================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended May 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____
Commission File No. 0-18105
VASOMEDICAL, INC.
(Name of registrant as specified in its charter)
Delaware 11-2871434
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
180 Linden Avenue, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 997-4600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 23, 1998, based on the average price on that date, was
$63,142,000. At July 23, 1998, the number of shares outstanding of the issuer's
common stock was 48,688,212.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated herein by reference as set forth in Item
13(a)3, Index to Exhibits, in Part IV.
================================================================================
<PAGE>
PART I
ITEM ONE - BUSINESS
Except for historical information contained herein, the matters discussed
are forward looking statements that involve risks and uncertainties. When used
herein, words such as "anticipate", "believe", "estimate", "expect" and "intend"
and similar expressions, as they relate to the Company or its management,
identify forward-looking statements. Such forward-looking statements are based
on the beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Among the factors
that could cause actual results to differ materially are the following: the
effect of business and economic conditions; the impact of competitive products
and pricing; capacity and supply constraints or difficulties; product
development, commercialization or technological difficulties; the regulatory and
trade environment; and the risk factors reported from time to time in the
Company's SEC reports.
General
Vasomedical, Inc. (the "Company"), incorporated in Delaware in July 1987,
is engaged in the commercialization of the EECP(R) enhanced external
counterpulsation system ("EECP"), a microprocessor-based medical device for the
noninvasive, atraumatic treatment of patients with coronary artery disease. EECP
is marketed worldwide to hospitals, clinics and other cardiac health care
providers.
In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso
Interim Corp. ("Vaso Interim"), acquired the worldwide exclusive marketing
rights (except in China) to EECP and agreed to fund the research and development
activities of Vasogenics, Inc. ("Vasogenics"), its joint-venture partner in Vaso
Interim and sole minority shareholder. Vasogenics held the intellectual property
rights to the EECP 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 technology. Vasogenics and
Vaso Interim were subsequently merged into Vasomedical.
EECP , 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 EECP Enhanced External Counterpulsation System
General Discussion
According to the American Heart Association, coronary heart disease ("CHD")
is the single largest killer of American males and females. CHD caused 481,287
deaths in the United States in 1995. A major complication of CHD is 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, when medication
fails, consists of invasive procedures, such as percutaneous transluminal
coronary angioplasty ("PTCA") and coronary artery bypass grafting ("CABG").
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 PTCA interventions in 30% to 40% of cases (Journal of the American
College of Cardiology Vol. 22, No. 7, December 1993:2033-2054) and localized or
diffuse narrowings occur in half of vein grafts by ten years after CABG
(Circulation Vol. 83, No. 3, March 1991:1125-1173).
<PAGE>
In March 1989, Vasogenics received 510(k) marketing clearance from the FDA
for the MC1 model of the EECP system. In February 1995, the Company received
510(k) marketing clearance for its EECP-MC2 model, which incorporated
technological improvements of external counterpulsation. Marketing clearance was
for use of the EECP procedure in the treatment of patients suffering from stable
and unstable angina pectoris, acute myocardial infarction and cardiogenic shock.
The Company has, however, decided to focus initially only on the stable angina
pectoris indication.
A US patent (which expires in 2005) covering EECP design and functions was
issued in June 1988 to Dr. Zheng of Sun Yat-sen University of Medical Sciences
in China. This patent was assigned to Vasogenics in September 1991 and it is now
owned by the Company. Additional international and domestic patent applications
were filed in May 1993. A new US patent was issued to the Company in October
1996, as well as several international patents since then. The Company expects
additional international patents to issue during fiscal 1999. Such patents cover
several specific enhancements to the current EECP model.
The System
EECP is an advanced treatment system utilizing fundamental hemodynamic
principles to relieve angina pectoris. Treatment involves the inflation and
deflation of a series of compressive air cuffs applied to the patient's lower
extremities - the calves, lower thighs, and upper thighs, including the
buttocks. Timing for inflation and deflation is regulated by a microprocessor
running electrocardiogram ("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, can raise cardiac output by as much as
63%.
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 produces long-term patient benefits remains
uncertain, but thallium-201 and exercise stress test results combined are
strongly indicative of an improvement in myocardial perfusion and resolution of
reversible ischemic defects. The most logical explanation for these observations
is that EECP 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, in response to ischemia.
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 increases diastolic, 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 causes some resetting of the systems (e.g., baroreceptors) that 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.
<PAGE>
The results of studies carried out at Stony Brook, supported by previous
experience in China, provide the first indications that EECP therapy may
stimulate collateral flow in coronary artery disease patients. In support of
this hypothesis is the observation that the presence of one or more vascular
conduits without significant stenosis appears to be predictive of a favorable
response to EECP therapy. In fact, effectiveness has been shown to be directly
related to the number of patent coronary vessels in the treated patients. The
explanation appears to be that a proximally patent conduit is necessary to allow
transmission of augmented diastolic pressure and flow to distal coronary
vessels, by which collateral recruitment or development is promoted.
The Company's EECP 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 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 external counterpulsation were not consistently achieved in early
studies because the equipment used then lacked some of the features found in the
EECP system, such as the computer-controlled operating system that makes
sequential cuff inflation 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 . Not only did a course of treatment
with EECP reduce the frequency and severity of anginal symptoms during normal
daily functions and also during exercise, but the improvements were sustained
for years after therapy.
These results prompted a group of investigators at Stony Brook to undertake
studies with EECP 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 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 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 not only produced significant improvements in exercise duration (22%),
but also increases in double product (peak exercise systolic blood pressure x
peak heart rate, a measure of cardiac work). Taking all these results together,
the conclusion was that a program of EECP 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.
Subsequent data from a group of 50 angina patients who were treated with
EECP 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 those with three-vessel disease.
<PAGE>
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 three 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
outpatient therapy appears to exert effects on the heart similar to those
achieved by exercise training. After receiving EECP , approximately 80% of the
patients studied achieved an increase in exercise time 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
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 . A maximal
radionuclide stress test was performed prior to entry into the study. Upon
completion of the EECP 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 radionuclide images demonstrated
meaningful increases in maximal exercise times. However, in the "unimproved"
group, there was a significant decrease in post-EECP double product, indicating
a useful decrease in peripheral vascular resistance. The authors concluded that
the two proposed mechanisms of EECP , 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.
A five-year follow-up study of morbidity and mortality in 33 angina
patients treated with EECP was reported by the Stony Brook center in April 1997.
These patients had received 35 hours of EECP between 1989 and 1996, had
documented CHD and had undergone pre- and post-exercise testing. The initial
group of 18 patients previously reported at three years of follow-up was
included in this expanded cohort. Cardiac angiography had been performed in 18
patients, with 16 of these patients having multi-vessel disease; ten of 33
patients treated had prior myocardial infarction and 13 had undergone either
CABG or PTCA, with eight having undergone both treatments. Of the 33 patients
treated, 4 died 1-5 years after initial treatment with EECP , and complete
follow-up data concerning cardiac events was obtained in the 29 surviving
patients. Although nine patients required interim hospitalizations for one or
more cardiac conditions, which consisted of acute myocardial infarcts (4), new
CABG or PTCA (6), other cardiac surgery (1) or unstable angina (1), 20 of the 33
patients treated experienced none of the above 4-7 years post-EECP treatment.
Since over 60% of the original cohort of 33 patients with advanced CHD are alive
and well and without new events, this five-year follow-up study suggests that
EECP is effective both in the short- and long-term therapy of chronic angina
pectoris.
In 1995, the Company began a large randomized, controlled and
double-blinded multi-center clinical study ("MUST-EECP") in four leading
university hospitals in the United States to confirm at other sites the patient
benefits observed in open studies conducted at the Stony Brook center and to
provide scientific evidence of this treatment's effectiveness. The University of
California San Francisco, Columbia University College of Physicians & Surgeons
at the Columbia-Presbyterian Medical Center in New York, Beth Israel Deaconess
Hospital, a teaching affiliate of Harvard Medical School, and Yale University
School of Medicine were the institutions that participated in the study. These
institutions were later joined by Loyola University, University of Pittsburgh
and Grant/Riverside Methodist Hospitals. MUST-EECP was completed in July 1997
and results were announced at the annual meeting of the American Heart
Association in November 1997 and of the American College of Cardiology in March
1998. The Company expects the results of MUST-EECP to be published in a major
peer-review medical journal in 1998.
<PAGE>
This ground-breaking study shows that EECP therapy is a safe and effective
choice for more than seven million patients suffering from angina pectoris, a
common symptom of CHD. This study provides scientific evidence of this novel
treatment's effectiveness, even in patients on maximal medication and for whom
invasive revascularization procedures are no longer an option. Results of
MUST-EECP confirm clinical benefits shown in previous open trials: a decline in
anginal frequency, an increase in the ability to exercise and a decrease in
exercise-induced signs of myocardial ischemia.
MUST-EECP was conducted from May 1995 to July 1997. One hundred and
thirty-nine (139) patients suffering from chronic angina pectoris and on maximal
medication were randomized to receive treatment or sham. The sham group was
treated in a manner identical in every way to the treatment group except that
cardiovascular hemodynamics were not affected. Neither patients nor physicians
involved with the study knew to which group an individual patient belonged.
Patients with a documented history of CHD, positive exercise stress tests
and who were classified with Canadian Cardiovascular Society Classes I, II and
III angina pectoris were randomized to treatment counterpulsation or sham
counterpulsation. Exclusion criteria included: unstable angina, myocardial
infarction, CABG three months prior, cardiac catheterization two weeks prior,
greater than 50% stenosis in the left main artery, ECG abnormalities that would
interfere with the interpretation of stress tests, overt congestive heart
failure, and inability to provide consent or cooperate with the study protocol
for the duration of the trial.
Participants were representative of patients with severe CHD. Average age
was 63 years (range 40-81 years): 88% were males; 58% had undergone either CABG
or PTCA; and 49% had experienced prior myocardial infarctions. In addition,
among those who benefited, 74% were in Canadian Class II or III, and 55% had
"residual" multivessel coronary artery disease despite revascularization.
Despite a considerable amount of medication prior to and during treatment,
patients in the treated group still were able to show improvement averaging 11%
in the time before the onset of ischemia demonstrated by stress ECG. Those in
the sham (control) group showed no improvement at all. Additionally, even in the
maximally medicated patients, exercise duration increased 10% in the average
participant receiving treatment as measured by exercise treadmill; exercise
duration increased only 6% in the sham group. Study participants followed a four
to seven week treatment program. The protocol required patients to undergo EECP
in one-hour sessions, until they had completed 35 hours of treatment.
In fiscal 1999, the Company intends to conduct further studies with EECP in
the United States and abroad to expand the patient data base in the treatment of
angina, as well as to expand the EECP claim structure. Moreover, the Company is
sponsoring a long-term quality-of-life and resource-utilization study with EECP
in the same institutions and with the same patients that participated in
MUST-EECP. The Company expects to supplement its applications to the Health Care
Financing Authority ("HCFA") and other third-party payers for positive coverage
policies with the results of this study.
In pursuit of its claim expansion program, the Company applied for and
received FDA approval in April 1998 to study the application of EECP in the
treatment of congestive heart failure ("CHF"), a disabling condition affecting
nearly 5 million Americans and the most frequent cause of hospitalization for
those over 65 years of age. The study is being conducted simultaneously at the
University of Pittsburgh and at the University of California San Francisco and
is expected to be completed in calendar 1999. CHF occurs when the heart is
unable to pump blood well enough to meet the body's needs. The circulatory
system becomes congested when the heart fails to empty its chambers
sufficiently, leading to an accumulation in the chest and lower limbs. According
to the American Heart Association, 2.5 million men and 2.4 million women in the
United States have CHF. About 400,000 new cases of the disease occur each year.
The need to find new and effective methods to treat CHF is pressing, since the
prevalence of the disease is growing rapidly as a result of the aging population
and the improved survival rate of heart attacks, while deaths caused by the
disease increased 116% from 1979 to 1995.
<PAGE>
The Company's Plans
The Company's short- and long-term plans are to:
(a) Establish EECP therapy as a new standard of care in CHD.
(b) Publish the results of MUST-EECP in a major peer-review medical
journal in calendar 1998.
(c) Complete, in calendar 1998, a cost-effectiveness and quality-of-life
evaluation of EECP therapy to justify reimbursement from HCFA
(Medicare), State Welfare (Medicaid) agencies, and commercial
insurance companies.
(d) Engage in educational campaigns designed to highlight the
cost-effectiveness of EECP therapy to managed care organizations.
(e) Complete a distribution network in international markets.
(f) Complete a feasibility study for the use of EECP in CHF in calendar
1999.
(g) Expand the EECP clinical research program to establish new claims
(e.g., use in the treatment of peripheral vascular disease) and
confirm authorized claims (e.g., use in the treatment of acute
coronary syndromes).
(h) Complete the development of the next-generation EECP model and
initiate its in-house assembly in calendar 1999.
(i) Establish and support academic reference centers in the United States
and overseas in order to accelerate the growth and prestige of EECP
therapy and to increase the number and diversity of clinical and
mode-of-action studies, as well as the number of presentations,
publications, speakers and advocates.
(j) Create new products for use in noninvasive cardiovascular medicine.
Glossary of Terms
Acute Myocardial Infarction - heart attack
Angina Pectoris - literally "chest pain"
Cardiogenic shock - severe reduction in blood pressure owing to weak pumping
action of the heart
Collateral circulation - the use (recruitment) of small supplemental, usually
unused channels through which blood can be made to flow when normal blood
supply is impeded because of obstructions in coronary arteries
Coronary Artery Bypass Graft or CABG - a surgical transplant of a vein to
connect the aorta with an obstructed coronary artery
Coronary arteries - those that supply blood to the heart muscle
Diastole - rest period during which the heart chambers fill with blood and the
heart muscle receives most of its supply of oxygen and other nutrients
Enhanced External Counterpulsation or EECP - "Enhanced" describes the Company's
proprietary system which increases the level of diastolic augmentation by
40-50% over that of earlier devices
Ischemia - lack of blood supply
Occlusion - blockage of blood vessels
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. While the Company believes that this competitor's
involvement in the market is limited, there can be no assurance that this
company will not become a competitive factor. Further, there can be no assurance
that other companies will not enter the intended market for EECP . 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.
<PAGE>
Government Regulations
The EECP system is subject to extensive regulation by the FDA. Pursuant to
the Federal Food, Drug and Cosmetic Act, as amended, the FDA regulates and must
approve the clinical testing, manufacture, labeling, distribution and promotion
of medical devices in the United States.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a device that was legally marketed prior
to May 28, 1976, the date on which the Medical Device Amendments of 1976 was
enacted, the manufacturer may seek marketing clearance from the FDA to market
the device by filing a 510(k) premarket notification. The 510(k) premarket
notification must be supported by appropriate data establishing the claim of
substantial equivalence to the satisfaction of the FDA. Pursuant to recent
amendments to the law, the FDA can now require clinical data or other evidence
of safety and effectiveness. The FDA may have authority to deny marketing
clearance if the device is not shown to be safe and effective even if the device
is "substantially equivalent" to a device marketed prior to May 28, 1976. The
Company's EECP system can be marketed in the United States based on the FDA's
determination of substantial equivalence. There can be no assurance that the
Company's EECP system will not be reclassified in the future by the FDA and
subject to additional regulatory requirements.
If substantial equivalence cannot be established or if the FDA determines
that a more extensive review of the device is in order, the FDA will require the
manufacturer to submit a premarket application ("PMA") that must be fully
reviewed and approved by the FDA. Management does not believe that the EECP
system will ultimately require PMA approval for continued commercialization;
however, the Company so designed the protocol for MUST-EECP as to be able to
generate some of the data needed in the event that a PMA is required at some
future date.
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 a PMA for EECP and there can be no
assurance that EECP would receive PMA approval.
In most countries to which the Company seeks to export the EECP system, it
must first obtain documentation from the local medical device regulatory
authority stating that the marketing of the device is not in violation of that
country's medical device laws. The regulatory review process varies from country
to country. Presently, the Company is in the process of obtaining regulatory
approval of the EECP system overseas.
There can be no assurance that all the necessary FDA clearances, including
approval of any PMA that may eventually be required, and overseas approvals will
be granted for EECP , its future-generation upgrades or newly developed
products, on a timely basis or at all. Delays in receipt of or failure to
receive such clearances could have a material adverse effect on the Company's
financial condition and results of operations.
In June 1998, the EECP system was awarded the CE Mark, which satisfies the
regulatory provisions for marketing in all 15 countries of the European Union.
The CE Mark was awarded by DGM of Denmark, an official notified regulatory body,
under the European Council Directive concerning medical devices. The CE Mark, in
combination with the ISO 9001 certification awarded by Underwriter's
Laboratories (UL) in February 1998, places the Company in full compliance with
requirements for the marketing of the EECP system in the countries of the
European Union. The ISO 9001 Certificate covers the Company's design and
manufacturing operation for the EECP system and recognizes that the Company has
established and operates a world-class quality system.
Third-Party Reimbursements
Health care providers, such as hospitals and physicians, that purchase or
lease medical devices, such as the EECP system, for use on their patients
generally rely on third-party payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed with these devices. Even if a device
has FDA approval, Medicare and other third-party payers may deny reimbursement
if they conclude that the device is not cost-effective, is experimental or is
used for an unapproved indication.
<PAGE>
The Company is currently engaged in discussions with HCFA and several large
health care insurers. Although it is unlikely that these third-party payers will
issue positive coverage policies for EECP therapy before the results of the
Company's multi-center study are published in a peer-review journal, the Company
will continue to pursue reimbursement vigorously in fiscal 1999. At a minimum,
the Company believes that its discussions with third-party payers will continue
to define circumstances that justify reimbursement on a case-by-case basis and
create a pathway for rapid review of patient data and determination of medical
necessity. To date, there have been many such reimbursements. In anticipation of
receiving approval for broad-based coverage, the Company will pursue, through
the cardiology profession, the establishment of a Current Procedural Code
("CPT"). Although such code is not essential and although there is no assurance
that a new code will be issued, the Company believes that having an up-to-date
CPT code will accelerate the processing of reimbursement claims.
The unavailability of third-party coverage or the inadequacy of the
reimbursement for treatment procedures using EECP 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.
Patents and Trademarks
The Company has received two US patents with respect to the EECP system
expiring 2005 and 2013, respectively. In addition, the Company has received
several international patents and expects additional international patents to
issue during fiscal 1999. Moreover, a trademark has been registered for the name
"EECP". The loss of the Company's EECP patents and trademark could have a
material adverse effect upon the Company's business.
Employees
As of July 23, 1998, the Company employed thirty-two persons on a full-time
basis consisting of its four executive officers, nine salespersons, four
clinical applications specialists, seven manufacturing and service
professionals/technicians, three marketing professionals, and five
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 $121,000. 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 in connection with possible registration
and reporting violations. 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 an unfavorable outcome or the
existence or amount of any potential loss.
<PAGE>
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 the EECP system.
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.
In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County, against the Company and other parties. The action seeks damages in the
sum of $5,000,000 based upon alleged injuries resulting from the alleged
negligence of the defendants in the use of the Company's product. Management
believes that this action is fully covered by insurance. 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 1998.
PART II
ITEM FIVE - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
"The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic
securities market comprised of competing Market Makers whose trading is
supported by a communications network linking them to quotation dissemination,
trade reporting, and order execution systems. This market also provides
specialized automation services for screen-based negotiations of transactions,
online comparison of transactions, and a range of informational services
tailored to the needs of the securities industry, investors and issuers.
The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol VASO. The table below sets forth the range
of high and low trade prices of the Common Stock as reported by Nasdaq for the
fiscal periods specified. The approximate number of record holders of Common
Stock as of July 23, 1998 was 830.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $2.063 $1.563 $4.313 $2.375
Second Quarter $3.563 $1.719 $3.063 $1.938
Third Quarter $2.250 $1.719 $2.781 $1.563
Fourth Quarter $2.094 $1.500 $2.563 $1.531
</TABLE>
The last bid price of the Company's Common Stock on July 23, 1998 was
$1.344 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.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the five
years ended May 31, 1998 as derived from the Company's audited consolidated
financial statements. These data should be read in conjunction with the
consolidated financial statements of the Company, related notes and other
financial information.
<TABLE>
<CAPTION>
Year ended May 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations
Revenues (1) $5,225,064 $2,096,562 $2,683,128 $- $1,370,257
---------------------------------------------------------------------
Cost of sales and services 1,543,849 1,020,047 609,136 404,471
Selling, general & administrative expenses 5,689,704 4,155,552 3,738,789 2,172,555 4,373,623
Research and development expenses 1,595,970 1,045,184 364,455 598,178 443,850
Depreciation and amortization 363,101 333,482 269,443 117,851 433,390
Provision for losses 225,000 318,000
Minority interests in net losses of
subsidiaries (221,587)
Net loss on sale or disposition of
subsidiary stock 780,299
Interest and financing costs 4,057 8,511 515,451 2,523 3,261
Interest and other income, net (169,422) (174,810) (171,001) (91,813) (35,897)
---------------------------------------------------------------------
9,027,259 6,612,966 5,326,273 3,117,294 6,181,410
---------------------------------------------------------------------
Net loss (3,802,195) (4,516,404) (2,643,145) (3,117,294) (4,811,153)
Deemed dividend on preferred stock (1,132,000)
Preferred stock dividend requirement (96,717)
---------------------------------------------------------------------
Net loss applicable to common stock $(5,030,912) $(4,516,404) $(2,643,145) $(3,117,294) $(4,811,153)
---------------------------------------------------------------------
Net loss per common share
(basic and diluted) $(.11) $(.10) $(.07) $(.10) $(.20)
---------------------------------------------------------------------
Weighted average common shares
outstanding (basic and diluted) 47,873,711 46,297,142 39,226,258 30,519,640 24,011,515
---------------------------------------------------------------------
Balance Sheet
Working capital $5,046,202 $1,981,331 $4,958,973 $747,070 $1,410,114
---------------------------------------------------------------------
Total assets $7,345,246 $4,175,021 $8,246,151 $2,753,138 $2,122,046
---------------------------------------------------------------------
Long-term debt $0 $0 $3,725,000 $0 $0
---------------------------------------------------------------------
Stockholders' equity (2) $5,752,993 $3,020,962 $3,091,094 $2,259,991 $1,528,031
---------------------------------------------------------------------
- -------------------
<FN>
(1) Substantially all revenues from fiscal 1994 were generated from subsidiaries
which have been disposed of.
(2) No cash dividends were declared during any of the above periods.
</FN>
</TABLE>
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal Years Ended May 31, 1998 and 1997
The Company generated revenues from the sale and lease of its EECP system
of $5,225,000 and $2,097,000 for the years ended May 31, 1998 and 1997,
respectively. The Company incurred net losses of $3,802,000 and $4,516,000 for
fiscal 1998 and 1997, respectively (excluding the fiscal 1998 recognition of a
$1,132,000 deemed dividend on preferred stock, representing the discount
resulting from the allocation of proceeds to the beneficial conversion feature
and the fair value of the underlying warrants, and $97,000 in dividend
requirements, in connection with the Company's June 1997 and April 1998
financings). The Company generated increasing revenues in fiscal 1998 as the
number of EECP units purchased or rented by treatment centers is growing,
although there can be no assurances that the EECP device will become a
commercial success. Management believes that the number of cardiology practices
and hospitals interested in becoming providers of EECP therapy has increased
following the announcement of the results of the Company's multi-center clinical
study at the American Heart Association meeting in November 1997 (which data are
expected to be published in a major peer-review journal in 1998) and additional
reports presented at the American College of Cardiology meeting at the end of
March 1998.
Gross margins are dependent on a number of factors, particularly the mix of
EECP units sold and rented during the period, the ongoing costs of servicing
such units, and 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 system in service for customer use.
Accordingly, the gross margin realized during the current period may not be
indicative of future margins.
Selling, general and administrative (SGA) expenses for the years ended May
31, 1998 and 1997 were approximately $5,690,000 and $4,156,000, respectively.
The $1,534,000 increase in SGA expenses in fiscal 1998 from fiscal 1997 resulted
primarily from increases in marketing expenses related to programs for the
dissemination of the Company's multicenter clinical study results and for
promotional materials, and the expansion of the Company's direct sales force.
Research and development (R&D) expenses increased $551,000 for the year
ended May 31, 1998 compared to the prior period. The increase was a result of
commitments and expenses related to the Company's multicenter clinical study of
EECP which was completed in July 1997, the initiation of the development of the
next-generation model of the EECP system, and expenses related to a continuing
quality-of-life and resource utilization study started in parallel with the
multi-center clinical study. Expenses related to this study (which includes a
long-term follow-up phase), the expansion of the International EECP Patient
Registry at the University of Pittsburgh, the completion of the development of
the new model of the EECP system and the initiation of feasibility studies in
congestive heart failure and peripheral vascular disease are expected to affect
operating results in fiscal 1999.
Fiscal Years Ended May 31, 1997 and 1996
The Company generated revenues from the sale and lease of its EECP system
of $2,097,000 and $2,683,000 for the years ended May 31, 1997 and 1996,
respectively. The Company incurred net losses of $4,516,000 and $2,643,000 for
fiscal 1997 and 1996, respectively. Quarterly fiscal 1997 revenues did not
continue at the level achieved in the last quarter of fiscal 1996, which the
Company believes was the result of the continuing absence of blanket
reimbursement coverage for EECP therapy and the inability or unwillingness of
certain patients to pay for treatment. Management believes another factor was
that many cardiologists interested in becoming providers of EECP therapy were
awaiting the announcement of the Company's multi-center clinical study due to
occur during the first half of fiscal 1998. Moreover, quarterly results in
fiscal 1997 were adversely affected by the mix favoring rentals over sales and
the non-payment of certain leases.
Gross margins from the EECP are dependent on a number of factors,
particularly the number of units sold or leased during the period, the ongoing
costs of servicing such units, 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 system in service for customer
use.
<PAGE>
Selling, general and administrative (SGA) expenses for the years ended May
31, 1997 and 1996 were approximately $4,156,000 and $3,739,000, respectively.
The $417,000 increase in SGA expenses for the comparable fiscal period resulted
primarily from a $732,000 increase in payroll, commissions and related costs
associated with the addition of a direct national sales force and other
operating personnel, offset by $168,000 in costs reported in this category in
the prior year, the nature of which was allocable to cost of sales and services
from the onset of revenues.
Research and development (R&D) expenses increased $681,000 compared to the
prior fiscal period. The increase was the result of commitments and expenses
related to the Company's multi-center clinical study of EECP , which was
completed July 1997, the initiation of the development of the next generation
model of the EECP system, and commitments and expenses related to a continuing
quality-of-life and resource utilization study being conducted in parallel with
the multi-center clinical study. Such commitments and expenses related to the
aforementioned parallel study (which includes a long-term follow-up phase) and
the continuing mechanical and clinical development of EECP continued in fiscal
1998.
The decrease in interest and financing costs was directly attributable to
the conversion of debt in June 1996.
Liquidity and Capital Resources
Working capital increased by $3,065,000 from $1,981,000 at May 31, 1997 to
$5,046,000 at May 31, 1998, principally as a result of net proceeds from the
issuance of convertible preferred stock ($6,112,000) and the exercise of options
and warrants ($484,000), offset by continuing operating losses.
In March 1996, the Company entered into an agreement with a medical
equipment finance company whereby this third party will purchase, subject to
credit approval, the EECP system on a non-recourse basis and lease the system to
the Company's customers. During fiscal 1998 and 1997, approximately 13% and 54%,
respectively, of the Company's revenues were derived through such transactions.
On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Convertible Preferred Stock to one accredited investor at a price of
$20 per share, realizing net cash proceeds of $2,818,000. Dividends due on such
preferred stock have been, and are expected to be, paid in shares of the
Company's common stock. At May 31, 1998, approximately 66% of Series B preferred
stock had been converted into common stock.
On April 30, 1998, the Company issued 175,000 shares of newly created 5%
Series C Convertible Preferred Stock to the same accredited investor at a price
of $20 per share, realizing net cash proceeds of $3,294,000. Dividends due on
such preferred stock are expected to be paid in shares of the Company's common
stock. At May 31, 1998, no Series C preferred stock had been converted into
common stock.
Management believes that its present working capital position at May 31,
1998, along with the ongoing commercialization of the EECP system in domestic
and international markets, 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 for the next twelve months.
Impact of the Year 2000 on Information Systems
The Year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has not yet contacted other companies on whose services the Company
depends to determine whether such companies' systems are year 2000 compliant.
Although the Company intends to make its systems year 2000 compliant (the costs
of which are not expected to be significant), there can be no assurance that at
the year 2000 such systems will in fact be compliant. If the systems of the
Company or other companies on whose services the Company depends, including the
Company's customers, or with whom the Company's systems interface are not year
2000 compliant, there could be a material adverse effect on the Company's
financial condition or results of operations.
<PAGE>
ITEM EIGHT - FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM ELEVEN - EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
<PAGE>
ITEM FOURTEEN-EXHIBITS AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements
--------------------
See Index to Consolidated Financial Statements on page F-1 at beginning of
attached financial statements.
(a) Exhibits
--------
(3) (a) Restated Certificate of Incorporation (2)
(b) By-Laws (1)
(4) (a) Specimen Certificate for Common Stock (1)
(b) Certificate of Designation of the Preferred Stock, Series A (3)
(c) Certificate of Designation of the Preferred Stock, Series B (10)
(d) Form of Rights Agreement dated as of March 9, 1995 between
Registrant and American Stock Transfer & Trust Company (6)
(e) Stock Purchase Agreement dated June 25, 1997 between Registrant
and JNC Opportunity Fund, Ltd. (10)
(f) Registration Rights Agreement dated June 25, 1997 between
Registrant and JNC Opportunity Fund, Ltd. (10)
(g) Form of Warrant dated June 25, 1997 (10)
(h) Certificate of Designation of the Preferred Stock, Series C (12)
(i) Stock Purchase Agreement dated April 30, 1998 between Registrant
and JNC Opportunity Fund, Ltd. (12)
(j) Registration Rights Agreement dated April 30, 1998 between
Registrant and JNC Opportunity Fund, Ltd. (12)
(k) Form of Warrant dated April 30, 1998 (12)
(10) (a) 1992 Non-Qualified Stock Option Plan (2)
(b) 1995 Stock Option Plan (9)
(c) Outside Director Stock Option Plan (9)
(d) Employment Agreement dated July 1, 1994, as amended on October
24, 1995 and March 12, 1998, between Registrant and Anthony
Viscusi (7) (8) (13)
(e) Offshore Securities Subscription Agreement dated December 2, 1994
between Registrant and Banca del Gottardo (3)
(f) Confidential Private Placement Memorandum dated December 5, 1994
(3)
(g) Employment Agreement dated January 23, 1995, as amended on
October 24, 1995 and March 12, 1998, between Registrant and
Anthony E. Peacock (4) (8) (13)
(h) Employment Agreement dated February 1, 1995, as amended March 12,
1998, between Registrant and John C.K. Hui (4) (13)
(i) Modification and Extension Agreement dated March 12, 1998 between
Registrant and Joseph Giacalone (13)
(j) Note Purchase, Paying and Conversion Agency Agreement dated July
5, 1995 between Registrant and Banca del Gottardo (5)
(k) 1997 Stock Option Plan (11)
(22) Subsidiary of the Registrant
<TABLE>
<CAPTION>
Percentage
Name State of Incorporation Owned by Company
---- ---------------------- ----------------
<S> <C> <C>
Viromedics, Inc. Delaware 61%
</TABLE>
(23) Consent of Grant Thornton LLP (13)
(27) Financial Data Schedule (13)
<PAGE>
- ---------
(1) Incorporated by reference to Registration Statement on Form S-18, No.
33-24095.
(2) Incorporated by reference to Registration Statement on Form S-1, No.
33-46377 (effective 7/12/94).
(3) Incorporated by reference to Report on Form 8-K dated November 14, 1994.
(4) Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(5) Incorporated by reference to Report on Form 8-K/A dated June 26, 1995.
(6) Incorporated by reference to Registration Statement on Form 8-A dated May
12, 1995.
(7) Incorporated by reference to Report on Form 10-K for the fiscal year ended
May 31,1994.
(8) Incorporated by reference to Report on Form 8-K dated October 24, 1995.
(9) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 5, 1995.
(10) Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(11) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
December 4, 1997.
(12) Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(13) Filed herewith.
(b) Form 8-K Reports
Report on Form 8-K dated April 30, 1998.
<PAGE>
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 thirty-first day
of July, 1998.
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 July 31, 1998 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
/s/ Abraham E. Cohen Chairman of the Board
- --------------------
Abraham E. Cohen
/s/ Joseph A. Giacalone Secretary and Treasurer (Principal Financial
- ----------------------- and Accounting Officer)
Joseph A. Giacalone
/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
<PAGE>
Vasomedical, Inc. and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the
years ended May 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended May 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended May 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Vasomedical, Inc.
We have audited the accompanying consolidated balance sheets of Vasomedical,
Inc. and Subsidiary (the "Company") as of May 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended May 31, 1998. 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, 1998 and 1997, and the consolidated results of their
operations and their consolidated cash flows for each of the three fiscal years
in the period ended May 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
July 28, 1998
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
May 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,367,986 $1,753,004
Accounts receivable 976,341 56,648
Inventories 678,302 953,045
Other current assets 164,826 86,063
---------- ----------
Total current assets 6,187,455 2,848,760
PROPERTY AND EQUIPMENT, net 352,902 308,204
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net 781,373 994,469
OTHER ASSETS 23,516 23,588
---------- ----------
$7,345,246 $4,175,021
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $436,730 $272,978
Accrued warranty and customer support expenses 240,000 321,000
Accrued professional fees 225,833 243,062
Accrued commissions 176,553 30,389
Dividends payable 62,137
---------- ---------
Total current liabilities 1,141,253 867,429
ACCRUED WARRANTY COSTS 334,000 220,000
OTHER LONG-TERM LIABILITIES 117,000 66,630
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000
shares authorized; 225,750 shares at May 31, 1998
issued and outstanding 2,258
Common stock, $.001 par value; 110,000,000 shares authorized;
48,531,278 and 46,782,003 shares at May 31, 1998
and 1997, respectively, issued and outstanding 48,531 46,782
Additional paid-in capital 36,458,155 28,699,219
Accumulated deficit (30,755,951) (25,725,039)
----------- -----------
5,752,993 3,020,962
----------- -----------
$7,345,246 $4,175,021
----------- -----------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended May 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Equipment sales $4,958,333 $1,625,150 $2,507,528
Equipment rentals and services 266,731 471,412 175,600
---------- ---------- ----------
5,225,064 2,096,562 2,683,128
---------- ---------- ----------
Costs and expenses
Cost of sales and services 1,543,849 1,020,047 609,136
Selling, general and administrative 5,689,704 4,155,552 3,738,789
Research and development 1,595,970 1,045,184 364,455
Depreciation and amortization 363,101 333,482 269,443
Write-off of accounts receivable 225,000
Interest and financing costs 4,057 8,511 515,451
Interest and other income - net (169,422) (174,810) (171,001)
--------- --------- ---------
9,027,259 6,612,966 5,326,273
--------- --------- ---------
NET LOSS (3,802,195) (4,516,404) (2,643,145)
Deemed dividend on preferred stock (1,132,000)
Preferred stock dividend requirement (96,717)
------------ ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCK $(5,030,912) $(4,516,404) $(2,643,145)
----------- ----------- -----------
Net loss per common share (basic and diluted) $(.11) $(.10) $(.07)
----- ----- -----
Weighted average common shares
outstanding (basic and diluted) 47,873,711 46,297,142 39,226,258
------------ ------------ ------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Additional Deferred Loss stock-
Preferred stock Common stock paid-in compen- on invest- Accumulated holders'
Shares Amount Shares Amount capital sation ments deficit equity
------ ------ ------ ------ ---------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1995 - - 37,899,432 $37,899 $21,134,578 $(339,626) $(7,370) $(18,565,490) $2,259,991
Common stock issued to consultant
in connection with debt financing 600,000 600 599,400 600,000
Common stock issued in lieu of cash interest 89,096 89 89,007 89,096
Conversion of debt 275,000 275 274,725 275,000
Exercise of warrants 3,340,585 3,341 2,319,628 2,322,969
Warrants issued to consultants 10,000 10,000
Amortization of deferred compensation 169,813 169,813
Realized loss on sale of investments 7,370 7,370
Net loss (2,643,145) (2,643,145)
------- ------ ---------- ------ ---------- -------- ----- ----------- ----------
Balance at May 31, 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 852,890 853 941,031 941,884
Amortization of deferred compensation 169,813 169,813
Net loss (4,516,404) (4,516,404)
------- ------ ---------- ------ ---------- -------- ------ ----------- ----------
Balance at May 31, 1997 - - 46,782,003 46,782 28,699,219 - - (25,725,039) 3,020,962
Issuance of preferred stock 325,000 $3,250 6,108,650 6,111,900
Conversion of preferred stock (99,250) (992) 1,160,064 1,160 (168) -
Exercise of options and warrants 568,406 568 483,895 484,463
Deemed dividend on preferred stock 1,132,000 (1,132,000) -
Preferred stock dividend requirement (96,717) (96,717)
Common stock issued in lieu of
preferred stock dividends 20,805 21 34,559 34,580
Net loss (3,802,195) (3,802,195)
------- ------ ---------- ------- ----------- ---------- ------- ------------ ----------
Balance at May 31, 1998 225,750 $2,258 48,531,278 $48,531 $36,458,155 $ - $ - $(30,755,951) $5,752,993
------- ------ ---------- ------- ----------- ---------- ------- ------------ ----------
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended May 31,
-----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(3,802,195) $(4,516,404) $(2,643,145)
----------- ----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 363,101 333,482 269,443
Provision for losses 225,000
Amortization of deferred compensation 169,813 169,813
Amortization of deferred loan costs 272,555
Warrants issued to consultants 10,000
Changes in operating assets and liabilities
Accounts receivable (919,693) 729,317 (1,010,965)
Inventories 389,382 (389,773) (563,272)
Other assets (78,691) 74,924 (54,338)
Accounts payable, accrued expenses and
other current liabilities 211,687 (113,978) 820,006
Other liabilities 164,370 77,000 206,000
---------- ---------- ----------
130,156 1,105,785 119,242
---------- ---------- ----------
Net cash used in operating activities (3,672,039) (3,410,619) (2,523,903)
---------- ---------- ----------
Cash flows from investing activities
Purchase of investments (20,034)
Proceeds from sale of investments 655,556
Purchase of property and equipment (309,342) (216,067) (186,391)
---------- ---------- ----------
Net cash (used in) provided by investing
activities (309,342) (216,067) 449,131
---------- ---------- ----------
Cash flows from financing activities
Proceeds from exercise of options and warrants 484,463 941,884 2,322,969
Proceeds from issuance of preferred stock, net 6,111,900
Proceeds from issuance of long-term debt, net 3,708,000
Debt conversion fees (10,000)
--------- ---------- ---------
Net cash provided by financing activities 6,596,363 931,884 6,030,969
--------- ---------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,614,982 (2,694,802) 3,956,197
Cash and cash equivalents - beginning of year 1,753,004 4,447,806 491,609
---------- ---------- ----------
Cash and cash equivalents - end of year $4,367,986 $1,753,004 $4,447,806
---------- ---------- ----------
Non-cash investing and financing activities
were as follows:
Deemed dividend on preferred stock $1,132,000
Issuance of common stock in lieu of preferred
dividends 34,580
Issuance of common stock upon conversion of debt $3,344,575 $275,000
Issuance of common stock in lieu of cash interest 89,096
Issuance of common stock for services 600,000
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1998, 1997 and 1996
NOTE A - BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated in Delaware in July 1987. During fiscal 1996,
the Company commenced the commercialization of its EECP enhanced external
counterpulsation system ("EECP "), a microprocessor-based medical device for the
noninvasive, atraumatic treatment of patients with coronary artery disease. EECP
is marketed worldwide to hospitals, clinics and other cardiac health care
providers. To date, substantially all of the Company's revenues have been
generated from customers in the United States.
In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso
Interim Corp. ("Vaso Interim"), acquired the worldwide exclusive marketing
rights (except in China) to EECP and agreed to fund the research and development
activities of Vasogenics, Inc. ("Vasogenics"), its joint-venture partner in Vaso
Interim and sole minority shareholder. Vasogenics held the intellectual property
rights to the EECP 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. 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.
EECP , 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.
A summary of the significant accounting policies consistently applied in the
preparation of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary. Significant intercompany accounts and
transactions have been eliminated.
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.
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, on a straight-line basis.
Accelerated methods of depreciation are used for tax purposes. Leasehold
improvements are amortized over the shorter of the useful life of the related
leasehold improvement or the life of the related lease, generally five years.
Long-lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles (including the capitalized cost in excess of fair value
of net assets acquired and property and equipment) whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. The Company has not identified any such
impairment loss. The capitalized cost in excess of fair value of net assets
acquired arising from the acquisition of Vasogenics is being amortized on a
straight-line basis over a period of seven years.
<PAGE>
Revenue Recognition
The Company recognizes revenue from the sale of its EECP system in the
period in which the Company fulfills its obligations under the sale agreement,
including delivery, installation and customer acceptance. The Company has also
entered into lease agreements for its EECP system that are classified as
operating leases. Revenues from operating leases are recognized on a
straight-line basis over the life of the respective leases.
Concentrations of Credit Risk
The Company markets the EECP system principally to hospitals, clinics and
other cardiac health care providers. The Company performs credit evaluations of
its customers' financial condition and does not require collateral. Receivables
are generally due within 60-90 days. Credit losses relating to customers have
historically been within management's expectations.
Warranty Costs
The Company provides for a warranty period on its EECP system. The Company
accounts for estimated warranty costs at the time the related revenue is earned.
As the Company's experience with respect to the commercial use of the EECP
system is limited, revisions to the Company's warranty cost estimates may be
necessary in the future.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Common Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share", which supercedes
Accounting Principles Board Opinion No. 15. Pursuant to SFAS No. 128, earnings
(loss) per common share is computed by dividing net income (loss) available to
common stockholders by the weighted average number of shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock. For the
fiscal years ended May 31, 1998, 1997 and 1996, there is no difference between
basic and diluted net loss per share or between the basic and diluted net loss
per share as previously reported. Potential common shares from stock options,
warrants and convertible preferred stock are excluded in computing basic and
diluted net loss per share as their effects would be antidilutive.
Stock Compensation
The Company measures stock-based awards using the intrinsic value method. As
provided in Note D, pro forma disclosure of the effect on net loss and loss per
share has been computed as if the fair value-based method had been applied in
measuring compensation expense.
Statements of Cash Flows
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of money market funds. The market value of the
cash equivalents approximates cost.
<PAGE>
NOTE B - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
May 31,
------
Property and equipment is summarized as follows: 1998 1997
---- ----
<S> <C> <C>
Office, laboratory and other equipment $261,964 $151,344
EECP units under operating leases 186,287 281,336
Furniture and fixtures 81,232 68,808
Leasehold improvements 89,760 89,760
-------- --------
619,243 591,248
Less accumulated depreciation and amortization (266,341) (283,044)
-------- --------
$352,902 $308,204
-------- --------
</TABLE>
NOTE C - STOCKHOLDERS' EQUITY AND WARRANTS
Fiscal 1996
In July 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 were being
amortized over the life of the Notes. In fiscal 1996, $275,000 principal amount
of Notes was converted into 275,000 shares of the Company's common stock. 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. These shares, valued at
$600,000 (such value being equivalent to the quoted market price of the
Company's common stock), were included in deferred loan costs.
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.
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.
Fiscal 1997
In June 1996, the remaining $3,725,000 in outstanding principal amount of
Notes was 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
was to increase stockholders' equity by $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).
Fiscal 1998
On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Cumulative Convertible Preferred Stock, $.01 par value, to one
accredited investor pursuant to Regulation D under the Securities Act of 1933 at
a price of $20 per share, for net cash proceeds of $2,818,000. The convertible
preferred stock has no voting rights and is convertible into common stock of the
Company at an effective conversion price of the lower of (i) $2.18 or (ii) 85%
of the average closing bid of the Company's common stock for the five (5)
trading days immediately preceding the conversion date, as defined in the
Certificate of Designation of the convertible preferred stock. In addition, the
investor was granted five-year warrants to purchase 405,405 shares of common
stock at an exercise price of $2.18 per share. The Company recorded a deemed
dividend of $857,000 in the first quarter of fiscal 1998, representing the
discount resulting from the allocation of proceeds to the beneficial conversion
feature and the fair value of the underlying warrants. Such deemed dividend was
recognized from the date of issuance through the date such preferred stock was
first convertible. In connection with this transaction, the Company issued
five-year warrants to the broker/finder to purchase 150,000 shares of common
stock at an exercise price of $2.18 per share. These warrants were fair valued
at $123,000. During fiscal 1998, 99,250 shares of Series B preferred stock were
converted into 1,160,064 shares of common stock. Subsequent to May 31, 1998,
8,250 shares of Series B preferred stock were converted into 149,536 shares of
common stock.
<PAGE>
On April 30, 1998, the Company completed a second tranche of financing with
the same accredited investor and issued 175,000 shares of newly created 5%
Series C Cumulative Convertible Preferred Stock, $.01 par value, pursuant to
Regulation D under the Securities Act of 1933 at a price of $20 per share, for
net cash proceeds of $3,294,000. The convertible preferred stock has no voting
rights and is convertible into common stock of the Company at an effective
conversion price of the lower of (i) $2.08 or (ii) 85% of the average closing
bid of the Company's common stock for the five (5) trading days immediately
preceding the conversion date, as defined in the Certificate of Designation of
the convertible preferred stock. In addition, the investor was granted five-year
warrants to purchase 413,712 shares of common stock at an exercise price of
$2.08 per share. The Company has estimated the value of the deemed dividend,
representing the discount resulting from the allocation of proceeds to the
beneficial conversion feature and the fair value of the underlying warrants, to
approximate $936,000. Such deemed dividend will be recognized from the date of
issuance through the date such preferred stock is first convertible (on or about
August 15, 1998). Accordingly, the Company recognized a deemed dividend of
$275,000 in the fourth quarter of fiscal 1998 and will recognize the remaining
portion of the deemed dividend of $661,000 in the first quarter of fiscal 1999.
In connection with this transaction, the Company issued five-year warrants to
the broker/finder to purchase 175,000 shares of common stock at an exercise
price of $2.08 per share. These warrants were fair valued at $135,000.
Warrants
Warrant activity for the years ended May 31, 1996, 1997 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Non-employee
Directors Employees Consultants Total Price Range
------------ --------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1995 1,275,000 2,595,000 6,728,539 10,598,539 $.25 - $5.00
Issued - - 100,000 100,000 $1.44
Exercised (100,000) (585,000) (2,655,585) (3,340,585) $.25 - $1.03
Canceled/retired - (35,000) (1,985,854) (2,020,854) $.73 - $5.00
--------- --------- --------- --------- -------------
Balance at May 31, 1996 1,175,000 1,975,000 2,187,100 5,337,100 $.25 - $1.81
Exercised - (25,000) (827,890) (852,890) $.41 - $1.81
Canceled/retired - - (141,209) (141,209) $1.10 - $1.81
--------- --------- --------- --------- -------------
Balance at May 31, 1997 1,175,000 1,950,000 1,218,001 4,343,001 $.25 - $1.50
Issued - 1,144,117 1,144,117 $2.08 - 2.18
Exercised (50,000) (30,000) (483,406) (563,406) $.25 - $2.18
Canceled/retired - (50,000) (50,000) $1.50
--------- --------- --------- --------- ------------
Balance at May 31, 1998 1,125,000 1,920,000 1,828,712 4,873,712 $.38 - $2.18
--------- --------- --------- --------- ------------
Number of shares exercisable 1,125,000 1,595,000 1,828,712 4,548,712 $.38 - $2.18
--------- --------- --------- --------- ------------
<FN>
The weighted-average fair value of warrants granted during fiscal 1998 and
1996 was $.80 and $.10, respectively.
</FN>
</TABLE>
The following table summarizes information about warrants outstanding at May
31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
--------------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
May 31, 1998 Contractual Exercise May 31, 1998 Exercise
Range of Exercise Prices Life (yrs.) Price Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.38 - $.56 2,500,000 1.4 $.42 2,175,000 $.42
$.91 - $1.25 895,000 0.4 $1.02 895,000 $1.02
$1.44 - $1.50 400,000 0.9 $1.49 400,000 $1.49
$2.08 - $2.18 1,078,712 4.5 $2.13 1,078,712 $2.13
------------------------------------------------------------
4,873,712 1.9 $1.00 4,548,712 $1.04
------------------------------------------------------------
</TABLE>
<PAGE>
NOTE D - OPTION PLANS
1995 Stock Option Plan
- ----------------------
In May 1995, the Company's stockholders approved the 1995 Stock Option Plan
for officers and employees of the Company, for which the Company reserved an
aggregate of 1,500,000 shares of common stock. In December 1997, the Company's
Board of Directors terminated the 1995 Stock Option Plan.
Outside Director Stock Option Plan
- ----------------------------------
In May 1995, the Company's stockholders approved an Outside Director Stock
Option Plan for non-employee directors of the Company, for which the Company
reserved an aggregate of 300,000 shares of common stock. In December 1997, the
Company's Board of Directors terminated the Outside Director Stock Option Plan.
1997 Stock Option Plan
- ----------------------
In December 1997, the Company's stockholders approved the 1997 Stock Option
Plan (the "1997 Plan") for officers, directors, employees and consultants of the
Company, for which the Company has reserved an aggregate of 1,800,000 shares of
common stock. The 1997 Plan provides that it will be administered by a committee
of the Board of Directors of the Company and that the committee will have full
authority to determine the identity of the recipients of the options and the
number of shares subject to each option. Options granted under the 1997 Plan may
be either incentive stock options or non-qualified stock options. The option
price shall be 100% of the fair market value of the common stock on the date of
the grant (or in the case of incentive stock options granted to any individual
principal stockholder who owns stock possessing more than 10% of the total
combined voting power of all voting stock of the Company, 110% of such fair
market value). The term of any option may be fixed by the committee but in no
event shall exceed ten years from the date of grant. Options are exercisable
upon payment in full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the option. The term for
which options may be granted under the 1997 Plan expires August 6, 2007.
Activity under all the plans is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------
Shares Available Number of Exercise Weighted Average
for Grant Shares Price per Share Exercise Price
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 1, 1995 1,800,000 25,000 $.91 - $1.03 $.93
Options granted (77,418) 77,418 $.78 $.78
------------------------------------------------------
Balance at May 31, 1996 1,722,582 102,418 $.78 - $1.03 $.81
Options granted (943,675) 943,675 $2.00 - $3.44 $3.21
Options canceled 20,000 (20,000) $3.44 $3.44
------------------------------------------------------
Balance at May 31, 1997 798,907 1,026,093 $.78 - $3.44 $2.97
Shares authorized 1,800,000 - - -
Plans terminated (798,907) - - -
Options granted (1,054,050) 1,054,050 $1.77 - $2.44 $1.91
Options exercised - (5,000) $1.03 $1.03
Options canceled 10,000 (15,000) $1.91 - $3.44 $2.42
------------------------------------------------------
Balance at May 31, 1998 755,950 2,060,143 $.78 - $3.44 $2.44
------------------------------------------------------
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding
at May 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
May 31, 1998 Contractual Exercise at Exercise
Range of Exercise Prices Life (yrs.) Price May 31, 1998 Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.78 - $1.03 97,418 6.7 $.80 97,418 $.80
$2.00 - $2.21 1,195,725 9.1 $1.93 71,675 $2.09
$3.44 767,000 8.0 $3.44 279,000 $3.44
-------------------------------------------------------------
2,060,143 8.6 $2.44 448,093 $2.65
-------------------------------------------------------------
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for stock-based awards. Pursuant to APB 25, the Company
generally recognizes no compensation expense with respect to such awards. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123 for awards granted after May 31, 1995 as if the Company had
accounted for its stock-based awards under the fair value method of SFAS No.
123. The fair value of the Company's stock-based awards was estimated using the
Black-Scholes option valuation model. The fair value of the Company's
stock-based awards was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
Fiscal year ended May 31, 1998 1997 1996
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Expected life (years) 5 5 5
Expected volatility 85% 85% 85%
Risk-free interest rate 5.68% 6.69% 5.90%
</TABLE>
The following are the pro forma net loss and net loss per share amounts for
fiscal 1998, 1997 and 1996, as if compensation expense for stock-based awards
had been determined based on their estimated fair value at the date of grant:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(5,702,635) $(5,607,637) $(2,685,725)
Pro forma net loss per share $(.12) $(.12) $(.07)
</TABLE>
The weighted-average fair value of options granted during fiscal 1998, 1997
and 1996 was $1.34, $2.29 and $.55, respectively. At May 31, 1998, there were
19,625,364 shares of authorized but unissued common stock reserved for issuance
under all stock option plans, stock warrants and shareholders' rights.
NOTE E - REVENUE CONCENTRATIONS
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 system on a non-recourse basis and lease the system to the Company's
customers. During fiscal 1998, 1997 and 1996, approximately 13%, 54% and 51%,
respectively, of the Company's revenues were derived through such transactions.
In fiscal 1998, the Company had sales to one customer accounting for 10% of
the Company's revenues. In fiscal 1997, the Company had sales to two customers,
each accounting for over 10% of the Company's sales, both of which are included
above, aggregating 43% of the Company's revenues. In fiscal 1996, the Company
had sales to four customers, each accounting for over 10% of the Company's
sales, two of which are included above, aggregating 54% of such revenues.
<PAGE>
NOTE F - 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:
<TABLE>
<CAPTION>
May 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss and other carryforwards $10,908,000 $9,226,000
Accrued compensation 120,000 148,000
Other 268,000 304,000
----------- ----------
Total gross deferred tax assets 11,296,000 9,678,000
Valuation allowance (11,296,000) (9,678,000)
----------- ----------
$ - $ -
----------- ----------
</TABLE>
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, 1998, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $28,400,000, expiring at various
dates through 2013.
NOTE G - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company maintains employment agreements with its executive officers,
expiring at various dates through January 2002. Such employment agreements
provide, among other things, that in the event there is a change in the control
of the Company, as defined therein, or in any person directly or indirectly
controlling the Company, as also defined therein, the employee has the option,
exercisable within six months of becoming aware of such event, to terminate 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.
Approximate aggregate minimum annual compensation obligations under active
employment agreements at May 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1999 $569,000
2000 569,000
2001 391,000
2002 93,000
----------
$1,622,000
----------
</TABLE>
Lease
The Company occupies office and warehouse space under a noncancelable
operating lease which expires on October 31, 2000. Rent expense was $121,000,
$118,000, and $111,000 in fiscal 1998, 1997, and 1996, respectively.
Approximate aggregate minimum annual obligations under this lease agreement
and other equipment leasing agreements at May 31, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1999 $152,000
2000 157,000
2001 69,000
2002 10,000
2003 2,000
--------
$390,000
--------
</TABLE>
<PAGE>
SEC Investigation
In February 1995, the Company received 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 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
an 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 . 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.
In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County, against the Company and other parties. The action seeks damages in the
sum of $5,000,000 based upon alleged injuries resulting from the alleged
negligence of the defendants in the use of the Company's product. Management
believes that this action is fully covered by insurance. 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.
401(k) Plan
In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan to
provide retirement benefits for its employees. As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides tax-deferred salary deductions
for eligible employees. Employees are eligible to participate in the next
quarter enrollment period after employment. Participants may make voluntary
contributions to the plan up to 15% of their compensation. No Company
contributions were made for the fiscal years ended May 31, 1998 and 1997.
Agreement with Foshan
In connection with the acquisition of Vasogenics in 1995, the Company
assumed commitments under an agreement, expiring November 2008, with Foshan
Analytical Instrument Factory ("Foshan"), a Chinese company, for the contract
manufacture of its current EECP model, subject to certain performance standards,
as defined. At May 31, 1998, the Company had outstanding purchase commitments of
$504,000.
Related Party
In fiscal 1996, payments for office facilities, services and equipment of
$42,000 were made to an entity whose principal stockholder is a director of the
Company.
<PAGE>
EXHIBIT INDEX
Exhibit No.
(10.1) Extension and Modification Agreement dated March 12, 1998 between the
Registrant and Anthony Viscusi
(10.2) Extension and Modification Agreement dated March 12, 1998 between the
Registrant and Anthony Peacock
(10.3) Extension and Modification Agreement dated March 12, 1998 between the
Registrant and John Hui
(10.4) Extension and Modification Agreement dated March 12, 1998 between the
Registrant and Joseph Giacalone
(23) Consent of Grant Thornton LLP
(27) Financial Data Schedule
Exhibit 10.1
EXTENSION AND MODIFICATION AGREEMENT
EXTENSION AND MODIFICATION AGREEMENT made this 12th day of March, 1998 and
between VASOMEDICAL, INC., a Delaware corporation (hereinafter the "Company"),
and Anthony Viscusi, an individual residing at 15 West 81st Street, New York,
New York 10024 (hereinafter "Employee").
W I T N E S S E T H
WHEREAS, the Company and Employee entered into an Employment Agreement
dated July 1, 1994 and modified on October 24, 1995 (hereinafter the "Employment
Agreement"); and
WHEREAS, the Company and Employee desire to amend said Employment
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Paragraph 3 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"3. Term. Subject to earlier termination on the terms and conditions hereinafter
provided, the term of this Employment Agreement shall end on December 31, 2000."
2. Paragraph 6(b)(iii) of the Employment Agreement is hereby deleted in
its entirety.
3. Paragraph 14 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"14. In the event (a) the Company has been consolidated or merged into or with
any other corporation or all or substantially all of the assets of the Company
have been sold to another corporation, with or without the consent of Employee,
in his sole discretion; or (b) the Company undergoes a Change of Control, as
hereinafter defined below, without prior Board approval; then
Employee is entitled to the following settlement benefits:
(i) lump-sum payment for the greater of (A) twelve (12) months of the
annual salary provided in section 4(a) hereof or (B) the balance of
compensation for the term of this Employment Agreement; and
(ii) any and all stock options and warrants held by Employee shall become
immediately vested and exercisable; if
(A) Employee voluntarily and unilaterally resigns his position
with the Company within 30 days of an event described in
Section 14(a) or (b) hereof, or
(B) Employee is given notice of termination directly as a result
of such Change in Control within six (6) months of an event
described in Section 14(a) or (b) hereof, or
(C) Employee's place of employment is moved beyond a
hundred-mile radius, as the crow flies, from 180 Linden
Avenue, Westbury, New York 11590 (or the Company's then
current business address) as a direct result of an event
described in Section 14(a) or (b) hereof.
<PAGE>
A "Change of Control" of the Company, or in any person directly or
indirectly controlling the Company, shall mean:
(i) a change of control as such term is presently defined in Regulation
240.12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act");
(ii) if during the Term of employment, any "person" (as such term is used
in Section 13(d) and 14(d)of the Exchange Act) other than the Company or any
person who on the date of this Employment Agreement is a director or officer of
the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 20% of the voting power of the Company's then outstanding
securities; or
(iii) if during the Term of employment, the individuals who at the
beginning of such period constitute the Board cease for any reason other than
death, disability or retirement to constitute at least a majority thereof."
4. The aforesaid Employment Agreement in all other respects is hereby
ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this Extension and
Modification Agreement as of the day and year first written above.
VASOMEDICAL, INC.
By: /s/Abraham E. Cohen
---------------------------------------
Abraham E. Cohen, Chairman of the Board
/s/Anthony Viscusi
---------------------------------------
Anthony Viscusi
Employee
Exhibit 10.2
EXTENSION AND MODIFICATION AGREEMENT
EXTENSION AND MODIFICATION AGREEMENT made this 12th day of March, 1998 and
between VASOMEDICAL, INC., a Delaware corporation (hereinafter the "Company"),
and Anthony E. Peacock, an individual residing at 25 Crown Drive, Warren, New
Jersey 07059 (hereinafter "Employee").
W I T N E S S E T H
WHEREAS, the Company and Employee entered into an Employment Agreement
dated December 15, 1994 and modified on October 24, 1995 (hereinafter the
"Employment Agreement"); and
WHEREAS, the Company and Employee desire to amend said Employment
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Paragraph 3 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"3. Term. Subject to earlier termination on the terms and conditions hereinafter
provided, the term of this Employment Agreement shall end on December 31, 2000."
2. Paragraph 6(b)(iii) of the Employment Agreement is hereby deleted in
its entirety.
3. Paragraph 14 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"14. In the event (a) the Company has been consolidated or merged into or with
any other corporation or all or substantially all of the assets of the Company
have been sold to another corporation, with or without the consent of Employee,
in his sole discretion; or (b) the Company undergoes a Change of Control, as
hereinafter defined below, without prior Board approval; then
Employee is entitled to the following settlement benefits:
(i) lump-sum payment for the greater of (A) twelve (12) months of the
annual salary provided in section 4(a) hereof or (B) the balance of
compensation for the term of this Employment Agreement; and
(ii) any and all stock options and warrants held by Employee shall become
immediately vested and exercisable; if
(A) Employee voluntarily and unilaterally resigns his position with
the Company within 30 days of an event described in Section 14(a)
or (b) hereof, or
(B) Employee is given notice of termination directly as a result of
such Change in Control within six (6) months of an event
described in Section 14(a) or (b) hereof, or
(C) Employee's place of employment is moved beyond a hundred-mile
radius, as the crow flies, from 180 Linden Avenue, Westbury, New
York 11590 (or the Company's then current business address) as a
direct result of an event described in Section 14(a) or (b)
hereof.
<PAGE>
A "Change of Control" of the Company, or in any person directly or
indirectly controlling the Company, shall mean:
(i) a change of control as such term is presently defined in
Regulation 240.12b-2 under the Securities Exchange Act of 1934 (the "Exchange
Act");
(ii) if during the Term of employment, any "person" (as such term is
used in Section 13(d) and 14(d)of the Exchange Act) other than the Company or
any person who on the date of this Employment Agreement is a director or officer
of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 20% of the voting power of the Company's then outstanding
securities; or
(iii) if during the Term of employment, the individuals who at the
beginning of such period constitute the Board cease for any reason other than
death, disability or retirement to constitute at least a majority thereof."
The aforesaid Employment Agreement in all other respects is hereby ratified
and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this Extension and
Modification Agreement as of the day and year first written above.
VASOMEDICAL, INC.
By: /s/Anthony Viscusi
----------------------------------
Anthony Viscusi, President and CEO
/s/Anthony E. Peacock
----------------------------------
Anthony E. Peacock
Employee
Exhibit 10.3
EXTENSION AND MODIFICATION AGREEMENT
EXTENSION AND MODIFICATION AGREEMENT made this 12th day of March, 1998 by
and between VASOMEDICAL, INC., a Delaware corporation (hereinafter the
"Company") and JOHN C. K. HUI, an individual residing at 7 Braemer Road, East
Setauket, New York 11733 (hereinafter "Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into an Employment Agreement
dated February 1, 1995 (hereinafter the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to amend said Employment
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Paragraph "3" of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be the following:
"3. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, the term of the Agreement shall be for a three (3)
year period of employment commencing February 1, 1999 and ending January
31, 2002."
2. Paragraphs "4(a)" and "4(c)" of the Employment Agreement are hereby
deleted in their entirety and in their place and stead shall be the following:
"4 (a). Employee shall be paid a minimum per annum base salary equal
to the compensation currently received by Employee, such base salary to be
payable in equal periodic installments in accordance with the Company's
regular payroll procedures for its executive employees. Employee's per
annum base salary may be increased based upon merit and increased
responsibilities as determined by the Company's Board of Directors
consistent with its salary administration guidelines."
"4(c). The Company shall forthwith issue to Employee options to
purchase an aggregate of three hundred thousand (300,000) shares of the
Company's Common Stock at $1.90625 per share (the "Options"). The Options
shall be vested and exercisable at the rate of one hundred thousand
(100,000) shares annually commencing January 31, 2000; provided that the
Options shall vest only in the event Employee is a full-time employee of
the Company at the time of vesting. The time within which the Options may
be exercised shall be ten (10) years from the date of issuance."
3. Paragraph "6 (b)(ii) is hereby deleted in its entirety.
<PAGE>
4. Paragraph "6(c)" of the Employment Agreement is hereby deleted in its
entirety and in its place and stead shall be the following:
"6(c). The severance benefits under this section shall consist of the
continued payment to Employee, for the balance of the term of this
Agreement, of the annual salary provided in Section 4(a) hereof plus the
immediate vesting of options held by Employee."
5. Paragraph "10" of the Employment Agreement is hereby deleted in its
entirety and in its place and stead shall be the following:
"10. Notice. Any notice to be given to the Company or Employee
hereunder shall be deemed given if delivered personally, telefaxed, or
mailed by certified or registered mail, postage prepaid, to the other party
hereto at the following addresses:
To the Company: Vasomedical, Inc.
180 Linden Avenue
Westbury, New York 11590
To Employee: John C. K. Hui
7 Braemer Road
East Setauket, New York 11733
6. Paragraph "14" shall be added to the Employment Agreement to be and read
as follows:
"14. Change of Control. In the event (a) the Company has been
consolidated or merged into or with any other corporation or all or
substantially all of the assets of the Company have been sold to another
corporation, with or without the consent of Employee, in his sole
discretion; or (b) the Company undergoes a Change of Control, as
hereinafter defined below; then
Employee is entitled to the following settlement benefits:
(i) a lump sum payment for the greater of (A) twelve (12) months of the
annual salary provided in Section 4(a) hereof or (B) the balance of compensation
for the term of this Employment Agreement; and
(ii) any and all stock options and warrants held by Employee shall become
immediately vested and exercisable; if
(A) Employee voluntarily and unilaterally resigns his position
with the Company within thirty (30) days of an event described in
Section 14(a) or (b) hereof; or
<PAGE>
(B) Employee is given notice of termination directly as a result
of such Change in Control within six (6) months of an event described
in Section 14(a) or (b) hereof, or
(C) Employee's place of employment is moved beyond a one-hundred
mile radius from 180 Linden Avenue, Westbury, New York 11590 (or the
Company's then current business address) as a direct result of an
event described in Section 14(a) or (b) hereof.
A "Change of Control" of the Company, or in any person directly or
indirectly controlling the Company, shall mean:
(i) a change of control as such term is presently defined in
Regulation 240.12b-2 under the Securities Exchange Act of 1934 (the "Exchange
Act");
(ii) if during the Term of employment, any "person" (as such term
is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company
or any person who on the date of this Employment Agreement is a director or
officer of the Company, becomes the "beneficial owner" (as defined in Rule
13(d)-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% of the voting power of the Company's then outstanding
securities without the approval of the Board of Directors; or
(iii) if during the Term of employment, the individuals who at
the beginning of such period constitute the Board cease for any reason other
than death, disability or retirement to constitute at least a majority thereof."
7. The aforesaid Employment Agreement in all other respects is hereby
ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this Extension and
Modification Agreement as of the day and year first written above.
VASOMEDICAL, INC.
By: /s/Anthony Viscusi
----------------------------------
Anthony Viscusi, President and CEO
/s/ John C. K. Hui
----------------------------------
John C. K. Hui
Employee
Exhibit 10.4
EXTENSION AND MODIFICATION AGREEMENT
EXTENSION AND MODIFICATION AGREEMENT made this 12th day of March, 1998 and
between VASOMEDICAL, INC., a Delaware corporation (hereinafter the "Company"),
and Joseph A. Giacalone, an individual residing at 30 Midtown Road, Carle Place,
New York 11514 (hereinafter "Employee").
W I T N E S S E T H
WHEREAS, the Company and Employee entered into an Employment Agreement
dated November 1, 1996 (hereinafter the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to amend said Employment
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Paragraph 3 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"3. Term. Subject to earlier termination on the terms and conditions hereinafter
provided, the term of this Employment Agreement shall end on December 31, 2000."
2. Paragraph 6(b)(iii) of the Employment Agreement is hereby deleted in
its entirety.
3. Paragraph 14 of the Employment Agreement is hereby deleted in its
entirety, and in its place and stead shall be inserted the following:
"14. In the event (a) the Company has been consolidated or merged into or with
any other corporation or all or substantially all of the assets of the Company
have been sold to another corporation, with or without the consent of Employee,
in his sole discretion; or (b) the Company undergoes a Change of Control, as
hereinafter defined below, without prior Board approval; then
Employee is entitled to the following settlement benefits:
(i) lump-sum payment for the greater of (A) twelve (12) months of the
annual salary provided in section 4(a) hereof or (B) the balance of
compensation for the term of this Employment Agreement; and
(ii) any and all stock options and warrants held by Employee shall become
immediately vested and
exercisable; if
(A) Employee voluntarily and unilaterally resigns his position with
the Company within 30 days of an event described in Section 14(a)
or (b) hereof, or
(B) Employee is given notice of termination directly as a result of
such Change in Control within six (6) months of an event
described in Section 14(a) or (b) hereof, or
(C) Employee's place of employment is moved beyond a hundred-mile
radius, as the crow flies, from 180 Linden Avenue, Westbury, New
York 11590 (or the Company's then current business address) as a
direct result of an event described in Section 14(a) or (b)
hereof.
<PAGE>
A "Change of Control" of the Company, or in any person directly or
indirectly controlling the Company, shall mean:
(i) a change of control as such term is presently defined in
Regulation 240.12b-2 under the Securities Exchange Act of 1934 (the "Exchange
Act");
(ii) if during the Term of employment, any "person" (as such term is
used in Section 13(d) and 14(d)of the Exchange Act) other than the Company or
any person who on the date of this Employment Agreement is a director or officer
of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 20% of the voting power of the Company's then outstanding
securities; or
(iii) if during the Term of employment, the individuals who at the
beginning of such period constitute the Board cease for any reason other than
death, disability or retirement to constitute at least a majority thereof."
4. The aforesaid Employment Agreement in all other respects is hereby
ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this Extension and
Modification Agreement as of the day and year first written above.
VASOMEDICAL, INC.
By: /s/Anthony Viscusi
----------------------------------
Anthony Viscusi, President and CEO
/s/Joseph A. Giacalone
----------------------------------
Joseph A. Giacalone
Employee
Exhibit 23
Consent of Independent Certified Public Accountants
We have issued our report dated July 28, 1998, accompanying the consolidated
financial statements included in the Annual Report of Vasomedical, Inc. and
Subsidiary on Form 10-K for the fiscal year ended May 31, 1998. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Vasomedical, Inc. and Subsidiary on Forms S-3 (File No. 333-33319,
effective August 21, 1997, and File No. 33-62329, effective September 18, 1995)
and on Forms S-8 (File No. 333-11579, effective September 6, 1996, File No.
333-11581, effective September 6, 1996, and File No. 333-11583, effective
September 6, 1996).
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
July 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the year ended May 31, 1998 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 4,367,986
<SECURITIES> 0
<RECEIVABLES> 976,341
<ALLOWANCES> 0
<INVENTORY> 678,302
<CURRENT-ASSETS> 6,187,455
<PP&E> 619,243
<DEPRECIATION> (266,341)
<TOTAL-ASSETS> 7,345,246
<CURRENT-LIABILITIES> 1,141,253
<BONDS> 0
0
2,258
<COMMON> 48,531
<OTHER-SE> 5,702,204
<TOTAL-LIABILITY-AND-EQUITY> 7,345,246
<SALES> 5,225,064
<TOTAL-REVENUES> 5,225,064
<CGS> 1,543,849
<TOTAL-COSTS> 1,543,849
<OTHER-EXPENSES> 7,479,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,057
<INCOME-PRETAX> (3,802,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,802,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,802,195)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
