<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the quarterly period ended February 28, 1997
[ ] 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 registrant as specified in its charter)
Delaware 11-2871434
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at April 11, 1997 46,770,603
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
<PAGE> 2
Vasomedical, Inc. and Subsidiaries
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 - Financial Statements: Page
----
<S> <C> <C>
Consolidated Condensed Balance Sheets as of
February 28, 1997 and May 31, 1996 (Unaudited) 3
Consolidated Condensed Statements of Operations for
the Nine- and Three-Months Ended February 28, 1997
and February 29, 1996 (Unaudited) 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the period from June 1, 1996 to
February 28, 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Nine-Months Ended February 28, 1997
and February 29, 1996 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION 11
</TABLE>
2
<PAGE> 3
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,817,653 $ 4,447,806
Accounts receivable, net 254,939 1,010,965
Inventory 1,054,581 563,272
Other current assets 122,970 160,987
------------ ------------
Total current assets 4,250,143 6,183,030
PROPERTY AND EQUIPMENT, net 325,900 211,173
CAPITALIZED COSTS IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 1,047,742 1,208,915
DEFERRED LOAN COSTS, net 619,445
OTHER ASSETS 23,588 23,588
------------ ------------
$ 5,647,373 $ 8,246,151
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 627,465 $ 542,250
Accrued professional fees 174,650 133,471
Accrued commissions 42,862 309,315
Accrued interest 239,021
------------ ------------
Total current liabilities 844,977 1,224,057
LONG-TERM DEBT 3,725,000
OTHER LONG-TERM LIABILITIES 427,320 206,000
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,
46,765,603 shares and 42,204,113 shares at February 28,
1997 and May 31, 1996, respectively, issued and outstanding 46,766 42,204
Additional paid-in capital 28,676,767 24,427,338
Deferred compensation (42,454) (169,813)
Accumulated deficit (24,306,003) (21,208,635)
------------ ------------
4,375,076 3,091,094
------------ ------------
$ 5,647,373 $ 8,246,151
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE> 4
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine-months ended Three-months ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Equipment sales $ 1,275,150 $ 320,000 $ 292,822 $ --
Equipment rentals 367,912 79,400 79,912 55,400
------------ ------------ ------------ ------------
1,643,062 399,400 372,734 55,400
------------ ------------ ------------ ------------
Costs and expenses
Cost of sales and services 728,871 137,413 243,891 88,423
Selling, general and administrative 3,293,141 2,357,818 1,056,823 855,600
Research and development 618,142 223,682 296,746 55,230
Depreciation and amortization 239,918 199,018 84,502 65,655
Interest and financing costs 3,750 384,664 1,843 142,123
Interest and other income - net (143,392) (140,885) (36,067) (36,061)
------------ ------------ ------------ ------------
4,740,430 3,161,710 1,647,738 1,170,970
------------ ------------ ------------ ------------
NET LOSS $ (3,097,368) $ (2,762,310) $ (1,275,004) $ (1,115,570)
------------ ------------ ------------ ------------
Net loss per common share $ (.07) $ (.07) $ (.03) $ (.03)
------------ ------------ ------------ ------------
Weighted average common shares
outstanding 46,542,928 38,859,272 46,747,312 39,030,458
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE> 5
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Total
Additional Deferred stock-
Common stock paid-in compen- Accumulated holders'
Shares Amount capital sation deficit equity
------ ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1996 42,204,113 $42,204 $24,427,338 $ (169,813) $(21,208,635) $ 3,091,094
Conversion of debt 3,725,000 3,725 3,330,850 3,334,575
Exercise of warrants 836,490 837 918,579 919,416
Amortization of deferred compensation 127,359 127,359
Net loss (3,097,368) (3,097,368)
---------- ------- ----------- ----------- ------------ -----------
Balance at February 28, 1997 46,765,603 $46,766 $28,676,767 $ (42,454) $(24,306,003) $ 4,375,076
---------- ------- ----------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this condensed statement.
5
<PAGE> 6
Vasomedical, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine-months ended
February 28, February 29,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,097,368) $(2,762,310)
----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 239,918 199,018
Provision for doubtful accounts 200,000
Amortization of deferred compensation 127,359 127,359
Amortization of deferred loan costs 198,223
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 556,026 (43,760)
Increase in inventory (491,309) (392,037)
Decrease (increase) in other current assets 38,017 (46,885)
Increase in other assets (13,807)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (140,060) 128,213
Increase in other liabilities 103,000
----------- -----------
632,951 156,324
----------- -----------
Net cash used in operating activities (2,464,417) (2,605,986)
----------- -----------
Cash flows from investing activities
Purchase of investments (20,034)
Proceeds from sale of investments 655,556
Purchase of property and equipment (193,472) (61,726)
----------- -----------
Net cash (used in) provided by investing activities (193,472) 573,796
----------- -----------
Cash flows from financing activities
Proceeds from exercise of warrants 919,416 193,356
Proceeds from the financing of operating leases 118,320
Debt conversion fees (10,000)
Proceeds from issuance of long-term debt, net 3,708,000
----------- -----------
Net cash provided by financing activities 1,027,736 3,901,356
----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (1,630,153) 1,869,166
Cash and cash equivalents - beginning of period 4,447,806 491,609
----------- -----------
Cash and cash equivalents - end of period $ 2,817,653 $ 2,360,775
----------- -----------
Non-cash investing and financing activities:
Issuance of common stock upon conversion of debt $ 3,344,575
</TABLE>
The accompanying notes are an integral part of these condensed statements.
6
<PAGE> 7
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
February 28, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of February 28, 1997 and
the related consolidated condensed statements of operations for the nine- and
three-month periods ended February 28, 1997 and February 29, 1996, changes in
stockholders' equity for the period ended February 28, 1997 and changes in cash
flows for the nine-month periods ended February 28, 1997 and 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 28, 1997 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, 1996. Results of
operations for the period ended February 28, 1997 are not necessarily indicative
of the operating results expected for the full year.
NOTE B - LONG-TERM DEBT
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 effect of this conversion to the
quarter ended August 31, 1996 was to increase stockholders' equity by
approximately $3,335,000, consisting of the debt conversion ($3,725,000) and
accrued interest ($239,000), net of unamortized loan costs and conversion fees
($629,000).
NOTE C - STOCKHOLDERS' EQUITY
In the first quarter of fiscal 1997, warrants to purchase 383,636
shares of common stock were exercised, aggregating $418,000.
In the second quarter of fiscal 1997, warrants to purchase 427,896
shares of common stock were exercised, aggregating $472,000.
In the third quarter of fiscal 1997, warrants to purchase 24,958 shares
of common stock were exercised, aggregating $29,000.
NOTE D - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Approximate aggregate minimum annual compensation obligations under
active employment agreements at February 28, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Twelve-months ended February 28, Amount
<S> <C> <C>
1998 $678,000
1999 285,000
--------
$963,000
--------
</TABLE>
7
<PAGE> 8
Vasomedical, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
February 28, 1997
(unaudited)
NOTE D - COMMITMENTS AND CONTINGENCIES (continued)
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
any unfavorable outcome or the existence or amount of any potential loss.
Litigation
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(R). 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.
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(R). The Company has committed monthly payments of $15,000 to the Research
Foundation through September 1, 1997.
Multicenter Clinical Trial
The Company has entered into several agreements with medical
institutions and consultants in connection with a multicenter clinical trial and
a parallel resource-utilization and quality-of-life study. Enrollment of the
targeted number of patients in these studies is expected to be completed during
fiscal 1997. As of February 28, 1997, the aggregate minimum obligation under
such agreements approximated $55,000.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations - Nine- and Three-months Ended February 28, 1997 and
February 29, 1996
The Company generated revenues from the sale and lease of its EECP(R)
(Enhanced External Counterpulsation) device of $1,643,000 and $373,000 for the
nine- and three-month periods ended February 28, 1997 as compared with $399,000
and $55,000 for the comparable prior periods. The Company incurred net losses of
$3,097,000 and $1,275,000 for the nine- and three-month periods ended February
28, 1997 as compared with $2,762,000 and $1,116,000 for the comparable prior
periods. Quarterly revenues did not continue at the level achieved in the last
quarter of fiscal 1996, which the Company believes is a result of the continuing
absence of blanket reimbursement coverage for EECP(R) and the inability or
unwillingness of certain patients to pay for treatment. Moreover, quarterly
results in fiscal 1997 were adversely affected by the mix favoring rentals over
sales and the non-performance of certain leases.
Gross margins from the EECP(R) 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. Gross
margins are furthermore affected by the location of the Company's customers and
the amount and nature of training and other initial costs required to place the
EECP(R) 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 nine- and
three-month periods ended February 28, 1997 and February 29, 1996 were
approximately $3,293,000 and $1,057,000, and $2,358,000 and $856,000,
respectively. The $935,000 increase in SGA expenses for the comparable
nine-month period resulted primarily from a $622,000 increase in payroll,
commissions and related costs associated with the addition of a direct national
sales force and other operating personnel, an increase of $235,000 in marketing
and related costs associated with the commercialization of EECP(R) and a
$200,000 reserve against uncollectable accounts, offset by $168,000 in costs
reported in this category in the prior year, the nature of which are currently
allocable to cost of sales since the onset of revenues. The $201,000 increase in
SGA expenses for the comparable three-month period resulted primarily from a
$178,000 increase in payroll, commissions and related costs associated with a
direct national sales force and other operating personnel, and an increase of
$61,000 in marketing and related costs associated with the commercialization of
EECP(R).
Research and development (R&D) expenses increased $394,000 and $242,000
for the nine- and three-months ended February 28, 1997 compared to the prior
periods. The increase is a result of the timing of commitments and expenses
related to the Company's multi-center clinical study for EECP(R). Such
commitments and expenses are expected to continue in fiscal 1997.
The decrease in interest and financing costs is directly attributable
to the conversion of debt in June 1996.
Liquidity and Capital Resources
Working capital at February 28, 1997 decreased $1,554,000 to $3,405,000
as compared to $4,959,000 at May 31, 1996 due to continuing operating losses,
offset by proceeds from the exercise of warrants and the cancellation of
$239,000 of interest due as a result of the conversion of Notes. During the
nine-months ended February 28, 1997, the Company generated net proceeds of
$919,000 from the exercise of common stock purchase warrants.
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. The first quarter
effect of this conversion was to increase stockholders' equity by approximately
$3,335,000, consisting of the debt conversion ($3,725,000) and accrued interest
($239,000), net of unamortized loan costs and conversion fees ($629,000).
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(R) system on a non-recourse basis and lease the system to the Company's
customers. During the nine-months ended February 28, 1997, approximately 65% of
the Company's revenues were derived through such transactions. Although there
can be no certainty about future revenues generated through these transactions,
the Company believes that these transactions will contribute to expected growing
revenues and working capital in the future.
9
<PAGE> 10
Management believes that its present working capital position at
February 28, 1997 and the ongoing commercialization of EECP(R), some units of
which will be purchased by the aforementioned medical equipment finance company,
will make it possible for the Company to support its internal overhead expenses
and to implement its business plans at least through February 28, 1998.
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 the dramatic changes taking place in the healthcare
environment; the impact of competitive procedures and products and their
pricing; unexpected manufacturing problems in foreign supplier facilities;
unforeseen difficulties and delays in the conduct of clinical trials and other
product development programs; the actions of regulatory authorities and
third-party payers in the United States and overseas; uncertainties about the
acceptance of a novel therapeutic modality by the medical community; and the
risk factors reported from time to time in the Company's SEC reports.
10
<PAGE> 11
VASOMEDICAL, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
Previously reported.
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
11
<PAGE> 12
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 14, 1997
12
<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
28, 1997 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 2,817,653
<SECURITIES> 0
<RECEIVABLES> 454,939
<ALLOWANCES> (200,000)
<INVENTORY> 1,054,581
<CURRENT-ASSETS> 4,250,143
<PP&E> 568,654
<DEPRECIATION> (242,754)
<TOTAL-ASSETS> 5,647,373
<CURRENT-LIABILITIES> 844,977
<BONDS> 0
0
0
<COMMON> 46,766
<OTHER-SE> 4,328,310
<TOTAL-LIABILITY-AND-EQUITY> 4,375,076
<SALES> 1,643,062
<TOTAL-REVENUES> 1,643,062
<CGS> 728,871
<TOTAL-COSTS> 728,871
<OTHER-EXPENSES> 4,011,559
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 3,750
<INCOME-PRETAX> (3,097,368)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,097,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,097,368)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
