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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Fiscal Year ended December 31, 2007
Commission File Number 0-13839
CAS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1123096
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
44 East Industrial Road, Branford, Connecticut 06405
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(Address of principal executive offices, including zip code)
(203) 488-6056
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.004 par value The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "accelerated filer", "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-Accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2007, which is the last business day of the registrant's most
recently completed second fiscal quarter, the aggregate market value of the
registrant's common stock held by non-affiliates of the registrant was
$67,460,000 based on the closing price as reported on the NASDAQ Global Market.
This calculation does not reflect a determination that persons are affiliates
for any other purpose.
As of March 1, 2008, there were 10,916,399 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 18, 2008 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-K.
INDEX Page
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PART I
Item 1 Business 4
Item 1A Risk Factors 11
Item 1B Unresolved Staff Comments 14
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A Quantitative and Qualitative Disclosures About Market Risk 22
Item 8 Financial Statements and Supplementary Data 22
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2007 and 2006 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2007, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6 to F-19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
Item 9A(T) Controls and Procedures 23
Item 9B Other Information 24
PART III
Item 10 Directors, Executive Officers and Corporate Governance 24
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 24
Item 13 Certain Relationships and Related Transactions, and
Director Independence 24
Item 14 Principal Accountant Fees and Services 25
PART IV
Item 15 Exhibits and Financial Statement Schedules 25
Signatures 28
Page 4
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; changes in the competitive environment; and other risks described in
Item 1A of this filing. 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. Business
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The Company
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CAS Medical Systems, Inc. is a Delaware corporation organized in 1984. Our
corporate offices are located at 44 East Industrial Road, Branford, CT 06405,
and our telephone number is (203) 488-6056. Our website address is
www.casmed.com. The information on, or that can be accessed through, our website
is not a part of this report. Unless the context indicates otherwise, as used in
this report, the terms "CAS," "CASMED," the "Company," "we," "us" and "our"
refer to CAS Medical Systems, Inc.
The Company designs, manufactures and markets innovative medical technologies
and products that are vital to patient care. The Company's products include
cerebral oximeters and sensors, 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,
based in Jacksonville, Florida, develops, assembles and sells blood pressure
cuffs, and rapid infusor cuffs for use in the medical industry worldwide.
The Company currently designs, manufactures, markets, and services all finished
products out of its Branford, Connecticut and Jacksonville, Florida facilities.
The Company has several products in various stages of development that it
believes will add to and complement its current product lines.
Description of Products and Services
------------------------------------
Effective during 2007, the Company has categorized its sales of products and
services, which represent one reportable business segment, as follows:
o High acuity products - includes sales of the FORE-SIGHT(R) cerebral
oximeter monitor and accessories.
o Low acuity products - includes sales of cardio-respiratory monitors
and accessories used to monitor apnea in home-based and hospital
settings; the Company's dual platform of vital signs monitors and
accessories incorporating various combinations of measurement
parameters for both human and veterinary use including pulse oximetry,
electro-cardiography, temperature, non-invasive blood pressure, and
capnography; co-branded products developed and manufactured by
Analogic Corporation including vital signs monitors utilizing
parameters as described above and additionally monitors which measure
non-invasive cardiac output and hemodynamic status, and maternal/fetal
monitors.
Page 5
o Blood Pressure Measurement Technology - includes sales to Original
Equipment Manufacturers ("OEM") of the Company's proprietary
non-invasive blood pressure technology (MAXNIBP(R)), blood pressure
cuffs and accessories for the OEM market, and related license fees.
o Supplies and Service - includes sales of blood pressure cuffs and
rapid infusor cuffs, neonatal intensive care supplies including
electrodes and skin temperature probes, and service repair revenues.
HIGH ACUITY PRODUCTS
Cerebral Oximetry Monitoring Equipment
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The Company began marketing its FORE-SIGHT Absolute Cerebral Oximeter in
mid-2007 targeted at the adult cardiovascular surgery market where nearly
700,000 procedures are performed annually 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 as these procedures are being performed. 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.
The FORE-SIGHT Cerebral Oximeter non-invasively and continuously measures
absolute brain tissue oxygen saturation, enabling clinicians to identify and
react to instances of lowered brain oxygen saturation before the situation
becomes critical. With sensors placed on the patient's forehead, FORE-SIGHT
utilizes the Company's LASER-SIGHT(R) Optical Technology to project near
infrared light into the brain to provide an absolute measurement indicating
cerebral tissue oxygen saturation.
Unlike readings obtained from a trend-only monitor, absolute cerebral tissue
oxygen saturation readings have stand-alone clinical significance because
individual measurements have a direct correlation to invasive measurements with
which clinicians are familiar. Several studies has been published to date
showing that the use of cerebral oximetry during cardiac surgery can
significantly reduce adverse clinical outcomes due to neurological complications
including permanent stroke. Other published studies have shown decreased length
of stay and decreased post operative ventilator time when cerebral oximetry is
used. This can lead to significant cost savings to hospitals.
The Company has 3 dedicated U.S. sales managers for the FORE-SIGHT product line
managing approximately 16 manufacturer representative groups. Additionally, the
Company has 6 clinical specialists throughout the U.S. dedicated to support of
clinical evaluations and installations of the product. In December 2007, the
Company expanded sales and marketing efforts for the product with the hiring of
an international sales manager focused on setting up European distribution for
the FORE-SIGHT.
During February 2008, the Company received 510(k) clearance for expanded
indications for use of its infant sensor to include the neonatal patient
population above 2,500 grams of weight. Measuring cerebral oxygen saturation is
vital for a variety of neonatal patients, including those born with congenital
heart defects that affect the ability of the heart to supply oxygenated blood to
the brain. Approximately 550 hospitals in the U.S. contain Neonatal Intensive
Care Units ("NICU") with 13,000 high acuity Level 3 beds. Approximately four
million births occur in the U.S. each year of which approximately 4% are babies
with a birth defect and about 12% are born preterm (defined as less than 37
weeks from gestation).
The Company intends to market the FORE-SIGHT neonatal and infant sensors
primarily into the hospital market during the second half of 2008 for use in the
Neonatal/Infant Cardiovascular operating room, the Cardiac Intensive Care Unit
and the NICU. The Company is currently conducting preference testing at five key
neonatal/infant locations throughout the U.S. The Company plans to establish a
direct sales force dedicated to sales into these markets.
Page 6
LOW ACUITY PRODUCTS
Vital Signs Monitoring Equipment
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The Company manufactures 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. During 2003,
the Company was awarded a multi-year, sole-source purchasing agreement by the
U.S. Department of Veterans Affairs ("VA") with respect to its vital signs
monitors. This agreement is scheduled to expire during 2008. Although the
Company is currently seeking an extension of the agreement, management does not
believe that its business with the VA will be materially affected should it not
be successful in receiving such extension.
During May 2007, the Company entered into an agreement with Analogic Corporation
under which the Company is the exclusive world-wide distributor of the
LIFEGARD(R) family of co-branded vital signs monitoring products formerly
marketed by Analogic. The initial term of the Agreement is five years, subject
to meeting certain minimum revenue targets, and incorporates additional one-year
extensions, again subject to meeting certain revenue targets. The LIFEGARD
family includes the highly portable, versatile LIFEGARD I vital signs monitor
targeting low-acuity areas; the LIFEGARD II that measures ECG, HR, SpO2, NIBP,
Temperature, Respiration, end-tidal CO2, and optional non-invasive cardiac
output via Impedance Cardiography (ICG); the LIFEGARD ICG, a compact,
stand-alone, non-invasive cardiac output and hemodynamic status monitor; and the
LIFEGARD Vue Central Nurses' Station. The LIFEGARD family also includes the
FETALGARD Lite(R) Fetal Monitor, and the FETALGARD Lite - NIBP which measures
maternal non-invasive blood pressure for monitoring Pregnancy-Induced
Hypertension (PIH).
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(TM) software saves patient data from the
monitors and generates reports for review by the clinician.
BLOOD PRESSURE MEASUREMENT TECHNOLOGY
The Company has developed a proprietary non-invasive blood pressure measurement
technology, MAXNIBP. 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 OEM agreements to supply its MAXNIBP technology to various companies
throughout the world. This technology is 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.
The Company's complete line of disposable and reusable blood pressure cuffs are
available to OEM partners, either under the Company's brand names, or
private-labeled.
SUPPLIES AND SERVICE
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-Cuff(R) Reusable Cuffs, and SoftCheck(R) and Safe-Cuff(R)
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.
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
Page 7
reflectors, and SoftCheck(R) neonatal blood pressure cuffs.
Sales and Marketing
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The Company markets its products globally, through hospital, alternate site,
homecare, veterinary and emergency medical distribution channels.
Sales of the Company's low-acuity products, blood pressure measurement
technologies and supplies and service in the U.S. are conducted by specialty
distributors working under both exclusive and non-exclusive arrangements, in
conjunction with eleven full-time field sales personnel. 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 one employee located outside of the United
States.
Sales of the Company's high-acuity products within the U.S. are conducted by
three Company sales managers and six clinical specialists supporting a network
of manufacturers' representatives under contract with the Company. International
sales of the Company's high-acuity products are conducted by a European based
sales consultant responsible for developing a distribution network for these
products outside of the U.S. principally through the use of distributor partners
and clinical support specialists.
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
2007 2006 2005
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Domestic Sales $29,601,305 $27,518,584 $21,891,805
International Sales 8,631,100 7,683,427 4,992,616
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$38,232,405 $35,202,011 $26,884,421
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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 various areas of the hospital
market.
The Company's products maintain a high, professional standard of accuracy and
quality in demanding environments such as those encountered in hospital and
transport situations. We believe that our reputation for producing innovative,
accurate, reliable, products that are user-friendly, manufactured in the USA,
and contain best-in-class technology are key factors in our ability to
successfully compete with larger organizations in the medical equipment market.
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 2007, 2006 and 2005, the Company incurred expenses of approximately
$2,733,000, $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 $2,254,000 for 2007, $2,762,000 for 2006 and $1,631,000 for
2005. Reimbursements were approximately $479,000 for 2007, $20,000 for 2006 and
$531,000 for 2005. Funding provided to the Company is recorded as a reduction in
R&D expenses.
Page 8
The majority of the Company's 2007 development efforts were directed toward
furthering the design and development of its patented LASER-SIGHT(R)
Near-Infrared Spectroscopy ("NIRS") technology used in the FORE-SIGHT Cerebral
Oximeter. Development efforts for 2007 included support of first launch product
in May 2007, software enhancements to the FORE-SIGHT monitor during the year as
well as the development of smaller FORE-SIGHT sensors specifically targeted for
the infant/neonatal market. Research efforts for the year are centered on adult
and neonatal clinical studies at various institutions throughout the U.S. to
support the launch of FORE-SIGHT into the cardio-vascular OR as well as other
new market opportunities.
Other development efforts included enhancements to the Company's Vital Signs
Monitors as well as design improvements to certain of the Company's OEM
non-invasive blood pressure modules.
As of December 31, 2007, the Company employed a staff of 19 engineers and
scientists focused on internal R&D activities outlined above. For 2008, we
expect a modest increase in staffing during the year and an increase in our
research, development and engineering expenses primarily as a result of costs
associated with development of additional FORE-SIGHT sensors, further
enhancements to the Cerebral Oximeter and continued clinical research efforts to
continue to expand the market opportunities for the Company's cerebral oximetry
products.
Clinical Research
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The Company believes that the early establishment of FORE-SIGHT Absolute
Cerebral Oximetry as a standard of care in all cardiac surgical procedures,
followed by its use in other high risk surgical procedures and other intensive
care applications, is essential to development of the market. We believe this
development of the market is achieved by increased market education as well as
investment in key clinical research studies.
Several clinical studies have already been published demonstrating the
importance & effectiveness of monitoring changes in cerebral oximetry during
cardiac surgery. These published studies include -
In September 2004 a retrospective, blinded intervention 2,279-patient published
as Scott Goldman, M.D., et al., "OPTIMIZING INTRAOPERATIVE CEREBRAL OXYGEN
DELIVERY USING NONINVASIVE CEREBRAL OXIMETRY DECREASES THE INCIDENCE OF STROKE
FOR CARDIAC SURGICAL PATIENTS", in The Heart Surgery Forum #2004-1062 showed a
significant reduction in permanent stroke when information from cerebral
oximetry was used to help manage regional brain blood oxygen saturation in
cardiac surgery patients. In January 2007, a 200-patient study, published as
John M. Murkin, M.D., et al., "MONITORING BRAIN OXYGEN SATURATION DURING
CORONARY BYPASS SURGERY: A RANDOMIZED, PROSPECTIVE STUDY", in Anesthesia and
Analgesia showed a statistically significant reduction in incidences of major
organ dysfunction when cerebral oximetry was used to provide information to help
manage regional brain blood oxygen saturation in coronary artery bypass surgery
patients
The Company is actively supporting several clinical studies throughout North
America and Europe, specifically designed to show the benefits of absolute
cerebral oximetry. These studies include -
In cardiac surgery - a 60 patient study of patients undergoing Coronary Artery
Bypass Graft ("CABG") surgery has recently been completed, with results from
this study expected to be presented later this year. Additionally, a 40 patient
study is nearing completion examining the effectiveness of monitoring absolute
cerebral oximetry in patients undergoing Deep Hypothermic Cardiac Arrest
("DHCA") aortic arch surgery. Early data from this study has lead to a review
paper published in the March 2008 edition of Seminars in Cardiothoracic and
Vascular Anesthesia. The publication, entitled "RECENT ADVANCES IN THE
APPLICATION OF CEREBRAL OXIMETRY IN ADULT CARDIOVASCULAR SURGERY", authored by
Gregory W. Fischer, M.D., Co-Director of Cardiac Anesthesia at Mount Sinai
Medical Center in New York. Additional cardiac and thoracic surgery studies are
underway including the use of monitoring cerebral oximetry during single lung
ventilation, and in Europe, two key cardiac surgery sites have been established
to support the launch of the FORE-SIGHT product internationally.
In other surgical procedures, the Company is sponsoring two studies to show the
benefit of absolute cerebral oximetry monitoring during shoulder surgery in the
sitting or "beach chair" position. In the summer of 2007 a Newsletter of the
Anesthesia Patient Safety Foundation ("APSF") described two patients with no
significant risk factors or evidence of cerebral vascular disease who both
developed permanent neurological deficits likely from global cerebral
hypo-perfusion while undergoing shoulder surgery in the beach chair position.
The beach chair position can cause significant hemodynamic changes, the response
to which are further blocked by this combination
Page 9
of inhalation/intravenous drugs. The current standard of care for these patients
is to measure blood pressure using a cuff placed on the opposite arm or either
leg that automatically identifies oscillometric blood pressure readings. The
Company believes that monitoring cerebral oximetry using FORE-SIGHT can
significantly benefit patients during these procedures.
The Company is also participating in a new NIH-funded major multi-center study
researching cognitive decline and delirium in elderly patients undergoing major
general surgery. The study involves seven key medical institutions throughout
the U.S. and is expected to begin in the first half of 2008. Approximately five
million elderly patients have surgery in the U.S. each year. These surgeries are
generally considered high risk due to a variety of factors. The Company believes
that monitoring cerebral oximetry using FORE-SIGHT can also significantly
benefit this population of patients.
In neonatal and infant markets - customer preference testing is also underway at
five key infant / neonatal clinical locations throughout the U.S. to support the
launch of the infant / neonatal sensor later this year. There are approximately
550 Hospitals with 13,000 NICU beds and 21,000 neonatal intensive and
intermediate level beds in the U.S. alone. Of the approximately 4 million babies
born in the U.S. each year, nearly 4% are born with birth defects and about 12%
are born preterm (less than 37 weeks gestation). The FORE-SIGHT Cerebral
Oximeter can accurately detect low cerebral oxygen saturation events during
critical periods, thereby allowing clinicians to intervene and reverse
potentially life threatening events before they become critical. Measuring
cerebral oxygen saturation is vital for a variety of neonatal patients,
including those born with congenital heart defects that affect the ability of
the heart to supply oxygenated blood to the brain. CASMED is the first and only
company currently in the marketplace to have received FDA regulatory clearance
with labeling for use of cerebral oximetry in neonatal and infant populations.
The Company continues to evaluate sponsoring other clinical studies that expand
the use of FORE-SIGHT Absolute Cerebral Oximetry into other patient populations
and applications.
Grant Awards
------------
On September 17, 2007, the Company was awarded a three year grant totaling $2.8
million by the National Institute of Neurological Disorders ("NINDS") and Stroke
of the NIH under its Small Business Innovative Research Program. The grant was
awarded primarily to support advanced clinical outcome studies that focus on the
Company's proprietary LASER-SIGHT technology incorporated into the FORE-SIGHT
Cerebral Oximeter. Further clinical studies funded by this grant will be used to
expand the clinical applications for FORE-SIGHT outside of the initial target
market of high risk cardio-vascular surgery. As of December 31, 2007,
approximately $2.3 million remained under the 2007 grant award.
The Company has, in prior years, been awarded various grants by the NINDS under
its Small Business Innovative Research Program. Grants under this program are
being used to support the Company's LASER-SIGHT 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 from the NIH were approximately $479,000 for 2007, $20,000 for
2006 and $531,000 for 2005. Funding provided to the Company is recorded as a
reduction in R&D expenses.
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), CASMED(R), For What's Vital(R), FORE-SIGHT(R), LASER- SIGHT(R),
Safe-Cuff(R), For Every Life and Breath Situation(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 CAS Express(TM) common law
trademark. 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.
Page 10
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 monitoring 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 NIRS cerebral oximetry technology.
The FORE-SIGHT NIRS cerebral oximetry technology has four U.S. patents issued
(US 6,456,862 B2, US 7,047,054, US 7,072,701, and US 7,313,427) and one
international patent issued. In addition, the Company currently has several
patents pending with U.S. 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, 2007, the Company had 165 employees, of which 164 were
full-time. The Company has no collective bargaining agreements and believes that
relations with its employees are good.
Government Regulation
---------------------
Medical products of the type currently being marketed and under development by
the Company are subject to regulation under the Food, Drug and Cosmetic Act (the
"FD&C 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
Notification 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 in violation of the FD&C Act.
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 FD&C 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. In the last factory
inspection of the Company there were no material non-conformities.
Page 11
International Regulatory Compliance
-----------------------------------
CASMED maintains certification to ISO 13485:2003 by the accredited body, BSI
Inc., in each of its manufacturing facilities. These certifications allow CASMED
to use the "CE" mark on its products. The CE mark is required for medical
devices to gain access to the European Union common market. The FDA, recognizing
the value of this universally accepted quality system, has patterned its Quality
System Regulations after ISO 9001 and ISO 13485. CASMED maintains full
compliance with the FDA Quality System Regulations.
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, printed circuit boards,
semi-conductor circuits, electronic and pneumatic components, power supplies,
and many other parts and sub-assemblies are obtained from outside vendors. 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.
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.
Customers
---------
No customer accounted for 10% of the Company's revenue during 2007. One
customer, Medtronic, Inc., accounted for 11% and 14% of revenues for 2006 and
2005, respectively. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong sales to Medtronic during the latter six months of 2007, overall sales to
Medtronic for 2007 decreased approximately $1,510,000 from 2006 and represented
approximately 7% of overall revenues.
Backlog
-------
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 1A. Risk Factors
---------------------
Our business faces many risks. If any of the events or circumstances described
in the following risk factors actually occurs, our business, financial condition
or results of operations could suffer, and the trading price of our common stock
could decline. The risks described below may not be the only risks we face.
Additional risks that we do not yet know of or that we currently believe are
immaterial may also impair our business operations. You should consider the
following risks, as well as the other information included or incorporated by
reference in this Form 10-K before deciding to invest in our common stock.
WE ARE A SMALL COMPANY IN A HIGHLY COMPETITIVE INDUSTRY
We are engaged in a rapidly evolving field. Competition from other medical
device companies, diversified healthcare companies and research and academic
institutions is intense and expected to increase. Many companies engaged in the
medical device sector have substantially greater financial and other resources
and development capabilities than we do, and have substantially greater
experience in testing of products, obtaining regulatory approvals and
manufacturing and marketing medical devices. Therefore, our competitors may
succeed in obtaining approval for products more rapidly than we can. Other
companies may succeed in developing and commercializing products earlier than we
do. In addition to competing with universities and other research institutions
in the development of products, technologies and processes, the Company may
compete with other companies in acquiring rights to products or technologies
from universities. Also, the medical device market is experiencing increasing
Page 12
customer concentration, due to the emergence of large purchasing groups. We
cannot assure you that we will develop products that are more effective or
achieve greater market acceptance than competitive products, or that our
competitors will not succeed in developing products and technologies that are
more effective than those being developed by us or that would render our
products and technologies less competitive or obsolete. Moreover, there can be
no assurance that we will be able to successfully sell to large purchasing
groups, which are increasingly looking to suppliers that can provide a broader
range of products than we currently offer.
WE ARE DEVOTING SUBSTANTIAL RESOURCES TO THE DEVELOPMENT AND MARKETING OF OUR
CEREBRAL OXIMETRY PRODUCTS
We expect to devote a significant amount of resources to continue the
development and marketing of our Fore-Sight Cerebral Oximetry products. We
believe that substantial resources are required to further our opportunity in
the markets for these products. Such investments include further research and
development, including significant expenditures for clinical studies,
manufacturing equipment, sales and marketing expenditures and general working
capital requirements. There are no assurances that we will be successful in
these endeavors.
THE SALE OF OUR PRODUCTS MAY RESULT IN SIGNIFICANT PRODUCT LIABILITY EXPOSURE
As a manufacturer of medical diagnostic equipment, we could face product
liability claims. We maintain product liability insurance in an aggregate amount
of $5 million. We cannot assure you that this insurance coverage will be
adequate to cover any product liability claims that occur in the future or that
product liability insurance will continue to be available at reasonable prices.
Any product liability judgments or settlements in excess of insurance coverage
could have a material adverse effect on our business and results of operations.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION
Our business is subject to varying degrees of governmental regulation in the
countries in which we operate. In the United States, our products are subject to
regulation as medical devices by the United States Food and Drug Administration
(the "FDA"), and by other federal and state agencies. These regulations pertain
to the manufacturing, labeling, development and testing of our devices as well
as to the maintenance of required records. An FDA regulation also requires
prompt reporting by all medical device manufacturers of an event or malfunction
involving a medical device where the device caused or contributed to death or
serious injury or is likely to do so.
Federal law provides for several routes by which the FDA reviews medical devices
before their entry into the marketplace. Medical products of the type currently
being marketed and under development by us 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 which replaced the regulations formerly
called Good Manufacturing Practices. In addition, depending upon product type,
we must also comply with those regulations governing the Conduct of Human
Investigations, Pre-Market Approval Regulations and other requirements, as
promulgated by the 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. Our products are primarily Class
I and II devices and several of them have required FDA notification under
Section 510(k) of the FDC Act.
Satisfaction of clearance or approval requirements may take up to several years
or more and may vary substantially based upon the type, complexity and novelty
of the product. The effect of government regulation may be to delay marketing of
new products for a considerable or indefinite period of time, to impose costly
procedures upon our activities and to furnish a competitive advantage to larger
companies that compete with us. We cannot assure you that FDA or other
regulatory clearance or approval for any products we develop will be granted on
a timely basis, if at all, or, once granted, that clearances or approvals will
not be withdrawn or other regulatory action taken which
Page 13
might limit our ability to market our proposed products. Any delay in obtaining
or failure to obtain these clearances or approvals would adversely affect the
manufacturing and marketing of our products and the ability to generate
additional product revenue.
WE RELY TO A SIGNIFICANT DEGREE ON OUR PROPRIETARY RIGHTS
We rely on a combination of patents, trade secrets, trademarks and
non-disclosure agreements to protect our proprietary rights. We cannot assure
you that our patent applications will result in the issuance of patents or that
any patents owned by us now or in the future will afford protection against
competitors that develop similar technology. We also cannot assure you that our
non-disclosure agreements will provide meaningful protection for our trade
secrets or other proprietary information. Moreover, in the absence of patent
protection, our business may be adversely affected by competitors who
independently develop substantially equivalent or superior technology.
It is possible that we may need to acquire licenses to, or to contest the
validity of, issued or pending patents of third parties relating to our
technology or to products presently marketed or under development by us. In
addition, we cannot assure that any license required under any patent would be
made available to us on acceptable terms, if at all, or that we would prevail in
any patent litigation.
OUR PRODUCTS MAY BECOME RAPIDLY OBSOLETE
The areas in which we are developing, distributing, and/or licensing products
involve rapidly developing technology. Others may develop products that might
cause products being developed, distributed or licensed by us to become obsolete
or uneconomical or result in products superior to our products.
Our international sales subject us to currency and related risks. Our
international sales accounted for 23% of our total net sales for the 2007 fiscal
year. We expect that international sales will continue to constitute a
significant portion of our business. Although we sell our products in United
States dollars and are not subject to significant currency risks, an increase in
the value of the United States dollar relative to foreign currencies in our
international markets could make our products less price competitive in these
markets.
AN ACQUISITION OF CAS MEDICAL SYSTEMS MAY BE HINDERED
Our Board of Directors is authorized to issue from time to time, without
stockholder authorization, shares of preferred stock, in one or more designated
series or classes. We are also subject to a Delaware statute regulating business
combinations. These provisions could discourage, hinder or preclude an
unsolicited acquisition of CAS Medical Systems, Inc. and could make it less
likely that stockholders receive a premium for their shares as a result of any
takeover attempt.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET
ORIGINALLY ISSUED THROUGH THE EXERCISE OF OPTIONS OR WARRANTS COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND MAY ALSO ADVERSELY AFFECT OUR
ABILITY TO RAISE ADDITIONAL CAPITAL
As of December 31, 2007, options and warrants for the purchase of 1,586,826
shares of our common stock are outstanding. Historically, our common stock has
been thinly traded. This low trading volume may have had a significant effect on
the market price of our common stock, which may not be indicative of the market
price in a more liquid market.
WE DEPEND HIGHLY ON CERTAIN KEY MANAGEMENT PERSONNEL
We believe that our future success will depend to a significant extent on the
efforts and abilities of our senior management, in particular, Andrew Kersey,
our President and Chief Executive Officer and Jeffery Baird, our Chief Financial
Officer. The loss of the services of Mr. Kersey or Mr. Baird could have a
material adverse effect on our business and results of operations.
Page 14
WE DO NOT EXPECT TO PAY CASH DIVIDENDS
We have not paid cash dividends on our common stock since inception, and at this
time we do not anticipate that we will pay cash dividends in the foreseeable
future.
Item 1B. Unresolved Staff Comments
----------------------------------
None.
Item 2. Properties
------------------
On September 6, 2007, the Company closed the sale and leaseback of its
headquarters and manufacturing facility in Branford, Connecticut, (the
"Property") which comprises approximately 24,000 square feet of office and
manufacturing space. Net proceeds from the sale were $2,791,529 of which
$928,872 was used to retire the related outstanding mortgage debt. The gain of
$1,346,373 realized on the sale has been deferred and will be recognized in
operations against rent expense over the initial term of the lease. The lease
has an initial term of ten years expiring on September 6, 2017 and an option for
two additional five-year periods. The lease provides for an annual base rent in
years one through five of $244,800 and $268,800 in years six through ten. The
Company will recognize rent expense on a straight-line basis over the ten years.
Under the lease, the Company is responsible for the costs of utilities,
insurance, taxes and maintenance expenses. Further, the Company is required to
maintain at least $600,000 in cash and cash equivalents (increasing at 3% per
annum) and net current assets of not less than $3,600,000.
In addition, the Company has a right of first offer to lease any additional
space or building built by the lessor on the Property, subject to certain
restrictions. The Company also has the right to require the lessor to build an
addition or additional building ("Expansion Premises"), subject to certain
restrictions. Upon the delivery of any Expansion Premises, the term of the Lease
would extend for a ten year term. The base rent for the Expansion Premises shall
be the greater of the then prevailing market rent or an amount equal to a return
on actual costs of construction of the greater of 250 basis points over the rate
on ten year U.S. Treasury Notes, or 8%. Upon delivery of the Expansion Premises,
the lessor would assume obligations under the Company's leases of its two
adjacent properties, in exchange for a payment equal to three months rent and
certain unamortized costs incurred in these facilities.
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 July
1, 2007 and expires June 30, 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 adequate for its current purposes and
are adequately insured.
Item 3. Legal Proceedings
-------------------------
The manufacture and sale of our products exposes us to product liability claims
and product recalls, including those which may arise from misuse or malfunction
of, or design flaws in, our products or use of our products with components or
systems not manufactured or sold by us. Product liability claims or product
recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or to pay significant damages. We are
currently a defendant in a product liability action which is scheduled for trial
during 2008. We believe that our product liability insurance is sufficient to
cover any damages and costs that are likely with respect to this matter.
There can be no assurance however, that this will be the case with respect to
any future matters. Furthermore, we may not be able to obtain insurance in the
future at satisfactory rates or in adequate amounts.
Page 15
In addition, publicity pertaining to the misuse or malfunction of, or design
flaws in, our products could impair our ability to successfully market and sell
our products and could lead to product recalls.
In addition, we may become, in the normal course of our business operations, a
party to other legal proceedings in addition to those described in the paragraph
above. None of these other proceedings would be expected to have a material
adverse impact on our results of operations, financial condition, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
------------------------------------------------------------------------------
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." 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 sales prices for the Company's common
stock during each quarterly period for the last two years.
Quarter Ended High Low
------------- ---- ---
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
March 31, 2007 $ 8.40 $ 6.26
June 30, 2007 $ 8.51 $ 6.27
September 30, 2007 $ 7.50 $ 4.25
December 31, 2007 $ 6.47 $ 4.76
The following table sets forth the approximate number of holders of record of
common stock of the Company on December 31, 2007.
Title of Class Number of Shareholders
-------------- ----------------------
Common stock, $.004 par value 1,728
To date, no cash dividends have been declared on the Company's common stock. The
Company does not currently intend to pay a cash dividend in the near future.
The Company did not issue any shares of common stock during the fourth quarter
of 2007 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
2007.
Page 16
Item 6. Selected Financial Data
-------------------------------
For Year Ended December 31, 2007(1) 2006(1) 2005(2) 2004 2003(3)
--------------------------------------------------------
(amounts in thousands, except per
share amounts)
Net Sales $ 38,232 $ 35,202 $ 26,884 $ 20,059 $ 16,849
Cost of Sales 24,585 20,803 15,092 11,056 10,308
------ ------ ------ ------ ------
Gross Profit 13,647 14,399 11,792 9,003 6,541
Operating Expenses:
Research and Development 2,254 2,762 1,631 1,033 929
Selling, General and Administrative 10,815 8,659 7,438 6,263 5,620
------ ----- ----- ----- -----
Total Operating Expenses 13,069 11,421 9,069 7,296 6,549
------ ------ ----- ----- -----
Operating Income (Loss) 579 2,978 2,723 1,707 (8)
Income Before Taxes 304 2,730 2,556 1,635 360
Net Income 306 1,747 1,815 1,205 561
Net Income per Diluted Common Share $ 0.03 $ 0.14 $ 0.15 $ 0.11 $ 0.05
Diluted Shares Outstanding 12,212 12,147 11,729 11,128 10,459
At Year End:
Working Capital $ 10,388 $ 9,096 $ 7,482 $ 5,369 $ 5,158
Long-term Debt, less Current Portion 2,323 3,807 4,416 1,035 1,535
Total Assets 23,888 21,443 17,918 10,993 10,098
Stockholder's Equity $ 13,751 $ 12,625 $ 9,117 $ 7,156 $ 5,891
(1) Operating income reduced $303 and $390 for 2007 and 2006, respectively,
from stock compensation expense. The Company adopted FAS 123R - Share-Based
Payment, as of January 1, 2006.
(2) 2005 operating income includes $401 credit from curtailment gain of
post-retirement benefit plan. 2005 reflects the acquisition of Statcorp,
Inc. on May 15, 2005.
(3) 2003 net income includes $500 of non-taxable income from insurance
proceeds.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
Certain statements included in this report, including without limitation
statements in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: foreign currency fluctuations, regulations and other
economic and political factors which affect the Company's ability to market its
products internationally, new product introductions by the Company's
competitors, increased price competition, dependence upon significant customers,
availability and cost of components for the Company's products, the impact of
any adverse litigation, marketplace acceptance for the Company's new products,
FDA and other governmental regulatory and enforcement actions, changes to
federal research and development grant programs presently utilized by the
Company and other factors described in greater detail in Item 1A hereof.
Introduction
Effective for 2007, the Company has categorized its sales of products and
services as follows:
o High acuity products - includes sales of the Fore-Sight(R) cerebral
monitor and accessories.
o Low acuity products - includes sales of cardio-respiratory monitors
and accessories used to monitor apnea in home-based and hospital
settings; the Company's dual platform of vital signs monitors and
accessories incorporating various combinations of measurement
parameters for both human and veterinary use including pulse oximetry,
electro-cardiography, temperature, non-invasive blood pressure, and
capnography; co-branded products developed and manufactured by
Analogic Corporation including vital
Page 17
signs monitors utilizing parameters as described above and
additionally monitors which measure non-invasive cardiac output and
hemodynamic status, and fetalgard monitors.
o Blood Pressure Measurement Technology - includes sales to Original
Equipment Manufacturers ("OEM") of the Company's proprietary
non-invasive blood pressure modules (MAXNIBP(R)), blood pressure cuffs
and accessories for the OEM market and related license fees.
o Supplies and Service - includes sales of blood pressure cuffs and
rapid infusor cuffs, neonatal intensive care supplies including
electrodes and skin temperature probes, and service repair revenues.
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 and rapid infusion
cuffs 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.
Results of Operations
---------------------
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net income for 2007 was $306,000 or $0.03 per common share on a diluted basis
compared to $1,747,000 or $0.14 per diluted common share for 2006. Pre-tax
income for 2007 and 2006 were affected by $303,000 and $390,000, respectively,
of stock compensation expense of which $98,000 and $343,000, respectively, was
non-deductible for income tax purposes.
Operating income for 2007 was $579,000 or $1.5% of revenues compared to
$2,978,000 or 8.5% of revenues for 2006. Several key factors contributed to the
decrease in operating income levels during 2007 including significant
investments in the cerebral oximetry market particularly in the areas sales and
marketing expenditures which increased approximately $1,300,000 over 2006
spending levels; product mix issues largely caused by reduced OEM sales which
normally carry higher than average gross margin rates and international sales of
Analogic products; increased manufacturing overhead costs including Fore-Sight
cerebral oximetry start-up costs; and Sarbanes Oxley 404 internal control
consulting fees of approximately $164,000. The Company generated revenues of
$38,232,000 for 2007, an increase of $3,030,000 or 8.6% over revenues of
$35,202,000 for 2006. The following table provides comparative results by
product and geographic category:
Year Ended Year Ended Increase
December 31, 2007 December 31, 2006 (Decrease)
----------------- ----------------- ----------
Low Acuity Products $ 18,640 $ 16,071 $ 2,569
High Acuity Products 315 -- 315
Blood Pressure Measurement Technology 5,825 6,571 (746)
Supplies/Service 13,452 12,560 892
-------- -------- -------
$ 38,232 $ 35,202 $ 3,030
======== ======== =======
Domestic Sales 29,601 27,519 2,082
International Sales 8,631 7,683 948
-------- -------- -------
$ 38,232 $ 35,202 $ 3,030
======== ======== =======
Revenues for 2007 increased 8.6% or $3,030,000 to $38,232,000 from $35,202,000
for 2006. Low acuity product sales increased $2,569,000 or 16% over 2006 led by
vital signs monitoring and accessories sales primarily sold to the VA and sales
of Analogic products marketed by the Company since May 2007, partially offset by
reductions in apnea monitoring products sales. High acuity products sales
represent the Company's Fore-Sight cerebral oximetry technology launched during
mid-2007. Revenues in this category are primarily sensor related where the
Company
Page 18
places the monitor and retains ownership of the device in exchange for
commitments to purchase disposable sensors. Blood pressure measurement
technology sales decreased $746,000 or 11% due to reductions in sales to a key
customer, Medtronic. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong fourth quarter sales which exceeded the prior year fourth quarter,
overall sales to Medtronic for 2007 decreased $1,510,000 as compared to 2006.
Medtronic represented approximately 11% of the Company's revenues for the full
year 2006. Sales of supplies and service increased $892,000 or 7% over 2006
sales and are primarily comprised of sales of blood pressure cuffs accounting
for approximately 71% of sales in this category. Sales to the U.S. market
accounted for $29,601,000 or 77% of the total revenues reported for 2007, an
increase of $2,082,000 or 8% over the $27,519,000 reported for 2006.
International sales accounted for $8,631,000 or 23% of total revenues, an
increase of $948,000 or 12% over 2006 sales levels.
Cost of sales as a percentage of net revenues increased to 64.3% for 2007
compared to 59.1% of net revenues for 2006. The increase in cost of sales as a
percentage of sales for 2007 was related to a number of causes including lost
gross margins on the shortfall in OEM revenues which normally carries higher
gross margins than other products sold by the Company; lower margins on Analogic
product sales particularly in the fourth quarter of 2007 primarily as a result
of additional international business; NIRS manufacturing start-up costs;
increased indirect manufacturing overhead costs to support the Company's
expanded operations; and reductions in accrued post-retirement benefit costs
during 2006 for changes made to terminate the Company's plan during 2005. The
Company is focusing its efforts during 2008 to achieve cost reductions to
improve overall gross profit levels.
R&D expenses decreased $508,000 or 18% to $2,254,000 for 2007 from $2,762,000
for 2006. R&D expenses are reported net of reimbursements received from the
National Institutes of Health ("NIH") pertaining to the Company's development of
its Near-Infrared Spectroscopy ("NIRS") technology. Amounts reimbursed from the
NIH, including accruals, for 2007 and 2006 were $480,000 and $21,000,
respectively. Increased reimbursements for 2007 reflect the fact that during
September 2007 the Company was awarded a three year grant totaling approximately
$2,800,000 million to support its NIRS research. R&D expenses before NIH
reimbursement approximated 7.2% and 7.9%, respectively, of 2007 and 2006
revenues. Increased NIH reimbursements offset increases in project material
costs, clinical evaluations and salaries and related fringe benefits.
Selling, general and administrative ("S,G&A") expenses increased $2,156,000 or
25% to $10,815,000 or 28% of revenues for 2007 from $8,659,000 or 25% of
revenues for 2006. Sales and marketing expenses in 2007 pertaining to the
Company's Fore-Sight cerebral oximeter were approximately $1,800,000 and
accounted for nearly $1,300,000 or 60% of the increase in S,G&A spending. The
Company also increased its investments in personnel in the areas of marketing,
customer service, international sales consultants and domestic sales management
in order to support the Company's growth. Additionally, increases in general
insurance costs, amortization and depreciation, and employee health care costs
also impacted S,G&A expenses. During 2007, the Company also incurred $164,000 in
consulting fees pertaining to its Sarbanes Oxley 404 compliance efforts.
Net interest expense increased $27,000 to $275,000 for 2007 from $248,000 for
2006 as a result of borrowings on the line-of-credit facility partially offset
by reductions in interest expenses associated with lower balances on the
Company's Statcorp acquisition loan and the payoff of the mortgage on the
Company's headquarters facility.
The income tax benefit for 2007 was $3,000 compared to income tax expense of
$983,000 for 2006. The benefit for 2007 is primarily related to an exchange of
$155,000 of state tax carryforwards for reduced cash receipts payable to the
Company partially offset by certain non-deductible expenses including stock
option compensation and entertainment costs. The provision for income taxes for
2006 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 income tax
benefit for 2007 represents an effective tax rate of approximately 1% resulting
primarily from R&D and other tax credits.
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 required
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
Page 19
share were reduced by $0.03 as a result. The Company's effective tax rate for
2006 approximated 36% primarily as a result of non-deductible charges.
Net 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 were 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 2006 represented an
effective tax rate of 36% which was 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 represented an effective tax rate of approximately 29% resulting
primarily from R&D and other tax credits.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
The Company's cash and cash equivalents were $667,000 at December 31, 2007
compared to $1,335,000 at December 31, 2006. Working capital increased
$1,292,000 to $10,388,000 at December 31, 2007 from $9,096,000 at December 31,
2006. The Company's current ratio declined slightly to 2.63 to 1 from 2.81 to 1.
Net cash used by operating activities for 2007 was $3,178,000 compared to cash
provided of $282,000 for the prior year. The change was primarily due to
increases in inventories and decreases in accounts payable and accrued expenses
which were partially offset by income before depreciation, amortization and
stock compensation costs. Increases in inventory were largely driven by the
Company's investments in cerebral oximetry related materials and inventories to
support the Company's agreement with Analogic Corporation.
Page 20
Net cash provided by investing activities was $1,124,000 for 2007 compared to
cash used of $1,500,000 for 2006. Proceeds of $2,792,000 were realized from the
sale of the Company's headquarters during September 2007. The Company made
$1,188,000 of capital expenditures during 2007 compared to $1,042,000 for 2006.
Equipment purchases during 2007 were driven by Fore-Sight cerebral oximeter
demonstration equipment and clinical research units, information technology,
manufacturing equipment and furniture and fixtures and leasehold improvements
pertaining to the Company's expansion of its adjacent facilities. Cash used for
investing activities in 2006 included $1,042,000 for 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. During 2007, the Company paid $480,000 to purchase intangible
assets including $220,000 for Analogic contract fees and $89,000 for patents and
trademarks.
Net cash provided by financing activities was $1,387,000 for 2007 compared to
$659,000 for 2006. Advances from the Company's line-of-credit of $2,249,000 were
primarily responsible for the increase in cash provided by financing activities
for 2007. The Company also received $419,000 of tax benefits from the exercise
of warrants, $411,000 from insurance notes and $232,000 of proceeds from the
exercise of stock options and warrants. During 2007, the Company repaid $587,000
of long-term debt and $408,000 of insurance notes and retired its mortgage debt
of $929,000 upon the sale of its headquarters.
As a result of the exercise of warrants to purchase the Company's common stock
during 2007 by a certain former director and the Company's Chairman of the Board
of Directors, the Company has recorded a reduction in its current federal and
state income taxes payable in the amount of $419,000. Further, at December 31,
2007, the Company had recoverable income taxes of $230,000 which consisted
primarily of state R&D tax credit refunds.
On February 11, 2008, the Company amended and restated its existing line of
credit with NewAlliance Bank (the "Bank"). The Company entered into a new
Commercial Loan Agreement (the "Loan Agreement") and related Commercial
Revolving Promissory Note (the "Note") which provide for borrowings on a
revolving basis, at the Bank's discretion, in an amount up to $10,000,000. Loans
in excess of $2,000,000 up to $10,000,000 can be made only if the maximum
principal amount outstanding does not exceed a borrowing base equal to the sum
of (i) 75% of eligible receivables (as defined in the Loan Agreement) and (ii)
the lesser of $2,500,000 or 30% of eligible inventory (as defined in the Loan
Agreement.) Interest on the outstanding loans pursuant to the Note is at the
Prime Rate (as defined in the Loan Agreement) minus 0.5%. Borrowings under the
Loan Agreement and the Note are secured by a first priority lien in all the
business assets of the Company pursuant to a Security Agreement (the "Security
Agreement"). The Credit Agreement, which contains customary non-financial
covenants and financial covenants consisting of a debt service coverage ratio
and a debt to tangible net worth ratio, expires on the final maturity date of
May 1, 2009.
During 2008, the Company intends to significantly increase its spending
associated with the NIRS based Fore-Sight Cerebral Oximeter launched in the U.S.
during mid-2007. Such spending includes additional R&D, expanded clinical
studies, sales and marketing expenses and capital expenditures. The Company
expects to launch the Fore-Sight Cerebral Oximeter outside of the U.S. during
early 2008. During February 2008, the Company received FDA 510(k) clearance for
expanded use of its Fore-Sight Cerebral Oximeter sensor to include the neonatal
patient population. As a result, the Company plans to establish a U.S. direct
sales force during 2008 dedicated to the sales of its Fore-Sight monitoring
products into various neonatal and infant settings including Neonatal/Infant
cardiovascular operating rooms, cardiac intensive care units and neonatal
intensive care units.
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 following table sets forth a summary of the Company's cash commitments under
contractual obligations as of December 31, 2007:
Page 21
Contractual One Year 2 - 4 5 - 7 More Than
Obligations Total or Less Years Years Seven Years
----------- ----------- ---------- ----------- ----------- -----------
Long-term debt $ 2,900,013 $ 577,453 $ 1,959,849 $ 362,711 $ --
Notes payable 71,537 71,537 -- -- --
Operating leases 3,335,898 561,792 1,204,409 852,897 716,800
----------- ---------- ----------- ----------- ----------
$ 6,307,448 $1,210,782 $ 3,164,258 $ 1,215,608 $ 716,800
=========== ========== =========== =========== ==========
On January 31, 2007, the Company entered into a five-year agreement effective
July 1, 2007 to lease approximately 13,000 square feet of office space adjacent
to two of the Company's other facilities. The lease provides for average annual
base rent of $114,000 and requires the Company to pay its proportionate share of
annual operating expenses including utilities, insurance, taxes and maintenance.
On September 6, 2007, the Company closed the sale and leaseback of its
headquarters and manufacturing facility in Branford, Connecticut, (the
"Property") which comprises approximately 24,000 square feet of office and
manufacturing space. Net proceeds from the sale were $2,791,529 of which
$928,872 was used to retire the related outstanding mortgage debt. The gain of
$1,346,373 realized on the sale has been deferred and will be recognized in
operations against rent expense over the term of the lease. The lease has an
initial term of ten years expiring on September 6, 2017 and an option for two
additional five-year periods. The lease provides for an annual base rent in
years one through five of $244,800 and $268,800 in years six through ten. The
Company will recognize rent expense on a straight-line basis over the ten years.
Under the lease, the Company is responsible for the costs of utilities,
insurance, taxes and maintenance expenses. Further, the Company is required to
maintain at least $600,000 in cash and cash equivalents (increasing at 3% per
annum) and net current assets of not less than $3,600,000.
In addition, the Company has a right of first offer to lease any additional
space or building built by the lessor on the Property, subject to certain
restrictions. The Company also has the right to require the lessor to build an
addition or additional building ("Expansion Premises"), subject to certain
restrictions. Upon the delivery of any Expansion Premises, the term of the Lease
would extend for a ten year term. The base rent for the Expansion Premises shall
be the greater of the then prevailing market rent or an amount equal to a return
on actual costs of construction of the greater of 250 basis points over the rate
on ten year U.S. Treasury Notes, or 8%. Upon delivery of the Expansion Premises,
the lessor would assume obligations under the Company's leases of its two
adjacent properties, in exchange for a payment equal to three months rent and
certain unamortized costs incurred in these facilities.
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. There were no significant
write-offs for any period presented.
Page 22
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. 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. To date, product warranty costs
have not been significant.
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 materially impact
the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The Company has certain exposures to market risk related to changes in interest
rates. The Company has an outstanding line-of-credit agreement, under which
there were borrowings of $2,249,349 at December 31, 2007. The line-of-credit
agreement, amended as of February 11, 2008 bears interest at variable rates
based on prime rate indices. The Company holds no derivative securities for
trading purposes and is not subject in any material respect to currency or other
commodity risk.
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
Page
Report of Independent Registered Public Accounting Firm F-1
Financial Statements
Consolidated Balance Sheets as of December 31, 2007 and 2006 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005 F-3
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2007, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005 F-5
Notes to Consolidated Financial Statements F-6 to F-19
F-1
REPORT OF 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, 2007 and 2006, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2007.
The Company's management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting 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. The Company is not required to
have, nor were we engaged to perform, an audit of the Company's internal control
over financial reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 as of
December 31, 2007 and 2006, and the consolidated results of its operations and
its cash flows for the each of the years in the three-year period ended December
31, 2007 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. Also, as discussed in
Note 3, the Company adopted FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -
AN INTERPRETATION OF FASB STATEMENT NO. 109, effective January 1, 2007.
/s/ UHY LLP
New Haven, Connecticut
March 18, 2008
F-2
CAS MEDICAL SYSTEMS, INC.
Consolidated Balance Sheets
As of December 31, 2007 and 2006
ASSETS 2007 2006
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 666,722 $ 1,334,535
Accounts receivable, less allowance of $125,000 in 2007
and $75,000 in 2006 4,947,300 4,906,303
Recoverable taxes receivable 230,458 320,943
Inventories 10,021,118 6,808,193
Deferred income taxes 474,265 329,458
Other current assets 414,204 408,171
------------ ------------
Total current assets 16,754,067 14,107,603
PROPERTY AND EQUIPMENT:
Land -- 535,000
Buildings and improvements -- 1,504,965
Leasehold improvements 266,493 158,151
Machinery and equipment 5,061,262 4,661,643
------------ ------------
5,327,755 6,859,759
Accumulated depreciation and amortization (2,987,030) (3,535,915)
------------ ------------
Property and equipment, net 2,340,725 3,323,844
INTANGIBLE AND OTHER ASSETS, net 846,602 457,352
GOODWILL 3,379,021 3,379,021
DEFERRED INCOME TAXES 567,971 175,611
------------ ------------
Total assets $ 23,888,386 $ 21,443,431
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 577,453 $ 609,615
Notes payable 71,537 69,241
Line-of-credit 2,249,349 --
Accounts payable 2,505,460 3,228,265
Accrued expenses 962,154 1,104,726
------------ ------------
Total current liabilities 6,365,953 5,011,847
------------ ------------
LONG-TERM DEBT, less current portion 2,322,561 3,806,587
DEFERRED GAIN ON SALE AND LEASEBACK OF PROPERTY 1,303,338 --
INCOME TAXES PAYABLE 145,125 --
COMMITMENTS (Note 12) -- --
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, 10,984,785 and 10,679,307 shares issued
as of December 31, 2007 and 2006, respectively,
including shares held in treasury 43,575 42,717
Common stock held in treasury, at cost - 86,000 shares (101,480) (101,480)
Additional paid-in capital 5,889,007 4,935,538
Retained earnings 7,920,307 7,748,222
------------ ------------
Total shareholders' equity 13,751,409 12,624,997
------------ ------------
Total liabilities and shareholders' equity $ 23,888,386 $ 21,443,431
============ ============
See accompanying notes.
F-3
CAS MEDICAL SYSTEMS, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2007, 2006 and 2005
2007 2006 2005
---- ---- ----
NET SALES $ 38,232,405 $ 35,202,011 $ 26,884,421
COST OF SALES 24,584,807 20,802,677 15,092,322
------------ ------------ ------------
Gross profit 13,647,598 14,399,334 11,792,099
OPERATING EXPENSES:
Research and development 2,253,512 2,762,269 1,630,681
Selling, general and
administrative 10,815,248 8,658,812 7,438,511
------------ ------------ ------------
Total operating expenses 13,068,760 11,421,081 9,069,192
------------ ------------ ------------
OPERATING INCOME 578,838 2,978,253 2,722,907
Interest expense, net 274,977 248,404 166,613
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 303,861 2,729,849 2,556,294
Income taxes (benefit) (2,599) 983,148 741,120
------------ ------------ ------------
NET INCOME $ 306,460 $ 1,746,701 $ 1,815,174
============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ 0.03 $ 0.17 $ 0.18
============ ============ ============
Diluted $ 0.03 $ 0.14 $ 0.15
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 10,696,217 10,373,225 9,941,670
============ ============ ============
Diluted 12,211,694 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, 2007, 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 1,746,701 1,746,701
Common stock issued upon
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 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
Adoption of FIN 48 (134,375) (134,375)
Net income 306,460 306,460
Common stock issued upon
exercise of stock options and warrants 192,824 771 116,391 117,162
Common stock issued under
stock purchase plan 21,654 87 114,543 114,630
Tax benefit from exercise of warrants 419,399 419,399
Restricted stock issued under equity
incentive plans 91,000 -- -- --
Stock compensation 303,136 303,136
---------- --------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 2007 10,984,785 $ 43,575 86,000 ($ 101,480) $ 5,889,007 $ 7,920,307 $13,751,409
========== ========= ======== ========== =========== =========== ===========
See accompanying notes.
F-5
CAS MEDICAL SYSTEMS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007, 2006 and 2005
2007 2006 2005
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 306,460 $ 1,746,701 $ 1,815,174
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization 816,286 516,150 542,073
Deferred income taxes (537,167) 37,813 36,940
Provision for doubtful accounts 50,000 -- 4,000
Stock compensation 303,136 390,283 --
Amortization of gain on sale and leaseback (43,035) -- --
Curtailment gain on retirement benefit plan -- -- (400,739)
Changes in operating assets and liabilities:
Accounts receivable (90,997) (1,687,340) 126,558
Recoverable income taxes 90,485 (320,943) --
Inventories (3,212,925) (1,215,386) (1,409,062)
Other current assets (6,033) 86,011 (122,462)
Accounts payable and accrued expenses (865,377) 1,097,560 544,296
Income taxes 10,750 (18,999) --
Retirement benefit obligation -- (349,567) 13,318
----------- ----------- -----------
Net cash (used) provided by operating activities (3,178,417) 282,283 1,150,096
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of intangible assets (479,543) (157,561) (299,214)
Proceeds from sale of property 2,791,529 -- --
Purchase of business, net of cash
acquired of $250,060 in 2005 -- (300,000) (4,524,249)
Purchases of property and equipment (1,188,030) (1,042,143) (656,896)
----------- ----------- -----------
Net cash provided (used) by investing activities 1,123,956 (1,499,704) (5,480,359)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings under notes payable 410,639 312,182 292,267
Repayments of notes payable (408,343) (449,300) (85,908)
Borrowings from line-of-credit, net 2,249,349 -- --
Proceeds from long-term debt agreement -- -- 4,200,000
Repayments of long-term debt (1,516,188) (574,115) (303,107)
Tax benefit from exercise of warrants 419,399 865,842 --
Proceeds from issuance of common stock 231,792 504,763 146,143
----------- ----------- -----------
Net cash provided by financing activities 1,386,648 659,372 4,249,395
----------- ----------- -----------
Net change in cash and cash equivalents (667,813) (558,049) (80,868)
Cash and cash equivalents, beginning of year 1,334,535 1,892,584 1,973,452
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 666,722 $ 1,334,535 $ 1,892,584
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 263,732 $ 247,663 $ 148,656
Cash paid during the year for income taxes $ 13,934 $ 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. ("CASMED") and its wholly-owned subsidiary,
Statcorp, Inc. ("Statcorp") operate as one reportable business segment.
Together, CASMED 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 manufacturers
representatives under contract, and pursuant to original equipment
manufacturer ("OEM") agreements both internationally and in the United
States. The Company's operations and manufacturing facilities are located
in the United States. No customer accounted for more than 10% of revenues
during 2007. During 2006 and 2005, the Company had sales to one customer
which approximated 11% and 14%, respectively, of net revenues. The Company
generated revenues from international sales of approximately $8.6 million
in 2007, $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 and
rapid infusion cuffs 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. 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 CASMED 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, including leasehold improvements, 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. Leasehold improvements are amortized over the life of the
improvement or the lease term, whichever is shorter. Maintenance and
repairs are charged to expense when incurred.
Depreciation and amortization expense on property and equipment was
$750,411 in 2007, $455,755 in 2006 and $431,129 in 2005.
LONG-LIVED ASSETS
The Company reviews its long-lived assets including goodwill 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 any year presented.
F-8
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of:
2007 2006
---- ----
Patents and other assets $ 577,481 $ 162,668
Patents pending 161,249 317,020
Purchased technology 254,393 33,893
Capitalized software 160,063 160,063
Deferred finance charges -- 26,484
---------- ----------
1,153,186 700,128
Accumulated amortization (306,584) (242,776)
---------- ----------
$ 846,602 $ 457,352
========== ==========
Intangible and other assets are stated at cost. Patents are amortized over
their estimated useful lives which range from 1 to 17 years. Purchased
technology is amortized over five years. 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 3 year useful lives. Deferred financing
costs were amortized over the term of the related debt. Amortization
expense was $63,808 in 2007, $60,395 in 2006 and $110,944 in 2005.
Approximate amortization expense of intangible assets as of December 31,
2007 over the next five years follows:
2008 $ 73,200
2009 63,600
2010 39,400
2011 26,900
2012 18,900
--------
$222,000
========
REVENUE AND ACCOUNTS RECEIVABLE RECOGNITION
Revenue from sales and accounts receivable are recognized when evidence of
an arrangement exists, delivery has occurred based upon shipping terms, the
selling price is fixed and determinable, and collectability is reasonably
assured. Terms of sale for most domestic sales are FOB origin and for most
international sales are EX-Works reflecting that ownership and risk of loss
are assumed by the buyer at shipping point. In addition, the Company has
certain agreements with its customers to ship FOB destination reflecting
that ownership and risk of loss are assumed by the buyer upon delivery.
While the Company accepts returns of products from its customers from time
to time for various reasons including defective goods, order entry,
shipping or other errors, the Company's business practices do not include
providing right of return at the time of sale. Historically, such returns
have not been significant. The Company has entered into agreements with
several customers to provide them with price rebates based upon their level
of purchases. Rebates are accrued by the Company as a reduction in net
sales as they are earned by customers. Payment terms range from prepayment
to net sixty days depending upon certain factors including customer credit
worthiness, geographical location and customer type (i.e., end-user,
distributor, government or private entity) and also includes irrevocable
letters of credit for certain international shipments. Price discounts that
may be taken by customers under contractual arrangements for payment of
invoices within specified periods are recorded as reductions to net sales.
Further, the Company accrues expected payment discounts based upon specific
customer accounts receivable balances. The Company does not incur post
shipment obligations with the exception of product warranties which are
generally fulfilled from the Company's corporate facilities and which costs
are not material relative to the sale of the product. Accounts receivable
are charged to the allowance for doubtful accounts when deemed
uncollectible.
F-9
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.
As of January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109" ("FIN 48"). FIN 48 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation
also provides guidance on de-recognition of income tax assets and
liabilities, the classification of current and deferred income tax assets
and liabilities, the accounting for interest and penalties associated with
tax positions, the accounting for income taxes in interim periods, and
income tax disclosures. In conjunction with the adoption of FIN 48, the
Company recognized non-current liabilities of $134,375 for uncertain tax
positions with a charge to retained earnings. There was no effect on
operating results or cash flows.
The Company files U.S. Federal and multiple state income tax returns. With
few exceptions, the Company's tax returns have been examined for years
prior to 2004. During 2006, an examination of the Company's 2004 U.S.
Federal income tax return was completed. There was no material effect on
the Company's financial statements. Interest and penalties related to
uncertain tax positions are classified with income taxes.
During 2007 and 2006, warrants to purchase 164,599 and 257,600 shares,
respectively, of the Company's common stock were exercised, including those
held by a former outside director and the Chairman of the Board of
Directors of the Company. The exercise of the warrants resulted in income
tax deductions in excess of compensation expense recognized of $1,140,573
in 2007 and $2,735,875 in 2006. Such amounts are included in the taxable
income of the applicable individuals 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 obligations by
$419,399 in 2007 and $865,842 in 2006 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.
A summary of the changes in the Company's warranty accrual follows:
2007 2006
---- ----
Beginning balance $ 50,000 $ 122,000
Provision (reversal for change in estimate) 185,962 (22,214)
Warranty costs incurred (185,962) (49,786)
---------- ----------
Ending balance $ 50,000 $ 50,000
========== ==========
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.
F-10
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
of R&D expenses. The Company recognizes the reimbursement on an accrual
basis as the qualifying costs are incurred.
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 $990,000 in 2007, $667,000 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:
2007 2006 2005
---- ---- ----
Weighted average shares outstanding, net of restricted
shares - used to compute basic earnings per share 10,696,217 10,373,225 9,941,670
Dilutive effect of restricted shares, and outstanding
warrants and options 1,515,477 1,774,148 1,787,677
---------- ---------- ----------
Weighted average shares of dilutive securities
outstanding - used to compute diluted
earnings per share 12,211,694 12,147,373 11,729,347
========== ========== ==========
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 thegrant-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 effect on 2007 was a reduction
in income before income taxes of $303,000 and net income of $229,000 ($0.02
per basic and diluted share). The stock compensation cost was largely not
deductible for income tax purposes; there was no effect on cash flows.
F-11
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, 2007, the unrecognized stock-based compensation cost
related to non-vested stock awards was $668,949. Such amount, reduced for
forfeitures, will be recognized in operations over a weighted average
period of 2.1 years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model Similar to other option pricing models,
the Black-Scholes model requires the input of highly subjective assumptions
which may materially affect the estimated fair value of the Company's stock
options. The following weighted-average assumptions were used for grants in
2007, 2006 and 2005: risk-free interest rates of 4.6%, 4.4% and 4.4%;
expected lives of 4.2 years, 7.0 years and 7.0 years; dividend yield of 0%;
and expected volatility of 115%, 130% and 130%. Risk-free interest rates
approximate U.S. Treasury yields in effect at the time of the grant. The
expected lives of the stock options are determined using historical data
adjusted for the estimated exercise dates of unexercised options.
Volatility is determined using both current and historical implied
volatilities of the underlying stock which is obtained from public data
sources.
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 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 February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND LIABILITIES--INCLUDING AN AMENDMENT OF FASB STATEMENT
NO. 115 ("SFAS 159"). SFAS 159 expands the use of fair value accounting but
does not affect existing standards which requires assets or liabilities to
be carried at fair value. The objective of SFAS 159 is to improve financial
reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS159, a company may elect to use fair value to measure
eligible items at specified election dates and report unrealized gains and
losses on items for which
F-12
the fair value option has been elected in earnings at each subsequent
reporting date. Eligible items include, but are limited to, accounts
receivable, accounts payable, and issued debt. If elected, SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the effect of adopting SFAS 159 on its financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), BUSINESS
COMBINATIONS ("SFAS 141(R)"). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. SFAS
141(R) also establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination. SFAS 141(R)
is effective for fiscal years beginning after December 15, 2008. The
Company will adopt SFAS 141(R) in the first quarter of 2009 and apply its
provisions to any acquisition after the adoption date.
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts follow:
2007 2006
---- ----
Balance at beginning of year $ 75,000 $ 75,000
Provision 58,000 27,000
Accounts written off (8,000) (27,000)
---------- ----------
Balance at end of year $ 125,000 $ 75,000
========== ==========
(5) INVENTORIES
Inventories consist of:
2007 2006
---- ----
Raw materials $ 7,481,065 $ 5,161,884
Work in process 187,134 99,663
Finished goods 2,352,919 1,546,646
----------- -----------
$10,021,118 $ 6,808,193
=========== ===========
(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 (6.88% at
December 31, 2007). 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 borrowings
under the line of credit agreement at December 31, 2007 were $5,000,000.
Subsequent to December 31, 2007, the Company amended and restated its
line-of-credit agreement with its bank. On February 11, 2008, the Company
entered into a new loan agreement under which the Company is permitted to
borrow up to a maximum of $10,000,000 subject to meeting certain
pre-established accounts receivable and inventory criteria when borrowings
reach $2,000,000. Loans in excess of $2,000,000 up to $10,000,000 can be
made only if the maximum principal amount outstanding does not exceed a
borrowing base
F-13
equal to the sum of (1) 75% of eligible accounts receivable, as defined and
(2) the lesser of $2,500,000 or 30% of eligible inventory, as defined.
Further, the Company is required to meet customary non-financial covenants
and financial covenants consisting of a debt service coverage ratio and a
debt to tangible net worth ratio. The agreement expires on May 1, 2009.
NOTES PAYABLE
The Company financed the premiums for its directors and officers and
property casualty insurance policies with short-term borrowings of $410,639
in 2007, $312,182 in 2006 and $292,267 in 2005. The outstanding balance as
of December 31, 2007 is due in monthly installments including interest at
5.89% and 6.25%, respectively, and expires at varying times to June 2008.
LONG-TERM DEBT
Long-term debt consists of: 2007 2006
---- ----
Mortgage payable to a bank (Paid prior to
maturity in 2007.)
$ -- $ 972,273
Note payable to a bank in monthly installments
of $61,533, including interest at 6.0%
to May 2012 2,900,014 3,443,929
----------- -----------
2,900,014 4,416,202
Less current portion 577,453 609,615
----------- -----------
$ 2,322,561 $ 3,806,587
=========== ===========
Scheduled principal maturities of long-term debt follow:
2008 577,453
2009 614,067
2010 652,482
2011 693,300
2012 362,712
-----------
$ 2,900,014
===========
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, 2007.
(7) ACCRUED EXPENSES
Accrued expenses consist of:
2007 2006
---- ----
Payroll $ 212,716 $ 185,143
Professional fees 119,681 181,980
Warranty 50,000 50,000
Contract fees 130,500 --
Bonuses 146,110 350,010
Customer refunds -- 44,722
Other 303,147 292,871
--------- -----------
$ 962,154 $ 1,104,726
========= ===========
F-14
(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 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, 2006, 449,750 shares were available for issuance under
the Incentive Plan. During 2007, under the Incentive Plan, options for
15,000 shares of common stock were granted to the Company's employees.
Further, 91,000 shares of restricted stock were issued during 2007 to
employees and members of the Board of Directors. As such, 343,750 shares of
common stock remain available for issuance under the Incentive Plan as of
December 31, 2007.
As of December 31, 2007, options to purchase 143,500 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.
A summary of the Company's stock option plans and changes during the years
follow:
2007 2006
WEIGHTED WEIGHTED
AVERAGE AGGREGATE AVERAGE AGGREGATE
OPTION EXERCISE INTRINSIC OPTION EXERCISE INTRINSIC
SHARES PRICE VALUE SHARES PRICE VALUE
------ ----- ----- ------ ----- -----
Outstanding at
beginning of year 537,650 $ 1.98 803,575 $ 1.73
Granted 15,000 5.64 10,000 9.49
Exercised (28,225) 1.54 (235,925) 1.03
Canceled -- 0.00 (40,000) 4.26
------- --------
Outstanding at end
of year 524,425 2.11 $ 3.39 537,650 1.98 $ 6.02
======= ========
Exercisable at end
of year 509,425 2.01 3.49 408,900 1.65 6.35
======= ========
Vested or expected to vest
at end of year 514,425 2.06 $ 3.39 535,392 1.98 $ 6.02
======= ========
Weighted average grant-date
fair value of options
granted during the year $ 5.11 $ 8.83
The weighted-average grant date fair value of stock options granted was
$5.11 in 2007 and $8.83 in 2006. The total intrinsic value of stock options
exercised was $143,821 in 2007 and $1,781,081 in 2006. 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-15
Additional information about stock options outstanding and exercisable at
December 31, 2007 follows:
WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
$0.53 - $0.67 73,500 4.2 $ 0.56 73,500 0.56
0.70 - 0.82 70,000 5.4 0.77 70,000 0.84
1.37 - 2.30 183,425 7.5 1.71 183,425 1.71
2.50 - 4.65 182,500 8.5 3.36 182,500 3.36
4.99 - 6.93 15,000 9.5 5.64 --
------- -------
$0.53 - $6.93 524,425 7.1 $ 2.11 509,425 2.01
======= =======
During 2007, the Company issued an aggregate of 79,000 shares of restricted
stock to employees and 12,000 shares of restricted stock to certain members
of the Board of Directors under the Incentive Plan. The restricted stock
issued to employees during 2007 vests thirty-six months from date of grant
while the restricted stock issued to members of the Board of Directors
vests ratably over twelve months from date of grant. The weighted average
value of the restricted stock was $6.38 per share and the aggregate fair
value of the stock issued based on the closing market price on the date
granted was $580,800. The fair value of the restricted common shares was
estimated based upon the market value of the common stock on the date of
issuance.
As of December 31, 2007, 135,000 shares of non-vested restricted common
stock issued to date remain outstanding. Stock compensation expense of
$252,457 has been recognized to December 31, 2007 related to restricted
shares granted in 2007 and in prior years. The unamortized stock
compensation expense associated with the restricted shares at December 31,
2007 was $614,103 and will be recognized ratably through 2010.
Warrants to purchase 1,064,401 shares of common stock at a weighted average
exercise price of $0.50 per share were outstanding at December 31, 2007.
These warrants have no specific expiration date and have an exercise price
range of $0.30 to $1.44 per share. Included in the outstanding warrants at
December 31, 2007 is a warrant issued to the Company's Chairman of the
Board of Directors and former President and CEO during 1998 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 2007, a former director and the Company's Chairman of the Board of
Directors exercised warrants to purchase a total of 164,599 shares of
common stock at a weighted average exercise price of $0.45 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, 2007, 76,988
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 14,614 shares issued during January 2008.
(9) 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 $110,586 in 2007,
$96,266 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-
F-16
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 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. Negative
unrecognized prior service costs of $195,921 applicable to current retirees
receiving benefits and an 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.
Components of net periodic benefit cost under the Plan prior to the
elimination of benefits 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
----
Benefit obligation at beginning of year $ 7,936
Interest cost 216
Benefits paid (8,152)
---------
Accrued post-retirement benefit costs $ --
=========
(10) INCOME TAXES
Recoverable income taxes as of December 31, 2007, 2006 and 2005 consist of
estimated tax deposits in excess of the current provision.
F-17
The provision for income taxes consists of:
2007 2006 2005
---- ---- ----
Current (benefit):
Federal $657,438 $914,089 $642,630
State (133,620) 31,246 61,549
-------- -------- --------
523,818 945,335 704,179
Deferred (benefit):
Federal (507,348) 79,527 86,599
State (19,069) (41,714) (49,658)
-------- -------- --------
(526,417) 37,813 36,941
-------- -------- --------
Income taxes (benefit) $ (2,599) $983,148 $741,120
======== ======== ========
A reconciliation of U.S. Federal income taxes computed at the statutory
rate to income taxes shown in operations follows:
2007 2006 2005
---- ---- ----
Income taxes at the statutory rate $ 103,313 $ 928,148 $ 869,140
State income taxes, net of federal
effect (100,774) (6,910) 4,895
R&D and other tax credits (80,700) (134,642) (108,821)
Stock options 33,424 116,522 -
Other 42,138 80,030 (24,094)
--------- --------- ---------
Income taxes $ (2,599) $ 983,148 $ 741,120
========= ========= =========
Deferred income tax assets and (liabilities) at December 31 relate to:
2007 2006
---- ----
Inventories $ 319,115 $ 286,946
Warranty accrual 17,495 17,495
Allowance for doubtful accounts 43,738 26,243
Tax credits 196,232 103,874
Property and equipment 8,835 53,385
Deferred gain on sale and leaseback 455,262 --
Other 138,571 116,744
----------- ----------
1,179,248 604,687
----------- ----------
Prepaid expenses (137,013) (99,618)
----------- ---------
$ 1,042,235 $ 505,069
=========== ==========
A reconciliation of unrecognized income tax benefits for 2007 follows:
Adoption of FIN 48 $ 107,500
Tax positions taken in current year --
Settlements --
Lapse of applicable statute of limitation --
----------
Unrecognized income tax benefits as of December 31, 2007 $ 107,500
==========
F-18
During 2007, $10,750 of interest on uncertain tax positions was recognized
as income tax expense. As of December 31, 2007, $37,625 of interest and
penalties were accrued and, together with $107,500 of unrecognized tax
benefits, were included in the $145,125 reported as income taxes payable on
the Company's balance sheet. The total amount of unrecognized income tax
benefits, if recognized, would affect the Company's effective income tax
rate by approximately $36,500. Currently, the Company does not believe that
the unrecognized income tax benefits will significantly change in 2008.
(11) 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 patient. In accordance with the terms of these grants, the
Company has been reimbursed for certain qualifying expenditures. On
September 17, 2007, the Company was awarded a three year grant totaling
$2.8 million to support its NIRS research.
Qualifying research and development costs ("R&D") of $479,000 in 2007,
$21,000 in 2006 and $531,000 in 2005 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. As of December 31, 2007, approximately $2,300,000 remains
available under the 2007 grant.
(12) COMMITMENTS
On May 8, 2007, the Company signed an exclusive distribution agreement (the
"Agreement") with Analogic Corporation under which the Company obtained
worldwide exclusive rights to market the Analogic Lifegard(R) family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand
the devices and reconfigure its Lifegard II monitor to include the
Company's MAXNIBP branded non-invasive blood pressure and other branded
technologies. Accordingly, the Company would reimburse Analogic
approximately $900,000 for such efforts. As of December 31, 2007, the
Company had made payments to Analogic of $90,000 and had accrued an
additional $130,500 for work completed under the contract.
The Company leases operating facilities and certain equipment under
non-cancellable operating leases.
On September 6, 2007, the Company closed the sale and leaseback of its
headquarters and manufacturing facility (the "Property"). Net proceeds from
the sale were $2,791,529 of which $928,872 was used to retire the related
outstanding mortgage debt. The gain of $1,346,373 realized on the sale has
been deferred and will be recognized in operations as a reduction in rent
expense over the term of the lease. The lease has an initial term of ten
years expiring on September 6, 2017 and an option for two additional
five-year periods. The lease provides for an annual base rent in years one
through five of $244,800 and $268,800 in years six through ten. The Company
recognizes rent expense on a straight-line basis over the ten years. Under
the lease, the Company is responsible for the costs of utilities,
insurance, taxes and maintenance expenses. Further, the Company is required
to maintain at least $600,000 in cash and cash equivalents (increasing at
3% per annum) and net current assets of not less than $3,600,000.
In addition, the Company has a right of first offer to lease any additional
space or building built by the lessor on the Property, subject to certain
restrictions. The Company also has the right to require the lessor to build
an addition or additional building ("Expansion Premises"), subject to
certain restrictions. Upon the delivery of any Expansion Premises, the term
of the Lease would extend for a ten year term. The base rent for the
Expansion Premises shall be the greater of the then prevailing market rent
or an amount equal to a return on actual costs of construction of the
greater of 250 basis points over the rate on ten year U.S. Treasury Notes,
or
F-19
8%. Upon delivery of the Expansion Premises, the lessor would assume
obligations under the Company's existing leases of its adjacent properties,
in exchange for a payment equal to three months rent and certain
unamortized costs incurred with respect to these two facilities.
Effective July 1, 2007, the Company entered into a five-year agreement to
lease approximately 13,000 square feet of office space adjacent to two of
the Company's other facilities. The lease provides for a minimum annual
rent of $114,000 and requires the Company to pay its proportionate share of
annual operating expenses including utilities, insurance, taxes and
maintenance.
Rent expense under above leases was $280,000 in 2007, $150,000 in 2006 and
$140,000 in 2005. Future annual minimum rental payments as of December 31,
2007 to the expiration of the leases follow: 2008-$562,000; 2009-$450,000;
2010-$386,000; 2011-$368,000; 2012-$315,000 and thereafter-$1,255,000.
(13) UNAUDITED QUARTERLY INFORMATION
Unaudited quarterly financial information follows:
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
YEAR ENDED DECEMBER 31, 2007
Net sales $ 9,289,332 $ 7,962,396 $ 10,663,435 $ 10,317,242 $ 38,232,405
Cost of products sold 5,747,621 5,447,781 6,634,787 6,754,618 24,584,807
------------ ------------ ------------ ------------ ------------
Gross profit 3,541,711 2,514,615 4,028,648 3,562,624 13,647,598
Net income (loss) 79,439 (300,618) 539,194 (11,555) 306,460
Net income (loss) per common share (1):
Basic $ 0.01 $ (0.03) $ 0.05 $ (0.00) $ 0.03
Diluted $ 0.01 $ (0.03) $ 0.05 $ (0.00) $ 0.03
YEAR ENDED DECEMBER 31, 2006
Net sales $ 7,556,685 $ 8,029,256 $ 9,425,508 $ 10,190,562 $ 35,202,011
Cost of products sold 4,604,237 4,564,210 5,340,278 6,293,942 20,802,677
------------ ------------ ------------ ------------ ------------
Gross profit 2,952,448 3,465,046 4,085,230 3,896,610 14,399,334
Net income 140,255 350,841 719,906 535,699 1,746,701
Net income per common share (1):
Basic $ 0.01 $ 0.03 $ 0.07 $ 0.05 $ 0.17
Diluted $ 0.01 $ 0.03 $ 0.06 $ 0.04 $ 0.14
(1) The sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods due to change the number of weighted
average shares outstanding and the effects of rounding.
Page 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A(T). 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, 2007. 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, 2007 that have materially
affected, or are reasonably likely to materially affect the Company's internal
control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in INTERNAL CONTROL - INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in INTERNAL CONTROL --
INTEGRATED FRAMEWORK, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in this
annual report.
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.
Page 24
Item 9B. Other Information
--------------------------
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
---------------------------------------------------------------
Reference is made to the disclosure required by Items 401, 405, 406 and
407(c)(3), (d)(4) and (d)(5) of Regulation S-K contained in the Registrant's
definitive proxy statement to be mailed to shareholders on or about April 25,
2008, and to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
-------------------------------
Reference is made to the disclosure required by Items 402 and 407 (e) (4) and
(e) (5) of Regulation S-K contained in the Registrant's definitive proxy
statement to be mailed to shareholders on or about April 25, 2008, and to be
filed with the Securities and Exchange Commission.
Item 12. 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-K
contained in the Registrant's definitive proxy statement to be mailed to
shareholders on or about April 25, 2008, 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, 2007:
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 524,425 $ 2.11 343,750
Equity compensation plans
not approved by security
holders 1,064,401 0.50 --
----------- ---------
Total 1,588,826 $ 1.03 343,750
=========== =========
Securities remaining available for issuance under equity compensation plans
approved by security holders are from the CAS Medical Systems, Inc. 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 13. Certain Relationships and Related Transactions, and Director
---------------------------------------------------------------------
Independence
------------
Reference is made to the disclosure required by Item 404 of Regulation S-K
contained in the Registrant's definitive proxy statement to be mailed to
shareholders on or about April 25, 2008, and to be filed with the Securities and
Exchange Commission.
Page 25
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 25, 2008, and to be filed with
the Securities and Exchange Commission.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The Company's financial statements are included in response to Item 8 of this
report.
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the Years Ended December 31,
2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31,
2007, 2006 and 2005
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
The Exhibits to this report are as set forth in the "Exhibit Index" on
pages 26-27 of this report. Management contracts or compensatory plans or
arrangements filed as an exhibit to this report is identified in the "Index
to Exhibits" with an asterisk after the exhibit number.
Page 26
EXHIBIT INDEX
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 (14)
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 (12)
10.19 Purchase and Sale Agreement between CAS Medical Systems, Inc. and Davis
Marcus Partners, Inc. (13)
10.20 Lease Agreement between CAS Medical Systems, Inc. and DMP New Branford,
LLC (13)
10.21 Commercial Loan Agreement dated February 11, 2008 between CAS Medical
Systems, Inc. and NewAlliance Bank (15)
10.22 Commercial Revolving Promissory Note dated February 11, 2008 (15)
10.23 Security Agreement dated February 11, 2008 in favor of NewAlliance Bank
(15)
21.1 Subsidiaries of the Registrant
23.1 Consent of 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
--------------------------------------------------------------------------------
(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
Page 27
(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
(12) Incorporated by reference to the Company's Form 10-KSB filed March 19, 2007
(13) Incorporated by reference to the Company's Form 8-K filed September 10,
2007
(14) Incorporated by reference to the Company's Form 8-K filed November 30, 2007
(15) Incorporated by reference to the Company's Form 8-K filed February 14, 2008
Page 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAS MEDICAL SYSTEMS, INC.
-------------------------
(Registrant)
/s/ Andrew E. Kersey Date: March 18, 2008
----------------------------
By: Andrew E. Kersey
President and Chief
Executive Officer
Pursuant to the requirements of 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/ Louis P. Scheps Date: March 18, 2008
----------------------------
Louis P. Scheps, Chairman
of the Board
/s/ Lawrence Burstein Date: March 18, 2008
----------------------------
Lawrence Burstein, Director
/s/ Jerome Baron Date: March 18, 2008
----------------------------
Jerome Baron, Director
/s/ Saul Milles Date: March 18, 2008
----------------------------
Saul Milles, Director
/s/ Andrew E. Kersey Date: March 18, 2008
----------------------------
Andrew E. Kersey, President,
Chief Executive Officer and
Director
/s/ Jeffery A. Baird Date: March 18, 2008
----------------------------
Jeffery A. Baird, Chief
Financial Officer (Chief
Financial and Accounting
Officer)