<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended February 29, 1996
/ / Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 11-2871434
- --------------------------------------------------------------------------------
(State or other jurisdiction of . (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
180 Linden Ave., Westbury, New York 11590
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number (516) 997-4600
--------------
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at April 12, 1996 40,594,715
----------
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 / /
Transitional Small Business Disclosure Format Yes / / No /X/
<PAGE> 2
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements: Page
----
<S> <C>
Consolidated Condensed Balance Sheets as of
February 29, 1996 and May 31, 1995 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Nine and Three Months Ended February 29, 1996 and
February 28, 1995 and for the period from July 22, 1987
(inception) to February 29, 1996 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the period from July 22, 1987 (inception) to
February 29, 1996 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended February 29, 1996 and February 28, 1995
and for the period from July 22, 1987 (inception)
to February 29, 1996 (Unaudited) 7
Notes to Consolidated Condensed Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION 13
</TABLE>
2
<PAGE> 3
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
February 29, May 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $2,360,775 $491,609
Investments in mutual funds 628,152
Accounts receivable 43,760
Inventory 337,821
Other current assets 167,341 120,456
----------- -----------
Total current assets 2,909,697 1,240,217
PROPERTY AND EQUIPMENT, net 156,861 77,075
CAPITALIZED COSTS IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 1,263,202 1,426,065
DEFERRED LOAN COSTS, net 693,778
OTHER ASSETS 23,588 9,781
------------ -----------
$5,047,126 $2,753,138
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $348,397 $404,051
Accrued interest 183,867 89,096
-------- --------
Total current liabilities 532,264 493,147
LONG-TERM DEBT 3,940,000
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; 39,126,517 shares and 37,899,432 shares at
February 29, 1996 and May 31, 1995, respectively, issued
and outstanding 39,126 37,899
Additional paid-in capital 22,075,803 21,134,578
Deferred compensation (212,267) (339,626)
Unrealized loss on investments (7,370)
Accumulated deficit (21,327,800) (18,565,490)
------------ ------------
574,862 2,259,991
---------- -----------
$5,047,126 $2,753,138
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE> 4
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Cumulative
July 22, 1987
Nine months ended Three months ended (inception) to
February 29, February 28, February 29, February 28, February 29,
1996 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $399,400 $ - $55,400 $ - $2,748,902
-------- ---------- ------- ---------- ---------
Costs and expenses
Cost of sales 137,413 88,423 751,892
Selling, general and
administrative 2,357,818 1,766,336 855,600 842,978 19,159,501
Research and development 223,682 474,274 55,230 234,274 3,685,989
Depreciation and amortization 397,241 52,037 139,988 29,216 1,323,391
Provision for uncollectable note 318,000
Royalty fees 196,963
Registration costs 89,797
Minority interest in net losses
of subsidiaries (1,110,221)
Net gain on sale or disposition
of subsidiaries stock (119,701)
Interest and financing costs 186,441 1,101 67,790 692 429,725
Interest and other income - net (140,885) (68,407) (36,061) (30,777) (648,634)
--------- -------- -------- -------- -----------
3,161,710 2,225,341 1,170,970 1,076,383 24,076,702
---------- --------- --------- ---------- -----------
NET LOSS $(2,762,310) $(2,225,341) $(1,115,570) $(1,076,383) $(21,327,800)
------------ ------------ ------------ ------------ -------------
Net loss per common share $(.07) $(.08) $(.03) $(.03)
------ ------ ------ ------
Weighted average common
shares outstanding 38,859,272 28,393,043 39,030,458 33,561,932
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE> 5
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common stock Additional Deferred
--------------- ------------ paid-in compen-
Shares Amount Shares Amount capital sation
------ ------ ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 22, 1987 (inception) - $ - - $ - $ - $ -
Issuance of common stock 7,330,355 7,330 296,215
Common stock issued for services 169,645 170 4,919
Net loss
------ ------ --------- ------ -------- -------
Balance at May 31, 1988 7,500,000 7,500 301,134
Issuance of common stock 2,500,000 2,500 2,054,246
Common stock issued for services 137,500 138 39,862
Net loss
------ ------ --------- ------ -------- -------
Balance at May 31, 1989 10,137,500 10,138 2,395,242
Net loss
------ ------ --------- ------ -------- -------
Balance at May 31, 1990 10,137,500 10,138 2,395,242
Common stock issued to consultants
for services 462,750 462 114,588
Additional paid-in capital arising
from investment in subsidiary by
minority interest 315,241
Net loss
------ ------ --------- ------ -------- -------
Balance at May 31, 1991 10,600,250 10,600 2,825,071
Common stock issued for services to
officers/employees and consultants 1,632,253 1,632 1,785,794
Issuance of common stock for cash 1,317,500 1,318 2,521,893
Common stock issued under option
agreements 225,000 225 53,910
Common stock dividend 901,553 902 (902)
Issuance of subsidiary stock to
minority interests pursuant to
anti-dilution provisions 304,400
Net loss
------ ------ -------- ------ ------- -------
Balance at May 31, 1992 14,676,556 14,677 7,490,166
Common stock issued for services to
officers/employees and consultants 227,500 227 252,818
Issuance of common stock for cash 8,217,876 8,218 8,216,782
Common stock issued to officers
under stock bonus arrangement 1,900,000 1,900 1,696,225 (1,698,125)
Amortization of deferred compensation 339,625
Warrants issued to lenders and
consultants 210,000
Net loss
------ ------ -------- ------ ------- -------
Balance at May 31, 1993 25,021,932 25,022 17,865,991 (1,358,500)
Net loss
------ ------ -------- ------ ------- -------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Unreal- Stock accumulated Total
ized gain sub- in the stock-
(loss) on in- scriptions development holders'
vestments receivable stage equity
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at July 22, 1987 (inception) $ - $ - $ - $ -
Issuance of common stock 303,545
Common stock issued for services 5,089
Net loss (233,465) (233,465)
--------- ---------- --------- ---------
Balance at May 31, 1988 (233,465) 75,169
Issuance of common stock 2,056,746
Common stock issued for services 40,000
Net loss (538,919) (538,919)
--------- ---------- --------- ---------
Balance at May 31, 1989 (772,384) 1,632,996
Net loss (797,720) (797,720)
--------- ---------- --------- ---------
Balance at May 31, 1990 (1,570,104) 835,276
Common stock issued to consultants
for services 115,050
Additional paid-in capital arising
from investment in subsidiary by
minority interest 315,241
Net loss (666,259) (666,259)
--------- ---------- --------- ---------
Balance at May 31, 1991 (2,236,363) 599,308
Common stock issued for services to
officers/employees and consultants 1,787,426
Issuance of common stock for cash 2,523,211
Common stock issued under option
agreements 54,135
Common stock dividend -
Issuance of subsidiary stock to
minority interests pursuant to
anti-dilution provisions 304,400
Net loss (4,043,755) (4,043,755)
--------- ---------- --------- ---------
Balance at May 31, 1992 (6,280,118) 1,224,725
Common stock issued for services to
officers/employees and consultants 253,045
Issuance of common stock for cash (1,712,500) 6,512,500
Common stock issued to officers
under stock bonus arrangement -
Amortization of deferred compensation 339,625
Warrants issued to lenders and
consultants 210,000
Net loss (4,356,925) (4,356,925)
--------- ---------- --------- ---------
Balance at May 31, 1993 (1,712,500) (10,637,043) 4,182,970
--------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this condensed statement.
5
<PAGE> 6
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Preferred Stock Common stock Additional Deferred
--------------- ------------ paid-in compen-
Shares Amount Shares Amount capital sation
------ ------ ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1993 25,021,932 25,022 17,865,991 (1,358,500)
Rescission of common stock under-
lying stock subscriptions receivable (1,712,500) (1,713) (1,710,787)
Issuance of common stock for cash 2,500,000 2,500 947,500
Common stock issued for services to
officers and consultants 555,000 555 416,539
Issuance of common stock of
subsidiary for services 120,667
Contribution of common stock
of subsidiaries by officers 135,329
Contribution of common stock
by officer and consultant (300,000) (300) 300
Warrants issued to officers/employees
and consultants 193,500
Amortization of deferred compensation 339,624
Net loss
-------- ------ --------- ------ --------- ---------
Balance at May 31, 1994 26,064,432 26,064 17,969,039 (1,018,876)
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 for services to
consultants 405,000 405 273,657
Warrants issued to directors and consultants 72,500
Amortization of deferred compensation 169,812
Unrealized loss on investments
Net loss
------- ------ --------- ------ --------- --------
Balance at May 31, 1995 - - 37,899,432 37,899 21,134,578 (339,626)
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 60,000 60 59,940
Exercise of warrants 477,989 478 192,878
Amortization of deferred compensation 127,359
Realized gain on investments
Net loss
------- ------ --------- ------ --------- --------
Balance at February 29, 1996 - - 39,126,517 $39,126 $22,075,803 $(212,267)
------- ------ --------- ------ --------- --------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Unreal- Stock accumulated Total
ized gain sub- in the stock-
(loss) on in- scriptions development holders'
vestments receivable stage equity
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at May 31, 1993 (1,712,500) (10,637,043) 4,182,970
Rescission of common stock under-
lying stock subscriptions receivable 1,712,500 -
Issuance of common stock for cash 950,000
Common stock issued for services to
officers and consultants 417,094
Issuance of common stock of
subsidiary for services 120,667
Contribution of common stock
of subsidiaries by officers 135,329
Contribution of common stock
by officer and consultant -
Warrants issued to officers/employees
and consultants 193,500
Amortization of deferred compensation 339,624
Net loss (4,811,153) (4,811,153)
-------- ----------- ------------ ------------
Balance at May 31, 1994 - - (15,448,196) 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 for services to
consultants 274,062
Warrants issued to directors and consultants 72,500
Amortization of deferred compensation 169,812
Unrealized loss on investments (7,370) (7,370)
Net loss (3,117,294) (3,117,294)
-------- ----------- ------------ -----------
Balance at May 31, 1995 (7,370) - (18,565,490) 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 60,000
Exercise of warrants 193,356
Amortization of deferred compensation 127,359
Realized gain on investments 7,370 7,370
Net loss (2,762,310) (2,762,310)
-------- ----------- ------------ -----------
Balance at February 29, 1996 $ - $ - $(21,327,800) $574,862
-------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this condensed statement.
6
<PAGE> 7
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Cumulative
Nine months ended July 22, 1987
February 29, February 28, (inception) to
1996 1995 February 29,1996
---- ---- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,762,310) $(2,225,341) $(21,327,800)
----------- ------------ -------------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 397,241 52,037 1,323,391
Reserve for uncollectable note 318,000 318,000
Unrealized loss on investments 42,650
Amortization of deferred compensation 127,359 127,359 976,420
Amortization of deferred revenue (101,840)
Minority interest in net losses of subsidiaries (1,110,221)
Common stock issued for services
Officers/employees 1,291,133
Consultants 1,326,746
Warrants issued to officers/employees, lenders
and consultants 35,000 451,000
Acquired research and development costs 547,657
Reduction in carrying value of patents 159,775
Common stock of a subsidiary
issued for no additional consideration 304,400
Net gain on sale/disposition
of subsidiary stock (119,701)
Officers' loans forgiven as compensation 133,500
Net loss on sale of equipment 4,300
Changes in assets and liabilities, net of
assets acquired or disposed
Increase in accounts receivable (43,760) (760,970)
Increase in inventory (392,037) (659,805)
Increase in other current assets (46,885) (67,895) (475,239)
Increase in other assets (13,807) (888) (39,155)
Increase in accounts payable and
accrued expenses 128,213 44,217 1,114,291
Increase in amount due to minority
shareholder of subsidiary 191,392
Increase in deferred revenue 350,000
---------- ----------- ------------
156,324 507,830 5,267,724
---------- ----------- ------------
Net cash used in operating activities (2,605,986) (1,717,511) (16,060,076)
---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
7
<PAGE> 8
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<TABLE>
<CAPTION>
Cumulative
Nine months ended July 22, 1987
February 29, February 28, (inception) to
1996 1995 February 29,1996
---- ---- ----------------
<S> <C> <C> <C>
Cash flows from investing activities
Purchase of investments (20,034) (34,944) (995,859)
Proceeds from sale of investments 655,556 297,653 953,209
Proceeds from the sale of subsidiary stock 2,137 900,000
Acquisition/disposition of subsidiaries, net of cash (1,003,483)
Purchase of property and equipment (61,726) (581,971)
Net proceeds from the sale of equipment 8,500
Loans to officers (174,500)
Repayment of officer loans 41,000
Purchase of intangibles (725,000)
Purchase of patent (159,775)
----------- ---------- ----------
Net cash provided by (used in)
investing activities 573,796 264,846 (1,737,879)
---------- ---------- ------------
Cash flows from financing activities
Proceeds from sale of common stock 1,500,000 14,330,360
Proceeds from the sale of preferred stock 400,000 387,625
Proceeds from exercise of stock options 54,135
Proceeds from exercise of warrants 193,356 193,356
Contribution from minority shareholder 525,000
Expenses of stock offerings (496,908)
Proceeds from notes 3,708,000 5,595,500
Repayments of loans (1,595,000)
Increase in stock subscriptions payable 85,000
Increase in minority interest 1,079,662
---------- --------- ------------
Net cash provided by financing activities 3,901,356 1,900,000 20,158,730
---------- --------- ------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 1,869,166 447,335 2,360,775
Cash and cash equivalents - beginning of period 491,609 762,875
---------- ---------- ------------
Cash and cash equivalents - end of period $2,360,775 $1,210,210 $2,360,775
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
8
<PAGE> 9
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
February 29, 1996
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of February 29, 1996 and
the related consolidated condensed statements of operations for the nine- and
three-month periods ended February 29, 1996 and February 28, 1995 and changes
in stockholders' equity and cash flows for the nine-month period ended February
29, 1996 have been prepared by Vasomedical, Inc. and Subsidiaries (the
"Company") without audit. In the opinion of management, all adjustments (which
include only normal, recurring accrual adjustments) necessary to present fairly
the financial position as of February 29, 1996 and for all periods presented
have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Annual Report on Form 10-KSB for the year ended May 31, 1995. Results of
operations for the period ended February 29, 1996 are not necessarily
indicative of the operating results expected for the full year.
NOTE B - 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. The
conversion price was equivalent to the quoted market price of the Company's
common stock when the transaction was negotiated.
Pursuant to the terms of the Note agreement: (i) the Noteholders may
request, at their option during the period June 1 through June 15, 1998,
redemption of the Notes at 104% of principal payable July 7, 1998, (ii) the
Company reserves the right to repay the Notes after January 7, 1996, at 110% of
principal, provided that the average daily closing price of the shares of the
Company is at least 200% of the conversion price for thirty (30) consecutive
trading days prior to conversion, (iii) the Company reserves the right to
convert all the Notes after January 7, 1996, provided that the average daily
closing price of the shares of the Company is at least 200% of the conversion
price for thirty (30) consecutive trading days prior to conversion, (iv) the
Note is collateralized by substantially all the existing assets of the Company,
and (v) interest is payable semi-annually commencing July 7, 1996. Also, 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.
On December 1, 1995, $60,000 principal amount of Notes were converted
into 60,000 shares of the Company's common stock.
NOTE C - STOCKHOLDERS' EQUITY
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. These shares were valued at $600,000 and are
included as deferred loan costs amortizable over a three-year period. Such
value was equivalent to the quoted market price of the Company's common stock.
In July 1995, the Company issued 89,096 shares of its common stock in
lieu of $89,096 of interest previously accrued under a 1992 note at the option
of the lender.
In August 1995, warrants to purchase 360,000 shares of common stock
were exercised, aggregating $90,000.
In the third quarter of fiscal 1996, warrants to purchase 117,989
shares of common stock were exercised, aggregating $103,000.
Subsequent to the third quarter of fiscal 1996, warrants to purchase
1,468,198 shares of common stock were exercised, aggregating $1,047,000.
9
<PAGE> 10
Vasomedical, Inc. and Subsidiaries
(a development stage enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
February 29, 1996
(unaudited)
NOTE D - COMMITMENTS AND CONTINGENCIES
Employment Agreements
In September 1995, the Board of Directors approved a three-year
extension of the employment agreements with the Company's President and its
Vice President, Marketing and Clinical Affairs.
Approximate aggregate minimum annual compensation obligations under
active employment agreements at February 29, 1996, after giving effect to the
above extensions, are summarized as follows:
<TABLE>
<CAPTION>
Year ended February 29, Amount
----------------------- ------
<S> <C>
1997 $623,000
1998 531,000
1999 178,000
-----------
$1,332,000
----------
</TABLE>
SEC Investigation
The Company has been 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 any unfavorable outcome or the existence or amount of any
potential loss.
Subsequent Event
On April 2, 1996, a motion was filed in the Supreme Court of the State
of New York, Nassau County, seeking limited pre-action discovery of certain
officers and employees of the Company to determine if there is a basis to
commence legal proceedings against the Company for the alleged breach of an
agreement to appoint a non-affiliated party as its exclusive distributor of
EECP(TM). The Company denies the existence of any agreement, believes that any
complaint would be frivolous and without merit, and will vigorously defend any
claims that may be asserted.
NOTE E - 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 training, if
applicable. 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.
The Company also provides for a warranty period of up to three years. When
material, 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.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Nine and Three Months Ended February 29, 1996 and February 28, 1995
The Company continued to generate revenues from the sale and lease of
its EECP(TM) (Enhanced External Counterpulsation) device during the third
quarter of fiscal 1996. The Company incurred net losses of $2,762,000 and
$1,116,000 and $2,225,000 and $1,076,000 for the nine and three months ended
February 29, 1996 and February 28, 1995, respectively.
Gross margins from the 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.
The Company has successfully negotiated the lease or sale of several
EECP(TM) units. Although there can be no assurances that EECP(TM) will be
successfully commercialized, the Company expects to generate increasing
revenues in the fourth quarter of fiscal 1996.
Potential investors should be aware of the difficulties and delays
normally encountered by a company in the development stage, especially in view
of the regulated environment in which the Company operates and the paradigm
shift in the treatment of ischemic heart disease that EECP(TM) represents.
Selling, general and administrative (SGA) expenses for the nine and
three months ended February 29, 1996 and February 28, 1995 were approximately
$2,358,000 and $856,000 and $1,766,000 and $843,000, respectively. The $592,000
increase in SGA expenses for the nine-month period resulted primarily from a
$515,000 increase in payroll and related costs associated with the addition of
management, employment of 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 $372,000 in marketing and related
costs associated with the commercial introduction of EECP(TM). Such increase was
adjusted for a $318,000 provision on an uncollected note in the prior period.
The $13,000 increase in SGA expenses for the three-month period resulted
primarily from a $168,000 increase in payroll and related costs associated with
the addition of management, employment of a direct national sales force and
other operating personnel, particularly those formerly employed by Vasogenics,
and an increase of $172,000 in marketing and related costs associated with the
commercial introduction of EECP(TM). Such increase was adjusted for a $318,000
provision on an uncollected note in the prior period.
The increase in depreciation and amortization expense of $345,000 and
$111,000 for the comparative nine and three month periods ended February 29,
1996 and February 28, 1995 was primarily related to the amortization of
goodwill relating to the Vasogenics acquisition in January 1995 and the
amortization of deferred loan costs in connection with the July 1995 debt
financing.
Research and development (R&D) expenses decreased $251,000 and
$179,000 for the comparative nine and three month periods ended February 29,
1996 and February 28, 1995. The decrease is a result of the timing of
commitments and expenses relating to the Company's multi-center clinical study
for EECP(TM). Such commitments and expenses are expected to continue in the
fourth quarter of fiscal 1996 and in fiscal 1997.
The increase in interest and financing costs is directly attributable
to the Company's debt issuance in July 1995.
Investment income increased during the nine and three months ended
February 29, 1996 due to the Company's increased cash and investment position
resulting from the July 1995 debt issuance.
11
<PAGE> 12
Liquidity and Capital Resources
Working capital at February 29, 1996 increased $1,630,000 to
$2,377,000 as compared to $747,000 at May 31, 1995 due to the $4,000,000 7%
Convertible Debenture financing secured in July 1995, offset by continuing
operating losses. Historically, the Company's principal source of funds from
financing activities has been from the sale of equity or debt securities in
public and private markets. Such proceeds have enabled the Company to continue
its operations despite its use of cash for operating activities. From inception
through February 29, 1996, the Company has raised $14,965,000 and $5,595,000
from the sale of equity and debt securities, respectively. As indicated in the
accompanying consolidated condensed statements of cash flows, cash flows
provided by investing activities were $574,000 and $265,000 for the nine months
ended February 29, 1996 and February 28, 1995, respectively. The Company's
investing activities to date have consisted primarily of purchases of: (a)
subsidiaries, (b) intangibles, (c) property and equipment, offset by the
proceeds from the sale of subsidiary stock and (d) net investments in mutual
funds.
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. The
Company intends to use the net cash proceeds of $3,700,000 to support the
expansion of the sales force for the EECP(TM) treatment procedure and new
clinical studies designed to confirm additional therapeutic claims, as well
as for inventory, capital expenditures and general working capital. On
December 1, 1995, $60,000 of such notes were converted into 60,000 shares of
the Company's common stock.
In the nine months ended February 29, 1996, the Company received
$193,000 from the exercise of warrants to purchase common stock. Subsequent to
the third quarter of fiscal 1996, warrants to purchase 1,468,198 shares of
common stock were exercised, aggregating $1,047,000.
Subsequent to February 29, 1996, the Company entered into a
non-recourse vendor finance program with a medical equipment finance company
which will purchase the Company's EECP(TM) equipment and lease it to the
Company's customers. As a result, the Company expects revenues for future
quarters to be higher than previously anticipated.
Management believes that its present working capital position at
February 29, 1996, the commercialization of EECP(TM), some units of which
will be purchased by the aforementioned medical equipment finance company,
and the exercise of outstanding warrants, will be sufficient to support its
internal overhead expenses and to implement its new development and business
plans at least through February 28, 1997.
12
<PAGE> 13
VASOMEDICAL, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
None
ITEM 2 - CHANGES IN SECURITIES:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
None
Reports on Form 8-K:
None
13
<PAGE> 14
In accordance with to the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VASOMEDICAL, INC.
By: /s/ Anthony Viscusi
-------------------
President and CEO (Principal Executive Officer)
/s/ Joseph A. Giacalone
-----------------------
Treasurer (Principal Financial and Accounting Officer)
Date: April 12, 1996
14
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated condensed financial statements for the nine months ended February
29, 1996 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 2,360,775
<SECURITIES> 0
<RECEIVABLES> 43,760
<ALLOWANCES> 0
<INVENTORY> 337,821
<CURRENT-ASSETS> 2,909,697
<PP&E> 304,732
<DEPRECIATION> (147,871)
<TOTAL-ASSETS> 5,047,126
<CURRENT-LIABILITIES> 532,264
<BONDS> 3,940,000
0
0
<COMMON> 39,126
<OTHER-SE> 535,736
<TOTAL-LIABILITY-AND-EQUITY> 5,047,126
<SALES> 399,400
<TOTAL-REVENUES> 399,400
<CGS> 137,413
<TOTAL-COSTS> 3,161,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186,441
<INCOME-PRETAX> (2,762,310)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,762,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,762,310)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
