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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, 2000
[ ] 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 31, 2000, based on the average price on that date, was
$218,842,000. At July 31, 2000, the number of shares outstanding of the issuer's
common stock was 56,339,042.
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 research, development and commercialization of systems and
equipment designed to provide non-invasive treatment of patients with
cardiovascular disease. The Company's lead product, its Enhanced External
Counterpulsation (EECP ) system, is a patented microprocessor-based device that
delivers a retrograde arterial pressure wave to the heart, increasing coronary
perfusion and reducing ventricular afterload. EECP therapy offers dramatic
relief of symptoms to angina sufferers who no longer respond to medication or
are poor candidates for invasive revascularization procedures such as bypass
surgery or balloon angioplasty. This system is marketed worldwide to hospitals,
clinics and other cardiac health care providers. EECP received marketing
clearance from the Food and Drug Administration (FDA) under a 510(k) premarket
notification in February 1995.
The EECP Enhanced External Counterpulsation System
General Discussion
Cardiovascular disease (CVD) is the leading cause of death in the world.
CVD claimed 953,110 lives in the United States in 1997 and was responsible for 1
of every 2.4 deaths. The American Heart Association reports in its 2000 Heart
and Stroke Statistical Update that, if high blood pressure is included,
approximately 60 million Americans suffer from some form of cardiovascular
disease. Among these, 12 million have coronary artery disease, 6.2 million of
whom suffer from angina pectoris, a painful and often debilitating complication
caused by obstruction of the arteries which supply blood to the myocardium or
heart muscle. Medications, including vasodilators, are often prescribed to
increase blood flow to the coronary arteries. When drugs fail or cease to
correct the problem, invasive revascularization procedures such as percutaneous
transluminal coronary angioplasty (PTCA), stenting and coronary artery bypass
grafting (CABG) are employed. Despite the success of these procedures in
lowering the death rate from cardiovascular disease and allowing many to live
longer lives, restenosis or reocclusion of the affected vessels remains a
problem. Restenosis rates currently reported in the literature for angioplasty
and stenting range from 18%-30%. Half of all vein grafts in coronary artery
bypass procedures exhibit localized or diffuse narrowings within approximately
ten years.
In February 1995, the Company received 510(k) clearance to market the
second generation version of this system, the MC2, which incorporated a number
of technological improvements over the original system. The FDA's clearance in
both cases was for the use of EECP therapy in the treatment of patients
suffering from stable or unstable angina pectoris, acute myocardial infarction
and cardiogenic shock.
The Company has, for several years now, focused its resources on the angina
market. According to 2000 data published by the American Heart Association,
there are approximately 6.2 million patients in the U.S. who suffer from angina
with an additional 350,000 new cases seen annually.
Data from the AHA indicates that congestive heart failure (CHF) affects
nearly 5 million Americans and is the single most frequent cause of
hospitalization among people age 65 and older. The incidence of new cases of
heart failure is 400,000 annually and rising. An aging population and an
increase in the number of patients who survive heart attacks are the primary
engines behind this rise in new cases. For most CHF patients, there are few
accepted forms of treatment beyond medical management, though left ventricular
assist devices (LVADs) and other implantable devices are continuing to advance,
particularly as a bridge to transplant.
The potential annual patient pool for EECP treatments in the U.S. alone is
over one million patients. The unrealized opportunity for EECP is significant
and could approach $150 - $200 million per annum within five years.
The System
The MC2 is an advanced treatment system utilizing fundamental hemodynamic
principles to relieve angina pectoris. Treatment is administered to patients in
daily one hour sessions, 5 days per week over seven weeks for a total of 35
treatments.
During EECP therapy, the patient lies on a bed while wearing three sets of
inflatable pressure cuffs, resembling oversized blood pressure cuffs, on the
calves, the upper and lower thighs and buttocks. The cuffs inflate sequentially
- -- via computer-interpreted ECG signals -- starting from the calves and
proceeding upward during the resting phase of each heartbeat (diastole). When
the heart pumps (systole), all three cuffs instantaneously deflate. This
sequential "squeezing" of the legs creates a pressure wave that forces blood
from the legs to the heart. To coordinate the inflation and deflation of the
cuffs with the beating heart, the heart rate and rhythm are monitored
constantly. Precise timing means that each wave of blood is delivered to the
heart when it will do the most good. This surge of circulation insures that the
heart does not have to work as hard to pump large amounts of blood through the
body, and that more blood is forced into the coronary arteries supplying energy
to the heart muscle or myocardium.
While the precise mechanism of action remains unknown, there is strong
hypothetical evidence to suggest that EECP triggers a neuro-hormonal response
that induces the production of growth factors and dilates existing blood
vessels, thus fostering angiogenisis the development of new collateral blood
vessels. These tiny collateral vessels, it is theorized, then bypass current
blockages and feed blood to areas of the heart that are receiving an inadequate
supply.
Circulation improvement is further induced or reinforced by the fact that a
course of EECP treatment represents sustained and moderately vigorous exercise,
even though passive in nature, that is much more than the often sedentary
patient has been able to attempt previously.
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. Data reported in the April 2000 issue of Clinical Cardiology showed
a five year survival rate for those who respond to EECP therapy of 88%, a rate
similar to those seen in contemporary surgical bypass and angioplasty trials,
despite the fact that many of the patients who underwent EECP therapy had
already failed previous attempts at revascularization. In addition, data
collected by the International EECP Patient Registry at the University of
Pittsburgh Graduate School of Public Health points to sustained lowering of
anginal severity and frequency of attacks at six and twelve months
post-treatment.
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 forty 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 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 (i.e. intra-aortic balloon pumping) 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" sequentially inflating
EECP device that incorporated a third cuff for the buttocks. Not only did a
course of treatment with EECP 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 the state University of
New York at Stony Brook (Stony Brook) to undertake a number of open studies with
EECP between 1989 and 1996 to reproduce the Chinese results, using both
subjective and objective endpoints. These studies, though open and
non-randomized, showed statistical improvement in exercise tolerance by patients
as evidenced by thallium-stress testing and partial or complete resolution of
coronary perfusion defects as evidenced by radionuclide imaging studies. All of
these results have been reported in the literature and support the assertion
that EECP therapy is an effective and durable treatment for patients suffering
from chronic angina pectoris.
In 1995, the Company began a large randomized, controlled and
double-blinded multicenter clinical study (MUST-EECP) at four leading university
hospitals in the United States to confirm the patient benefits observed in the
open studies conducted at Stony Brook and to provide definitive scientific
evidence of EECP therapy's effectiveness. Initial participating sites included
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 the Yale University School of Medicine. These institutions were later joined
by Loyola University, the University of Pittsburgh and Grant/Riverside Methodist
Hospitals. MUST-EECP was completed in July 1997 and the results presented at the
annual meetings of the American Heart Association in November 1997 and the
American College of Cardiology in March 1998. The results of MUST-EECP were
published in the Journal of the American College of Cardiology (JACC), a major
peer-review medical journal, in June 1999.
This ground-breaking 139 patient study, which included a placebo control
group, showed once and for all that EECP therapy was a safe and effective
treatment option for patients suffering from angina pectoris, including those on
maximal medication and for whom invasive revascularization procedures were no
longer an option. The results of the MUST-EECP study confirmed the clinical
benefits described in earlier open trials, namely a decline in anginal
frequency, an increase in the ability to exercise and a decrease in
exercise-induced signs of myocardial ischemia. Data collected by the
International EECP Patient Registry (IEPR) at the University of Pittsburgh
Graduate School of Public Health closely mirror the results seen in the
MUST-EECP trial.
In fiscal 1999, the Company completed a long-term quality-of-life study
with EECP in the same institutions and with the same patients that participated
in MUST-EECP. The positive results of this study were presented at major
scientific meetings, and a publication in a major peer-review journal is
expected during fiscal 2001.
As part of its program to expand the therapy's indications for use beyond
the treatment of angina, the Company applied for and received FDA approval in
April 1998 to study, under an Investigational Device Exemption (IDE) protocol,
the application of EECP in the treatment of congestive heart failure (CHF), a
disabling condition affecting nearly 5 million Americans. CHF is the most
frequent cause of hospitalization for those over 65 years of age. The study was
conducted simultaneously at the University of Pittsburgh, the University of
California San Francisco and the Grant/Riverside Methodist Hospitals in
Columbus, Ohio, and the results presented at the 49th Scientific Sessions of the
American College of Cardiology in March 2000. This pilot study concluded that
EECP therapy was beneficial to left ventricular function in heart failure
patients and may be a useful adjunct to current medical therapy.
In July 2000, an IDE supplement to proceed with a pivotal study to
demonstrate the efficacy of EECP therapy in most types of heart failure patients
was approved with conditions by the FDA, to which the Company will agree. This
study is scheduled to begin patient enrollment in the fall of 2000, and is
expected to take two years to complete. The study will involve up to eighteen
centers and enroll approximately 200 patients.
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 following heart attacks,
while deaths caused by the disease increased 116% between 1979 and 1995.
The International EECP Patient Registry at the University of Pittsburgh
Graduate School of Public Health was established in January 1998 to track the
outcomes of patients who have undergone EECP therapy. As of this publication,
eighty centers participate in the Registry and data from over 2,700 patient
records has been entered. The IEPR is a vital source of information about the
effectiveness of EECP in a real-world environment for the medical community at
large. For this reason, the Company will continue to work with the Registry to
publicize data which may assist clinicians in delivering optimal care to
patients. Recently released data from the IEPR shows that patients continue to
receive dramatic benefit at six and twelve months following the completion of
their course of EECP therapy.
The Company's Plans
The Company's short- and long-term plans are to:
(a) Increase its penetration of the current angina market through the
initiation of a dramatically stepped-up campaign to market the
benefits of EECP therapy directly to patients and clinicians.
(b) Engage in educational campaigns designed to highlight the
cost-effectiveness and quality-of-life advantages of EECP therapy to
State Welfare (Medicaid) agencies, commercial insurance companies, and
managed care organizations.
(c) Initiate a pivotal multicenter study for the use of EECP in CHF in
fiscal 2001.
(d) Continue product development efforts to improve the EECP system, seek
additional patents and initiate in-house assembly during fiscal 2001.
(e) Publish the results of its long-term quality-of-life outcomes study in
a major peer-review medical journal in fiscal 2001.
(f) Continue to work with the International EECP Patient Registry at the
University of Pittsburgh Graduate School of Public Health to publicize
key information relating to patient outcomes.
(g) Pursue additional clinical indications for EECP therapy.
(h) Establish a distribution network in international markets.
(i) Continue to establish and support academic reference centers in the
United States and overseas in order to accelerate the growth and
prestige of EECP 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.
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
Congestive Heart Failure or CHF-A condition in which the heart is unable to pump
blood efficiently enough to meet the body's demands. The circulatory
systems of CHF patients become congested when the heart fails to empty its
chambers sufficiently, leading to an accumulation in the chest and lower
limbs
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 - "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 sells its EECP systems to treatment providers in the United
States through a direct sales force that is supported by an in-house service
organization. The Company's sales force has tripled since January 2000 and is
now comprised of sixteen sales representatives and two area directors. The sales
team will continue to grow at a pace necessary to achieve its growth objectives.
Independent representatives, who have been employed to extend the reach of the
Company's sales effort in the past, will be phased out as sufficient geographic
coverage is achieved by the Company's direct sales force. The efforts of the
Company's sales organization is further supported by a field-based staff of six
clinical educators who are responsible for the on-site training and
certification of physicians and therapists as new centers are established.
Training generally takes three days. These centers are closely monitored and
their charts reviewed for several weeks following the initial training of the
center's clinicians to ensure treatment guidelines are being appropriately
followed. This clinical group is also responsible for training and certification
of new personnel at each site as well as for updating providers on new clinical
developments relating to EECP therapy.
The expanded sales force will allow the Company to focus more intently on
sales to National Accounts and in a somewhat more formal manner. The Company
will continue to develop its relationships with such major U.S. hospital groups
as Tenet Healthcare, Amerinet, Kaiser Permanente, Health South, Columbia HCA,
the Veterans Administration and with other cardiac care operations that have
plans for nationwide expansion.
Vasomedical's continued transformation from a research and development
organization to a more commercial, market-driven company will be reflected in
its marketing activities planned for 2001. Included among these activities are a
national media campaign and a WEB-based promotional program designed to
accelerate patient-driven demand for the therapy while heightening awareness
among clinicians. Additional activities will include journal advertising,
publication of EECP-related newsletters, support of physician education
programs, exhibition at national, international and regional medical
conferences, as well as sponsorship of seminars at professional association
meetings. All of these programs are designed to support the Company's field
sales organization.
The Company employs service technicians responsible for the installation
of EECP 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 its
customers under annual service contracts or on a fee-for-service basis.
International Operations
The Company's key objective is to appoint distributors in exchange for
exclusive marketing rights to EECP in their respective countries. The Company
currently has distribution agreements for Canada, Japan, the Middle East,
Greece, the United Kingdom and Italy. 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,
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
approvals. In July 2000, the Company received its medical device license to
market its EECP system in Canada. However, there can be no assurance that all of
the Company's distributors will be successful in obtaining proper approvals for
the EECP 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 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 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 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 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 system will ultimately
require PMA approval for continued commercialization under its present labeling;
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. The Company received notice in June 2000 that its EECP system, when
used to treat congestive heart failure patients, will be classified by FDA as a
Class III PMA device. This classification has important strategic implications
for the Company and could provide a significant competitive advantage and a
barrier to entry for would-be competitors over the course of the next several
years.
In most countries to which the Company seeks to export the EECP 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 system overseas.
There can be no assurance that all the necessary FDA clearances, including
approval of any PMA required, and overseas approvals will be granted for EECP,
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 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 system in the countries of the
European Union. The ISO 9001 Certificate covers the Company's design and
manufacturing operation for the EECP system and recognizes that the Company has
established and operates a world-class quality system. In addition, in July
2000, the Company received its license for Level II devices from the Canadian
Health authority.
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 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 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. In January 2000, a national Medicare payment level was established. In
July 2000, the American Medical Association's Relative Value Update Committee
(RUC), which periodically reviews Medicare reimbursement levels, proposed a 20%
increase in payment to Medicare-sponsored healthcare providers of EECP therapy.
If approved by HCFA, the proposed change would increase the national average
payment from $127.42 to $153.49 per session effective January 1, 2001.
Beginning August 1, 2000 Medicare coverage will be extended to include EECP
treatment received on an outpatient basis at hospitals and clinics under the new
APC (Ambulatory Payment Classification) system. The national average payment
rate is $149.83 per session.
Some private insurance carriers continue to adjudicate EECP claims on a
case-by-case basis. Since the establishment of reimbursement by the federal
government, however, an increasing number of these private carriers now
routinely pay for use of EECP for the treatment of angina. Over 150 private
insurers are reimbursing for EECP today and the Company expects increasing
third-party reimbursement.
The Company is continuing 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. In
anticipation of receiving approval for broad-based coverage, the Company intends
to 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 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.
Patents and Trademarks
The Company owns three US Patents that issued in June 1988, October 1996
and December 1999 which expire in 2005, 2013 and 2017, respectively. In
addition, several international patents have issued which expire in 2013 and the
Company expects additional international patents to issue during fiscal 2001.
Such patents cover several specific enhancements to the current EECP model. The
Company has filed for a continuation in part on one patent and is pursuing
additional patent applications.
Moreover, trademarks have been registered for the names "EECP" and "Natural
Bypass", and in 1999 the Company filed for registration of additional
trademarks.
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
patents and trademarks could have a material adverse effect upon the Company's
business.
Employees
As of July 20, 2000, the Company employed fifty-three full-time persons
with nineteen in sales and sales support, seven in clinical applications,
thirteen in manufacturing and technical service, three in marketing, two in
engineering 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
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 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 $130,000. 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. In April 2000, the Company exercised
its option under the lease to purchase the building and is presently negotiating
the purchase price. The purchase price, including improvements, is estimated at
$1,300,000, which the Company intends to finance with a mortgage lender. In the
event the Company is unsuccessful in its negotiations, it has the right to renew
the aforementioned lease through October 2005. 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
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 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, a motion for summary
judgment to dismiss the complaint in its entirety was granted. This decision has
been appealed.
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.
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 21, 2000 was 872, which does not include
approximately 44,400 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 2000 Fiscal 1999
----------------------- -----------------------
High Low High Low
---- --- ---- ---
First Quarter $ 2.000 $ 1.219 $1.688 $ .750
Second Quarter $ 1.688 $ .813 $1.210 $ .625
Third Quarter $ 3.375 $ .781 $2.063 $ .656
Fourth Quarter $ 14.188 $ 2.500 $1.500 $ 1.000
The last bid price of the Company's Common Stock on July 31, 2000 was
$4.0625 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, 2000 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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations
Revenues $13,673,632 $6,024,263 $5,225,064 $2,096,562 $2,683,128
----------- ---------- ---------- ---------- ----------
Cost of sales and services 3,060,765 1,833,238 1,543,849 1,020,047 609,136
Selling, general & administrative
expenses 7,118,836 5,946,405 5,689,704 4,155,552 3,738,789
Research and development expenses 1,411,503 706,934 1,595,970 1,045,184 364,455
Depreciation and amortization 483,627 463,859 363,101 333,482 269,443
Provision for losses 400,000 225,000
Interest and financing costs 7,302 11,880 4,057 8,511 515,451
Interest and other income, net (99,317) (115,064) (169,422) (174,810) (171,001)
----------- ---------- ---------- ---------- ----------
12,382,716 8,847,252 9,027,259 6,612,966 5,326,273
----------- ---------- ---------- ---------- ----------
Net earnings (loss) before tax benefit 1,290,916 (2,822,989) (3,802,195) (4,516,404) (2,643,145)
Income tax benefit 400,000 - - - -
----------- ---------- ---------- ---------- ----------
Net earnings (loss) 1,690,916 (2,822,989) (3,802,195) (4,516,404) (2,643,145)
Deemed dividend on preferred stock - (864,000) (1,132,000) - -
Preferred stock dividend requirement (94,122) (205,163) (96,717) - -
----------- ---------- ---------- ---------- ----------
Earnings (loss) applicable to
common stock $1,596,794 $(3,892,152) $(5,030,912)$(4,516,404) $(2,643,145)
========== =========== =========== =========== ===========
Net earnings (loss) per common share
(basic and diluted) $.03 $(.08) $(.11) $(.10) $(.07)
========== =========== =========== =========== ===========
Weighted average common shares
outstanding - basic 52,580,623 49,371,574 47,873,711 46,297,142 39,226,258
========== =========== =========== =========== ===========
Weighted average common shares
outstanding - diluted 57,141,949 49,371,574 47,873,711 46,297,142 39,226,258
========== =========== =========== =========== ===========
Balance Sheet
Working capital $7,380,236 $2,174,774 $5,046,202 $1,981,331 $4,958,973
Total assets $10,588,962 $5,198,172 $7,345,246 $4,175,021 $8,246,151
Long-term debt $0 $0 $0 $0 $3,725,000
Stockholders' equity (1) $7,943,770 $3,153,533 $5,752,993 $3,020,962 $3,091,094
- -------------------
(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, 2000 and 1999
The Company generated revenues from the sale and lease of EECP systems of
$13,674,000 and $6,024,000 for the years ended May 31, 2000 and 1999,
respectively. The Company reported net earnings of $1,691,000 for fiscal 2000
versus a net loss $2,823,000 for fiscal 1999 (before deducting $864,000 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 in fiscal 1999, and $94,000 and $205,000 in fiscal 2000
and 1999, respectively, in dividend requirements related to 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 approximately 38
million beneficiaries. In addition, the results of the Company's multicenter,
prospective, randomized, blinded, controlled clinical study of EECP (MUST-EECP)
were 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 meetings in November 1999
and 1998, at the American College of Cardiology (ACC) annual meeting in March
1999 and other scientific meetings.
Revenue growth in fiscal 2000 was initially hindered because local Medicare
contractors established inappropriate payment levels that did not take into
account the full value of the resources health care providers must deploy to
deliver EECP therapy. Consequently, in November 1999, HCFA created a specific
code for external counterpulsation therapy and established a nationally
applicable allowable charge, effective on January 1, 2000. The allowable charge
under the new code was based upon a preliminary determination of Relative Value
Units (RVUs) assigned by HCFA to the resources needed for the administration of
the therapy. Certain patients may require additional services, such as
evaluation and management, which may be billed separately. The Company estimates
the standard national charge to approximate $130 per session of EECP therapy,
which may be adjusted by certain geographic indices. This would result in a
standard charge of $4,550 for a full course of therapy, which typically involves
35 one-hour outpatient sessions. The assigned code will allow EECP providers to
bill Medicare electronically, substantially reducing the process for receiving
reimbursement. Moreover, in light of the new payment instructions, local
Medicare contractors will no longer have the responsibility of establishing
reimbursement rates. These events led to revenue growth in the latter fiscal
quarters, aided by the conversion to financed leases or outright sales of units
previously placed under rental or fee-for-use arrangements. In July 2000, the
American Medical Association's Relative Value Update Committee (RUC), which
periodically reviews Medicare reimbursement levels, proposed a 20% increase in
payment to Medicare- sponsored healthcare providers of EECP therapy. If approved
by HCFA, the proposed change would increase the national average payment from
$127.42 to $153.49 per session effective January 1, 2001. Management expects the
aforementioned events to provide a strong foundation for accelerated growth in
fiscal 2001.
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 primarily attributable to fourth quarter sales of $3,500,000, which were
aided by the HCFA decision described above, as well as some placements made in
the past under rental or fee-for-use arrangements that began to convert to
financed leases or outright sales.
Gross margins are dependent on a number of factors, particularly the mix of
EECP 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 (including non- domestic business or distributorship
arrangements which, for discounted equipment purchase prices, co-invest in
establishing a market for EECP equipment) and the amount and nature of training
and other initial costs required to place the EECP system in service for
customer use. Consequently, 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, 2000 and 1999 were approximately $7,119,000 and $5,946,000, respectively.
The $1,173,000 increase in SGA expenses for the comparable fiscal year resulted
primarily from an increase in sales and marketing personnel (including
non-recurring recruiting expenses), sales commissions and other selling expenses
related to increased revenues.
Research and development (R&D) expenses in the year ended May 31, 2000
increased by $705,000 from the prior fiscal year. The increase relates primarily
to the expansion of the International EECP Patient Registry at the University of
Pittsburgh, continued product design and development costs, and the feasibility
study in heart failure.
Fiscal Years Ended May 31, 1999 and 1998
The Company generated revenues from the sale and lease of EECP 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).
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's reimbursement decision.
Gross margins are dependent on a number of factors, particularly the mix of
EECP 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 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 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, will further affect operating results in fiscal 2000.
Liquidity and Capital Resources
The Company has financed its fiscal 2000 operations primarily from working
capital and operating results. For the past two fiscal years, the Company's
operations were primarily funded from the proceeds of equity financings in
fiscal 1998 (described below). At May 31, 2000, the Company had a cash balance
of $3,058,000 and working capital of $7,380,000, compared to a cash balance of
$1,678,000 and working capital of $2,175,000 at May 31, 1999. The Company's
operating activities used cash of $1,159,000 and $3,028,000 for fiscal 2000 and
1999, respectively. Net cash used during fiscal 2000 consisted primarily of
earnings from operations, increases in accounts payable and accrued expenses,
offset by increases in accounts receivable, inventories and other current
assets.
Investing activities used net cash of $279,000 and $17,000 during fiscal
2000 and 1999, respectively. The principal uses were for the purchase of
property and equipment. At May 31 2000, the Company is in the negotiation
process for the purchase of its present facilities. The purchase price,
including improvements, is estimated at $1,300,000, which the Company intends to
finance with a mortgage lender.
Financing activities provided cash of $2,819,000 and $355,000 during fiscal
2000 and 1999, respectively. Financing activities during fiscal 2000 and fiscal
1999 consisted primarily from the sale of common stock and receipt of cash
proceeds upon the exercise of Company common stock warrants by officers,
directors, employees and consultants. Subsequent to May 31, 2000, the Company
received additional cash proceeds of $868,000 from the exercise of Company
common stock options and warrants.
In fiscal 1998, the Company issued an aggregate of 325,000 shares of newly
created 5% Series B and 5% 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 were paid in shares of the
Company's common stock. By February 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. By February 29, 2000, all of the Series C preferred stock (175,000
shares) had been converted into 3,095,612 shares of the Company's common stock.
Management believes that its working capital position at May 31, 2000,
along with the ongoing commercialization of the EECP system 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 at least the next twelve months.
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 2000 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 2000 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 2000 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 2000 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 (13)
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 (8)
(d) Form of Rights Agreement dated as of March 9, 1995 between
Registrant and American Stock Transfer & Trust Company (5)
(e) Certificate of Designation of the Preferred Stock, Series C (9)
(f) Stock Purchase Agreement dated April 30, 1998 between Registrant
and JNC Opportunity Fund, Ltd. (9)
(g) Registration Rights Agreement dated April 30, 1998 between
Registrant and JNC Opportunity Fund, Ltd. (9)
(h) Form of Warrant dated April 30, 1998 (9)
(10) (a) 1995 Stock Option Plan (7)
(b) Outside Director Stock Option Plan (7)
(c) Employment Agreement dated January 23, 1995, as amended on
October 24, 1995 and March 12, 1998, between Registrant and
Anthony E. Peacock (4) (6) (10)
(d) Employment Agreement dated February 1, 1995, as amended March 12,
1998, between Registrant and John C.K. Hui (4) (10)
(e) Modification and Extension Agreement dated March 12, 1998 between
Registrant and Joseph Giacalone (10)
(f) 1997 Stock Option Plan, as amended (11)
(g) Employment Agreement dated January 6, 2000, between Registrant
and D. Michael Deignan (12)
(h) 1999 Stock Option Plan, as amended (13)
(22) Subsidiary of the Registrant
Percentage
Name State of Incorporation Owned by Company
---- ---------------------- ----------------
Viromedics, Inc. Delaware 61%
(23) Consent of Grant Thornton LLP (13)
Financial Data Schedule (13)
- ---------
(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 Registration Statement on Form 8-A dated May
12, 1995.
(6) Incorporated by reference to Report on Form 8-K dated October 24, 1995.
(7) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 5, 1995.
(8) Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(9) Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(10) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31, 1998.
(11) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31, 1999.
(12) Incorporated by reference to Report on Form 10-Q for the quarterly period
ended February 29, 2000.
(13) 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 31st day of
July, 2000.
VASOMEDICAL, INC.
By: /s/ D. Michael Deignan
-------------------------------------------
D. Michael Deignan
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 July 31, 2000 by the following persons in
the capacities indicated:
- ---------------------- Director
Alexander G. Bearn
/s/ David S. Blumenthal Director
- -----------------------
David S. Blumenthal
/s/ Abraham E. Cohen Chairman of the Board
- -----------------------
Abraham E. Cohen
/s/ D. Michael Deignan President, Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer)
D. Michael Deignan
/s/ Joseph A. Giacalone Chief Financial Officer (Principal Financial and
- ----------------------- Accounting Officer)
Joseph A. Giacalone
/s/ John C.K. Hui Senior Vice President, R&D and Manufacturing and
- ----------------------- Director
John C.K. Hui
/s/ Photios T. Paulson Director
- -----------------------
Photios T. Paulson
/s/ Kenneth W. Rind Director
- -----------------------
Kenneth W. Rind
/s/ E. Donald Shapiro Director
- -----------------------
E. Donald Shapiro
/s/ Anthony Viscusi Director
- -----------------------
Anthony Viscusi
/s/ Forrest R. Whittaker Director
- -----------------------
Forrest R. Whittaker
/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
Additions
- ---------------------------------------------------------------------------------------------------------
(1) (2)
Balance at Charged to Charged Balance at
beginning costs and to other end of
of period expenses accounts Deductions period
---------- ---------- -------- ---------- ----------
Year ended May 31, 2000
Allowance for doubtful
accounts (a) $- $400,000 $400,000
==========================================================================
Year ended May 31, 1999
Allowance for doubtful
accounts (a) $- $-
==========================================================================
Year ended May 31, 1998
Allowance for doubtful
accounts (a) $- $-
==========================================================================
(a) Deducted from accounts receivable.
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, 2000 and 1999 F-3
Consolidated Statements of Operations for the
years ended May 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended May 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the
years ended May 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-15
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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, 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, 2000, 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, 2000. 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
July 20, 2000
F-2
Vasomedical, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
May 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,058,367 $1,678,175
Accounts receivable, net of an allowance for doubtful
accounts of $400,000 at May 31, 2000 4,832,810 1,585,432
Inventories 906,984 594,093
Deferred income taxes 400,000
Other current assets 479,267 177,713
----------- ----------
Total current assets 9,677,428 4,035,413
PROPERTY AND EQUIPMENT, net 548,316 571,368
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net of accumulated
amortization of $1,136,517 and $923,421 at May 31,
2000 and 1999, respectively 355,181 568,277
OTHER ASSETS 8,037 23,114
----------- ----------
$10,588,962 $5,198,172
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,219,803 $705,640
Accrued warranty and customer support expenses 258,000 382,000
Accrued professional fees 276,000 271,438
Accrued commissions 543,389 307,951
Dividends payable 193,610
----------- ----------
Total current liabilities 2,297,192 1,860,639
ACCRUED WARRANTY COSTS 129,000 114,000
OTHER LONG-TERM LIABILITIES 16,000 70,000
DEFERRED REVENUES 203,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 175,000 shares at May 31,
1999, issued and outstanding (liquidation preference
of $3,500,000 at May 31, 1999) 1,750
Common stock, $.001 par value; 110,000,000 shares authorized;
55,921,330 and 50,402,687 shares at May 31, 2000 and 1999,
respectively, issued and outstanding 55,921 50,403
Additional paid-in capital 40,939,158 37,749,483
Accumulated deficit (33,051,309) (34,648,103)
----------- ----------
7,943,770 3,153,533
----------- ----------
$10,588,962 $5,198,172
=========== ==========
The accompanying notes are an integral part of these statements.
F-3
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended May 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues
Equipment sales $13,120,144 $5,335,200 $4,958,333
Equipment rentals and services 553,488 689,063 266,731
----------- ---------- ----------
13,673,632 6,024,263 5,225,064
----------- ---------- ----------
Costs and expenses
Cost of sales and services 3,060,765 1,833,238 1,543,849
Selling, general and administrative 7,118,836 5,946,405 5,689,704
Research and development 1,411,503 706,934 1,595,970
Depreciation and amortization 483,627 463,859 363,101
Provision for doubtful accounts 400,000
Interest and financing costs 7,302 11,880 4,057
Interest and other income - net (99,317) (115,064) (169,422)
----------- ---------- ----------
12,382,716 8,847,252 9,027,259
----------- ---------- ----------
NET EARNINGS (LOSS) BEFORE INCOME TAXES 1,290,916 (2,822,989) (3,802,195)
Benefit for income taxes 400,000
----------- ---------- ----------
NET EARNINGS (LOSS) 1,690,916 (2,822,989) (3,802,195)
Deemed dividend on preferred stock (864,000) (1,132,000)
Preferred stock dividend requirement (94,122) (205,163) (96,717)
----------- ---------- ----------
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $1,596,794 $(3,892,152) $(5,030,912)
=========== =========== ===========
Net earnings (loss) per common share
(basic and diluted) $.03 $(.08) $(.11)
==== ===== =====
Weighted average common shares
outstanding - basic 52,580,623 49,371,574 47,873,711
=========== =========== ===========
- diluted 57,141,949 49,371,574 47,873,711
=========== =========== ===========
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 Accum- stock-
Preferred stock Common stock paid-in ulated holders'
Shares Amount Shares Amount capital deficit equity
------ ------ ------ ------ ------- ------- --------
Balance at June 1, 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
Conversion of preferred stock (175,000) (1,750) 3,095,612 3,096 (1,346) -
Exercise of options and warrants 2,169,831 2,169 2,816,542 2,818,711
Preferred stock dividend requirement (94,122) (94,122)
Common stock issued in lieu of
preferred stock dividends 253,200 253 287,479 287,732
Stock options granted for services 87,000 87,000
Net earnings 1,690,916 1,690,916
------- ------ ---------- ------- ----------- ------------ ----------
Balance at May 31, 2000 - - 55,921,330 $55,921 $40,939,158 $(33,051,309) $7,943,770
======= ====== ========== ======= =========== ============ ==========
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,
------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net earnings (loss) $1,690,916 $(2,822,989) $(3,802,195)
---------- ---------- ----------
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 483,627 463,859 363,101
Provision for doubtful accounts 400,000
Deferred income taxes (400,000)
Stock options granted for services 87,000
Changes in operating assets and liabilities
Accounts receivable (3,647,378) (609,091) (919,693)
Inventories (281,337) (367,791) 203,096
Other assets (286,478) (12,485) (78,691)
Accounts payable, accrued expenses and
other current liabilities 630,164 587,915 211,687
Other liabilities 164,000 (267,000) 164,370
---------- ---------- ----------
(2,850,402) (204,593) (56,130)
---------- ---------- ----------
Net cash used in operating activities (1,159,486) (3,027,582) (3,858,325)
---------- ---------- ----------
Cash flows from investing activities
Purchase of property and equipment (279,033) (17,229) (123,056)
---------- ---------- ----------
Net cash used in investing activities (279,033) (17,229) (123,056)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from exercise of options and warrants 2,818,711 355,000 484,463
Proceeds from issuance of preferred stock, net 6,111,900
---------- ---------- ----------
Net cash provided by financing activities 2,818,711 355,000 6,596,363
---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,380,192 (2,689,811) 2,614,982
Cash and cash equivalents - beginning of year 1,678,175 4,367,986 1,753,004
---------- ---------- ----------
Cash and cash equivalents - end of year $3,058,367 $1,678,175 $4,367,986
========== ========== ==========
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 $94,122 73,692 34,580
Inventories transferred to property and equipment,
attributable to operating leases - net 31,554 452,000 71,647
The accompanying notes are an integral part of these statements.
F-6
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000, 1999 and 1998
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 enhanced external
counterpulsation system ("EECP"), a microprocessor-based medical device for the
noninvasive, atraumatic treatment of patients with cardiovascular disease. EECP
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 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, whichever is less.
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.
Revenue Recognition
The Company recognizes revenue from the sale of its EECP system in the
period in which the Company fulfills its obligations under the sale agreement,
including delivery and customer acceptance. The Company has also entered into
lease agreements for its EECP 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. Revenues from the sale of extended warranties on
the EECP system are recognized on a straight-line basis over the life of the
extended warranty, ranging from one year to four years. Deferred revenues relate
to extended warranty fees which have been paid by customers prior to the
performance of extended warranty services.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"),"Revenue Recognition in Financial
Statements." The Company will adopt the provisions of SAB 101 in the first
quarter of fiscal 2001 and anticipates that such adoption will not have a
material impact on the Company's financial statements.
Concentrations of Credit Risk
The Company markets the EECP system principally to hospitals, clinics and
other cardiac health care providers. The Company performs credit evaluations of
its customers' financial condition and, as a consequence, believes that its
receivable credit risk exposure is limited. Receivables are generally due within
60-90 days.
F-7
Warranty Costs
The Company provides for a warranty period on its EECP 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
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 Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed by dividing net
earnings (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 for fiscal 1999 and 1998 as their effects
would be antidilutive.
Stock Compensation
The Company measures stock-based awards using the intrinsic value method.
As described in Note E, pro forma disclosure of the effect on net earnings
(loss) and net earnings (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.
NOTE B - INVENTORIES
May 31,
-------
Inventories consist of the following: 2000 1999
---- ----
Raw materials $545,924 $79,174
Finished goods 361,060 514,919
-------- --------
$906,984 $594,093
======== ========
F-8
NOTE C - PROPERTY AND EQUIPMENT
May 31,
------
Property and equipment is summarized as follows: 2000 1999
---- ----
Office, laboratory and other equipment $413,070 $273,354
EECP units under operating leases 416,000 624,000
Furniture and fixtures 81,232 81,232
Construction in progress 139,317
Leasehold improvements 95,610 95,610
--------- ---------
1,145,229 1,074,196
Less accumulated depreciation and amortization (596,913) (502,828)
--------- ---------
$ 548,316 $ 571,368
========= =========
NOTE D - STOCKHOLDERS' EQUITY AND WARRANTS
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.
Fiscal 2000
In fiscal 2000, all 175,000 shares of Series C preferred stock were converted
into 3,095,612 shares of common stock. In addition, warrants to purchase
1,435,000 shares of common stock were exercised (net of 101,910 shares offered
in payment in lieu of cash), aggregating $1,272,000 in proceeds to the Company.
Subsequent to May 31, 2000, warrants to purchase 413,712 shares of common stock
were exercised, aggregating $861,000 in proceeds to the Company.
Warrants
Warrant activity for the years ended May 31, 1998, 1999 and 2000 is
summarized as follows:
Non-employee
Directors Employees Consultants Total Price Range
------------ --------- ----------- ----- -----------
Balance at June 1, 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
Exercised (400,000) (525,000) (510,000) (1,435,000) $.38 - $2.18
--------- --------- --------- --------- ---- -----
Balance at May 31, 2000 - 750,000 868,712 1,618,712 $.45 - $2.08
========= ========= ========= ========= ==== =====
Number of shares exercisable - 750,000 868,712 1,618,712 $.45 - $2.08
========= ========= ========= ========= ==== =====
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, 2000:
Warrants Outstanding and Exercisable
Weighted
Number Average
Outstanding and Remaining Weighted
Exercisable at Contractual Life Average
Range of Exercise Prices May 31, 2000 (yrs.) Exercise Price
- ------------------------ ------------ ---------------- --------------
$.45 750,000 2.1 $.45
$.91 200,000 6.4 $.91
$1.44 100,000 .8 $1.44
$2.08 568,712 2.1 $2.08
--------- --- -----
1,618,712 2.5 $1.14
========= === =====
F-10
NOTE E - 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.
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 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 a consultant to purchase 150,000 shares of common stock
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 were contingent upon meeting certain performance criteria. The
stock options were fair-valued at $87,000 for which the Company recorded a
charge to operations in fiscal 2000, commensurate with the satisfaction of the
performance criteria defined therein.
1999 Stock Option Plan
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. The 1999 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 1999 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 1999
Plan expires July 12, 2009. Subsequent to May 31, 2000, the Board of Directors
granted stock options under the 1999 Plan to employees and a consultant to
purchase an aggregate of 191,500 shares and 30,000 shares of common stock,
respectively, at exercise prices ranging from $4.28 to $4.94 per share (which
represented the fair market value of the underlying common stock at the time of
the respective grants). The stock options issued to the consultant were
fair-valued at $126,000 for which the Company will record a charge to operations
in the periods that the options vest, as defined.
F-11
In July 2000, the Company's Board of Directors increased the number of
shares authorized for issuance under the 1999 Plan by 1,000,000 shares to
3,000,000 shares.
Activity under all the plans for the years ended May 31, 1998, 1999 and
2000 is summarized as follows:
Outstanding Options
----------------------------------------------
Shares Available Number of Exercise Weighted Average
for Grant Shares Price per Share Exercise Price
---------------- --------- --------------- ----------------
Balance at June 1, 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
Shares authorized 2,000,000
Options granted (1,270,000) 1,270,000 $1.22 - $5.15 $1.95
Options exercised - (836,741) $.75 - $3.44 $1.85
Options canceled 134,668 (144,668) $.88 - $1.91 $1.47
---------- --------- ---------------- -----
Balance at May 31, 2000 905,168 4,143,734 $.78 - $5.15 $1.76
========== ========= =============== =====
The following table summarizes information about stock options outstanding
and exercisable at May 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------
Weighted
Average Weighted
Number Remaining Weighted Number Average
Outstanding at Contractual Life Average Exercisable at Exercise
Range of Exercise Prices May 31, 2000 (yrs.) Exercise Price May 31, 2000 Price
- ------------------------ -------------- ---------------- -------------- -------------- --------
$.75 - $.88 1,514,515 6.1 $.86 1,061,846 $.87
$1.22 - $1.78 973,900 9.3 $1.37 33,900 $1.77
$1.91 - $2.44 839,319 7.7 $1.93 534,981 $1.94
$3.44 - $5.15 816,000 7.2 $3.69 621,000 $3.60
--------- --- ----- --------- -----
4,143,734 7.4 $1.76 2,251,727 $1.89
========= === ===== ========= =====
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, 2000 1999 1998
- ------------------------- ---- ---- ----
Expected life (years) 5 5 5
Expected volatility 80% 80% 85%
Risk-free interest rate 6.0% 4.4% 5.7%
F-12
The following are the pro forma net earnings (loss) and net earnings (loss)
per share - basic and diluted amounts for fiscal 2000, 1999 and 1998, as if
compensation expense for stock-based awards had been determined based on their
estimated fair value at the date of grant:
2000 1999 1998
---- ---- ----
Pro forma net earnings (loss) $576,435 $(5,534,569) $(5,702,635)
Pro forma net earnings (loss) per share
- - basic and diluted $.01 $(.11) $(.12)
The weighted-average fair value of options granted during fiscal 2000, 1999
and 1998 was $2.75, $.58 and $1.34, respectively. At May 31, 2000, there were
approximately 16,400,000 remaining authorized shares of common stock after
reserves for all stock option plans, stock warrants and shareholders' rights.
NOTE F EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the fiscal year ended May 31,
--------------------------------
2000 1999 1998
---- ---- ----
Numerator:
Basic earnings (loss) $1,690,916 $(2,822,989) $(3,802,195)
Preferred stock dividends (94,122) (1,069,163) (1,228,717)
---------- ----------- -----------
Diluted earnings (loss) $1,596,794 $(3,892,152) $(5,030,912)
========== =========== ===========
Denominator:
Basic - weighted average shares 52,580,623 49,371,574 47,873,711
Stock options 1,389,607 - -
Warrants 1,428,678 - -
Convertible preferred stock 1,743,041 - -
---------- ----------- -----------
Diluted - weighted average shares 57,141,949 49,371,574 47,873,711
========== =========== ===========
Basic and diluted earnings (loss) per
share $0.03 $(.08) $(.11)
===== ===== =====
NOTE G - REVENUE CONCENTRATIONS
In fiscal 1999, the Company had sales to one customer, accounting for 21%
of the Company's revenues. No single customer accounted for greater than 10% of
the Company's revenues in fiscal 1998 and 2000.
NOTE H - INCOME TAXES
In fiscal 2000, the Company recorded a deferred tax benefit of $400,000
resulting from the recognition of a deferred tax asset summarized as follows:
May 31,
------
2000 1999 1998
---- ---- ----
Deferred tax assets
Net operating loss and other carryforwards $14,627,000 $11,913,000 $10,908,000
Accrued compensation 12,500 92,000 120,000
Bad debts 187,000 - -
Other 238,500 247,000 268,000
----------- ----------- -----------
Total gross deferred tax assets 15,065,000 12,252,000 11,296,000
Valuation allowance (14,665,000) (12,252,000) (11,296,000)
----------- ----------- -----------
$ 400,000 $ - $ -
=========== =========== ===========
F-13
Management has established a valuation allowance for a portion of the
deferred tax assets based on uncertainties with respect to the Company's ability
to generate future taxable income.
At May 31, 2000, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $42,685,000, expiring at various
dates from 2003 through 2020.
The following is a reconciliation of the effective income tax rate to the
federal statutory rate:
2000 1999 1998
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
Federal statutory rate $387,911 34.0 $(959,816) (34.0) $(1,292,746) (34.0)
State taxes, net of federal benefit 83,451 7.3 (275,455) (9.7) (304,175) (8.0)
Permanent differences 89,756 7.8 86,165 3.1 92,611 2.4
Utilization of current year net operating
loss generating no tax benefit (561,118) (49.1) 1,149,106 40.6 1,504,310 39.6
Adjustment of valuation allowance (400,000) (35.0) - - - -
--------- ---- --------- ---- ---------- ----
$(400,000) (35.0) $ - - $ - -
========= ==== ========= ==== ========== ====
Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined, were to occur. Section 382 of the Internal
Revenue Code provides, in general, that if an "ownership change" occurs with
respect to a corporation with net operating and other loss carryforwards, such
carryforwards will be available to offset taxable income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally, the product of the fair market value of the corporation's stock at
the time of the ownership change, with certain adjustments, and a specified
long-term tax-exempt bond rate at such time). The Company's ability to use its
loss carryforwards would be limited in the event of an ownership change.
NOTE I - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company maintains employment agreements with its executive officers,
expiring at various dates through January 2002. In January 2000, the Board of
Directors appointed a new President and CEO and approved a one-year employment
agreement for annual compensation of $180,000, including a grant of
non-qualified stock options to purchase 600,000 shares of common stock at $1.21
per share, subject to vesting provisions, as defined. Additionally, all 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, 2000, are summarized as follows:
Fiscal Year Amount
----------- ------
2001 $403,000
2002 93,000
--------
$496,000
========
F-14
Leases
The Company occupies office and warehouse space under a noncancelable
operating lease which expires on October 31, 2000. Rent expense was $130,000,
$125,000 and $121,000 in fiscal 2000, 1999 and 1998, respectively. In April
2000, the Company exercised its option under the lease to purchase the building
and is presently negotiating the purchase price, which it expects to finance
through a mortgage lender. In the event the Company is unsuccessful in its
negotiations, it has the right to renew the aforementioned lease through October
2005.
Approximate aggregate minimum annual obligations under this lease agreement
and other equipment leasing agreements at May 31, 2000 are summarized as
follows:
Fiscal Year Amount
----------- ------
2001 $113,000
2002 19,000
2003 16,000
--------
$148,000
========
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 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, a motion for summary
judgment to dismiss the complaint in its entirety was granted. This decision has
been appealed.
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, 2000, 1999 and 1998.
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"), a Chinese company, for the contract manufacture of its
current EECP system, subject to certain performance standards, as defined. At
May 31, 2000, the Company had outstanding purchase commitments of $389,000. The
Company believes that VAMED will be able to meet the Company's needs for EECP
systems.
F-15
EXHIBIT INDEX
Exhibit No.
(10) 1999 Stock Option Plan, as amended
(23) Consent of Grant Thornton LLP
(27) Financial Data Schedule