UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended August 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________
Commission File Number: 0-18105
VASOMEDICAL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2871434
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
180 Linden Ave., Westbury, New York 11590
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(Address of principal executive offices)
Registrant's Telephone Number (516) 997-4600
Number of Shares Outstanding of Common Stock,
$.001 Par Value, at September 22, 2000 56,389,042
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
--- --
<PAGE>
Vasomedical, Inc. and Subsidiary
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited) Page
----
Consolidated Condensed Balance Sheets as of
August 31, 2000 and May 31, 2000 3
Consolidated Condensed Statements of Earnings for the
Three Months Ended August 31, 2000 and 1999 4
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Period from June 1, 2000 to
August 31, 2000 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended August 31, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION 11
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
---- ----
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,456,597 $3,058,367
Accounts receivable, net of allowance for doubtful
accounts of $451,000 at August 31, 2000
and $400,000 at May 31, 2000 5,267,723 4,832,810
Inventories 1,363,846 906,984
Deferred income taxes 758,000 400,000
Other current assets 470,796 479,267
----------- -----------
Total current assets 12,316,962 9,677,428
PROPERTY AND EQUIPMENT, net 600,804 548,316
CAPITALIZED COST IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization
of $1,210,041 and $1,136,517 at August 31, 2000 and May 31,
2000, respectively 301,907 355,181
OTHER ASSETS 8,037 8,037
----------- -----------
$13,227,710 $10,588,962
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,688,023 $1,219,803
Accrued warranty and customer support expenses 249,000 258,000
Accrued professional fees 167,120 276,000
Accrued commissions 374,415 543,389
----------- -----------
Total current liabilities 2,478,558 2,297,192
ACCRUED WARRANTY COSTS 186,000 129,000
OTHER LONG-TERM LIABILITIES 11,000 16,000
DEFERRED REVENUES 332,917 203,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value; 110,000,000 shares authorized;
56,339,042 and 55,921,330 shares at August 31, 2000 and
May 31, 2000, respectively, issued and outstanding 56,339 55,921
Additional paid-in capital 41,813,886 40,939,158
Accumulated deficit (31,650,990) (33,051,309)
----------- -----------
Total stockholders' equity 10,219,235 7,943,770
----------- -----------
$13,227,710 $10,588,962
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
August 31,
----------
2000 1999
---- ----
<S> <C> <C>
Revenues
Equipment sales $5,193,909 $2,890,180
Equipment rentals and services 50,750 129,300
---------- ----------
5,244,659 3,019,480
---------- ----------
Costs and expenses
Cost of sales and services 1,311,956 612,270
Selling, general and administrative 2,328,508 1,742,316
Research and development 442,714 253,148
Depreciation and amortization 116,981 121,607
Provision for doubtful accounts 51,000 -
Interest and financing costs 2,427 2,012
Interest and other income - net (51,246) (20,022)
---------- ----------
4,202,340 2,711,331
---------- ----------
NET EARNINGS BEFORE
INCOME TAXES 1,042,319 308,149
Deferred income tax benefit 358,000 -
---------- ----------
NET EARNINGS 1,400,319 308,149
Preferred stock dividend requirement - (38,463)
---------- ----------
EARNINGS APPLICABLE TO
COMMON STOCK $1,400,319 $269,686
========== ==========
Earnings per common
share (basic and diluted) $.02 $.01
==== ====
Weighted average common shares
outstanding
Basic 56,129,057 50,850,526
========== ==========
Diluted 59,694,225 56,216,368
========== ==========
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Total
Additional Accum- stock
Common Stock paid-in ulated holders'
Shares Amount capital deficit equity
------ ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 2000 55,921,330 $55,921 $40,939,158 $(33,051,309) $ 7,943,770
Exercise of options and warrants 417,712 418 867,728 868,146
Stock options granted for services 7,000 7,000
Net earnings 1,400,319 1,400,319
---------- ------- ----------- ------------ -----------
Balance at August 31, 2000 56,339,042 $56,339 $41,813,886 $(31,650,990) $10,219,235
========== ======= =========== ============ ===========
<FN>
The accompanying notes are an integral part of this condensed statement.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
August 31,
----------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net earnings $1,400,319 $308,149
---------- ----------
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation and amortization 116,981 121,607
Provision for bad debts 51,000 -
Deferred income taxes (358,000)
Stock options granted for services 7,000 58,000
Changes in operating assets and liabilities
Accounts receivable (485,913) (86,930)
Inventories (467,808) 29,676
Other current assets 8,472 49,193
Accounts payable, accrued expenses and other current
liabilities 181,366 (130,680)
Other liabilities 181,917 (47,000)
---------- ----------
(764,985) (6,134)
---------- ----------
Net cash provided by operating activities 635,334 302,015
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (105,250) (16,967)
---------- ----------
Net cash used in investing activities (105,250) (16,967)
---------- ----------
Cash flows from financing activities
Proceeds from exercise of options and warrants 868,146 51,250
---------- ----------
Net cash provided by financing activities 868,146 51,250
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,398,230 336,298
Cash and cash equivalents - beginning of period 3,058,367 1,678,175
---------- ----------
Cash and cash equivalents - end of period $4,456,597 $2,014,473
========== ==========
Non-cash investing and financing activities were as follows:
Issuance of common stock in lieu of preferred dividends - $32,608
Inventories transferred to (from) property and equipment,
attributable to operating leases - net $(10,944) (57,334)
<FN>
The accompanying notes are an integral part of these condensed statements.
</FN>
</TABLE>
<PAGE>
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 2000
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated condensed balance sheet as of August 31, 2000 and the
related consolidated condensed statements of earnings for the three-month
periods ended August 31, 2000 and 1999, changes in stockholders' equity for the
three-month period ended August 31, 2000 and cash flows for the three-month
periods ended August 31, 2000 and 1999 have been prepared by Vasomedical, Inc.
and Subsidiary (the "Company") without audit. In the opinion of management, all
adjustments (which include only normal, recurring accrual adjustments) necessary
to present fairly the financial position and results of operations as of August
31, 2000 and for all periods presented have been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended
May 31, 2000. Results of operations for the periods ended August 31, 2000 and
1999 are not necessarily indicative of the operating results expected or
reported for the full year.
NOTE B - INVENTORIES
<TABLE>
<CAPTION>
August 31, May 31,
---------- -------
Inventories consist of the following: 2000 2000
---- ----
<S> <C> <C>
Raw materials $748,006 $545,924
Finished goods 615,840 361,060
---------- --------
$1,363,846 $906,984
========== ========
</TABLE>
NOTE C - STOCKHOLDERS' EQUITY
In the first quarter of fiscal 2001, the Board of Directors granted
stock options under the 1999 Stock Option Plan (the "1999 Plan") to employees
and a consultant to purchase an aggregate of 191,500 shares and 30,000 shares of
common stock, respectively, at exercise prices ranging form $4.28 to $4.94 per
share (which represented the fair market value of the underlying common stock at
the time of the respective grants). The stock options issued to the consultant
were fair-valued at $126,000 for which the Company will record a charge to
operations in accordance with the terms of the agreement, as defined.
In the first quarter of fiscal 2001, options and warrants to purchase
417,712 shares of common stock were exercised, aggregating $868,000 in proceeds
to the Company. Subsequent to August 31, 2000, options to purchase 50,000 shares
of common stock were exercised, aggregating $47,000 in proceeds to the Company.
NOTE D EARNINGS PER COMMON SHARE
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted earnings per share are based on the weighted number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon the exercise of stock options and warrants,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period, and convertible
preferred stock, assuming conversion at the beginning of the period.
<PAGE>
Vasomedical, Inc. and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
August 31, 2000
(unaudited)
NOTE D EARNINGS PER COMMON SHARE (continued)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended August 31,
2000 1999
---- ----
<S> <C> <C>
Numerator:
Basic earnings $1,400,319 $269,686
Preferred stock dividends - 38,463
---------- ----------
Diluted earnings $1,400,319 $308,149
========== ==========
Denominator:
Basic weighted average shares 56,129,057 50,850,526
Stock options 2,473,640 853,110
Warrants 1,091,528 1,300,926
Convertible preferred stock - 3,211,806
---------- ----------
Diluted weighted average shares 59,694,225 56,216,368
========== ==========
Basic and diluted earnings per share $.02 $.01
==== ====
</TABLE>
NOTE E - COMMITMENTS AND CONTINGENCIES
Litigation
----------
In May 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 systems. The complaint
sought damages in the approximate sum of $50,000,000, declaratory relief and
punitive damages. The Company denied the existence of any agreement, and
contended that the complaint was frivolous and without merit. The Company also
asserted substantial counterclaims. In August 1999, a motion for summary
judgment to dismiss the complaint in its entirety was granted. This decision has
been appealed.
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. The Company
and its insurer believe that the complaint is frivolous and without merit and
are vigorously defending the claims. Furthermore, management believes that the
damages sought under the complaint are fully covered by insurance. This matter
is in its preliminary stages and the Company is unable to establish the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.
In February 1999, an action was commenced in the Massachusetts Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000 based upon an alleged breach of a sales contract. The Company
believes that the complaint is frivolous and without merit and is vigorously
defending the claims. This matter is in its preliminary stages and the Company
is unable to establish the likelihood of an unfavorable outcome or the existence
or amount of any potential loss.
Agreement with VAMED
--------------------
In connection with an acquisition in 1995, the Company assumed
commitments under an agreement, expiring November 2008, with VAMED Medical
Instrument Company Ltd. ("VAMED"), a Chinese company, for the contract
manufacture of its current EECP system, subject to certain performance
standards, as defined. At August 31, 2000, the Company had outstanding purchase
commitments of $684,000. The Company believes that VAMED will be able to meet
the Company's needs for EECP systems.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--------------------------------------------------------------------------
OPERATIONS
----------
Results of Operations
---------------------
Three Months Ended August 31, 2000 and August 31, 1999
------------------------------------------------------
The Company generated revenues from the sale and lease of EECP systems
of $5,245,000 and $3,019,000 for the three-month periods ended August 31, 2000
and August 31, 1999, respectively. The Company generated earnings of $1,400,000
and $308,000, respectively, (before deducting $38,000 in preferred stock
dividend requirements for the three months ended August 31, 1999) for the three
months ended August 31, 2000 and 1999.
The number of cardiology practices and hospitals interested in becoming
providers of enhanced external counterpulsation (EECP) has increased following
the announcement by the Health Care Financing Administration (HCFA) in February
1999 of its decision to extend Medicare coverage nationally to the Company's
noninvasive, outpatient treatment for coronary artery disease. HCFA is the
federal agency that administers the Medicare program for approximately 38
million beneficiaries. In addition, the results of the Company's multicenter,
prospective, randomized, blinded, controlled clinical study of EECP (MUST-EECP)
were published in the June 1999 issue of the Journal of the American College of
Cardiology. Interest in EECP therapy has also been spurred by the announcement
of the results of the Company's one-year follow-up quality-of-life outcomes
study at the American Heart Association (AHA) annual meeting in November 1999,
at the American College of Cardiology (ACC) annual meeting in March 1999 and
other scientific meetings.
Revenue growth in fiscal 2000 was initially hindered because local Medicare
contractors established inappropriate payment levels that did not take into
account the full value of the resources health care providers must deploy to
deliver EECP therapy. Consequently, in November 1999, HCFA created a specific
code for external counterpulsation therapy and established a nationally
applicable allowable charge, effective on January 1, 2000. The allowable charge
under the new code was based upon a preliminary determination of Relative Value
Units (RVUs) assigned by HCFA to the resources needed for the administration of
the therapy. Certain patients may require additional services, such as
evaluation and management, which may be billed separately. The Company estimates
the standard national charge to approximate $130 per session of EECP therapy,
which may be adjusted by certain geographic indices. This would result in a
standard charge of $4,550 for a full course of therapy, which typically involves
35 one- hour outpatient sessions. The assigned code will allow EECP providers to
bill Medicare electronically, substantially reducing the process for receiving
reimbursement. Moreover, in light of the new payment instructions, local
Medicare contractors will no longer have the responsibility of establishing
reimbursement rates. These events led to revenue growth in recent quarters,
aided by the conversion to financed leases or outright sales of units previously
placed under rental or fee-for-use arrangements. In July 2000, the American
Medical Association's Relative Value Update Committee (RUC), which periodically
reviews Medicare reimbursement levels, proposed a 20% increase in payment to
Medicare-sponsored healthcare providers of EECP? therapy. If approved by HCFA,
the proposed change would increase the national average payment from $127.42 to
$153.49 per session effective January 1, 2001. In addition, beginning August 1,
2000, Medicare coverage will be extended to include EECP treatment received on
an outpatient basis at hospitals and outpatient clinics under the new APC
(Ambulatory Payment Classification) system. The national average payment rate
approximates $150 per session. Management expects the aforementioned events to
provide a strong foundation for accelerated growth in fiscal 2001.
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 certain fixed period costs, including facilities, payroll and
insurance. Gross margins are furthermore affected by the location of the
Company's customers (including non- domestic business or distributorship
arrangements which, for discounted equipment purchase prices, co-invest in
establishing a market for EECP equipment) and the amount and nature of training
and other initial costs required to place the EECP system in service for
customer use. Consequently, the gross margin realized during the current period
may not be indicative of future margins.
Selling, general and administrative (SGA) expenses for the three months
ended August 31, 2000 and 1999 were $2,329,000 and $1,742,000, respectively. The
increases in SGA expenses of $587,000 from the comparable prior- year fiscal
period resulted primarily from increases in sales and marketing personnel and
other selling expenses related to increased revenues.
<PAGE>
Research and development (R&D) expenses in the three months ended August
31, 2000 increased by $190,000 from the comparable prior-year period. The
increase relates primarily to continued product design and development costs
(including an increase in personnel), as well as the initiation of the pivotal
study in heart failure (which received FDA approval in July 2000).
The increase in interest income is the result of larger average cash
balances invested during the current period.
Liquidity and Capital Resources
-------------------------------
The Company has financed its fiscal 2001 and 2000 operations primarily
from working capital and operating results. At August 31, 2000, the Company had
a cash balance of $4,457,000 and working capital of $9,838,000, compared to a
cash balance of $3,058,000 and working capital of $7,380,000 at May 31, 2000.
The Company's operating activities provided cash of $635,000 and $302,000 for
the three months ended August 31, 2000 and 1999, respectively. Net cash provided
during the three months ended August 31, 2000 consisted primarily of earnings
from operations, increases in accounts payable and accrued expenses, offset by
increases in accounts receivable and inventories.
Investing activities used net cash of $105,000 and $17,000 during the
three months ended August 31, 2000 and 1999, respectively. The principal uses
were for the purchase of property and equipment. At August 31, 2000, the Company
is in the negotiation process for the purchase of its present facilities. The
purchase price, including improvements, is estimated at $1,300,000, which the
Company intends to finance with a mortgage lender.
Financing activities provided cash of $868,000 and $51,000 during the
three months ended August 31, 2000 and 1999, respectively. Financing activities
during fiscal 2001 and 2000 consisted primarily from the sale of common stock
and receipt of cash proceeds upon the exercise of Company common stock warrants
by officers, directors, employees and consultants. Subsequent to August 31,
2000, the Company received additional cash proceeds of $47,000 from the exercise
of Company common stock options.
Management believes that its working capital position at August 31,
2000, along with the ongoing commercialization of the EECP system and possible
further proceeds from the exercise of options and warrants, will make it
possible for the Company to support its internal overhead expenses and to
implement its business plans for at least the next twelve months.
Except for historical information contained herein, the matters
discussed are forward-looking statements that involve risks and uncertainties.
When used in this report, words such as "anticipate", "believe", "estimate",
"expect" and "intend" and similar expressions, as they relate to the Company or
its management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Among the factors that could cause actual results to differ
materially are the following: the effect of the dramatic changes taking place in
the healthcare environment; the impact of competitive procedures and products
and their pricing; unexpected manufacturing problems in foreign supplier
facilities; unforeseen difficulties and delays in the conduct of clinical trials
and other product development programs; the actions of regulatory authorities
and third-party payers in the United States and overseas; uncertainties about
the acceptance of a novel therapeutic modality by the medical community; and the
risk factors reported from time to time in the Company's SEC reports. The
Company undertakes no obligation to update forward-looking statements as a
result of future events or developments.
<PAGE>
VASOMEDICAL, INC. AND SUBSIDIARY
--------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS:
Previously reported.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
No. 27 Financial Data Schedule
Reports on Form 8-K:
None
<PAGE>
In accordance with to the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VASOMEDICAL, INC.
By: /s/ D. Michael Deignan
----------------------
D. Michael Deignan
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Joseph A. Giacalone
-----------------------
Joseph A. Giacalone
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: September 26, 2000
