UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended August 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-2871434
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(State or other jurisdiction of . (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at October 18, 2002 57,559,120
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the 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 [ ]
Vasomedical, Inc. and Subsidiaries
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited) Page
----
Consolidated Condensed Balance Sheets as of
August 31, 2002 and May 31, 2002 3
Consolidated Condensed Statements of Earnings for the
Three Months Ended August 31, 2002 and 2001 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2002 to August 31, 2002 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION 15
2
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, May 31,
2002 2002
---------- --------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,488,924 $ 2,967,627
Accounts receivable, net of an allowance for doubtful accounts of
$1,322,372 at August 31, 2002 and $1,099,687 at May 31, 2002 9,987,321 12,682,725
Inventories 5,192,024 4,902,121
Deferred income taxes 877,000 3,033,000
Financing receivables, net 172,250 633,786
Other current assets 891,969 627,243
----------- -----------
Total current assets 19,609,488 24,846,502
PROPERTY AND EQUIPMENT, net 3,163,360 3,252,030
FINANCING RECEIVABLES, net 798,311 2,941,587
NOTES RECEIVABLE - 512,329
DEFERRED INCOME TAXES 13,069,000 9,658,000
OTHER ASSETS 363,737 207,810
----------- -----------
$37,003,896 $41,418,258
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $3,156,665 $3,645,846
Current maturities of long-term debt and notes payable 1,047,258 1,046,445
Sales tax payable 679,160 732,362
Deferred revenues 372,016 272,000
Accrued warranty and customer support expenses 526,417 588,334
Accrued professional fees 316,568 362,083
Accrued commissions 767,814 973,998
----------- -----------
Total current liabilities 6,865,898 7,621,068
LONG-TERM DEBT 1,060,593 1,072,716
ACCRUED WARRANTY COSTS 369,583 402,666
DEFERRED REVENUES 814,434 719,204
OTHER LIABILITIES 400,000 -
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;
57,559,120 and 57,309,120 shares at August 31, 2002 and
May 31, 2002, respectively, issued and outstanding 57,559 57,309
Additional paid-in capital 50,240,960 50,116,148
Accumulated deficit (22,805,131) (18,570,853)
----------- -----------
Total stockholders' equity 27,493,388 31,602,604
----------- -----------
$37,003,896 $41,418,258
=========== ===========
The accompanying notes are an integral part of these condensed statements.
3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
Three months ended
August 31,
-----------------------
2002 2001
---- ----
Revenues
Equipment sales $ 4,204,509 $ 7,431,536
Equipment rentals and services 334,661 365,140
Equipment sold under sales-type leases - 1,829,561
----------- -----------
4,539,170 9,626,237
Cost of sales and services 1,959,352 2,779,108
----------- -----------
Gross Profit 2,579,818 6,847,129
Expenses
Selling, general and administrative 3,686,896 3,634,952
Research and development 1,190,986 1,149,880
Provision for doubtful accounts 3,248,874 99,000
Interest and financing costs 48,852 20,229
Interest and other income, net (76,490) (26,492)
----------- -----------
8,099,118 4,877,569
----------- -----------
EARNINGS (LOSS) BEFORE
INCOME TAXES (5,519,300) 1,969,560
Income tax (expense) benefit, net 1,285,022 (726,802)
----------- -----------
NET EARNINGS (LOSS) $(4,234,278) $1,242,758
=========== ===========
Net earnings (loss) per common share
- basic $(.07) $.02
===== ====
- diluted $(.07) $.02
===== ====
Weighted average common shares
outstanding - basic 57,477,598 57,198,388
=========== ===========
- diluted 57,477,598 59,775,522
=========== ===========
The accompanying notes are an integral part of these condensed statements.
4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Total
Additional stock-
Common Stock paid-in Accumulated holders'
Shares Amount capital deficit equity
------------ ------ ----------- ------------ -------
Balance at June 1, 2002 57,309,120 $57,309 $50,116,148 $(18,570,853) $31,602,604
Exercise of warrants 250,000 250 112,250 112,500
Stock options granted for services 12,562 12,562
Net loss (4,234,278) (4,234,278)
---------- ------- ----------- ------------ -----------
Balance at August 31, 2002 57,559,120 $57,559 $50,240,960 $(22,805,131) $27,493,388
========== ======= =========== ============ ===========
The accompanying notes are an integral part of this condensed statement.
5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
August 31,
---------------------
2002 2001
---- ----
Cash flows from operating activities
Net earnings (loss) $(4,234,278) $1,242,758
----------- ----------
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 286,968 225,378
Provision for doubtful accounts, net of write-offs 3,248,874 99,000
Deferred income taxes (1,255,000) 670,000
Stock options granted for services 12,562 15,000
Changes in operating assets and liabilities
Accounts receivable 2,472,719 (655,177)
Financing receivables, net 90,952 (1,829,561)
Inventories (438,108) (2,011,209)
Other current assets (264,726) (320,259)
Other assets (161,531) (12,843)
Accounts payable, accrued expenses and other
current liabilities (755,983) 1,205,796
Other liabilities 462,147 16,195
----------- ----------
3,698,874 (2,597,680)
----------- ----------
Net cash used in operating activities (535,404) (1,354,922)
----------- ----------
Cash flows from investing activities
Purchase of property and equipment (44,489) (95,042)
----------- ----------
Net cash used in investing activities (44,489) (95,042)
----------- ----------
Cash flows from financing activities
Payments on notes (11,310) -
Proceeds from exercise of options and warrants 112,500 31,200
----------- ----------
Net cash provided by financing activities 101,190 31,200
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (478,703) (1,418,764)
Cash and cash equivalents - beginning of period 2,967,627 3,785,456
----------- ----------
Cash and cash equivalents - end of period $2,488,924 $2,366,692
=========== ==========
Non-cash investing and financing activities were
as follows:
Inventories transferred to property and equipment,
attributable to operating leases - net $148,205 $235,788
The accompanying notes are in integral part of these condensed statements.
6
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 2002
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of August 31, 2002 and the
related consolidated condensed statements of earnings for the three-month
periods ended August 31, 2002 and 2001, changes in stockholders' equity for the
three-month period ended August 31, 2002 and cash flows for the three-month
periods ended August 31, 2002 and 2001 have been prepared by Vasomedical, Inc.
and Subsidiaries (the "Company") without audit. In the opinion of management,
all adjustments (which include only normal, recurring accrual adjustments)
necessary to present fairly the financial position and results of operations as
of August 31, 2002 and for all periods presented have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended
May 31, 2002. Results of operations for the periods ended August 31, 2002 and
2001 are not necessarily indicative of the operating results expected or
reported for the full year.
NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for segments of a
business to be disposed of. The new rules were effective for the Company on June
1, 2002. The adoption of SFAS No. 144 did not have a material effect on the
Company's financial position or results of operations.
NOTE C - INVENTORIES
August 31, May 31,
2002 2002
---------- ---------
Inventories consist of the following:
Raw materials $2,461,692 $2,661,303
Work in progress 397,832 547,818
Finished goods 2,332,500 1,693,000
---------- ----------
$5,192,024 $4,902,121
========== ==========
NOTE D - FINANCING RECEIVABLES
The following table shows the future minimum rentals receivable under
sales-type leases and future minimum lease payments and obligations under
capital leases in effect for the twelve months ended August 31:
2003 $ 268,383
2004 817,907
2005 393,941
----------
Total minimum lease payments 1,480,231
Less estimated executory costs (64,808)
----------
Net minimum lease payments 1,415,423
Less interest (199,037)
----------
Present value of minimum lease payments 1,216,386
Less valuation allowance (245,825)
----------
Net financing receivables 970,561
Less current portion (172,250)
----------
Long-term portion $ 798,311
==========
The annual minimum lease payments are subject to adjustments based on usage
of the leased units in accordance with the provisions of the lease agreements.
7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 2002
(unaudited)
NOTE E - RECEIVABLES FROM A MAJOR CUSTOMER
Under a multi-year sales contract, the Company sold equipment (EECP units)
to a customer engaged in establishing a national network of EECP centers under
sales-type leases aggregating revenues of $3,160,792 in fiscal 2002. No
additional equipment was sold to this customer during the quarter ended August
31, 2002. At August 31, 2002, financing receivables of approximately $2,558,000
from these sales-type lease transactions with this customer are outstanding. In
addition, in March 2002, the Company provided a $500,000 unsecured loan to this
customer. This financing was part of an aggregate $3.2 million credit facility,
subject to certain conditions, executed by the customer with the Company and an
unaffiliated lender in January 2002, under which the Company has no further
financing obligation. The customer issued two notes to the Company of $250,000
each in connection with two EECP centers that bear interest at 18% per annum and
mature in September 2005. Payments of principal and interest under these notes
will commence in April 2003 in varying amounts determined by a formula based
upon cash generated, as defined in the loan agreement. In connection with this
financing, the customer issued to the Company a warrant to purchase 52,620 of
its common shares at $2.20 per share expiring in January 2007. The warrant
contains a repurchase option for a 30-day period beginning December 1, 2006
(assuming no earlier liquidity event has taken place, as defined) that allows
the Company, at its option, to require the customer to redeem the warrant for
$249,945. The warrant value is collateralized by a subordinated security
interest in the customer's accounts receivable.
In late August 2002, this customer became delinquent in its scheduled
monthly payments under its financing obligations to the Company. Subsequently,
the Company was notified by this customer of recent circumstances that preclude
their ability to remain current under their financing obligations to the
Company. Based on their situation, for which the customer is attempting to
remedy through a recapitalization, significant uncertainties exist in connection
with the ongoing viability of their business. Accordingly, management has
decided to write-off, in full, all funds due from this customer as of August 31,
2002 which aggregate approximately $3,000,000. Future collections of these
receivables, if any, will be treated as a recovery of uncollectable accounts.
NOTE F - LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
The Company purchased its headquarters and warehouse facility and secured
notes of $641,667 and $500,000, respectively, under two programs sponsored by
New York State. These notes, which bear interest at 7.8% and 6%, respectively,
are payable in monthly installments consisting of principal and interest
payments over a fifteen-year term and are secured by the building. At August 31,
2002, $1,107,851 remains outstanding in connection with these notes.
The Company maintains a secured revolving credit line with a bank. The
credit line, as amended in October 2002, provides for borrowings up to
$5,000,000 ($2,000,000, at anytime that consolidated net income for the
immediately preceding three-month period is less than $1), primarily based upon
eligible accounts receivable, as defined therein, at the Libor Rate plus 200
basis points (3.82% at August 31, 2002). At August 31, 2002, approximately
$2,000,000 of the line was available of which there were outstanding borrowings
of $1,000,000. Under the terms of the agreement, which expires in February 2005,
the Company is required to meet certain covenants, including, among others,
minimum net income, minimum interest coverage and minimum tangible net worth. In
addition, the line is secured by substantially all the tangible assets of the
Company. At August 31, 2002, the Company did not meet the minimum requirements
of certain financial covenants but has received a waiver from its bank for the
first quarter. As noted above, the covenants contained in the amended credit
agreement have been revised. Management expects that the Company will be in
compliance with the revised covenants.
NOTE G - STOCKHOLDERS' EQUITY
In the first quarter of fiscal 2003, the Board of Directors granted stock
options under the 1999 Stock Option Plan to an employee to purchase 30,000
shares of common stock at an exercise price of $1.67 per share (which
represented the fair market value of the underlying common stock at the time of
the respective grant).
In the first quarter of fiscal 2003, warrants to purchase 250,000 shares of
common stock were exercised, aggregating $112,500 in proceeds to the Company.
8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 2002
(unaudited)
NOTE H - EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share are based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted earnings (loss) per share are based on the weighted number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon the exercise of stock options and warrants,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period. Options and warrants to
purchase 5,765,000 and 1,367,000 shares of common stock were excluded from the
computation of diluted earnings per share as of August 31, 2002 and 2001,
respectively, because the effect of their inclusion would be antidilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Three months ended August 31,
-----------------------------
2002 2001
---- ----
Numerator:
Basic and diluted earnings (loss) $(4,234,278) $ 1,242,758
=========== ===========
Denominator:
Basic - weighted average shares 57,477,598 57,198,388
Stock options - 1,919,061
Warrants - 658,073
----------- -----------
Diluted - weighted average shares 57,477,598 59,775,522
=========== ===========
Earnings (loss) per share - basic $(.07) $.02
===== =====
- diluted $(.07) $.02
===== =====
NOTE I - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
In June 2001, an action was commenced in the New York Supreme Court, Nassau
County, against the Company by the former holder of a warrant to purchase
100,000 shares of the Company's stock seeking undefined damages based upon a
claim that the Company breached an agreement to register the common shares
underlying the warrant at the "earliest practicable date" after due demand by
the warrant holder had been made. In October 2002, the Company decided to settle
this matter for $600,000 through the execution of an agreement that enables the
Company to satisfy this obligation over a four-year period ($200,000 in fiscal
2003, $133,000 each in fiscal years 2004 and 2005 and $134,000 in fiscal 2006).
Accordingly, the Company has recorded a $600,000 charge to operations in the
three-month period ended August 31, 2002.
In or about late June 2002, the Company was notified by a letter from the
domestic counsel for Foshan Life Sciences Co. Ltd. ("FLSC"), a joint venture
comprised of a Florida company and Vamed Medical Instrument Company Limited
("Vamed"), a Chinese company with whom the Company had an agreement to
manufacture the Company's EECP Model MC2 system, that FLSC was initiating an
arbitration proceeding before the Hong Kong International Arbitration Council
("HKIAC") to recover compensatory and punitive damages in excess of $1,000,000
and injunctive relief based upon claims of breach of the manufacturing
agreement, tortious interference and misappropriation of confidential
information and trade secrets. Although possessing several substantive defenses
to these claims, the Company initially has challenged the HKIAC's right to hear
and determine the dispute on the ground that FLSC is neither a legitimate nor
recognized party to the manufacturing agreement which provides for such
arbitration and, therefore, is not entitled to enforce the same. The Company
also has demanded that FLSC deposit with the HKIAC security to cover the
Company's costs of arbitration. To date, FLSC has neither responded to the
Company's demand for security nor apparently filed a formal statement of claim
with the HKIAC.
Purchase Commitments
- --------------------
At August 31, 2002, the Company had outstanding purchase commitments of
$162,000 with FLSC, a Chinese company that has assumed the operational
activities of Vamed, another Chinese company, for the manufacture of its EECP
Model MC2 system. The Company believes that FLSC will be able to meet the
Company's future need for this system.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended August 31, 2002 and August 31, 2001
The Company generated revenues from the sale and lease of EECP(R) systems
of $4,539,000 and $9,626,000 for the three months ended August 31, 2002 and
2001, respectively, representing a 53% decrease. The decrease in revenues for
the three months ended August 31, 2002 as compared to August 31, 2001 is a
result of the following:
(1) The Company's prior-year quarterly revenues were favorably impacted by
$1,800,000 resulting from the shipment of sixteen EECP units under sales-type
leases. There was no equipment sold under sales-type leases in the current
quarterly period and the Company does not expect fiscal 2003 revenues from
sales-type leases to approach fiscal 2002 levels. The Company offered equipment
under sales-type leases only to select customers in the past, based upon, among
other things, the customers' credit history with the Company.
(2) At August 31, 2002, the Company had received approximately $3,100,000
in sales orders for EECP systems from domestic and international customers
which, due to certain customer constraints (principally the temporary
unavailability of space or personnel) as well as the present regulatory status
of the EECP Model TS3 in Europe, were unable to be shipped and recognized as
revenue in the first quarter. The Company has completed and filed its submission
for the CE mark on its EECP Model TS3 in October 2002 and expects to receive the
approval notification to allow for shipments to Europe in the second or third
quarter of fiscal 2003. In addition, the Company expects that a portion of the
domestic orders received will ship in the second quarter as well.
(3) The Company also has been experiencing a longer selling cycle for EECP
systems and attributes this to, among other things, (a) a change in the mix of
prospective customers toward larger medical practices and hospitals which have
longer decision-making processes; (b) inconsistent or inadequate reimbursement
coverage policies among certain third-party insurers; (c) the activities and
pricing of competitors which lengthens the negotiation process; and (d) general
economic conditions.
As a result of the shortfall in revenues and certain non-recurring charges,
the Company incurred a loss before income taxes of $5,519,000 for the three
months ended August 31, 2002 versus earnings before income taxes of $1,970,000
for the three months ended August 31, 2001. The Company reported a net loss of
$4,234,000 versus net earnings of $1,243,000 for the three months ended August
31, 2002 and 2001, respectively, after recognition of an income tax (benefit)
provision of $(1,285,000) and $727,000, respectively.
The Company's revenue growth over the last several years resulted primarily
from the increase in cardiology practices and hospitals who became providers of
EECP therapy following the announcement by the Centers for Medicare and Medicaid
Services (CMS) (formerly 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. CMS 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 announcement
of the results of six-month, twelve-month and twenty-four month post-treatment
outcomes reported by the International EECP Patient Registry, as well as
numerous other studies reported and presented at major scientific meetings,
including the American Heart Association (AHA) and the American College of
Cardiology (ACC) annual meetings.
The Company continues to be optimistic about its future. In June 2002, the
Company announced that all three of its models of the EECP system had been
granted a 510(k) market clearance from the Food and Drug Administration (FDA)
for a new indication for the treatment of congestive heart failure. Congestive
heart failure afflicts more than 5 million people in the United States alone,
with more than 550,000 new patients diagnosed every year. It is the single most
expensive disease state in the nation, accounting for more than $40 billion in
direct and indirect medical costs. EECP therapy was the featured topic at a CME
(Continuing Medical Education) satellite symposium held at the Heart Failure
Society of America's Sixth Annual Scientific Meeting in September where over 300
heart failure specialists attended the symposium, entitled "Enhanced External
Counterpulsation: A Novel Potential Approach to Heart Failure," which was
sponsored by the University of Minnesota and supported by an educational grant
from the Company. Vasomedical's multicenter, randomized, controlled, PEECH(TM)
(Prospective Evaluation of EECP in Congestive Heart Failure) trial, which is
more than 50% enrolled, is of significant importance and should confirm the
benefits of EECP for heart failure patients that have been observed to date in
smaller studies and lead to more widespread acceptance and adoption of the
therapy in clinical practice. The Company's heart failure feasibility study was
published in the July/August issue of the journal Congestive Heart Failure.
10
Gross profit margins for the first quarter ended August 31, 2002 and 2001
were 57% and 71%, respectively. Gross profits are dependent on a number of
factors, particularly the mix of EECP units sold, rented or placed 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 margin for the three
months ended August 31, 2002 compared to August 31, 2001 primarily resulted from
the significant decrease in revenue from the prior comparable quarter.
Selling, general and administrative (SG&A) expenses for the three months
ended August 31, 2002 and 2001 were $3,687,000 (81% of revenues) and $3,635,000
(38% of revenues), respectively. The increase in the percentage of SG&A expenses
as a percentage of sales increased 43% primarily due to the significant decrease
in revenue from the prior comparable quarter. The increase in SG&A expenses, on
an absolute basis, from the comparable prior fiscal quarter resulted primarily
from the $600,000 accrual arising from the settlement of litigation, offset by
decreases in sales commissions related to decreased revenues, and other
decreases which resulted from the timing of certain marketing and promotional
programs in the prior year versus the current year.
During the first quarter of fiscal 2003, the Company charged $3,249,000 to
its provision for doubtful accounts as compared to $99,000 during the first
quarter of fiscal 2002, primarily as a result of a write-off due to significant
uncertainties with respect to a major customer's ability to meet its present and
future financial obligations, as well as reserves applied against certain
domestic and international accounts for which extended credit terms were
offered.
Research and development (R&D) expenses of $1,191,000 (26% of revenues) for
the three months ended August 31, 2002 increased by $41,000, or 4%, from the
prior three months ended August 31, 2001 of $1,150,000 (12% of revenues). R&D
expenses are primarily impacted by the PEECH clinical trial in heart failure,
other clinical studies and initiatives (including the International EECP Patient
Registry), as well as continued product design and development costs. The
Company expects to continue its investments in product development and clinical
trials in fiscal 2003 and beyond to further expand the clinical applications of
EECP, including, but not limited to, heart failure, diabetes disease management
and acute coronary syndromes.
In the first quarter of fiscal 2003, the Company recorded a benefit for
income taxes of $1,285,000, inclusive of a $622,000 valuation allowance on
deferred tax assets and $30,000 in current tax benefit principally resulting
from a state tax refund. This is in contrast to a deferred tax provision
reported the first quarter of fiscal 2002 of $727,000, inclusive of $57,000 in
current tax expense principally resulting from the federal alternative minimum
tax.
The increase in interest income from the prior period is the direct result
of interest income reported on equipment sold under sales-type leases, offset by
the decrease in the average cash balances invested during the year, as well as
declining interest rates this year over last year.
The increase in interest expense over the prior period is primarily due to
interest on loans secured to refinance the November 2000 purchase of the
Company's headquarters and operating facility, as well as working capital
borrowings under the Company's revolving secured credit facility.
Liquidity and Capital Resources
The Company has financed its fiscal 2003 and 2002 operations primarily from
working capital and operating results. At August 31, 2002, the Company had a
cash balance of $2,489,000 and working capital of $12,744,000, compared to a
cash balance of $2,968,000 and working capital of $17,225,000 at May 31, 2002.
The Company's operating activities used cash of $535,000 and $1,355,000 for
August 31, 2002 and 2001, respectively. Net cash used in operations during the
three months ended August 31, 2002 consisted primarily of increases in
inventory, other current assets and other liabilities, offset by decreases in
accounts receivable, accounts payable and accrued expenses. The increase in
inventories resulted from an increase in finished goods of the Company's Model
TS3 system due to a shortfall in anticipated sales. The decrease in accounts
receivable resulted primarily from decreased sales in the current quarter. The
Company's management provides routine oversight with respect to its accounts
receivable credit and collection efforts, as well as the procurement of its raw
materials and management of finished goods inventory levels. Cash used in
operations during the first quarter of fiscal 2003 is not necessarily indicative
of the results expected in future years.
Investing activities used net cash of $44,000 and $95,000 during the three
months ended August 31, 2002 and 2001, respectively. The principal use of cash
was for the purchase of property and equipment.
11
Financing activities provided cash of $101,000 and $31,000 during the three
months ended August 31, 2002 and 2001, respectively. Financing activities during
fiscal 2002 and 2001 consisted of 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. In October 2002, the Company
amended its existing credit facility to provide for borrowings up to $5,000,000
($2,000,000, at any time that consolidated net income for the immediately
preceding three-month period is less than $1), primarily based upon eligible
accounts receivable, as defined therein, at the Libor Rate plus 200 basis
points. Although the Company was not in compliance with certain financial
covenants at August 31, 2002, the bank issued a waiver to the Company for that
period. As noted above, the covenants contained in the amended credit agreement
have been revised. Management expects that the Company will be in compliance
with the revised covenants. At August 31, 2002, $2,000,000 of the line was
available of which there were outstanding borrowings of $1,000,000.
Management believes that its working capital position at August 31, 2002,
the availability of its credit facility, and the ongoing commercialization of
the EECP 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.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of August 31, 2002:
Due as of Due as of 8/31/04 Due as of 8/31/06 Due
Total 8/31/03 and 8/31/05 and 8/31/07 Thereafter
- ---------------------------------------------------------------------------------------------------------------
Line-of Credit (1) $1,000,000 $1,000,000
Long-Term Debt 1,107,850 47,258 $104,958 $120,634 $835,000
Operating Leases 226,000 94,000 92,000 40,000 -
Litigation Settlement 600,000 200,000 266,000 134,000
Employment Agreements 666,500 390,000 276,500 - -
Purchase Obligations 162,000 162,000 - - -
----------------------------------------------------------------------------------
Total Contractual Cash
Obligations $3,762,350 $1,893,258 $739,458 $294,634 $835,000
==================================================================================
(1) The Company maintains a revolving credit agreement that, as amended in
October 2002, provides for borrowings of up to $5,000,000, primarily based
upon eligible accounts receivable, as defined therein. Approximately
$2,000,000 is available under the revolving credit agreement, of which
$1,000,000 is outstanding at August 31, 2002. The revolving credit
agreement expires in February 2005.
Effects of Inflation
The Company believes that inflation and changing prices over the past three
years have not had a significant impact on our revenue or on our results of
operations.
Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to certain financial market risks, including changes
in interest rates. All of the Company's revenue, expenses and capital spending
are transacted in US dollars. The Company's exposure to market risk for changes
in interest rates relates primarily to our cash and cash equivalent balances,
investments in sales-type leases and the line of credit agreement. The majority
of our investments are in short-term instruments and subject to fluctuations in
US interest rates. Due to the nature of our short-term investments, we believe
that there is no material risk exposure.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission, or SEC, in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note A of the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2002 includes a summary of the Company's significant
accounting policies and methods used in the preparation of our financial
statements. In preparing these financial statements, the Company has made its
best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. The Company's critical accounting policies are as
follows:
12
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, generally for terms of one year or less,
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.
The Company follows SFAS No. 13, "Accounting For Leases," for its sales of
EECP units under sales-type leases with two customers. In accordance with SFAS
No. 13, the Company records the sale and financing receivable at the amount of
the minimum lease payment, less unearned interest income, which is computed at
the interest rate implicit in the lease, and executory costs. The cost of the
EECP unit acquired by the customer is recorded as cost of sales in the same
period.
Accounts Receivable/Financing Receivables
Estimates are used in determining our allowance for doubtful accounts based
on our historical collections experience, current trends, credit policy and a
percentage of our accounts receivable by aging category. In determining these
percentages, we look at historical write-offs of our receivables. The Company
also looks at the credit quality of its customer base as well as changes in its
credit policies. The Company continuously monitors collections and payments from
its customers. While credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same credit loss rates that it has in the past.
In addition, the Company periodically reviews and assesses the net
realizability of its receivables arising from sales-type leases. If this review
results in a lower estimate of the net realizable value of the receivable, an
allowance for the unrealized amount is established in the period in which the
estimate is changed. In the first quarter of fiscal 2003, management decided to
write-off financing receivables under sales-type leases of approximately
$2,500,000 as a result of significant uncertainties with respect to a major
customer's ability to meet its present and future financial obligations.
Inventories
The Company values inventory at the lower of cost or estimated market, cost
being determined on a first-in, first-out basis. The Company regularly reviews
inventory quantities on hand, particularly raw materials and components, and
records a provision for excess and obsolete inventory based primarily on
existing and anticipated design and engineering changes to our products as well
as forecasts of future product demand.
Warranty Costs
Equipment sold is generally covered by a warranty period of one year. The
Company accrues a warranty reserve for estimated costs to provide warranty
services. The estimate of costs to service our warranty obligations is based on
historical experience and an expectation of future conditions. While these
warranty costs have historically been within the Company's expectations and the
provisions established, to the extent the Company experiences increased warranty
claim activity or increased costs associated with servicing those claims, the
warranty accrual will increase, and the Company would experience decreased gross
profit.
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.
13
Stock Compensation
The Company measures stock-based awards using the intrinsic value method.
As described in Note I to the consolidated financial statements included in the
Annual Report on Form 10-K for the year ended May 31, 2002, pro forma disclosure
of the effect on net earnings and net earnings per common share has been
computed as if the fair value-based method had been applied in measuring
compensation expense.
Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for segments of a
business to be disposed of. The new rules were effective for the Company on June
1, 2002. The adoption of SFAS No. 144 did not have a material effect on the
Company's financial position or results of operations.
Procedures and Controls
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Except for historical information contained herein, the matters discussed
are forward-looking statements that involve risks and uncertainties. When used
in this report, 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 the dramatic changes taking place in the healthcare
environment; the impact of competitive procedures and products and their
pricing; unexpected manufacturing problems in foreign supplier facilities;
unforeseen difficulties and delays in the conduct of clinical trials and other
product development programs; the actions of regulatory authorities and
third-party payers in the United States and overseas; uncertainties about the
acceptance of a novel therapeutic modality by the medical community; 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.
14
VASOMEDICAL, INC. AND SUBSIDIARIES
----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS:
Previously reported.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 99 - Certification of Periodic Report
(b) Reports on Form 8K: None
15
In accordance with to the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VASOMEDICAL, INC.
By: /s/ D. Michael Deignan
D. Michael Deignan
President, Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Joseph A. Giacalone
Joseph A. Giacalone
Chief Financial Officer (Principal
Financial and Accounting
Officer)
Date: October 18, 2002
16