-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ToH1UkpsB1wuVu7MyJ8DOOJmbI5XirNF/W51zRkpPSoJXF3gkVfqq50pZicWRI1n 990sKSNnKl1xEM3oIue93g== 0000950123-96-004790.txt : 19960830 0000950123-96-004790.hdr.sgml : 19960830 ACCESSION NUMBER: 0000950123-96-004790 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960829 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASOMEDICAL INC CENTRAL INDEX KEY: 0000839087 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 112871434 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18105 FILM NUMBER: 96623236 BUSINESS ADDRESS: STREET 1: 150 MOTOR PARKWAY STREET 2: STE 408 CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5169974600 MAIL ADDRESS: STREET 1: 150 MOTOR PARKWAY STREET 2: SUITE 408 CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE MEDICAL PRODUCTS INC /NY/ DATE OF NAME CHANGE: 19920506 10KSB40 1 VASOMEDICAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1996 [ ] 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 small business issuer as specified in its charter) Delaware 11-2871434 (State or other jurisdiction of (I.R.S. Employer of incorporation or organization) Identification No.) 180 Linden Avenue, Westbury, New York 11590 (Address of Principal Executive Offices) (Zip Code) Issuer'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) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] The issuer had revenues for its most recent fiscal year ended May 31, 1996 of $2,683,000. The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 21, 1996, based on the average price on that date, was $128,330,000. At August 21, 1996, the number of shares outstanding of the issuer's common stock was 46,312,749. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Vasomedical, Inc. Annual Report to Stockholders for the year ended May 31, 1996 are incorporated herein by reference in Part II. Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders of Vasomedical, Inc. are incorporated herein by reference in Part III. Certain exhibits are incorporated herein by reference as set forth in Item 13(a)3, Index to Exhibits, in Part IV. Transitional Small Business Disclosure Format Yes [ ] No [X] 2 PART I ITEM ONE - BUSINESS GENERAL Vasomedical, Inc. (the "Company"), incorporated in Delaware in July 1987, is engaged in the commercialization of Enhanced External Counterpulsation ("EECP(TM)"), a microprocessor-based medical device for the non-invasive, atraumatic treatment of patients with coronary artery disease. EECP(TM) is marketed worldwide to hospitals, clinics and other cardiac health care providers. To date, the Company's revenues have been generated solely from customers in the United States. In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso Interim Corp. ("Vaso Interim") (formerly Vasomedical, Inc.), acquired the worldwide exclusive marketing rights (except in China) to EECP(TM) and agreed to fund research and development activities performed by Vasogenics, Inc. ("Vasogenics"), its joint-venture partner in the former Vasomedical, Inc. and sole minority shareholder. Vasogenics held the intellectual property rights to the EECP(TM) technology, including patents and manufacturing rights. In January 1995, the Company acquired all the capital stock of Vasogenics for stock consideration and the assumption of certain liabilities. In connection with the acquisition, the Company retained certain key employees of Vasogenics who had been involved in the development of the EECP(TM) technology. EECP(TM), which had undergone clinical studies at the State University of New York's University Medical Center at Stony Brook ("Stony Brook"), received marketing clearance from the Food and Drug Administration ("FDA") under a 510(k) premarket notification in February 1995. The Company's 61%-owned subsidiary, Viromedics, Inc. ("VMI"), was formed in 1989 to acquire certain rights to an organic compound intended to be used as an anti-viral agent. VMI entered into an agreement with the Albert Einstein College of Medicine ("AECOM") which, as modified in September 1994, assigned its entire rights and interest in the organic compound in exchange for the release of all outstanding financial commitments due AECOM and for 20% of any monetary consideration received by AECOM for VMI's patent rights and know-how, as defined. To date, no monetary consideration has been received by VMI. THE EECP(TM) SYSTEM General Discussion According to the U.S. Surgeon General, coronary heart disease ("CHD") is the number one cause of death in the United States. A major complication of CHD is chronic angina pectoris, from which millions of Americans suffer. It is caused by obstruction of arteries which supply the heart muscle with blood. The pain associated with angina pectoris can be disabling, and conventional therapy consists of invasive procedures, such as coronary angioplasty and bypass grafting, as well as medication. According to a Report of the American College of Cardiology/American Heart Association Task Force on Assessment of Diagnostic and Therapeutic Cardiovascular Procedures, re-occlusion of dilated vessels occurs within six months of coronary angioplasty procedures in 30% to 40% of cases (Journal of the American College of Cardiology Vol. 22, No. 7) and localized or diffuse narrowings of vein grafts occur by ten years after coronary artery bypass graftings (Circulation Vol. 83, No. 3). The Company formed Vaso Interim, a joint venture with Vasogenics, for the purpose of developing and marketing a system for the atraumatic, noninvasive treatment of CHD, specifically for patients who suffer from angina pectoris, acute myocardial infarction (heart attack) and cardiogenic shock. The system can also be used by patients as a complementary treatment after coronary bypass surgery ("CABG") or angioplasty ("PTCA"). This system, called Enhanced External Counterpulsation ("EECP(TM)"), involves the use of a patient's electrocardiogram ("ECG") signals to modulate the timing of the inflation and deflation of a series of compressive air cuffs wrapped around the lower extremities. During diastole, the cuffs inflate sequentially to push venous blood toward the heart and, more importantly, create a retrograde arterial pressure wave. The result is augmented diastolic central aortic 3 and coronary perfusion pressure and increased venous return. Rapid and simultaneous deflation of the cuffs at the onset of systole produces systolic unloading and decreased cardiac workload. Researchers postulate that EECP(TM) facilitates the development or opening of coronary collaterals, whereby a natural bypass of occluded arteries is achieved. This could explain why EECP(TM) reduces inequalities of myocardial perfusion of ischemic regions and causes both subjective and objective improvement in patients with CHD. In March 1989, Vasogenics received 510(k) marketing clearance from the FDA for its Model EECP-MC1 system. In February 1995, the Company received 510(k) marketing clearance for its Model EECP-MC2 system, which incorporates the latest technological improvements of the EECP(TM) system. A U.S. patent (which expires in 2005) covering EECP(TM) design and functions was issued in June 1988 to Dr. Zheng of Sun Yat-sen University of Medical Sciences in China. In September 1991, this patent was assigned to Vasogenics and now it is owned by the Company. International and additional domestic patent applications were filed in May 1993 and the Company expects these patents to issue during fiscal 1997. The System EECP(TM) is an advanced treatment system utilizing fundamental hemodynamic principles to relieve CHD chest pain. Treatment involves the use of the EECP(TM) equipment to inflate and deflate a series of compressive air cuffs applied to the patient's lower extremities - the calves, lower thighs, and upper thighs, including the large vascular beds in the buttocks. Timing for inflation and deflation is regulated by a microprocessor running ECG signals through sets of algorithms that monitor safety and precision. Upon diastole, the cuffs are inflated sequentially and rapidly from the calves proximally, creating a retrograde arterial pressure wave that increases systemic aortic diastolic pressure, coronary perfusion pressure and blood flow. Compression of the vascular beds of the legs also increases venous return. Instantaneous decompression of all cuffs at the onset of systole lowers vascular impedance thereby decreasing ventricular workload. This latter effect, when coupled with the augmented venous return, raises cardiac output by as much as 65%. Patients usually begin to experience symptomatic relief of angina after 15 or 20 hours of a 35-hour treatment regimen. Positive effects are sustained between treatments and usually persist years after completion of a full course of therapy, as reported in the April 15, 1995 issue of the American Journal of Cardiology. The mechanism by which EECP(TM) produces long-term improvements in myocardial perfusion defects remains uncertain, but thallium-201 and exercise stress test results combined are strongly indicative of an improvement in myocardial perfusion and resolution of ischemic defects. The most logical explanation for these observations is that EECP(TM) in some way stimulates collateral vessel recruitment and/or growth. Collateral vessels may be regarded as one of the heart's emergency systems, and can be called upon to open up and also to be extended by new growth, in response to ischemia. It has been known for some time, from animal experiments, that collateral flow can increase within several minutes of the onset of ischemia, presumably due to recruitment of existing, but dormant, vessels. There is also mounting evidence, largely using the intra-aortic balloon pump in models of acute myocardial ischemia and reperfusion, that counterpulsation has the potential to stimulate collateral flow. The results of studies carried out at Stony Brook, supported by previous experience in China, provide the first indications that EECP(TM) may stimulate collateral flow in chronic stable angina. In support of this suggestion, it is becoming apparent that the best results with this technique are obtained in patients with at least one patent major epicardial vessel, and who therefore still have the means to develop collaterals. The response rate of patients with severe or diffuse triple-vessel disease has been poor. The contribution of collateral blood flow to total myocardial perfusion has been recognized for decades. Collateral vessels are brought into play by a critical occlusion in a coronary artery. This causes a drop in perfusion pressure distal to the occlusion, which, in turn, creates an increased pressure gradient across the collateral vessel bridging the patent and occluded artery. The increased pressure gradient is believed to be the main reason for recruitment of collateral vessels in the early stages of acute myocardial ischemia. As EECP(TM) increases diastolic, 2 4 and thus coronary perfusion pressure, it would be expected to increase the intensity of the stimulus, and thereby enhance the recruitment of latent collateral vessels. However, the fact that most patients do not begin to experience symptomatic benefit until after the second or third week of treatment suggests the possibility that growth of new vessels may also be involved. This could, in turn, result from chronic alteration and resetting of autocrine and endocrine neurohormonal systems, including concentrations of local growth factors. Studies to explore these possibilities are already being planned. Factors such as angiotensin II, endothelin and platelet-derived growth factor ("PDGF") have all been shown to possess both vasoactive and mitotic properties on vascular smooth muscle. It is possible that EECP(TM) may cause some resetting of the systems (e.g., baroreceptors) which regulate blood pressure. If these changes were to involve some of the aforementioned factors, they might exert their immediate effects on vascular smooth muscle tone and their long-term effects on vascular smooth muscle mass. The Company's EECP(TM) equipment consists of a control unit, an air compressor, an ECG and pulse monitoring unit, in addition to the series of compressive cuffs that are wrapped around the lower extremities of the patient. The EECP(TM) timing logic is controlled by a central microprocessor which obtains signals from the electrical activities of the heart, determines the period for each heart beat, calculates the precise instant when the heart is contracting or relaxing and sends out a signal to control the inflation and deflation valves so as to apply and relieve pressure at the appropriate time. Clinical Studies Early experiments with counterpulsation at Harvard in the 1950s demonstrated that this technique markedly reduces the workload, and thus oxygen consumption, of the left ventricle. This basic effect has been demonstrated over the past 40 years in both animal experiments and in patients. The clinical benefits of counterpulsation were less consistently observed in early studies because of equipment that lacked sequential cuff inflation and the computer-controlled operating system that made sequential cuff inflation and other features possible. As the technology improved, however, it became apparent that both internal and external forms of counterpulsation were capable of improving survival in patients with cardiogenic shock following myocardial infarction. Later, in the 1980s, Dr. Zheng and colleagues in China reported on their extensive experience in treating angina using the newly developed enhanced sequential device - EECP(TM). Not only did a course of treatment with EECP(TM) reduce the frequency and severity of anginal symptoms during normal daily functions and also during exercise, but the improvements were sustained for years after therapy. These results prompted a group of investigators at Stony Brook to undertake studies with EECP(TM) to reproduce the Chinese results, using both subjective and objective endpoints. The first study group consisted of 18 patients with chronic stable angina, despite medical and surgical intervention, as well as evidence, assessed by thallium-201 perfusion imaging, of ischemia during an exercise stress test. EECP(TM) treatment was administered for one hour daily for a total of 36 hours over approximately seven weeks. During the course of treatment, all 18 patients experienced substantial subjective improvements in symptoms, and 16 were completely free of angina during normal daily activities. Looking at objective measures of benefit, a comparison of maximal stress test results before and after treatment showed that EECP(TM) produced a significant increase (19%) in exercise tolerance in the total patient population. Intriguingly, results of thallium-201 scans before and after treatment also showed a complete resolution of perfusion defects in 12 patients (67%), and a decrease in the size of the ischemic zone in another two. Thus 14 of 18 patients (78%) experienced a reduction in ischemia as assessed by radionuclide imaging. A subgroup analysis of exercise stress tests for these patients revealed that EECP(TM) not only produced significant improvements in exercise duration (22%), but also increases in double product (blood pressure x heart rate, a measure of cardiac work). Taking all these results together, the conclusion was that a program of EECP(TM) treatment was somehow capable of producing a sustained improvement in myocardial oxygen supply, and hence an increase in oxygen consumption. The heart was thus able to work harder for longer periods. 3 5 Subsequent data from a group of 50 angina patients who were treated with EECP(TM) are consistent with the above results. All of these patients reported a reduction in symptoms, and 80% demonstrated improvement by radionuclide testing. Patients with one- or two-vessel disease were significantly more likely to respond than were those with three-vessel disease. Seventeen of the original 18 patients studied, including 13 of the 14 patients who had previously shown a reduction in myocardial ischemia were followed up for an average of three years. One of these 13 patients suffered a myocardial infarction, and another underwent a revascularization procedure during the intervening period. Of the remaining 11 patients, all remained free of limiting angina. Ten patients underwent repeat stress thallium testing. In these patients, the mean double product at 3 years was not significantly different from the baseline value; however, eight patients (80%) demonstrated persistent improvements in the results of thallium scintigraphy. Another study of 27 patients with angina pectoris indicated that EECP(TM) outpatient therapy appears to exert effects on the heart similar to those achieved by exercise training. After receiving EECP(TM), approximately 80% of the patients studied increased the amount of time that they were able to exercise as measured during thallium stress tests. Although exercise usually causes increases in the heart rate and blood pressure, these patients exhibited lower than expected heart rate increases and no significant increases in blood pressure during their stress tests. This indicates that they achieved similar conditioning benefits from EECP(TM) as might be expected from engaging in a regular program of exercise. In this study, 26 men and one woman received 35 hours of EECP(TM). A maximal radionuclide stress test was performed prior to entry into the study. Upon completion of the EECP(TM) treatment course, patients were again tested to the same cardiac workload and to maximum effort. The radionuclide imaging results were similar to those reported in previous studies with 78% of patients having a partial or complete resolution of perfusion defects indicating better or normalized blood flow to ischemic areas of the heart. Only those who had improved post-EECP(TM) radionuclide images demonstrated meaningful increases in maximal exercise times. However, in the "unimproved" group, there was a significant decrease in post-EECP(TM) double product (peak exercise systolic pressure x peak heart rate), indicating a useful decrease in peripheral vascular resistance. The authors concluded that the two proposed mechanisms of EECP(TM), improved stress perfusion of the ischemic myocardium and decreased peripheral vascular resistance, are complementary and may explain the improved exercise tolerance and symptomatic relief sometimes seen in patients with unchanged stress perfusion imaging. In May 1995, the Company began a large blinded, randomized multi-center clinical study in four leading university hospitals in the United States to further document the extent and circumstances of patient benefits that can be derived from EECP(TM) and to gather information for medical reimbursement. These institutions are: University of California San Francisco, Columbia University College of Physicians & Surgeons at the Columbia-Presbyterian Medical Center in New York, Deaconess Hospital, a teaching affiliate of Harvard Medical School, and Yale University School of Medicine. In fiscal 1997, the Company intends to conduct further studies with EECP(TM) in the United States and abroad to expand the patient data base in the treatment of angina, as well as to expand the EECP(TM) claim structure. The Company's Plans The Company's short and long-term plans are to: (a) Establish the Company's EECP(TM) procedure as a new standard of care in coronary artery disease. (b) Focus marketing strategies and programs to teaching hospitals and major cardiology practices. (c) Establish a distribution network in international markets. (d) Complete a multi-center clinical study in major teaching hospitals in order to i) further document the efficacy of EECP(TM) in the treatment of patients suffering from CHD and ii) understand more about the patients who can benefit from EECP(TM). (e) Complete a cost-effectiveness and quality-of-life evaluation of treatment with EECP(TM) to justify reimbursement of the cost of treatment from the Health Care Financing Authority ("HCFA"), State Welfare ("Medicaid") agencies, and commercial insurance companies. 4 6 (f) Expand the EECP(TM) clinical research program to confirm new claims (e.g., use in early, acute myocardial infarction and prevention of restenosis following coronary angioplasty). (g) Use the Company's proprietary technology to develop upgrades of the current EECP(TM) model and create new products for use in cardiovascular medicine. (h) Initiate in-house assembly of EECP(TM). 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 usual blood supply is cut off 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(TM) - "Enhanced" describes the Company's proprietary system which increases the level of diastolic augmentation by 40-50% over that of earlier devices Ischemia - lack of blood supply Occlusion - blockage of blood vessels Percutaneous Transluminal Coronary Angioplasty or PTCA - insertion of a wire into a coronary artery to which a balloon or other instrument is attached for the purpose of widening a narrowed vessel Stenosis - the narrowing of a blood vessel's diameter Systole - contracting period during which the heart is pumping blood to the rest of the body Thallium - an imaging medium used to detect areas of ischemia within the heart muscle COMPETITION Presently, Vasomedical is aware of only one competitor with an external counterpulsation device. The Company believes that this competitor's involvement in the market is very limited. There can be no assurance, however, that other companies will not enter the intended market for EECP(TM). Such companies may have substantially greater financial, manufacturing, marketing and technological resources than those possessed by the Company and may, therefore, succeed in developing products or technologies that are more effective than those offered by the Company and that would render the Company's technology and existing products obsolete or noncompetitive. GOVERNMENT REGULATION The EECP(TM) system is subject to extensive regulation by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act, as amended, the FDA regulates and must approve the clinical testing, manufacture, labeling, distribution and promotion of medical devices in the United States. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 28, 1976, the date on which the Medical Device Amendments of 1976 was enacted, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification. The 510(k) premarket notification must be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. Pursuant to recent amendments to the law, the FDA can now require clinical data or other evidence of safety and effectiveness. The FDA may have authority to deny the 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(TM) 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(TM) system will not be reclassified in the future by the FDA and subject to additional regulatory requirements. 5 7 If substantial equivalence cannot be established or if the FDA determines that a more extensive review of the device is in order, the FDA will require the manufacturer to submit a PMA application that must be fully reviewed and approved by the FDA. Management does not believe that the EECP(TM) system will ultimately require PMA approval for continued commercialization; however, the Company so designed the protocol for its current multi-center study as to be able to generate some of the data needed in the event that a PMA is required at some future date. Typically it takes one year from the date of filing to complete the PMA review and approval process. There can be no assurance that the FDA would not take more than one year to review and approve the EECP(TM) application and there can be no assurance that EECP(TM) would receive PMA approval. In most countries to which the Company seeks to export the EECP(TM) 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 applying for regulatory approval of the EECP(TM) system overseas. There can be no assurance that all the necessary FDA clearances, including approval of any PMA application that may eventually be required, and overseas approvals will be granted for EECP(TM), 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. THIRD PARTY REIMBURSEMENTS Health care providers, such as hospitals and physicians, that purchase or lease medical devices, such as the EECP(TM), 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. The Company is currently engaged in discussions with several large health care insurers. Although it is unlikely that insurers will grant blanket coverage for EECP(TM) before the results of the Company's multi-center study are known, the Company will continue to pursue this goal vigorously in fiscal 1997. At a minimum, the Company believes that this dialogue will continue to define circumstances wherein insurers would consider reimbursement on a case-by-case basis and create a pathway for rapid review of new data as they become available. To date, there have been a handful of such reimbursements. In anticipation of receiving large-scale reimbursement, the Company has recently applied to the American Medical Association for a new Current Procedural Code ("CPT"). Although such code is not essential and there is no assurance that a new code will be issued, the Company believes that having an up-to-date CPT code will greatly impact the rapid processing of insurance claims. The unavailability of third-party coverage or the inadequacy of the reimbursement for treatment procedures using EECP(TM) 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 third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company. INSURANCE The Company currently carries product liability insurance of $5,000,000. However, there can be no assurance that it will be able to continue to secure such insurance in adequate amounts or at reasonable premiums. Product liability insurance costs have been increasing rapidly and dramatically during the last few years and many carriers are reducing coverage, insisting upon large deductibles and contributions to defense costs, and abandoning lines. Should the Company be unable to secure adequate product liability insurance, its business could be seriously damaged by claims arising out of the allegedly improper manufacture or use of its products. 6 8 PATENTS AND TRADEMARKS The Company has received patents with respect to EECP(TM) expiring in 2005. In May 1993, international and additional domestic patent applications were filed and the Company expects these patents to issue during fiscal 1997. Additionally, trademarks have been registered for the names "Future Care", "Drug Free" and "Where the Future of Medicine is Today" and registration is pending for "EECP". The loss of the Company's EECP(TM) patents could have a material adverse effect upon the Company's business. EMPLOYEES As of August 1, 1996, the Company and its subsidiaries employed twenty-three persons on a full-time basis consisting of its five executive officers, eight salespersons, seven clinical, manufacturing and service professionals/technicians, and three administrative personnel. ITEM TWO - PROPERTIES The Company maintains its office and warehouse at 180 Linden Avenue, Westbury, New York 11590, where approximately 18,000 square feet of space is leased from a non-affiliated landlord through October 31, 2000 at an annual cost of approximately $120,000. Upon the expiration of the lease, the Company, at its option, may renew the lease for an additional five-year period or purchase the facility at fair market value, as defined. ITEM THREE - LEGAL PROCEEDINGS In February 1995, the Company received a subpoena duces tecum from the broker-dealer branch of the Northeast Regional Office of the Securities and Exchange Commission requesting certain documents from the Company pursuant to a formal order of private investigation. The Company has complied with the request for such documents. Whatever the ultimate objectives of the Commission's fact-finding inquiry may be, the Company intends to cooperate as the investigation proceeds. As stated in the subpoena, the "investigation is confidential and should not be construed as an indication by the Commission or its staff that any violations of law have occurred, nor should it be interpreted as an adverse reflection on any person, entity or security." This investigation is in its early stages and the Company is unable to determine the likelihood of any unfavorable outcome or the existence or amount of any potential loss. In furtherance of a previously withdrawn motion for pre-trial discovery, on or about May 23, 1996, an action was commenced in the Supreme Court of the State of New York, Nassau County, against the Company, its directors and certain of its officers and employees for the alleged breach of an agreement to appoint a non-affiliated party as its exclusive distributor of EECP(TM). The complaint seeks damages in the approximate sum of $50,000,000, declaratory relief and punitive damages. The Company denies the existence of any agreement, believes that the complaint is frivolous and without merit and is vigorously defending the claims as well as asserting substantial counterclaims. This matter is in its preliminary stages and the Company is unable to determine 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 the Company's stockholders during the fourth quarter of fiscal 1996. 7 9 PART II ITEM FIVE - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Common Stock Data on page 20 of the Company's Annual Report to Stockholders for the fiscal year ended May 31, 1996 is incorporated herein by reference. ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 7 and 8 of the Company's Annual Report to Stockholders for the fiscal year ended May 31, 1996 is incorporated herein by reference. ITEM SEVEN - FINANCIAL STATEMENTS The consolidated financial statements on pages 9 through 19, and the Report of Independent Certified Public Accountants on page 20 of the Company's Annual Report to Stockholders for the fiscal year ended May 31, 1996 are incorporated herein by reference. ITEM EIGHT - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM NINE - 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 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM TEN - 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 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM ELEVEN - 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 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM TWELVE - 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 1996 Annual Meeting of Stockholders, and is incorporated herein by reference. 8 10 ITEM THIRTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)(2) Financial Statements and Schedules
PAGE REFERENCE -------------- INCORPORATED BY REFERENCE FROM ANNUAL REPORT TO STOCKHOLDERS Report of Independent Certified Public Accountants 20 Consolidated Financial Statements: Consolidated Balance Sheets as of May 31, 1996 and 1995 9 Consolidated Statements of Operations for the years ended May 31, 1996 and 1995 10 Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 1996 and 1995 11 Consolidated Statements of Cash Flows for the years ended May 31, 1996 and 1995 12 Notes to Consolidated Financial Statements 13
(a) Exhibits (3) (a) Restated Certificate of Incorporation (3) (b) By-Laws (1) (4) (a) Specimen Certificate for Common Stock (1) (b) Certificate of Designations of the Class A Preferred Stock, Series A (6) (c) Form of Rights Agreement dated as of March 9, 1995 between Registrant and American Stock Transfer & Trust Company (10) (10) (a) 1992 Non-Qualified Stock Option Plan (3) (b) 1995 Stock Option Plan (13) (c) Outside Director Stock Option Plan (13) (d) Licensing Agreement dated May 29, 1990 between Albert Einstein College of Medicine of Yeshiva University and Viromedics, Inc. (2) (e) Agreement dated October 1991 between Vasogenics, Inc. and Registrant (3) (f) Purchase Agreement dated April 9, 1992 among Registrant, Devaron, Inc., Dr. Yair Devash and Dr. Yacov Ron (3) (g) Amendment dated November 20, 1992 to Agreement between Registrant and Vasogenics, Inc. (3) (h) Employment Agreement dated November 1, 1992, as amended November 1, 1993, between Registrant and Eugene H. Glicksman (3) (4) (i) Modification Agreement dated as of May 13, 1993 to the May 29, 1990 agreement with Albert Einstein College of Medicine of Yeshiva University and Viromedics, Inc. (5) (j) Employment Agreement dated July 1, 1994, as amended on October 24, 1995, between Registrant and Anthony Viscusi (11) (12) (k) Settlement Agreement dated September 1, 1994 between Viromedics, Inc. and the Albert Einstein College of Medicine of Yeshiva University (11) (l) Stock Repurchase Agreement dated October 27, 1994 between Registrant and Devaron, Inc. (7) (m) Offshore Securities Subscription Agreement dated December 2, 1994 between Registrant and Banca del Gottardo (6) (n) Confidential Private Placement Memorandum dated December 5, 1994 (6) (o) Stock Purchase Agreement dated January 24, 1995 between Registrant and Vasogenics, Inc. (8) (p) Employment Agreement dated January 23, 1995, as amended on October 24, 1995, between Registrant and Anthony E. Peacock (8) (12)
9 11 (q) Employment Agreement dated February 1, 1995 between Registrant and John C.K. Hui (8) (r) Note Purchase, Paying and Conversion Agency Agreement dated July 5, 1995 between Registrant and Banca del Gottardo (9)
(13) 1996 Annual Report to Stockholders (14) (22) Subsidiaries of the Registrant Percentage Name State of Incorporation Owned by Company ---- ---------------------- ---------------- Viromedics, Inc. Delaware 61% Vaso Interim Corp. Delaware 100% Vasogenics, Inc. New York 100% (23) Consent of Grant Thornton LLP (14) (27) Financial Data Schedule (14) - --------- (1) Incorporated by reference to Registration Statement on Form S-18, No. 33-24095. (2) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31,1991. (3) Incorporated by reference to Registration Statement on Form S-1, No. 33-46377 (effective 7/12/94). (4) Incorporated by reference to Report on Form 8-K dated November 1, 1992. (5) Incorporated by reference to Report on Form 8-K dated May 13, 1993. (6) Incorporated by reference to Report on Form 8-K dated November 14, 1994. (7) Incorporated by reference to Report on Form 10-QSB for the quarter ended November 30, 1994. (8) Incorporated by reference to Report on Form 8-K dated January 24, 1995. (9) Incorporated by reference to Report on Form 8-K/A dated June 26, 1995. (10) Incorporated by reference to Registration Statement on Form 8-A dated May 12, 1995. (11) Incorporated by reference to Report on Form 10-K for the fiscal year ended May 31,1994. (12) Incorporated by reference to Report on Form 8-K dated October 24, 1995. (13) Incorporated by reference to Notice of Annual Meeting of Stockholders dated December 5, 1995. (14) Filed herewith. (b) Form 8-K Reports Report on Form 8-K dated May 23, 1996. 10 12 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 twenty-ninth day of August, 1996. VASOMEDICAL, INC. By: /s/ Anthony Viscusi -------------------------------- Anthony Viscusi President, Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on August 29, 1996 by the following persons in the capacities indicated: /s/ Alexander G. Bearn Director - --------------------------- Alexander G. Bearn /s/ David S. Blumenthal Director - --------------------------- David S. Blumenthal /s/ Francesco Bolgiani Director - --------------------------- Francesco Bolgiani Chairman of the Board - --------------------------- Abraham E. Cohen /s/ Joseph A. Giacalone Secretary and Treasurer (Principal Financial and Accounting Officer) - --------------------------- Joseph A. Giacalone /s/ Eugene H. Glicksman Executive Vice President and Director - --------------------------- Eugene H. Glicksman /s/ John C.K. Hui Senior Vice President, R&D and Manufacturing and Director - --------------------------- John C.K. Hui /s/ Kenneth W. Rind Director - --------------------------- Kenneth W. Rind /s/ E. Donald Shapiro Director - --------------------------- E. Donald Shapiro /s/ Anthony Viscusi President, Chief Executive Officer and Director - --------------------------- (Principal Executive Officer) Anthony Viscusi s/ Zhen-sheng Zheng Director - --------------------------- Zhen-sheng Zheng
11 13 EXHIBIT INDEX -------------
Exhibit No. Description ----------- ----------- (13) 1996 Annual Report to Stockholders (23) Consent of Grant Thornton LLP (27) Financial Data Schedule
EX-13 2 ANNUAL REPORT TO SHAREHOLDERS-1996 1 [PHOTO OF MR. ROD BUSH] "You have to have angina to know how frightening it can be; that feeling that your body is about to give up on you. On April 15, 1994, tax day, I was in trouble but it wasn't the tax man. Most of the arteries in my heart were almost closed and they wanted me to have bypass surgery the next day. Since I read the scientific literature I learned about EECP(TM) and decided to give it a try. It's given me a new lease on life. I no longer have this feeling of impending doom. Recently, I was in a 42-mile bikathon. I have improved tremendously. I haven't felt better in my life." MR. ROD BUSH VASOMEDICAL, INC. [LOGO] 1996 Annual Report [PHOTO OF MRS. DEE PLASTINI] "After my heart attack in 1995 and three failed angioplasties, I was facing open heart surgery. I was offered EECP(TM) but was afraid that EECP(TM) wouldn't work and I would still have to have a bypass operation. I need not have worried. Before EECP(TM) I couldn't do very much at all but now I walk at least 3 miles every day. I feel normal again. I have plenty of energy." MRS. DEE PLASTINI [PHOTO OF MR. JOHN MISHKO] "In December 1990, I had angioplasty but it closed up in seven weeks. They attempted a second angioplasty but they couldn't get into the problem area. My doctor told me another angioplasty would be too risky and I should think about a bypass. Some people I know have had bypasses and they told me that, even years later, they hadn't fully recovered. When I heard that EECP(TM) was being tested at Stony Brook, I asked about it. I'm glad I did. Since having EECP(TM) I haven't had any chest pain and I avoided the surgery. I was semi-retired before EECP(TM), but after EECP(TM) I went back to work for two years. The most important thing to me is that I have had more than five years of normal life." MR. JOHN MISHKO 2 EECP(TM) "Noninvasive, atraumatic treatment for patients with coronary artery disease." "Facilitates development of networks of tiny blood vessels thereby providing a `natural' bypass of obstructed coronary arteries." "Better exercise treadmill times." "...can provide relief without the risks or costs of surgery." "Elimination or reduction of the need for antianginal medications." "Rectification of exercise ECG ST-segment abnormalities." "...ability to enjoy a more independently mobile and active life." "Therapy is comfortable... patients often read or sleep during treatment." "Sustained relief of anginal symptoms." "Resolution of reversible ischemic defects evident on radionuclide scans." "Beneficial effects have persisted for at least 3 years after a course of treatment." 3 MESSAGE TO SHAREHOLDERS For the past two years, the central topic of our annual letter to stockholders has been the reshaping of Vasomedical, Inc. and the new sense of purpose and direction that we have brought to it. This finds expression in our new mission statement: TO PROVIDE SUPERIOR SOLUTIONS IN THE MANAGEMENT OF CARDIOVASCULAR DISEASES THROUGH PRODUCTS THAT MAKE IMPROVED CLINICAL AND ECONOMIC OUTCOMES POSSIBLE. BY THESE MEANS, WE AIM TO GROW SHAREHOLDER VALUE. We are very proud of the initial achievements of the people of Vasomedical in the furtherance of the Company's mission. Fiscal 1996 was indeed a year of major milestones in our ongoing efforts to build the structure and acquire the capabilities crucial to our future success. FISCAL 1996 ACCOMPLISHMENTS AND RESULTS MARKETING - -Commercial introduction of EECP(TM) for the treatment of patients with coronary artery disease, with 21 hospitals or free-standing treatment centers equipped to offer EECP(TM) by May 31, 1996. In addition, four university research centers, affiliated with Columbia, Harvard, UCSF, and Yale, are engaged in a long-term multicenter study. - -Establishment of a direct national sales force consisting of a Director of Sales and Customer Relations and eight Regional Sales Managers, whose efforts are supplemented by manufacturer's representatives covering about 85% of the country. - -Development of a program for the recruitment of patients, provided as a customer service to treatment centers offering EECP(TM). - -Establishment of a dedicated department for the training of staff operating EECP(TM) equipment and nurses supervising the treatment of patients. - -Establishment of a Technical Services function for the installation and maintenance of EECP(TM) equipment that is fully responsive to customer needs. - -Publication of two new clinical reports in peer-reviewed medical journals, one of them involving 50 patients and demonstrating statistically significant improvement in radionuclide stress perfusion imaging after therapy with EECP(TM). All these actions and accomplishments culminated in the achievement of the Company's first revenues with EECP(TM), in the second quarter, and the first profitable quarter from operations in its history, in the last quarter of fiscal year 1996, a milestone reached earlier than expected. FINANCIAL - -A 209% increase in the Company's stock price from $0.81 to $2.50 per share and a 240% increase in market capitalization from $31 million to $105 million at fiscal year-end. - -Sale of $4,000,000 of 7% five-year convertible debentures to cover the cost of the sales force expansion and ongoing clinical trials. (The debentures were fully converted by June 1996 prior to the scheduled payment of the first interest installment, thereby eliminating all long-term indebtedness and strengthening the Company's net worth by over $3,500,000.) - -Agreement with the Vendor Finance Group of DVI Financial Services, Inc. to administer the Company's private label finance program, which enables hospitals and other treatment centers to lease EECP(TM) systems and the Company to receive upfront payment for the revenue stream and thus to enhance cash flow. - -Increase in cash flow from $1,120,000 to $4,448,000 (+297%) due to proceeds from the convertible debentures, the exercise of warrants and the sale and financing of EECP(TM) units. - -Increase in working capital by $4,212,000 to $4,959,000 at fiscal year-end (+563%). These results have enabled the Company to enter the 1997 fiscal year in a solid financial position and with the ability to finance its aggressive marketing and clinical research programs. GOALS AND STRATEGIES ESTABLISH THE COMPANY'S EECP(TM) PROCEDURE AS A NEW STANDARD OF CARE IN CORONARY ARTERY DISEASE. Vasomedical intends to establish EECP(TM) not just as a last-resort treatment for patients who no longer can withstand invasive procedures, but as a first-line option along with angioplasty and bypass grafting when medication fails and, eventually, as a precursor treatment modality. The 1 4 Company believes that the features of EECP(TM) permit the delivery of superior clinical benefits, a dramatically improved quality of life, and a significant reduction of overall treatment costs. FOCUS ON TEACHING HOSPITALS AND MAJOR CARDIOLOGY PRACTICES. Management is convinced that one of the surest ways to validate the performance of EECP(TM), accelerate market acceptance and stimulate patient demand for treatment is to secure the support of recognized clinical opinion leaders and respected cardiology practitioners. Our marketing strategies and programs flow directly from this premise. CREATE A DISTRIBUTION NETWORK IN INTERNATIONAL MARKETS. While the Company pursues the CE mark, which is a regulatory approval to sell a product in the European Union, and the ISO certification, which is an internationally recognized quality manufacturing systems assessment, we will continue to enter into agreements for the marketing, distribution and servicing of EECP(TM) in key international markets. The Company has already concluded arrangements for Central European and Southern Asian countries and it is in advanced stages of negotiations with local national distributors in other parts of the world. So far the Company has focused on ensuring marketing success in the United States, knowing that acceptance of EECP(TM) here will make market entry overseas easier, faster and ultimately more cost efficient. The expansion of the Company's presence globally will receive dedicated attention as a result of the appointment of a Director of International Affairs. [GRAPHIC HIGHLIGHTED EXCERPT] To provide superior solutions in the management of cardiovascular diseases through products that make improved clinical and economic outcomes possible. By these means, we aim to grow shareholder value.[END GRAPHIC HIGHLIGHTED EXCERPT] EXPAND THE EECP(TM) CLINICAL RESEARCH PROGRAM TO CONFIRM NEW CLAIMS. Teaching hospitals affiliated with Columbia, Harvard, UCSF and Yale are carrying out a randomized, double-blinded study with EECP(TM) in the treatment of stable angina pectoris, the results of which we expect to be ready for publication in fiscal 1997. A parallel quality-of-life and resource-utilization study is also in progress in the same institutions. A pilot study of EECP(TM) for the prevention of post-angioplasty restenosis has been initiated. But for the optimal exploitation of EECP(TM) in cardiovascular practice we intend to undertake a broad-scoped clinical studies program. This long-term program is designed to expand the claim structure for EECP(TM) to include silent ischemia, acute myocardial infarction, and peripheral and cerebral vascular diseases, among other indications. In addition, we intend to establish the usefulness of EECP(TM) in the treatment of heart failure patients, post-MI events (e.g., sudden death syndrome) and microvascular diseases (e.g., due to diabetes). We believe that most of these indications are highly probable and that critical planning is required to determine how best to optimize resources for the acceleration of claim expansion and the exploitation of the resulting enlarged market. Moreover, we believe that, as the acceptance of EECP(TM) as a mainstream treatment grows, the academic community will, on its own initiative, undertake studies to corroborate some of the working hypotheses of the physiological basis of clinical benefits, such as collateral development and effects on endothelial function. The scientific validation of EECP(TM) would then be complete. USE THE COMPANY'S PROPRIETARY TECHNOLOGY TO DEVELOP UPGRADES OF EECP(TM) AND CREATE NEW PRODUCTS. The Company is in the process of designing modular component upgrades of the existing model of EECP(TM) and developing a new-generation transportable model to achieve greater flexibility in tuning therapy to patient-specific demands and to accommodate the applications that the new envisaged indications will make 2 5 possible. Moreover, the Company intends to leverage its position with EECP(TM) and make available other non-invasive devices for use in cardiovascular medicine. INITIATE IN-HOUSE ASSEMBLY OF EECP(TM). The Company's current production operations consist only of capabilities for the testing and quality assurance of components and systems supplied by third-party manufacturers. A recent FDA inspection of its facilities in Westbury, New York, found all the inspected areas and practices to be in compliance with applicable requirements and implementing regulations. To reduce reliance on contract manufacturing and ensure continuity of supply, the Company will initiate final assembly of EECP(TM) in its Westbury facilities in 1997 under the supervision of a recently appointed Director of Operations who has had a long experience in the production of medical devices. The required scale-up will call for limited investment in manufacturing infrastructure. We believe that the Company has a robust strategic framework for achieving growth. What is certain is that EECP(TM) and the customer services with which we surround it provide a solid platform for growth. Our non-invasive treatment, administered on an out-patient basis, offers those who suffer with coronary artery disease unique benefits in terms of safety, efficacy and convenience and, by reducing the need for surgery and its consequences, it gives health care providers the value they seek in the cost-containment environment in which they must now operate. It is our opinion, indeed, that the surest way to deliver maximum value to you, our shareholders, as we move forward in the accomplishment of our mission, is to provide the innovative therapies that patients need and the value in disease management that health care providers want. We are intent on working diligently and taking all required steps to improve the Company's performance and thus justify your continued trust and confidence. [PHOTO OF ABRAHAM E. COHEN AND ANTHONY VISCUSI] Sincerely, /s/ Abraham E. Cohen Abraham E. Cohen Chairman of the Board /s/ Anthony Viscusi Anthony Viscusi President and CEO 3 6 FREQUENTLY ASKED QUESTIONS WHAT IS THE MARKET POTENTIAL? Although the potential applications for EECP(TM) are many, and represent additional opportunities, currently, we are focused on establishing EECP(TM) in the treatment of angina pectoris. There are more than six million people with a diagnosis of angina pectoris in the USA and probably as many as four times this number in overseas health care systems. It's too early to say how many among this patient population are likely to be treated with EECP(TM) but, over time, a significant proportion could be attainable. Realizing this potential will depend on how quickly EECP(TM) can become widely available and take its place alongside standard therapies like angioplasty and bypass grafting. Judging by the favorable reception enjoyed by EECP(TM) so far, we expect growing acceptance of EECP(TM), especially following the reporting of our multicenter trial results. Of course, reimbursement of treatment fees is a vitally important issue affecting the acceptance of EECP(TM), but with the US healthcare bill for coronary revascularization procedures now at nearly $48 billion annually, as we are able to engender larger clinical experience, we expect a favorable response to our representations from third-party payers. After all, we believe EECP(TM) can play a significant role in containing this cost. [PHOTO OF ANTHONY E. PEACOCK] WHAT'S HAPPENING WITH REIMBURSEMENT? Obtaining reimbursement is our number one priority right now and, already, we are engaged in discussions with a number of large healthcare insurers. Although it is unlikely that any major insurer will grant blanket coverage before the results of our multicenter study are known, we are, nevertheless, pursuing this goal vigorously. At the very least we are opening dialogue and creating a pathway for rapid review of new data as it comes to hand. Usually, we accomplish much more than that by helping to define circumstances wherein the insurance company would consider reimbursement on a case-by-case basis. There has been a handful of such reimbursements to-date and we believe that, during the coming months, there will be more of these. To assist in this process, we encourage patients to apply to their insurers in advance of beginning treatment. This allows insurance companies to gauge the level of interest and consider their positions on behalf of each individual. In anticipation of receiving full coverage in the future, though there can be no assurance in this regard, we recently applied to the American Medical Association for a new Current Procedural Code. Although it's not essential, having an up-to-date CPT code helps enormously in the rapid processing of insurance claims. [PHOTO] HOW'S THE MULTICENTER STUDY DOING? As mentioned earlier, everyone is awaiting the results of this trial with great anticipation. The study is being 4 7 conducted in four renowned university cardiology research centers where patients are being chosen randomly in a blinded fashion to be in one of two groups, one group being the control for the other. Completion of the trial depends on how quickly the two groups show a statistically significant difference for the main end point, that being rectification of ECG exercise stress test ischemic abnormalities. We cannot be absolutely sure, but we hope to complete patient entry by year-end 1996 and report the results soon after. The trial is being conducted rigorously and can be considered definitive for the extent of overall efficacy. Going by previous study results from SUNY Stony Brook, there is reason to be optimistic about a positive outcome. In addition to the clinical protocol, there are instruments for measuring quality of life factors as well as provision of important cost/effectiveness information. [PHOTO OF JOHN C.K. HUI, PhD] WHAT ARE YOUR DEVELOPMENT PLANS FOR EECP(TM)? We are implementing plans both for the upgrading of our current Model MC2 and development of our new, more sophisticated, transportable Model MC3, but it's important to recognize that while EECP(TM) is dependent on our equipment, the equipment alone is not the product. EECP(TM) is a medical procedure that may benefit the whole of the vascular system and, therefore, vascular diseases of many kinds. As we mentioned earlier, there are numerous possible clinical applications for EECP(TM) both within and beyond diseases of the heart. Potential uses in a wide variety of organ problems are documented. Each potential use, however, will certainly require further clinical exploration, as well as better documentation, with our counterpulsation equipment. Needless to say, we will be zealous in our pursuit of every legitimate medical use for EECP(TM). Our immediate priority is, however, ensuring a better understanding of who among heart disease patients is best suited to EECP(TM), how early EECP(TM) should be begun, what can be achieved under what circumstances and what, precisely, are the modes of action. DO YOU HAVE PRODUCTS OTHER THAN EECP(TM)? Right now, EECP(TM) is our only product, albeit with potential uses in a variety of disease markets. We are considering, however, two distinct inventions; one, a therapeutic add-on to EECP(TM), the other, a completely separate item but still within the cardiovascular arena. We will disclose details only after more feasibility analysis. [PHOTO] 5 8 TESTIMONIALS CLINICAL BENEFITS "EECP(TM) promises to be one of the more important changes we have seen in the treatment of heart disease. It's my belief that, if EECP(TM) can improve collateral flow and stimulate a natural bypass of obstructed vessels, it will become basic therapy for coronary artery disease patients. It's just a matter of extending the experience to a greater number of cardiologists." Bruce L. Fleishman, MD FACC Interventional Cardiologist, Medical Director, HeartCare Centers of Ohio. Program Director-Cardiology, Family Practice Program, Grant Medical Center. President-Elect, Medical Staff, Grant Medical Center. Columbus, Ohio [PHOTO OF BRUCE L. FLEISHMAN, MD FACC] TREATMENT WITH EECP(TM) "The long-term care of patients with chronic coronary artery disease requires the cardiologist to use aggressive preventive methods and more cost-effective treatments to improve clinical and financial outcomes. EECP(TM) is a safe, cost-effective, noninvasive method of restoring myocardial perfusion and reducing symptoms of angina. EECP(TM) is the perfect disease management tool for chronic coronary artery disease." John E. Strobeck, MD PhD Interventional Cardiologist, Co-founder of the Heart Failure Society of America and Director of Medical Affairs for Lifeway, Inc., Paramus, New Jersey [PHOTO OF JOHN E. STROBECK, MD PhD] GREATLY IMPROVED QUALITY OF LIFE "What I like about EECP(TM) is that there's nothing invasive about it. It relieves the angina, patients have more energy and can do more. Not only that, EECP(TM) costs less than the alternatives, it can be done in the physician's office and patients can go home after each treatment. I think it's going to be used earlier and earlier, not just in patients without any other options." Randy B. Hartman, MD FACC Interventional Cardiologist, Executive Committee Member, Heart Center of Sarasota, Sarasota, Florida [PHOTO OF RANDY B. HARTMAN, MD FACC] 6 9 VASOMEDICAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Years Ended May 31, 1996 and 1995 The Company generated revenues from the sale and lease of its EECP(TM) (Enhanced External Counterpulsation) device during fiscal 1996 of $2,683,000. No revenues were generated in fiscal 1995. The Company incurred net losses of $2,643,000 and $3,117,000 for the years ended May 31, 1996 and May 31, 1995, respectively. The Company has leased or sold several EECP(TM) units in fiscal 1996. Although there can be no assurances that EECP(TM) will be successfully commercialized, the Company expects to generate increasing revenues in fiscal 1997, including the introduction of EECP(TM) in international markets. Approximately $2,284,000 of the Company's fiscal 1996 revenues were generated in the fourth quarter resulting in the first profitable quarter in the Company's history. Net earnings for the quarter were $119,000. The Company attributes its recent results to the ongoing efforts of its direct sales force, established in November 1995, and increasing acceptance of EECP(TM) by cardiologists. Gross margins from EECP(TM) are dependent on a number of factors, particularly the number of units sold or leased during the period, and by certain fixed period costs including facilities, payroll and insurance. Furthermore, gross margins are 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(TM) 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, 1996 and May 31, 1995 were approximately $3,739,000 and $2,173,000, respectively. The $1,566,000 increase in SGA expenses for the fiscal year resulted primarily from a $870,000 increase in payroll and related costs associated with the addition of management, a direct national sales force and other operating personnel, particularly those formerly employed by Vasogenics, which was acquired in January 1995, and an increase of $514,000 in marketing and related costs associated with the commercial introduction of EECP(TM). The increase in depreciation and amortization expense of $152,000 for the year ended May 31, 1996 was primarily related to the amortization of goodwill relating to the Vasogenics acquisition in January 1995. Research and development (R&D) expenses decreased $234,000 for the year ended May 31, 1996. The decrease is a result of i) the expiration of contractual obligations to support the activities of Vasogenics as a result of the Company's acquisition of Vasogenics in January 1995 and ii) the timing of commitments and expenses related to the Company's multi-center clinical study for EECP(TM). Such commitments and expenses are expected to continue in fiscal 1997. The increase in interest and financing costs is directly attributable to interest accrued and amortization of deferred loan costs in connection with the July 1995 debt issuance. Investment income increased during fiscal 1996 due to the Company's increased cash and investment position resulting from the July 1995 debt issuance, as well as from proceeds generated from the exercise of warrants. Liquidity and Capital Resources Working capital at May 31, 1996 increased by $4,212,000 to $4,959,000 as compared to $747,000 at May 31, 1995 due to i) the $4,000,000 7% Convertible Debenture financing secured in July 1995, ii) proceeds from the exercise of warrants (substantially in the fourth quarter), and iii) the onset of sales and leases of EECP(TM) (substantially in the fourth quarter), offset by continuing operating losses. In fiscal 1996, the Company raised net proceeds of $3,708,000 and $2,323,000 from the sale of debt securities and the exercise of common stock purchase warrants, respectively. As indicated in the accompanying consolidated statements of cash flows, cash flows provided by investing activities of $449,000 for the year ended May 31, 1996 were principally from the sale of investments in mutual funds. 7 10 VASOMEDICAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In July 1995, the Company sold $4,000,000 of 7% five-year Convertible Debentures (the "Notes"), convertible into shares of the Company's common stock at $1.00 per share. By May 31, 1996, $275,000 of such notes were converted into 275,000 shares of the Company's common stock. In June 1996, subsequent to year-end, the $3,725,000 outstanding principal amount of Notes were converted into 3,725,000 shares of the Company's common stock. As a result of such conversion, accrued interest of $239,000 was also canceled in accordance with the terms of the Note agreement. The fiscal 1997 effect of this conversion was to increase stockholders' equity by $3,345,000, consisting of the debt conversion ($3,725,000) and accrued interest ($239,000), net of unamortized loan costs ($619,000). During fiscal 1996, warrants to purchase 3,340,585 shares of common stock were exercised, generating proceeds to the Company of $2,323,000. In March 1996, the Company entered into an exclusive agreement with a third party whereby such third party will purchase, subject to credit approval, the EECP(TM) system on a non-recourse basis and lease the system to the Company's customers. During fiscal 1996, approximately 51% of the Company's revenues were derived through such transactions. Although there can be no assurance as to future revenues generated through these transactions, the Company expects that these transactions will generate significant revenues and working capital in fiscal 1997. Management believes that its present working capital position at May 31, 1996, the ongoing commercialization of EECP(TM), some units of which will be purchased by the aforementioned medical equipment finance company, and the relief of its long-term debt obligation will make it possible for the Company to support its internal overhead expenses and to implement its new development and business plans at least through May 31, 1997. Except for historical information contained herein, the matters discussed are forward looking statements that involve risks and uncertainties. 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, reimbursement and trade environment; and the risk factors reported from time to time in the Company's SEC reports. 8 11 VASOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
May 31, ------------------------------ 1996 1995 ------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents ........................................... $ 4,447,806 $ 491,609 Investments in mutual funds ......................................... 628,152 Accounts receivable ................................................. 1,010,965 Inventory ........................................................... 563,272 Other current assets ................................................ 160,987 120,456 -------------------------------- Total current assets .............................................. 6,183,030 1,240,217 PROPERTY AND EQUIPMENT, NET ........................................... 211,173 77,075 CAPITALIZED COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED, NET . 1,208,915 1,426,065 DEFERRED LOAN COSTS, NET .............................................. 619,445 OTHER ASSETS .......................................................... 23,588 9,781 -------------------------------- $ 8,246,151 $ 2,753,138 -------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses ............................... $ 542,250 $ 243,029 Accrued professional fees ........................................... 133,471 161,022 Accrued commissions ................................................. 309,315 Accrued interest .................................................... 239,021 89,096 -------------------------------- Total current liabilities ......................................... 1,224,057 493,147 LONG-TERM DEBT ........................................................ 3,725,000 OTHER LONG-TERM LIABILITIES ........................................... 206,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding ........................................ -- -- Common stock, $.001 par value; 85,000,000 shares authorized; 42,204,113 shares and 37,899,432 shares at May 31, 1996 and 1995, respectively, issued and outstanding ............................... 42,204 37,899 Additional paid-in capital .......................................... 24,427,338 21,134,578 Deferred compensation ............................................... (169,813) (339,626) Unrealized loss on investments ..................................... (7,370) Accumulated deficit ................................................. (21,208,635) (18,565,490) -------------------------------- 3,091,094 2,259,991 -------------------------------- $ 8,246,151 $ 2,753,138 ================================
The accompanying notes are an integral part of these statements. 9 12 VASOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended May 31, -------------------------------- 1996 1995 -------------------------------- Revenues Equipment sales .......................... $ 2,507,528 $ -- Equipment rentals ........................ 175,600 -------------------------------- 2,683,128 -- -------------------------------- Costs and expenses Cost of sales ............................ 609,136 Selling, general and administrative ...... 3,738,789 2,172,555 Research and development ................. 364,455 598,178 Depreciation and amortization ............ 269,443 117,851 Provision for uncollectable note ......... 318,000 Interest and financing costs ............. 515,451 2,523 Interest and other income--net ........... (171,001) (91,813) -------------------------------- 5,326,273 3,117,294 -------------------------------- NET LOSS ................................. $ (2,643,145) $ (3,117,294) -------------------------------- Net loss per common share .................. $ (.07) $ (.10) -------------------------------- Weighted average common shares outstanding . 39,226,258 30,519,640 ================================
The accompanying notes are an integral part of these statements. 10 13 VASOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Unreal- Preferred Stock Common Stock Additional Deferred ized loss ---------------- ---------------- paid-in compen- on invest- Accumulated Shares Amount Shares Amount capital sation ments deficit --------------------------------------------------------------------------------------------------- Balance at June 1, 1994 26,064,432 $26,064 $17,969,039 $(1,018,876) $ -- $(15,448,196) Unvested common stock forfeited under stock bonus arrangement.... (570,000) (570) (508,868) 509,438 Issuance of common stock for cash....... 6,000,000 6,000 1,481,625 Issuance of preferred stock for cash....... 500,000 5,000 382,625 Conversion of preferred stock...... (500,000) (5,000) 1,000,000 1,000 4,000 Issuance of common stock to acquire subsidiary........... 5,000,000 5,000 1,460,000 Common stock issued to consultants for services......... 405,000 405 273,657 Warrants issued to directors and consultants.......... 72,500 Amortization of deferred compensation......... 169,812 Unrealized loss on investments....... (7,370) Net loss............... (3,117,294) ----------------------------------------------------------------------------------------------------- Balance at May 31, 1995 -- -- 37,899,432 37,899 21,134,578 (339,626) (7,370) (18,565,490) Common stock issued to consultant in connection with debt financing....... 600,000 600 599,400 Common stock issued in lieu of cash interest 89,096 89 89,007 Conversion of debt..... 275,000 275 274,725 Exercise of warrants... 3,340,585 3,341 2,319,628 Warrants issued to consultants.......... 10,000 Amortization of deferred compensation......... 169,813 Realized loss on sale of investments....... 7,370 Net loss............... (2,643,145) -------------------------------------------------------------------------------------------------- Balance at May 31, 1996 -- -- 42,204,113 $42,204 $24,427,338 $ (169,813) $ -- $(21,208,635) ==================================================================================================
Total stock- holders' equity ------------ Balance at June 1, 1994 $ 1,528,031 Unvested common stock forfeited under stock bonus arrangement.... -- Issuance of common stock for cash....... 1,487,625 Issuance of preferred stock for cash....... 387,625 Conversion of preferred stock...... -- Issuance of common stock to acquire subsidiary........... 1,465,000 Common stock issued to consultants for services......... 274,062 Warrants issued to directors and consultants.......... 72,500 Amortization of deferred compensation......... 169,812 Unrealized loss on investments....... (7,370) Net loss............... (3,117,294) ------------ Balance at May 31, 1995 2,259,991 Common stock issued to consultant in connection with debt financing....... 600,000 Common stock issued in lieu of cash interest 89,096 Conversion of debt..... 275,000 Exercise of warrants... 2,322,969 Warrants issued to consultants.......... 10,000 Amortization of deferred compensation......... 169,813 Realized loss on sale of investments....... 7,370 Net loss............... (2,643,145) ------------ BALANCE AT MAY 31, 1996 $ 3,091,094 ============
The accompanying notes are an integral part of this statement. 11 14 VASOMEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31, ------------------------------- 1996 1995 ------------------------------- Cash flows from operating activities Net loss $(2,643,145) $(3,117,294) ------------------------------ Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization ........................................... 269,443 117,851 Reserve for uncollectable note .......................................... 318,000 Amortization of deferred compensation ................................... 169,813 169,812 Amortization of deferred loan costs ..................................... 272,555 Warrants issued to directors and consultants ............................ 10,000 47,500 Net loss on sale of equipment ........................................... 2,950 Changes in operating assets and liabilities Increase in accounts receivable ....................................... (1,010,965) Increase in inventory ................................................. (563,272) Increase in other current assets ...................................... (40,531) (82,917) Increase in other assets .............................................. (13,807) (888) Increase in accounts payable, accrued expenses and other current liabilities ................................................ 820,006 145,794 Increase in other liabilities ......................................... 206,000 ------------------------------ 119,242 718,102 ------------------------------ Net cash used in operating activities ................................... (2,523,903) (2,399,192) ------------------------------ Cash flows from investing activities Purchase of investments ..................................................... (20,034) (44,858) Proceeds from sale of investments ........................................... 655,556 297,653 Acquisition/disposition of subsidiaries, net of cash ........................ 2,137 Purchase of property and equipment .......................................... (186,391) (2,256) ------------------------------ Net cash provided by investing activities ..................................... 449,131 252,676 ------------------------------ Cash flows from financing activities Proceeds from sale of common stock .......................................... 1,487,625 Proceeds from sale of preferred stock ....................................... 387,625 Proceeds from exercise of warrants .......................................... 2,322,969 Proceeds from issuance of long-term debt, net ............................... 3,708,000 ------------------------------ Net cash provided by financing activities ..................................... 6,030,969 1,875,250 ------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 3,956,197 (271,266) Cash and cash equivalents--beginning of year .................................. 491,609 762,875 ------------------------------ Cash and cash equivalents--end of year ........................................ $ 4,447,806 491,609 ------------------------------ Noncash investing and financing activities were as follows: Issuance of common stock for debt conversion ................................ $ 275,000 Issuance of common stock in lieu of cash interest ........................... 89,096 Issuance of common stock for acquisition .................................... $ 1,465,000 Issuance of common stock and warrants for services .......................... 600,000 299,063
The accompanying notes are an integral part of these statements. 12 15 VASOMEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND 1995 NOTE A--BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company, formerly a development stage enterprise, was incorporated in Delaware in July 1987. During fiscal 1996, the Company commenced the commercialization of Enhanced External Counterpulsation ("EECP(TM)"), a microprocessor-based medical device for the non-invasive, atraumatic treatment of patients with coronary artery disease. EECP(TM) is marketed worldwide to hospitals, clinics and other cardiac health care providers. To date, the Company's revenues have been generated solely from customers in the United States. In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso Interim Corp. ("Vaso Interim") (formerly Vasomedical, Inc.), acquired the worldwide exclusive marketing rights (except in China) to EECP(TM) and agreed to fund research and development activities performed by Vasogenics, Inc. ("Vasogenics"), its joint-venture partner in the former Vasomedical, Inc. and sole minority shareholder. Vasogenics held the intellectual property rights to the EECP(TM) technology, including patents and manufacturing rights. In January 1995, the Company acquired all the capital stock of Vasogenics for stock consideration and the assumption of certain liabilities. In connection with the acquisition, the Company retained certain key employees of Vasogenics who had been involved in the development of the EECP(TM) technology. EECP(TM), which had undergone clinical studies at the State University of New York's University Medical Center at Stony Brook, received marketing clearance from the Food and Drug Administration ("FDA") under a 510(k) premarket notification in February 1995. The acquisition of Vasogenics was recorded as a purchase transaction. The Company fair valued the 5,000,000 shares of common stock it issued in consideration of the acquisition at $1,465,000 or 75% of the quoted market price on the acquisition date to recognize the restriction on the subsequent sale of such shares. The excess of the purchase price over the fair value of assets acquired and liabilities assumed, aggregating $1,492,000, was capitalized in the accompanying consolidated balance sheet. Pro-forma operating results, assuming the acquisition took place at the beginning of fiscal 1995, were as follows:
Year ended May 31,1995 ---------------------- Revenues .................................................. $ -- Net loss .................................................. (3,238,000) Net loss per common share ................................. (.09)
Pro-forma adjustments consist of amortization of the excess of cost over net assets acquired and the issuance of 5,000,000 shares of the Company's common stock to consummate the acquisition. A summary of the significant accounting policies consistently applied in the preparation of the consolidated financial statements follows: 1. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. 2. INVESTMENTS Investments consist principally of short-term, fixed- income mutual funds. The Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities" at the beginning of fiscal 1995. Investments pursuant to SFAS 115 are classified into three categories. Those securities classified as "trading" or "available for sale" are reported at fair value. Debt securities classified as "held to maturity" are reported at amortized cost. The Company's investments in mutual funds at May 31, 1995 are classified as available for sale, whereby unrealized gains and losses are reported as a separate component of stockholders' equity, net of related tax effects, if any. The cost of such available-for-sale securities was $678,172 at May 31, 1995. At May 31, 1995, the unrealized decline in market value of these investments of $7,370 was recorded as a separate component of stockholders' equity in the accompanying consolidated balance sheet. Such investments were subsequently sold in fiscal 1996. 3. INVENTORIES Inventories consisting of equipment held for sale are stated at the lower of cost or market; cost is determined using the first-in, first-out method. 13 16 VASOMEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND 1995 (Continued) 4. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the assets, which range from three to seven years using accelerated depreciation methods. Leasehold improvements are amortized over the shorter of the useful life of the related leasehold improvement or the life of the related lease, generally five years. 5. CAPITALIZED COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED The capitalized costs in excess of fair value of net assets acquired arising from the acquisitions of Vaso Interim and Vasogenics are being amortized on a straight-line basis over a period of five and seven years, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121") that establishes accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. In accordance with SFAS 121, it is the Company's policy to periodically review and evaluate whether there has been a permanent impairment in the value of intangibles. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. 6. REVENUE RECOGNITION The Company recognizes revenue from the sale of its EECP(TM) device in the period in which the Company fulfills its obligations under the sale agreement, including delivery, installation and customer acceptance. The Company has also entered into lease agreements for its EECP(TM) device that are classified as operating leases. Revenues from operating leases are recognized on a straight-line basis over the life of the respective leases. 7. WARRANTY COSTS The Company also provides for a warranty period on its EECP(TM) system. The Company provides for estimated warranty costs at the time the related revenue is earned. As the Company's experience with respect to the commercial application of EECP(TM) is limited, revisions to the Company's warranty cost estimates may be necessary in the future. 8. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 9. INCOME TAXES Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance has been established to offset the deferred tax assets as it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 10. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. 11. NET LOSS PER COMMON SHARE Loss per common share is based upon the weighted average number of common shares outstanding during the year. Common stock equivalents have not been included in this calculation since their inclusion would be antidilutive. 12. STOCK-BASED COMPENSATION Adoption of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") is required for fiscal years beginning after December 15, 1995 and allows for a choice of the method of accounting used for stock-based compensation. Entities may elect the "intrinsic value" method based on APB No. 25, "Accounting for Stock Issued to Employees" or the new "fair value" method, contained in SFAS 123. The Company intends to implement SFAS 123 in fiscal 1997 by continuing to account for stock-based compensation under APB No. 25. As required by SFAS 123, the pro-forma effects on net earnings (loss) and earnings (loss) per share will be determined as if the fair-value-based method 14 17 had been applied and disclosed in the notes to the consolidated financial statements. 13. STATEMENTS OF CASH FLOWS The Company considers highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist principally of money market funds. The market value of the cash equivalents approximates cost. NOTE B--PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
May 31, ---------------------------- 1996 1995 ---------------------------- Office, laboratory and other equipment ........................ $ 113,929 $ 66,929 EECP(TM)units under operating leases ....................... 119,318 Furniture and fixtures ................... 58,930 55,881 Leasehold improvements ................... 83,004 65,980 ---------------------------- 375,181 188,790 Less accumulated depreciation and amortization ........................... (164,008) (111,715) ---------------------------- $ 211,173 $ 77,075 ============================
NOTE C--LONG-TERM DEBT On July 7, 1995, the Company sold $4,000,000 principal amount of 7% five-year Convertible Debentures (the "Notes"), convertible into shares of the Company's common stock at $1.00 per share commencing December 1, 1995 at the option of the holder. The conversion price was equivalent to the quoted market price of the Company's common stock when the transaction was negotiated. Deferred loan costs, aggregating $892,000, incurred in connection with obtaining the Notes are being amortized over the life of the Notes. In connection with the sale of the Notes, the Company issued 600,000 shares of its common stock to the broker/finder for services rendered. In fiscal 1996, $275,000 principal amount of Notes were converted into 275,000 shares of the Company's common stock. The fair value of the outstanding Notes at May 31, 1996, based upon the trading value of the Company's common stock, was approximately $9,313,000. In June 1996, the $3,725,000 outstanding principal amount of Notes were converted into 3,725,000 shares of the Company's common stock. As a result of such conversion, accrued interest of $239,000 was also canceled in accordance with the terms of the Note agreement. The pro-forma effect of this conversion was to increase stockholders' equity by $3,345,000, consisting of the debt conversion ($3,725,000) and accrued interest ($239,000), net of unamortized loan costs ($619,000). The pro-forma loss per share, as if the conversion had been effected at the beginning of fiscal 1996, was $.05. NOTE D--STOCKHOLDERS' EQUITY 1. In fiscal 1995, the Company issued warrants to certain directors and outside consultants to purchase an aggregate of 825,000 and 200,000 shares, respectively, of the Company's common stock at prices ranging from $.28 to $1.00 per share (then current market value) exercisable through February 2000 for services rendered or to be rendered to the Company. Based upon trading history, stock price volatility and other relevant factors, management fair valued those warrants issued to outside consultants at $.10 per share and charged $20,000 to operations in fiscal 1995. 2. During the first quarter of fiscal 1995, the Company issued 50,000 registered shares of its common stock to an outside consultant for services rendered in fiscal 1994. The value of common stock issued, aggregating $38,000, represented the quoted market price at the time of the agreement and was charged to operations in fiscal 1994. 3. In December 1994, the Company sold 6,000,000 shares of its common stock together with warrants to purchase 600,000 shares of its common stock at $.25 per share expiring in December 1999 to a foreign banking institution pursuant to a private placement for $1,500,000 cash. In August 1995, warrants to purchase 360,000 shares of common stock were exercised, aggregating $90,000. 4. Also in December 1994, the Company sold 500,000 shares of its Class A preferred stock, aggregating $400,000, to five individuals, of which certain officers and directors purchased 187,500 preferred shares aggregating $150,000. The price paid per preferred 15 18 VASOMEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND 1995 (Continued) share (of $.80 per share) was at a premium to its then common stock equivalent price per share. Each share of the preferred stock was entitled to two votes per share and was convertible, at the holder's option, into two shares of common stock. The preferred stock was senior to the common stock with respect to liquidation rights; however, the preferred stock was not entitled to any dividends. In May 1995, the five individual holders of the preferred stock exercised their conversion rights and were issued 1,000,000 shares of common stock upon cancellation of the preferred stock. 5. In March 1995, the Company's Board of Directors approved a Shareholder Rights Plan, under which a dividend distribution of one Right for each outstanding share of the Company's common stock is authorized. Each Right will entitle shareholders of record on May 9, 1995 to purchase one-half share of common stock at a 50% discount to market price if a person or group acquires 20% or more of the Company's outstanding stock. 6. In May 1995, the Company's stockholders amended its certificate of incorporation to increase the number of authorized common shares from 45,000,000 shares to 85,000,000 shares. 7. In the first quarter of fiscal 1996, the Company issued 600,000 shares of its common stock to a broker/finder in connection with its July 1995 Convertible Debenture financing (see Note C). These shares, valued at $600,000 (such value being equivalent to the quoted market price of the Company's common stock), are included in deferred loan costs. 8. In July 1995, the Company issued 89,096 shares of its common stock in lieu of $89,096 of interest previously accrued for, at the option of the lender. 9. In fiscal 1996, the Company issued warrants to an outside consultant to purchase 100,000 shares of the Company's common stock at $1.44 per share (then current market value) exercisable through February 2001 for services rendered to the Company. Based upon trading history, stock price volatility and other relevant factors, management fair valued those warrants issued at $.10 per share and charged $10,000 to operations in fiscal 1996. 10. Subsequent to May 31, 1996, warrants to purchase 383,636 shares of common stock have been exercised, resulting in proceeds to the Company of $418,000. WARRANTS Warrant activity for the years ended May 31, 1995 and 1996 is summarized as follows (see Note H-1):
Non-employee Directors Employees Consultants Price Range ------------ ------------ ------------ ------------ Balance at June 1, 1994 .... 450,000 760,000 6,208,750 $ .72-$5.00 Issued ................... 825,000 1,835,000 815,789 $ .28-$ .76 Exercised ................ -- -- -- Canceled/retired ......... -- -- (296,000) $1.31-$2.01 ------------ ------------ ------------ ------------ Balance at May 31, 1995 .... 1,275,000 2,595,000 6,728,539 $ .28-$5.00 Issued ................... -- -- 100,000 $ 1.44 Exercised ................ (100,000) (585,000) (2,655,585) $ .25-$1.03 Canceled/retired ......... -- (35,000) (1,985,854) $ .73-$5.00 ------------ ------------ ------------ ------------ Balance at May 31, 1996 .... 1,175,000 1,975,000 2,187,100 $ .28-$1.50 ------------ ------------ ------------ ------------ Number of shares exercisable 875,000 545,000 2,187,100 $ .28-$1.50 ============ ============ ============ ============
NOTE E--COMPENSATION PLANS 1992 NON-QUALIFIED STOCK OPTION PLAN In June 1993, the Company's stockholders approved a 1992 Non-Qualified Stock Option Plan (the "Non-Qualified Plan") for officers, directors, employees and consultants of the Company, for which the Company reserved an aggregate of 1,500,000 shares of common stock. In fiscal 1994, options to purchase 30,000 shares of common stock at prices ranging between $.91 and $1.03 per share (which approximated market value) were granted under the Non-Qualified Plan. In November 1994, the Company's Board of Directors terminated the Non-Qualified Plan. No other options have been 16 19 granted under the Non-Qualified Plan and 25,000 options were outstanding as of the termination date and remain exercisable through November 1998. 1995 STOCK OPTION PLAN In May 1995, the Company's stockholders approved the 1995 Stock Option Plan (the "1995 Option Plan") for officers and employees of the Company, for which the Company has reserved an aggregate of 1,500,000 shares of common stock. The 1995 Option 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 1995 Option 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 1995 Option Plan expires March 8, 2005. At May 31, 1996 and 1995, no options were granted or are outstanding under the 1995 Option Plan. In June 1996, the Board of Directors granted non-qualified stock options to officers and employees to purchase an aggregate of 555,000 shares and 237,000 shares, respectively, at $3.44 per share. OUTSIDE DIRECTOR STOCK OPTION PLAN In May 1995, the Company's stockholders approved an Outside Director Stock Option Plan (the "Director Plan") for non-employee directors ("Outside Directors") of the Company, for which the Company has reserved an aggregate of 300,000 shares of common stock. The Director Plan will be administered by the Board of Directors of the Company. In accordance with the terms of the Director Plan, each Outside Director will be granted ten-year, non-qualified stock options commencing June 1, 1995, and on the first day of each June thereafter, to purchase those number of shares of the Company's common stock having an aggregate market value of $10,000 at the average closing price of the common stock on NASDAQ or such other exchange upon which the Company's stock is listed for the five trading days immediately preceding the date of grant. Options granted to each Outside Director shall vest in one year. 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. On June 1, 1995, options to purchase an aggregate of 77,418 shares of common stock at $.78 per share were granted to Outside Directors. On June 1, 1996, options to purchase an aggregate of 31,675 shares of common stock at $2.21 per share were granted to Outside Directors. To date, no stock options have been exercised. NOTE F--LEASING REVENUES In March 1996, the Company entered into an exclusive agreement with a third party whereby such third party will purchase, subject to credit approval, the EECP(TM) system on a non-recourse basis and lease the system to the Company's customers. During fiscal 1996, approximately 51% of the Company's revenues were derived through such transactions. Further, the Company had sales to four individual customers, each over 10%, two of which are included above, aggregating 54% of the Company's fiscal 1996 revenues. Also during fiscal 1996, the Company directly entered into leases with customers classified as operating leases. Such leases are generally for a three-year term and are noncancelable. Aggregate minimum future lease rentals as of May 31, 1996 are as follows:
Fiscal Year Amount - -------------------------------------------------------------------------------- 1997 ............................................. $ 882,000 1998 ............................................. 1,440,000 1999 ............................................. 1,323,000 2000 ............................................. 558,000 ---------- $4,203,000 ==========
17 20 VASOMEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND 1995 (Continued) NOTE G--INCOME TAXES Deferred tax assets or liabilities are computed based on the impact of "temporary differences" between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The tax effects of temporary differences which give rise to deferred tax assets are summarized as follows:
May 31, ---------------------------------- 1996 1995 ---------------------------------- Deferred tax assets Net operating loss and other carryforwards ........... $ 6,905,000 $ 5,040,000 Accrued compensation ........... 155,000 165,000 Other .......................... 115,000 ---------------------------------- Total gross deferred tax assets .................. 7,175,000 5,205,000 Valuation allowance ............ (7,175,000) (5,205,000) ---------------------------------- $ -- $ -- ==================================
Management has established a valuation allowance for the full amount of the deferred tax assets based on uncertainties with respect to the Company's ability to generate future taxable income. At May 31, 1996, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $16,500,000, expiring at various dates through 2011. Further, the Company's subsidiary, Viromedics, Inc., has separate net operating loss carryforwards available to offset future taxable income, aggregating approximately $1,700,000, expiring at various dates through 2011. NOTE H--COMMITMENTS AND CONTINGENCIES 1. EMPLOYMENT AGREEMENTS The Company maintains employment agreements with its executive officers, expiring at various dates through January 1999. Employment agreements with certain of the Company's officers also provide that in the event there is a change in the control of the Company, as defined therein, or in any person directly or indirectly controlling the Company, as also defined therein, the employee has the option, exercisable within six months of becoming aware of such event, to terminate his employment agreement. Upon such termination, the employee has the right to receive as a lump-sum payment certain compensation remaining to be paid for the balance of the term of the agreement. In July 1994, in connection with an employment agreement with its newly appointed President and Chief Executive Officer, the Company issued five-year warrants to purchase 1,000,000 shares of its common stock at $.45 per share (which approximated market value at the date of grant) vesting at 25% per year beginning June 30, 1995. Such vesting is contingent upon his continued employment with the Company. In October 1994, the Company settled an employment commitment through December 1997 with its former Chairman and President, aggregating $244,000, for $35,000. In addition, this former officer forfeited 570,000 shares of the Company's common stock issued as a stock bonus in December 1992 which had not vested at the settlement date. This former officer also resigned from the Company's Board of Directors. In December 1994, the Company settled an employment commitment through November 1996 with its former Vice President--Finance, aggregating $190,000, for $75,000 which was charged to operations during fiscal 1995. This former officer also resigned from the Company's Board of Directors. In January 1995, in connection with an employment agreement with its recently appointed Vice President of Marketing, the Company issued five-year warrants to purchase 300,000 shares of its common stock at $.38 per share (which approximated market value at the date of grant) vesting at 25% per year beginning January 1996. Such vesting is contingent upon his continued employment with the Company. In February 1995, in connection with an employment agreement with its recently appointed Senior Vice President of R&D and Manufacturing, the Company issued five-year warrants to purchase 300,000 shares of its common stock at $.40 per share (which approximated market value at the date of grant) vesting at 33% per year beginning February 1996. Such vesting is contingent upon his continued employment with the Company. Also in February 1995, the Company issued five-year warrants to its Treasurer to purchase 200,000 shares of the Company's common stock at $.41 per share (which approximated market value at the date of grant) with 50,000 such shares vested immediately and the remainder vesting at 33% per year beginning February 1996. Such vesting is contingent upon his continued employment with the Company. 18 21 Approximate aggregate minimum annual compensation obligations under active employment agreements at May 31, 1996, after giving effect to the above settlements, are summarized as follows:
Fiscal Year Amount - -------------------------------------------------------------------------------- 1997 ............................................ $ 651,000 1998 ............................................ 498,000 1999 ............................................ 114,000 ---------- $1,263,000 ==========
2. LEASE The Company occupies office and warehouse space under a noncancelable operating lease which expires on October 31, 2000, at an annual cost of approximately $120,000. Rent expense was $111,000 and $87,000 in fiscal 1996 and 1995, respectively. Approximate aggregate minimum annual obligations under this lease agreement at May 31, 1996 are summarized as follows:
Fiscal Year Amount - --------------------------------------------------------------------------------------------------------------------------- 1997 .............................................. $118,000 1998 .............................................. 121,000 1999 .............................................. 125,000 2000 .............................................. 130,000 2001 .............................................. 55,000 -------- $549,000 ========
3. MULTI-CENTER CLINICAL TRIAL The Company has entered into several agreements with medical institutions and consultants in connection with a multi-center clinical trial and cost-effectiveness study expected to be completed during fiscal 1997. As of May 31, 1996, the aggregate minimum obligation under such agreements approximates $233,000. 4. SEC INVESTIGATION In February 1995, the Company was served with a subpoena duces tecum by the broker-dealer branch of the Northeast Regional Office of the Securities and Exchange Commission ("SEC") requesting certain documents from the Company pursuant to a formal order of private investigation in connection with possible registration and reporting violations. The Company is cooperating fully with such investigation. As stated in the subpoena, the "investigation is confidential and should not be construed as an indication by the Commission or its staff that any violations of law have occurred, nor should it be interpreted as an adverse reflection on any person, entity or security." This investigation is in its early stages and the Company is unable to determine the likelihood of an unfavorable outcome or the existence or amount of any potential loss. 5. LITIGATION In furtherance of a previously withdrawn motion for pre-trial discovery, on or about May 23, 1996, an action was commenced in the Supreme Court of the State of New York, Nassau County, against the Company, its directors and certain of its officers and employees for the alleged breach of an agreement to appoint a non-affiliated party as its exclusive distributor of EECP(TM). The complaint seeks damages in the approximate sum of $50,000,000, declaratory relief and punitive damages. The Company denies the existence of any agreement, believes that the complaint is frivolous and without merit and is vigorously defending the claims as well as asserting substantial counterclaims. This matter is in its preliminary stages and the Company is unable to determine the likelihood of an unfavorable outcome or the existence or amount of any potential loss. 6. THE RESEARCH FOUNDATION The Company has entered into an agreement with the Research Foundation of the State University of New York at Stony Brook to perform research on EECP(TM). The Company has committed monthly payments of $15,000 to the Research Foundation through September 1, 1996. The Company paid approximately $180,000 and $60,000, respectively, to the Research Foundation in fiscal 1996 and 1995. 7. AGREEMENT WITH FOSHAN The Company has entered into an agreement, expiring November 2008, with Foshan Analytical Instrument Factory ("Foshan"), a Chinese company, for the contract manufacture of EECP(TM), subject to certain performance standards, as defined. At May 31, 1996, the Company has outstanding purchase commitments aggregating $288,000. 8. RELATED PARTY In fiscal 1996 and 1995, payments for office facilities, services and equipment of $42,000 and $55,000, respectively, were made to an entity whose principal stockholder is a director of the Company. 19 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors [GRANT THORNTON LOGO] of Vasomedical, Inc. We have audited the accompanying consolidated balance sheets of Vasomedical, Inc. and Subsidiaries (the "Company") as of May 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP GRANT THORNTON LLP Melville, New York August 2, 1996 VASOMEDICAL INC. AND SUBSIDIARIES MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) Small-Cap Issues market under the symbol VASO. The table below sets forth the range of high and low bid prices of the Common Stock as reported by NASDAQ for the fiscal periods specified. These prices represent inter-dealer quotations without retail markups, markdowns or commissions and do not necessarily represent actual transactions. The approximate number of record holders of Common Stock as of August 21, 1996 was 750.
FISCAL 1996 Fiscal 1995 -------------------------------------------------- HIGH LOW High Low -------------------------------------------------- First Quarter .......... 1 3/4 3/4 21/32 3/8 Second Quarter ......... 1 5/8 23/32 7/16 1/4 Third Quarter .......... 1 5/16 3/4 3/4 9/32 Fourth Quarter ......... 2 17/32 1 5/16 27/32 1/2
The last bid price of the Company's Common Stock on August 21, 1996 was $3 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 appropriate. Stock dividends, if any, also will be dependent on such factors as the Board of Directors deems appropriate. 20 23 CORPORATE DIRECTORY OFFICERS Anthony Viscusi President and Chief Executive Officer Eugene H. Glicksman Executive Vice President John C.K. Hui, PhD Senior Vice President, R&D and Manufacturing Anthony E. Peacock Vice President, Marketing and Clinical Affairs Joseph A. Giacalone Treasurer and Secretary BOARD OF DIRECTORS Abraham E. Cohen Chairman, Vasomedical, Inc. Former President of Merck International and Senior Vice President of Merck and Co., Inc. Alexander G. Bearn, MD Adjunct Professor, Rockefeller University. Former Chairman of the Department of Medicine of Cornell University Medical College and Senior Vice President of Medical and Scientific Affairs of Merck International David S. Blumenthal, MD Practicing Cardiologist affiliated with New York Hospital-Cornell Medical Center Francesco Bolgiani Deputy Chairman, Banca del Gottardo Eugene H. Glicksman Executive Vice President, Vasomedical, Inc. John C.K. Hui, PhD Senior Vice President, Vasomedical, Inc. Kenneth W. Rind, PhD Chairman, Oxford Venture Corporation. Former Vice President of Corporate Finance at Oppenheimer & Co., Inc., and Principal at Xerox Development Corp. E. Donald Shapiro Joseph Solomon Distinguished Professor of Law and former Dean, New York Law School Anthony Viscusi President and CEO, Vasomedical, Inc. Zhen-sheng Zheng, MD Director of the Cardiovascular Research Institute, Sun Yat-sen University of Medical Sciences GENERAL COUNSEL Blau, Kramer, Wactlar & Lieberman, P.C. Attorneys at Law 100 Jericho Quadrangle Jericho, New York 11753 AUDITORS Grant Thornton LLP Certified Public Accountants Suite 3S01 One Huntington Quadrangle Melville, New York 11747 REGISTRAR AND TRANSFER AGENT American Stock Transfer and Trust Company 40 Wall Street New York, New York 10005 OTHER AVAILABLE INFORMATION A copy of the Company's Annual Report on Form 10-KSB for the year ended May 31, 1996, as filed with the Securities and Exchange Commission, is available without charge to interested stockholders upon a written request to: Vasomedical, Inc. Attn. Investor Relations 180 Linden Avenue Westbury, NY 11590 or visit our homepage on the World Wide Web (www.vasomedical.com). 24 [VASOMEDICAL LOGO] EX-23 3 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-KSB) of Vasomedical, Inc. of our report dated August 2, 1996, included in the 1996 Annual Report to Stockholders of Vasomedical, Inc. Grant Thornton LLP Melville, New York August 2, 1996 EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR MAY-31-1996 JUN-01-1995 MAY-31-1996 4,447,806 0 1,010,965 0 563,272 6,183,030 375,181 164,008 8,246,151 1,224,057 3,725,000 0 0 42,204 3,048,890 8,246,151 2,683,128 2,683,128 609,136 609,136 4,372,687 0 515,451 (2,643,145) 0 (2,643,145) 0 0 0 (2,643,145) (.07) (.07)
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