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, 2001
[ ] 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 August 14, 2001, based on the average price on that date,
was $214,000,000. At August 14, 2001, the number of shares outstanding of the
issuer's common stock was 57,210,453.
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.
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, outpatient treatment of patients
with cardiovascular disease. The Company's lead product, its EECP(R) ("EECP")
enhanced external counterpulsation system, is a patented microprocessor-based
device that delivers a retrograde arterial pressure wave to the heart,
increasing coronary perfusion and reducing ventricular afterload. The therapy
serves to increase circulation in areas of the heart with less than adequate
blood supply and the Company believes it may restore systemic vascular function.
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 is currently indicated for use in patients with stable or
unstable angina, acute myocardial infarction and cardiogenic shock. The Company
is also actively engaged in research to determine the potential benefits of EECP
therapy in the setting of acute coronary syndromes, as well as in the management
of other major vascular disease states, including congestive heart failure and
diabetes.
The EECP Enhanced External Counterpulsation System
General Discussion
Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare spending in nearly every
country. CVD claimed approximately 950,000 lives in the United States in 1998
and was responsible for 1 of every 2.5 deaths. The American Heart Association
(AHA) reports in its 2001 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, 6.4 million of whom suffer from angina pectoris, a painful and often
debilitating complication caused by obstruction of the arteries that supply
blood to the myocardium or heart muscle, with an additional 350,000 new cases
seen annually. 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 angioplasty
and coronary stent placement, as well as 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 its EECP therapy system, the MC2, which
incorporated a number of technological improvements over the original system. In
addition, in December 2000, the Company received 510(k) clearance to market its
third generation system, the TS3. The FDA's clearance in all 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.
1
The System
The EECP therapy systems MC2 and TS3 (collectively, the system(s)) are
advanced treatment systems utilizing fundamental hemodynamic principles to
relieve angina pectoris. Treatment is administered to patients on an outpatient
basis 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 which supply
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 the recruitment of 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, twelve and twenty-four 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
current EECP systems, such as the computerized electrocardiographic gating, 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
2
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 139 patient study, which included a placebo control group, showed 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 quality-of-life study with EECP in
the same institutions and with the same patients that participated in MUST-EECP.
Two highly regarded standardized means of measurement were used to gauge changes
in patients outlook and ability to participate in normal daily living during the
treatment phase and for up to 12 months after treatment. Results of this study,
which have been presented at major scientific meetings, show that the group of
patients receiving EECP enjoyed significantly improved aspects of health-related
quality of life compared to those who received a sham treatment. Publication of
this work in a peer-review journal is expected in fiscal 2002.
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). Data
from the AHA indicates that CHF affects nearly 5 million Americans and 22
million worldwide and is the single most frequent cause of hospitalization among
people age 65 and older. The incidence of new cases of heart failure is 550,000
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
the use of cardiac resynchronization and implantable defibrillators continue to
advance.
A 32-patient feasibility study was conducted simultaneously at the
University of Pittsburgh, the University of California San Francisco and the
Grant/Riverside Methodist Hospitals in Columbus, Ohio. The results of this study
were presented at the 49th Scientific Sessions of the American College of
Cardiology in March 2000 and the Heart Failure Society of America's Annual
Meeting in September 2000. This 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 summer 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. This study, known as PEECH (Prospective Evaluation of EECP in
Congestive Heart Failure), began patient enrollment in March 2001 and is
expected to take approximately two years to complete, including data compilation
necessary for submission to FDA for premarket approval. The PEECH trial, which
is expected to involve eighteen centers and enroll 180 patients, will evaluate
improvements in exercise capacity and quality of life, as well as the reduction
in the need for certain medications that CHF patients are typically prescribed.
Centers participating in the PEECH trial include, among others, the Cleveland
Clinic, Mayo Clinic, Ochsner Clinic, Scripps Clinic, Texas Heart Institute, the
University of California at San Diego Medical Center, the University of
California at Los Angeles Medical Center, University Hospital at the UMDNJ/New
Jersey Medical School, the University of Pittsburgh Medical Center and the
Cardiovascular Research Institute. In July 2001, the Company reached a formal
agreement with the FDA that the key parameters of its investigational plan for
studying the use of EECP in patients with CHF were appropriate to access the
safety and effectiveness of EECP as an adjunct therapy for heart failure. Such
agreement with the FDA could facilitate the premarket approval of EECP for this
indication.
The Company has recently initiated discussions with leading heart failure
clinicians in Europe to design and implement an efficacy study of the use of
EECP therapy in heart failure. This study is intended to provide complimentary
data to that provided by the PEECH trial and will be tailored to clinical
practices in Europe.
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,
more than one hundred centers participate in the registry and data from 5,000
3
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 provide an
ongoing grant to fund the Registry to publicize data that may assist clinicians
in delivering optimal care to patients. Recently released data from the IEPR
show that patients continue to receive dramatic benefit at six, twelve and
twenty-four 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) Maximize its penetration of the current angina market through the
initiation of a stepped-up campaign to market the benefits of EECP
therapy directly to patients and clinicians.
(b) Enlarge the market opportunity, short and long-term, by (i) advancing
the progress of marketplace acceptance of EECP as a common treatment
for the early and mid-stage (Class I and II) angina populations, (ii)
increasing the reimbursed patient base for the existing angina
indication, (iii) drive the clinical validation process for acceptance
of EECP as a primary or complimentary therapy for congestive heart
failure, diabetes disease management, peripheral vascular and
cerebrovascular conditions and (iv) renew the exposure of EECP as an
already approved therapy for acute coronary conditions, such as
myocardial infarction and cardiogenic shock.
(c) Continue the development of EECP in international markets, principally
through the establishment of a distribution network.
(d) 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.
(e) Continue product development efforts to improve the EECP system and
expand its intellectual property estate by filing for additional
patents.
(f) Engage in educational campaigns for providers and medical directors of
third party insurers designed to highlight the cost-effectiveness and
quality-of-life advantages of EECP therapy in order to broaden
coverage policies and process claims more rapidly for EECP services.
(g) Publish the results of its long-term quality-of-life outcomes study in
a major peer-review medical journal in fiscal 2002.
(h) Invest in creative partnerships with others who have distinctive
competencies or delivery capabilities for serving the cardiovascular
and disease management marketplace.
(i) Continue to provide an ongoing grant to fund the International EECP
Patient Registry at the University of Pittsburgh Graduate School of
Public Health to publicize key information relating to patient
outcomes.
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
4
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 effectively tripled since January
2000 and is now comprised of twenty sales representatives, including management.
The sales team is expected to continue to grow at a pace necessary to achieve
the Company's growth objectives. Independent representatives, who have been
employed to extend the reach of the Company's sales effort in the past, will be
utilized on a limited basis where sufficient geographic coverage is not achieved
by the Company's direct sales force. The efforts of the Company's sales
organization are further supported by a field-based staff of 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 applications 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 has allowed the Company to focus more intently on
sales to National Accounts. The Company plans to continue developing its
relationships with such major U.S. hospital groups as Tenet Healthcare, Kaiser
Permanente, Health South, Columbia HCA, the Veterans Administration and with
other cardiac care operations that have plans for nationwide expansion. To date,
the Company has entered into agreements with three group purchasing
organizations: Amerinet, Magnet and MedAxiom. In addition, in April 2001, the
Company entered into a co-promotional agreement with CardioDynamics
International Corporation, a market leader in Impedance Cardiography (ICG), to
market the companies' respective noninvasive technologies to physicians and
hospitals throughout the US.
Vasomedical's continuing transformation to a more commercial, market-driven
company will be reflected in its marketing activities planned for 2002. 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 are expected to
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 product warranty that
includes parts and labor. The Company offers extended service to its customers
under annual service contracts or on a fee-for-service basis.
International Operations
One of the Company's key objectives is to appoint distributors in exchange
for exclusive marketing rights to EECP in their respective countries. The
Company currently has distribution agreements for Canada, the Middle East,
India, Pakistan, Greece, the United Kingdom, Italy and the Far East. 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 and maintaining an infrastructure to provide post-sales
support, including clinical training and product maintenance services. 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.
5
To date, revenues from international operations have not been significant
(fiscal 2001 revenues approximated 5%) but are expected to increase in future
periods. Toward that end, in June 2001, the Company hired a Director of Sales
and Marketing for Europe. Marketing activities planned include, among other
things, increasing our participation in medical conferences to create greater
awareness and acceptance of EECP therapy by clinicians. 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 at least two competitors with an
external counterpulsation device on the market, namely Cardiomedics, Inc. and
Nicore, Inc. While the Company believes that these competitors' involvement in
the market is limited, there can be no assurance that these companies will not
become a significant competitive factor. The Company believes it competes
favorably in value with these companies, as EECP is the only system that is
clinically proven in controlled trials and the only system to be covered by an
independent patient registry. In addition, EECP is the only external
counterpulsation system to have been granted an IDE to conduct a controlled
study in heart failure. FDA has determined this to be a new intended use of EECP
and will require a PMA approval prior to marketing. Although pursuit of an
approved indication for use of EECP in heart failure is expected to require
considerable resources, the Company believes that such investment could provide
a significant competitive advantage. Vasomedical views other companies engaged
in the development of device-related and biotechnology approaches to the
management of cardiovascular disease as potential competitors in the marketplace
as well.
There can be no assurance that other companies will not enter the market
intended for EECP systems. Such other 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 Act 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 in non-domestic markets.
6
There can be no assurance that all the necessary FDA clearances, including
approval of any PMA required, and non-domestic 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 Company's EECP System Model MC2 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 this 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. In July 2001, the Company received the UL
classified mark, an electrical certification, for its new TS3 system and intends
to pursue the CE Mark for the TS3.
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, and are subject to periodic
inspection and evaluation 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 39 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.
Effective January 1, 2001, HCFA approved an 11% increase in the reimbursement
rate for EECP therapy which raised the average Medicare payment from $130 to
$144 per hourly session. Beginning August 1, 2000, Medicare coverage was
extended to include EECP treatment received on an outpatient basis at hospitals
and outpatient clinics under the new APC (Ambulatory Payment Classification)
system. The national average payment rate approximates $150 per hourly 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 200 private
insurers are reimbursing for EECP today at improved levels 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.
If there is any material change in the availability of third-party coverage
or the inadequacy of the reimbursement level for treatment procedures using the
EECP system, it 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.
7
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 2002.
Such patents cover several specific enhancements to the current EECP models. The
Company has filed for a continuation in part on one patent and is pursuing
several additional patent applications. Moreover, trademarks have been
registered for the names "EECP" and "Natural Bypass", as well as for its
widely-recognized man-like figure representing the application of EECP therapy.
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 15, 2001, the Company employed ninety-four full-time persons
with twenty-two in sales and sales support, eight in clinical applications,
thirty-seven in manufacturing and technical service, nine in marketing, ten in
engineering, regulatory and clinical research and eight in administration. None
of the Company's employees are represented by a labor union. The Company
believes that its employee relations are satisfactory.
Manufacturing
The Company manufactures its EECP Model TS3 at its plant in Westbury, NY
and believes its manufacturing facility, in addition to the other warehouse
facilities presently under lease, are adequate to meet the current and
immediately foreseeable future demand for the production of these systems. The
Company also contracts for the manufacture of its EECP Model MC2 system with
VAMED Medical Instrument Company Ltd. ("VAMED"), a Chinese company. The Company
believes that VAMED will be able to meet the Company's needs for such EECP
systems.
ITEM TWO - PROPERTIES
The Company owns its 18,000 square foot headquarters and manufacturing
facility at 180 Linden Avenue, Westbury, New York 11590. In addition, the
Company maintains two additional warehouses, approximating 7,000 square feet of
space, under leases with two non-affiliated landlords through October 31, 2002
and October 31, 2006, respectively, at an annual cost of approximately $65,000.
Management believes that the Company's combined facilities are adequate to meet
its current needs and should continue to be adequate for the immediately
foreseeable future.
ITEM THREE - LEGAL PROCEEDINGS
In June 2001, an action was commenced in the New York Supreme Court, Nassau
County, against the Company. The action seeks undefined damages based upon the
alleged breach of an agreement to register the Company's common stock. The
Company believes that the complaint is 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.
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
8
believes that the complaint is without merit and is vigorously defending the
claims. This matter is in its preliminary stages and the Company is unable to
establish the likelihood of an unfavorable outcome or the existence or amount of
any potential loss.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
ITEM FIVE - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM under the symbol VASO. The approximate number of record
holders of Common Stock as of July 30, 2001 was 912, which does not include
approximately 45,000 beneficial owners of shares held in the name of brokers or
other nominees. The table below sets forth the range of high and low trade
prices of the Common Stock as reported by the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM for the fiscal periods specified.
Fiscal 2001 Fiscal 2000
High Low High Low
First Quarter $ 5.500 $ 3.563 $ 2.000 $ 1.219
Second Quarter $ 5.500 $ 2.531 $ 1.688 $ .813
Third Quarter $ 5.625 $ 2.000 $ 3.375 $ .781
Fourth Quarter $ 5.000 $ 2.938 $ 14.188 $ 2.500
The last bid price of the Company's Common Stock on August 14, 2001 was
$3.95 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.
9
ITEM SIX - SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the five
years ended May 31, 2001 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,
2001 2000 1999 1998 1997
Statement of Operations
Revenues $27,508,338 $13,673,632 $6,024,263 $5,225,064 $2,096,562
Cost of sales and services 7,910,359 3,277,700 2,035,578 1,654,979 1,103,417
--------------------------------------------------------------------------
Gross profit 19,597,979 10,395,932 3,988,685 3,570,085 993,145
Selling, general & administrative expenses 11,634,965 7,383,567 6,207,924 5,941,675 4,405,664
Research and development expenses 2,554,470 1,413,464 706,934 1,595,970 1,045,184
Provision for doubtful accounts 325,000 400,000 225,000
Interest and financing costs 48,294 7,302 11,880 4,057 8,511
Interest and other income, net (201,992) (99,317) (115,064) (169,422) (174,810)
--------------------------------------------------------------------------
14,360,737 9,105,016 6,811,674 7,372,280 5,509,549
--------------------------------------------------------------------------
Net earnings (loss) before tax benefit 5,237,242 1,290,916 (2,822,989) (3,802,195) (4,516,404)
Income tax benefit 6,457,108 400,000 - - -
--------------------------------------------------------------------------
Net earnings (loss) 11,694,350 1,690,916 (2,822,989) (3,802,195) (4,516,404)
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 stockholders $11,694,350 $1,596,794 $(3,892,152) $(5,030,912) $(4,516,404)
==========================================================================
Net earnings (loss) per common share
- basic $.21 $.03 $(.08) $(.11) $(.10)
==========================================================================
- diluted $.20 $.03 $(.08) $(.11) $(.10)
==========================================================================
Weighted average common shares
outstanding - basic 56,571,402 52,580,623 49,371,574 47,873,711 46,297,142
==========================================================================
- diluted 59,927,199 57,141,949 49,371,574 47,873,711 46,297,142
==========================================================================
Balance Sheet
Working capital $16,214,655 $7,380,236 $2,174,774 $5,046,202 $1,981,331
Total assets $36,518,974 $10,588,962 $5,198,172 $7,345,246 $4,175,021
Long-term debt $1,108,593 $0 $0 $0 $0
Stockholders' equity (1) $28,508,729 $7,943,770 $3,153,533 $5,752,993 $3,020,962
- -------------------
(1) No cash dividends were declared during any of the above periods.
10
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal Years Ended May 31, 2001 and 2000
The Company generated revenues from the sale and lease of EECP systems of
$27,508,000 and $13,674,000 for fiscal 2001 and fiscal 2000, respectively. The
Company generated earnings of $11,694,000 and $1,597,000 for fiscal 2001 and
fiscal 2000, respectively (after recognition of a deferred income tax benefit of
$6.6 million for fiscal 2001 and after deducting $94,000 in preferred stock
dividend requirements related to its June 1997 financing for fiscal 2000).
The number of cardiology practices, hospitals and independent centers
interested in becoming providers of EECP external counterpulsation therapy
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 39 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 announcements of the results of six-month, twelve-month and
twenty-four month post-treatment outcomes reported by the International EECP
Patient Registry and presented at major scientific meetings, including the
American Heart Association (AHA) and the American College of Cardiology (ACC)
annual meetings.
Revenue growth in the prior fiscal period (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, which became 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. This resulted in a standard charge of $4,550 for a full
course of therapy, which typically involves 35 one-hour outpatient sessions. The
assigned code now allows EECP providers to bill Medicare electronically,
substantially reducing the process for receiving reimbursement. Moreover, in
light of the new payment instructions, local Medicare contractors no longer have
the responsibility of establishing reimbursement rates. Effective January 1,
2001, HCFA approved an 11% increase in the reimbursement rate for EECP therapy
which raised the average Medicare payment from $130 to $144 per hourly session,
or $5,040 for a full course of therapy. Beginning August 1, 2000, Medicare
coverage was extended to include EECP treatment received on an outpatient basis
at hospitals and outpatient clinics under the new APC (Ambulatory Payment
Classification) system. The national average payment rate approximates $150 per
session. These events led to an increased demand for EECP therapy and EECP
equipment and, consequently, to revenue growth overall, as well as an increase
in the number of systems placed under fee-per-use arrangements with certain
providers.
In fiscal 2001, the Company shipped 168% more systems over the prior year
under various domestic and non-domestic commercial arrangements, including
direct sales, rental and "fee-per-use" placements and sales to foreign
distributors. Revenues from non-domestic business were $1.4 million, accounting
for 5% of total revenues compared to $155K, or 1%, in 2000.
Gross profit for fiscal 2001 and 2000 were 71% and 76%, respectively. Gross
profits are dependent on a number of factors, particularly the mix of EECP units
sold and rented during the period, the mix of EECP models sold, 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 profit realized during the current
period may not be indicative of future margins. The decrease in gross profit for
fiscal 2001 was partially attributable to the increased manufacturing costs of
its Model TS3 system manufactured in Westbury, NY. Management believes that
these increased costs will be offset in the future by manufacturing efficiencies
and the Company is presently engaged in a product cost reduction program.
Selling, general and administrative (SG&A) expenses for fiscal 2001 and
2000 were $11,635,000 and $7,384,000, respectively. The increase in SG&A
expenses of $4,251,000 from the comparable prior fiscal year resulted primarily
11
from increases in personnel in sales, marketing and administrative functions,
increases in selling and marketing expenses, including commissions, related to
increased revenues, as well as increases in insurance and other administrative
expenses.
Research and development (R&D) expenses of $2,554,0000, or 9% of revenues,
in fiscal 2001 increased by $1,141,000 from the comparable prior year expenses
of $1,413,000, or 10% of revenues. The increase relates primarily to continued
product design and development costs (including an increase in engineering and
other personnel), as well as the initiation of the pivotal study in heart
failure (which received FDA approval in July 2000 and began treating patients in
March 2001). The Company's newly developed EECP system, Model TS3, received FDA
510(k) clearance to market in December 2000 and was commercially available for
sale in the fourth quarter of fiscal 2001. The Company intends to aggressively
invest in product development and clinical trials in future periods to further
expand the clinical applications of EECP, including, but not limited to, heart
failure and diabetes disease management.
In fiscal 2001, the Company recorded a benefit for income taxes of
$6,457,000, inclusive of $140,000 in current tax expense principally resulting
from the federal alternative minimum tax and a deferred tax benefit of
$6,597,000 resulting principally from the change in the valuation allowance. The
fiscal 2001 deferred tax benefit does not include the tax benefit associated
with the current and prior years' exercises of stock options and warrants,
aggregating $7,209,000, which was credited directly to additional paid-in
capital in fiscal 2001.
In fiscal 2000, management had 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
valuation allowance primarily related to net operating losses and a $6,165,000
tax benefit from the exercise of stock options and warrants included in the net
operating loss carryforward.
As of May 31, 2001, management determined that no valuation allowance was
required based upon its financial performance, which was positively affected by
the availability of Medicare coverage and reimbursement and the increasing
acceptance by the medical community of the Company's cost-effective and
noninvasive therapy system. In addition, the Company's assessment of the
cardiovascular disease marketplace, which includes favorable patient
demographics and unmet clinical needs, provides a substantial economic
opportunity and anticipated future earnings stream with respect to current and
prospective clinical applications for its products. Ultimate realization of the
deferred tax assets is dependent upon the Company generating sufficient taxable
income prior to the expiration of the loss carryforwards. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax assets will be realized. The amount of the deferred tax assets
considered realizable, however, could be reduced in the future if estimates of
future taxable income during the carryforward period are reduced.
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 incurred net earnings of $1,691,000 for fiscal 2000
versus a net loss of $2,823,000 for fiscal 1999, respectively (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, and $94,000 and $205,000,
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
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, 2000 and 1999 were approximately $7,384,000 and $6,208,000, respectively.
The $1,176,000 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.
12
Research and development (R&D) expenses in the year ended May 31, 2000
increased by $707,000 from the prior fiscal year. The increase 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. Fiscal 2000 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
feasibility study in congestive heart failure, all of which, to some extent,
will further affect operating results in fiscal 2001.
In fiscal 2000, the Company recorded a benefit for income taxes of $400,000
resulting principally from the change in its valuation allowance related to
deferred tax assets.
Liquidity and Capital Resources
The Company has financed its fiscal 2001 and 2000 operations primarily from
working capital and operating results. At May 31, 2001, the Company had a cash
balance of $3,785,000 and working capital of $16,215,000 compared to a cash
balance of $3,058,000 and working capital of $7,380,000 at May 31, 2000. The
Company's operating activities provided (used) cash of $679,000 and $(1,159,000)
for fiscal 2001 and fiscal 2000, respectively. Net cash provided from operations
during fiscal 2001 consisted primarily of earnings from operations and increases
in accounts payable and accrued expenses, offset by increases in accounts
receivable and inventories. The increase in inventories, particularly raw
materials, and the increase in accounts payable are attributable to the purchase
of components and assemblies for the production of the new Model TS3 system,
which began commercial shipments in the fourth quarter of fiscal 2001.
Investing activities used net cash of $1,578,000 and $279,000 during fiscal
2001 and fiscal 2000, respectively. The principal uses were for the purchase of
property and equipment, including the purchase of the Company's headquarters and
manufacturing facility in November 2000. The purchase price, including planned
improvements, approximated $1,400,000. The Company has secured long-term
financing at favorable interest rates through two financing programs sponsored
by New York State, which are expected to close in August 2001. In the interim
period, the Company secured bridge financing with its existing bank for a period
of nine months, for which $1,141,667 cash has been restricted as collateral.
Financing activities provided cash of $1,627,000 and $2,819,000 during
fiscal 2001 and fiscal 2000, respectively, which resulted from the sale of
common stock and receipt of cash proceeds upon the exercise of Company common
stock options and warrants by officers, directors, employees and consultants.
During fiscal 2001, the Company established a secured revolving credit line with
its existing bank. The credit line provides for borrowings up to $5,000,000,
based upon eligible accounts receivable, as defined therein, at the Libor Rate
plus 150 basis points. Under the terms of the agreement, which expires on
September 30, 2001 and is expected to be renewed, the Company is required to
meet certain covenants, including, among others, maintenance of minimum tangible
net worth and current ratio. In addition, the line is secured by substantially
all the tangible assets of the Company. At May 31, 2001, there were no
outstanding borrowings under this line. Furthermore, as a result of commercial
agreements generated from units shipped under operating leases, the Company
believes that additional financing, if necessary, could be secured on a recourse
basis, generating more than $1,500,000 in additional working capital.
Management believes that its working capital position at May 31, 2001 and
the ongoing commercialization of the EECPR) system will make it possible for the
Company to support its operating expenses and to implement its business plans
for at least the next twelve months.
13
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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders,
and is incorporated herein by reference.
14
ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K
(a) Financial Statements and Financial Statement Schedules
------------------------------------------------------
(1) See Index to Consolidated Financial Statements on page F-1 at
beginning of attached financial statements.
(2) The following Consolidated Financial Statement Schedule is included in
Part IV of this report:
Schedule II Valuation and Qualifying Accounts (14)
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(b) Form 8-K Reports
----------------
None
(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 (6)
(b) Outside Director Stock Option Plan (6)
(c) Employment Agreement dated February 1, 1995, as amended March 12,
1998, between Registrant and John C.K. Hui (4) (9)
(d) Modification and Extension Agreement dated March 12, 1998 between
Registrant and Joseph Giacalone (10)
(e) 1997 Stock Option Plan, as amended (10)
(f) Employment Agreement dated January 6, 2000, and amended November
2000, between Registrant and D. Michael Deignan (11) (13)
(g) 1999 Stock Option Plan, as amended (12)
(22) Subsidiary of the Registrant
Percentage
Name State of Incorporation Owned by Company
---- ---------------------- ----------------
Viromedics, Inc. Delaware 61%
180 Linden Avenue Corp. New York 100%
(23) Consent of Grant Thornton LLP (14)
- --------------------------
(1) Incorporated by reference to Registration Statement on Form S-18, No.
33-24095.
(2) Incorporated by reference to Registration Statement on Form S-1, No.
33-46377 (effective 7/12/94).
(3) Incorporated by reference to Report on Form 8-K dated November 14, 1994.
(4) Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(5) Incorporated by reference to Registration Statement on Form 8-A dated May
12, 1995.
(6) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 5, 1995.
(7) Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(8) Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(9) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31, 1998.
(10) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31, 1999.
(11) Incorporated by reference to Report on Form 10-Q for the quarterly period
ended February 29, 2000.
(12) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31, 2000.
(13) Incorporated by reference to Report on Form 10-Q for the quarterly period
ended November 30, 2000.
(14) Filed herewith.
15
(15) 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
seventeenth day of August, 2001.
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 August 17, 2001 by the following persons in the
capacities indicated:
/s/ Alexander G. Bearn Director
Alexander G. Bearn
/s/ David S. Blumenthal Director
David S. Blumenthal
/s/ Abraham E. Cohen Chairman of the Board
Abraham E. Cohen
/s/ D. Michael Deignan President, Chief Executive Officer and Director
D. Michael Deignan (Principal Executive Officer)
/s/ Joseph A. Giacalone Chief Financial Officer (Principal Financial and
Joseph A. Giacalone Accounting Officer)
/s/ John C.K. Hui Senior Vice President, Chief Technology Officer
John C.K. Hui and Director
/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
16
Vasomedical, Inc. and Subsidiaries
Schedule II Valuation and Qualifying Accounts
Vasomedical, Inc. and Subsidiaries
Schedule II Valuation and Qualifying Accounts
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions
---------
(1) (2)
Balance at Charged to Charged to Balance at
beginning of costs and other end of period
period expenses accounts Deductions
- ------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts (a)
Year ended May 31, 2001 $400,000 $325,000 $180,000 (a) $545,000
Year ended May 31, 2000 $- $400,000 $400,000
Reserve for obsolete inventory
Year ended May 31, 2001 $- $150,000 $150,000
Valuation Allowance Deferred Tax
Asset
Year ended May 31, 2001 $14,665,000 $14,665,000 $0
Year ended May 31, 2000 $12,252,000 $2,413,000 $14,665,000
Year ended May 31, 1999 $11,296,000 $956,000 $12,252,000
Provision for warranty obligations
Year ended May 31, 2001 $387,000 $1,250,000 $582,000 $1,055,000
Year ended May 31, 2000 $496,000 $316,000 $425,000 $387,000
Year ended May 31, 1999 $574,000 $438,000 $516,000 $496,000
(a) accounts receivable written off
Vasomedical, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 2001 and 2000 F-3
Consolidated Statements of Earnings for the
years ended May 31, 2001, 2000 and 1999 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended May 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the
years ended May 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-16
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
of Vasomedical, Inc.
We have audited the accompanying consolidated balance sheets of Vasomedical,
Inc. and Subsidiaries (the "Company") as of May 31, 2001 and 2000, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three fiscal years in the period ended May 31, 2001.
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, 2001 and 2000, 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, 2001 in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three fiscal years in the period ended May 31, 2001. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
July 27, 2001
F-2
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
May 31,
2001 2000
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,785,456 $3,058,367
Restricted cash 1,141,667
Accounts receivable, net of an allowance for doubtful accounts
of $545,000 and $400,000 at May 31, 2001 and 2000, respectively 9,731,749 4,832,810
Inventories 4,367,943 906,984
Deferred income taxes 2,908,000 400,000
Other current assets 443,887 479,267
---------- ----------
Total current assets 22,378,702 9,677,428
PROPERTY AND EQUIPMENT, net 2,606,037 548,316
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization
of $1,349,613 and $1,136,517 at May 31, 2001 and 2000,
respectively 142,085 355,181
DEFERRED INCOME TAXES 11,298,000
OTHER ASSETS 94,150 8,037
---------- -----------
$36,518,974 $10,588,962
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $4,573,791 $1,219,803
Current maturities of long-term debt 33,074
Accrued warranty and customer support expenses 567,000 258,000
Accrued professional fees 320,854 276,000
Accrued commissions 669,328 543,389
---------- -----------
Total current liabilities 6,164,047 2,297,192
LONG-TERM DEBT 1,108,593
ACCRUED WARRANTY COSTS 488,000 129,000
OTHER LONG-TERM LIABILITIES 6,454 16,000
DEFERRED REVENUES 243,151 203,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value; 110,000,000 shares authorized;
57,195,453 and 55,921,330 shares at May 31, 2001 and 2000,
respectively, issued and outstanding 57,195 55,921
Additional paid-in capital 49,808,493 40,939,158
Accumulated deficit (21,356,959) (33,051,309)
---------- -----------
28,508,729 7,943,770
---------- -----------
$36,518,974 $10,588,962
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended May 31,
2001 2000 1999
---------------------------------------------------
Revenues
Equipment sales $26,912,373 $13,120,144 $5,335,200
Equipment rentals and services 595,965 553,488 689,063
----------- ----------- ----------
27,508,338 13,673,632 6,024,263
Cost of sales and services 7,910,359 3,277,700 2,035,578
----------- ----------- ----------
Gross profit 19,597,979 10,395,932 3,988,685
Expenses
Selling, general and administrative 11,634,965 7,383,567 6,207,924
Research and development 2,554,470 1,413,464 706,934
Provision for doubtful accounts 325,000 400,000
Interest and financing costs 48,294 7,302 11,880
Interest and other income - net (201,992) (99,317) (115,064)
----------- ----------- ----------
14,360,737 9,105,016 6,811,674
----------- ----------- ----------
NET EARNINGS (LOSS) BEFORE INCOME TAXES 5,237,242 1,290,916 (2,822,989)
Income tax benefit, net 6,457,108 400,000
----------- ----------- ----------
NET EARNINGS (LOSS) 11,694,350 1,690,916 (2,822,989)
Deemed dividend on preferred stock (864,000)
Preferred stock dividend requirement (94,122) (205,163)
----------- ----------- -----------
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $11,694,350 $1,596,794 $(3,892,152)
=========== =========== ===========
Net earnings (loss) per common share
- basic $.21 $.03 $(.08)
===== ===== ======
- diluted $.20 $.03 $(.08)
===== ===== ======
Weighted average common shares
outstanding - basic 56,571,402 52,580,623 49,371,574
=========== =========== ===========
- diluted 59,927,199 57,141,949 49,371,574
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
Vasomedical, Inc. and Subsidiaries
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, 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
Exercise of options and warrants 1,274,123 1,274 1,625,335 1,626,609
Stock options granted for services 35,000 35,000
Tax benefit of stock options and warrants
exercised in the current and prior years 7,209,000 7,209,000
Net earnings 11,694,350 11,694,350
-------- ------ ---------- ------- ----------- ------------ -----------
Balance at May 31, 2001 - $ - 57,195,453 $57,195 $49,808,493 $(21,356,959) $28,508,729
======== ====== ========== ======= =========== ============ ===========
The accompanying notes are an integral part of this statement.
F-5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31,
-----------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net earnings (loss) $11,694,350 $1,690,916 $(2,822,989)
----------- ---------- -----------
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 587,541 483,627 463,859
Provision for doubtful accounts, net of write-offs 145,000 400,000
Reserve for inventory obsolescence 150,000
Deferred income taxes (6,597,000) (400,000)
Stock options granted for services 35,000 87,000
Changes in operating assets and liabilities
Accounts receivable (5,043,939) (3,647,378) (609,091)
Inventories (4,460,572) (281,337) (367,791)
Other current assets 35,380 (301,555) (12,887)
Other assets (90,251) 15,077 402
Accounts payable, accrued expenses and other current
liabilities 3,833,781 630,164 587,915
Other liabilities 389,605 164,000 (267,000)
----------- ---------- -----------
(11,015,455) (2,850,402) (204,593)
----------- ---------- -----------
Net cash provided by (used in) operating activities 678,895 (1,159,486) (3,027,582)
----------- ---------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,578,415) (279,033) (17,229)
----------- ---------- -----------
Net cash used in investing activities (1,578,415) (279,033) (17,229)
----------- ---------- -----------
Cash flows from financing activities
Proceeds from notes 1,141,667
Restricted cash (1,141,667)
Proceeds from exercise of options and warrants 1,626,609 2,818,711 355,000
----------- ---------- -----------
Net cash provided by financing activities 1,626,609 2,818,711 355,000
----------- ---------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 727,089 1,380,192 (2,689,811)
Cash and cash equivalents - beginning of year 3,058,367 1,678,175 4,367,986
----------- ---------- -----------
Cash and cash equivalents - end of year $3,785,456 $3,058,367 $1,678,175
=========== ========== ===========
Non-cash investing and financing activities were as follows:
Deemed dividend on preferred stock $864,000
Issuance of common stock in lieu of preferred dividends $94,122 73,692
Inventories transferred to property and equipment,
attributable to operating leases net $849,613 31,554 452,000
Supplemental disclosures:
Interest paid $48,294 $7,302 $11,880
Income taxes paid 10,749 9,224 9,486
The accompanying notes are an integral part of these statements.
F-6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
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, a significant portion 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,
its wholly-owned subsidiary 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 thirty-nine 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 that have been paid by customers prior to the
performance of extended warranty services.
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.
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.
F-7
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 is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, the Company generally considers all expected future events
other than an enactment of changes in the tax laws or rates. The deferred tax
asset is continually evaluated for realizability. To the extent management's
judgment regarding the realization of the deferred tax assets change, an
adjustment to the allowance is recorded, with an offsetting increase or
decrease, as appropriate, in income tax expense. Such adjustments are recorded
in the period in which management's estimate as to the realizability of the
asset changed.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
relate to estimates of collectibility of accounts receivable, the realizability
of deferred tax assets, and the adequacy of inventory and warranty reserves.
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 as their effects would have
been antidilutive.
Stock Compensation
The Company measures stock-based awards using the intrinsic value method.
As described in Note F, 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.
Reclassifications
Certain reclassifications have been made to the prior-years' financial
statements to conform to the fiscal 2001 presentation.
NOTE B - INVENTORIES
May 31,
-------
Inventories consist of the following: 2001 2000
---- ----
Raw materials $3,364,276 $545,924
Work in progress 497,667 -
Finished goods 506,000 361,060
---------- --------
$4,367,943 $906,984
========== ========
F-8
NOTE C - PROPERTY AND EQUIPMENT
May 31,
-------
Property and equipment is summarized as follows: 2001 2000
---- ----
Land $200,000 $ -
Building and improvements 1,252,423 -
Office, laboratory and other equipment 617,875 413,070
EECP units under operating leases 1,176,500 416,000
Furniture and fixtures 124,764 81,232
Construction in progress - 139,317
Leasehold improvements 112,578 95,610
---------- --------
3,484,140 1,145,229
Less accumulated depreciation and
amortization (878,103) (596,913)
---------- --------
$2,606,037 $548,316
========== ========
NOTE D LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
May 31,
2001
-------
Revolving credit agreement (a) -
Term loan (b) $1,141,667
----------
1,141,667
Less current portion 33,074
----------
$1,108,593
==========
(a) On February 28, 2001, the Company established a secured revolving
credit line with its existing bank. The credit line provides for borrowings up
to $5,000,000, based upon eligible accounts receivable, as defined therein, at
the Libor Rate plus 150 basis points (5.65% at May 31, 2001). Under the terms of
the agreement, which expires on September 30, 2001, the Company is required to
meet certain covenants, including, among others, maintenance of minimum tangible
net worth and current ratio. In addition, the line is secured by substantially
all the tangible assets of the Company. At May 31, 2001, there were no
outstanding borrowings under this line.
(b) In November 2000, the Company purchased its headquarters and warehouse
facilities and secured a note payable from a financial institution for
$1,141,667. The note bears interest at the Libor Rate plus 150 basis points
(5.65% at May 31, 2001) and is due in monthly payments of interest only, with a
balloon payment due in August 2001. The note is secured by the building, and the
Company maintains a restricted cash balance with the financial institution for
the amount of the note during its term. The Company has received long-term
financing commitments under two programs sponsored by New York State at
favorable fixed interest rates, ranging from 6% to 7.9%, over a fifteen-year
term. The existing note is expected to be refinanced under these commitments in
August 2001. As such, the Company has classified the note payable in the
accompanying consolidated balance sheet in accordance with the estimated
amortization schedule of principal and interest payments.
Maturities of long-term debt are as follows at May 31, 2001:
2002 $33,074
2003 46,879
2004 50,270
2005 53,912
2006 57,823
Thereafter 899,709
----------
$1,141,667
==========
F-9
NOTE E - STOCKHOLDERS' EQUITY AND WARRANTS
Fiscal 1999
Based upon negotiations between the Company and the holder of its
then-existing 5% Series C Cumulative Convertible Preferred Stock (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 was reduced to the
lower of (i) $2.00 per share or (ii) 81% of the Average Closing Price, as
defined. The Company 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 its
then-existing 5% Series B Cumulative Convertible 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.
Fiscal 2001
In fiscal 2001, warrants to purchase 776,212 shares of common stock were
exercised, aggregating $1,143,000 in proceeds to the Company.
Warrants
- --------
Warrant activity for the years ended May 31, 1999, 2000 and 2001 is
summarized as follows:
Non-employee
Directors Employees Consultants Total Price Range
------------ --------- ----------- ----- -----------
Balance at June 1, 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
Exercised (250,000) (526,212) (776,212) $.45 - $2.08
--------- --------- --------- --------- ------------
Balance at May 31, 2001 - 500,000 342,500 842,500 $.45 - $2.08
========= ========= ========= ========= ============
Number of shares exercisable - 500,000 342,500 842,500 $.45 - $2.08
========= ========= ========= ========= ============
The following table summarizes information about warrants outstanding
and exercisable at May 31, 2001:
Warrants Outstanding and Exercisable
------------------------------------
Weighted
Number Average
Outstanding and Remaining Weighted
Exercisable at Contractual Life Average
Range of Exercise Prices May 31, 2001 (yrs.) Exercise Price
- ----------------------------------------------------------------------------------------------
$.45 500,000 1.6 $.45
$.91 200,000 5.4 $.91
$2.08 142,500 1.1 $2.08
----------------------------------------------------------
842,500 2.4 $.83
==========================================================
F-10
NOTE F - 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. 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.
In January 2001, the Board of Directors granted stock options under the
1999 Plan to a consultant to purchase 25,000 shares of common stock at an
exercise price of $3.81 per share (which represented the fair market value of
the underlying common stock at the time of the respective grant). These stock
options were fair-valued at $60,000 which the Company will charge to operations
over the one-year period in which services are rendered. During fiscal 2001, the
Company charged $35,000 to operations.
Subsequent to May 31, 2001, the Board of Directors granted stock options
under the 1999 Plan to officers/employees to purchase an aggregate of 700,000
shares of common stock at exercise prices ranging from $3.96 to $4.02 per share
(which represented the fair market value of the underlying common stock at the
time of the respective grants).
F-11
Activity under all the plans for the years ended May 31, 1999, 2000 and
2001 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, 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 $.75 - $5.15 $1.76
Shares authorized 1,000,000
Options granted (798,000) 798,000 $2.66 - $5.00 $4.00
Options exercised - (497,911) $.75 - $3.44 $.97
Options canceled 111,000 (111,000) $.75 - $3.47 $1.90
-----------------------------------------------------------------------
Balance at May 31, 2001 1,218,168 4,332,823 $.75 - $5.15 $2.03
=======================================================================
The following table summarizes information about stock options outstanding
and exercisable at May 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Outstanding at Contractual Life Average Exercisable at Average
Range of Exercise Prices May 31, 2001 (yrs.) Exercise Price May 31, 2001 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
$.75 - $.88 1,017,279 5.7 $.87 828,780 $.87
$1.22 - $1.77 938,250 8.4 $1.36 281,582 $1.41
$1.91 - $2.66 873,294 7.0 $1.99 803,294 $1.93
$2.91 - $4.28 1,206,000 7.3 $3.68 621,000 $3.49
$4.59 - $5.15 298,000 9.1 $4.82 60,000 $5.15
------------------------------------------------ --------------------------
4,332,823 7.2 $2.26 2,594,656 $1.98
================================================ ==========================
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, 2001 2000 1999
- ------------------------- ---- ---- ----
Expected life (years) 5 5 5
Expected volatility 80% 80% 80%
Risk-free interest rate 5.2% 6.0% 4.4%
The following are the pro forma net earnings (loss) and net earnings (loss)
per share basic and diluted amounts for fiscal 2001, 2000 and 1999, as if
compensation expense for stock-based awards had been determined based on their
estimated fair value at the date of grant:
2001 2000 1999
---- ---- ----
Pro forma net earnings (loss) $10,382,690 $576,435 $(5,534,569)
Pro forma net earnings (loss) per share
- basic $.18 $.01 $(.11)
- diluted $.17 $.01 $(.11)
F-12
The weighted-average fair value of options granted during fiscal 2001, 2000
and 1999 was $2.73, $2.75 and $.58, respectively. At May 31, 2001, there were
approximately 13,180,000 remaining authorized shares of common stock after
reserves for all stock option plans, stock warrants and shareholders' rights.
NOTE G 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,
------------------------------------
2001 2000 1999
---- ---- ----
Numerator:
Basic earnings (loss) $11,694,350 $1,690,916 $(2,822,989)
Preferred stock dividends - (94,122) (1,069,163)
----------- ---------- ------------
Diluted earnings (loss) $11,694,350 $1,596,794 $(3,892,152)
=========== ========== ============
Denominator:
Basic - weighted average shares 56,571,402 52,580,623 49,371,574
Stock options 2,270,094 1,389,607 -
Warrants 1,085,703 1,428,678 -
Convertible preferred stock - 1,743,041 -
----------- ---------- ------------
Diluted weighted average shares 59,927,199 57,141,949 49,371,574
=========== ========== ============
Earnings (loss) per share - basic $.21 $0.03 $(.08)
===== ===== ======
- diluted $.20 $0.03 $(.08)
===== ===== ======
NOTE H - 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 2001 and 2000.
NOTE I - INCOME TAXES
In fiscal 2001, the Company recorded a benefit for income taxes of
$6,457,108, inclusive of $139,892 in current tax expense principally resulting
from the federal alternative minimum tax and a deferred tax benefit of
$6,597,000 resulting principally from the change in the valuation allowance. In
fiscal 2000, the Company recorded a $400,000 benefit for income taxes resulting
principally from a change in the deferred tax valuation allowance. The Company's
deferred tax assets are summarized as follows:
May 31,
------------------------------------
2001 2000 1999
---- ---- ----
Deferred tax assets
Net operating loss and other carryforwards $13,422,000 $14,627,000 $11,913,000
Accrued compensation - 12,500 92,000
Bad debts 178,000 187,000 -
Other 606,000 238,500 247,000
----------- ----------- -----------
Total gross deferred tax assets 14,206,000 15,065,000 12,252,000
Valuation allowance - (14,665,000) (12,252,000)
----------- ----------- -----------
Net deferred tax assets $14,206,000 $ 400,000 $ -
=========== =========== ===========
The fiscal 2001 deferred tax benefit does not include the tax benefit
associated with the current and prior years' exercises of stock options and
warrants, aggregating $7,209,000, which was credited directly to additional
paid- in capital in such year.
In fiscal 2000 and 1999, management had established a valuation allowance
for all or 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 valuation allowance primarily related to net operating losses and a
$6,165,000 tax benefit from the exercise of stock options and warrants included
in the net operating loss carryforward. At May 31, 1999, the valuation allowance
primarily related to net operating losses and a $2,200,000 tax benefit from the
exercise of stock options and warrants included in the net operating loss
carryforward.
F-13
As of May 31, 2001, management determined that no valuation allowance was
required based upon its financial performance, which was positively affected by
the availability of Medicare coverage and reimbursement and the increasing
acceptance by the medical community of the Company's cost-effective and
noninvasive therapy system. In addition, the Company's assessment of the
cardiovascular disease marketplace, which includes favorable patient
demographics and unmet clinical needs, provides a substantial economic
opportunity and anticipated future earnings stream with respect to current and
prospective clinical applications for its products. Ultimate realization of the
deferred tax assets is dependent upon the Company generating sufficient taxable
income prior to the expiration of the loss carryforwards. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax assets will be realized. The amount of the deferred tax assets
considered realizable, however, could be reduced in the future if estimates of
future taxable income during the carryforward period are reduced.
At May 31, 2001, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $39,058,000, expiring at various
dates from 2005 through 2020.
The following is a reconciliation of the effective income tax rate to the
federal statutory rate:
2001 2000 1999
Amount % Amount % Amount %
---------------------------------------------------------------------------
Federal statutory rate $1,781,000 34.0 $387,911 34.0 $(959,816) (34.0)
State taxes, net 65,000 1.2 83,451 7.3 (275,455) (9.7)
Permanent differences 67,300 1.3 89,756 7.8 86,165 3.1
Net operating loss generating no
current year tax benefit 1,149,106 40.6
Utilization of net operating (1,781,000) (34.0) (561,118) (49.1) - -
loss
Change in valuation allowance - -
relating to operations (6,719,000) (128.3) (400,000) (35.0)
Other 129,592 2.5
---------------------------------------------------------------------------
$(6,457,108) (123.3) $(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 J - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company maintains employment agreements with certain executive
officers, expiring at various dates through January 2002. 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 the 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.
F-14
The approximate aggregate minimum compensation obligation under active
employment agreements at May 31, 2001 is $213,000 payable in fiscal 2002.
Leases
The Company leases additional warehouse space under two noncancelable
operating leases which expire on October 31, 2002 and September 30, 2006,
respectively. Rent expense was $69,000, $130,000 and $125,000 in fiscal 2001,
2000 and 1999, respectively. In November 2000, upon the expiration of another
unrelated lease, the Company purchased its headquarters and manufacturing
facilities.
Approximate aggregate minimum annual obligations under these lease
agreements and other equipment leasing agreements at May 31, 2001 are summarized
as follows:
Fiscal Year Amount
----------- ------
2002 $81,000
2003 75,000
2004 49,000
2005 42,000
2006 37,000
2007 12,000
-------
$296,000
========
Litigation
In June 2001, an action was commenced in the New York Supreme Court, Nassau
County, against the Company. The action seeks undefined damages based upon the
alleged breach of an agreement to register the Company's common stock. The
Company believes that the complaint is 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.
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 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, 2001, 2000 and 1999.
Purchase Commitments
At May 31, 2001, the Company had outstanding purchase commitments of
$1,296,000 with VAMED Medical Instrument Company Ltd. ("VAMED"), a Chinese
company, for the contract manufacture of its EECP Model MC2 system. The Company
believes that VAMED will be able to meet the Company's future needs for these
systems.
NOTE K SUMMARY OF QUARTERLY FINANCIAL DATA
The following is a summary of the Company's unaudited quarterly operating
results for the years ended May 31, 2000 and 2001.
Three months ended
----------------------------------------------------------------------------------------------------
(in 000s except
earnings per share May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30, Aug. 31,
data) 2001 2001 2000 2000 2000 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
Revenues $8,741 $7,068 $6,454 $5,245 $4,521 $3,178 $2,956 $3,019
Gross Profit $6,115 $4,836 $4,765 $3,882 $3,564 $2,341 $2,138 $2,353
Net Earnings $6,814 $1,785 $1,695 $1,400 $1,023 $250 $54 $270
F-15
Earnings per
share - basic $.12 $.03 $.03 $.02 $.02 $.00 $.00 $.01
- diluted $.11 $.03 $.03 $.02 $.02 $.00 $.00 $.01
Weighted average
common shares
outstanding
- basic 57,068 56,711 56,383 56,129 55,746 52,687 51,093 50,851
- diluted 60,299 59,891 59,852 59,694 60,948 55,271 55,488 56,216
F-16