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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended May 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____ to _____
Commission File No. 0-18105
VASOMEDICAL, INC.
(Name of registrant as specified in its charter)
Delaware 11-2871434
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
180 Linden Avenue, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 997-4600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by a 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 a 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 ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 30, 1999, based on the average price on that date, was
$74,816,000. At July 30, 1999, the number of shares outstanding of the issuer's
common stock was 50,978,568.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated herein by reference as set forth in Item
13(a)3, Index to Exhibits, in Part IV.
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PART I
ITEM ONE - BUSINESS
Except for historical information contained herein, the matters discussed
are forward looking statements that involve risks and uncertainties. When used
herein, words such as "anticipate", "believe", "estimate", "expect" and "intend"
and similar expressions, as they relate to the Company or its management,
identify forward- looking statements. Such forward-looking statements are based
on the beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the impact of competitive products
and pricing; capacity and supply constraints or difficulties; product
development, commercialization or technological difficulties; the regulatory and
trade environment; and the risk factors reported from time to time in the
Company's SEC reports. The Company undertakes no obligation to update
forward-looking statements as a result of future events or developments.
General
Vasomedical, Inc. (the "Company"), incorporated in Delaware in July 1987,
is engaged in the commercialization of the EECP(r) enhanced external
counterpulsation ("EECP(r)") system, a computer-based medical device for the
noninvasive, atraumatic treatment of patients with coronary artery disease. The
EECP(r) system is marketed worldwide to hospitals, clinics and other cardiac
health care providers.
In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso
Interim Corp. ("Vaso Interim"), acquired the worldwide exclusive marketing
rights (except in China) to the EECP(r) system and agreed to fund the research
and development activities of Vasogenics, Inc. ("Vasogenics"), its joint-venture
partner in Vaso Interim and sole minority shareholder. Vasogenics held the
intellectual property rights to the EECP(r) technology, including patents and
manufacturing rights.
In January 1995, the Company acquired all the capital stock of Vasogenics
for stock consideration and the assumption of certain liabilities. In connection
with the acquisition, the Company retained certain key employees of Vasogenics
who had been involved in the development of the EECP(r) technology. Vasogenics
and Vaso Interim were subsequently merged into Vasomedical.
EECP(r) received marketing clearance from the Food and Drug Administration
("FDA") under a 510(k) premarket notification in February 1995.
The EECP(r) Enhanced External Counterpulsation System
General Discussion
According to the American Heart Association, coronary heart disease ("CHD")
is the single largest killer of American males and females. CHD caused 481,287
deaths in the United States in 1995. A major complication of CHD is angina
pectoris, from which millions of Americans suffer. It is caused by obstruction
of arteries which supply the heart muscle with blood. The pain associated with
angina pectoris can be disabling, and conventional therapy, when medication
fails, consists of invasive procedures, such as percutaneous transluminal
coronary angioplasty ("PTCA") and coronary artery bypass grafting ("CABG").
According to a Report of the American College of Cardiology/American Heart
Association Task Force on Assessment of Diagnostic and Therapeutic
Cardiovascular Procedures, re-occlusion of dilated vessels occurs within six
months of PTCA interventions in 30% to 40% of cases (Journal of the American
College of Cardiology Vol. 22, No. 7, December 1993:2033-2054) and localized or
diffuse narrowings occur in half of vein grafts by ten years after CABG
(Circulation Vol. 83, No. 3, March 1991:1125-1173).
In March 1989, Vasogenics received 510(k) marketing clearance from the FDA
for the MC1 model of the EECP(r) system. In February 1995, the Company received
510(k) marketing clearance for its EECP-MC2 model, which incorporated
technological improvements of external counterpulsation. Marketing clearance was
for use of the EECP(r) procedure in the treatment of patients suffering from
stable or unstable angina pectoris, acute myocardial infarction and cardiogenic
shock. The Company decided, however, to focus initially only on the stable
angina pectoris indication.
The System
EECP(r) is an advanced treatment system utilizing fundamental hemodynamic
principles to relieve angina pectoris. Treatment involves the inflation and
deflation of a series of compressive air cuffs applied to the patient's lower
extremities - the calves, lower thighs, and upper thighs, including the
buttocks. Timing for inflation and deflation is regulated by a microprocessor
running electrocardiogram ("ECG") signals through sets of algorithms that
monitor safety and precision.
Upon diastole, the cuffs are inflated sequentially and rapidly from the
calves proximally, creating a retrograde arterial pressure wave that increases
systemic aortic diastolic pressure, coronary perfusion pressure and blood flow.
Compression of the vascular beds of the legs also increases venous return.
Instantaneous decompression of all cuffs at the onset of systole lowers vascular
impedance, thereby decreasing ventricular workload. This latter effect, when
coupled with the augmented venous return, can raise cardiac output by as much as
63%.
Patients usually begin to experience symptomatic relief of angina after 15
or 20 hours of a 35-hour treatment regimen. Positive effects are sustained
between treatments and usually persist years after completion of a full course
of therapy, as reported in the April 15, 1995 issue of the American Journal of
Cardiology.
The mechanism by which EECP(r) produces long-term patient benefits remains
uncertain, but thallium-201 and exercise stress test results combined are
strongly indicative of an improvement in myocardial perfusion and resolution of
reversible ischemic defects. The most logical explanation for these observations
is that EECP(r) in some way stimulates collateral vessel recruitment and/or
growth. Collateral vessels may be regarded as one of the heart's emergency
systems, and can be called upon to open up and also to be extended, in response
to ischemia.
The results of studies carried out at the State University of New York's
University Medical Center at Stony Brook ("Stony Brook"), supported by previous
experience in China, provided the first indication that EECP(r) therapy may
stimulate collateral flow in coronary artery disease patients. In support of
this hypothesis is the observation that the presence of one or more vascular
conduits without significant stenosis appears to be predictive of a favorable
response to EECP(r) therapy. In fact, effectiveness has been shown to be
directly related to the number of patent coronary vessels in the treated
patients. The explanation appears to be that a proximally patent conduit is
necessary to allow transmission of augmented diastolic pressure and flow to
distal coronary vessels, by which collateral recruitment or development is
promoted.
Clinical Studies
Early experiments with counterpulsation at Harvard in the 1950s
demonstrated that this technique markedly reduces the workload, and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past 40 years in both animal experiments and in patients. The clinical
benefits of external counterpulsation were not consistently achieved in early
studies because the equipment used then lacked some of the features found in the
EECP(r) system, such as the computer-controlled operating system that makes
sequential cuff inflation possible. As the technology improved, however, it
became apparent that both internal and external forms of counterpulsation were
capable of improving survival in patients with cardiogenic shock following
myocardial infarction. Later, in the 1980s, Dr. Zheng and colleagues in China
reported on their extensive experience in treating angina using the newly
developed enhanced sequential device - EECP(r). Not only did a course of
treatment with EECP(r) reduce the frequency and severity of anginal symptoms
during normal daily functions and also during exercise, but the improvements
were sustained for years after therapy.
These results prompted a group of investigators at Stony Brook to undertake
studies with EECP(r) to reproduce the Chinese results, using both subjective and
objective endpoints. The first study group consisted of 18 patients with chronic
stable angina, despite medical and surgical intervention, as well as evidence,
assessed by thallium-201 perfusion imaging, of ischemia during an exercise
stress test. EECP(r) treatment was administered for one hour daily for a total
of 36 hours over approximately seven weeks. During the course of treatment, all
18 patients experienced substantial subjective improvements in symptoms, and 16
were completely free of angina during normal daily activities. Looking at
objective measures of benefit, a comparison of maximal stress test results
before and after treatment showed that EECP(r) produced a significant increase
(19%) in exercise tolerance in the total patient population.
Intriguingly, results of thallium-201 scans before and after treatment also
showed a complete resolution of perfusion defects in 12 patients (67%) and a
decrease in the size of the ischemic zone in another two. Thus, 14 of 18
patients (78%) experienced a reduction in ischemia as assessed by radionuclide
imaging.
Subsequent data from a group of 50 angina patients who were treated with
EECP(r) are consistent with the above results. All of these patients reported a
reduction in symptoms and 80% demonstrated improvement by radionuclide testing.
Patients with one- or two-vessel disease were significantly more likely to
respond than those with three-vessel disease.
Seventeen of the original 18 patients studied, including 13 of the 14
patients who had previously shown a reduction in myocardial ischemia, were
followed up for an average of three years. One of these 13 patients suffered a
myocardial infarction, and another underwent a revascularization procedure
during the intervening period. Of the remaining 11 patients, all remained free
of limiting angina. Ten patients underwent repeat stress thallium testing. In
these patients, the mean double product at three years was not significantly
different from the baseline value; however, eight patients (80%) demonstrated
persistent improvements in the results of thallium scintigraphy.
Another study of 27 patients with angina pectoris indicated that EECP(r)
outpatient therapy appears to exert effects on the heart similar to those
achieved by exercise training. After receiving EECP(r), approximately 80% of the
patients studied achieved an increase in exercise time as measured during
thallium stress tests. Although exercise usually causes increases in the heart
rate and blood pressure, these patients exhibited lower than expected heart rate
increases and no significant increases in blood pressure during their stress
tests. This indicates that they achieved similar conditioning benefits from
EECP(r) as might be expected from engaging in a regular program of exercise.
In this study, 26 men and one woman received 35 hours of EECP(r). A maximal
radionuclide stress test was performed prior to entry into the study. Upon
completion of the EECP(r) treatment course, patients were again tested to the
same cardiac workload and to maximum effort. The radionuclide imaging results
were similar to those reported in previous studies with 78% of patients having a
partial or complete resolution of perfusion defects indicating better or
normalized blood flow to ischemic areas of the heart.
Only those who had improved post-EECP(r) radionuclide images demonstrated
meaningful increases in maximal exercise times. However, in the "unimproved"
group, there was a significant decrease in post-EECP(r) double product,
indicating a useful decrease in peripheral vascular resistance. The authors
concluded that the two proposed mechanisms of EECP(r), improved stress perfusion
of the ischemic myocardium and decreased peripheral vascular resistance, are
complementary and may explain the improved exercise tolerance and symptomatic
relief sometimes seen in patients with unchanged stress perfusion imaging.
A five-year follow-up study of morbidity and mortality in 33 angina
patients treated with EECP(r) was reported by the Stony Brook center in April
1997. These patients had received 35 hours of EECP(r) between 1989 and 1996, had
documented CHD and had undergone pre- and post-exercise testing. The initial
group of 18 patients previously reported at three years of follow-up was
included in this expanded cohort. Cardiac angiography had been performed in 18
patients, with 16 of these patients having multi-vessel disease; ten of 33
patients treated had prior myocardial infarction and 13 had undergone either
CABG or PTCA, with eight having undergone both treatments. Of the 33 patients
treated, 4 died 1-5 years after initial treatment with EECP(r), and complete
follow-up data concerning cardiac events was obtained in the 29 surviving
patients. Although nine patients required interim hospitalizations for one or
more cardiac conditions, which consisted of acute myocardial infarcts (4), new
CABG or PTCA (6), other cardiac surgery (1) or unstable angina (1), 20 of the 33
patients treated experienced none of the above 4-7 years post-EECP(r) treatment.
Since over 60% of the original cohort of 33 patients with advanced CHD are alive
and well and without new events, this five-year follow-up study suggests that
EECP(r) is effective both in the short- and long-term therapy of chronic angina
pectoris.
In 1995, the Company began a large randomized, controlled and
double-blinded multicenter clinical study ("MUST-EECP") in four leading
university hospitals in the United States to confirm at other sites the patient
benefits observed in open studies conducted at the Stony Brook center and to
provide scientific evidence of this treatment's effectiveness. The University of
California San Francisco, Columbia University College of Physicians & Surgeons
at the Columbia-Presbyterian Medical Center in New York, Beth Israel Deaconess
Hospital, a teaching affiliate of Harvard Medical School, and Yale University
School of Medicine were the institutions that participated in the study. These
institutions were later joined by Loyola University, University of Pittsburgh
and Grant/Riverside Methodist Hospitals. MUST-EECP was completed in July 1997
and results were announced at the annual meeting of the American Heart
Association in November 1997 and of the American College of Cardiology in March
1998. The results of MUST-EECP were published in the Journal of the American
College of Cardiology, a major peer- review medical journal, in June 1999.
This ground-breaking study shows that EECP(r) therapy is a safe and
effective choice for more than seven million patients suffering from angina
pectoris, a common symptom of CHD. This study provides scientific evidence of
this novel treatment's effectiveness, even in patients on maximal medication and
for whom invasive revascularization procedures are no longer an option. Results
of MUST-EECP confirm clinical benefits shown in previous open trials: a decline
in anginal frequency, an increase in the ability to exercise and a decrease in
exercise- induced signs of myocardial ischemia.
MUST-EECP was conducted from May 1995 to July 1997. One hundred and
thirty-nine (139) patients suffering from chronic angina pectoris and on maximal
medication were randomized to receive treatment or sham. The sham group was
treated in a manner identical in every way to the treatment group except that
cardiovascular hemodynamics were not affected. Neither patients nor physicians
involved with the study knew to which group an individual patient belonged.
Participants were representative of patients with severe CHD. Average age
was 63 years (range 40-81 years): 88% were males; 58% had undergone either CABG
or PTCA; and 49% had experienced prior myocardial infarctions. In addition,
among those who benefited, 74% were in Canadian Class II or III, and 55% had
"residual" multivessel coronary artery disease despite revascularization.
Despite a considerable amount of medication prior to and during treatment,
patients in the treated group still were able to show improvement averaging 11%
in the time before the onset of ischemia demonstrated by stress ECG. Those in
the sham (control) group showed no improvement at all. Additionally, even in the
maximally medicated patients, exercise duration increased 10% in the average
participant receiving treatment as measured by exercise treadmill; exercise
duration increased only 6% in the sham group. Study participants followed a four
to seven week treatment program. The protocol required patients to undergo
EECP(r) in one-hour sessions, until they had completed 35 hours of treatment.
In fiscal 1999, the Company completed a long-term quality-of-life study
with EECP(r) in the same institutions and with the same patients that
participated in MUST-EECP. The positive results of this study have already been
presented at major scientific meetings, and a publication in a major peer-review
journal is expected during fiscal 2000.
In pursuit of its claim expansion program, the Company applied for and
received FDA approval in April 1998 to study, under an Investigational Device
Exemption protocol, the application of EECP(r) in the treatment of congestive
heart failure ("CHF"), a disabling condition affecting nearly 5 million
Americans and the most frequent cause of hospitalization for those over 65 years
of age. The study is being conducted simultaneously at the University of
Pittsburgh, the University of California San Francisco and the Grant Hospital in
Columbus,Ohio, and is expected to be completed in calendar 1999. CHF occurs when
the heart is unable to pump blood well enough to meet the body's needs. The
circulatory system becomes congested when the heart fails to empty its chambers
sufficiently, leading to an accumulation in the chest and lower limbs. According
to the American Heart Association, 2.5 million men and 2.4 million women in the
United States have CHF. About 400,000 new cases of the disease occur each year.
The need to find new and effective methods to treat CHF is pressing, since the
prevalence of the disease is growing rapidly as a result of the aging population
and the improved survival rate of heart attacks, while deaths caused by the
disease increased 116% from 1979 to 1995.
The Company's Plans
The Company's short- and long-term plans are to:
(a) Establish EECP(r) therapy as a new standard of care in CHD.
(b) Publish the results of its long-term quality-of-life outcomes study in
a major peer-review medical journal in fiscal 2000.
(c) Engage in educational campaigns designed to highlight the
cost-effectiveness and quality-of-life advantages of EECP(r) therapy
to State Welfare (Medicaid) agencies, commercial insurance companies,
and managed care organizations.
(d) Complete a feasibility study for the use of EECP(r) in CHF and present
preliminary results in calendar 1999.
(e) Initiate a pivotal multicenter study for the use of EECP(r) in CHF in
fiscal 2000.
(f) Complete the development of an upgraded EECP(r) system and initiate
its in-house assembly in fiscal 2000.
(g) Continue to establish a distribution network in international markets.
(h) Continue to establish and support academic reference centers in the
United States and overseas in order to accelerate the growth and
prestige of EECP(r) therapy and to increase the number and diversity
of clinical and mode-of-action studies, as well as the number of
presentations, publications, speakers and advocates.
(i) Create new products for use in noninvasive cardiovascular medicine.
Glossary of Terms
Acute Myocardial Infarction - heart attack
Angina Pectoris - literally "chest pain"
Cardiogenic shock - severe reduction in blood pressure owing to weak pumping
action of the heart
Collateral circulation - the use (recruitment) of small supplemental, usually
unused channels through which blood can be made to flow when normal blood
supply is impeded because of obstructions in coronary arteries
Coronary Artery Bypass Graft or CABG - a surgical transplant of a vein to
connect the aorta with an obstructed coronary artery
Coronary arteries - those that supply blood to the heart muscle
Diastole - rest period during which the heart chambers fill with blood and the
heart muscle receives most of its supply of oxygen and other nutrients
Enhanced External Counterpulsation or EECP(r) - "Enhanced" describes the
Company's proprietary system which increases the level of diastolic
augmentation by 40-50% over that of earlier devices
Ischemia - lack of blood supply
Occlusion - blockage of blood vessels Percutaneous Transluminal Coronary
Angioplasty or PTCA - insertion of a wire into a coronary artery to which a
balloon or other instrument is attached for the purpose of widening a
narrowed vessel
Stenosis - the narrowing of a blood vessel's diameter
Systole - contracting period during which the heart is pumping blood to the rest
of the body
Thallium - an imaging medium used to detect areas of ischemia within the heart
muscle
Sales and Marketing
Domestic Operations
The Company's direct sales and marketing team consists of ten (10) regional
and territory sales managers, five (5) clinical application specialists,
customer support and communications managers, and directors of sales and
marketing. Their efforts are supplemented by those of a network of independent
manufacturers' representatives.
Marketing activities are designed to support the Company's direct sales
team and independent representatives, and include journal advertising,
newsletters, physician educational programs, exhibits at trade shows and
seminars at professional association meetings.
The Company has developed a multi-day, on-site clinical training program
for physicians and therapists. After initial customer training, these clinical
applications specialists provide routine on- and off-site customer support,
including the review of clinical charts, certification of new personnel and
updating of customers on new clinical developments.
The Company employs service technicians responsible for the installation of
EECP(r) systems and, in many instances, on-site training of a customer's
biomedical engineering personnel. The Company provides a one- year warranty that
includes parts and labor. The Company intends to offer extended service to our
customers under annual service contracts or on a fee-for-service basis.
In fiscal 1999 and 1998, the Company had sales to Parimist Funding Corp.
and HPSC, Inc. (medical equipment financing firms) in each period, accounting
for 21% and 10% of the Company's revenues, respectively. In fiscal 1997, the
Company had sales to the Heart-Lung Center of Hawthorne and Metuchen Heart
Associates, aggregating 43% of the Company's revenues.
International Operations
The Company's key objective is to appoint distributors in exchange for
exclusive marketing rights to EECP(r) in their respective countries. The Company
currently has distribution agreements for Japan, and some European and Latin
American countries. Each distribution agreement contains a number of
requirements that must be met for the distributor to retain exclusivity,
including minimum performance standards. In most cases, foreign distributors
must either obtain an FDA-equivalent marketing clearance or establish
confirmation clinical evaluations conducted by local opinion leaders in
cardiology. Each distributor is responsible for obtaining any required approval.
There can be no assurance that any of the Company's distributors will be
successful in obtaining proper approvals for the EECP(r) system in their
respective countries or that these distributors will be successful in their
marketing efforts. The Company plans to enter into additional distribution
agreements to enhance its international distribution base. There can be no
assurance that the Company will be successful in entering into any additional
distribution agreements.
To date, revenues from international operations have not been significant.
International sales may be subject to certain risks, including export/import
licenses, tariffs, other trade regulations and local medical regulations. Tariff
and trade policies, domestic and foreign tax and economic policies, exchange
rate fluctuations and international monetary conditions have not significantly
affected the Company's business to date.
Competition
Presently, Vasomedical is aware of only one competitor with an external
counterpulsation device on the market. While the Company believes that this
competitor's involvement in the market is limited, there can be no assurance
that this company will not become a significant competitive factor. Further,
there can be no assurance that other companies will not enter the market
intended for EECP(r) systems. Such companies may have substantially greater
financial, manufacturing and marketing resources and technological expertise
than those possessed by the Company and may, therefore, succeed in developing
technologies or products that are more efficient than those offered by the
Company and that would render the Company's technology and existing products
obsolete or noncompetitive.
Government Regulations
The EECP(r) system is subject to extensive regulation by the FDA. Pursuant
to the Federal Food, Drug and Cosmetic Act, as amended, the FDA regulates and
must approve the clinical testing, manufacture, labeling, distribution and
promotion of medical devices in the United States.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a device that was legally marketed prior
to May 28, 1976, the date on which the Medical Device Amendments of 1976 was
enacted, the manufacturer may seek marketing clearance from the FDA to market
the device by filing a 510(k) premarket notification. The 510(k) premarket
notification must be supported by appropriate data establishing the claim of
substantial equivalence to the satisfaction of the FDA. Pursuant to recent
amendments to the law, the FDA can now require clinical data or other evidence
of safety and effectiveness. The FDA may have authority to deny marketing
clearance if the device is not shown to be safe and effective even if the device
is "substantially equivalent" to a device marketed prior to May 28, 1976. The
Company's EECP(r) system can be marketed in the United States based on the FDA's
determination of substantial equivalence. There can be no assurance that the
Company's EECP(r) system will not be reclassified in the future by the FDA and
subject to additional regulatory requirements.
If substantial equivalence cannot be established or if the FDA determines
that more extensive efficacy and safety data are in order, the FDA will require
the manufacturer to submit a premarket application ("PMA") for full review and
approval. Management does not believe that the EECP(r) system will ultimately
require PMA approval for continued commercialization; however, the Company so
designed the protocol for MUST-EECP as to be able to generate some of the data
needed in the event that a PMA is required at some future date.
Typically it takes one year from the date of filing to complete the PMA
review and approval process. There can be no assurance that the FDA would not
take more than one year to review and approve a PMA for EECP(r) and there can be
no assurance that EECP(r) would receive PMA approval.
In most countries to which the Company seeks to export the EECP(r) system,
it must first obtain documentation from the local medical device regulatory
authority stating that the marketing of the device is not in violation of that
country's medical device laws. The regulatory review process varies from country
to country. Presently, the Company is in the process of obtaining regulatory
approval of the EECP(r) system overseas.
There can be no assurance that all the necessary FDA clearances, including
approval of any PMA that may eventually be required, and overseas approvals will
be granted for EECP(r), its future-generation upgrades or newly developed
products, on a timely basis or at all. Delays in receipt of or failure to
receive such clearances could have a material adverse effect on the Company's
financial condition and results of operations.
In June 1998, the EECP(r) system was awarded the CE Mark, which satisfies
the regulatory provisions for marketing in all 15 countries of the European
Union. The CE Mark was awarded by DGM of Denmark, an official notified
regulatory body, under the European Council Directive concerning medical
devices. The CE Mark, in combination with the ISO 9001 certification awarded by
Underwriter's Laboratories (UL) in February 1998, places the Company in full
compliance with requirements for the marketing of the EECP(r) system in the
countries of the European Union. The ISO 9001 Certificate covers the Company's
design and manufacturing operation for the EECP(r) system and recognizes that
the Company has established and operates a world-class quality system.
Compliance with current Good Manufacturing Practices ("GMP") regulations is
necessary to receive FDA approval to market new products and to continue to
market current products. The Company's manufacturing (including its contract
manufacturer), quality control and quality assurance procedures and
documentation are currently in compliance, but will be inspected and evaluated
periodically in the future by the FDA.
Third-Party Reimbursements
Health care providers, such as hospitals and physicians, that purchase or
lease medical devices, such as the EECP(r) system, for use on their patients
generally rely on third-party payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed with these devices. Even if a device
has FDA approval, Medicare and other third-party payers may deny reimbursement
if they conclude that the device is not cost-effective, is experimental or is
used for an unapproved indication.
In February 1999, the Health Care Financing Administration ("HCFA"), the
federal agency that administers the Medicare program for more than 38 million
beneficiaries, issued a national coverage policy for the use of the EECP(r)
system for patients with disabling angina pectoris who, in the opinion of a
cardiologist or cardiothoracic surgeon, are not readily amenable to surgical
interventions, such as balloon angioplasty and cardiac bypass. In July 1999,
HCFA communicated payment instructions for the EECP therapy to its contractors
around the country, stipulating coverage for services provided on or after July
1, 1999. HCFA has restricted coverage "to those enhanced external
counterpulsation systems that have sufficiently demonstrated their medical
effectiveness in treating patients with severe angina in well-designed clinical
trials. Note that a 510(k) clearance by the Food and Drug Administration does
not, by itself, satisfy this requirement." Presently, the Company's EECP(r)
system is the only such system to have undergone a rigorous test in a
controlled, double-blinded, randomized, multicenter study (MUST-EECP). The
results of this study were published in a peer-review journal, the Journal of
the American College of Cardiology ("JACC"), in June 1999.
The Company continues its dialogue with several large commercial health
care payers for the establishment of positive coverage policies. The Company
believes that its discussions with these third-party payers will, as a minimum,
continue to define circumstances that justify reimbursement on a case-by-case
basis and create a pathway for rapid review of patient data and determination of
medical necessity. To date, there have been many such reimbursements. The
Company is optimistic that, given the recent HCFA coverage and payment
decisions, as well as the publication of the results of MUST-EECP in JACC, many
of these third-party payers will issue positive coverage policies for EECP(r)
therapy in fiscal 2000. In anticipation of receiving approval for broad-based
coverage, the Company will pursue, through the cardiology profession, the
establishment of a Current Procedural Code ("CPT") specific to the EECP
procedure. Although such code is not essential and although there is no
assurance that a new code will be established, the Company believes that having
a CPT code specifically assigned to EECP will accelerate the processing of
reimbursement claims.
Limited availability of third-party coverage or the inadequacy of the
reimbursement level for treatment procedures using the EECP(r) system would
adversely affect the Company's business, financial condition and results of
operations. Moreover, the Company is unable to forecast what additional
legislation or regulation, if any, relating to the health care industry or
Medicare coverage and payment level may be enacted in the future or what effect
such legislation or regulation would have on the Company.
Insurance
The Company currently carries product liability insurance for an aggregate
coverage limit of $5,000,000. However, there can be no assurance that it will be
able to continue to secure such insurance in adequate amounts or at reasonable
premiums. Product liability insurance costs have been increasing rapidly and
dramatically during the last few years and many carriers are reducing coverage,
insisting upon large deductibles and contributions to defense costs, and
abandoning lines. Should the Company be unable to secure adequate product
liability insurance, its business could be seriously damaged by claims arising
out of the allegedly improper manufacture or use of its products.
Patents and Trademarks
A US patent (which expires in 2005) covering EECP(r) design and functions
was issued in June 1988 and it is now owned by the Company. Additional
international and domestic patent applications were filed in May 1993. A new US
patent was issued to the Company in October 1996 (which expires in 2013), and
several international patents have been issued since then. Such international
patents also expire in 2013. The Company expects additional international
patents to issue during fiscal 2000. Such patents cover several specific
enhancements to the current EECP(r) model.
Moreover, a trademark has been registered for the name "EECP", and in 1999
the Company filed for registration of additional trademarks, including "Natural
Bypass".
The Company pursues a policy of seeking patent protection, both in the
United States and abroad, for its proprietary technology. There can be no
assurance that the Company's patents will not be violated or that any issued
patents will provide protection that has commercial significance. Litigation may
be necessary to protect the Company's patent position. Such litigation may be
costly and time-consuming, and there can be no assurance that the Company will
be successful in such litigation. The loss or violation of the Company's EECP(r)
patents and trademarks could have a material adverse effect upon the Company's
business.
Employees
As of July 30, 1999, the Company employed forty-one full-time persons with
twelve in sales, five in clinical applications, ten in manufacturing and
service, five in marketing, and nine in administration (including its four
executive officers). None of the Company's employees are represented by a labor
union. The Company believes that its employee relations are satisfactory.
Manufacturing
The Company currently contracts for the manufacture of its current EECP(r)
system with VAMED Medical Instrument Company Ltd. ("VAMED"), a Chinese company,
subject to certain performance standards, as defined. The Company believes that
VAMED will be able to meet the Company's needs for EECP(r) systems.
ITEM TWO - PROPERTIES
The Company maintains its office and warehouse at 180 Linden Avenue,
Westbury, New York 11590, where approximately 18,000 square feet of space is
leased from a non-affiliated landlord through October 31, 2000 at an annual cost
of approximately $125,000. Upon the expiration of the lease, the Company, at its
option, may renew the lease for an additional five-year period or purchase the
facility at fair market value, as defined. Management believes that the
Company's facilities are adequate to meet its current needs and should continue
to be adequate for the foreseeable future.
ITEM THREE - LEGAL PROCEEDINGS
SEC Investigation
In February 1995, the Company received a subpoena duces tecum from the
broker-dealer branch of the Northeast Regional Office of the Securities and
Exchange Commission ("SEC") requesting certain documents from the Company
pursuant to a formal order of private investigation in connection with possible
registration and reporting violations. In July 1999, the Company was notified
that the investigation was terminated and that no enforcement action was
recommended to the SEC.
Litigation
In May 1996, an action was commenced in the Supreme Court of the State of
New York, Nassau County, against the Company, its directors and certain of its
officers and employees for the alleged breach of an agreement to appoint a
non-affiliated party as its exclusive distributor of EECP(r) systems. The
complaint sought damages in the approximate sum of $50,000,000, declaratory
relief and punitive damages. The Company denied the existence of any agreement,
and contended that the complaint was frivolous and without merit. The Company
also asserted substantial counterclaims. In August 1999, the motion for summary
judgment to dismiss the complaint in its entirety was granted. The time to
appeal the dismissal has not yet expired.
In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County, against the Company and other parties. The action seeks damages in the
sum of $5,000,000 based upon alleged injuries resulting from the alleged
negligence of the defendants in the use of the Company's product. The Company
and its insurer believe that the complaint is frivolous and without merit and
are vigorously defending the claims. Furthermore, management believes that the
damages sought under this complaint are fully covered by insurance. This matter
is in its preliminary stages and the Company is unable to establish the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.
In February 1999, an action was commenced in the Massachusetts Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000 based upon an alleged breach of a sales contract. The Company
believes that the complaint is frivolous and without merit and is vigorously
defending the claims. This matter is in its preliminary stages and the Company
is unable to establish the likelihood of an unfavorable outcome or the existence
or amount of any potential loss.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
ITEM FIVE - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM under the symbol VASO. The approximate number of record
holders of Common Stock as of July 30, 1999 was 882, which does not include
approximately 10,000 beneficial owners of shares held in the name of brokers or
other nominees. The table below sets forth the range of high and low trade
prices of the Common Stock as reported by the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM for the fiscal periods specified.
Fiscal 1999 Fiscal 1998
High Low High Low
First Quarter $1.688 $.750 $2.063 $1.563
Second Quarter $1.210 $.625 $3.563 $1.719
Third Quarter $2.063 $.656 $2.250 $1.719
Fourth Quarter $1.500 $1.000 $2.094 $1.500
The last bid price of the Company's Common Stock on July 30, 1999 was
$1.563 per share. The Company has never paid any cash dividends on its Common
Stock. While the Company does not intend to pay cash dividends in the
foreseeable future, payment of cash dividends, if any, will be dependent upon
the earnings and financial position of the Company, investment opportunities and
such other factors as the Board of Directors deems pertinent. Stock dividends,
if any, also will be dependent on such factors as the Board of Directors deems
pertinent.
ITEM SIX - SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the
five years ended May 31, 1999 as derived from the Company's audited consolidated
financial statements. These data should be read in conjunction with the
consolidated financial statements of the Company, related notes and other
financial information.
Year ended May 31,
1999 1998 1997 1996 1995
Statement of Operations
Revenues $6,024,263 $5,225,064 $2,096,562 $2,683,128 $-
-----------------------------------------------------------------------
Cost of sales and services 1,833,238 1,543,849 1,020,047 609,136
Selling, general & administrative expenses 5,946,405 5,689,704 4,155,552 3,738,789 2,172,555
Research and development expenses 706,934 1,595,970 1,045,184 364,455 598,178
Depreciation and amortization 463,859 363,101 333,482 269,443 117,851
Provision for losses 225,000 318,000
Interest and financing costs 11,880 4,057 8,511 515,451 2,523
Interest and other income, net (115,064) (169,422) (174,810) (171,001) (91,813)
-----------------------------------------------------------------------
8,847,252 9,027,259 6,612,966 5,326,273 3,117,294
-----------------------------------------------------------------------
Net loss (2,822,989) (3,802,195) (4,516,404) (2,643,145) (3,117,294)
Deemed dividend on preferred stock (864,000) (1,132,000)
Preferred stock dividend requirement (205,163) (96,717)
-----------------------------------------------------------------------
Loss applicable to common stock $(3,892,152) $(5,030,912) $(4,516,404) $(2,643,145) $(3,117,294)
=======================================================================
Net loss per common share
(basic and diluted) $(.08) $(.11) $(.10) $(.07) $(.10)
=======================================================================
Weighted average common shares
outstanding (basic and diluted) 49,371,574 47,873,711 46,297,142 39,226,258 30,519,640
=======================================================================
Balance Sheet
Working capital $2,174,774 $5,046,202 $1,981,331 $4,958,973 $747,070
Total assets $5,198,172 $7,345,246 $4,175,021 $8,246,151 $2,753,138
Long-term debt $0 $0 $0 $3,725,000 $0
Stockholders' equity (1) $3,153,533 $5,752,993 $3,020,962 $3,091,094 $2,259,991
- -------------------
(1) No cash dividends were declared during any of the above periods.
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal Years Ended May 31, 1999 and 1998
The Company generated revenues from the sale and lease of EECP(r) systems
of $6,024,000 and $5,225,000 for the years ended May 31, 1999 and 1998,
respectively. The Company incurred net losses of $2,823,000 and $3,802,000 for
fiscal 1999 and 1998, respectively (before deducting $864,000 and $1,132,000,
respectively, in deemed dividends on preferred stock representing the discount
resulting from the allocation of proceeds to the beneficial conversion feature
and the fair value of underlying warrants, and $205,000 and $97,000,
respectively, in dividend requirements, in connection with the Company's April
1998 and June 1997 financings).
The number of cardiology practices and hospitals interested in becoming
providers of enhanced external counterpulsation (EECP) has increased following
the announcement by the Health Care Financing Administration (HCFA) in February
1999 of its decision to extend Medicare coverage nationally to the Company's
noninvasive, outpatient treatment for coronary artery disease. HCFA is the
federal agency that administers the Medicare program for 38 million
beneficiaries. In addition, the results of the Company's randomized, controlled
multicenter clinical study of EECP ("MUST-EECP") was published in the June 1999
issue of the Journal of the American College of Cardiology. Interest in EECP
therapy has also been spurred by the announcement of the results of the
Company's one-year follow-up quality-of-life outcomes study at the American
Heart Association (AHA) annual meeting in November 1998 and additional reports
presented at the American College of Cardiology annual meeting in March 1999.
Revenues in fiscal 1999, particularly in the first two fiscal quarters, were
adversely affected by the nature of the commercial arrangements under which
those units were placed. The overall increase in Company revenues in fiscal 1999
were attributable to fourth quarter sales of $3,500,000, which were aided by the
HCFA decision described above. The Company expects, especially as a result of
HCFA's recent coverage decision and effective payment date of July 1, 1999, that
several placements made in the past under rental or fee-for-use arrangements
will convert to financed leases or outright sales in the first and second
quarters of fiscal 2000, although there can be no assurance that this will
occur.
Gross margins are dependent on a number of factors, particularly the mix of
EECP(r) units sold and rented during the period, the ongoing costs of servicing
such units, and certain fixed period costs, including facilities, payroll and
insurance. Gross margins are furthermore affected by the location of the
Company's customers and the amount and nature of training and other initial
costs required to place the EECP(r) system in service for customer use.
Accordingly, the gross margin realized during the current period may not be
indicative of future margins. Selling, general and administrative (SGA) expenses
for the years ended May 31, 1999 and 1998 were approximately $5,946,000 and
$5,690,000, respectively. The $256,000 increase in SGA expenses for the
comparable fiscal year resulted primarily from an increase in marketing
personnel, commissions and other selling expenses related to increased revenues.
Research and development (R&D) expenses in the year ended May 31, 1999 decreased
by $889,000 from the prior fiscal year. The decrease is related to significant
prior year expenses for the completion of the Company's multicenter clinical
study of EECP (completed in July 1997) and the front-loaded expenses for the
development of an upgraded EECP(r) system. Current period expenses relate to the
long-term follow-up phase of the multicenter clinical study, i.e., a
quality-of-life outcomes study (completed in July 1998), the expansion of the
International EECP Patient Registry at the University of Pittsburgh, and the
ongoing feasibility study in congestive heart failure, all of which, to some
extent, are expected to further affect operating results in fiscal 2000.
Fiscal Years Ended May 31, 1998 and 1997
The Company generated revenues from the sale and lease of its EECP(r)
system of $5,225,000 and $2,097,000 for the years ended May 31, 1998 and 1997,
respectively. The Company incurred net losses of $3,802,000 and $4,516,000 for
fiscal 1998 and 1997, respectively (excluding the fiscal 1998 recognition of a
$1,132,000 deemed dividend on preferred stock, representing the discount
resulting from the allocation of proceeds to the beneficial conversion feature
and the fair value of the underlying warrants, and $97,000 in dividend
requirements, in connection with the Company's June 1997 and April 1998
financings).
Gross margins are dependent on a number of factors, particularly the mix of
EECP(r) units sold and rented during the period, the ongoing costs of servicing
such units, and certain fixed period costs, including facilities, payroll and
insurance. Gross margins are furthermore affected by the location of the
Company's customers and the amount and nature of training and other initial
costs required to place the EECP(r) system in service for customer use.
Selling, general and administrative (SGA) expenses for the years ended May
31, 1998 and 1997 were approximately $5,690,000 and $4,156,000, respectively.
The $1,534,000 increase in SGA expenses in fiscal 1998 from fiscal 1997 resulted
primarily from increases in marketing expenses related to programs for the
dissemination of the Company's multicenter clinical study results, new
promotional and educational materials, and the expansion of the Company's direct
sales force.
Research and development (R&D) expenses in the year ended May 31, 1998
increased by $551,000 from the prior period. The increase was a result of
commitments and expenses related to the Company's multicenter clinical study of
EECP(r), which was completed in July 1997, the initiation of the development of
an upgraded model of the EECP(r) system, and a quality-of-life outcomes study
started in parallel with the multicenter clinical study.
Liquidity and Capital Resources
The Company has financed its fiscal 1999 operations primarily from the
proceeds of equity financings in fiscal 1998 (described below). At May 31, 1999,
the Company had a cash balance of $1,678,000 and working capital of $2,175,000,
compared to a cash balance of $4,368,000 and working capital of $5,046,000 at
May 31, 1998. The Company's operating activities used cash of $3,028,000 and
$3,858,000 for the years ended May 31, 1999 and 1998, respectively. Net cash
used during the year ended May 31, 1999 consisted primarily of losses from
operations, increases in accounts receivable and inventories, offset by
increases in accounts payable and accrued expenses.
Investing activities used net cash of $17,000 and $123,000 during the years
ended May 31, 1999 and 1998, respectively. The principal uses were for the
purchase of property and equipment. At May 31, 1999, the Company did not have
any material commitments for capital expenditures.
Financing activities provided cash of $355,000 and $6,596,000 during the
years ended May 31, 1999 and 1998, respectively. Financing activities during
fiscal 1999 consisted primarily of cash proceeds from the exercise of Company
common stock warrants by officers and directors.
In fiscal 1998, the Company issued an aggregate of 325,000 shares of newly
created 5% Series B and Series C Convertible Preferred Stock to one accredited
investor at a price of $20 per share, realizing net cash proceeds of $6,112,000.
Dividends due on such preferred stock have been, and are expected to be, paid in
shares of the Company's common stock. As of May 31, 1999, all of the Series B
preferred stock (150,000 shares) had been converted into 2,135,946 shares of the
Company's common stock and none of the Series C preferred stock had converted
into common stock. Subsequent to May 31, 1999, 28,000 shares of Series C
preferred stock, representing 16% of the total outstanding, were converted into
approximately 478,000 shares of the Company's common stock.
Management believes that its working capital position at May 31, 1999,
along with the ongoing commercialization of the EECP(r) system (including, but
not limited to, the conversion of current units under rental or use arrangements
to outright sales or financed leases), and possible further proceeds from the
exercise of options and warrants, will make it possible for the Company to
support its internal overhead expenses and to implement its business plans for
the next twelve months.
Impact of the Year 2000 on Information Systems
The Year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company's sole product is not expected to be affected by Year 2000 as
it does not rely on date- sensitive software or affected hardware. The Company's
current accounting and other systems were purchased "off- the-shelf". The
Company has or intends to timely update its accounting and other systems which
are determined to be affected by Year 2000 by purchasing Year 2000 compliant
software and hardware available from retail vendors at reasonable costs.
The Company has inquired of its major suppliers about their progress in
identifying and addressing problems related to the Year 2000. Certain of the
Company's major suppliers have informed the Company that they do not anticipate
problems in their business operations due to Year 2000 compliance issues. The
Company is unable to determine the extent to which Year 2000 issues will affect
its other suppliers, or the extent to which it would be vulnerable to the
suppliers' failure to remediate any of their Year 2000 problems. Although no
assurance can be given that all of the Company's major suppliers' systems will
be Year 2000 compliant, the Company believes that the risk is not significant.
ITEM EIGHT - FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements are filed as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM ELEVEN - EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
------------------------------------------------------
(1) See Index to Consolidated Financial Statements on page F-1 at beginning
of attached financial statements.
(2) The following Consolidated Financial Statement Schedule is included in
Part IV of this report:
Schedule II - Valuation and Qualifying Accounts (14) All other
schedules are omitted because they are not applicable, or not required, or
because the required information is included in the Consolidated Financial
Statements or notes thereto.
(c) Exhibits
(3) (a) Restated Certificate of Incorporation (2)
(b) By-Laws (1)
(4) (a) Specimen Certificate for Common Stock (1)
(b) Certificate of Designation of the Preferred Stock, Series A
(3)
(c) Certificate of Designation of the Preferred Stock, Series B
(10)
(d) Form of Rights Agreement dated as of March 9, 1995 between
Registrant and American Stock Transfer & Trust Company (6)
(e) Stock Purchase Agreement dated June 25, 1997 between
Registrant and JNC Opportunity Fund, Ltd. (10)
(f) Registration Rights Agreement dated June 25, 1997 between
Registrant and JNC Opportunity Fund, Ltd. (10)
(g) Form of Warrant dated June 25, 1997 (10)
(h) Certificate of Designation of the Preferred Stock, Series C
(12)
(i) Stock Purchase Agreement dated April 30, 1998 between
Registrant and JNC Opportunity Fund, Ltd. (12)
(j) Registration Rights Agreement dated April 30, 1998 between
Registrant and JNC Opportunity Fund, Ltd. (12)
(k) Form of Warrant dated April 30, 1998 (12)
(10) (a) 1992 Non-Qualified Stock Option Plan (2)
(b) 1995 Stock Option Plan (9)
(c) Outside Director Stock Option Plan (9)
(d) Employment Agreement dated July 1, 1994, as amended on
October 24, 1995 and March 12, 1998, between Registrant and
Anthony Viscusi (7) (8) (13)
(e) Offshore Securities Subscription Agreement dated December 2,
1994 between Registrant and Banca del Gottardo (3)
(f) Confidential Private Placement Memorandum dated December 5,
1994 (3)
(g) Employment Agreement dated January 23, 1995, as amended on
October 24, 1995 and March 12, 1998, between Registrant and
Anthony E. Peacock (4) (8) (13)
(h) Employment Agreement dated February 1, 1995, as amended
March 12, 1998, between Registrant and John C.K. Hui (4)
(13)
(i) Modification and Extension Agreement dated March 12, 1998
between Registrant and Joseph Giacalone (13)
(j) Note Purchase, Paying and Conversion Agency Agreement dated
July 5, 1995 between Registrant and Banca del Gottardo (5)
(k) 1997 Stock Option Plan (11)
(l) 1999 Stock Option Plan (14)
(22) Subsidiary of the Registrant
Percentage
Name State of Incorporation Owned by Company
---- ----------------------- ----------------
Viromedics, Inc. Delaware 61%
(23) Consent of Grant Thornton LLP (14)
(27) Financial Data Schedule (14)
- ---------
(1) Incorporated by reference to Registration Statement on Form S-18, No.
33-24095.
(2) Incorporated by reference to Registration Statement on Form S-1, No.
33-46377 (effective 7/12/94).
(3) Incorporated by reference to Report on Form 8-K dated November 14, 1994.
(4) Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(5) Incorporated by reference to Report on Form 8-K/A dated June 26, 1995.
(6) Incorporated by reference to Registration Statement on Form 8-A dated May
12, 1995.
(7) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31,1994.
(8) Incorporated by reference to Report on Form 8-K dated October 24, 1995.
(9) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 5, 1995.
(10) Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(11) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 4, 1997.
(12) Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(13) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31,1998.
(14) Filed herewith.
(b) Form 8-K Reports
----------------
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the sixteenth day of
August, 1999.
VASOMEDICAL, INC.
By: /s/ Anthony Viscusi
-----------------------------------------------
Anthony Viscusi
President, Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on August 16, 1999 by the following persons in
the capacities indicated:
/s/ Alexander G. Bearn Director
Alexander G. Bearn
/s/ David S. Blumenthal Director
David S. Blumenthal
/s/ Francesco Bolgiani Director
Francesco Bolgiani
/s/ Abraham E. Cohen Chairman of the Board
Abraham E. Cohen
/s/ Joseph A. Giacalone Secretary and Treasurer
Joseph A. Giacalone (Principal Financial and Accounting Officer)
/s/ John C.K. Hui Senior Vice President,
John C.K. Hui R&D and Manufacturing and Director
_____________________ Director
Kenneth W. Rind
/s/ E. Donald Shapiro Director
E. Donald Shapiro
/s/ Anthony Viscusi President, Chief Executive Officer and Director
Anthony Viscusi (Principal Executive Officer)
/s/ Zhen-sheng Zheng Director
Zhen-sheng Zheng
Vasomedical, Inc. and Subsidiary
Schedule II - Valuation and Qualifying Accounts
- --------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Balance at Additions Deductions Balance at
beginning of end of period
period ------------------------
(1) (2)
Charged to Charged to
costs and other accounts
expenses
- --------------------------------------------------------------------------------
Year ended
May 31, 1999
Allowance for
doubtful
accounts (a) $- $-
-----------------------------------------------------------------
Year ended
May 31, 1998
Allowance for
doubtful
accounts (a) $- $-
-----------------------------------------------------------------
Year ended
May 31, 1997
Allowance for
doubtful
accounts (a) $- $225,000 $(225,000)(b) $-
-----------------------------------------------------------------
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
Vasomedical, Inc. and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the
years ended May 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years ended May 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-14
F - 1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Vasomedical, Inc.
We have audited the accompanying consolidated balance sheets of Vasomedical,
Inc. and Subsidiary (the "Company") as of May 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended May 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of May 31, 1999 and 1998, and the consolidated results of their
operations and their consolidated cash flows for each of the three fiscal years
in the period ended May 31, 1999, in conformity with generally accepted
accounting principles.
We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended May 31, 1999. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Melville, New York
August 3, 1999
F - 2
Vasomedical, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
May 31,
1999 1998
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,678,175 $4,367,986
Accounts receivable 1,585,432 976,341
Inventories 594,093 678,302
Other current assets 177,713 164,826
---------- ----------
Total current assets 4,035,413 6,187,455
PROPERTY AND EQUIPMENT, net 571,368 352,902
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization
of 923,421 and 710,325 at May 31, 1999 and 1998, respectively 568,277 781,373
OTHER ASSETS 23,114 23,516
---------- ----------
$5,198,172 $7,345,246
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $705,640 $436,730
Accrued warranty and customer support expenses 382,000 240,000
Accrued professional fees 271,438 225,833
Accrued commissions 307,951 176,553
Dividends payable 193,610 62,137
---------- ----------
Total current liabilities 1,860,639 1,141,253
ACCRUED WARRANTY COSTS 114,000 334,000
OTHER LONG-TERM LIABILITIES 70,000 117,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 175,000 and 225,750 shares at May 31, 1999
and 1998, respectively, issued and outstanding (liquidation
preference of $3,500,000 and $4,515,000 at May 31, 1999
and 1998, respectively) 1,750 2,258
Common stock, $.001 par value; 110,000,000 shares authorized;
50,402,687 and 48,531,278 shares at May 31, 1999 and 1998,
respectively, issued and outstanding 50,403 48,531
Additional paid-in capital 37,749,483 36,458,155
Accumulated deficit (34,648,103) (30,755,951)
---------- ----------
3,153,533 5,752,993
---------- ----------
$5,198,172 $7,345,246
---------- ----------
The accompanying notes are an integral part of these statements.
F - 3
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended May 31,
------------------------------------
1999 1998 1997
---- ---- ----
Revenues
Equipment sales $5,335,200 $4,958,333 $1,625,150
Equipment rentals and services 689,063 266,731 471,412
---------- ---------- ----------
6,024,263 5,225,064 2,096,562
---------- ---------- ----------
Costs and expenses
Cost of sales and services 1,833,238 1,543,849 1,020,047
Selling, general and administrative 5,946,405 5,689,704 4,155,552
Research and development 706,934 1,595,970 1,045,184
Depreciation and amortization 463,859 363,101 333,482
Write-off of accounts receivable 225,000
Interest and financing costs 11,880 4,057 8,511
Interest and other income - net (115,064) (169,422) (174,810)
---------- ---------- ----------
8,847,252 9,027,259 6,612,966
---------- ---------- ----------
NET LOSS (2,822,989) (3,802,195) (4,516,404)
Deemed dividend on preferred stock (864,000) (1,132,000)
Preferred stock dividend requirement (205,163) (96,717)
---------- ---------- ----------
LOSS APPLICABLE TO
COMMON STOCK $(3,892,152) $(5,030,912) $(4,516,404)
---------- ---------- ----------
Net loss per common share (basic and diluted) $(.08) $(.11) $(.10)
---------- ---------- ----------
Weighted average common shares
outstanding (basic and diluted) 49,371,574 47,873,711 46,297,142
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
F - 4
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Total
Additional Deferred Accum- stock-
Preferred stock Common stock paid-in compen- ulated holders'
Shares Amount Shares Amount capital sation deficit equity
------ ------ ------ ------ ---------- -------- --------- --------
Balance at June 1, 1996 - - 42,204,113 $42,204 $24,427,338 $(169,813) $(21,208,635) $3,091,094
Conversion of debt 3,725,000 3,725 3,330,850 3,334,575
Exercise of warrants 852,890 853 941,031 941,884
Amortization of deferred compensation 169,813 169,813
Net loss (4,516,404) (4,516,404)
------- ------- ---------- ------ ---------- ------- ----------- ----------
Balance at May 31, 1997 - - 46,782,003 46,782 28,699,219 - (25,725,039) 3,020,962
Issuance of preferred stock 325,000 $3,250 6,108,650 6,111,900
Conversion of preferred stock (99,250) (992) 1,160,064 1,160 (168) -
Exercise of options and warrants 568,406 568 483,895 484,463
Deemed dividend on preferred stock 1,132,000 (1,132,000) -
Preferred stock dividend requirement (96,717) (96,717)
Common stock issued in lieu of
preferred stock dividends 20,805 21 34,559 34,580
Net loss (3,802,195) (3,802,195)
------- ------- ---------- ------ ---------- ------- ----------- ----------
Balance at May 31, 1998 225,750 2,258 48,531,278 48,531 36,458,155 - (30,755,951) 5,752,993
Conversion of preferred stock (50,750) (508) 975,882 976 (468) -
Exercise of warrants 825,000 825 354,175 355,000
Deemed dividend on preferred stock 864,000 (864,000) -
Preferred stock dividend requirement (205,163) (205,163)
Common stock issued in lieu of
preferred stock dividends 70,527 71 73,621 73,692
Net loss (2,822,989) (2,822,989)
------- ------- ---------- ------ ---------- ------- ----------- ----------
Balance at May 31, 1999 175,000 $1,750 50,402,687 $50,403 $37,749,483 - $(34,648,103) $3,153,533
------- ------- ---------- ------ ---------- ------- ----------- ----------
The accompanying notes are an integral part of this statement.
F - 5
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31,
------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Net loss $(2,822,989) $(3,802,195) $(4,516,404)
----------- ----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 463,859 363,101 333,482
Provision for losses 225,000
Amortization of deferred compensation 169,813
Changes in operating assets and liabilities
Accounts receivable (609,091) (919,693) 729,317
Inventories (367,791) 203,096 (551,740)
Other assets (12,485) (78,691) 74,924
Accounts payable, accrued expenses and other current liabilities 587,915 211,687 (113,978)
Other liabilities (267,000) 164,370 77,000
----------- ----------- -----------
(204,593) (56,130) 943,818
----------- ----------- -----------
Net cash used in operating activities (3,027,582) (3,858,325) (3,572,586)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (17,229) (123,056) (54,100)
----------- ----------- -----------
Net cash used in investing activities (17,229) (123,056) (54,100)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from exercise of options and warrants 355,000 484,463 941,884
Proceeds from issuance of preferred stock, net 6,111,900
Debt conversion fees (10,000)
----------- ----------- -----------
Net cash provided by financing activities 355,000 6,596,363 931,884
----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (2,689,811) 2,614,982 (2,694,802)
Cash and cash equivalents - beginning of year 4,367,986 1,753,004 4,447,806
----------- ----------- -----------
Cash and cash equivalents - end of year $1,678,175 $4,367,986 $1,753,004
----------- ----------- -----------
Non-cash investing and financing activities were as follows:
Deemed dividend on preferred stock $864,000 $1,132,000
Issuance of common stock in lieu of preferred dividends 73,692 34,580
Inventories transferred to property and equipment,
attributable to operating leases - net 452,000 71,647 $163,317
Issuance of common stock upon conversion of debt 3,344,575
The accompanying notes are an integral part of these statements.
F - 6
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1999, 1998 and 1997
NOTE A - BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated in Delaware in July 1987. During fiscal 1996,
the Company commenced the commercialization of its EECP(r) enhanced external
counterpulsation system ("EECP(r)"), a microprocessor-based medical device for
the noninvasive, atraumatic treatment of patients with coronary artery disease.
EECP(r) is marketed worldwide to hospitals, clinics and other cardiac health
care providers. To date, substantially all of the Company's revenues have been
generated from customers in the United States.
A summary of the significant accounting policies consistently applied in
the preparation of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary. Significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories consisting of equipment held for sale are stated at the lower
of cost or market; cost is determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful lives of the
assets, which range from three to seven years, on a straight-line basis.
Accelerated methods of depreciation are used for tax purposes. Leasehold
improvements are amortized over the shorter of the useful life of the related
leasehold improvement or the life of the related lease, generally five years.
Capitalized Cost in Excess of Fair Value of Net Assets Acquired
The capitalized cost in excess of the fair value of the net assets acquired
(goodwill) is being amortized on a straight-line basis over a period of seven
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill to determine possible impairment by considering current operating
results and comparing the carrying value to the anticipated undiscounted future
cash flows of the related assets.
F - 7
Revenue Recognition
The Company recognizes revenue from the sale of its EECP(r) system in the
period in which the Company fulfills its obligations under the sale agreement,
including delivery, installation and customer acceptance. The Company has also
entered into lease agreements for its EECP(r) system that are classified as
operating leases. Revenues from operating leases are recognized on a
straight-line basis over the life of the respective leases.
Concentrations of Credit Risk
The Company markets the EECP(r) system principally to hospitals, clinics
and other cardiac health care providers. The Company performs credit evaluations
of its customers' financial condition and does not require collateral.
Receivables are generally due within 60-90 days. Credit losses relating to
customers have historically been within management's expectations.
Warranty Costs
The Company provides for a warranty period on its EECP(r) system. The
Company accounts for estimated warranty costs at the time the related revenue is
earned. As the Company's experience with respect to the commercial use of the
EECP(r) system is limited, revisions to the Company's warranty cost estimates
may be necessary in the future.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance has been established to offset the deferred
tax assets as it is more likely than not that all, or some portion, of such
deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Common Share
Basic earnings (loss) per common share is computed by dividing net income
(loss) available to common stockholders by the weighted average number of shares
outstanding during the period. Diluted earnings (loss) per common share reflect
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock. Potential common shares from stock options,
warrants and convertible preferred stock are excluded in computing basic and
diluted net loss per share as their effects would be antidilutive.
Stock Compensation
The Company measures stock-based awards using the intrinsic value method.
As described in Note D, pro forma disclosure of the effect on net loss and net
loss per common share has been computed as if the fair value-based method had
been applied in measuring compensation expense.
Statements of Cash Flows
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of money market funds. The market value of the
cash equivalents approximates cost.
F - 8
NOTE B - PROPERTY AND EQUIPMENT
May 31,
-------
Property and equipment is summarized as follows: 1999 1998
---- ----
Office, laboratory and other equipment $273,354 $261,964
EECP(r) units under operating leases 624,000 186,287
Furniture and fixtures 81,232 81,232
Leasehold improvements 95,610 89,760
--------- --------
1,074,196 619,243
Less accumulated depreciation and amortization (502,828) (266,341)
--------- --------
$571,368 $352,902
--------- --------
NOTE C - STOCKHOLDERS' EQUITY AND WARRANTS
Fiscal 1997
In June 1996, $3,725,000 in outstanding principal amount of 7% five-year
Convertible Debentures (the "Notes") was converted into 3,725,000 shares of the
Company's common stock. As a result of such conversion, accrued interest of
$239,000 was also canceled in accordance with the terms of the Note agreement.
The effect of this conversion was to increase stockholders' equity by
$3,335,000, consisting of the debt conversion ($3,725,000) and accrued interest
($239,000), net of unamortized loan costs and conversion fees ($629,000).
Fiscal 1998
On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Cumulative Convertible Preferred Stock, $.01 par value, to one
accredited investor pursuant to Regulation D under the Securities Act of 1933 at
a price of $20 per share, for net cash proceeds of $2,818,000. The convertible
preferred stock had no voting rights and was convertible into common stock of
the Company at an effective conversion price of the lower of (i) $2.18 per share
or (ii) 85% of the average closing bid of the Company's common stock for the
five (5) trading days immediately preceding the conversion date, as defined in
the Certificate of Designation of the convertible preferred stock. In addition,
the investor was granted five-year warrants to purchase 405,405 shares of common
stock at an exercise price of $2.18 per share. The Company recorded a deemed
dividend of $857,000 in the first quarter of fiscal 1998, representing the
discount resulting from the allocation of proceeds to the beneficial conversion
feature and the fair value of the underlying warrants. Such deemed dividend was
recognized from the date of issuance through the date such preferred stock was
first convertible. In connection with this transaction, the Company issued
five-year warrants to the broker/finder to purchase 150,000 shares of common
stock at an exercise price of $2.18 per share. These warrants were fair valued
at $123,000. During fiscal 1998, 99,250 shares of Series B preferred stock were
converted into 1,160,064 shares of common stock.
On April 30, 1998, the Company completed a second tranche of financing with
the same accredited investor and issued 175,000 shares of newly created 5%
Series C Cumulative Convertible Preferred Stock, $.01 par value, pursuant to
Regulation D under the Securities Act of 1933 at a price of $20 per share, for
net cash proceeds of $3,294,000. The convertible preferred stock has no voting
rights and is convertible into common stock of the Company at an effective
conversion price of the lower of (i) $2.08 per share or (ii) 85% of the average
closing bid of the Company's common stock for the five (5) trading days
immediately preceding the conversion date (the "Average Closing Price"), as
defined in the Certificate of Designation of the convertible preferred stock. In
addition, the investor was granted five-year warrants to purchase 413,712 shares
of common stock at an exercise price of $2.08 per share. The Company has
estimated the value of the deemed dividend, representing the discount resulting
from the allocation of proceeds to the beneficial conversion feature and the
fair value of the underlying warrants, to approximate $936,000. Such deemed
dividend was recognized from the date of issuance through the date such
preferred stock was first convertible (on or about August 15, 1998).
Accordingly, the Company recognized a deemed dividend of $275,000 in the fourth
quarter of fiscal 1998 and the $661,000 remaining deemed dividend in the first
quarter of fiscal 1999. In connection with this transaction, the Company issued
five-year warrants to the broker/finder to purchase 175,000 shares of common
stock at an exercise price of $2.08 per share. These warrants were fair valued
at $135,000.
F - 9
Fiscal 1999
Based upon negotiations between the Company and the holder of the Series
C preferred stock in December 1998 relating to the delayed effectiveness of a
registration statement covering the underlying shares of common stock, the
conversion price with respect to the Series C preferred stock has been reduced
to the lower of (i) $2.00 per share or (ii) 81% of the Average Closing Price.
The Company has estimated the incremental value of the deemed dividend,
representing the additional discount resulting from the allocation of proceeds
to the beneficial conversion feature, to approximate $203,000. Accordingly, the
Company recognized this incremental deemed dividend in the second quarter of
fiscal 1999. In fiscal 1999, the remaining balance of 50,750 shares of Series B
preferred stock were converted into 975,882 shares of common stock. Subsequent
to May 31, 1999, 28,000 shares of Series C preferred stock were converted into
477,912 shares of common stock.
Warrants
- --------
Warrant activity for the years ended May 31, 1997, 1998 and 1999 is
summarized as follows:
Non-employee
Directors Employees Consultants Total Price Range
------------ --------- ----------- ----- -----------
Balance at June 1, 1996 1,175,000 1,975,000 2,187,100 5,337,100 $.25 - $1.81
Exercised - (25,000) (827,890) (852,890) $.41 - $1.81
Canceled/retired - - (141,209) (141,209) $1.10 - $1.81
--------- --------- --------- --------- -------------
Balance at May 31, 1997 1,175,000 1,950,000 1,218,001 4,343,001 $.25 - $1.50
Issued - - 1,144,117 1,144,117 $2.08 - $2.18
Exercised (50,000) (30,000) (483,406) (563,406) $.25 - $2.18
Canceled/retired - - (50,000) (50,000) $1.50
--------- --------- --------- --------- -------------
Balance at May 31, 1998 1,125,000 1,920,000 1,828,712 4,873,712 $.38 - $2.18
Exercised (300,000) (525,000) - (825,000) $.38 - $.45
Canceled/retired (425,000) (120,000) (450,000) (995,000) $.91 - $1.50
--------- --------- --------- --------- -------------
Balance at May 31, 1999 400,000 1,275,000 1,378,712 3,053,712 $.38 - $2.18
--------- --------- --------- --------- -------------
Number of shares exercisable 400,000 1,275,000 1,378,712 3,053,712 $.38 - $2.18
--------- --------- --------- --------- -------------
The weighted-average fair value of warrants granted during fiscal 1998 was $.80.
The following table summarizes information about warrants outstanding
and exercisable at May 31, 1999:
Warrants Outstanding and Exercisable
----------------------------------------------------
Weighted
Number Outstanding Average Weighted
and Exercisable at Remaining Average
May 31, 1999 Contractual Life Exercise Price
Range of Exercise Prices (yrs.)
- -----------------------------------------------------------------------------------
$.38 - $.45 1,675,000 1.7 $.42
$.91 200,000 7.4 $.91
$1.44 100,000 1.8 $1.44
$2.08 - $2.18 1,078,712 3.5 $2.13
---------------------------------------------------
3,053,712 2.7 $1.09
---------------------------------------------------
NOTE D - OPTION PLANS
1995 Stock Option Plan
- ----------------------
In May 1995, the Company's stockholders approved the 1995 Stock Option
Plan for officers and employees of the Company, for which the Company reserved
an aggregate of 1,500,000 shares of common stock. In December 1997, the
Company's Board of Directors terminated the 1995 Stock Option Plan.
Outside Director Stock Option Plan
- ----------------------------------
In May 1995, the Company's stockholders approved an Outside Director
Stock Option Plan for non-employee directors of the Company, for which the
Company reserved an aggregate of 300,000 shares of common stock. In December
1997, the Company's Board of Directors terminated the Outside Director Stock
Option Plan.
F - 10
1997 Stock Option Plan
- ----------------------
In December 1997, the Company's stockholders approved the 1997 Stock
Option Plan (the "1997 Plan") for officers, directors, employees and consultants
of the Company, for which the Company has reserved an aggregate of 1,800,000
shares of common stock. The 1997 Plan provides that it will be administered by a
committee of the Board of Directors of the Company and that the committee will
have full authority to determine the identity of the recipients of the options
and the number of shares subject to each option. Options granted under the 1997
Plan may be either incentive stock options or non-qualified stock options. The
option price shall be 100% of the fair market value of the common stock on the
date of the grant (or in the case of incentive stock options granted to any
individual principal stockholder who owns stock possessing more than 10% of the
total combined voting power of all voting stock of the Company, 110% of such
fair market value). The term of any option may be fixed by the committee but in
no event shall exceed ten years from the date of grant. Options are exercisable
upon payment in full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the option. The term for
which options may be granted under the 1997 Plan expires August 6, 2007.
In September 1998, the Board of Directors granted stock options under the
1997 Plan to an employee to purchase 90,000 shares of common stock at an
exercise price of $.75 per share (which represented the fair market value of the
underlying common stock at the time of grant).
In January 1999, the Company's Board of Directors increased the number of
shares authorized for issuance under the 1997 Plan by 1,000,000 shares to
2,800,000 shares. In addition, the Board of Directors granted stock options
under the 1997 Plan to directors, officers, employees and a consultant to
purchase an aggregate of 830,000 shares, 470,000 shares, 313,500 shares and
150,000 shares of common stock, respectively, at an exercise price of $.875 per
share (which represented the fair market value of the underlying common stock at
the time of grant). The stock options granted to the consultant are contingent
upon meeting certain performance criteria. Accordingly, the Company has not
recorded any charge to operations in fiscal 1999 pertaining to such options
granted to the consultant.
In July 1999, the Company's Board of Directors approved the 1999 Stock
Option Plan (the "1999 Plan"), for which the Company reserved an aggregate of
2,000,000 shares of common stock. In addition, the Board of Directors granted
stock options under the 1999 Plan to certain officers and employees to purchase
an aggregate of 175,000 shares and 150,000 shares of common stock, respectively,
at an exercise price of $1.69 per share, and to an employee to purchase 30,000
shares of common stock at an exercise price of $1.53 per share (which
represented the fair market value of the underlying common stock at the time of
the respective grants). Subsequent to May 31, 1999, options and warrants to
purchase 70,175 shares of common stock were exercised, aggregating $51,250 in
proceeds to the Company.
Activity under all the plans is summarized as follows:
Outstanding Options
-------------------------------------------------------------
Shares Available Number of Number of Exercise Weighted Average
for Grant Shares Price per Share Exercise Price
--------------------------------------------------------------------------------
Balance at June 1, 1996 1,722,582 102,418 $.78 - $1.03 $.81
Options granted (943,675) 943,675 $2.00 - $3.44 $3.21
Options canceled 20,000 (20,000) $3.44 $3.44
--------------------------------------------------------------------------------
Balance at May 31, 1997 798,907 1,026,093 $.78 - $3.44 $2.97
Shares authorized 1,800,000 - - -
Plans terminated (699,357) - - -
Options granted (1,054,050) 1,054,050 $1.77 - $2.44 $1.91
Options exercised - (5,000) $1.03 $1.03
Options canceled 10,000 (15,000) $1.91 - $3.44 $2.42
--------------------------------------------------------------------------------
Balance at May 31, 1998 855,500 2,060,143 $.78 - $3.44 $2.44
Shares authorized 1,000,000
Options granted (1,853,500) 1,853,500 $.75 - $.88 $.87
Options canceled 38,500 (58,500) $.88 - $1.91 $1.36
--------------------------------------------------------------------------------
Balance at May 31, 1999 40,500 3,855,143 $.75 - $3.44 $1.70
--------------------------------------------------------------------------------
F - 11
The following table summarizes information about stock options
outstanding and exercisable at May 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
May 31, 1999 Contractual Life Exercise Price May 31, 1999 Exercise Price
Range of Exercise Prices (yrs.)
- -------------------------------------------------------------------------------------------------------------
$.75 - $.88 1,918,918 6.8 $.87 907,418 $.87
$1.77 - $2.44 1,169,225 8.0 $1.93 477,225 $1.94
$3.44 767,000 7.0 $3.44 523,000 $3.44
-------------------------------------------------------------------------------
3,855,143 7.2 $1.70 1,907,643 $1.84
-------------------------------------------------------------------------------
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for stock-based awards. Pursuant to APB 25, the Company
generally recognizes no compensation expense with respect to such awards. Pro
forma information regarding net income and earnings per share is required for
awards granted as if the Company had accounted for its stock-based awards under
the fair value method of SFAS No. 123. The fair value of the Company's
stock-based awards was estimated using the Black-Scholes option valuation model.
The fair value of the Company's stock-based awards was estimated assuming no
expected dividends and the following weighted-average assumptions:
Fiscal year ended May 31, 1999 1998 1997
------------------------- ---- ---- ----
Expected life (years) 5 5 5
Expected volatility 80% 85% 85%
Risk-free interest rate 4.4% 5.68% 6.69%
The following are the pro forma net loss and net loss per share amounts
for fiscal 1999, 1998 and 1997, as if compensation expense for stock-based
awards had been determined based on their estimated fair value at the date of
grant:
1999 1998 1997
---- ---- ----
Pro forma net loss $(5,534,569) $(5,702,635) $(5,607,637)
Pro forma net loss per share $(.11) $(.12) $(.12)
The weighted-average fair value of options granted during fiscal 1999,
1998 and 1997 was $.58, $1.34 and $2.29, respectively. At May 31, 1999, there
were approximately 17,000,000 remaining authorized shares of common stock after
reserves for all stock option plans, stock warrants, convertible preferred stock
and shareholders' rights.
NOTE E - REVENUE CONCENTRATIONS
In March 1996, the Company entered into an exclusive agreement with a third
party, whereby such third party would purchase, subject to credit approval, the
EECP(r) system on a non-recourse basis and lease the system to the Company's
customers. During fiscal 1998 and 1997, approximately 13% and 54%, respectively,
of the Company's revenues were derived through such transactions. There were no
revenues derived from such transactions during fiscal 1999.
In fiscal 1999 and 1998, the Company had sales to one customer in each
period, accounting for 21% and 10% of the Company's revenues, respectively. In
fiscal 1997, the Company had sales to two customers, aggregating 43% of the
Company's revenues.
F - 12
NOTE F - INCOME TAXES
Deferred tax assets or liabilities are computed based on the impact of
"temporary differences" between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. The tax effects of
temporary differences which give rise to deferred tax assets are summarized as
follows:
May 31,
---------------------------
1999 1998
---- ----
Deferred tax assets
Net operating loss and other carryforwards $11,913,000 $10,908,000
Accrued compensation 92,000 120,000
Other 247,000 268,000
----------- -----------
Total gross deferred tax assets 12,252,000 11,296,000
Valuation allowance (12,252,000) (11,296,000)
----------- -----------
$ - $ -
----------- -----------
Management has established a valuation allowance for the full amount of
the deferred tax assets based on uncertainties with respect to the Company's
ability to generate future taxable income.
At May 31, 1999, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $33,000,000, expiring at various
dates from 2003 through 2019.
NOTE G - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company maintains employment agreements with its executive officers,
expiring at various dates through January 2002. Such employment agreements
provide, among other things, that in the event there is a change in the control
of the Company, as defined therein, or in any person directly or indirectly
controlling the Company, as also defined therein, the employee has the option,
exercisable within six months of becoming aware of such event, to terminate his
employment agreement. Upon such termination, the employee has the right to
receive as a lump-sum payment certain compensation remaining to be paid for the
balance of the term of the agreement.
Approximate aggregate minimum annual compensation obligations under
active employment agreements at May 31, 1999, are summarized as follows:
Fiscal Year Amount
----------- ------
2000 $569,000
2001 391,000
2002 93,000
----------
$1,053,000
----------
Leases
The Company occupies office and warehouse space under a noncancelable
operating lease which expires on October 31, 2000. Rent expense was $125,000,
$121,000 and $118,000 in fiscal 1999, 1998 and 1997, respectively.
Approximate aggregate minimum annual obligations under this lease
agreement and other equipment leasing agreements at May 31, 1999 are summarized
as follows:
Fiscal Year Amount
----------- ------
2000 159,000
2001 81,000
2002 10,000
2003 8,000
--------
$258,000
--------
F - 13
SEC Investigation
In February 1995, the Company received a subpoena duces tecum from the
broker-dealer branch of the Northeast Regional Office of the Securities and
Exchange Commission ("SEC") requesting certain documents from the Company
pursuant to a formal order of private investigation in connection with possible
registration and reporting violations. In July 1999, the Company was notified
that the investigation was terminated and that no enforcement action was
recommended to the SEC.
Litigation In May 1996, an action was commenced in the Supreme Court of the
State of New York, Nassau County, against the Company, its directors and certain
of its officers and employees for the alleged breach of an agreement to appoint
a non-affiliated party as its exclusive distributor of EECP(r) systems. The
complaint sought damages in the approximate sum of $50,000,000, declaratory
relief and punitive damages. The Company denied the existence of any agreement,
and contended that the complaint was frivolous and without merit. The Company
also asserted substantial counterclaims. In August 1999, the motion for summary
judgment to dismiss the complaint in its entirety was granted. The time to
appeal the dismissal has not yet expired.
In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County, against the Company and other parties. The action seeks damages in the
sum of $5,000,000 based upon alleged injuries resulting from the alleged
negligence of the defendants in the use of the Company's product. The Company
and its insurer believe that the complaint is frivolous and without merit and
are vigorously defending the claims. Furthermore, management believes that the
damages sought under the complaint are fully covered by insurance. This matter
is in its preliminary stages and the Company is unable to establish the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.
In February 1999, an action was commenced in the Massachusetts Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000 based upon an alleged breach of a sales contract. The Company
believes that the complaint is frivolous and without merit and is vigorously
defending the claims. This matter is in its preliminary stages and the Company
is unable to establish the likelihood of an unfavorable outcome or the existence
or amount of any potential loss.
401(k) Plan
In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan to
provide retirement benefits for its employees. As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides tax-deferred salary deductions
for eligible employees. Employees are eligible to participate in the next
quarter enrollment period after employment. Participants may make voluntary
contributions to the plan up to 15% of their compensation. No Company
contributions were made for the fiscal years ended May 31, 1999, 1998 and 1997.
Agreement with VAMED
In connection with an acquisition in 1995, the Company assumed commitments
under an agreement, expiring November 2008, with VAMED Medical Instrument
Company Ltd. ("VAMED") (formerly Foshan Analytical Instrument Factory), a
Chinese company, for the contract manufacture of its current EECP(r) system,
subject to certain performance standards, as defined. At May 31, 1999, the
Company had outstanding purchase commitments of $168,000. The Company believes
that VAMED will be able to meet the Company's needs for EECP(r) systems.
F - 14
EXHIBIT INDEX
Exhibit No.
(10) 1999 Stock Option Plan
(23) Consent of Grant Thornton LLP
(27) Financial Data Schedule