------------
Income taxes $ 983,148 $ 741,120
============ ============
A reconciliation of U.S. Federal income taxes computed at the statutory
rate to income taxes shown in operations follows:
2006 2005
------------ ------------
Income taxes at the statutory rate $ 928,148 $ 869,140
State income taxes, net of federal effect (6,910) 4,895
R&D and other tax credits (134,642) (108,821)
Stock options 116,522 --
Other 80,030 (24,094)
------------ ------------
Income taxes $ 983,148 $ 741,120
============ ============
F-17
Deferred income tax assets and (liabilities) at December 31 relate to:
2006 2005
------------ ------------
Inventories $ 286,946 $ 237,023
Warranty accrual 17,495 42,688
Allowance for doubtful accounts 26,243 26,090
Tax credits 103,874 74,440
Property and equipment 53,385 79,281
Retirement benefit obligation -- 122,313
Other 116,744 108,360
------------ ------------
604,687 690,195
------------ ------------
Prepaid expenses (99,618) (147,313)
------------ ------------
$ 505,069 $ 542,882
============ ============
(12) GRANT AWARDS
The Company has been awarded various grants by the National Institutes of
Neurological Disorders and Stroke of the NIH under its Small Business
Innovative Research Program. Grants under this program have been used to
support the development of the Company's Near-Infrared Spectroscopy
("NIRS") technology which non-invasively measures the brain oxygenation
level of a neonatal patient. In accordance with the terms of these
grants, the Company has been reimbursed for certain qualifying
expenditures. As of December 31, 2006, there were no remaining active
grants although the Company is pursuing additional NIH grants to support
its NIRS research.
During 2006 and 2005, approximately $21,000 and $531,000, respectively,
of qualifying research and development costs ("R&D") were reimbursed
under grants. Such reimbursements are recorded as a reduction in R&D
expenses. The Company recognizes these reimbursements on an accrual basis
as the qualifying costs are incurred.
(13) COMMITMENTS AND CONTINGENCIES
The Company is committed under an employment agreement with its President
and Chief Executive Officer, Louis P. Scheps, for payments aggregating
approximately $275,000 per year, through March 31, 2007. Mr. Scheps will
then serve as a part-time employee in a senior executive role from April
1, 2007 through March 31, 2009 at an annual salary of $100,000. From
October 1, 2005 to October 1, 2007 the Company will maintain life
insurance coverage for Mr. Scheps naming him as the insured party in an
amount not less than $250,000. Further, the Company will use commercially
reasonable efforts to secure continuation of Mr. Scheps' Company paid
life insurance for the period from October 1, 2007 to March 31, 2009 in
amounts commensurate with existing coverage of $250,000.
The Company is committed under an employment agreement with Andrew E.
Kersey, effective April 1, 2007 at which time Mr. Kersey succeeds Mr.
Scheps as the Company's President and Chief Executive Officer. According
to the terms of the employment agreement, Mr. Kersey shall receive an
annual salary of $250,000 and is eligible for Company paid stock and/or
cash bonuses subject to the discretion of the Compensation Committee of
the Board of Directors.
The Company's certificate of incorporation provides that the Company will
indemnify its directors 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 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.
F-18
The Company leases operating facilities and certain equipment under
non-cancellable operating leases. Rent expense under these leases was
$150,000 in 2006 and $140,000 in 2005. Future annual minimum rental
payments as of December 31, 2006 to the expiration of the leases follow:
2007- $199,000; 2008- $199,000; 2009- $79,000; 2010- $12,000 and 2011 and
thereafter- $2,000.
During February 2007, the Company entered into a five year lease
agreement for approximately 13,000 square feet of office space at an
adjacent facility. The lease is effective June 1, 2007 and requires
minimum aggregated lease payments of $571,000 over the term of the lease.
Page 15
Item 8. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 8A. 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 December 31, 2006. Based upon the foregoing evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that its
disclosure controls and procedures were effective as of that date.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended December 31, 2006 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.
Item 8B. Other Information
----------------------------
On February 19, 2007, the Compensation Committee of the Board of Directors
approved a discretionary cash bonus resulting from the 2006 financial
performance in the aggregate of $120,000 payable to the Company's officers. As
such Louis P. Scheps received $60,000, Andrew E. Kersey, Chief Operating
Officer, received $30,000 and Jeffery A. Baird, Chief Financial Officer,
received $30,000. Such bonuses were accrued as of December 31, 2006.
Appointment of Board Member
---------------------------
On March 16, 2007, the Board of Directors of the Company increased its size from
four members to five and appointed Andrew E. Kersey to fill the vacancy on the
Board resulting from its increase in size. Mr. Kersey, age 46, has over 20 years
experience in the medical device business and has been with the Company since
2001. Before becoming Chief Operating Officer in January 2004, Mr. Kersey was
Director of Engineering. Prior to joining the Company, Mr. Kersey held various
engineering management positions at Novametrix Medical Systems, Inc. and
Corometrics Medical Systems, a division of Marquette Medical.
Employment Agreement with Andrew Kersey
---------------------------------------
On March 16, 2007, the Company entered into an Employment Agreement with Andrew
E. Kersey (the "Employment Agreement"), pursuant to which Mr. Kersey will assume
the positions of President and Chief Executive Officer of the Company effective
April 1, 2007. Under the terms of the Employment Agreement, Mr. Kersey will be
employed on an "at will" basis, will receive an annual base salary of two
hundred fifty thousand dollars ($250,000) and will be eligible for an annual
bonus in the form of cash or Company common stock as determined at the sole
discretion of the Compensation Committee of the Board of Directors. Mr. Kersey
will also be entitled to participate in all employee benefit programs of the
Company, as such programs may be in effect from time to time.
Page 16
If the Company terminates Mr. Kersey's employment without Serious Cause (as
defined in the Employment Agreement) or Mr. Kersey terminates his employment for
Good Reason (as defined in the Employment Agreement), the Company will continue
to pay Mr. Kersey his then-current base salary for a period of six (6) months
from the date of such termination and he shall be entitled to participate in the
Company's health benefit plans (with standard employee payment not to exceed the
payment level prior to termination) for the six (6) month period. In addition,
if Mr. Kersey terminates his employment for Good Reason or if the Company
terminates Mr. Kersey's employment without Serious Cause, all of Mr. Kersey's
equity-linked grants (such as stock options and restricted stock) shall
immediately accelerate and vest in full. If Mr. Kersey' employment is terminated
by the Company (or successor thereto) without Serious Cause or Mr. Kersey
terminates employment with the Company (or successor thereto) for Good Reason,
within the period commencing on the date that a Change of Control (as defined in
the Employment Agreement) is formally proposed to the Company's Board of
Directors and ending on the second anniversary of the date on which such Change
of Control occurs, then Mr. Kersey will be entitled to receive his then-current
base salary for a period of one (1) year from the date of such termination and
in addition will be entitled to participate in the Company's health benefit
plans (with standard employee payment not to exceed the payment level prior to
the change in control) for the period of one (1) year. The foregoing description
of the Employment Agreement does not purport to be complete and is qualified in
its entirety by reference to the Employment Agreement, a copy of which is filed
as Exhibit 10.18 hereto.
PART III
--------
Item 9. Directors, Executive Officers, Promoters, Control Persons and
------------------------------------------------------------------------
Corporate Governance; Compliance with Section 16(a) of the Exchange Act
-----------------------------------------------------------------------
Reference is made to the disclosure required by Items 401, 405, 406 and
407(c)(3), (d)(4) and (d)(5) of Regulation S-B contained in the Registrant's
definitive proxy statement to be mailed to shareholders on or about April 23,
2007, and to be filed with the Securities and Exchange Commission.
Item 10. Executive Compensation
---------------------------------
Reference is made to the disclosure required by Item 402 of Regulation S-B
contained in the Registrant's definitive proxy statement to be mailed to
shareholders on or about April 23, 2007, and to be filed with the Securities and
Exchange Commission.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
-----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Reference is made to the disclosure required by Item 403 of Regulation S-B
contained in the Registrant's definitive proxy statement to be mailed to
shareholders on or about April 23, 2007, and to be filed with the Securities
Exchange Commission.
The following table provides information regarding the Company's equity
compensation plans as of December 31, 2006:
Number of securities Number of securities
to be issued upon Weighted-average remaining available
exercise of exercise price of for future issuance
outstanding options outstanding options under equity
Plan Category and warrants and warrants compensation plans
---------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 537,650 $ 1.98 449,750
Page 17
Equity compensation plans
not approved by security
holders 1,229,000 0.49
----------- ----------- -----------
Total 1,766,650 $ 0.94 449,750
=========== ===========
Securities remaining available for issuance under equity compensation plans
approved by security holders represent the 2003 Equity Incentive Plan approved
during 2004. The equity compensation plans not approved by security holders
consist of warrants granted to an officer and directors of the Company as
compensation for services rendered. These warrants have no expiration date. See
Note 8 to the Company's Financial Statements.
Item 12. Certain Relationships and Related Transactions, and Director
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Independence
------------
Reference is made to the disclosure required by Item 404 of Regulation S-B
contained in the Registrant's definitive proxy statement to be mailed to
shareholders on or about April 23, 2007, and to be filed with the Securities and
Exchange Commission.
Item 13. Exhibits
-------------------
2.1 Stock Purchase Agreement dated May 15, 2005 between CAS Medical
Systems, Inc., Statcorp, Inc., and the Stockholders of Statcorp Inc.
(1)
3.1 Certificate of Incorporation of Registrant (2)
3.2 Amended and Restated Bylaws of Registrant (3)
10.1 Employment Agreement dated September 1, 1993 between Louis P. Scheps
and CAS Medical Systems, Inc. (4)
10.2 Amendment Number One to Employment Agreement between Louis P. Scheps
and CAS Medical Systems, Inc. (4)
10.3 Amendment Number Two to Employment Agreement between Louis P. Scheps
and CAS Medical Systems, Inc. (4)
10.4 Amendment Number Three to Employment Agreement between Louis P.
Scheps and CAS Medical Systems, Inc. (4)
10.5 Amendment Number Four to Employment Agreement between Louis P. Scheps
and CAS Medical Systems, Inc. (3)
10.6 Amendment Number Five to Employment Agreement between Louis P. Scheps
and CAS Medical Systems, Inc. (5)
10.7 Amendment Number Six to Employment Agreement between Louis P. Scheps
and CAS Medical Systems, Inc. (6)
10.8 1994 Employees' Incentive Stock Option Plan (7)
10.9 CAS Medical Systems, Inc. Employee Stock Purchase Plan (8)
10.10 CAS Medical Systems, Inc. 2003 Equity Incentive Plan (9)
10.11 Form of Option Agreement (5)
10.12 Commercial Line of Credit Note and Loan Agreement with NewAlliance
Bank (10)
10.13 Security Agreement with NewAlliance Bank (10)
10.14 Commercial Loan and Security Agreement between CAS Medical Systems,
Inc., NewAlliance Bank and Statcorp Inc. (1)
10.15 Modification to Agreement between CAS Medical Systems, Inc. and
NewAlliance Bank. (6)
10.16 Commercial Line of Credit Note and Loan Agreement dated October 27,
2006 (11)
10.17 Security Agreement in favor of NewAlliance Bank dated October 27,
2006 (11)
10.18 Employment Agreement between Andrew E. Kersey and CAS Medical
Systems, Inc. effective April 1, 2007
21.1 Subsidiaries of the Registrant
23.1 Consent of UHY LLP, Independent Registered Public Accounting Firm
31.1 Certification of CEO Pursuant to Rule 13a-14
31.2 Certification of CFO Pursuant to Rule 13a-14
32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. 1350
___________________
Page 18
(1) Incorporated by reference to the Company's Form 8-K/A filed July 29, 2005
(2) Incorporated by reference to the Company's Registration Statement, dated
April 15, 1985, filed with the Securities and Exchange Commission
(3) Incorporated by reference to the Company's Form 10-KSB filed March 29, 2004
(4) Incorporated by reference to the Company's Form 10-KSB filed March 28, 2003
(5) Incorporated by reference to the Company's Form 10-KSB filed March 31, 2005
(6) Incorporated by reference to the Company's Form 10-QSB filed November 14,
2005
(7) Incorporated by reference to the Company's Form S-8 filed October 4, 2000
(8) Incorporated by reference to the Company's Form S-8 filed June 10, 2004
(9) Incorporated by reference to the Company's Form S-8 filed June 10, 2004
(10) Incorporated by reference to the Company's Form 10-QSB filed November 12,
2004
(11) Incorporated by reference to the Company's Form 8-K filed October 30, 2006
Item 14. Principal Accountant Fees and Services
-------------------------------------------------
Reference is made to the proposal regarding the approval of the Registrant's
independent accountants contained in the Registrant's definitive proxy statement
to be mailed to shareholders on or about April 23, 2007, and to be filed with
the Securities and Exchange Commission.
Page 19
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant 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: March 19, 2007
---------------------------------------
By: Louis P. Scheps
Chairman of the Board, President
and Chief Executive 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/ Lawrence Burstein Date: March 19, 2007
---------------------------------------
Lawrence Burstein, Director
/s/ Jerome Baron Date: March 19, 2007
---------------------------------------
Jerome Baron, Director
/s/ Saul Milles Date: March 19, 2007
---------------------------------------
Saul Milles, Director
/s/ Louis P. Scheps Date: March 19, 2007
---------------------------------------
Louis P. Scheps, Chairman of the Board,
President, Chief Executive Officer and Director
/s/ Andrew E. Kersey Date: March 19, 2007
---------------------------------------
Andrew E. Kersey, Director,
Chief Operating Officer
/s/ Jeffery A. Baird Date: March 19, 2007
---------------------------------------
Jeffery A. Baird, Chief Financial Officer
(Chief Financial and Accounting Officer)