================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number 0-13839
CAS MEDICAL SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 06-1123096
------------------------------ ----------------
State or other jurisdiction of (I.R.S. employer
incorporation of organization) identification no.)
44 East Industrial Road, Branford, Connecticut 06405
----------------------------------------------------
(Address of principal executive offices)
(203) 488-6056
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, $.004 par value:
9,743,573 shares as of August 10, 2004.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
================================================================================
Form 10-QSB
June 30, 2004
Page 2
INDEX
-----
PART I Financial Information Page No.
------ --------------------- --------
Item 1 Financial Statements
Condensed Balance Sheets as of June 30, 2004
and December 31, 2003 ................................... 4
Condensed Statements of Income for the Three and Six
Months Ended June 30, 2004 and 2003 ..................... 6
Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 ..................... 7
Notes to Condensed Financial Statements ................. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 11
Item 3 Controls and Procedures ................................. 14
PART II Other Information
------- -----------------
Item 2 Changes in Securities and Small Business Issuer
Purchases of Equity Securities .......................... 14
Item 4 Submission of Matters to a Vote of Security Holders ..... 15
Item 6 Exhibits and Reports on Form 8-K ........................ 15
Signatures ......................................................... 16
Form 10-QSB
June 30, 2004
Page 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
The financial statements included herein have been prepared by CAS Medical
Systems, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
It is recommended that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report filed on Form 10-KSB for the year ended December 31,
2003.
In the opinion of the Company, all adjustments necessary to present fairly
the financial position of CAS Medical Systems, Inc. as of June 30, 2004, and the
results of its operations and its cash flows for the six months ended June 30,
2004 and 2003 have been included in the accompanying unaudited financial
statements. The results of operations for the six months ended June 30, 2004 are
not necessarily indicative of the expected results for the full year.
Form 10-QSB
June 30, 2004
Page 4
CAS Medical Systems, Inc.
Condensed Balance Sheets
------------------------
(Unaudited)
June 30, December 31,
Assets 2004 2003
------ ------------ ------------
Current Assets:
Cash and cash equivalents $ 1,409,222 $ 881,087
Accounts receivable, net of allowance
for doubtful accounts 2,492,018 3,307,059
Inventories 2,877,190 2,270,616
Deferred tax assets 347,155 347,155
Other current assets 154,107 489,451
------------ ------------
Total current assets 7,279,692 7,295,368
Property and Equipment:
Land and improvements 535,000 535,000
Building and improvements 1,472,162 1,472,162
Machinery and equipment 2,752,863 2,504,313
------------ ------------
4,760,025 4,511,475
Less accumulated depreciation (2,446,769) (2,287,978)
------------ ------------
Property and equipment, net 2,313,256 2,223,497
------------ ------------
Intangible and other assets, net 205,060 209,210
Deferred tax assets 182,652 182,652
------------ ------------
Total assets $ 9,980,660 $ 9,910,727
============ ============
The accompanying notes are an integral part of these financial statements
Form 10-QSB
June 30, 2004
Page 5
CAS Medical Systems, Inc.
Condensed Balance Sheets
------------------------
(Unaudited)
June 30, December 31,
Liabilities and Stockholders' Equity 2003 2004
------------------------------------ ------------ ------------
Current Liabilities:
Current portion of long-term debt $ 311,219 $ 475,185
Notes payable 12,221 219,619
Accounts payable 1,105,451 1,007,617
Accrued expenses 668,719 434,963
------------ ------------
Total current liabilities 2,097,610 2,137,384
------------ ------------
Long-term debt, less current portion 1,064,360 1,534,523
------------ ------------
Stockholders' Equity:
Common stock, $.004 par value per share;
19,000,000 shares authorized; 9,829,573
and 9,712,577 shares issued, respectively 39,663 38,851
Additional paid-in capital 3,007,654 2,870,769
Treasury stock at cost - 86,000 shares at
June 30, 2004 (101,480) --
Retained earnings 3,872,853 3,329,200
------------ ------------
Total stockholders' equity 6,818,690 6,238,820
------------ ------------
Total liabilities and stockholders' equity $ 9,980,660 $ 9,910,727
============ ============
The accompanying notes are an integral part of these financial statements
Form 10-QSB
June 30, 2004
Page 6
CAS Medical Systems, Inc.
Condensed Statements of Income
------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Net product sales $ 4,851,836 $ 4,088,146 $ 9,367,716 $ 8,302,384
OPERATING EXPENSES:
Cost of product sales 2,635,175 2,285,208 5,061,685 4,668,570
Research & development 246,866 217,734 520,515 424,521
Selling, general & administrative 1,497,567 1,391,562 3,025,888 2,731,113
------------ ------------ ------------ ------------
Operating income 472,228 193,642 759,628 478,180
OTHER INCOME AND EXPENSES:
Proceeds from life insurance policy -- -- -- 500,000
Interest expense 21,410 61,032 49,190 87,836
------------ ------------ ------------ ------------
Income before income taxes 450,818 132,610 710,438 890,344
PROVISION FOR INCOME TAXES 156,434 38,000 166,785 106,000
------------ ------------ ------------ ------------
Net income $ 294,384 $ 94,610 $ 543,653 $ 784,344
============ ============ ============ ============
Weighted average number of common
shares outstanding:
Basic 9,786,568 9,645,077 9,755,285 9,645,077
============ ============ ============ ============
Diluted 11,065,039 10,032,386 11,048,745 9,962,389
============ ============ ============ ============
Earnings per common share:
Basic $ 0.03 $ 0.01 $ 0.06 $ 0.08
============ ============ ============ ============
Diluted $ 0.03 $ 0.01 $ 0.05 $ 0.08
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
Form 10-QSB
June 30, 2004
Page 7
CAS Medical Systems, Inc.
Condensed Statements of Cash Flows
----------------------------------
(Unaudited)
Six Months Ended
------------------------------
June 30, June 30,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 543,653 $ 784,344
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 242,531 231,364
Provision for bad debt 31,000 --
Changes in operating assets and liabilities:
Accounts receivable 784,041 (162,343)
Inventories (606,574) 85,550
Other current assets 335,344 216,157
Accounts payable and accrued expenses 345,557 232,835
------------ ------------
Net cash provided by operating activities 1,675,552 1,387,907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (268,663) (75,831)
Purchase of intangible assets (59,477) (25,020)
------------ ------------
Net cash used in investing activities (328,140) (100,851)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under notes payable (207,398) --
Repayments under long-term debt (634,129) (205,077)
Proceeds from issuance of common stock 123,730 --
Purchase of treasury stock (101,480) --
Repayments under line of credit -- (600,000)
------------ ------------
Net cash used in financing activities (819,277) (805,077)
------------ ------------
Net increase in cash and cash equivalents 528,135 481,979
CASH AND CASH EQUIVALENTS, beginning of period 881,087 325,670
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,409,222 $ 807,649
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 55,840 $ 97,880
Cash paid during the period for income taxes $ 173,506 $ 78,075
The accompanying notes are an integral part of these financial statements
Form 10-QSB
June 30, 2004
Page 8
CAS Medical Systems, Inc.
Notes to Condensed Financial Statements
---------------------------------------
(Unaudited)
June 30, 2004
(1) The Company
CAS Medical Systems, Inc. ("CAS" or the "Company") is a Delaware
corporation organized in 1984. The Company designs, manufactures and markets
medical products, specifically blood pressure measurement equipment, apnea
monitoring equipment and products for other patient applications, including
neonatal intensive care. The Company's products are designed to improve the
quality of patient care and provide exceptional value and performance. Markets
for the Company's products include hospital, alternate site, emergency medical
services and homecare. The Company's products are sold through its direct sales
force, via distributors and pursuant to Original Equipment Manufacturer ("OEM")
agreements both internationally and in the United States. The Company has
several other products in various stages of development that it believes will
add to and complement its current product lines. Certain 2003 balances have been
reclassified to conform to current year presentation.
(2) Inventory
Inventory is stated at the lower of cost or market. The Company provides
inventory reserves for any material that has become obsolete or may become
unsaleable based upon estimates of future demand and sale price in the market.
Judgments with respect to salability and usage of inventory, 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. At June 30, 2004 and December 31, 2003, inventory consisted
of the following:
June 30, December 31,
2004 2003
------------ ------------
Raw Material $ 1,724,229 $ 1,281,620
Work-In-Process 363,206 434,055
Finished Inventory 789,755 554,941
------------ ------------
$ 2,877,190 $ 2,270,616
============ ============
(3) 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. 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.
Balance at December 31, 2003 $ 122,000
Additions to reserve 59,000
Warranty costs incurred (59,000)
------------
Balance at June 30, 2004 $ 122,000
============
(4) Earnings per Common Share
The Company computes earnings per common share in accordance with SFAS No.
128, "Earnings Per Share." Under SFAS No. 128, basic earnings per share is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding during the period. No dilution for any potentially
dilutive securities is included. Diluted earnings per share assumes the exercise
or conversion of dilutive securities using the treasury stock method. For the
three months ended June 30, 2004 and 2003, certain options and warrants to
purchase 169,250 and
Form 10-QSB
June 30, 2004
Page 9
1,775,491 shares, respectively, of the Company's common stock at June 30, 2004
and 2003 were not included in the computation of diluted earnings per share
because their exercise price was greater than the average market price of the
common shares and, therefore, their inclusion would have been anti-dilutive. For
the six months ended June 30, 2004 and 2003, options and warrants to purchase
169,250 and 1,845,881 shares, respectively, of the Company's common stock were
excluded from the computation.
The following summarizes the Company's calculation of basic and diluted earnings
per share for the three-month and six-month periods ended June 30, 2004 and
2003:
Three Months Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income $ 294,384 $ 94,610 $ 543,653 $ 784,344
Weighted average shares outstanding 9,786,568 9,645,077 9,755,285 9,645,077
Add: dilutive effect of outstanding
warrants and options 1,278,471 387,309 1,293,460 317,312
============ ============ ============ ============
Total weighted average shares of
dilutive securities outstanding 11,065,039 10,032,386 11,048,745 9,962,389
============ ============ ============ ============
Earnings per share - basic $ 0.03 $ 0.01 $ 0.06 $ 0.08
Earnings per share - dilutive $ 0.03 $ 0.01 $ 0.05 $ 0.08
============ ============ ============ ============
(5) Stock-Based Compensation
The Company primarily grants qualified stock options for a fixed number of
shares to employees with an exercise price equal to the fair market value of the
shares at the date of the grant. The Company has adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure." SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations where,
generally, when the exercise price of stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
Had compensation cost for the stock option awards been determined to be
consistent with SFAS No. 123, the Company's net income and earnings per share
for the six and three month periods ended June 30, 2004 and 2003 would have been
changed to the following pro forma amounts:
Three Months Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income:
As reported $ 294,384 $ 94,610 $ 543,653 $ 784,344
Compensation expense for stock options
based on fair value, net of taxes 25,541 15,039 26,642 37,095
------------ ------------ ------------ ------------
Pro forma 268,843 79,571 517,011 749,249
Earnings per share:
As reported - Basic $ 0.03 $ 0.01 $ 0.06 $ 0.08
Pro forma - Basic $ 0.03 $ 0.01 $ 0.05 $ 0.08
As reported - Diluted $ 0.03 $ 0.01 $ 0.05 $ 0.08
Pro forma - Diluted $ 0.02 $ 0.01 $ 0.05 $ 0.08
Form 10-QSB
June 30, 2004
Page 10
(6) Capital Stock
On June 2, 2004, the Company's stockholders approved the CAS Medical
Systems, Inc. 2003 Equity Incentive Plan (the "Plan"). Accordingly, 1,000,000
shares of common stock have been reserved for issuance under the Plan. Awards
that may be granted under the Plan include options, restricted stock and
restricted stock units, and other stock-based awards. The purposes of the Plan
are to make available to our key employees and directors, certain compensatory
arrangements related to growth in 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 interest of our stockholders.
On June 2, 2004, the Company's stockholders approved the CAS Medical
Systems, Inc. Employee Stock Purchase Plan. Accordingly, 150,000 shares of
common stock have been reserved for issuance under the Stock Purchase Plan. The
initial offering period began on July 1, 2004. The Stock Purchase Plan offers
the Company's employees an opportunity to participate in a payroll-deduction
based program designed to incentivize them to contribute to the Company's
success and prosperity.
During the second quarter of 2004, the Company purchased 86,000 shares of
its common stock from a former employee for $101,480.
(7) Financing Arrangements
During August 2003, the Company renewed its $3,000,000 line-of-credit with
its bank lender. The line is payable on demand and matures in September 2004.
Borrowings under the line-of-credit bear interest at the bank's base rate (4.0%
at June 30, 2004) which may change from time to time. At June 30, 2004, there
were no amounts outstanding under the line-of-credit facility. Under the terms
of the agreement, the Company is permitted to borrow against accounts receivable
and inventory according to pre-established criteria. The bank has a first
security interest in substantially all assets of the Company.
The Company has financed its directors and officer's insurance policy and
its property casualty insurance policy. The monthly installments are $12,275 and
$22,859, respectively, including interest at 4.13% and 3.58%, respectively. The
notes were repaid in full during August 2004.
(8) Income Taxes
The provision for income taxes of $167,000 for the first six months of 2004
reflects an expected effective rate of approximately 35% for 2004 offset by an
$80,000 income tax benefit resulting primarily from a refund pertaining to state
research and development tax credits. The combined estimated federal and state
effective tax rate is lower than the statutory rate as a result of anticipated
R&D tax credits.
(9) Grant Awards
The Company has been awarded various grants by the National Institute of
Neurological Disorders and Stroke of the NIH under its Small Business Innovative
Research Program. Grants under this program are being used to support
development of a new technology, Near-Infrared Spectroscopy ("NIRS") that can
non-invasively measure the brain oxygenation level of a neonatal patient. In
accordance with the terms of these grants, the Company is being
Form 10-QSB
June 30, 2004
Page 11
reimbursed for certain qualifying expenditures under the agreement. The Company
is pursuing additional NIH grants to support its NIRS research. Grants received
under this program include a phase II award received by the Company during
September 2000 in the amount of $836,000 for development in the area of neonatal
application of NIRS. During May 2004, the Company was awarded a phase II grant
approximating $1,000,000 for continued development of NIRS in the adult
population.
Other miscellaneous grants for research in various applications of NIRS
cerebral oximetry have been awarded to the Company including $200,000 awarded
during 2003. During March 2004, the Company was awarded a $100,000 grant for
developing a new generation of automated non-invasive blood pressure ("NIBP")
monitors, which will incorporate advanced NIBP algorithms that compensate for
arterial stiffness.
During the three months ended June 30, 2004 and 2003, approximately
$115,000 and $132,000, respectively, of such research and development ("R&D")
costs were reimbursed under the grants. During the six months ended June 30,
2004 and 2003, approximately $144,000 and $229,000, respectively, of such costs
were reimbursed. Funding provided to the Company is being recorded as a
reduction in R&D expenses. The Company recognizes the reimbursement on an
accrual basis as the qualifying costs are incurred.
(10) Guarantees
Pursuant to our certificate of incorporation and bylaws, we have agreed to
indemnify our officers and directors for certain events or occurrences while the
officer or director is or was serving, at our request, in such capacity. The
maximum potential amount of future payments we could be required to make
pursuant to these provisions is unlimited; however, we have a Director and
Officer insurance policy that limits our exposure and enables us to recover a
portion of any future amounts paid. As a result of our insurance policy
coverage, we believe the estimated fair value of these indemnification
obligations is minimal. We have no liabilities recorded for these obligations as
of June 30, 2004.
We enter into standard indemnification agreements in our ordinary course of
business. Pursuant to these agreements, we indemnify, hold harmless, and agree
to reimburse the indemnified parties for losses suffered or incurred by the
indemnified parties, generally our business partners or customers, in connection
with any U.S. patent, copyright or other intellectual property infringement
claim by any third party with respect to our products. The term of these
indemnification agreements is generally perpetual. The maximum potential amount
of future payments we could be required to make under these indemnification
agreements is unlimited. We have no liabilities recorded for these agreements as
of June 30, 2004.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
Certain statements included in this report, including without limitation
statements in the Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts, are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: foreign currency fluctuations, regulations and other
economic and political factors which affect the Company's ability to market its
products internationally, new product introductions by the Company's
competitors, increased price competition, dependence upon significant customers,
availability and cost of components for the Company's products, marketplace
acceptance for the Company's new products, FDA and other governmental regulatory
and enforcement actions, and changes to federal research and development grant
programs presently utilized by the Company.
Form 10-QSB
June 30, 2004
Page 12
Results of Operations
---------------------
For the three months ended June 30, 2004, the Company reported net income
of approximately $294,000 or $0.03 per diluted common share compared to $95,000
or $0.01 per diluted common share reported for the same period of 2003.
Net income for the first six months of 2004 was $544,000 or $0.05 per
diluted common share compared to net income of $784,000 or $0.08 per diluted
share for the six months ended June 30, 2003. Net income for the first six
months of 2003 included $500,000, or $0.05 per diluted share, of non-taxable
proceeds from a life insurance policy paid upon the death of one of the
Company's key employees. Net income for the first six months of 2004 was
favorably affected by $80,000 of income tax benefits, primarily from a refund
pertaining to state research and development tax credits that lowered the
effective tax rate for the first quarter of 2004.
The Company recorded revenue of $4,852,000 for the second quarter ended
June 30, 2004, an increase of $764,000, or 19%, over sales of $4,088,000 for the
second quarter of 2003. Product sales increased 23% and were led primarily by
increases in blood pressure product sales of 29% and neonatal product sales of
30%. Increases in blood pressure sales were driven by sales to domestic
customers, primarily the Department of Veterans Affairs ("VA") under the
Company's multi-year contract, sales to the veterinary market, and sales to
Original Equipment Manufacturers ("OEM"). The Company expects orders from the VA
for its vital signs monitors to increase during the balance of the fiscal year
as these facilities utilize budgeted funds and the Company penetrates these
accounts. Sales to the veterinary market were driven by the launch of the
Company's new Model 750 cardio-vascular monitor under a private label
distribution arrangement as well as continued strong sales of the Model 740
vital signs monitor. Partially offsetting these increases were reductions in
service related sales of 45%, or $106,000, primarily from the Company's
discontinuance of service support on older apnea products. This has generated
customer demand for the Company's newer apnea monitoring devices which is
expected to continue for the balance of 2004.
Revenues for the first six months of 2004 were $9,368,000 an increase of
$1,066,000, or 13%, over revenues of $8,302,000 recorded for the first six
months of 2003. Product sales increased 16% primarily as a result of a 22%
increase in vital signs monitor sales. Partially offsetting these increases were
reductions in service related sales of 43%, or $208,000.
The cost of products sold as a percentage of net sales was 54.3% for the
three-month period ended June 30, 2004, compared to 55.9% for the same period of
2003. Cost of products sold as a percentage of net sales for the first six
months of 2004 was 54.0% compared to 56.2% for the first six months of 2003. The
improvement in cost of sales results primarily from reductions in manufacturing
production costs, inventory provisions, and purchased component costs. The
Company is continuing to work aggressively to lower its cost of products sold
during 2004 through manufacturing efficiencies, company-wide quality and process
improvement initiatives, and capital expenditures designed to replace aged
manufacturing equipment.
Research and Development ("R&D") expenses were $247,000 for the three
months ended June 30, 2004 compared to $218,000 for the three months ended June
30, 2003. Increases in engineering project materials and supplies of $12,000 and
reductions in amounts reimbursed from the National Institutes of Health (NIH)
under established grant programs of $17,000 compared to prior year were
primarily responsible for the increase in R&D expenses for this period. R&D
expenses were $521,000 for the fist six months of 2004 compared to $425,000 for
the first six months of the prior year. Reductions in NIH reimbursements of
$86,000 were primarily responsible for the increase in R&D net spending.
Selling, general and administrative expenses ("S,G&A") increased $106,000,
or 8%, to $1,498,000 for the three months ended June 30, 2004, compared to
$1,392,000 for the three months ended June 30, 2003. Increased salaries and
related fringe benefits of $116,000, bad debt provision of $28,000 and net
freight costs of $15,000, partially offset by decreased legal expenses of
$57,000 were primarily responsible for the increased S,G&A expenses. S,G&A
expenses were $3,026,000 for the first six months of 2004 compared to $2,731,000
for the first six months of 2003 representing an increase of $295,000 or 11%.
Increases in salaries and related fringe benefits of $319,000, outside
accounting fees of $25,000, bad debt provision of $16,000 and general insurance
costs of $18,000 were partially
Form 10-QSB
June 30, 2004
Page 13
offset by reduced legal expenses of $65,000 and advertising and promotional
costs of $21,000.
Interest expense was $21,000 for the three months ended June 30, 2004
compared to interest expense of $61,000 for the three months ended June 30,
2003. Interest expense was $49,000 for the first six months of June 30, 2004
compared to $88,000 for the first six months of 2003. Reductions in interest
expenses for both periods reflect lower borrowing levels and improved interest
rates.
The provision for income taxes of $167,000 for the first six months of 2004
reflects an expected effective rate of approximately 35% for 2004 offset by an
$80,000 income tax benefit resulting primarily from a refund pertaining to state
research and development tax credits. The combined estimated federal and state
effective tax rate is lower than the statutory rate as a result of anticipated
R&D tax credits. The income tax provision of $106,000 for the first six months
of 2003 reflected an effective tax rate of approximately 12% due to the
exclusion of $500,000 of non-taxable insurance proceeds, qualifying foreign
trade income and expected benefits from R&D tax credits.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At June 30, 2004, the Company's cash and cash equivalents totaled
$1,409,000 compared to $881,000 at December 31, 2003. Working capital increased
by $24,000 to $5,182,000 at June 30, 2004, from $5,158,000 on December 31, 2003.
The Company's current ratio increased slightly to 3.5 to 1 from 3.4 to 1 at
December 31, 2003.
Cash provided by operations for the six months ended June 30, 2004 was
$1,676,000 compared to $1,388,000 for the first six months of the prior year.
Decreases in accounts receivable and other current assets and increases in
accounts payable and accrued expenses, partially offset by increases in
inventory, were primarily responsible for improvement in cash provided by
operations. Cash provided by operations for the first six months of 2003 was
increased by $500,000 of non-taxable life insurance proceeds resulting from the
death of one of the Company's key employees. Increases in inventory resulted
primarily from the Company's expanded product offerings and its efforts to
improve customer order fulfillment and component parts requirements for the new
Model 750 product launch.
Cash used in investing activities was $328,000 for the first six months of
2004 compared to $101,000 for the first six months of 2003. The increase
resulted from several significant capital equipment purchases including a
$173,000 payment for the purchase of a new enterprise resource planning ("ERP")
system expected to be operational during the first quarter of 2005 and a $37,000
payment toward new manufacturing equipment needed to enhance productivity and
quality. Further expenditures approximating $215,000 will be required to
complete both of these initiatives.
Cash used in financing activities for the first six months of 2004 was
$819,000 compared to $805,000 for the first six months of the prior year. During
the first six months of 2004, the Company repaid $634,000 of outstanding bank
debt obligations including an unscheduled principal payment of $400,000 during
June 2004 against its term loan. The unscheduled payment was made as a
cost-savings measure. During the first six months of 2003, the Company
eliminated the outstanding balance on its line-of-credit obligation in the
amount of $600,000 and repaid $205,000 of other bank debt obligations.
During August 2003, the Company renewed its $3,000,000 line-of-credit with
its bank lender. The line is payable on demand and matures in September 2004.
Borrowings under the line-of-credit bear interest at the bank's base rate (4.5%
at July 30, 2004) which may change from time to time. At June 30, 2004, there
were no amounts outstanding under the line-of-credit facility. Under the terms
of the agreement, the Company is permitted to borrow against accounts receivable
and inventory according to pre-established criteria. The bank has a first
security interest in substantially all assets of the Company. The Company is
currently working with its lender to complete the renewal of its line-of-credit.
During 2003, the Company refinanced its mortgage and notes payable with its
bank lender reducing the per annum fixed interest rates from 7.25% and 8.59%,
respectively, to 5.45% and 5.0%, respectively. The refinancing and related
reduction in interest rates had the effect of reducing aggregate monthly
payments of principal and interest by
Form 10-QSB
June 30, 2004
Page 14
approximately $2,170. All other terms of the agreements remained unchanged.
The Company believes that its source of funds consisting of cash and cash
equivalents, projected cash flow from operating activities for 2004, and funds
available from the revolving credit facility will be sufficient to meet its
current and expected requirements over at least the next twelve months. Although
there can be no assurance that the Company's revolving credit facility will be
renewed, management believes that, if needed, it would be able to find
alternative sources of funds on commercially acceptable terms.
Critical Accounting Judgments and Estimates
-------------------------------------------
The Company's discussion and analysis of financial condition and results of
operations are based upon the condensed financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. The Company's estimates include those related to revenue
recognition, the valuation of inventory, and valuation of deferred tax assets
and liabilities, useful lives of intangible assets, warranty obligations and
accruals. The Company bases its estimates on historical experience and on
various other assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. For a complete description of accounting policies,
see Note 2 to our financial statements included in the Company's Form 10-KSB for
the year ended December 31, 2003.
ITEM 3 CONTROLS AND PROCEDURES
--------------------------------
As of June 30, 2004, an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures was conducted
under the supervision and with the participation of the Chief Executive Officer
and the Chief Financial Officer. Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were adequate and designed to ensure that
information required to be disclosed by the Company in this report is recorded,
processed, summarized and reported in a timely manner, including that such
information is accumulated and communicated to management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
------------------------------------------------------------------------------
SECURITIES
----------
The following table provides information with respect to the purchase of
shares of the Company's common stock from a former employee during the second
quarter of 2004:
Total number Approximate
of shares dollar value of
Total number purchased as shares that may
of shares Average price part of publicly yet be purchased
Period purchased paid per share announced plan under the plan
------------------------------ ------------ ------------ ------------ ------------
April 1, 2004 - April 30, 2004 -- -- $ --
May 1, 2004 - May 31, 2004 86,000 $ 1.18 -- --
June 1, 2004 - June 30, 2004 -- -- -- --
------------ ------------ ------------ ------------
Total 86,000 $ 1.18 -- $ --
============ ============ ============ ============
Form 10-QSB
June 30, 2004
Page 15
In May 20024, the Company repurchased from a former employee 86,000 shares
of common stock for an aggregate purchase price of $101,480. This repurchase was
a private transaction and was not part of any regular stock repurchase plan or
program.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------
At the Company's annual meeting of stockholders held on June 2, 2004, four
proposals were voted upon by the Company's stockholders. A brief description of
each proposal voted upon at the annual meeting and the number of votes cast for,
against and withheld, as well as the number of abstentions and broker non-votes
to each proposal are set forth below.
i) Election of members of the Board of Directors, each for a term of one
year
Nominee For Against
Louis P. Scheps 8,116,951 2,567
Lawrence S. Burstein 8,116,951 2,467
Jerome S. Baron 8,116,951 2,467
Saul S. Milles 8,116,951 2,467
ii) Approval of the CAS Medical Systems, Inc. Stock Purchase Plan
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
5,007,684 143,892 5,600 2,962,342
iii) Approval of the CAS Medical Systems, Inc. 2003 Equity Incentive Plan
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
5,039,524 112,652 5,000 2,962,342
iv) Ratification of the Board of Directors appointment of
PricewaterhouseCoopers LLP as auditors for the Company for the fiscal
year ending December 31, 2004
For Against Abstain
--- ------- -------
8,117,568 1,750 200
There were no broker non-votes with respect to Proposals 1 and 4.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 10-KSB
--------------------------------------------
(A) Exhibits
Form 10-QSB
June 30, 2004
Page 16
11. See Notes to Condensed Financial Statements Note 4, regarding
computation of earnings per share.
31.1 Certification pursuant to Rule 13a-14(a) of Louis P. Scheps, President
and Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief
Financial Officer
32.1 Certification of Periodic Financial Report of Louis P. Scheps,
President and Chief Executive Officer and Jeffery A. Baird, Chief
Financial Officer
(B) Reports on Form 8-K
On April 26, 2004, the Company filed a Current Report on Form 8-K
announcing the Company's financial results for the first quarter ended March 31,
2004.
Form 10-QSB
June 30, 2004
Page 17
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAS MEDICAL SYSTEMS, INC.
-------------------------
(Registrant)
/s/ Louis P. Scheps Date: August 13, 2004
-------------------------------------
Louis P. Scheps
President and Chief Executive Officer
/s/ Jeffery A. Baird Date: August 13, 2004
-------------------------------------
Jeffery A. Baird
Chief Financial Officer